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

                                   FORM 10-QSB
(Mark One)

|X|   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
      EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004.

|_|   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
      EXCHANGE ACT OF 1934.

                                    For the transition period from ____ to ____.

Commission file number 1-15117.


                             ON2 TECHNOLOGIES, INC.
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)


             Delaware                                   84-1280679
--------------------------------------------------------------------------------
    (State or other jurisdiction           (I.R.S. Employer Identification No.)
   of incorporation or organization)


21 Corporate Drive, Suite 103 Clifton Park, NY            12065
--------------------------------------------------------------------------------
  (Address of principal executive offices)              (Zip Code)

                                 (518) 348-0099
--------------------------------------------------------------------------------
              (Registrant's telephone number, including area code)


--------------------------------------------------------------------------------
              (Former name, former address and former fiscal year,
                         if changed since last report)


      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. |X| Yes |_| No

                APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
                  PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

      Indicate by check mark whether the registrant has filed all documents  and
reports  required  to be filed  by  Sections 12, 13 or  15(d) of the  Securities
Exchange Act of 1934 subsequent to the  distribution of securities  under a plan
confirmed by a court. |_| Yes |_| No


                                       1
<PAGE>

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

      State the number of shares  outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:

The number of shares of the Registrant's  Common Stock, par value $0.01 ("Common
Stock"), outstanding as of July 21, 2004 was 78,086,147.

Transitional Small Business Disclosure Format (Check one):   |_| Yes   |X| No


                                       2
<PAGE>

<TABLE>
<CAPTION>

                                TABLE OF CONTENTS

PART I -- FINANCIAL INFORMATION
                                                                                                               Page
                                                                                                               ----
Item 1.  Consolidated Financial Statements.

<S>                                                                                                             <C>
Condensed Consolidated Balance Sheets at June 30, 2004 (unaudited) and December 31, 2003.......................  4
Unaudited Condensed Consolidated Statements of Operations,
  Three and Six Months Ended June 30, 2004 and 2003............................................................  5
Unaudited Condensed Consolidated Statements of Cash Flows
  Six Months Ended June 30, 2004 and 2003......................................................................  6
Notes to Unaudited Condensed Consolidated Financial Statements.................................................  8

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

Item 3.  Controls and Procedures............................................................................... 20

PART II -- OTHER INFORMATION

Item 1.  Legal Proceedings..................................................................................... 21

Item 4.  Submission of Matters to a Vote of Security Holders................................................... 21

Item 6.  Exhibits and Reports on Form 8-K...................................................................... 22

Signatures..................................................................................................... 22

Certifications................................................................................................. 23

</TABLE>


                                       3
<PAGE>

<TABLE>
<CAPTION>

                         PART I -- FINANCIAL INFORMATION

Item 1.  Consolidated Financial Statements

                                                 ON2 TECHNOLOGIES, INC.
                                       CONDENSED CONSOLIDATED BALANCE SHEETS

                                                                                   June 30,           December 31,
                                                                                     2004                2003
                                                                                -------------        -------------
                                                                                 (unaudited)
                                    ASSETS

   Current assets:
<S>                                                                             <C>                  <C>
     Cash and cash equivalents...............................................   $   3,222,000        $   2,963,000
     Marketable equity securities.............................................         82,000
     Accounts receivable, net of allowance for doubtful accounts..............        252,000              826,000
     Prepaid expenses and other current assets................................        186,000              164,000
                                                                                -------------        -------------
        Total current assets..................................................      3,742,000            3,953,000

   Property and equipment, net................................................        139,000              149,000
   Other assets...............................................................        137,000               26,000
                                                                                -------------        -------------
        Total assets.........................................................   $   4,018,000        $   4,128,000
                                                                                =============        =============
                     LIABILITIES AND STOCKHOLDERS' EQUITY

   Current liabilities:
     Accounts payable........................................................   $      29,000      $       119,000
     Accrued and other liabilities............................................        145,000              221,000
     Deferred revenue.........................................................         97,000               30,000
     Term-loan................................................................        185,000               63,000
     Current portion of capital lease obligations.............................         15,000
                                                                                -------------        -------------
        Total current liabilities.............................................        471,000              433,000

   Capital lease obligations, net of current portion..........................         36,000

   Convertible debentures.....................................................        324,000              409,000

   Commitments and contingencies..............................................

   Stockholders' equity:
     Preferred stock..........................................................         44,000               56,000
     Common stock.............................................................        776,000              741,000
     Additional paid-in                                                           111,209,000          110,229,000
     capital............................................... ..................
     Accumulated other comprehensive loss.....................................          5,000              (18,000)
     Deferred compensation....................................................       (464,000)
     Accumulated deficit......................................................   (108,383,000)        (107,722,000)
                                                                                -------------        -------------
       Total stockholders' equity............................................       3,187,000            3,286,000
                                                                                -------------        -------------
       Total liabilities and stockholders' equity............................   $   4,018,000        $   4,128,000
                                                                                =============        =============
</TABLE>

      See accompanying notes to condensed consolidated financial statements


                                       4
<PAGE>

<TABLE>
<CAPTION>

                                                   ON2 TECHNOLOGIES, INC.
                                 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                                                                       Three Months Ended                Six Months Ended
                                                                             June 30,                        June 30,
                                                                       2004             2003           2004            2003
                                                                    -----------     -----------     -----------     -----------

<S>                                                                <C>             <C>             <C>             <C>
Revenue ........................................................   $  1,570,000    $    827,000    $  2,164,000    $  2,110,000

Operating expenses:
     Cost of revenue (1)........................................        335,000         438,000         677,000         842,000
     Research and development (2)...............................        206,000         291,000         448,000         616,000
     Sales and marketing (2)....................................        121,000         107,000         231,000         192,000
     General and administrative (2).............................        596,000         562,000       1,067,000       1,176,000
     Equity-based compensation:
         Research and development...............................         22,000                          30,000
         Sales and marketing....................................          6,000                           9,000
         General and administrative.............................        194,000                         261,000           7,000
                                                                    -----------     -----------     -----------     -----------
Total operating expenses........................................      1,480,000       1,398,000       2,723,000       2,833,000
                                                                    -----------     -----------     -----------     -----------

Income (loss) from operations ..................................         90,000        (571,000)       (559,000)       (723,000)

Interest and other income (expense), net .......................        (26,000)         57,000         (99,000)         42,000
                                                                    -----------     -----------     -----------     -----------

Income (loss) before provision for income taxes ................         64,000        (514,000)       (658,000)       (681,000)

Provision for income taxes .....................................          2,000           4,000           3,000           6,000
                                                                    -----------     -----------     -----------     -----------

Net income (loss) ..............................................   $     62,000    $   (518,000)   $   (661,000)   $   (687,000)
                                                                   ============    ============    ============    ============

Basic and diluted net income (loss) per common share ...........   $        0.0    $      (0.01)   $      (0.01)   $      (0.01)
                                                                   ============    ============    ============    ============
  Weighted average common shares outstanding:
  Basic ........................................................     76,629,000      62,956,000      75,701,000      61,291,000
                                                                   ============    ============    ============    ============
  Fully diluted ................................................     83,780,000      62,956,000      75,701,000      61,291,000
                                                                   ============    ============    ============    ============

</TABLE>

(1)  Includes equity-based compensation of $54,000 and $71,000 for the three and
     six months ended June 30, 2004.

(2) Excludes equity-based compensation, which is presented separately.

 See accompanying notes to unaudited condensed consolidated financial statements


                                       5
<PAGE>

<TABLE>
<CAPTION>

                                                ON2 TECHNOLOGIES, INC.
                               UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                                  Six Months Ended June 30,
                                                                                  --------------------------
                                                                                      2004          2003
                                                                                  -----------    -----------
 Cash flows from operating activities:
<S>                                                                               <C>            <C>
  Net .........................................................................   $  (661,000)   $  (687,000)
  loss
    Adjustments to reconcile net loss to net cash used in operating activities:
     Equity based compensation ................................................       371,000          7,000
     Depreciation and .........................................................        60,000        476,000
     amortization
     Writeoff of fixed ........................................................        18,000
     assets
     Amortization of debt discount ............................................        15,000         11,000
     Unrealized loss on marketable equity securities ..........................        68,000             --
   Changes in operating assets and liabilities:
     Accounts receivable ......................................................       424,000       (549,000)
     Prepaid expenses and other assets ........................................      (133,000)       (90,000)
     Accounts payable accrued expenses and other liabilities ..................      (166,000)      (157,000)
     Deferred revenue .........................................................        67,000         60,000
                                                                                  -----------    -----------

Net cash provided by (used) in operating activities ...........................        63,000       (929,000)
                                                                                  -----------    -----------
Cash flows from investing activities:

  Purchases of property and equipment .........................................       (15,000)       (17,000)
                                                                                  -----------    -----------

Net cash used in investing activities .........................................       (15,000)       (17,000)
                                                                                  -----------    -----------
Cash flows from financing activities:

  Principal payments on capital lease obligations .............................        (2,000)        (2,000)
  Purchase of common stock warrants ...........................................                      (42,000)
  Proceeds from term-loan, net of repayments ..................................       123,000
  Proceeds from the sale of common stock ......................................                    1,313,000
  Proceeds from exercise of common stock options ..............................        67,000        137,000
                                                                                  -----------    -----------

Net cash provided by financing activities .....................................       188,000      1,406,000
                                                                                  -----------    -----------
Net change in cash and cash equivalents .......................................       236,000        460,000

Effect of exchange rate changes on cash and cash equivalents ..................        23,000         (1,000)

Cash and cash equivalents, beginning of period ................................     2,963,000        553,000
                                                                                  -----------    -----------
Cash and cash equivalents, end of period ......................................   $ 3,222,000    $ 1,012,000
                                                                                  ===========    ===========
</TABLE>


                                       6
<PAGE>

<TABLE>
<CAPTION>

                                             ON2 TECHNOLOGIES, INC.
                        UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                  (CONTINUED)

      SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND NON-CASH INVESTING AND FINANCING ACTIVITIES:

                                                                                                 Six Months Ended June 30,
                                                                                             ----------------------------------
                                                                                                 2004                 2003
                                                                                             --------------      --------------

 Cash paid during the period for:
<S>                                                                                          <C>                 <C>
    Interest...............................................................................  $        3,000      $        5,000
                                                                                             ==============      ==============
    Taxes..................................................................................  $        2,000      $        6,000
                                                                                             ==============      ==============
  Acquisition of fixed assets under capital leases.........................................  $       53,000
                                                                                             ==============
  Conversion of debentures into shares of common stock.....................................  $      100,000
                                                                                             ==============
  Conversion of preferred stock into shares of common stock................................  $       12,000
                                                                                             ==============
  Marketable equity securities received for accounts receivable............................  $      150,000
                                                                                             ==============
  Unearned compensation from the issuance of restricted common stock, net of forfeiture ...  $      835,000
                                                                                             ==============

</TABLE>

      See accompanying notes to condensed consolidated financial statements


                                       7
<PAGE>

                             ON2 TECHNOLOGIES, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1) Description of On2 Technologies, Inc.

      On2  Technologies,  Inc.  ("On2"  or the  "Company")  is a  leading  video
compression   technology   firm.  The  Company  has  developed  its  proprietary
technology  platform and video  compression/decompression  software ("codec") to
deliver  high-quality  video at the  lowest  possible  data  rates to intra- and
internets, such as set-top boxes, the Internet and wireless devices. The Company
offers  a suite  of  products  and  professional  services  that  encompass  its
proprietary compression technology. The Company's professional service offerings
include  customized  engineering  and consulting  services and high-level  video
encoding.  In addition,  the Company licenses its software products for use with
video delivery platforms.

      The Company's business is characterized by rapid technological change, new
product development and evolving industry  standards.  Inherent in the Company's
business  model are  various  risks and  uncertainties,  including  its  limited
operating  history,  unproven  business  model and the  limited  history  of the
industry in which it operates.  The Company's  success may depend, in part, upon
the wide adoption of video  delivery  mediums,  prospective  product and service
development efforts, and the acceptance of the Company's technology solutions by
the marketplace.

(2) Basis of Presentation

      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.

      The interim  condensed  consolidated  financial  statements are unaudited.
However, in the opinion of management, the interim data include all adjustments,
consisting  only  of  normal,  recurring  adjustments,   necessary  for  a  fair
presentation of the consolidated  results for the interim periods. The condensed
consolidated financial statements included herein have been prepared pursuant to
the rules and  regulations of the Securities  and Exchange  Commission  ("SEC").
Certain information and footnote  disclosures  normally included in consolidated
financial statements prepared in accordance with accounting principals generally
accepted in the United States of America have been condensed or omitted pursuant
to such  rules  and  regulations.  The  Company  believes  that the  disclosures
included herein are adequate to make the  information  presented not misleading.
These condensed  consolidated financial statements should be read in conjunction
with the annual financial statements and notes thereto included in the Company's
Annual Report on Form 10-KSB filed with the SEC on March 30, 2004.

(3) Stock-Based Compensation

      Statement of Financial  Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based  Compensation" encourages the use of the fair value based method
of accounting for stock-based employee compensation.  Alternatively, SFAS No.123
allows  entities to continue to apply the intrinsic  value method  prescribed by
Accounting  Principles Board ("APB") Opinion 25, "Accounting for Stock Issued to
Employees", and related interpretations and provide pro forma disclosures of net
income (loss) and earnings  (loss) per share,  as if the fair value based method
of accounting  had been applied to employee  awards.  The Company has elected to
continue to apply the  provisions of APB Opinion 25 and provide the  disclosures
required  by  SFAS  No.  123 and  SFAS  No.  148,  "Accounting  for  Stock-Based
Compensation - Transition and Disclosure".  The following table  illustrates the
effect on net  income  (loss)  and  earnings  (loss) per share if the fair value
based method had been applied to all awards.


                                       8
<PAGE>

<TABLE>
<CAPTION>

                            Three months ended, June 30,    Six months ended, June 30,
                             --------------------------    ----------------------------
                                 2004          2003           2004            2003
                             -----------    -----------    -----------    -------------

<S>                          <C>            <C>            <C>            <C>
Reported net income (loss)   $    62,000    $  (518,000)   $  (661,000)   $    (687,000)

Stock-based employee
 compensation  determined
 under the fair
 value-based method             (157,000)      (235,000)      (358,000)        (386,000)
                             -----------    -----------    -----------    -------------

Pro forma net loss           $   (95,000)   $  (753,000)   $(1,019,000)   $  (1,073,000)
                             ===========    ===========    ===========    =============
Loss per common share
 (basic and diluted):

    As reported              $      0.00    $     (0.01)   $     (0.01)   $       (0.01)
                             ===========    ===========    ===========    =============

    Pro forma                $      0.00    $     (0.01)   $     (0.01)   $       (0.02)
                             ===========    ===========    ===========    =============

</TABLE>

      During 2004 the company  granted  restricted  stock to its  employees  and
directors  as  compensation.  The company  issued  870,000  shares of its common
stock, net of forfeitures of 20,000 shares,  with a fair value of $835,000.  The
restricted   stock  vests  over  a  period  of  nine  months  and  requires  the
employee/director  to be  employed/affiliated  with the  company on the  vesting
date.  The related  compensation  expense of $276,000 and $371,000 for the three
and  six  months  ended  June  30,  2004,  respectively,   is  included  in  the
determination of reported net income (loss) for those periods.

(4) Marketable Equity Securities

      During the first quarter of 2004 the Company  received 469,000 shares of a
customer's  publicly  traded  common  stock with a market  value of  $150,000 in
payment of an outstanding account receivable pursuant to a December 2003 license
agreement. The market value on June 30, 2004 declined to $82,000 and the Company
recorded  an expense of $7,000 and  $68,000  for the three and six months  ended
June 30, 2004 as unrealized loss on marketable  equity  securities.  During 2004
the Company's chief executive officer became a director of this company.

(5) Beijing E-world

      In June  2003 On2  entered  into two  source  code  license  and  software
distribution  agreements with Beijing E-World  Technology Co., Ltd  ("E-world").
The two separate license arrangements granted E-World rights to use On2's source
code in its video disk (EVD) and high definition  television (HDTV) products and
in its non-EVD/HDTV products.

      The EVD/HDTV  agreement  provides that E-World will pay On2 $50,000 within
10 days of the  effective  date of the agreement  and also  establishes  royalty
rates for each unit manufactured.  The arrangement  provides that,  beginning in
the first calendar  quarter of 2004 and  continuing  through the last quarter of
2005, E-world will pay On2 certain minimum amounts based on anticipated  numbers
of units to be manufactured  in the relevant  quarters (with excess actual units
manufactured  in 2004 reducing the subsequent  year's minimum  obligation).  The
total two-year  minimum  royalty value due to On2 is  approximately  $4,900,000.
Nonrefundable payments for royalties,  including minimum royalties,  are payable
quarterly, beginning with the quarter ending March 31, 2004.


                                       9
<PAGE>

      The non-EVD/HDTV  arrangement  provides that E-World will pay On2 $250,000
within 10 days of the effective date of the agreement,  $400,000 upon completion
of the Initial Port (porting of the Encoder and Decoder to the Chips by E-World)
and $350,000 within 6 months of completion of the Initial Port. The non-EVD/HDTV
license arrangement also provides that,  beginning in the first calendar quarter
of 2004 and  continuing  through the last quarter of 2005,  E-world will pay On2
certain minimum amounts based on anticipated numbers of units to be manufactured
in the relevant quarters (with excess actual units manufactured in 2004 reducing
the subsequent  year's minimum  obligation).  The total two-year minimum royalty
value  to  On2  for  the  non-EVD  HDTV  license  is   approximately   $100,000.
Nonrefundable payments for royalties,  including minimum royalties,  are payable
quarterly beginning with the quarter ending March 31, 2004.

      The initial payments aggregating $300,000 were received in June 2003.

      Beyond the licensing of the software,  On2 will provide E-World with phone
and email source code porting,  optimization and integration  technical  support
for a period of 24 months at no additional charge.  E-World can elect to receive
an  additional 12 months of technical  support for an  additional  $37,500 under
each of the two arrangements.

      The  accompanying  condensed  consolidated  financial  statements  do  not
reflect  $822,000 for minimum  royalties for the six months ended June 30, 2004.
Management  believes  these  payments  are due from  E-World  under the  license
agreements,  however  E-world  has not yet  paid  this  sum.  On2 has  begun  an
arbitration  proceeding in London against E-world as provided for in the license
agreements. The Company has consulted with attorneys in New York and Beijing and
believes that it is likely that it will prevail in the arbitration, and that any
judgment in the arbitration  proceeding will be enforceable in China, which is a
signatory  to the New York  Convention  on  enforcement  of foreign  arbitration
awards.  In addition,  the Company also believes  that the $750,000  source code
fees are due and payable because E-World has not made reasonable best efforts to
complete the Initial Port as provided for under the contract.

      Under its  agreements  with E-World,  as amended  during the quarter ended
December 31, 2003,  On2 has agreed to pay to E-world a portion of royalties that
the Company receives from sales to other customers in China. Cost of revenue for
the six months ended June 30, 2004 includes $47,000 paid to E-World.

(6) Customer concentration

      For the three months ended June 30, 2004,  one customer  accounted for 92%
of revenue.  For the six months ended June 30, 2004, one customer  accounted for
67% of revenue. Three customers accounted for 91% of revenue and three customers
accounted  for 77% of revenue for the three and six months  ended June 30, 2003,
respectively.


                                       10
<PAGE>

(7) Term-loan

      During  2004 the  company  financed  certain  insurance  policies  using a
term-loan.  The  principal  balance is  $185,000  as of June 30,  2004 and bears
interest at a rate of 4.95% with a term of nine  months  with the first  payment
due in July 2004.

(8) Conversion of Series A Secured Convertible Debentures

      During  the  second  quarter  of 2004 a holder of the  Company's  Series A
secured Convertible  Debentures  converted $100,000 of par value debentures into
common stock.  The Company issued 893,000 shares of common stock in exchange for
the debentures.

(9) Conversion of Preferred Stock

      During  the  second  quarter  of 2004 the  holder of  Series  C-V and C-VI
preferred stock  converted the preferred stock into shares of common stock.  The
conversion  consisted of 364,000 shares of Series C-V into 500,000 shares of the
Company's  common  stock and the  conversion  of 840,000  shares of Series  C-VI
preferred stock into 900,000 shares of the Company's common stock.


                                       11
<PAGE>

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

      This document  contains  forward-looking  statements within the meaning of
Section 27A of the  Securities  Act of 1933 and  Section  21E of the  Securities
Exchange Act of 1934.  These  statements  relate to future  events or our future
financial  performance and are not statements of historical fact. In some cases,
you can  identify  forward-looking  statements  by  terminology  such as  "may,"
"will,"  "should,"   "expect,"  "plan,"   "anticipate,"   "assume,"   "believe,"
"estimate,"  "predict,"  "potential,"   "objective,   "  "forecast,"  "goal"  or
"continue,"  the negative of such terms,  their  cognates,  or other  comparable
terminology. These statements are only predictions, and actual events or results
may differ  materially.  Although we believe that the expectations  reflected in
the  forward-looking  statements  are  reasonable,  we cannot  guarantee  future
results, levels of activity, performance or achievements, and in all cases, such
statements are subject to the Company's ability to secure  additional  financing
or to increase revenues to support its operations.  We believe that our existing
funds and funds that we expect to  generate  will be  sufficient  to finance our
operations for the next 12 months.  There is no assurance that additional  funds
will not be required to support our operations. In this regard, the business and
operations  of the Company are subject to  substantial  risks that  increase the
uncertainty  inherent in the forward-looking  statements  contained in this Form
10-QSB.  You should  consider  the  material  presented  in this Form  10-QSB in
conjunction with  "Management's  Discussion and Analysis of Financial  Condition
and  Results of  Operations  - Risk  Factors  That May Affect  Future  Operating
Results" in the Company's Form 10-KSB for the year ended December 31, 2003.

      The inclusion of the forward-looking  statements should not be regarded as
a representation by the Company, or any other person, that such  forward-looking
statements  will  be  achieved.  We  undertake  no  duty  to  update  any of the
forward-looking  statements,  whether  as a result  of new  information,  future
events or  otherwise.  In light of the  foregoing,  readers are cautioned not to
place undue reliance on the forward-looking statements contained in this report.

OVERVIEW

      We are a leading video  compression  technology  firm. We have developed a
proprietary  technology  platform and the VPx family  (e.g.,  VP4,  VP5, VP6) of
video compression/decompression software ("codec") to deliver high-quality video
at the lowest possible data rates over proprietary  networks and the Internet to
set-top  boxes,  personal  computers  and wireless  devices.  Unlike other video
codecs that are based on  standard  compression  specifications  set by industry
groups (e.g., MPEG and H.264), our video compression software is based solely on
intellectual property that we developed and own ourselves.

      We offer the following suite of products and services that incorporate our
proprietary compression technology:


PRODUCTS                     o        video codecs;
                             o        audio codecs; and
                             o        encoding and server software, for
                                      use with video delivery platforms

SERVICES                     o        customized engineering and
                                      consulting services;
                             o        technical support; and
                             o        high-level video encoding



                                       12
<PAGE>

<TABLE>
<CAPTION>

      Our  customers  use our  products  and  services  chiefly to  provide  the
following video-related products and services to end users:

TYPE OF CUSTOMER APPLICATION                               EXAMPLES

<S>                                        <C>      <C>
Video and Audio Distribution over           o        providing video-on-demand services to
Proprietary Networks                                 residents in multi-dwelling units (MDUs)
                                            o        video surveillance

Consumer Electronic Devices                 o        digital video players
                                            o        digital video recorders

Wireless Applications                       o        delivery of video via satellite
                                            o        providing video to web-enabled cell phones
                                                     and PDAs

Video and Audio Distribution over           o        video-on-demand
IP-based Networks (Internet)                o        teleconferencing services
                                            o        video instant messaging

</TABLE>

      As discussed in greater  detail  below,  we earn revenue  chiefly  through
licensing  our software  and  providing  specialized  software  engineering  and
consulting services to customers. In addition to license fees, we often charge a
royalty fee based on the number of units of the customer's  products  containing
the relevant On2 software  products  that are sold or  distributed.  Some of our
agreements with customers also require that the customers pay us a percentage of
the revenues that they earn from any of their  products or services that use our
software.  Royalties may be subject to guaranteed minimum amounts.  We also sell
licenses to  third-party  resellers.  In  addition,  we  generally  require that
customers  pay us if they desire to receive any upgrades to our software  (e.g.,
from VP6 to VP7). We charge a fee for engineering and consulting services, based
on an estimate of the time it will take our  software  engineers  to provide the
services, or an hourly fee for ongoing services such as product support.

      The primary  factor that will be critical to our success is our ability to
continue to improve on our current video compression software so that it streams
the  highest-quality  video at the  lowest  transmission  rates (bit  rate).  We
believe  that our  video  compression  software  is highly  efficient,  allowing
customers  to  stream  comparatively   good-quality  video  (compared  with  our
competitors)  at low bit rates (i.e.,  over slow  connections)  and  unsurpassed
high-resolution video at high bit rates (i.e., over broadband  connections).  As
connection  speeds increase,  however,  the advantage that our  highly-efficient
software has over competing technology may decrease.

      Another  factor that may affect our success is the relative  complexity of
our  video  compression   software  compared  with  other  compression  software
producing  comparable  compression rates and image quality.  Software with lower
complexity  can run on a  computer  chip that is less  powerful,  and  therefore
generally  less  expensive,  than  would be  required  to run  software  that is
comparatively  more complex.  Increased  compression  rates frequently result in
increased  complexity.  While potential  customers desire software that produces
the  highest  possible  compression  rates  while  producing  the best  possible
decompressed  image,  they also desire to keep production costs low by using the
lowest-powered  and accordingly least expensive chips that will still allow them
to perform the processing they require. In addition, in some applications,  such
as mobile devices,  size constraints rather than price issues limit the power of
the chips embedded in such devices.  Of course, in devices where a great deal of
processing  power can be devoted to video  compression  and  decompression,  the
issue  of  software  complexity  is less  important.  In  addition,  in  certain
applications,  savings  in  chip  costs  related  to the  use of low  complexity
software may be offset by increased  costs (or reduced  revenue)  stemming  from
less efficient compression (e.g., increased bandwidth costs).


                                       13
<PAGE>

      One  of  the  most  significant  recent  trends  in  our  business  is our
increasing  reliance on the success of the product deployments of our customers.
As  referenced  above,  an  increasing  number of our  license  agreements  with
customers  provide for the  payment of license  fees that are  dependent  on the
number of units of a customer's product incorporating our software that are sold
or the amount of revenue  generated  by a customer  from the sale of products or
services that  incorporate our software.  We have chosen this  royalty-dependent
licensing model because,  as a company of only 26 employees,  we do not have the
product  development  or marketing  resources  to develop and market  end-to-end
video  solutions.  Instead,  our  software is  primarily  intended  for use as a
building  block for companies  that are  developing  end-to-end  video  products
and/or  services.  Although we are confident  that we have adopted the licensing
model most  appropriate  for a  business  of our size and  expertise,  a natural
result of this  licensing  model is that the amount of revenue  we  generate  is
highly dependent on the success of our customers'  product  deployments.  If the
products of customers with whom we have  established per unit royalty or revenue
sharing  relationships do not generate  significant  sales, such revenue may not
attain  significant  levels.  Conversely,  if one or  more  of  such  customers'
products are widely adopted, our revenues will likely be enhanced.

      Another  significant  recent  trend in our  business is the  emergence  of
Microsoft as a principal competitor in the market for digital media creation and
distribution technology.  Microsoft currently competes with us in the market for
digital media servers, players, codecs and other technology and services related
to digital distribution of media.  Microsoft's commitment to and presence in the
media  delivery  industry has  increased.  Microsoft  distributes  its competing
streaming  encoder,  media server,  player,  tools and digital rights management
products by bundling them with its Windows  operating  systems and servers at no
additional  cost or otherwise  making them  available free of charge or at a low
cost.  Microsoft's  practices  have caused,  and may continue to cause,  pricing
pressure on our revenue generating products and services and may affect usage of
our  competing  products and  formats.  Microsoft's  practices  have led in some
cases, and could continue to lead to, longer sales cycles, decreased sales, loss
of existing and potential  customers and reduced market share.  In addition,  we
believe that Microsoft has used and may continue to use its monopoly position in
the computer  industry and its  financial  resources to secure  preferential  or
exclusive  distribution,  use and  bundling  contracts  for its  media  delivery
technologies  and products with third parties,  such as ISPs,  content  delivery
networks,  content providers,  entertainment and media companies, VARs and OEMs,
including third parties with whom we have relationships.

      A  potential  trend  that  we are  currently  monitoring  is the  possible
emergence of H.264 as a competitor in the video  compression  field.  H.264 is a
standards-based  codec that is the successor to MPEG-4.  Although we believe our
technology is superior to H.264,  H.264 may become  widely  adopted by potential
customers because,  as a standards-based  codec,  there are numerous  developers
programming  to the  H.264  standard  and  developing  products  based  on  such
standard.  In  addition,  there are  certain  customers  that  prefer to license
standards-based codecs.

      The  market  for  digital  media  creation  and  delivery   technology  is
constantly  changing and intensely  and  increasingly  competitive.  We have and
continue  to take a number  of steps to  address  this  competition.  First  and
foremost,    we    focus    on    providing    our    customers    with    video
compression/decompression  technology  that delivers the highest  possible video
quality at the lowest  possible  data  rates.  In order to do this,  we devote a
significant  portion of our  engineering  capacity to research and  development.
Although we expect that  competition  from Microsoft and others will continue to
intensify,  and that additional  competition from H.264 may emerge, we currently
expect that our video compression technology will remain competitive and that we
will continue to innovate in the video  compression  field.  We also address the
competitive  threats that we face by focusing on developing  relationships  with
customers who do not want to do business with  Microsoft  and/or do not find the
complex and rigid standards-based licenses and fee structures appealing.


                                       14
<PAGE>

Critical Accounting Policies and Estimates

      This  discussion  and analysis of our  financial  condition and results of
operations are based on our condensed  consolidated  financial  statements  that
have been prepared  pursuant to the rules and  regulations of the Securities and
Exchange  Commission  ("SEC").  The  preparation  of our condensed  consolidated
financial  statements requires management to make estimates and assumptions that
affect  the  reported  amounts  of  assets  and  liabilities  at the date of the
financial statements and the reported amounts of revenue and expenses during the
reporting  period.  Actual results could materially differ from those estimates.
The condensed  consolidated  financial  statements and the related notes thereto
should be read in  conjunction  with the  following  discussion  of our critical
accounting  policies  and our Form 10-KSB  filed with the SEC on March 30, 2004.
Our critical accounting policies and estimates are:

Revenue recognition

Valuation of goodwill, intangible assets and other long-lived assets

Revenue recognition.  We currently recognize revenue from professional  services
and the sale of software licenses.  As described below,  significant  management
judgments  and  estimates  must be made and used in  determining  the  amount of
revenue  recognized in any given  accounting  period.  Material  differences may
result in the amount and timing of our revenue for any given  accounting  period
depending upon judgments made by or estimates utilized by management.

      We recognize  revenue in  accordance  with  Statement of Position  ("SOP")
97-2, "Software Revenue  Recognition",  as amended by SOP 98-4, "Deferral of the
Effective  Date  of SOP  97-2,  Software  Revenue  Recognition"  and  SOP  98-9,
"Modification  of SOP 97-2 with  Respect  to Certain  Transactions".  Under each
arrangement,  revenues are recognized when a  non-cancelable  agreement has been
signed and the customer  acknowledges  an  unconditional  obligation to pay, the
products  or  applications  have  been  delivered,  there  are no  uncertainties
surrounding  customer  acceptance,  the fees are  fixed  and  determinable,  and
collection is considered  probable.  Revenues  recognized from  multiple-element
software  arrangements are allocated to each element of the arrangement based on
the  fair  values  of the  elements,  such as  product  licenses,  post-contract
customer support,  or training.  The determination of the fair value is based on
the vendor specific  objective evidence available to us. If such evidence of the
fair value of each  element  of the  arrangement  does not  exist,  we defer all
revenue from the arrangement  until such time as evidence of the fair value does
exist or until all elements of the arrangement are delivered.

      Our software licensing  arrangements  typically consist of two elements: a
software  license and  post-contract  customer  support  ("PCS").  We  recognize
license  revenues based on the residual method after all elements other than PCS
have been  delivered as  prescribed  by SOP 98-9. We recognize PCS revenues over
the term of the maintenance  contract or on a "per usage" basis,  depending upon
the terms of the contract.  Vendor specific objective evidence of the fair value
of PCS is determined by reference to the price the customer will have to pay for
PCS when it is sold separately (i.e. the renewal rate).  Each license  agreement
offers  additional  PCS at a stated  price.  Revenue is recognized on a per-copy
basis for licensed software when each copy of the licensed software purchased by
the customer or reseller is  delivered.  We do not allow  returns,  exchanges or
price  protection for sales of software  licenses to our customers or resellers,
and  we  do  not  allow  our  resellers  to  purchase  software  licenses  under
consignment arrangements.


                                       15
<PAGE>

      When engineering and consulting services are sold together with a software
license,  the  arrangement  typically  requires  customization  and  integration
(porting)  of the  software  into a third  party  hardware  platform.  In  these
arrangements, we require the customer to pay a fixed fee for the engineering and
consulting  services  and  generally  require a  licensing  fee in the form of a
per-unit  royalty.  We account for  engineering  and consulting  arrangements in
accordance with SOP 81-1,  "Accounting for Performance of Construction  Type and
Certain  Production Type Contracts".  When reliable  estimates are available for
the costs and  efforts  necessary  to complete  the  engineering  or  consulting
services  and those  services do not  include  contractual  milestones  or other
acceptance  criteria,  we recognize  revenue under the  percentage of completion
contract  method based upon input measures,  such as hours.  When such estimates
are not available,  we defer all revenue recognition until we have completed the
contract and have no further obligations to the customer.

      Encoding Services consist of services that convert video and audio content
into formats for delivery to end-users. Encoding services are generally provided
under  per unit or time and  materials  contracts.  Under  these  contracts,  we
recognize  revenue  when  services  have been  rendered  and we have no  further
interest or obligation in the goods and services, which is generally the date on
which the goods or services have been delivered to the customer.

Valuation of Goodwill,  Intangible  Assets and Other Long-Lived  Assets. In June
2001, the Financial  Accounting  Standards  Board ("FASB")  issued  Statement of
Financial  Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets" ("SFAS No. 142"). SFAS 142 requires goodwill and other intangible assets
to be tested for  impairment at least  annually,  and written off when impaired,
rather than being amortized as previously required.

      Long-lived  assets and  identifiable  intangibles  with  finite  lives are
reviewed for impairment  whenever  events or changes in  circumstances  indicate
that the carrying amount of an asset may not be recoverable.  Recoverability  of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future  undiscounted  net cash flows expected to be generated by the
asset. If such assets are considered to be impaired,  the impairment  recognized
is measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets.  Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.

Results of Operations

Revenue.  Revenue for the three  months  ended June 30, 2004 was  $1,570,000  as
compared to $827,000 for the three  months ended June 30, 2003.  Revenue for the
six months ended June 30, 2004 was  $2,164,000 as compared to $2,110,000 for the
six months ended June 30, 2003.  Revenue for the three and six months ended June
30, 2004 and 2003 was derived  primarily from the sale of software  licenses and
engineering and consulting  services.  The Company believes that the increase in
revenue  is  attributed  to a wider  acceptance  of On2's  products  in both the
domestic  and  foreign  market.  For the  three  months  ended  June  30,  2004,
approximately  92% of revenue  was  generated  from the  license of  software to
Macromedia, Inc.


                                       16
<PAGE>

Operating expenses

      The Company's operating expenses consist of cost of revenue,  research and
development,  sales and  marketing  and  general  and  administrative  expenses.
Operating  expenses for the three months ended June 30, 2004 were  $1,480,000 as
compared to  $1,398,000  for the three  months  ended June 30,  2003.  Operating
expenses were  $2,723,000  for the six months ended June 30, 2004 as compared to
$2,833,000 for the six months ended June 30, 2003.

Cost of Revenue. Cost of revenue includes personnel and consulting  compensation
costs, related overhead expenses, certain hardware costs, fees paid for licensed
technology,  depreciation  costs and the  amortization of purchased  technology.
Cost of  revenue  for the three  months  ended  June 30,  2004 was  $335,000  as
compared to $438,000 for the three months ended June 30, 2003.  Cost of revenues
for the six months  ended June 30, 2004 was $677,000 as compared to $842,000 for
the six months ended June 30,  2003.  The decrease in expenses for the three and
six months ended June 30, 2004 is primarily  due to a reduction in  amortization
of purchased  technology  that was fully  amortized  as of the third  quarter of
2003,  partially offset by equity-based  compensation in the three and six month
periods ended June 30, 2004.

Research  and  Development.   Research  and  development   expenses,   excluding
equity-based  compensation,  primarily  consist of salaries and related expenses
and  consulting  fees  associated  with the  development  and  production of our
products and services,  operating lease costs and depreciation  costs.  Research
and development  expenses for the three months ended June 30, 2004 were $206,000
as compared to $291,000 for the three  months ended June 30, 2003.  Research and
development  expenses  for the six months  ended June 30, 2004 were  $448,000 as
compared to $616,000 for the six months ended June 30,  2003.  The  decreases in
expenses were  primarily  attributed to a reduction in  compensation  and travel
costs.

Sales  and  Marketing.  Sales and  marketing  expenses,  excluding  equity-based
compensation, consist primarily of salaries and related costs of sales, business
development and marketing personnel,  tradeshow costs, marketing and promotional
costs incurred to create brand awareness and public  relations  expenses.  Sales
and marketing expenses for the three months ended June 30, 2004 were $121,000 as
compared  to  $107,000  for the three  months  ended  June 30,  2003.  Sales and
marketing  expenses  for the six months  ended June 30,  2004 were  $231,000  as
compared to $192,000 for the six months ended June 30, 2003.  The increases were
primarily  attributed to an increase in  compensation  and benefits costs due to
the addition of personnel.

General and  Administrative.  General  and  administrative  expenses,  excluding
equity-based  compensation,  consist primarily of salaries and related personnel
costs for general corporate functions including finance, human resources,  legal
and  facilities,  outside legal,  professional  fees and insurance.  General and
administrative  expenses for the three months ended June 30, 2004 were  $596,000
as compared with $562,000 for the three months ended June 30, 2003.  General and
administrative  expenses for the six months ended June 30, 2004 were  $1,067,000
as compared with $1,176,000 for the six months ended June 30, 2003. The increase
for the three month  period is primarily  due to increases in accrued  vacation,
benefits,  consulting  fees  and  professional  fees,  offset  by  decreases  in
salaries,  depreciation and travel and  entertainment.  The decrease for the six
months ended June 30, 2004 was primarily  attributable to decreases in salaries,
travel and entertainment and depreciation.

Equity-Based  Compensation.  During 2004 the company  granted  870,000 shares of
restricted  common stock, net of forfeitures of 20,000 shares,  to its employees
and directors as compensation, which had a fair value of $835,000 on the date of
grant.  The restricted stock vests over a period of nine months and requires the
employee/director  to be affiliated  with the company on the vesting  date.  The
compensation  expense was  $276,000  and  $371,000  for the three and six months
ended June 30,  2004,  respectively.  Equity-based  compensation  of $54,000 and
$71,000 is included  in cost of revenue for the three and six months  ended June
30,  2004,  respectively.  Equity-based  compensation  of  $22,000  and  $30,000
relating to research and  development,  $6,000 and $9,000  relating to sales and
marketing  and  $194,000 and  $261,000  relating and general and  administrative
costs for the three and six months ended June 30, 2004, respectively,  have been
presented separately.


                                       17
<PAGE>

Interest and other income  (expense),  net. Interest and other income (expense),
net was  ($26,000)  for the three  months  ended June 30,  2004 as  compared  to
$57,000 for the three  months  ended June 30,  2003.  Interest  and other income
(expense),  net was ($99,000) for the six months ended June 30, 2004 as compared
to $42,000 for the six months  ended June 30,  2003.  Interest  and other income
(expense),  net  primarily  consists  interest  earned  money  market  accounts,
interest incurred for capital lease obligations, term-loans and the interest and
amortization  of debt  discount  related  to the  Series A  secured  convertible
debentures.  The  increase  in other  expense,  net for the three and six months
ended June 30, 2004 is primarily  attributable to the write down, to market,  of
the publicly  traded stock the company  received in the first quarter of 2004 in
payment of an outstanding receivable.

      As of June 30, 2004, we had approximately 26 full-time employees.

Liquidity and Capital Resources

      As of  June  30,  2004,  we had  cash  reserves  and  working  capital  of
$3,222,000 and $3,271,000, respectively as compared to $2,963,000 and $3,520,000
at December 31, 2003.

Net cash provided by (used in) operating  activities  was $63,000 and ($929,000)
for the six months ended June 30, 2004 and 2003, respectively. Net cash provided
by operating  activities  for the six months  ended June 30, 2004 was  primarily
attributable  to a decrease in accounts  receivable  of  $424,000,  equity-based
compensation of $371,000,  an unrealized loss on marketable equity securities of
$68,000,  depreciation  and  amortization of $60,000 and an increase in deferred
revenue of $67,000  offset by a net loss of  $661,000,  an  increase  in prepaid
expenses  and other  assets of $133,000  and a decrease in accounts  payable and
accrued expenses of $166,000.  Net cash used in operating activities for the six
months ended June 30, 2003 was primarily attributable to a net loss of $687,000,
an  increase  in  accounts  receivable  of  $549,000  and a decrease in accounts
payable and accrued  expenses of $157,000,  partially offset by depreciation and
amortization of $476,000.

      Net cash used in investing  activities was $15,000 and $17,000 for the six
months ended June 30, 2004 and 2003, respectively, which relates to purchases of
property and equipment.

      Net cash provided by financing  activities was $188,000 and $1,406,000 for
the six  months  ended  June  30,  2004 and  2003,  respectively.  The  decrease
primarily  relates to a decrease in the  proceeds  from the sale of common stock
under  the  company's  equity  line of credit  and  proceeds  received  from the
exercise of common stock options.

      We  currently  have no material  commitments  for the next 12 months other
than those under our operating lease  arrangements.  These arrangements  consist
primarily  of lease  arrangements  for our  office  space  in New York  City and
Clifton Park, New York. The aggregate  required  payments for the next 12 months
under these  arrangements  are  $140,000.  Notwithstanding  the above,  our most
significant   non-contractual  operating  costs  for  the  next  12  months  are
compensation and benefit costs,  insurance costs and general overhead costs such
as telephone and utilities.  During the next 12 months, we anticipate  incurring
approximately $400,000 per month in cash operating costs.


                                       18
<PAGE>

      Based on our current working  capital  requirements,  management  believes
additional funding will come from cash positive operating results. Additionally,
we may  require  additional  financing  to  fund  revenue  growth,  develop  new
technologies or acquire  strategic  assets.  Our management is actively pursuing
increases  to our net cash  flows  through  increases  in  revenues.  Management
believes  that  increases  to operating  cash flow,  primarily  through  revenue
growth,  will generate  sufficient cash flow to fund our operations for the next
12  months.  However,  there  are  no  assurances  that  such  matters  will  be
successfully consummated. See "Management's Discussion and Analysis of Financial
Condition  and  Results of  Operations  - Risk  Factors  That May Affect  Future
Operating Results" in the Company's 10-KSB for the year ended December 31, 2003.

      In July 2001 the Company  entered into a Software  Development and License
Agreement  with Real Networks,  Inc. Under terms of the agreement,  we agreed to
develop a software  plug-in to  RealPlayer  that would allow  consumers  to play
files encoded in our VP4 and VP5  compression  format using the  RealPlayer.  In
conjunction  with the  development  of the  codec  software,  we also  agreed to
develop  a  software  plug-in  to  the  RealSystem   Server  that  would  enable
broadcasters  to stream VP4 and VP5 encoded files and a software  plug-in to the
RealProducer that would enable users of the RealProducer to encode content using
VP4  and  VP5.  In  order  for  us to  develop  the  plug-ins  described  in the
RealNetworks  agreement,  RealNetworks  was  required to provide us with certain
development software as well as fulfill certain other obligations.  RealNetworks
failed to deliver  such  software  and  perform  such other  obligations.  After
honoring the contract from its inception and attempting to resolve the situation
with RealNetworks for over 9 months through business discussions, in May 2002 we
notified  RealNetworks  that we were  terminating  the  agreement.  RealNetworks
responded and disputed our right to terminate the agreement and further  claimed
that we were in  breach  of the  agreement.  We  responded  by  reiterating  our
positions.  We have not had any contacts or discussions with RealNetworks  since
delivering this response.  As a result,  we are not generating any revenues from
the sale of RealNetworks related products.

      The Company  believes that our May 2002  termination  of the  RealNetworks
agreement was effective.  However, because the arrangement with RealNetworks was
exclusive  in certain  respects,  should it hereafter  be  determined  that such
termination  was not effective,  we could be restricted  from  supporting  other
software  platforms,  including certain components of our own software platforms
and,  although we do not believe that it would be the case, we might be found to
have breached the agreement with  RealNetworks.  Whether we might have liability
to RealNetworks depends on a variety of factors,  including whether RealNetworks
met its  obligations  to us,  whether it caused  any  breach  that we might have
committed and whether it otherwise  has  liability to us in connection  with the
agreement.

      We have experienced  significant  operating losses and negative  operating
cash  flows to date.  Our  management's  plan to  increase  our cash  flows from
operations  relies  significantly  on  increases in revenue  generated  from our
broadband  technology  services,  products and licenses.  However,  there are no
assurances  that we will be successful in effecting such  increases.  The market
for  distribution  of  broadband  technology  services  is  highly  competitive.
Additionally,  our capital  requirements  depend on numerous factors,  including
market acceptance of our technology and services, research and development costs
and the  resources we spend on marketing  and selling our products and services.
Additionally,  we continue to evaluate investments in complementary  businesses,
products and services, some of which may be significant.

      In the event we cannot procure appropriate capital resources,  through net
operating  cash  flows,  we may be  required  to reduce the  development  of our
products  and  services or scale back  current  operations  until  funds  become
available on terms acceptable to us.


                                       19
<PAGE>

Impact of Recently Issued Accounting Pronouncements

None
ITEM 3. CONTROLS AND PROCEDURES.

(a) Evaluation of Disclosure Controls and Procedures:

      Disclosure controls and procedures are designed to ensure that information
required to be  disclosed in the reports  filed or submitted  under the Exchange
Act is recorded,  processed,  summarized  and  reported  within the time periods
specified  in the SEC's  rules and forms.  Disclosure  controls  and  procedures
include,  without  limitation,  controls and procedures  designed to ensure that
information required to be disclosed in the reports filed under the Exchange Act
is accumulated  and  communicated  to management,  including the Chief Executive
Officer and Chief Financial Officer,  as appropriate,  to allow timely decisions
regarding  required  disclosure.  Within the 90 days prior to the filing of this
report,  the Company  carried out an evaluation,  under the supervision and with
the  participation  of the Company's  management,  including the Company's Chief
Executive  Officer and Chief  Financial  Officer,  of the  effectiveness  of the
design and operation of the Company's disclosure controls and procedures.  Based
upon and as of the date of that  evaluation,  the Chief  Executive  Officer  and
Chief Financial  Officer  concluded that the Company's  disclosure  controls and
procedures are effective to ensure that information  required to be disclosed in
the reports the Company  files and submits  under the  Exchange Act is recorded,
processed, summarized and reported as and when required.

(b) Changes in Internal Controls:

There were no changes in the  Company's  internal  controls or in other  factors
that could have significantly  affected those controls subsequent to the date of
the Company's most recent evaluation.


                                       20
<PAGE>

PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On May 3, 2004, On2 commenced arbitration against its customer, Beijing E-world.
The arbitration is pending in the London Court of International  Arbitration and
relates to a dispute  arising from two license  agreements  that On2 and E-world
entered into in June 2003. Under those agreements,  On2 licensed the source code
to its video  compression  (codec)  technology  to E-world for use in  E-world's
video disk (EVD) and high definition  television  (HDTV) products as well as for
other  non-EVD/HDTV  products.  The  license  agreements  imposed  a  number  of
obligations on E-world, including the requirements that:

o     Commencing in the first calendar  quarter of 2004 and  continuing  through
      2005, E-world pay to On2 certain minimum quarterly payments;

o     E-world  cause On2's  software  to be  included in a new Chinese  national
      standard for EVD by December 31, 2003; and

o     E-world use best reasonable  efforts to have On2's video codec "ported" to
      (i.e., integrated with) a customized chip to be used in EVD players.

On2's  arbitration  claim  alleges  that,  despite  its  obligations  under  the
contract, E-world has:

o     Failed  to pay On2 the  first  quarterly  payment  of  $411,000,  which is
      currently due and owing;

o     Failed to cause On2's software to be included in the EVD standard; and

o     Failed to use best reasonable  efforts to have On2's video codec ported to
      a chip.

On2 has requested that the  arbitrator  award it $4,992,000 in damages under the
contract and grant it further relief as may be just and equitable.

E-world has responded by denying each of On2's claims and has requested that the
arbitrator  find  that  E-world  has  complied  with the  terms  of the  license
agreements. E-world has also filed a counterclaim alleging that On2 has breached
certain contractual  restrictions on public disclosures  relating to the license
agreements.   On2  has  responded  to  E-world's  counterclaim  by  denying  the
allegation.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

The  Company's  2004 Annual  Meeting of  Stockholders  was held on May 21, 2004.
Represented at the Annual Meeting, either in person or by proxy, were 53,175,904
voting  shares.  The  following  actions  were taken by a vote of the  Company's
stockholders at the Annual Meeting:

Messrs. Doug McIntyre,  William A. Newman, J. Allen Kosowsky,  Tom Weigman, Mike
Kopetski,  and  Michael  J.  Alfant  were  elected  to serve as  members  of the
Company's Board of Directors. The votes for Messrs. McIntyre,  Newman, Kosowsky,
Weigman, Kopetski, and Alfant were as follows:


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<PAGE>

                             FOR                  AGAINST              ABSTAIN

Douglas A. McIntyre       64,264,700              522,203              715,243
William A. Newman         64,260,430              526,473              715,243
J. Allen Kosowsky         64,779,504                7,399              715,243
Tom Weigman               64,781,404                5,499              715,243
Mike Kopetski             64,303,030              483,873              715,243
Mike Alfant               63,259,452            1,527,451              715,243

The  appointment  of Eisner LLP as the Company's  independent  certified  public
accountants  for  the  fiscal  year  ending  December  31,  2004  was  ratified;
65,076,459 votes were cast for the ratification; 268,045 votes were cast against
the  ratification;  and there  were  157,642  abstentions.  There  were no votes
withheld and no broker non-votes.

The proposal to amend the Company's certificate of incorporation,  as previously
amended,  to increase the number of authorized shares of Common Stock, par value
$0.01 per share, to 150,000,000 was adopted;  62,928,569 votes were cast for the
proposal; 2,443,345 votes were cast against the proposal; and there were 130,232
abstentions.

Item 6. Exhibits and Reports on Form 8-K


Exhibits

31.1   Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2   Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1   Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2   Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

      Reports on Form 8-K

      Current Report on Form 8-K filed on April 29, 2004.


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<PAGE>

SIGNATURES

In accordance  with the  requirements  of the Exchange Act, the  registrant  has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                               On2 Technologies, Inc.
                                      ------------------------------------------
                                                  (Registrant)



July 22, 2004                         /s/ Anthony Principe
-------------                         ------------------------------------------
   (Date)                             (Signature)
                                      Anthony Principe
                                      Vice President and Chief Financial Officer
                                      (Principal Financial Officer)


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