<PAGE>

                                  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 September 30, 2000.

/ /      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.COM INC.
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)


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


375 Greenwich Street, New York, NY                                      10013
--------------------------------------------------------------------------------
(Address of principal executive offices)                              (Zip Code)


                                 (212) 941-2400
--------------------------------------------------------------------------------
              (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 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

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

<PAGE>

         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 November 8, 2000 was 26,935,533.

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












                                      -2-
<PAGE>

                                TABLE OF CONTENTS

PART I -- FINANCIAL INFORMATION

                                                                            Page
                                                                            ----

Item 1.  Unaudited Condensed Consolidated Financial Statements.

Unaudited Condensed Consolidated Balance Sheets at
  September 30, 2000 and December 31, 1999 ..................................  4
Unaudited Condensed Consolidated Statements of Operations,
  Three and Nine Months Ended September 30, 2000 and 1999 ...................  5
Unaudited Condensed Consolidated Statements of Cash Flows
  Nine Months Ended September 30, 2000 and 1999 .............................  6

Notes to Unaudited Condensed Consolidated Financial Statements ..............  8

Item 2.  Management's Discussion and Analysis of Financial
           Condition and Results of Operations .............................. 15

Item 3.  Qualitative and Quantitative Disclosures About Market Risk ......... 24


PART II -- OTHER INFORMATION

Item 1.  Legal Proceedings................................................... 25

Item 2.  Changes in Securities............................................... 25

Item 4.  Submission of Matters to a Vote of Security Holders................. 25

Item 6.  Exhibits and Reports on Form 8-K.................................... 25

Signatures................................................................... 26





                                      -3-
<PAGE>

                         PART I -- FINANCIAL INFORMATION

Item 1.  Unaudited Condensed Consolidated Financial Statements

                                  ON2.COM INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                    September 30,      December 31,
                                                        2000              1999
                                                    ------------       ------------
                                                              (unaudited)
<S>                                                 <C>                <C>
ASSETS

Current assets:
  Cash and cash equivalents                         $  5,031,863       $ 15,083,419
  Accounts receivable                                    474,055            136,766
  Advances to affiliates                                 952,000                 --
  Prepaid and other current assets                       742,690            753,919
                                                    ------------       ------------
     Total current assets                              7,200,608         15,974,104

Property and equipment, net                            2,866,864          1,322,690
Goodwill and other intangible assets, net              5,244,548          4,617,058
Other assets                                             580,853            518,020
                                                    ------------       ------------
     Total assets                                   $ 15,892,873       $ 22,431,872
                                                    ============       ============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable and accrued expenses             $  1,122,662       $  1,419,307
  Notes payable to stockholders                               --            649,624
  Deferred revenue                                       185,604                 --
  Current portion of capital lease obligations            37,518                 --
                                                    ------------       ------------
     Total current liabilities                         1,345,784          2,068,931

Commitments and contingencies

  Stockholders' equity:
  Preferred stock                                         30,029             20,000
  Common stock                                           269,355            242,866
  Additional paid-in capital                          68,068,889         35,457,250
  Deferred compensation                                  (75,571)                --
  Accumulated other comprehensive loss                    (3,858)              (259)
  Accumulated deficit                                (53,741,755)       (15,356,916)
                                                    ------------       ------------
  Total stockholders' equity                          14,547,089         20,362,941
                                                    ------------       ------------
  Total liabilities and stockholders' equity        $ 15,892,873       $ 22,431,872
                                                    ============       ============
</TABLE>


SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


                                      -4-
<PAGE>

                                  ON2.COM INC.
            UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                     Three Months Ended                 Nine Months Ended
                                                        September 30,                      September 30,
                                                -----------------------------     -----------------------------
                                                    2000             1999             2000             1999
                                                ------------     ------------     ------------     ------------
                                                         (unaudited)                      (unaudited)
<S>                                             <C>              <C>              <C>              <C>
Revenues                                        $    289,750     $      6,911     $    618,724     $     23,543

Operating expenses:
  Research and development                         2,590,394        1,197,578        8,715,055        1,876,900
  Sales and marketing                                995,496          579,756        5,386,091        1,058,521
  General and administrative                       2,785,993        1,093,409        8,054,912        2,139,073
  Non-cash stock based charge                             --               --       11,557,883               --
                                                ------------     ------------     ------------     ------------

Total operating expenses                           6,371,883        2,870,743       33,713,941        5,074,494
                                                ------------     ------------     ------------     ------------

Loss from operations                              (6,082,133)      (2,863,832)     (33,095,217)      (5,050,951)

Interest and other income, net                        69,285          129,452          495,444          164,306
                                                ------------     ------------     ------------     ------------

Loss before provision for income taxes            (6,012,848)      (2,734,380)     (32,599,773)      (4,886,645)

Provision for income taxes                            16,128               --           84,140            2,119
                                                ------------     ------------     ------------     ------------

Net loss                                          (6,028,976)      (2,734,380)     (32,683,913)      (4,888,764)

Convertible preferred stock dividend                 292,624               --        5,700,926               --
                                                ------------     ------------     ------------     ------------

Net loss attributable to common stockholders    $ (6,321,600)    $ (2,734,380)    $(38,384,839)    $ (4,888,764)
                                                ============     ============     ============     ============

Basic and diluted net loss per common share     $      (0.24)    $      (0.12)    $      (1.50)    $      (0.27)
                                                ============     ============     ============     ============

Weighted average basic and diluted
   common shares outstanding                      26,896,160       23,011,518       25,611,297       18,316,628
                                                ============     ============     ============     ============
</TABLE>

SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


                                      -5-
<PAGE>

                                  ON2.COM INC.
            UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

                                                                                 Nine Months Ended September 30,
                                                                                 ------------------------------
                                                                                     2000             1999
                                                                                 ------------     ------------
                                                                                 (unaudited)       (unaudited)
<S>                                                                              <C>              <C>
Cash flows from operating activities:

Net loss                                                                         $(32,683,913)    $ (4,888,764)
  Adjustments to reconcile net loss to net cash used in operating activities:
  Non-cash stock based charges                                                     11,557,883               --
  Depreciation and amortization                                                     2,345,164          184,210
  Deferred compensation                                                                37,075               --
Changes in operating assets and liabilities, net of effect of acquisitions:
  Accounts receivable, net                                                            (64,755)           8,900
  Prepaid and other current assets                                                   (283,395)        (244,955)
  Other assets                                                                         26,675           (4,500)
  Accounts payable and accrued expenses                                              (332,577)         372,774
  Deferred revenue                                                                    185,604               --
                                                                                 ------------     ------------
Net cash used in operating activities                                             (19,212,239)      (4,567,835)
                                                                                 ------------     ------------

Cash flows from investing activities:

Purchases of property and equipment                                                (2,187,211)        (806,230)
Purchase of trademarks and patents                                                         --          (25,000)
Advances to affiliate                                                                (952,000)              --
Cash paid for acquisitions, net of cash acquired                                     (241,551)        (390,768)
                                                                                 ------------     ------------

Net cash used in investing activities                                              (3,380,762)      (1,226,498)
                                                                                 ------------     ------------
Cash flows from financing activities:

Principal payments on capital lease obligations                                       (35,232)              --
Principal payments on note to stockholder                                            (355,000)         (25,376)
Loans to stockholders                                                                      --           (2,536)
Proceeds from the issuance of Series C Preferred Stock, net                         9,990,825               --
Proceeds from the issuance of Series C-II Preferred Stock, net                      2,450,000               --
Proceeds from the issuance of Series A Preferred Stock, net                                --       14,614,113
Proceeds from the sale of common stock                                                     --           20,010
Proceeds from exercise of common stock options and warrants                           494,451            1,000
                                                                                 ------------     ------------

Net cash provided by financing activities                                          12,545,044       14,607,211
                                                                                 ------------     ------------
Net change in cash and cash equivalents                                           (10,047,957)       8,812,878

Effect of exchange rate changes on cash and cash equivalents                           (3,599)              --

Cash and cash equivalents, beginning of period                                     15,083,419        1,227,706
                                                                                 ------------     ------------
Cash and cash equivalents, end of period                                         $  5,031,863     $ 10,040,584
                                                                                 ============     ============
</TABLE>


                                      -6-
<PAGE>

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


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

<TABLE>
<CAPTION>

                                                Nine Months Ended September 30,
                                                ------------------------------
                                                     2000             1999
                                                ------------      ------------
                                                  (unaudited)       (unaudited)
<S>                                                 <C>              <C>
Cash paid during the period for:
  Interest                                          $27,393          $   754
                                                    =======          =======
  Taxes                                             $72,191          $22,218
                                                    =======          =======
Acquisition of fixed assets under capital leases    $72,750          $    --
                                                    =======          =======
</TABLE>

SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS







                                      -7-
<PAGE>

                                  ON2.COM INC.
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Description of On2.com Inc.

     On2.com Inc. (the "Company") has developed proprietary video compression
and Internet streaming technology that combines the classic elements of
television with the interactivity of the Internet for delivery to broadband
Internet users. The Company's business model is to provide broadband Internet
video encoding, streaming and hosting services, broadband consulting services
and to license its proprietary broadband technology solutions to video content
owners who want to distribute television quality video images to broadband
Internet users.

     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 broadband
technology services on the Internet. The Company's success may depend, in part,
upon the emergence of the Internet as a communications medium, prospective
product and service development efforts, and the acceptance of the Company's
broadband technology solutions by the marketplace.

(b) Basis of Presentation

     The condensed consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries from their respective dates of
acquisition. 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 generally accepted accounting
principles 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
Report filed with the SEC on March 30, 2000.

(c) Goodwill and Intangible Assets

     Goodwill and intangible assets primarily relates to the Company's
acquisitions accounted for under the purchase method of accounting or its
purchase of intangible assets. Goodwill and intangible assets is stated at cost,
net of accumulated amortization, and is being amortized under the straight-line
method using estimated useful lives ranging from 3-4 years, the expected period
of benefit.

     Amortization of goodwill and intangible assets was $561,770 and $1,456,448
for the three and nine months ended September 30, 2000, respectively.
Amortization of goodwill and intangible assets for the three and nine months
ended September 30, 1999 was insignificant. Accumulated amortization was
$1,921,776 as of September 30, 2000.


                                      -8-
<PAGE>

(d) Comprehensive Loss

     The Company's comprehensive loss for the three and nine months ended
September 30, 2000 was comprised of net loss and the foreign currency
translation adjustment. The foreign currency translation adjustment was not
significant for the three and nine months ended September 30, 2000.
Comprehensive loss for the three and nine months ended September 30, 1999 was
comprised of net loss.

(e) Net Loss per Common Share

     The Company computes net loss per common share in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share". Under
the provisions of SFAS No. 128, basic net loss per share is computed by dividing
the net loss attributable to common stockholders by the weighted average number
of common shares outstanding during the period. Diluted net loss per common
share is computed by dividing the net loss attributable to common stockholders
by the weighted average number of common and common equivalent shares
outstanding during the period. Common equivalent shares, comprised of
incremental common shares issuable upon the exercise of stock options and
warrants (using the treasury stock method) and convertible preferred stock
(using the if-converted method), have not been included in the computation of
diluted net loss per share as their effect is anti-dilutive.

     Excluded from the computation of diluted net loss per common share for the
three and nine months ended September 30, 2000 and 1999 are options and warrants
to purchase 12,702,203 and 8,295,797 shares of Common Stock, respectively, and
3,002,932 and 2,000,000 shares of convertible preferred stock, respectively,
that may convert into equivalent shares of Common Stock.

(f) Reclassifications

     Certain reclassifications have been made to the prior year's condensed
consolidated financial statements to conform to the current year's presentation.

(2) PROPERTY AND EQUIPMENT

<TABLE>
<CAPTION>
                                                    September 30, 2000   December 31, 1999
                                                    ------------------   -----------------
<S>                                                     <C>                 <C>
Furniture and fixtures                                  $  309,342          $   86,102
Computer equipment                                       2,872,013           1,488,344
Leasehold improvements                                     687,051             167,205
Licensed software                                          851,284             418,736
                                                        ----------          ----------
                                                         4,719,690           2,160,387

Less accumulated depreciation and amortization           1,852,826             837,697
                                                        ----------          ----------
Total                                                   $2,866,864          $1,322,690
                                                        ==========          ==========
</TABLE>

     As of September 30, 2000, property and equipment included assets under
capital leases of $72,750 with related accumulated depreciation of $18,187.
There were no assets under capital leases as of December 31, 1999.


                                      -9-
<PAGE>

(3) ACQUISITIONS

     (a) Assets DVD Mags, Inc.

     On April 4, 2000, Quickband, Inc. ("Quickband"), a wholly owned subsidiary
of the Company, acquired substantially all of the assets of DVD Mags, Inc. ("DVD
Mags"), a California corporation in the business of aggregating and producing
short-form entertainment content for distribution across digital and traditional
channels (the "Quickband Acquisition"). The Quickband Acquisition was effected
pursuant to an Asset Purchase Agreement ("Purchase Agreement") dated as of March
9, 2000 by and among the Company, Quickband and DVD Mags. The assets acquired in
connection with the Quickband Acquisition consisted primarily of a short form
entertainment content library and other physical property used in connection
with the production of the short-form entertainment content.

     The Company issued 136,339 shares of Common Stock, valued at $1,872,957,
and 34,100 shares of Series B Convertible Preferred Stock (see note 5), valued
at $468,449, in connection with the Purchase Agreement. In addition to the
issuance of common and convertible preferred stock, the Company incurred $47,993
of acquisitions costs.

     The Quickband Acquisition was accounted for under the purchase method of
accounting. The Company preliminarily allocated $305,462 of the $2,389,400
purchase price to the net tangible assets acquired. The historical carrying
amounts of the net tangible assets acquired approximated their fair market value
on the date of acquisition. The purchase price in excess of the fair market
value of the net tangible assets acquired was $2,083,938 and had been
preliminarily allocated to goodwill. The goodwill amount is being amortized
under the straight-line method over an estimated useful life of three years, the
expected period of benefit.

     The Quickband Acquisition was not considered a significant transaction.
Thus, the Company has not presented historical or pro forma consolidated
financial information.

     (b) Eight Cylinders Studio, Inc.

     On July 13, 2000, the Company executed an Agreement and Plan of Merger by
and among the Company, 8C Acquisition Corp., a Delaware corporation and a wholly
owned subsidiary of the Company, and Eight Cylinder Studios, Inc. ("8CS"), a
California corporation that offers content development solutions and interface
technologies for the broadband internet market. As of September 30, 2000, the
Company had advanced $952,000 to 8CS. The Company completed its acquisition of
8CS on November 3, 2000. In connection with the 8CS acquisition, the Company
will issue 748,638 shares of common stock, valued at $4,605,621, and options to
purchase 897,642 shares of Common Stock. In addition, the Company has
preliminarily estimated acquisition costs of approximately $630,000. The 8CS
acquisition will be accounted for under the purchase method of accounting.

(4) NOTES PAYABLE TO STOCKHOLDERS

     On June 9, 1999, the Company entered into a Separation and Release
Agreement ("Release Agreement") with an officer and shareholder. In connection
with the Release Agreement, the Company repurchased 302,374 shares of the
Company's Common Stock from the officer and shareholder at a price of $1.12 per
share through the issuance of a note payable to the shareholder. Under the terms
of the Release Agreement, on January 15, 2000, the Company offset the remaining
balance of the note payable to the shareholder against certain notes and
advances receivable from the shareholder in the amount of $294,624.


                                      -10-
<PAGE>

(5) STOCKHOLDERS' EQUITY

(a) Delaware Reincorporation

     On May 17, 2000, the Company effected an Amended and Restated Agreement and
Plan of Merger between On2.com Inc., a Colorado corporation, and On2.com Inc., a
Delaware corporation, that effectively reincorporated the Company in Delaware
(the "Reincorporation"). The Reincorporation did not materially affect the
Company's Certificate of Incorporation, the Bylaws, officers, directors or the
stock based compensation plans in effect immediately prior to the
Reincorporation. Each issued and outstanding share of the Company's Common
Stock, no par value, was exchanged for an equivalent share of Common Stock,
$0.01 par value. Each issued and outstanding share of Preferred Stock, no par
value (as defined below), was exchanged for an equivalent share of Preferred
Stock, $0.01 par value. The Reincorporation does not affect the rights or
privileges of the Preferred Stockholders. No other property, shares, other
securities or considerations were issued in connection with the Reincorporation.

(b) Preferred Stock

     The Company has 20,000,000 shares of preferred stock authorized for
issuance and, as of September 30, 2000, four series of convertible preferred
stock (collectively "Preferred Stock") were issued and outstanding. Pursuant to
its Certificate of Incorporation, the Company may serially designate separate
classes of preferred stock up to the aggregate of its authorized limit. The
holders of the various series of Preferred Stock generally have similar rights
and privileges. Each class of the Preferred Stock is convertible into equivalent
shares of the Company's Common Stock and has rights and preferences which are
generally more senior to the Company's Common Stock and are more fully described
in the Company's Certificate of Incorporation. The Company had 2,000,000 shares
of Series A Convertible Preferred Stock issued and outstanding as of December
31, 1999.

     In April 2000, the Company designated and issued 34,100 shares of its
authorized preferred stock as Series B Preferred Stock, $0.01 par value ("Series
B Preferred"), in connection with the Quickband Acquisition. Each share of
Series B Preferred converts into one share of the Company's Common Stock. The
fair market value of the Series B Preferred on the closing date of the Quickband
Acquisition was $468,449, as determined by the fair market value of the
Company's Common Stock on such date. In the event of any liquidation,
dissolution or winding up of the Company, either voluntary or involuntary, the
holders of the Series B Preferred are entitled to receive an amount equal to
$23.46875 per share. The liquidation price per share would be paid out of the
assets of the Company available for distribution prior to any payments made on
any shares of the Company's Common Stock or any other capital stock other than
the Preferred Stock.

     In June 2000, the Company designated 4,285,715 shares of its authorized
preferred stock as Series C-I Preferred Stock, $0.01 par value ("Series C-I
Preferred"). On June 8, 2000, the Company completed a private placement of
1,644,304 shares of the Series C-I Preferred with detachable warrants, under
Rule 506 of the Securities Act of 1933, for an aggregate purchase price of
$10,000,000 in connection with an investment by the Travelers Indemnity Company
("Travelers"). The Company incurred transaction costs of $9,175 in connection
with the transaction. Each share of Series C-I Preferred converts into one share
of the Company's Common Stock. In the event of any liquidation, dissolution or
winding up of the Company, either voluntary or involuntary, the holders of the
Series C-I Preferred are entitled to receive an amount equal to $6.0816 per
share. The liquidation price per share would be paid out of the assets of the
Company available for distribution prior to any payments made on any shares of
the Company's Common Stock or any other capital stock other than the Preferred
Stock.


                                      -11-
<PAGE>

     In addition to the Series C-I Preferred, Travelers received detachable
warrants which provide them the right to purchase 205,538 shares of the
Company's Common Stock at an exercise price of $8.69 and 205,538 shares at of
the Company's Common Stock at an exercise price of $10.86.

     The aggregate fair market value of the Series C-I Preferred on the closing
date of the Travelers private placement was $14,284,891, based upon the fair
market value of the Company's Common Stock on that date. Additionally, the fair
market value of the warrants issued, as calculated using the Black Scholes
pricing model, was $1,793,113. In accordance with EITF Issue No. 98-5,
"Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios" ("EITF 98-5"), the Company allocated
the net proceeds between the Series C-I Preferred and the detachable warrants
based on the relative fair value method as described in APB Opinion No. 14,
"Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants"
("APB No. 14"). The Company allocated $8,876,589 to the Series C-I Preferred and
recorded $1,114,235 of additional paid-in-capital to account for the issuance of
the warrants. The difference between the net proceeds allocated to, and the fair
market value of, the Series C-I Preferred on the closing date was recorded as a
preferred stock dividend in accordance with EITF 98-5.

     In September 2000, the Company designated 924,527 shares of its authorized
preferred stock as Series C-II Preferred Stock, $0.01 par value ("Series C-II
Preferred"). On September 29 2000, the Company completed a private placement of
the 924,527 shares of the Series C-II Preferred with detachable warrants, under
Rule 506 of the Securities Act of 1933, for an aggregate purchase price of
$2,450,000 (the "Series C-II Investors"). Each share of Series C-II Preferred
converts into one share of the Company's Common Stock. In the event of any
liquidation, dissolution or winding up of the Company, either voluntary or
involuntary, the holders of the Series C Preferred are entitled to receive an
amount equal to $2.65 per share. The liquidation price per share would be paid
out of the assets of the Company available for distribution prior to any
payments made on any shares of the Company's Common Stock or any other capital
stock other than the Preferred Stock.

     In addition to the Series C-II Preferred, the Series C-II Investors
received detachable warrants which provide them the right to purchase an
aggregate of 396,037 shares of the Company's Common Stock at an exercise price
of $2.65.

     The aggregate fair market value of the Series C-II Preferred on September
29, 2000 was $2,302,072, based upon the fair market value of the Company's
Common Stock on that date. Additionally, the fair market value of the warrants
issued, as calculated using the Black Scholes pricing model, was $504,706. In
accordance with EITF 98-5, the Company allocated the net proceeds between the
Series C-II Preferred and the detachable warrants based on the relative fair
value method as described in APB No. 14. The Company allocated $2,009,448 to the
Series C-II Preferred and recorded $440,552 of additional paid-in-capital to
account for the issuance of the warrants. The difference between the net
proceeds allocated to, and the fair market value of, the Series C-II Preferred
on the closing date was recorded as a preferred stock dividend in accordance
with EITF 98-5.

     On May 25, 2000 and June 2, 2000, approximately 1,066,667 and 533,333
shares of Series A Preferred Stock, respectively, were converted into equivalent
shares of the Company's Common Stock.

(6) NON-CASH STOCK-BASED CHARGE

     Pursuant to the Company's 1999 Amended and Restated Incentive and
Nonqualified Stock Option Plan (the "1999 Plan"), employees of the Company were
granted options to purchase shares of Common Stock. The terms of the options
granted to employees under the 1999 Plan, including exercise price and number of
shares granted, were fixed on the date of grant and remain the same throughout
the duration of


                                      -12-
<PAGE>

the 1999 Plan. In June 2000, the Company contracted with a third party to settle
all exercises under the 1999 Plan.

     The Company accounts for stock-based compensation agreements in accordance
with the provisions of APB Opinion No. 25, "Accounting for Stock Issued to
Employees," ("APB No. 25"). Under APB No. 25, fixed option plans for
employees--that is those plans whose terms, including price and number of shares
granted, remain the same throughout the duration of the plan--have no
compensation expense associated with the options when the exercise price is
equal to the fair value of the stock at the grant date. All options granted
under the 1999 Plan were at fair market value on the date of grant. Accordingly,
compensation expense was not recorded for options awarded to employees.

     For the period January 2000 through May 2000, the Company chose to
self-administer the 1999 Plan. Also during the period, various employees began
to exercise a vested portion of their options. Pursuant to the "cashless
exercise" provisions of the 1999 Plan, the employees were permitted to pay the
exercise price with cash, or "by surrendering, in addition to the options
representing the shares being purchased, unexercised, vested options with a net
fair market value equal to the price of the shares being purchased." The
employees chose to surrender unexercised options, from their fixed grant total,
with a fair market value equivalent to the cash exercise price.

     Under an interpretation of generally accepted accounting principles related
to stock-based compensation, the employees' surrendering of unexercised, vested
options in satisfaction of the exercise price, in lieu of cash, under a
self-administered plan, resulted in the requirement to recognize the entire
exercise value of the shares as non-cash stock based compensation expense.

     The number of shares, the range of exercise prices and the range of market
values for the cashless exercises for January through May 2000 are as follows:

      Number of Shares
(includes shares surrendered)  Range of Exercise Prices   Range of Market Values
-----------------------------  ------------------------   ----------------------

          586,359                   $0.88 - $2.25            $10.75 - $23.375


     The total non-cash compensation charge for these exercises for the three
and nine months ended September 30, 2000 was $-0- and $10,257,883, respectively.

     On January 31, 2000, the Company issued a warrant to purchase 100,000
shares of its Common Stock to a business partner, in exchange for the partner's
commitment to be a sponsor of the Company's Web site. The warrant has a
five-year life and is immediately exercisable at an exercise price of $19.8875.
The fair market value of the Company's Common Stock at the date of issue was
$19.75.

     The sponsorship agreement is renewable annually and may be terminated at
such time by either the Company or the business partner upon notice. The fair
market value of the warrant was $1,300,000, calculated under the Black-Scholes
pricing model using the following assumptions: risk-free interest rate of 6%,
volatility of 75% and a 5 year term. As the warrant is immediately exercisable,
the Company recorded a non-cash compensation charge of $1,300,000 during the
first quarter of 2000.


                                      -13-
<PAGE>

(7) 2000 NONQUALIFIED STOCK OPTION PLAN

     In September 2000, the Board of Directors adopted the 2000 Nonqualified
Stock Option Plan (the "2000 Plan"). The 2000 Plan reserved for issuance
5,000,000 shares of the Company's Common Stock. The 2000 Plan authorizes the
Board of Directors to issue nonqualified stock options as provided in section
422 of the Internal Revenue Code. Nonqualified options may be granted only to
employees of the Company, including officers of the Company, and its
subsidiaries. A committee selected by the Company's Board of Directors has the
authority to approve optionees and the terms of the stock options granted,
including the stock option's exercise price and the vesting terms. Options
granted under the 2000 Plan expire after a ten year period and are subject to
the acceleration of vesting upon the occurrence of certain events. There were
1,500,000 stock options outstanding of as September 30, 2000 under the 2000
Plan.

(8) COMMITMENTS AND CONTINGENCIES

     The Company was a defendant in a lawsuit regarding an alleged breach of
contract that sought damages in the millions of dollars. The Company denied the
substantive allegations and contested the case vigorously. During fiscal year
1998, the court ruled that the plaintiff is entitled to $60,000 based on the
contract, plus interest. Accordingly, the Company accrued and paid $89,000
relating to this matter. The Plaintiff filed a notice of appeal with respect to
the summary judgment and trial decision. The Company opposed the appeal and
cross-appealed with respect to denomination of prevailing party. The court held
that the Company was the prevailing party and was thus entitled to recover
reasonable counsel fees. In April 2000, the Company was granted a judgment for
$215,000 in legal fees, which payment was received in May 2000.

(9)  SUBSEQUENT EVENTS

     On October 23, 2000, the Company submitted to a vote of shareholders via a
proxy solicitation, a proposal to increase the Company's Common Stock authorized
for issuance from 50,000,000 shares to 100,000,000 shares. The Company
anticipates the results of such matter to be determined at a Special Meeting of
Shareholders on November 17, 2000.


                                      -14-
<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 the Company's
future financial performance. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "expect," "plan,"
"anticipate," "believe," "estimate," "predict," "potential" or "continue," the
negative of such terms, or other comparable terminology. The inclusion of
forward-looking statements should not be regarded as a representation by the
Company, or any other person, that such statements will be achieved. These
statements are only predictions. Actual events or results may differ materially.
Although the Company believes that the expectations reflected in the
forward-looking statements are reasonable, it cannot guarantee future results,
levels of activity, performance or achievements. 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. The Company undertakes 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. In evaluating the
Company's business, you should give careful consideration to the information set
forth below under the caption "Risk Factors That May Affect Future Operating
Results," in addition to the other information set forth herein.

OVERVIEW

     The Company has developed proprietary video compression and Internet
streaming technology that combines the classic elements of television with the
interactivity of the Internet for delivery to broadband Internet users.

     Founded in 1992, the Company developed and marketed video
compression/decompression software technology ("codecs") that enabled developers
of computer video games, video games for dedicated video game consoles and
multi-media presentations on computers to convert an analog video signal to a
digital video signal, and to compress the signal for storage and playback on the
required device. The Company also developed its own proprietary video streaming
technology, enabling delivery of high quality video signals over high bandwidth
networks. Additionally, the Company developed technology allowing for real-time
capture, compression and storage of digital video signals.

     In view of the rapidly evolving nature of its business and its limited
operating history, the Company has little experience forecasting its revenues.
Therefore, the Company believes that period-to-period comparisons of financial
results are not necessarily meaningful and should not be relied upon as an
indication of future performance. To date, the Company has incurred substantial
costs to create technology and services. The Company will continue to incur
costs to develop, introduce and enhance services, build brand awareness and grow
the business. The Company may also incur significant additional costs and
expenses related to technology, marketing or acquisitions of businesses and
technologies to respond to changes in this rapidly changing industry. These
costs may not correspond with any meaningful increases in revenues in the near
term, if at all.

RESULTS OF OPERATIONS

     REVENUES. Revenues for the three and nine months ended September 30, 2000
were $289,750 and $618,724, respectively, as compared to $6,911 and $23,543 for
the three and nine months ended September 30, 1999, respectively. Revenues for
the three and nine months ended September 30, 2000 were derived primarily from
encoding, streaming and hosting services and the licensing of DVD assets
acquired in connection with the acquisition of Quickband. Through the first
quarter of 2000, the


                                      -15-
<PAGE>

Company devoted substantially all its efforts to building the On2.com network
and developing the technology to operate a broadband content site. Commencing
with the second quarter of 2000, the Company made a strategic decision to
de-emphasize the development of its content site and re-directed its strategic
operating focus toward providing its proprietary broadband technology solutions
to customers requiring television quality video signals for distribution to
their broadband Internet user base.

     Historically, substantially all of the Company's revenue was derived from a
few large technology licensing agreements whereby the Company received
non-refundable advances against future royalties based on sales by the licensee,
or outright license of certain elements of the Company's technology. The
majority of the Company's current and future revenue is and will be derived from
broadband Internet video encoding, streaming and hosting services, consulting
services and licensing its technology to video content owners who want to use
the Company's technology to distribute television quality video images to
broadband Internet users.

     OPERATING EXPENSES

     The Company's operating expenses consist of research and development, sales
and marketing and general and administrative expenses. Comparability between
periods is significantly affected by the rapid growth and development of the
Company since becoming publicly traded in June 1999.

     RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of salaries and related expenses for personnel and consulting fees
associated with the development and enhancement of the Company's proprietary
broadband technology and products. Research and development expenses for the
three and nine months ended September 30, 2000 were $2,590,394 and $8,715,055,
respectively, as compared to $1,197,578 and $1,876,900 for the three and nine
months ended September 30, 1999, respectively. The period-to-period increase in
absolute dollars for both three and nine months ended is primarily attributable
to an increase in internal personnel and consulting fees associated with
developing and enhancing the new technology and products. A portion of research
and development expenses to date has been focused on the development of
technology to deliver television quality video signals to broadband Internet
users. Additionally, the Company has incurred expenses developing products that
encompass its proprietary technology for sale or license to third parties.
Research and development expenses for the nine months ended September 30, 2000
also include costs associated with the development of a broadband content
Website and costs associated with producing, acquiring, processing and
distributing content for it. As a result of a strategic decision to focus on
providing services and products that include its proprietary broadband
technology solutions, the Company did not incur content development and
distribution costs for the three months ended September 30, 2000 nor does it
expect to incur such costs in future periods. Additionally, the Company did not
incur content development and distribution costs for the three or nine months
ended September 30, 1999. The Company expects research and development costs to
increase in absolute dollars as the Company hires additional engineers and
outside consultants in order to attain its strategic objectives.

     SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries and related costs of sales, business development and marketing
personnel, advertising costs, marketing and promotional costs incurred to create
brand awareness and public relations expenses. Sales and marketing expenses for
the three and nine months ended September 30, 2000 were $995,496 and $5,386,091,
respectively, as compared to $579,756 and $1,058,521 for the three and nine
months ended September 30, 1999, respectively. The period-to-period increase for
the three and nine months ended is primarily attributable to increased staffing
to sell and market the Company's technology products and services and
advertising and marketing costs incurred to create brand awareness for the
Company's broadband technology solutions. The Company intends to continue to
recruit and hire experienced personnel to sell and market its products and
services.


                                      -16-
<PAGE>

     GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries and related personnel costs for general corporate
functions including finance, human resources, legal and facilities, outside
legal and professional fees, amortization of goodwill and other intangible
assets and general operating overhead. General and administrative costs for the
three and nine months ended September 30, 2000 were $2,785,993 and $8,054,912,
respectively, as compared to $1,093,409 and $2,139,073 for the three and nine
months ended September 30, 1999, respectively. The period-to-period increase for
the three and nine months ended is attributable to increased salaries and
related costs to build our basic infrastructure, increased legal and accounting
fees, increased amortization of goodwill and other intangibles related to
acquisitions, and increased costs associated with operating a public company,
such as investor relations costs and directors and officers insurance. The
Company anticipates that general and administrative costs will increase as the
Company continues to build its infrastructure, including additional personnel,
office space and internal information systems.

     NON-CASH STOCK BASED CHARGE. The non-cash stock based charge is the result
of cashless exercises of stock options granted to employees under the 1999 Plan.
As the 1999 Plan was self-administered between January 2000 and May 2000,
generally accepted accounting principles required the Company to recognize the
full fair market value of all shares exercised under the cashless provision
during that period. The Company has now contracted a third party to administer
all stock option exercises. Thus, the Company does not anticipate non-cash
charges from cashless exercises in future periods (see note 6 to the interim
consolidated financial statements). The non-cash stock based charge related to
these cashless exercises for the three and nine months ended September 30, 2000
was $-0- and $10,257,883, respectively. Additionally, for the nine months ended
September 30, 2000, the Company recorded a non-cash stock based charge of
$1,300,000 in connection with the issuance of a warrant to a business partner
who agreed to sponsor the Company's site.

     INTEREST AND OTHER INCOME, NET. Interest and other income, net primarily
consists of interest income earned on the Company's cash and cash equivalents
and interest expense incurred from the Company's capital lease obligations and a
note payable to a stockholder. Interest and other income, net for the three and
nine months ended September 30, 2000 was $69,285 and $495,444, respectively, as
compared to $129,452 and $164,306 for the three and nine months ended September
30, 1999, respectively. The period-to-period decrease for the three months ended
is a result of a decrease in the average balance of our cash and cash
equivalents for the three months ended September 30, 2000 as compared to same
period in 1999. The period-to-period increase for the nine months ended is
primarily attributable to an increase in the average balance of our cash and
cash equivalents for the first nine months of 2000 as compared to the same
period in 1999.

     INCOME TAXES. Income taxes are based solely on state and local taxes on
business and investment capital. Income taxes for the three and nine months
ended September 30, 2000 were $16,128 and $84,140, respectively, as compared to
$-0- and $2,119 for the three and nine months ended September 30, 1999,
respectively. The period-to-period increase is attributable to an increase in
the Company's investment capital.

     At September 30, 2000, the Company had approximately 110 full-time
employees. The Company expects the number of employees to continue to increase
in future periods.


                                      -17-
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

     At September 30, 2000, the Company had cash and cash equivalents of
$5,031,863 as compared to $15,083,419 at December 31, 1999.

     Net cash used in operating activities was $19,212,239 and $4,567,835 for
the nine months ended September 30, 2000 and 1999, respectively. The increase in
net cash used in operating activities is primarily attributable to an increase
in the Company's net operating losses, excluding depreciation and amortization
and non-cash stock based charges and a decrease in accounts payable and accrued
expenses.

     Net cash used in investing activities was $3,380,762 and $1,226,498 for the
nine months ended September 30, 2000 and 1999, respectively. The
period-to-period increase is primarily attributable to an increase in the
purchases of property and equipment, advances made to affiliates and net cash
paid for acquisitions.

     Net cash provided by financing activities was $12,545,044 and $14,607,211
for the nine months ended September 30, 2000 and 1999, respectively. The
period-to-period difference is primarily attributable to amounts received from
private issuances of convertible preferred stock and an increase in the
principal payments of notes to stockholders offset by proceeds received from the
exercise of options and warrants to purchase shares of Common Stock.

     The Company currently has no material commitments other than those under
our capital and operating lease arrangements. The Company expects to meet its
lease obligations with its cash and cash equivalents.

     The market for distribution of broadband technology services is highly
competitive and requires significant capital expenditures. The Company's capital
requirements depend on numerous factors, including market acceptance of its
technology and services, research and development costs and the resources it
spends on marketing and selling its technology and services. Additionally, the
Company continues to evaluate investments in complementary businesses, products
and services, some of which may be significant. The Company has experienced
increases in its capital expenditures, consistent with the growth of its
business, and significant operating losses to date and believes that it will
continue to incur operating losses and negative operating cash flows for the
foreseeable future.

      The Company will require additional funding during the next 12 months to
adequately finance the growth of its current operations and fulfillment of its
strategic objectives. Additionally, the Company may require more financing to
fund acquisitions, develop new technologies or acquire strategic assets. The
Company has a commitment from a group of investors lead by Verus International
to purchase an additional $2.55 million in convertible preferred stock and
detachable warrants in a private placement by the end of fiscal year 2000. In
addition, the Company has signed a nonbinding letter of intent under which we
may have the right to sell, subject to certain price and volume limitations, up
to $40.0 million of Common Stock over three years. However, there is no offer to
sell any securities thereunder and there can be no assurance that we will be
able to procure additional funding on terms acceptable to us, or at all. In such
event, the Company could reduce the development of its products and services,
scale back current operations until such funds become available on terms
acceptable to the Company and could potentially result in a modification to
the auditor's report on the Company's December 31, 2000 financial statements.
See "Risk Factors That May Affect Future Operating Results."

EFFECTS OF INFLATION

     Due to the relatively low levels of inflation in 1999, 1998, 1997 and 1996,
inflation has not had a significant effect on the Company's results of
operations.


                                      -18-
<PAGE>

IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements." SAB 101 provides guidance
on the recognition, presentation, and disclosure of revenue in financial
statements filed with the SEC. The Company does not expect the adoption of SAB
101 to have a material effect on its consolidated financial statements.

     In March 2000, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation, an Interpretation of APB No. 25." FIN 44 provides guidance
on certain aspects of applying APB No. 25. FIN 44 is effective July 1, 2000, but
is also effective for certain events that have occurred after December 15, 1998
or January 12, 2000. To date, FIN 44 has not had a material impact on the
Company's consolidated financial statements.

     In March 2000, the Emerging Issues Task Force of the FASB reached a
consensus on Issue No. 00-2, "Accounting for Web Site Development Costs" ("Issue
No. 00-2") which provides guidance on when to capitalize versus expense costs
incurred to develop a web site. The consensus is effective for web site
development costs in quarters beginning after June 30, 2000. Issue No.00-2 has
not had a material impact on the Company's consolidated financial statements.


              RISK FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS, TOGETHER WITH OTHER
INFORMATION IN THIS REPORT, BEFORE MAKING AN INVESTMENT DECISION. OUR BUSINESS,
FINANCIAL CONDITION AND OPERATING RESULTS COULD BE ADVERSELY AFFECTED BY ANY OF
THE FOLLOWING FACTORS, IN WHICH EVENT THE TRADING PRICE OF OUR COMMON STOCK
COULD DECLINE AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT. THE RISKS AND
UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES THAT WE FACE. ADDITIONAL
RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US, OR THAT WE CURRENTLY THINK
ARE IMMATERIAL, MAY ALSO IMPAIR OUR BUSINESS.

WE HAVE A HISTORY OF LOSSES AND NEGATIVE CASH FLOW AND ANTICIPATE CONTINUED
LOSSES.

     Since our inception, we have incurred significant losses and negative cash
flow from operations, and as of September 30, 2000, we had an accumulated
deficit of approximately $53.7 million. We have not achieved profitability and
we expect to continue to incur operating losses for the foreseeable future as we
fund operating and capital expenditures in attaining our strategic objectives.
Our business model assumes that consumers will be attracted to and use
broadband-specific video compression technology to access content available on
customer Web sites that will, in turn, allow us to provide our technology
solutions to customers. Our business model is not yet proven, and we cannot
assure you that we will ever achieve or sustain profitability or that our
operating losses will not increase in the future. Our business strategy may be
unsuccessful and we may not be able to adequately address all or any of these
risks. Even if we are able to achieve profitability, we may be unable to sustain
or increase our profitability. In either case, our business, financial
conditions and results of operations will be materially and adversely affected.

WE MAY NEED ADDITIONAL CASH TO OPERATE OUR BUSINESS.

     We anticipate that we will require additional funding within the next 12
months to adequately finance the growth of our current operations and the
fulfillment of our strategic objectives. Additionally, we may require additional
financing within this time frame to fund acquisitions, develop new technologies
or acquire strategic assets. The Company has a commitment from a group of
investors lead by Verus International to purchase an additional $2.55 million in
convertible preferred stock and detachable


                                      -19-
<PAGE>

warrants in a private placement by the end of fiscal year 2000. In addition, the
Company has signed a nonbinding letter of intent under which we may have the
right to sell, subject to certain price and volume limitations, up to $40.0
million of Common Stock over three years. However, there is no offer to sell any
securities thereunder and there can be no assurance that we will be able to
procure additional funding on terms acceptable to us, or at all. In that event,
we could reduce the development of our products and services, scale back
current operations until funds become available to us on favorable terms and
could potentially result in a modification to the auditor's report on the
Company's December 31, 2000 financial statements. We cannot assure you that
we will be able to generate sufficient cash flow from our operations or be
able to raise sufficient capital, or at all, to enable us to operate our
business.

SINCE WE RECENTLY CHANGED OUR STRATEGIC OPERATING MODEL, WE ARE ESSENTIALLY A
NEW COMPANY AND ACCORDINGLY ARE SUBJECT TO THE RISKS ASSOCIATED WITH A NEW
COMPANY.

     Even though our business was founded in 1992, we have only recently
implemented our new business plan. As a result, our company is essentially a new
venture. Therefore, we do not have a significant operating history upon which
you can evaluate us and our prospects, and you should not rely upon our past
performance to predict our future performance. In transitioning to our new
business model, we are substantially changing our business operations, sales and
implementation practices, customer service and support operations and management
focus. We also face new risks and challenges, including a lack of meaningful
historical financial data upon which to plan future budgets, competition from a
new range of sources, the need to develop strategic relationships and other
risks described below. We cannot guarantee that we will be able to transition
successfully to our new business model.

     Our ability to generate profits, if any, will depend on our ability:

     o    to attract customers to use our technology infrastructure and support
          services;

     o    to generate revenues from software licensing and product sales,
          broadband encoding and streaming services and consulting to developers
          of broadband content; and

     o    to control costs.

     WE ANTICIPATE CONTINUED SIGNIFICANT OPERATING LOSSES FOR THE FORESEEABLE
FUTURE AND WE CANNOT ASSURE YOU THAT PROFITABILITY WILL EVER BE ATTAINED.

     In light of the rapidly evolving nature of our business and its limited
operating history, the Company has little experience forecasting its revenues
and believes that period-to-period comparisons of financial results are not
necessarily meaningful. Therefore, you should not rely on period-to-period
comparisons of our historical financial results as an indication of our future
financial results. Moreover, our financial results may vary from period to
period due to the uncertainties of our business.

OUR STOCK PRICE IS VOLATILE.

     The market for our common stock has experienced extreme price and volume
fluctuations and may continue to be volatile in response to various factors,
including:

     o    quarterly variations in our operating results;

     o    competitive announcements;

     o    the operating and stock price performance of other companies that
          investors may deem comparable to us;

     o    news relating to trends in our markets and

     o    changes in financial estimates by securities analysts or failure to
          meet analyst estimates.


                                      -20-
<PAGE>

     In addition, the stock market generally has experienced significant price
and volume fluctuations, and the market prices of companies in our industry have
been highly volatile. Due to the volatility of the stock market generally, the
price of our common stock could fluctuate for reasons beyond our control.

THE SALE OF SHARES ELIGIBLE FOR FUTURE SALE IN THE OPEN MARKET COULD DEPRESS OUR
STOCK PRICE.

     Sales of significant amounts of common stock in the public market in the
future, the perception that sales will occur or the registration of such shares
could materially and adversely affect the market price of the common stock or
our future ability to raise capital through an offering of our equity
securities. We currently have approximately 11,206,000 shares of common stock
that are freely tradable. We have issued approximately 17,094,096 shares of
common stock, warrants to purchase up to 6,950,635 shares of our common stock
upon exercise and 3,002,931 shares of preferred stock that are convertible under
certain circumstances into our common stock, in private transactions since June
of 1999 and we have granted the holders of such securities certain registration
rights. Therefore, these shares of common stock, warrants and preferred stock
can be sold in accordance with Rule 144 of the Securities Act or the holders
thereof can exercise their registration rights related thereto. In addition,
there are outstanding options to purchase approximately 5,863,000 shares of
common stock that become eligible for sale in the public market from time to
time depending on vesting.

WE DEPEND ON THE GROWTH OF BROADBAND INTERNET USAGE.

     Our technology works primarily over "broadband" Internet connections. The
main services we are building require high-bandwidth access to the Internet and
delivery of data volumes that are higher than most service providers are
presently delivering. While we are striving to overcome the technical and
business hurdles inherent in establishing a network of this nature, there can be
no assurance we will be successful in obtaining the bandwidth required to
provide our services, or obtain it at economical cost.

     Broadband web usage may be inhibited for a number of reasons, such as:

     o    inadequate network infrastructure;

     o    security concerns;

     o    inconsistent quality of service; and

     o    availability of cost-effective, high-speed service.

Our business would be adversely affected if broadband web usage does not
continue to grow.

OUR SUCCESS DEPENDS ON OUR ABILITY TO CONTINUE TO ATTRACT, RETAIN AND MOTIVATE
HIGHLY SKILLED EMPLOYEES.

     Our ability to execute our growth plan and be successful depends on our
continuing ability to attract, retain and motivate other highly skilled
employees. As we continue to grow, we will need to hire additional personnel in
all operational areas. Competition for personnel throughout the Internet
industry is intense. We may be unable to retain our key employees or attract,
assimilate or retain other highly qualified employees in the future. We have
from time to time in the past experienced, and we expect to continue to
experience in the future, difficulty in hiring and retaining highly skilled
employees with appropriate qualifications. If we do not succeed in attracting
new personnel or retaining and motivating our current personnel, our business
will be adversely affected.

MUCH OF OUR TECHNOLOGY RELIES ON OWNED OR LICENSED INTELLECTUAL PROPERTY AND WE
CANNOT BE SURE THAT SUCH RIGHTS ARE PROTECTED FROM THE USE OF OTHERS, INCLUDING
POTENTIAL COMPETITORS.


                                      -21-
<PAGE>

     We regard much of our technology as proprietary and try to protect it by
relying on trademarks, copyrights, patents, trade secret laws and
confidentiality agreements. In connection with our license agreements with third
parties, we seek to control access to and distribution of our technology,
documentation and other proprietary information. Even with all of these
precautions, it could be possible for someone else to either copy or otherwise
obtain and use our proprietary information without our authorization or to
develop similar technology independently. Effective trademark, copyright and
trade secret protection may not be available in every country in which our
services are made available through the Internet, and policing unauthorized use
of our proprietary information is difficult and expensive. We cannot be sure
that the steps we have taken will prevent misappropriation of our proprietary
information. Such misappropriation could have a material adverse effect on our
business. In the future, we may need to go to court to either enforce our
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of the proprietary rights of others. Such litigation might
result in substantial costs and diversion of resources and management attention.

     We currently license from third parties certain technologies incorporated
into some of our products and services. As we continue to introduce new services
that incorporate new technologies, we may be required to license additional
technology from others. We cannot be sure that these third-party technology
licenses will continue to be available on commercially reasonable terms, if at
all.

OUR INDUSTRY IS HIGHLY COMPETITIVE.

     The Internet industry is highly competitive and affected by rapid change.
We believe that the principal competitive factors in our business include
technological innovation, pricing, customer service, network quality, service
offerings and the flexibility to adapt to changing market conditions. In
establishing our broadband strategy, we face a number of strong, firmly
entrenched competitors who are currently providing similar services to
low-bandwidth and high-bandwidth users. These and other companies have announced
plans to provide broadband video-based services and technology. In addition to
competition from other Internet content and technology companies,
well-established media distribution companies, particularly in the cable
television and satellite markets, have established, and continue to seek to
establish, interactive, on-demand digital services through the development of
sophisticated digital set-top technology and related back-end server systems.
Many of our existing competitors have, and some future competitors may have,
significantly greater financial and technical resources than we have.

WE MUST KEEP PACE WITH TECHNOLOGICAL CHANGE TO REMAIN COMPETITIVE.

     Our future success depends, in large part, on our ability to use leading
technologies effectively, to develop our technological expertise, to enhance our
existing services and to develop new services that meet changing customer needs
on a timely and cost-effective basis. We are unable to predict which
technological development will challenge our competitive position or the amount
of expenditures that will be required to respond to a rapidly changing
technological environment. Our failure to respond in a timely and effective
manner to new and evolving technologies could have a negative impact on our
operating results and financial condition.

INTERNET CAPACITY CONSTRAINTS MAY IMPAIR THE ABILITY OF CONSUMERS TO ACCESS OUR
CUSTOMER'S WEB SITES, WHICH COULD HINDER OUR ABILITY TO GENERATE REVENUE.

     Our success will depend, in large part, upon a robust communications
industry and infrastructure for providing Internet access and carrying Internet
traffic. The Internet may ultimately not prove to be a viable commercial medium
because of:

     o    inadequate development of the necessary infrastructure such as a
          reliable network backbone;


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<PAGE>

     o    failure to timely develop complementary products such as high speed
          modems that will enable broadband access for individuals;

     o    delays in the development or adoption of new standards and protocols
          required to handle increased levels of Internet activity; or

     o    increased government regulation.

     If the Internet continues to experience significant growth in the number of
users and the level of use, then the Internet infrastructure may not be able to
continue to support the demands placed on it.

WE FACE UNCERTAINTIES REGARDING GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES.

     Laws and regulations specifically pertaining to the Internet are new and
developing. These laws or regulations govern matters such as online content,
intellectual property, user privacy, e-commerce, information security and
taxation. In addition, the applicability of existing laws to the Internet is
uncertain and evolving. As a result of this uncertainty, it is difficult to
predict the impact, if any, that future regulation or changes in regulation may
have on our operations.

     Moreover, we may be liable to third parties for any content that we encode,
distribute or make available on our website if such content violates a third
party's intellectual property rights or violates any applicable laws, such as
obscenity laws or defamation laws. Although we try to mitigate this risk by
seeking indemnification from our customers and suppliers, we may still be
subject to liability if such indemnification is not obtained, is contested or
does not provide us with enough resources to cover any potential liability.

EFFECTS OF ANTI-TAKEOVER PROVISIONS COULD INHIBIT POTENTIAL INVESTORS.

     Some of the provisions of our certificate of incorporation, our bylaws and
Delaware law could, together or separately:

     o    discourage potential acquisition proposals;

     o    delay or prevent a change in control; and

     o    limit the price that investors might be willing to pay in the future
          for shares of our common stock.

     In particular, our Board of Directors are authorized to issue up to
20,000,000 shares of preferred stock (less any outstanding shares of preferred
stock) with rights and privileges that might be senior to our common stock,
without the consent of the holders of the common stock.

WE HAVE NEVER PAID DIVIDENDS.

     We currently intend to retain earnings, if any, to support our growth
strategy. We do not anticipate paying dividends on our stock in the foreseeable
future.


OUR BUSINESS MAY FACE ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO
US WHICH COULD CAUSE OUR BUSINESS TO SUFFER.

     In addition to the risks specifically identified in this section or
elsewhere herein, we may face additional risks and uncertainties not presently
known to us or that we currently deem immaterial which ultimately impair our
business, results of operations and financial condition.


                                      -23-
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ITEM 3.  QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

     COLLECTION RISK. The Company's accounts receivables are subject, in the
normal course of business, to collection risks. Although the Company regularly
assess these risks and has policies and business practices to mitigate the
adverse effects of collection risks, significant losses may result due to the
non-payment of receivables by its customers.

     INTEREST RATE RISK. The Company's return on its investments in cash and
cash equivalents is subject to interest rate risks. The Company regularly
assesses these risks and has established policies and business practices to
manage the market risk of its cash and cash equivalents.

     FOREIGN CURRENCY RISK. The Company transacts business in the United
Kingdom. Accordingly, the Company may be subject to exposure from the adverse
movements in foreign currency exchange rates. The effect of foreign currency
exchange rate fluctuations has not been material to date. The Company does not
use derivative financial instruments to limit its foreign currency risk
exposure.














                                      -24-
<PAGE>

                          PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     Note 8 to the interim consolidated financial statements in Part I of this
Form are hereby incorporated by reference.

ITEM 2. CHANGES IN SECURITIES

     Note 5(b) to the interim consolidated financial statements in Part I of
this Form are hereby incorporated by reference.

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

     None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a)      Exhibits

         Exhibit Number             Description
         --------------             -----------
         27.1                       Financial Data Schedule


(b)      Reports on Form 8-K

         None.









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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.com Inc.
                            ----------------------------------------
                                          (Registrant)



November 14, 2000           /s/ Mark J. Meagher
-------------------------   ----------------------------------------
(Date)                      (Signature)
                            Mark J. Meagher
                            Executive Vice President and Chief Financial Officer










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