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

                                    FORM 10-Q
                                   (Mark One)

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

                                  For the quarterly period ended March 31, 2005.

|_|   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
of incorporation or organization)                       Identification No.)


21 Corporate Drive, Suite 103, Clifton Park, New York             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


      Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).                     |_| Yes  |X| 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 Sections12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.                                            |X| Yes |_| No


                                      -1-
<PAGE>

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

      Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest applicable date:

The number of shares of the Registrant's Common Stock, par value $0.01 ("Common
Stock"), outstanding as of April 21, 2005, was 88,505,315.


                                      -2-
<PAGE>

                                Table of Contents




<TABLE>
<CAPTION>
PART I -- FINANCIAL INFORMATION
                                                                                                               Page

Item 1.  Consolidated Financial Statements.
<S>                                                                                                            <C>
Condensed Consolidated Balance Sheets at March 31, 2005 (unaudited) and December 31, 2004......................  4
Unaudited Condensed Consolidated Statements of Operations,
  Three Months Ended March 31, 2005 and 2004...................................................................  5
Unaudited Condensed Consolidated Statements of Comprehensive Loss,
  Three Months Ended March 31, 2005 and 2004...................................................................  6
Unaudited Condensed Consolidated Statements of Cash Flows
  Three Months Ended March 31, 2005 and 2004...................................................................  7
Notes to Unaudited Condensed Consolidated Financial Statements.................................................  9

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations................. 14

Item 3.  Quantitative and Qualitative Disclosures About Market Risk............................................ 21

Item 4.  Controls and Procedures............................................................................... 21

PART II -- OTHER INFORMATION

Item 1.  Legal Proceedings..................................................................................... 23

Item 6.  Exhibits and Reports on Form 8-K...................................................................... 23

Signatures..................................................................................................... 24

Certifications................................................................................................. 25
</TABLE>


                                      -3-
<PAGE>

                         PART I -- FINANCIAL INFORMATION

Item 1.  Consolidated Financial Statements

                             ON2 TECHNOLOGIES, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                March 31,       December 31,
                                                                                  2005              2004
                                                                              -------------    -------------
                                                                               (unaudited)
                                    ASSETS
<S>                                                                           <C>              <C>

Current assets:
  Cash and cash equivalents...............................................    $   8,007,000    $   5,418,000
  Marketable equity securities ............................................         233,000          445,000
  Accounts receivable .....................................................         361,000          249,000
  Prepaid and other current assets ........................................         171,000          156,000
                                                                              -------------    -------------

     Total current assets .................................................       8,772,000        6,268,000

Property and equipment, net ...............................................         120,000           87,000
Other assets ..............................................................          53,000           80,000

     Total assets.........................................................    $   8,945,000    $   6,435,000
                                                                              =============    =============

                  LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable........................................................    $      37,000    $     177,000
  Accrued expenses ........................................................         251,000          393,000
  Deferred revenue ........................................................         146,000          153,000
  Term-loan ...............................................................          62,000
  Capital lease obligation ................................................          18,000           17,000
                                                                              -------------    -------------

     Total current liabilities ............................................         452,000          802,000

Capital lease obligation, excluding current portion .......................          21,000           26,000
Convertible debentures ....................................................         333,000          330,000
                                                                              -------------    -------------

      Total liabilities ...................................................         806,000        1,158,000

Commitments and contingencies

Stockholders' equity:
  Preferred stock .........................................................          33,000           33,000
  Common stock ............................................................         876,000          803,000
  Additional paid-in capital ..............................................     120,207,000      115,841,000
  Accumulated other comprehensive loss ....................................         (35,000)         (42,000)
  Accumulated deficit .....................................................    (112,942,000)    (111,358,000)
                                                                              -------------    -------------

    Total stockholders' equity ............................................       8,139,000        5,277,000
                                                                              -------------    -------------

    Total liabilities and stockholders' equity............................    $   8,945,000    $   6,435,000
                                                                              =============    =============
</TABLE>

See accompanying notes to unaudited condensed consolidated financial statements


                                      -4-
<PAGE>

                             ON2 TECHNOLOGIES, INC.
            UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                   Three Months Ended March 31,
                                                                                   ----------------------------
                                                                                       2005            2004
                                                                                   ------------    ------------

<S>                                                                                <C>             <C>
Revenue ........................................................................   $    353,000    $    594,000

Operating expenses:
     Cost of revenue (1) .......................................................        369,000         342,000
     Research and development (2) ..............................................        258,000         242,000
     Sales and marketing (2) ...................................................        111,000         110,000
     General and administrative (2) ............................................        717,000         471,000
     Equity-based compensation:
        Research and development ...............................................                          8,000
        Sales and marketing ....................................................                          3,000
        General and administrative .............................................                         67,000
                                                                                   ------------    ------------

Total operating expenses .......................................................      1,455,000       1,243,000
                                                                                   ------------    ------------

Loss from operations ...........................................................     (1,102,000)       (649,000)

Interest and other expense, net ................................................       (200,000)        (73,000)
                                                                                   ------------    ------------

Loss before provision for income taxes .........................................     (1,302,000)       (722,000)

Provision for income taxes .....................................................                          1,000
                                                                                   ------------    ------------

Net loss .......................................................................   $ (1,302,000)   $   (723,000)

Convertible preferred stock deemed dividend ....................................        180,000
Convertible preferred stock 8% dividend ........................................         81,000
Accretion of costs associated with the Series D Preferred Stock ................         21,000
                                                                                   ------------    ------------

Net loss attributable to common stockholders ...................................   $ (1,584,000)   $   (723,000)
                                                                                   ============    ============


Basic and diluted net loss attributable to common stockholders per common share    $      (0.02)   $      (0.01)
                                                                                   ============    ============



Weighted average basic and diluted common
  shares outstanding ...........................................................     85,755,000      74,619,000
                                                                                   ============    ============
</TABLE>


      (1)   Includes equity-based compensation of $17,000 for the three months
            ended March 31, 2004.

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

See accompanying notes to unaudited condensed consolidated financial statements


                                      -5-
<PAGE>

                             ON2 TECHNOLOGIES, INC.
        UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

                                                    Three Months Ended
                                                         March 31,
                                               -----------------------------
                                                   2005             2004
                                               ------------    ------------

Net loss ...................................   $ (1,302,000)   $   (723,000)

Other Comprehensive income:

     Foreign currency translation adjustment          7,000          23,000
                                               ------------    ------------

Comprehensive loss .........................   $ (1,295,000)   $   (700,000)
                                               ============    ============

See accompanying notes to unaudited condensed consolidated financial statements



                                      -6-
<PAGE>

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

<TABLE>
<CAPTION>
                                                                Three Months Ended March 31,
                                                                ----------------------------
                                                                    2005            2004
                                                                ------------    ------------
<S>                                                             <C>             <C>
Cash flows from operating activities:

  Net loss ..................................................   $ (1,302,000)   $   (723,000)
    Adjustments to reconcile net loss to net cash used in
        operating activities:
        Equity based compensation ...........................                         95,000
     Depreciation and amortization ..........................         19,000          27,000
     Amortization of debt discount ..........................          3,000           4,000
     Net loss on marketable equity securities ...............        212,000          61,000
   Changes in operating assets and liabilities:
     Accounts receivable, net ...............................       (112,000)        279,000
     Prepaid and other current assets .......................        (15,000)         44,000
     Other assets ...........................................         27,000          (2,000)
     Accounts payable and accrued expenses ..................       (283,000)        (81,000)
     Deferred revenue .......................................         (7,000)        (14,000)
                                                                ------------    ------------

Net cash used in operating activities .......................     (1,458,000)       (310,000)
                                                                ------------    ------------

Cash flows from investing activities:

  Purchases of property and equipment .......................        (52,000)        (17,000)
                                                                ------------    ------------

Net cash used in investing activities .......................        (52,000)        (17,000)
                                                                ============    ============

Cash flows from financing activities:

  Principal payments on capital lease obligations ...........         (4,000)
  Principal payments on term-loan ...........................        (62,000)        (58,000)
  Proceeds from exercise of common stock options and warrants      4,158,000          67,000
                                                                ------------    ------------

Net cash provided by financing activities ...................      4,092,000           9,000
                                                                ------------    ------------

Net change in cash and cash equivalents .....................      2,582,000        (318,000)

Effect of exchange rate changes on cash and cash equivalents           7,000          23,000

Cash and cash equivalents, beginning of period ..............      5,418,000       2,963,000
                                                                ------------    ------------

Cash and cash equivalents, end of period ....................   $  8,007,000    $  2,668,000
                                                                ============    ============
</TABLE>


                                      -7-
<PAGE>

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


Supplemental disclosure of cash flow information and non-cash investing and
financing activities:

<TABLE>
<CAPTION>
                                                                             Three Months Ended March 31,
                                                                                 2005           2004
                                                                             ---------------------------
<S>                                                                          <C>            <C>
Cash paid during the period for:
   Interest ..............................................................   $      1,000   $      1,000
                                                                             ============   ============
   Taxes .................................................................                  $      1,000
                                                                                            ============
 Non-cash transactions:
    Marketable equity securities received as consideration for account
    receivable ...........................................................                  $    150,000
                                                                                            ============
    Unearned Compensation from the issuance of restricted common stock ...                  $    854,000
                                                                                            ============
    Deferred revenue not collected .......................................                  $    411,000
                                                                                            ============
    Common stock issued for dividends on Series D Preferred Stock ........   $     80,000
                                                                             ============
    Increase in accrued dividend on Series D Preferred Stock .............   $      1,000
                                                                             ============
    Accretion of costs  associated  with the issuance of Series D Preferred
    Stock ................................................................   $     21,000
                                                                             ============
    Convertible Preferred Stock deemed dividend ..........................   $    180,000
                                                                             ============
</TABLE>


See accompanying notes to unaudited condensed consolidated financial statements


                                      -8-
<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 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, such financial statements contain all
adjustments necessary to present fairly the financial position of the Company
and its results of operations and cash flows for the interim periods presented.
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 Form 10-KSB/A Report filed with the
SEC on March 23, 2005.

(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


                                      -9-
<PAGE>

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 and earnings per share if the fair value based method had
been applied to all awards.


<TABLE>
<CAPTION>
                                                        Three months ended, March 31,
                                                        --------------------------
                                                           2005            2004
                                                        -----------    -----------
<S>                                                     <C>            <C>
Reported net loss attributable to common stockholders   $(1,584,000)   $  (723,000)
Stock-based employee compensation determined under
the fair value-based method                                (309,000)      (201,000)
                                                        -----------    -----------


Pro forma net loss                                      $(1,893,000)   $  (924,000)
                                                        ===========    ===========

Loss per common share (basic and diluted):
    As reported                                         $     (0.02)   $     (0.01)
                                                        ===========    ===========
    Pro forma                                           $     (0.02)   $     (0.01)
                                                        ===========    ===========
</TABLE>

      During the three months ended March 31, 2004 the Company granted 870,000
shares of restricted common stock to its employees and directors as incentive
compensation. The stock vested on December 1, 2004 and the total compensation
expense of $835,000 was amortized over the nine-month vesting period. The
company recorded compensation expense of $95,000 for the quarter ended March 31,
2004.

      The fair value of each option grant on the date of grant is estimated
using the Black-Scholes option-pricing model reflecting the following for the
three months ended March 31, 2004:


Volatility                                127%
Expected life of options               5 years
Risk free interest rate                   3.1%
Dividend yield                              0%

      There were no stock options granted during the quarter ended March 31,
2005. The weighted average grant date fair value of options granted during the
three months ended March 31, 2004 was $1.19.

(4)   Marketable Equity Securities

      As of December 31, 2004 the Company held 2,119,000 shares of a customer's
common stock with a market value of $445,000, which were received as payment of
license fees. The market value of these shares decreased to $233,000 ($0.11 per
share) as of March 31, 2005. The market value of these shares was $.07 per share
as of April 15, 2005. The Company classifies these shares as trading securities
and pursuant to SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities", unrealized gains and losses are included in the
determination of net income (loss). Other income for the three months ended
March 31, 2005 includes $212,000 of net unrealized loss on these securities. The
Company's Chief Executive Officer (who is a director and shareholder of the
Company) is a director of this customer.


                                      -10-
<PAGE>

(5)   Common Stock Warrants

      During the quarter ended March 31, 2005 the following common stock
warrants were exercised:

      Travelers exercised all of the remaining Series C-VI Preferred Warrants
and the Company received proceeds of $2,247,000 and issued 4,012,000 shares of
Common Stock.

      Midsummer Investment Ltd. exercised all of the one-year Series D Warrants
and the Company received proceeds from the exercise in the amount of $1,886,000
(net of $60,000 of expenses) and issued 2,994,000 shares of Common Stock.

      A debenture holder exercised all of their warrants and the Company
received proceeds of $20,000 and issued 179,000 shares of Common Stock.

      A warrant holder exercised their warrants and the Company received
proceeds of $5,000 and issued 12,500 shares of Common Stock

(6)   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 Company believed the arrangement provided
that, beginning in the first calendar quarter of 2004 and continuing through the
last quarter of 2005, E-world was to 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 ($1,620,000 in 2004).

      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 Company
believed that the non-EVD/HDTV license arrangement also provided that, beginning
in the first calendar quarter of 2004 and continuing through the last quarter of
2005, E-world was to 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 ($22,000 in 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 from the date of the agreement at no additional
charge. E-World can elect to receive an additional 12 months of technical
support for an additional $38,000 under each of the two arrangements. Deferred
revenue at March 31, 2005 includes $19,000 which will be recognized as revenue


                                      -11-
<PAGE>

over the remaining three months of technical support. Through March 31, 2005 the
Company has recognized cumulative revenue of $281,000 in connection with these
agreements.

      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 year ended December 31, 2004 includes $47,000 paid to E-World.

      E-World has not made the minimum quarterly payments that the Company
believed were provided for under the license agreements and in 2004 On2
commenced an arbitration proceeding seeking damages for E-World's failure to
perform.

On2's arbitration claim alleged that E-world had:

      o     Failed to make the quarterly payments;

      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 had requested that the arbitrator award it damages under the contract
and grant it further relief as may be just and equitable. E-world responded by
denying each of On2's claims and requested that the arbitrator find that E-world
complied with the terms of the license agreements.

      On March 10, 2005, the decision of the arbitrator was released. The
arbitrator dismissed each of On2's claims and dismissed E-world's request for a
declaration that it had complied with the contracts. In particular, the
arbitrator ruled that:


      o     E-World was not obligated to pay minimum royalty amounts beginning
            in the first quarter of 2004, because the parties had not ported VP6
            to a jointly-selected digital signal processor ("DSP");

      o     E-World was not yet required to pay the remaining license fee due
            under the contracts; and

      o     Because E-World had submitted On2's compression software to be made
            part of the People's Republic of China industrial standard for EVD
            prior to December 2003, E-World was not in breach of its obligation
            to have On2's software included as part of the EVD standard.

      o     The arbitrator further found that:

      o     the contracts remain in effect; and

      o     the parties have a continuing obligation to work towards porting
            On2's software to two commercially-available DSPs.

      The arbitrator found that E-World did include the VP5 and VP6 codecs as
part of its standards submissions to the Ministry of Information and Industry
and China's Standards Accreditation Committee. On2 has recently learned,
however, that the submissions were not accepted in full and that On2's software
has not currently been included in the standard. Accordingly the Company does


                                      -12-
<PAGE>

not know whether E-World will use the Company's compression technology in a
manner that will generate revenue for the Company.

(7)   Customer concentration

      For the three months ended March 31, 2005, three customers accounted for
35%, 34% and 17% of revenues. For the three months ended March 31, 2004, four
customers accounted for 25%, 23%, 21% and 12% of the revenues.

(8)   Subsequent events

      On April 5, 2005 the Company announced that it had entered into a purchase
and license agreement with Wildform, Inc. regarding the Flix(TM) Flash video
encoder technology. The Flix products enable media design professionals as well
as everyday users to encode video, audio and image files into Flash, the most
popular media format on the web. The Macromedia(R) Flash(R) player is commonly
installed on PCs and Flix-encoded video provides seamless playback without
requiring viewers to download additional software. The total consideration

      Total consideration for the deal will be approximately $1.2 million in
cash. At the closing, the parties will also enter into a support and maintenance
agreement pursuant to which Wildform will be paid approximately 280,000 On2
common shares and $160,000 in cash in return for the performance by Wildform of
certain software integration, technical support and marketing services. The
transaction also includes a license to Wildform of On2's video codec for use in
its new product line.

      Macromedia has licensed the Company's video compression technology for
integration into its Macromedia Flash family of products.


                                      -13-
<PAGE>

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

Forward-Looking Statement

      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 we have
sufficient funds and will generate sufficient funds 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-Q. You
should consider the material presented in this Form 10-Q 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.


                                      -14-
<PAGE>

      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


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

<TABLE>
<CAPTION>
       TYPE OF CUSTOMER APPLICATION                               EXAMPLES
       ----------------------------                               --------
<S>                                         <C>
Video and Audio Distribution over           o providing video-on-demand services to residents
Proprietary Networks                          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
                                            o video for Voice-over-IP (VOIP) services
</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.


                                      -15-
<PAGE>

      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).

      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 30 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 to be used 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 anticompetitive 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


                                      -16-
<PAGE>

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.


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/A filed with the SEC on March 23, 2005.
Our critical accounting policies and estimates are:

      o     Revenue recognition

      o     Equity-based compensation

      Revenue recognition. We currently recognize revenue from the sale of
software licenses and professional services. 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


                                      -17-
<PAGE>

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 that 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.

      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.

      Equity-based compensation. 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."


                                      -18-
<PAGE>

Results of Operations

Revenue. Revenue for the three months ended March 31, 2005 was $353,000 as
compared to $594,000 for the three months ended March 31, 2004. Revenue for the
three months ended March 31, 2005 and 2004 was derived primarily from the sale
of software licenses and engineering and consulting services. For the three
months ended March 31, 2005, 86% of the Company's revenue was generated from 3
customers. For the three months ended March 31, 2004, 81% of the Company's
revenue was generated from 4 customers.

      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 March 31, 2005, were $1,455,000 as
compared to $1,243,000 for the three months ended March 31, 2004.

      Cost of Revenue. Cost of revenue includes personnel and related overhead
expenses, consulting compensation costs, and bandwidth costs. Cost of revenue
was $369,000 for the three months ended March 31, 2005 as compared to $342,000
for the three months ended March 31, 2004. The increase is attributed to an
increase in personnel and related overhead expenses.

      Research and Development. Research and development expenses primarily
consist of personnel and related overhead expenses and consulting compensation
costs 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 March 31, 2005 were $258,000 as compared to
$250,000 for the three months ended March 31, 2004. We believe that continued
investments in research and development are necessary to maintain our
competitive advantage and we will continue to invest in such costs as considered
necessary.

      Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and related overhead 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 March 31, 2005, were $111,000 as compared to $113,000 for
the three months ended March 31, 2004. We have recently added two additional
sales executives in an effort to increase our sales exposure, and we intend to
continue to recruit and hire experienced personnel or consultants, as necessary,
to sell and market our products and services.

      General and Administrative. General and administrative expenses consist
primarily of salaries and related personnel costs for general corporate
functions, professional fees, insurance and depreciation. General and
administrative costs for the three months ended March 31, 2005, were $717,000 as
compared to $538,000 for the three months ended March 31, 2004. The increase is
principally attributable to an increase of $213,000 in professional fees in
connection with the E-World arbitration, increase in fees paid for our web
redesign and an increase in fees paid for printing related to our annual report
and $29,000 were fees paid to our directors for attendance at Board meetings
partially offset by a decrease of $67,000 in equity-based compensation recorded
in the first quarter of 2004. We do not anticipate significant fluctuations in
general and administrative expenses in the foreseeable future.

      Interest and other expense, net. Interest and other expense, net was
$200,000 for the three months ended March 31, 2005 as compared to $73,000 for
the three months ended March 31, 2004. Interest and other expense, net primarily
consists of interest paid for capital lease obligations and long-term debt,
amortization of debt discount and net loss on marketable equity securities. The
increase is principally attributable to an increase in the net loss on
marketable equity securities.

      At March 31, 2005, we had approximately 32 full-time employees. We expect
to hire employees as necessary in order to attain our strategic objectives.


                                      -19-
<PAGE>

Liquidity and Capital Resources

      At March 31, 2005, we had cash reserves of $8,007,000 as compared to
$5,418,000 at December 31, 2004. At March 31, 2004 the Company had working
capital of $8,320,000 as compared with $5,466,000 at December 31, 2004.

      Net cash used in operating activities was $1,458,000 and $310,000 for the
three months ended March 31, 2005 and 2004, respectively. The increase in net
cash used in operating activities is primarily attributable to an increase in
the net loss, changes in accounts receivable and accounts payable, partially
offset by an increase in loss on marketable equity securities.

      Net cash used in investing activities was $52,000 and $17,000 for the
three months ended March 31, 2005 and 2004, respectively, reflecting an increase
in the purchase of property and equipment.

      Net cash provided by financing activities was $4,092,000 and $9,000 for
the three months ended March 31, 2005 and 2004, respectively. The increase is
attributable to an increase in proceeds received from the exercise of common
stock warrants.

      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 Clifton Park and New
York City. The aggregate required payments for the next 12 months under these
arrangements are $210,000. 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
$500,000 per month in cash operating costs.

      The Company believes that existing funds are sufficient to fund its
operations through 2005. The Company plans to increase cash flows from
operations principally from increases in revenue generated from its compression
technology services and products. The Company may also pursue additional
financings. 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, 2004.

      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
technology services and products. 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.


                                      -20-
<PAGE>

Off-Balance Sheet Arrangements

      The Company has no off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on the Company's financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that is
material to investors.

Impact of Recently-Issued Accounting Pronouncements

      In December 2004, the FASB issued SFAS No. 123 (revised 2004) "Share-Based
Payment" ("SFAS 123(R)"). SFAS 123(R) addresses the accounting for transactions
in which an enterprise exchanges its equity instruments for employee services.
It also addresses transactions in which an enterprise incurs liabilities that
are based on the fair value of the enterprise's equity instruments or that may
be settled by the issuance of those equity instruments in exchange for employee
services. The cost of employee services received in exchange for equity
instruments, including employee stock options, is to be measured on the
grant-date fair value of those instruments. That cost will be recognized as
compensation expense over the service period, which would normally be the
vesting period. SFAS 123(R) is effective as of the first annual reporting period
that begins after June 15, 2005. We are currently evaluating the impact of
adopting SFAS 123(R) on our financial position and results of operations.

Item 3. Quantitative and Qualitative Disclosures About Risk

      The Company does not currently have any material exposure to interest rate
risk, foreign currency risk, exchange rate risk, commodity price risk or other
relevant market rate or price risks.

Item 4. 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 current 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.


                                      -21-
<PAGE>

                          PART II -- OTHER INFORMATION

Item 1. Legal Proceedings

On May 3, 2004, On2 commenced arbitration against its customer, Beijing E-World
relating 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. We believed that 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 chip to be used in EVD
            players.

      On2's arbitration claim alleged that, despite its obligations under the
contracts, E-World had:

      o     Failed to pay On2 the quarterly payments of $1,232,000, which we
            believe were 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 had 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 responded by denying each of On2's claims and requesting that the
arbitrator rule as to the meaning of certain language in the agreements.

On March 10, 2005, the London Court of International Arbitration tribunal
released the decision of the arbitrator in On2's proceeding against its
licensee, Beijing E-World, for breach of the two source code licenses between
On2 and E-World, and the arbitration has now terminated. The arbitrator
dismissed each of On2's claims and dismissed E-World's request for a declaration
regarding meaning of certain language under the contracts. In particular, the
arbitrator ruled that:

      o     E-World was not obligated to pay minimum royalty amounts beginning
            in the first quarter of 2004, because the parties had not ported VP6
            to a jointly-selected DSP;

      o     E-World was not yet required to pay the remaining license fee due
            under the contracts; and

      o     Because E-World had submitted On2's compression software to be made
            part of the People's Republic of China industrial standard for EVD
            prior to December 2003, E-World was not in breach of its obligation
            to have On2's software included as part of the EVD standard.


                                      -22-
<PAGE>

      o     The arbitrator further found that:

      o     the contracts remain in effect; and

      o     the parties have a continuing obligation to work towards porting
            On2's software to two commercially-available DSPs.

      The arbitrator found that E-World did include the VP5 and VP6 codecs as
      part of its standards submissions to the Ministry of Information and
      Industry and China's Standards Accreditation Committee. On2 has recently
      learned, however, that the submissions were not accepted in full and that
      On2's software has not been included in the standard and that, to our
      knowledge, the only video compression software presently included in the
      current generation of the standard is MPEG-2. E-World testified during the
      arbitration hearing, however, that if the standards committee did not
      include On2's software in the EVD standard, E-World would seek to amend
      the standard to have On2's software included.

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

(a) Exhibits

31.1  Certifications Of Chief Executive Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act Of 2002

31.2  Certifications Of Chief Financial Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act Of 2002

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

32.2  Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section
      1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.


(b) Reports on Form 8-K

The Company filed Form 8-K on January 6, 2005, containing a transcript of a
conference call in which Douglas A. McIntyre, On2's Chairman, President and CEO,
discussed certain initiatives of the Company.

The Company filed Form 8-K on March 14, 2005, announcing the results of its
arbitration with Beijing E-World.

The Company filed Form 8-K on March 15, 2005, containing a press release
announcing the Company's results of operations for the fourth quarter ending
December 31, 2004.


                                      -23-
<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)



April 25, 2005                 /s/ Anthony Principe
-----------------------        -------------------------------------
(Date)                                      (Signature)
                               Anthony Principe
                               Senior Vice President and Chief Financial Officer
                                   (Principal Financial Officer)


                                      -24-