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 June 30, 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 Identification No.)
of incorporation or organization)

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


<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 July 27, 2005, was 91,180,885.


<PAGE>

                               TABLE OF CONTENTS

PART I -- FINANCIAL INFORMATION
                                                                            Page

Item 1.  Consolidated Financial Statements.

Condensed Consolidated Balance Sheets at June 30, 2005 (unaudited)
  and December 31, 2004......................................................  4
Unaudited Condensed Consolidated Statements of Operations,
  Three and Six Months Ended June 30, 2005 and 2004..........................  5
Unaudited Condensed Consolidated Statements of Comprehensive Loss
  Six Months Ended June 30, 2005 and 2004....................................  6
Unaudited Condensed Consolidated Statements of Cash Flows
  Six Months Ended June 30, 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........................................... 12

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.......... 20

Item 4.  Controls and Procedures............................................. 20

PART II -- OTHER INFORMATION

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

Item 6.  Exhibits and Reports on Form 8-K.................................... 21

Signatures................................................................... 23

Certifications............................................................... 24


                                      -3-
<PAGE>

PART I -- FINANCIAL INFORMATION

Item 1.  Consolidated Financial Statements

                               ON2 TECHNOLOGIES, INC.
                       CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>

                                                       June 30,        December 31,
                                                        2005               2004
                                                     -------------    -------------
<S>                                                  <C>              <C>
                                                      (unaudited)
                                       ASSETS

Current assets:
  Cash and cash equivalents .........................$   5,665,000    $   5,418,000
  Marketable equity securities ......................      159,000          445,000
  Accounts receivable ...............................      442,000          249,000
  Prepaid and other current assets...................      177,000          156,000
                                                     -------------    -------------
     Total current assets ...........................    6,443,000        6,268,000

Acquired software, net ..............................      774,000
Other acquired intangibles, net .....................      176,000
Goodwill ............................................      244,000

Property and equipment, net..........................      153,000           87,000
Other assets ........................................       29,000           80,000
                                                     -------------    -------------
     Total assets ...................................$   7,819,000    $   6,435,000
                                                     =============    =============

                       LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable ..................................$      58,000    $     177,000
  Accrued expenses ..................................      173,000          393,000
  Deferred revenue ..................................      220,000          153,000
  Term-loan .........................................                        62,000
  Capital lease obligation...........................       19,000           17,000
                                                     -------------    -------------
     Total current liabilities ......................      470,000          802,000

Capital lease obligation, excluding current portion .       17,000           26,000
Convertible debentures ..............................      336,000          330,000
                                                     -------------    -------------
      Total liabilities .............................      823,000        1,158,000
                                                     -------------    -------------

Commitments and contingencies

Stockholders' equity:
  Preferred stock....................................       19,000           33,000
  Common stock ......................................      898,000          803,000
  Additional paid-in capital.........................  120,483,000      115,841,000
  Accumulated other comprehensive loss...............      (38,000)         (42,000)
  Accumulated deficit................................ (114,366,000)    (111,358,000)
                                                     -------------    -------------
    Total stockholders' equity ......................    6,996,000        5,277,000
                                                     -------------    -------------
    Total liabilities and stockholders' equity.......$   7,819,000    $   6,435,000
                                                     =============    =============

  See accompanying notes to unaudited condensed consolidated financial statements
</TABLE>


                                        -4-
<PAGE>

<TABLE>
<CAPTION>
                                            ON2 TECHNOLOGIES, INC.
                           UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                                                        Three Months Ended             Six Months Ended
                                                            June 30,                        June 30,
                                                  ----------------------------    ----------------------------
                                                      2005             2004           2005            2004
                                                  ------------    ------------    ------------    ------------
<S>                                               <C>             <C>             <C>             <C>
Revenue .......................................   $    346,000    $  1,570,000    $    699,000    $  2,164,000

Operating expenses:
     Cost of revenue (1) ......................        410,000         335,000         779,000         677,000
     Research and development (2) .............        248,000         206,000         506,000         448,000
     Sales and marketing (2) ..................        194,000         121,000         305,000         231,000
     General and administrative (2) ...........        564,000         596,000       1,281,000       1,067,000
     Equity-based compensation:
         Research and development .............                         22,000                          30,000
         Sales and marketing ..................                          6,000                           9,000
         General and administrative ...........                        194,000                         261,000
                                                  ------------    ------------    ------------    ------------
Total operating expenses ......................      1,416,000       1,480,000       2,871,000       2,723,000

Income (loss) from operations .................     (1,070,000)         90,000      (2,172,000)       (559,000)

Interest and other
  income (expense), net .......................        (59,000)        (26,000)       (259,000)        (99,000)
                                                  ------------    ------------    ------------    ------------
Income (loss) before provision for income
   taxes ......................................     (1,129,000)         64,000      (2,431,000)       (658,000)

Provision for income taxes ....................         12,000           2,000          12,000           3,000
                                                  ------------    ------------    ------------    ------------
Net income (loss) .............................   $ (1,141,000)   $     62,000    $ (2,443,000)   $   (661,000)

Convertible preferred stock deemed
   dividend ...................................        180,000                         360,000

Convertible preferred stock 8%
   dividend ...................................         81,000                         162,000

Accretion of costs associated with the Series D
   Preferred Stock ............................         22,000                          43,000
                                                  ------------    ------------    ------------    ------------
Net income (loss) attributable to common
   shareholders ...............................   $ (1,424,000)   $     62,000    $ (3,008,000)   $   (661,000)
                                                  ============    ============    ============    ============

Basic and diluted net income (loss)
   attributable to common shareholders per
   common share ...............................   $      (0.02)   $       0.00    $      (0.03)   $      (0.01)
                                                  ============    ============    ============    ============

Weighted average common shares outstanding:

  Weighted average common shares outstanding:
  Basic .......................................     88,750,000      76,629,000      87,261,000      75,701,000
                                                  ============    ============    ============    ============
  Diluted .....................................     88,750,000      83,780,000      87,261,000      75,701,000
                                                  ============    ============    ============    ============

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


                See accompanying notes to unaudited condensed consolidated financial statements
</TABLE>

                                                      -5-
<PAGE>

<TABLE>
<CAPTION>
                                            ON2 TECHNOLOGIES, INC.
                       UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

                                                        Three Months Ended             Six Months Ended
                                                             June 30,                      June 30,
                                                  ----------------------------    ----------------------------
                                                      2005            2004            2005            2004
                                                  ------------    ------------    ------------    ------------
<S>                                               <C>             <C>             <C>             <C>
Net income (loss)                                 $ (1,141,000)   $     62,000    $ (2,443,000)   $   (661,000)

Other comprehensive income (loss):

Foreign currency translation adjustment........         (3,000)                          4,000          23,000
                                                  ------------    ------------    ------------    ------------
Comprehensive income (loss).....................  $ (1,144,000)   $     62,000    $ (2,439,000)   $   (638,000)
                                                  ============    ============    ============    ============


                See accompanying notes to unaudited condensed consolidated financial statements
</TABLE>


                                                     -6-
<PAGE>

<TABLE>
<CAPTION>
                                           ON2 TECHNOLOGIES, INC.
                          UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                                  Six Months Ended June 30,
                                                                                  --------------------------
                                                                                      2005           2004
                                                                                  -----------    -----------
<S>                                                                               <C>            <C>
Cash flows from operating activities:

  Net loss ....................................................................   $(2,443,000)   $  (661,000)
    Adjustments to reconcile net loss to net cash used in operating activities:
     Equity-based compensation ................................................                      371,000
     Depreciation and amortization ............................................        73,000         60,000
     Write-off of fixed assets ................................................                       18,000
     Amortization of debt discount ............................................         6,000         15,000
     Unrealized loss on marketable equity securities ..........................       286,000         68,000
   Changes in operating assets and liabilities:
     Accounts receivable ......................................................      (193,000)       424,000
     Prepaid expenses and other assets ........................................        30,000       (133,000)
     Accounts payable accrued expenses and other liabilities ..................      (339,000)      (166,000)
     Deferred revenue .........................................................        67,000         67,000
                                                                                  -----------    -----------
Net cash provided by (used) in operating activities ...........................    (2,513,000)        63,000
                                                                                  -----------    -----------
Cash flows from investing activities:

  Acquisition of Flix software line ...........................................    (1,229,000)

  Purchases of property and equipment .........................................      (104,000)       (15,000)
                                                                                  -----------    -----------
Net cash used in investing activities .........................................    (1,333,000)       (15,000)
                                                                                  -----------    -----------
Cash flows from financing activities:

  Principal payments on capital lease obligations .............................        (7,000)        (2,000)
  Purchase of common stock warrants
  Proceeds from term-loan, net of repayments ..................................       (62,000)       123,000
  Proceeds from the sale of common stock
  Proceeds from exercise of common stock options and warrants .................     4,158,000         67,000
                                                                                  -----------    -----------
Net cash provided by financing activities .....................................     4,089,000        188,000
                                                                                  -----------    -----------
Net change in cash and cash equivalents .......................................       243,000        236,000

Effect of exchange rate changes on cash and cash equivalents ..................         4,000         23,000

Cash and cash equivalents, beginning of period ................................     5,418,000      2,963,000
                                                                                  -----------    -----------
Cash and cash equivalents, end of period ......................................   $ 5,665,000    $ 3,222,000
                                                                                  ===========    ===========
</TABLE>


                                                    -7-
<PAGE>

<TABLE>
<CAPTION>

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


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

                                                                                   Six Months Ended June 30,
                                                                                  --------------------------
                                                                                      2005           2004
                                                                                  -----------    -----------
<S>                                                                               <C>            <C>
 Cash paid during the period for:
    Interest...................................................................   $     4,000    $     3,000
                                                                                  ===========    ===========
    Taxes......................................................................   $    11,000    $     2,000
                                                                                  ===========    ===========
  Acquisition of fixed assets under capital leases.............................                  $    53,000
                                                                                                 ===========
  Conversion of debentures into shares of common stock.........................                  $   100,000
                                                                                                 ===========
  Conversion of preferred stock into shares of common stock....................   $    14,000    $    12,000
                                                                                  ===========    ===========
  Marketable equity securities received for accounts receivable................                  $   150,000
                                                                                                 ===========
  Unearned compensation from the issuance of restricted common
  stock, net of forfeiture.....................................................                  $   835,000
                                                                                                 ===========
  Common stock issued for dividends on Series D Preferred Stock................   $   162,000
                                                                                  ===========
  Accretion of costs associated with the issuance of Series D
  Preferred Stock..............................................................   $    43,000
                                                                                  ===========
  Convertible Preferred Stock deemed dividend..................................   $   360,000
                                                                                  ===========


               See accompanying notes to unaudited condensed consolidated financial statements
</TABLE>


                                                     -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
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.


                                      -9-
<PAGE>

<TABLE>
<CAPTION>
                                                  Three months ended, June 30,     Six months ended, June 30,
                                                  ----------------------------    ----------------------------
                                                      2005             2004           2005            2004
                                                  ------------    ------------    ------------    ------------
<S>                                               <C>             <C>             <C>             <C>
Reported net income  (loss)  attributable  to
common shareholders                               $ (1,424,000)   $     62,000    $ (3,008,000)   $   (661,000)

Stock-based employee compensation  determined
under the fair value-based method                     (828,000)       (157,000)     (1,136,000)       (358,000)
                                                  ------------    ------------    ------------    ------------
Pro forma net loss                                $ (2,252,000)   $    (95,000)   $ (4,144,000)   $ (1,019,000)
                                                  ============    ============    ============    ============

Loss per common share (basic and diluted):

    As reported                                   $      (0.02)   $       0.00    $      (0.03)   $      (0.01)
                                                  ============    ============    ============    ============
    Pro forma                                     $      (0.03)   $       0.00    $      (0.05)   $      (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
related  compensation  expense of $276,000  and  $371,000  for the three and six
months ended June 30, 2004,  respectively,  is included in the  determination of
reported net income (loss) for those periods.

      The fair  value  of each  option  grant on the date of grant is  estimated
using the Black-Scholes option-pricing model reflecting the following;

<TABLE>
<CAPTION>
                                                  Three months ended, June 30,     Six months ended, June 30,
                                                  ----------------------------    ----------------------------
                                                      2005            2004            2005            2004
                                                  ------------    ------------    ------------    ------------
<S>                                               <C>             <C>             <C>             <C>
Volatility                                                 122%            131%            122%     127% - 131%
Expected life of options                               5 years         5 years         5 years         5 years
Risk free interest rate                                    3.8%            3.9%            3.8%     3.1% - 3.9%
Dividend yield                                               0%              0%              0%              0%
</TABLE>


      The weighted  average grant date fair value of options  granted during the
three and six  months  ended  June 30,  2005 was $0.52.  No stock  options  were
granted during the three months ended March 31, 2005. The weighted average grant
date fair value of options  granted  during the three and six months  ended June
30, 2004 was $0.58 and $0.85, respectively.

(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 $159,000 ($0.075 per
share) as of June 30, 2005.  The market value of these shares was $.09 per share
as of July 18, 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 six months ended June
30, 2005  includes  $286,000 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 six months  ended June 30,  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)   Customer concentration

      For the three months ended June 30, 2005,  three  customers  accounted for
35%,  14% and 14% of revenue  and for the six months  ended June 30,  2005,  two
customers  accounted  for 35%, and 17% of revenue.  For the three and six months
ended  June  30,  2004,  one  customer  accounted  for 92%  and 67% of  revenue,
resepectvely.

(7)   Flix Acquisition

      On April 29, 2005 the Company  acquired certain assets related to the Flix
software line of Wildform,  Inc. (Wildform),  pursuant to the terms of the Asset
Purchase And Software License  Agreement dated as of April 4, 2005,  between the
Company and Wildform.

      Pursuant to the terms of the  Purchase  Agreement,  the  Company  acquired
certain   assets  related  to  the  Flix  software  and  received  a  perpetual,
irrevocable,   royalty-free,   sub-licensable   license  to  use  certain  other
intellectual  property (the Licensed Flix IP) related to the Flix software.  The
Company also  received a  perpetual,  irrevocable,  royalty-free  license to use
certain web sales  software  (E-Commerce  Software).  In  addition,  the Company
granted  Wildform a perpetual  license to use the Purchased  Flix Assets and new
versions of the Flix software in certain new software  products being  developed
by Wildform in exchange for a payment of a royalty to the Company by Wildform.

      In consideration for the sale of the Purchased Flix Assets and the license
of the  Licensed  Flix IP and  Licensed  E-Commerce  Software,  the Company paid
Wildform  $1,215,000,  $200,000 of which has been deposited in an escrow account
that will be maintained  until the one-year  anniversary  of the Closing Date as
security  for  Wildform's   obligations  under  the  Purchase   Agreement.   The
preliminary allocation of the total acquisition cost of $1,229,000 was allocated
as follows:

Software:             $800,000
Other intangibles     $185,000
Goodwill:             $244,000

The acquired software and other intangible assets are being amortized over their
estimated useful lives of our years.

(8) Conversion of Preferred Stock

During the second quarter of 2005 the holder of Series C-V preferred stock
converted the remaining 1,450,000 shares of Series C-V into 2,040,000 shares of
the Company's common stock.

                                      -11-
<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,"
"might,"  "will,"  "would,"  "could,"  "should,"  "expect,"  "foresee,"  "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, 2004.

      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.,  VP5,  VP6, VP7) 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.


                                      -12-
<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:

       TYPE OF CUSTOMER APPLICATION                    EXAMPLES
       ----------------------------                    --------
Video and Audio Distribution over           o   providing video-on-demand
Proprietary Networks                            services to residents in
                                                multi-dwelling units (MDUs)
                                            o   video surveillance

Consumer Electronic Devices                 o   digital video players
                                            o   digital video recorders

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

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

      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 and/or maximum
amounts (e.g., annual caps).

      We have recently begun selling  products and services,  where the sales or
services  relate to our existing  relationships  with  licensees.  For instance,
where a customer has licensed our software to develop its own proprietary  video
format and video  players,  we may sell  encoding  software to users who want to
encode  video  for  playback  on  our  customers'  players  or  we  may  provide
engineering  services to companies that want to modify our  customer's  software
for use on a specific platform, such as a cell phone. As with royalties or


                                      -13-
<PAGE>

revenue  share  arrangements,   complementary  sales  of  encoding  software  or
engineering  services  should  allow us to  participate  in the  success  of our
customers' products.  For instance, if a customer's video platform does well, we
would  expect  there to be a market for  encoding  software  and/or  engineering
services in support of that platform.

      We also sell licenses to certain third-party  resellers.  In addition,  we
generally  require that  customers pay us if they desire to receive any upgrades
to our software  (e.g.,  from VP6 to VP7). We charge a fee for  engineering  and
consulting services,  based on an estimate of the time it will take our software
engineers to provide the services, or an hourly fee for ongoing services such as
product support.

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

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

      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.

      As discussed above, under our agreements with certain  customers,  we have
retained  the  right  to  market   products  that   complement   those  customer
applications. As with arrangements in which we receive royalties, the ability to
market  complementary  products  can yield  revenues  in excess of any  initial,
one-time  license  fee. In  instances  where we have  licensed  our  products to
well-known  customers,  our  right to sell  complementary  products  may be very
valuable.  But unlike  royalties,  which we receive  automatically  without  any
additional  effort on our part, the successful  sale of  complementary  products
requires  that we  effectively  execute  an  end-user  product  development  and
marketing program.  Until recently, we have generally produced software targeted
at developers,  who integrate our software into their  products,  and developing
and marketing products aimed at end users is therefore a relatively new business
for us.


                                      -14-
<PAGE>

      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
or for  which  we  expect  to  market  complementary  products  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
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
and there are several  manufacturers of multimedia processors that have done the
work  necessary  to have H.264  operate on their chips.  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


                                      -15-
<PAGE>

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
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.


                                      -16-
<PAGE>

      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."

RESULTS OF OPERATIONS

Revenue.  Revenue  for the three  months  ended June 30,  2005 was  $346,000  as
compared to $1,570,000 for the three months ended June 30, 2004. Revenue for the
six months  ended June 30, 2005 was $699,000 as compared to  $2,164,000  for the
six months ended June 30, 2004.  Revenue for the three and six months ended June
30, 2005 and 2004 was derived  primarily from the sale of software  licenses and
engineering and consulting services.  The decrease in revenue for both the three
and six months  ended June 30,  2005 is  primarily  attributed  to a  $1,452,000
license of software to Macromedia, Inc.

Operating expenses

      The Company's operating expenses consist of cost of revenue,  research and
development,  sales and  marketing  and  general  and  administrative  expenses.
Operating  expenses for the three months ended June 30, 2005 were  $1,416,000 as
compared to  $1,480,000  for the three  months  ended June 30,  2004.  Operating
expenses were  $2,871,000  for the six months ended June 30, 2005 as compared to
$2,723,000 for the six months ended June 30, 2004.

Cost of Revenue. Cost of revenue includes personnel and consulting  compensation
costs, related overhead expenses, certain hardware costs, fees paid for licensed
technology,  amortization  of  assets  recorded  in  connection  with  the  Flix
acquisition and depreciation  costs.  Cost of revenue for the three months ended
June 30, 2005 was  $410,000 as compared to $335,000  for the three  months ended
June 30,  2004.  Cost of  revenues  for the six months  ended June 30,  2005 was
$779,000 as compared to $677,000  for the six months  ended June 30,  2004.  The
increase  in  expenses  for the  three and six  months  ended  June 30,  2005 is
primarily  due to an  increase  in  compensation  costs  from  the  addition  of
personnel and the  amortization  of assets  recorded in connection with the Flix
acquisition,  partially offset by equity-based compensation in the three and six
month periods ended June 30, 2004.

Research  and  Development.   Research  and  development   expenses,   excluding
equity-based  compensation,  primarily  consist of salaries and related expenses
and  consulting  fees  associated  with the  development  and  production of our
products and services,  operating lease costs and depreciation  costs.  Research
and development  expenses for the three months ended June 30, 2005 were $248,000
as compared to $206,000 for the three  months ended June 30, 2004.  Research and
development  expenses  for the six months  ended June 30, 2005 were  $506,000 as
compared to $448,000 for the six months ended June 30,  2004.  The  increases in
expenses were primarily  attributed to an increase in compensation  costs due to
the addition of certain personnel.


                                      -17-
<PAGE>

Sales  and  Marketing.  Sales and  marketing  expenses,  excluding  equity-based
compensation,   consist  primarily  of  salaries  and  related  costs,  business
development and marketing personnel,  tradeshow costs, marketing and promotional
costs incurred to create brand awareness and public  relations  expenses.  Sales
and marketing expenses for the three months ended June 30, 2005 were $194,000 as
compared  to  $121,000  for the three  months  ended  June 30,  2004.  Sales and
marketing  expenses  for the six months  ended June 30,  2005 were  $305,000  as
compared to $231,000 for the six months ended June 30, 2004.  The increases were
primarily  attributed to an increase in  compensation  and benefits costs due to
the addition of two sales persons.

General and  Administrative.  General  and  administrative  expenses,  excluding
equity-based  compensation,  consist primarily of salaries and related personnel
costs for general corporate functions including finance, human resources,  legal
and facilities, outside legal and other professional fees and insurance. General
and  administrative  expenses  for the three  months  ended  June 30,  2005 were
$564,000 as compared  with  $596,000  for the three  months ended June 30, 2004.
General and administrative  expenses for the six months ended June 30, 2005 were
$1,281,000 as compared with  $1,067,000  for the six months ended June 30, 2004.
The  decrease  for the  three-month  period is  primarily  due to a decrease  in
insurance premiums,  consulting fees and professional fees. The increase for the
six months  ended June 30,  2005 was  primarily  attributable  to  increases  in
compensation and benefit costs,  professional fees, trade show costs, travel and
supplies, partially offset by a decrease in stock based compensation expense.

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

Interest and other income  (expense),  net. Interest and other income (expense),
net was  $(59,000)  for the three  months  ended June 30,  2005 as  compared  to
$(26,000)  for the three months  ended June 30, 2004.  Interest and other income
(expense), net was $(259,000) for the six months ended June 30, 2005 as compared
to $(99,000)  for the six months ended June 30, 2004.  Interest and other income
(expense),  net  primarily  consists of interest  earned money market  accounts,
interest  incurred for capital  lease  obligation,  term-loan,  the interest and
amortization  of debt  discount  related  to the  Series A  secured  convertible
debentures and gains and losses incurred on marketable  equity  securities.  The
increase in other expense,  net for the three and six months ended June 30, 2005
is primarily  attributable to the write down, to market,  of the publicly traded
stock the company  received as payment for a license sold in the last quarter of
2004.

      At June 30, 2005, we had approximately 36 full-time  employees.  We expect
to hire employees as necessary in order to attain our strategic objectives

LIQUIDITY AND CAPITAL RESOURCES

      At June 30,  2005,  we had cash  reserves  of  $5,665,000  as  compared to
$5,418,000  at December  31,  2004.  At June 30,  2005,  the Company had working
capital of $5,973,000 as compared with $5,466,000 at December 31, 2004.

      Net cash used in operating activities was $2,513,000 and $63,000 for the
six months ended June 30, 2005 and 2004, respectively. The increase in net cash
used in operating activities is primarily attributable to an increase in the net
loss, a decrease in equity-based compensation, changes in accounts receivable,
prepaid expenses and other assets and accounts payable and accrued expenses,
partially offset by an increase in loss on marketable equity securities.


                                      -18-
<PAGE>

      Net cash used in investing  activities  was $1,333,000 and $15,000 for the
six  months  ended  June  30,  2005  and  2004,  respectively,   reflecting  the
acquisition of the Flix product line and an increase in the purchase of property
and equipment.

      Net cash provided by financing  activities was $4,089,000 and $188,000 for
the six months  ended June 30,  2005 and 2004,  respectively.  The  increase  is
attributable  to an increase in proceeds  received  from the  exercise of common
stock options and 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/A 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.

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


                                      -19-
<PAGE>

vesting period.  SFAS 123(R) is effective for the Company as of January 1, 2006.
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 MARKET 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.  However,  the  Company  does  have some
exposure to foreign  currency  rate  fluctuations  arising from  maintaining  an
office for the Company's U.K.  based,  wholly owned  subsidiary  which transacts
business in the local  functional  currency.  The U.K. based subsidiary does not
conduct any sales and all their costs are funded in United  States  dollars.  To
date,  the Company has not entered into any derivative  financial  instrument to
manage foreign  currency risk and is not currently  evaluating the future use of
any such financial instruments.

ITEM 4. CONTROLS AND PROCEDURES

      Under  the  supervision  and with  the  participation  of our  management,
including  the Chief  Executive  Officer and Chief  Financial  Officer,  we have
evaluated  the  effectiveness  of our  disclosure  controls  and  procedures  as
required by Exchange Act Rule  13a-15(b) as of the end of the period  covered by
this report.  Based on that  evaluation,  the Chief Executive  Officer and Chief
Financial  Officer have concluded that these disclosure  controls and procedures
are  effective.  There were no changes in our internal  control  over  financial
reporting during the quarter ended June 30, 2005 that have materially  affected,
or are  reasonably  likely to  materially  affect,  our  internal  control  over
financial reporting.


                                      -20-
<PAGE>

                          PART II -- OTHER INFORMATION


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

The  Company's  2005  Annual  Meeting of  Stockholders  was held on May 5, 2005.
Represented at the Annual Meeting, either in person or by proxy, were 77,865,193
voting  shares.  The  following  actions  were taken by a vote of the  Company's
stockholders at the Annual Meeting:

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

                              FOR        AGAINST/WITHHELD    ABSTAIN

Douglas A. McIntyre        74,199,369        3,108,745             0
William A. Newman          75,016,692        2,291,422             0
J. Allen Kosowsky          75,387,738        1,920,376             0
Tom Weigman                75,244,323        2,063,791             0
Mike Kopetski              74,271,207        3,036,907             0
Mike Alfant                75,734,187        1,573,927             0

There were no broker non-votes with respect to the election of directors.

The  appointment  of Eisner LLP as the Company's  independent  certified  public
accountants  for  the  fiscal  year  ending  December  31,  2005  was  ratified;
75,471,409  votes  were cast for the  ratification;  1,996,714  votes  were cast
against or were  withheld with respect to the  ratification;  there were 397,070
abstentions; and there were no broker non-votes.

The  proposal  to  authorize  the  On2   Technologies,   Inc.,   2005  Incentive
Compensation  Plan was  adopted;  15,487,055  votes were cast for the  proposal;
9,690,107 votes were cast against the proposal;  there were 393,363 abstentions;
and there were 53,294,666 broker non-votes.


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.


                                      -21-
<PAGE>

(b)   Reports on Form 8-K

      The Company  filed Form 8-K on April 5, 2005,  containing a press  release
announcing  that it had  entered  into a purchase  and  license  agreement  with
Wildform, Inc. regarding Wildform's Flix(TM) Flash video encoder technology.

      The Company  filed Form 8-K on April 21, 2005,  containing a press release
announcing the Company's  results of operations for the quarter ending March 31,
2005.

      The Company filed Form 8-K on May 5, 2005,  (i)  announcing the completion
of the previously-announced acquisition by the Company of certain assets related
to the "Flix(TM)"  software line of Wildform,  Inc.,  pursuant to the terms of a
certain Asset Purchase And Software License Agreement (the "Purchase Agreement")
dated as of April 4, 2005, between the Company and Wildform and (ii) attaching a
copy of the Purchase Agreement.

      The Company filed Form 8-K on May 11, 2005,  announcing that the Company's
stockholders had approved the On2 Technologies, Inc. 2005 Incentive Compensation
Plan (the "2005 Plan") and attaching a copy of the 2005 Plan.

      The  Company  filed  Form  8-K on May 13,  2005,  announcing  (i) that the
Company's  Board of Directors  (the "Board") had adopted the annual meeting fees
and option  grants for  members of the Board;  (ii) that James Meyer and Afsaneh
Naimollah had been appointed to the Board; and (iii) that the Board had extended
the contracts of Douglas McIntyre, the President's Chairman, President, and CEO,
Eric Ameres,  the  Company's  Chief  Technology  Officer,  and Tim Reusing,  the
Company's EVP - Legal Affairs and Business Relations.

      The Company filed Form 8-K on May 31, 2005,  announcing that the Board had
adopted a new Code of Ethics  for  Employees  and  Directors  (the  "Code")  and
attaching a copy of the Code.


                                      -22-
<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)

August 1, 2005                                       /s/ Anthony Principe
--------------                                  --------------------------------
(Date)                                                   (Signature)
                                                Anthony Principe
                                                Senior Vice President and
                                                Chief Financial Officer
                                                (Principal Financial Officer)


                                      -23-