<PAGE>

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

                                   FORM 10-QSB

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

               For the quarterly period ended September 30, 2003.

                        Commission file number 1-15117.

                             On2 Technologies, 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)

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

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

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

      Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. |X| Yes |_| No

The number of shares of the Registrant's Common Stock, par value $0.01 ("Common
Stock"), outstanding as of November 11, 2003 was 72,477,138.

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


                                     - 1 -
<PAGE>

                                Table of Contents

PART I -- FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                                                                                   Page
                                                                                                   ----
<S>                                                                                                 <C>
Item 1.  Consolidated Financial Statements.

Condensed Consolidated Balance Sheets at September 30, 2003 (unaudited) and December 31, 2002.....  3

Unaudited Condensed Consolidated Statements of Operations,
  Three and Nine Months Ended September 30, 2003 and 2002.........................................  4

Unaudited Condensed Consolidated Statements of Cash Flows
  Nine Months Ended September 30, 2003 and 2002...................................................  5

Notes to Unaudited Condensed Consolidated Financial Statements....................................  7

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations.... 10

Item 3.  Controls and Procedures.................................................................. 17

PART II -- OTHER INFORMATION

Item 1.  Legal Proceedings........................................................................ 18

Item 6.  Exhibits and Reports on Form 8-K......................................................... 18

Signatures........................................................................................ 19

Certifications.................................................................................... 20
</TABLE>


                                     - 2 -
<PAGE>

                         PART I -- FINANCIAL INFORMATION

Item 1.  Consolidated Financial Statements

                             ON2 TECHNOLOGIES, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                   September 30,     December 31,
                                                                       2003              2002
                                                                   -------------    -------------
                                                                    (unaudited)
                            ASSETS
<S>                                                                <C>              <C>
   Current assets:
     Cash and cash equivalents .................................   $   2,915,000    $     553,000
     Accounts receivable, net of allowance for doubtful accounts         961,000          601,000
     Prepaid expenses and other current assets .................         222,000          101,000
                                                                   -------------    -------------
        Total current assets ...................................       4,098,000        1,255,000

   Property and equipment, net .................................         174,000          353,000
   Purchased technology and other intangible assets, net .......                          463,000
   Other assets ................................................          26,000            9,000
                                                                   -------------    -------------
        Total assets ...........................................   $   4,298,000    $   2,080,000
                                                                   =============    =============

            LIABILITIES AND STOCKHOLDERS' EQUITY

   Current liabilities:
     Accounts payable ..........................................   $     161,000    $     266,000
     Accrued and other liabilities .............................         187,000          254,000
     Deferred revenue ..........................................          53,000
     Current portion of capital lease obligations ..............                            4,000
     Term loan .................................................         108,000
                                                                   -------------    -------------
        Total current liabilities ..............................         509,000          524,000

   Capital lease obligations, net of current portion ...........                            5,000

   Convertible debentures ......................................         541,000          569,000

   Commitments and contingencies

   Stockholders' equity:
     Preferred stock ...........................................          99,000           99,000
     Common stock ..............................................         662,000          596,000
     Additional paid-in ........................................     109,165,000      105,422,000
     capital
     Accumulated other comprehensive loss ......................         (19,000)         (16,000)
     Accumulated deficit .......................................    (106,659,000)    (105,119,000)
                                                                   -------------    -------------

       Total stockholders' equity ..............................       3,248,000          982,000
                                                                   -------------    -------------

       Total liabilities and stockholders' equity ..............   $   4,298,000    $   2,080,000
                                                                   =============    =============
</TABLE>

See accompanying notes to unaudited condensed consolidated financial statements


                                     - 3 -
<PAGE>

                             ON2 TECHNOLOGIES, INC.
            UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                     Three Months Ended               Nine Months Ended
                                                        September 30,                   September 30,
                                                ----------------------------    ----------------------------
                                                    2003            2002            2003            2002
                                                ------------    ------------    ------------    ------------
<S>                                             <C>             <C>             <C>             <C>
Revenues ....................................   $    866,000    $    824,000    $  2,976,000    $  2,540,000

Operating expenses:
     Cost of revenues .......................        410,000         422,000       1,252,000       1,630,000
     Research and development ...............        249,000         455,000         865,000       1,847,000
     Sales and marketing ....................        158,000         108,000         350,000         848,000
     General and administrative .............        650,000         605,000       1,833,000       2,515,000
     Impairment charges .....................             --              --              --          30,000
     Cost curtailment and restructuring
       charges ..............................             --         502,000              --         581,000
                                                ------------    ------------    ------------    ------------
Total operating expenses ....................      1,467,000       2,092,000       4,300,000       7,451,000
                                                ------------    ------------    ------------    ------------
Loss from operations ........................       (601,000)     (1,268,000)     (1,324,000)     (4,911,000)

Interest and other
 (expense), net .............................        (21,000)         (4,000)         21,000         (14,000)
                                                ------------    ------------    ------------    ------------
Loss before provision for income taxes ......       (622,000)     (1,272,000)     (1,303,000)     (4,925,000)

Provision for income taxes ..................          3,000           9,000           9,000          27,000
                                                ------------    ------------    ------------    ------------
Net loss ....................................       (625,000)     (1,281,000)     (1,312,000)     (4,952,000)

Non-cash convertible preferred stock dividend        228,000         668,000         228,000         668,000
                                                ------------    ------------    ------------    ------------
Net loss attributable to common
   stockholders .............................   $   (853,000)   $ (1,949,000)   $ (1,540,000)   $ (5,620,000)
                                                ============    ============    ============    ============

Basic and diluted net loss per common share .   $       (0.0)   $      (0.03)   $      (0.02)   $      (0.11)
                                                ============    ============    ============    ============

Weighted average basic and diluted common
   shares outstanding .......................     65,339,000      56,094,000      62,678,000      51,321,000
                                                ============    ============    ============    ============
</TABLE>

See accompanying notes to unaudited condensed consolidated financial statements


                                     - 4 -
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                Nine Months Ended September 30,
                                                                                -------------------------------
                                                                                     2003            2002
                                                                                  -----------    -----------
<S>                                                                               <C>            <C>
Cash flows from operating activities:
  Net .........................................................................   $(1,312,000)   $(4,952,000)
  loss
    Adjustments to reconcile net loss to net cash used in operating activities:
     Non-cash bond interest ...................................................        26,000
     Depreciation and
       amortization ...........................................................       672,000      1,214,000
     Amortization of debt discount ............................................        22,000          1,000
     Restructuring and impairment charges .....................................            --         30,000
     Charge related to conversion of debentures ...............................            --         24,000
     Loss on disposal of fixed assets .........................................            --        289,000
   Changes in operating assets and liabilities, net of effect of acquisitions:
     Accounts receivable, net .................................................      (360,000)      (157,000)
     Prepaid expenses and other current assets ................................      (120,000)       (50,000)
     Other assets .............................................................       (17,000)       253,000
     Accounts payable, accrued expenses and other liabilities .................      (172,000)      (181,000)
     Deferred revenue .........................................................        53,000        (31,000)
                                                                                  -----------    -----------
Net cash used in operating activities .........................................    (1,208,000)    (3,560,000)
                                                                                  -----------    -----------
Cash flows from investing activities:

  Purchases of property and equipment .........................................       (30,000)       (69,000)
                                                                                  -----------    -----------
Net cash used in investing activities .........................................       (30,000)       (69,000)
                                                                                  -----------    -----------
Cash flows from financing activities:

  Principal payments on capital lease obligations .............................        (9,000)        (2,000)
  Purchase of common stock warrants ...........................................       (42,000)            --
  Proceeds from term loan, net of repayment ...................................       108,000             --
  Proceeds from the sale of common stock ......................................     1,313,000      3,258,000
  Proceeds from the issuance of convertible debentures ........................            --        650,000
  Proceeds from exercise of common stock options and warrants .................     2,233,000             --
                                                                                  -----------    -----------
Net cash provided by financing activities .....................................     3,603,000      3,906,000
                                                                                  -----------    -----------
Net change in cash and cash equivalents .......................................     2,365,000        277,000

Effect of exchange rate changes on cash and cash equivalents ..................        (3,000)        (3,000)
                                                                                  -----------    -----------

Cash and cash equivalents, beginning of period ................................       553,000        216,000
                                                                                  -----------    -----------
Cash and cash equivalents, end of period ......................................   $ 2,915,000    $   490,000
                                                                                  ===========    ===========
</TABLE>


                                     - 5 -
<PAGE>

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

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

<TABLE>
<CAPTION>
                                                         Nine Months Ended September 30,
                                                         -------------------------------
                                                                2003         2002
                                                             -----------------------
<S>                                                          <C>          <C>
Cash paid during the period for:
   Interest ..............................................   $   10,000   $    2,000
                                                             =======================
   Taxes .................................................   $   13,000   $   18,000
                                                             =======================
 Acquisition of fixed assets under capital leases ........                $   12,000
                                                             =======================
 Conversion of debentures into shares of common stock ....   $   50,000   $2,000,000
                                                             =======================
 Conversion of preferred stock into shares of common stock                $   26,000
                                                             =======================
 Non-cash convertible preferred stock dividends ..........   $  228,000   $  668,000
                                                             =======================
</TABLE>

               See accompanying notes to the unaudited condensed
                       consolidated financial statements


                                     - 6 -
<PAGE>

ON2 TECHNOLOGIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

(1) Organization and Summary of Significant Accounting Policies

(a) 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 closed area
networks, 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.

(b) Basis of Presentation

      The unaudited 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 have been prepared assuming the Company will
continue as a going concern. The condensed consolidated financial statements do
not include any adjustments that might result from the Company's inability to
continue as a going concern. 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
31, 2003.

(c) 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


                                     - 7 -
<PAGE>

ON2 TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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", which was released in
December 2002 as an amendment of SFAS No. 123. The following table illustrates
the effect on net income and earnings per share if the fair value based method
had been applied to all awards.

<TABLE>
<CAPTION>
                                               Three months ended, September 30,    Nine months ended, September 30,
                                               ---------------------------------    --------------------------------
                                                  2003                 2002            2003                 2002
                                               -----------          -----------     -----------        -------------
<S>                                            <C>                  <C>             <C>                <C>
Reported net loss attributable to common
stockholders                                   $  (853,000)         $(1,949,000)    $(1,540,000)       $  (5,620,000)

Stock-based employee compensation determined
under the fair value-based method
                                                   (54,000)            (506,000)       (440,000)          (3,375,000)
                                               -----------          -----------     -----------        -------------

Pro forma net loss                             $  (907,000)         $(2,455,000)    $(1,980,000)       $  (8,995,000)
                                               ===========          ===========     ===========        =============

Loss per common share (basic and diluted):

    As reported                                $     (0.01)         $     (0.03)    $     (0.02)       $       (0.11)
                                               ===========          ===========     ===========        =============

    Pro forma                                  $     (0.01)         $     (0.04)    $     (0.03)       $       (0.18)
                                               ===========          ===========     ===========        =============
</TABLE>

(2) Term Loan

      During July 2003 the Company obtained unsecured financing in the amount of
$160,000 to finance their Directors' and Officer' Liability Insurance for the
next twelve months. The financing arrangement is for nine months; runs through
March of 2004 and bears interest at an annual rate of 7.75%.

(3) Stockholders' Equity

(a) Preferred Stock

      During the third quarter of 2003 the Company agreed to extend certain
anti-dilution rights to the holders of its Series C-VI Preferred Stock,
retroactive to the issuance of such shares. The conversion price of the Series
C-VI Preferred Stock has been adjusted to $0.5226 from $0.5601 per share as a
result of the retroactive treatment. The Company recorded deemed dividends of
$143,000 in the quarter ending September 30, 2003 relating to this adjustment.


                                     - 8 -
<PAGE>

ON2 TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

During the third quarter of 2003 the Company granted a cashless exercise to a C-
II Preferred Sock warrant holder. The Company recorded a deemed dividend of
$85,000 in the quarter ending September 30, 2003 upon the cashless exercise of
these warrants.

(b) Equity-Line of Credit

      Since April 2002, when the Company's stockholders approved the sale, at
the sole discretion of the Company, of up to 9,000,000 shares of Common Stock in
connection with the Second Stock Purchase Agreement, the Company has sold
9,000,000 shares of Common Stock for net proceeds of approximately $2,073,000
through June 30, 2003 at which time the Company had issued all the stock
registered for the Second Stock Purchase Agreement. For the nine months ended
September 30, 2003 the Company issued 3,387,000 shares of its common stock and
received proceeds of $1,313,000 in connection with the Second Stock Purchase
Agreement.

(c) Common Stock Options and Warrants

      For the nine months ended September 30, 2003, the Company issued 1,649,000
shares of common stock and received proceeds of $845,000 for the exercise of
common stock options and issued 1,049,000 shares of common stock and received
proceeds of $1,388,000 for the exercise of common stock warrants.

(d) Customer concentration

      For the three months ended September 30, 2003, approximately 75% of the
Company's gross revenues were generated from two customers. Approximately 58%
was generated from the license of software to the Company's Japanese reseller,
MCS K.K. and 17% was generated from the license of software to Electronic Arts,
Inc. For the three months ended September 30, 2002, approximately 75% of the
Company's gross revenues were generated from two customers. Approximately 50%
was generated from the Company's Japanese reseller, MCS K.K., for encoders and
servers and 25% was generated from the sale of VP5 encoders to America Online.


                                     - 9 -
<PAGE>

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

      This document contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These statements relate to future events or our future
financial performance and are not statements of historical fact. In some cases,
you can identify forward-looking statements by terminology such as "may,"
"will," "should," "expect," "plan," "anticipate," "believe," "estimate,"
"predict," "potential," "objective," "forecast," "goal" or "continue," the
negative of such terms, 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. If the Company cannot secure additional financing or increase its
revenues to support its operations, the Company's status as a going concern will
remain in doubt. 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 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 video compression/decompression software
("codec") to deliver high quality video at the lowest possible data rates to
closed area networks, such as set-top boxes, the Internet and wireless devices.
We offer a suite of products and services that encompass our proprietary
compression technology. Our service offerings include customized engineering and
consulting services and technical support and high-level video encoding. In
addition, we license our software products, which include video and audio codecs
and encoding and server software, for use with video delivery platforms.

      In view of the rapidly evolving nature of our business and our limited
operating history, we have limited experience forecasting our revenues and
operating costs. Therefore, we believe that period-to-period comparisons of
financial results are not necessarily meaningful and should not be relied upon
as an indication of our future performance. To date, we have incurred
substantial costs to create technology products and services. As of September
30, 2003, we had an accumulated deficit of $106.6 million. We will continue to
incur costs to develop, introduce and enhance products and services, build brand
awareness and grow our business. We may also incur significant additional costs
related to technology, marketing or acquisitions of businesses and technologies
to respond to changes in this rapidly developing industry. These costs may not
correspond with any meaningful increases in revenues in the near term, if at
all. As such, these costs may result in negative operating cash flows until such
time as we generate sufficient revenues to offset such costs.


                                     - 10 -
<PAGE>

Critical Accounting Policies and Estimates

      This discussion and analysis of our financial condition and results of
operations are based on our condensed consolidated financial statements that
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). The preparation of our condensed consolidated
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could materially differ from those estimates.
The condensed consolidated financial statements and the related notes thereto
should be read in conjunction with the following discussion of our critical
accounting policies and our Form 10-KSB filed with the SEC on March 30, 2003.
Our critical accounting policies and estimates are:

      o     Revenue recognition
      o     Valuation of goodwill, intangible assets and other long-lived assets

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

      We recognize revenue in accordance with SOP 97-2, "Software Revenue
Recognition" ("SOP 97-2"), 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" ("SOP 98-9"). 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, whichever is
stated in 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 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
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


                                     - 11 -
<PAGE>

Certain Production Type Contracts," ("SOP 81-1"). When reliable estimates are
available for the costs and efforts necessary to complete the engineering or
consulting services and those services do not include contractual milestones or
other acceptance criteria, we recognize revenue under the percentage of
completion contract method based upon input measures, such as hours. When such
estimates are not available, we defer all revenue recognition until we have
completed the contract and have no further obligations to the customer.

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

      Valuation of goodwill and intangible assets. We evaluate our long-lived
assets in accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS No. 121").
Long-lived assets that are not identified with an impaired asset are reviewed
for impairment whenever events or changes in circumstances indicate that the net
carrying value of the asset may not be recoverable. Certain circumstances
include a deterioration of our financial resources, poor economic trends within
the industry, significant changes in our business model or a significant decline
in the demand for video delivery solutions. In such circumstances, the net
carrying value of the asset is compared to the undiscounted future cash flows of
the business segment to which that asset is attributable. As we operate under
one business segment, the net carrying value of all long-lived assets are
compared to our consolidated undiscounted future cash flows. Impairment losses
are measured by the amount in which the net carrying value of the assets exceed
the fair value.

      In July of 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets" ("SFAS No. 142"). SFAS 142 requires goodwill and other
intangible assets to be tested for impairment at least annually, and written off
when impaired, rather than being amortized as previously required. As of June
30, 2003, we had no recorded goodwill. As of June 30, 2003, our intangible
assets consisted of purchased technology, which we will continue to amortize
over its remaining useful life. The purchased technology will be fully amortized
as of September 2003. The adoption of SFAS 142 had no significant impact on our
results of operations or financial position.

Results of Operations

      Revenue. Revenue for the three months ended September 30, 2003 was
$866,000 as compared to $824,000 for the three months ended September 30, 2002.
Revenue for the nine months ended September 30, 2003 was $2,976,000 as compared
with $2,540,000 for the nine months ended September 30, 2002. Revenue for the
three and nine months ended September 30, 2003 and 2002 was derived primarily
from the sale of software licenses, engineering and consulting services. The
increase in revenue is attributed to the development of certain digital video
and video-on-demand initiatives in Asia. For the three months ended September
30, 2003, approximately 75% of the Company's gross revenues were generated from
two customers. Approximately 58% was generated from the license of software to
the Company's Japanese reseller, MCS K.K. and 17% was generated from the license
of software to Electronic Arts Inc. For the three months ended September 30,
2002, approximately 75% of the Company's gross revenues were generated from two
customers. Approximately 50% was generated from the Company's Japanese reseller,
MCS K.K., for encoders and servers and 25% was generated from the sale of VP5
encoders to America Online.

      Operating expenses

      The Company's operating expenses consist of cost of revenue, research and
development, sales and marketing, general and administrative expenses,
impairment charges and cost curtailment and


                                     - 12 -
<PAGE>

restructuring charges. Operating expenses for the three months ended September
30, 2003 were $1,467,000 as compared to $2,092,000 for the three months ended
September 30, 2002. Operating expenses were $4,300,000 for the nine months ended
September 30, 2003 as compared to $7,451,000 for the nine months ended September
30, 2002.

      Cost of Revenue. Cost of revenue includes personnel and consulting
compensation costs, related overhead expenses, certain hardware costs, bandwidth
costs, fees paid for licensed technology, depreciation costs and the
amortization of purchased technology. Cost of revenue for the three months ended
September 30, 2003 was $410,000 as compared to $422,000 for the three months
ended September 30, 2002. Cost of revenues for the nine months ended September
30, 2003 was $1,252,000 as compared with $1,630,000 for the nine months ended
September 30, 2002. The decrease in expenses for the three and nine months ended
September 30, 2003 is primarily due to a reduction in headcount and
depreciation. Amortization of purchased technology was $150,000 and $464,000 for
the three and nine months ended September 30, 2003. As of September 30, 2003
purchased technology was fully amortized

      Research and Development. Research and development expenses 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 September 30, 2003 were $249,000 as compared with $455,000 for the three
months ended September 30, 2002. Research and development expenses for the nine
months ended September 30, 2003 were $865,000 as compared with $1,847,000 for
the nine months ended September 30, 2002. The decreases in expenses were
primarily attributed to a reduction in compensation and benefits costs due to a
reduction in headcount and a reduction in depreciation.

      Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and related costs of sales, business development and marketing
personnel, tradeshow costs, marketing and promotional costs incurred to create
brand awareness and public relations expenses. Sales and marketing expenses for
the three months ended September 30, 2003 were $158,000 as compared with
$108,000 for the three months ended September 30, 2002. Sales and marketing
expenses for the nine months ended June 30, 2003 were $350,000 as compared with
$848,000 for the nine months ended September 30, 2002. The increase for the
three months ended September 30, 2003 is primarily attributable to consulting
fees paid in the quarter for certain customer related projects. The decrease for
the nine months ended September 30, 2003 was primarily attributed to a reduction
in compensation and benefits costs due to a reduction in headcount and a
decrease in advertising, marketing and business development costs.

      General and Administrative. General and administrative expenses consist
primarily of salaries and related personnel costs for general corporate
functions including administration, finance, human resources, legal and
facilities, consulting, outside legal and professional fees and insurance.
General and administrative expenses for the three months ended September 30,
2003 were $650,000 as compared with $605,000 for the three months ended
September 30, 2002. General and administrative expenses for the nine months
ended September 30, 2003 were $1,833,000 as compared with $2,515,000 for the
nine months ended September 30, 2002. The increase for the three months ended
September 30, 2003 was primarily attributed to an increase in legal, consulting
and other professional fees related to the E-world contracts. The decreases for
the nine months ended September 30, 2003 was primarily attributed to a reduction
in compensation and benefits costs due to a reduction in headcount and a general
decrease in unallocated operating overhead attributed to an entity-wide decrease
in personnel.

      Impairment Charges. The Company did not incur impairment charges for the
three and nine months ended September 30, 2003. Impairment charges were $30,000
for the nine months ended September 30, 2002. The $30,000 charge relates to the
write-down of the remaining value of a DVD content library. The library was
originally acquired for the Company's broadband content network, which ceased


                                     - 13 -
<PAGE>

operations in the second quarter of 2000. There will be no additional charges
related to the impairment of the content library in future periods.

      Cost Curtailment and Restructuring Charges. The Company did not incur cost
curtailment and restructuring charges for the three and nine months ended
September 30, 2003. Cost curtailment and restructuring charges were $502,000 and
$581,000 for the three and nine months ended September 30, 2002. The charges
were comprised of the following: (1) $113,000 related to severance accrued and
paid for terminated employees resulting from the elimination of the Company's
New York City office; (2) $172,000 in penalties to terminate the lease on the
Company's office space in New York City; (3) $7,000 in relocation costs incurred
to relocate the Company's offices to the Albany, New York area; (4) $289,000
write-off of the net carrying value of fixed assets abandoned as a result of
closing the New York City office.

      Interest and other income (expense), net. Interest and other income
(expense), net was $(21,000) as compared to $(4,000) for the three months ended
September 30, 2003 and 2002, respectively. Interest and other income (expense),
net was $21,000 as compared with $(14,000) for the three and nine months ended
September 30, 2003 and 2002, respectively. Interest and other income (expense),
net primarily consists interest earned on our rental security deposits and money
market accounts, interest incurred for capital lease obligations, and the
interest and amortization of debt discount related to the Series A secured
convertible debentures. The increase in interest and other expense for the three
months ended September 30, 2003 was primarily attributable to interest incurred
on the Series A secured convertible debentures. For the nine months ended
September 30, 2003, interest and other income (expense), net includes other
income of $70,000 that represents receipt of the final installment in the legal
settlement with E-Coin partially offset by the interest incurred on the
convertible debentures.

      As of September 30, 2003, the Company had approximately 26 full-time
employees.

Liquidity and Capital Resources

      As of September 30, 2003, the Company had cash reserves and working
capital of $2,915,000 and $3,589,000, respectively as compared with $553,000 and
$731,000 at December 31, 2002.

      Net cash used in operating activities was $1,208,000 and $3,560,000 for
the nine months ended September 30, 2003 and 2002, respectively. The decrease in
net cash used in operating activities was primarily attributed to a decrease in
our net operating losses, partially offset by a decrease in depreciation and
amortization, a loss on disposal of fixed assets in the nine months ended
September 30, 2002 and changes in accounts receivable.

      Net cash used in investing activities was $30,000 and $69,000 for the nine
months ended September 30, 2003 and 2002, respectively, which relates to
purchases of property and equipment.

      Net cash provided by financing activities was $3,603,000 and $3,906,000
for the nine months ended September 30, 2003 and 2002, respectively. During the
nine months ended September 30, 2003 the Company received proceeds of $1,313,000
from the sale of common stock under its equity line of credit, $2,233,000 from
the exercise of options and warrants and $108,000 under its term loan, net of
repayment. During the nine months ended September 30, 2002 the Company received
proceeds of $3,258,000 from the sale of common stock under its equity line of
credit and $650,000 from the issuance of secured convertible debentures.

      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


                                     - 14 -
<PAGE>

space in New York City and Clifton Park, New York. The aggregate required
payments for the next 12 months under these arrangements are $160,000.
Notwithstanding the above, our most significant non-contractual operating costs
for the next 12 months are compensation and benefit costs, insurance costs and
general overhead costs such as telephone and utilities. During the next 12
months, we anticipate incurring approximately $400,000 per month in cash
operating costs.

      The Company currently has two equity lines of credit. In December 2000,
the Company entered into a common stock purchase agreement ("Initial Stock
Purchase Agreement") with an accredited investor ("Investor"), for the sale,
from time to time, of the Company's Common Stock. Pursuant to the Initial Stock
Purchase Agreement, the Investor has committed to purchase up to $23,000,000 of
Common Stock over a 36-month period. The Investor may be required to invest an
additional $17,000,000 upon the attainment of certain trading volumes and
weighted average market prices in the Company's Common Stock. However, the
Company's ability to procure funds through the Initial Stock Purchase Agreement
may be limited or prohibited based on certain trading volumes and weighted
average market prices in the Company's Common Stock.

      Under the Initial Stock Purchase Agreement, shares of Common Stock are
periodically sold to the Investor at a discount from market value ranging from
6%-10%, depending on the closing price of the Company's Common Stock. The amount
of Common Stock sold is at the sole discretion of the Company and at no time
throughout the term of the Stock Purchase Agreement is the Company obligated to
sell its Common Stock, unless the Company issues a draw-down notice. The Company
issued warrants to purchase 50,000 shares of the Company's Common Stock and
incurred $25,000 of transaction costs in connection with the Stock Purchase
Agreement.

      In May 2001, the Company's shareholders approved the sale, at the sole
discretion of the Company, of up to 15,500,000 shares of Common Stock in
connection with the Initial Stock Purchase Agreement. The Company has sold
15,500,000 shares of Common Stock for net proceeds of approximately $6,670,000
under the Initial Stock Purchase Agreement,

      In November 2001, the Company entered into a second common stock purchase
agreement ("Second Stock Purchase Agreement") with the Investor, for sale, from
time to time, of the Company's Common Stock. Under the Second Stock Purchase
Agreement, the Investor has committed to purchase an additional $23,000,000
million over a 36-month period, with an additional commitment for $17,000,000
upon the attainment of certain price and volume thresholds. Under the Second
Stock Purchase Agreement, providing that the volume weighted average stock price
for the 30-day period preceding a draw-down notice is at least $0.30, the
Company may request (a) a minimum amount of $300,000 or (b) a maximum amount
equal to the greater of $500,000 or $300,000 plus 4.5% of the volume weighted
average stock price for the preceding 30-day period multiplied by the total
trading volume for the preceding 3-month period. If the volume weighted average
stock price is below $0.30 and greater than $0.10, the minimum draw down amount
is pro-ratably reduced from $300,000 to $100,000.

      Under the Second Stock Purchase Agreement, shares of Common Stock are
periodically sold to the Investor at a discount from market value ranging from
6%-10%, depending on the closing price of the Company's Common Stock. The amount
of Common Stock sold is at the sole discretion of the Company and at no time
throughout the term of the Stock Purchase Agreement is the Company obligated to
sell its Common Stock, unless the Company issues a draw down notice. The Company
issued 100,000 shares of unrestricted Common Stock and incurred approximately
$10,000 of transaction costs in connection with the Second Stock Purchase
Agreement.


                                     - 15 -
<PAGE>

      Since April 2002, when the Company's shareholders approved the sale, at
the sole discretion of the Company, of up to 9,000,000 shares of Common Stock in
connection with the Second Stock Purchase Agreement, the Company has sold
9,000,000 shares of Common Stock for net proceeds of approximately $2,073,000
and has issued all the stock registered for the Second Stock Purchase Agreement.
For the nine months ended September 30, 2003 the Company issued 3,387,000 shares
of its common stock and received proceeds of $1,313,000 in connection with the
Second Stock Purchase Agreement.

      Based on our current working capital requirements, we do not believe we
will require additional funding during the next 12 months to finance our current
level of operations.

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

Impact of Recently Issued Accounting Pronouncements

      In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" as an amendment to SFAS
No. 123 to provide alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for stock-based
employee compensation. It also amends the disclosure provisions of SFAS No. 123
to require prominent disclosure about the effects on reported net income (loss)
of an entity's accounting policy decisions with respect to stock-based employee
compensation and amends APB Opinion No. 28 to require disclosure about those
effects in interim financial information. The disclosure provisions are
effective for fiscal years ending after December 15, 2002 and for interim
periods beginning after December 15, 2002. The Company follows the intrinsic
value method of accounting for stock-based employee compensation, but will
continue to evaluate the benefits of a voluntary change to the fair value based
method.


                                     - 16 -
<PAGE>

Item 3. Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures:

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

(b) Changes in Internal Controls:

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


                                     - 17 -
<PAGE>

PART II -- OTHER INFORMATION

Item 1. Legal Proceedings

From time to time the Company is party to various legal proceedings arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.

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

(a) Exhibits

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

(b) Reports on Form 8-K

Current Report on Form 8-K filed on July 28, 2003

Current Report on Form 8-K filed on July 29, 2003

Current Report on Form 8-K filed on August 12, 2003

Current Report on Form 8-K filed on September 2, 2003


                                     - 18 -
<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)


November 14, 2003                     /s/ Anthony Principe
-----------------------------------     ----------------------------------------
(Date)                                  (Signature)
                                        Anthony Principe
                                        Vice President and Chief Financial
                                          Officer (Principal Financial Officer)


                                     - 19 -