<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   FORM 10-QSB

(Mark One)

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

                                   For the quarterly period ended June 30, 2003.

[ ]      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)


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

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

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

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


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

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

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

                                      -1-
<PAGE>
                      APPLICABLE ONLY TO CORPORATE ISSUERS:

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

The number of shares of the Registrant's Common Stock, par value $0.01 ("Common
Stock"), outstanding as of August 12, 2003 was 66,011,847.

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

                                      -2-
<PAGE>
                                TABLE OF CONTENTS

PART I -- FINANCIAL INFORMATION

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

Condensed Consolidated Balance Sheets at June 30, 2003 (unaudited) and December 31, 2002......................       4
Unaudited Condensed Consolidated Statements of Operations,
  Three and Six Months Ended June 30, 2003 and 2002...........................................................       5
Unaudited Condensed Consolidated Statements of Cash Flows
  Six Months Ended June 30, 2003 and 2002.....................................................................       6
Notes to Unaudited Condensed Consolidated Financial Statements................................................       8

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

Item 3.  Controls and Procedures..............................................................................      19

PART II -- OTHER INFORMATION

Item 1.  Legal Proceedings....................................................................................      20

Item 4.  Submission of Matters to a Vote of Security Holders..................................................      20

Item 6.  Exhibits and Reports on Form 8-K.....................................................................      20

Signatures....................................................................................................      21

Certifications................................................................................................      22
</TABLE>

                                       -3-
<PAGE>
                         PART I -- FINANCIAL INFORMATION

Item 1.  Consolidated Financial Statements

                             ON2 TECHNOLOGIES, INC.

                      CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                       June 30,         December 31,
                                                                        2002               2002
                                                                   -------------       -------------
                                                                     (unaudited)
<S>                                                                <C>                 <C>
                                    ASSETS

Current assets:
  Cash and cash equivalents .................................      $   1,012,000       $     553,000
  Accounts receivable, net of allowance for doubtful accounts          1,150,000             601,000
  Prepaid expenses and other current assets .................            175,000             101,000
                                                                   -------------       -------------
     Total current assets ...................................          2,337,000           1,255,000

Property and equipment, net .................................            207,000             353,000
Purchased technology and other intangible assets, net .......            150,000             463,000
Other assets ................................................             25,000               9,000
                                                                   -------------       -------------
     Total assets ...........................................      $   2,719,000       $   2,080,000
                                                                   =============       =============

                  LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable ..........................................      $     149,000       $     266,000
  Accrued and other liabilities .............................            214,000             254,000
  Deferred revenue ..........................................             60,000
  Current portion of capital lease obligations ..............              4,000               4,000
                                                                   -------------       -------------
     Total current liabilities ..............................            427,000             524,000

Capital lease obligations, net of current portion ...........              3,000               5,000

Convertible debentures ......................................            580,000             569,000

Commitments and contingencies

Stockholders' equity:
  Preferred stock ...........................................             99,000              99,000
  Common stock ..............................................            636,000             596,000
  Additional paid-in ........................................        106,867,000         105,422,000
  capital ...................................................                                      .
  Accumulated other comprehensive loss ......................            (18,000)            (16,000)
  Accumulated deficit .......................................       (105,875,000)       (105,119,000)
                                                                   -------------       -------------
    Total stockholders' equity ..............................          1,709,000             982,000
                                                                   -------------       -------------

    Total liabilities and stockholders' equity ..............      $   2,719,000       $   2,080,000
                                                                   =============       =============
</TABLE>

      See accompanying notes to condensed consolidated financial statements

                                      -4-
<PAGE>
                             ON2 TECHNOLOGIES, INC.
            UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                        Three Months Ended                    Six Months Ended
                                                             June 30,                             June 30,
                                                  -------------------------------       -------------------------------
                                                       2003               2002              2003               2002
                                                  ------------       ------------       ------------       ------------
<S>                                               <C>                <C>                <C>                <C>
Revenues ...................................      $    827,000       $    514,000       $  2,110,000       $  1,716,000

Operating expenses:
     Cost of revenues ......................           438,000            736,000            842,000          1,208,000
     Research and development ..............           291,000            701,000            616,000          1,392,000
     Sales and marketing ...................           107,000            369,000            192,000            739,000
     General and administrative ............           562,000            951,000          1,183,000          1,990,000
     Impairment charges ....................                --             30,000                 --             30,000

Total operating expenses ...................         1,398,000          2,787,000          2,833,000          5,359,000
                                                  ------------       ------------       ------------       ------------
Loss from operations .......................          (571,000)        (2,273,000)          (723,000)        (3,643,000)

Interest and other
  income (expense), net ....................            57,000              1,000             42,000            (10,000)
                                                  ------------       ------------       ------------       ------------

Loss before provision for income taxes .....          (514,000)        (2,272,000)          (681,000)        (3,653,000)

Provision for income taxes .................             4,000              5,000              6,000             18,000
                                                  ------------       ------------       ------------       ------------

Net loss ...................................      $   (518,000)      $ (2,277,000)      $   (687,000)      $ (3,671,000)
                                                  ============       ============       ============       ============
Basic and diluted net loss per common share       $      (0.01)      $      (0.04)      $      (0.01)      $      (0.08)
                                                  ============       ============       ============       ============
Weighted average basic and diluted common
   shares outstanding ......................        62,956,000         50,684,000         61,291,000         46,781,000
                                                  ============       ============       ============       ============
</TABLE>


 See accompanying notes to unaudited condensed consolidated financial statements

                                      -5-
<PAGE>
                             ON2 TECHNOLOGIES, INC.
            UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                      Six Months Ended June 30,
                                                                    -----------------------------
                                                                       2003               2002
                                                                    -----------       -----------
<S>                                                                 <C>               <C>
Cash flows from operating activities:

  Net loss ...................................................      $  (687,000)      $(3,671,000)
    Adjustments to reconcile net loss to net cash used in
      operating activities:
     Non-cash stock based compensation .......................            7,000                --
     Depreciation and amortization ...........................          476,000           814,000
     Amortization of debt discount ...........................           11,000                --
     Restructuring and impairment charges ....................               --            30,000
     Charge related to conversion of debentures ..............               --            24,000

    Changes in operating assets and liabilities, net of effect
      of acquisitions:
     Accounts receivable .....................................         (549,000)          247,000
     Prepaid expenses and other assets .......................          (90,000)         (173,000)
     Accounts payable accrued expenses and other liabilities .         (157,000)          307,000
     Deferred revenue ........................................           60,000           (31,000)
                                                                    -----------       -----------
Net cash used in operating activities ........................         (929,000)       (2,453,000)
                                                                    -----------       -----------
Cash flows from investing activities:

  Purchases of property and equipment ........................          (17,000)          (67,000)
                                                                    -----------       -----------
Net cash used in investing activities ........................          (17,000)          (67,000)
                                                                    -----------       -----------
Cash flows from financing activities:

  Principal payments on capital lease obligations ............           (2,000)           (1,000)
  Purchase of common stock warrants ..........................          (42,000)               --
  Proceeds from the sale of common stock .....................        1,313,000         2,628,000
  Proceeds from exercise of common stock options .............          137,000                --
                                                                    -----------       -----------
Net cash provided by financing activities ....................        1,406,000         2,627,000
                                                                    -----------       -----------
Net change in cash and cash equivalents ......................          460,000           107,000

Effect of exchange rate changes on cash and cash equivalents .           (1,000)           (2,000)

Cash and cash equivalents, beginning of period ...............          553,000           216,000
                                                                    -----------       -----------
Cash and cash equivalents, end of period .....................      $ 1,012,000       $   321,000
                                                                    ===========       ===========
</TABLE>

                                      -6-
<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>
                                                                 Six Months Ended June 30,
                                                                --------------------------
                                                                 2003              2002
                                                                ------          ----------
<S>                                                             <C>             <C>
Cash paid during the period for:
   Interest ..............................................      $5,000          $    2,000
                                                                ======          ==========
   Taxes .................................................      $6,000          $   18,000
                                                                ======          ==========
 Acquisition of fixed assets under capital leases ........                      $   12,000
                                                                ======          ==========
 Conversion of debentures into shares of common stock ....                      $2,000,000
                                                                ======          ==========
 Conversion of preferred stock into shares of common stock                      $   15,000
                                                                ======          ==========
</TABLE>

      See accompanying notes to condensed consolidated financial statements

                                      -7-
<PAGE>
                             ON2 TECHNOLOGIES, INC.
              NOTES TO 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

                                      -8-
<PAGE>
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, June 30,          Six months ended, June 30,
                                                  -----------------------------       -------------------------------
                                                      2003              2002               2003               2002
                                                  -----------       -----------       -----------       -------------
<S>                                               <C>               <C>               <C>               <C>
Reported net loss attributable to common
stockholders ...............................      $  (518,000)      $(2,277,000)      $  (687,000)      $  (3,671,000)

Stock-based employee compensation determined
under the fair value-based method
                                                     (235,000)       (1,427,000)         (386,000)         (2,869,000)
                                                  -----------       -----------       -----------       -------------

Pro forma net loss .........................      $  (753,000)      $(3,704,000)      $(1,073,000)      $  (6,540,000)
                                                  ===========       ===========       ===========       =============

Loss per common share (basic and diluted):

    As reported ............................      $     (0.01)      $     (0.04)      $     (0.01)      $       (0.08)
                                                  ===========       ===========       ===========       =============

    Pro forma ..............................      $     (0.01)      $     (0.07)      $     (0.02)      $       (0.14)
                                                  ===========       ===========       ===========       =============
</TABLE>


(2) Source Code License Arrangements

     On June 21, 2003 On2 entered into two source code license and software
distribution agreements with Beijing E-World Technology Co., Ltd ("E-World"), a
company organized under the laws of the People's Republic of China (PRC), with
its principal offices and operations located in the Xicheng District of Beijing,
PRC. The two separate license arrangements extended E-World rights for use of
On2's source code in its EVD and non-EVD/HDTV products. "EVD" means the Enhanced
Versatile Disc Technology System being developed by E-world as a national
industrial standard for China that will be used to record and playback
video/audio/data (multimedia) using the EVD Equipment. "Non-EVD/HDTV Product"
means a platform or device that E-world desires to port or use On2's Encoder
and/or Decoder to or with other than the EVD/HDTV Products.

     The EVD arrangement requires E-World to pay a license fee of $50,000 within
10 days of the effective date of the agreement and also establishes royalty
rates for each unit manufactured. The arrangement also designates minimum
numbers of units manufactured in 2004 and 2005 (with excess actual units
manufactured in 2004 reducing the subsequent year minimum obligation). The total
two-year minimum royalty value due to On2 is approximately $4,900,000.
Nonrefundable payments for royalties, including minimum royalties, are payable
quarterly, beginning with the quarter ending March 31, 2004.

     The non-EVD/HDTV license requires E-World to pay On2 a license fee of
$1,000,000 as follows: (1) $250,000 within 10 days of the effective date of the
agreement; (2) $400,000 upon completion of the Initial Port (porting of the
Encoder and Decoder to the Chips by E-World); and (3) $350,000 within 6 months
of completion of the Initial Port. The non-EVD/HDTV license arrangement also
establishes minimum numbers of units manufactured for royalties in 2004 and 2005
(with excess actual units

                                      -9-
<PAGE>
manufactured in 2004 reducing the subsequent year minimum obligation). The total
two-year minimum royalty value to On2 for the non-EVD HDTV license is
approximately $100,000. Nonrefundable payments for royalties, including minimum
royalties, are payable quarterly beginning with the quarter ending March 31,
2004.

     The initial license fee payments of $300,000 were received in June 2003.
All payments are non-refundable and On2 delivered the source code under the
arrangements in June 2003.

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

    In the three months ended June 30, 2003, pursuant to guidance provided by
SOP 97-2, "Software Revenue Recognition" and SOP 98-9, "Modification of SOP 97-2
with Respect to Certain Transactions" On2 recognized $244,000 as revenue, which
reflects the $300,000 non-refundable initial license fee payment less $56,000
related to the technical support. The total value of technical support over the
two-year term of the arrangements is $150,000, which has been allocated from the
license fees based on vendor specific objective evidence (the renewal rate of
the technical support of $37,500 per year under each of the two agreements). The
$150,000 will be recognized ratably over the 24 months of the arrangements
($6,250/month) beginning in July 2003. The $56,000 represents a deferral for the
proportionate share of the license fees recognized to date, which has been
adjusted to cover the support period through the date that the first minimum
royalties will be recognized. E-World is required to fulfill its payment
schedule stipulated in the arrangements, or On2 will not be obligated to
continue providing technical support. It is anticipated that the remainder of
the technical support balance ($94,000) will be deducted from the pending
$750,000 of license fees that will become due and recognizable upon completion
of the Initial Porting by E-World. Alternatively, The $94,000 will be deducted
from the guaranteed minimum royalty payments to the extent that these payments
precede completion of Initial Porting.

     The nonrefundable minimum royalties under both arrangements will be accrued
and recognized quarterly throughout their term, beginning March 31, 2004.
Royalties in excess of guaranteed minimums, if any, will be accrued and
recognized in the periods when they become fixed and determinable.

     On2 has sold and delivered a completed source code product to E-World that
does not require additional, continued or follow-up development to satisfy the
E-World arrangements. The Initial Porting is being performed by E-World. On2 has
no further obligations to E-World, other than telephone and email based porting
and technical support.

(3)   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 has issued all the stock
registered for the Second Stock Purchase Agreement.

(4)   Subsequent Events

     Subsequent to June 30, 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

                                      -10-
<PAGE>
Series C-VI Preferred Stock has been adjusted to $0.5226 per share as a result
of the retroactive treatment. The Company will reflect deemed dividends of
$143,000 in the net income (loss) attributable to common stockholders in the
quarter ending September 30, 2003 relating to this adjustment.

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 June 30,
2003, we had an accumulated deficit of $105.9 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.

                                      -11-
<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:

     -    Revenue recognition

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

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

     We recognize revenue in accordance with 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

                                      -12-
<PAGE>
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 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 June 30, 2003 was $827,000 as
compared to $514,000 for the three months ended June 30, 2002. Revenue for the
six months ended June 30, 2003 was $2,110,000 as compared to $1,716,000 for the
six months ended June 30, 2002. Revenue for the three and six months ended June
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 video-on-demand initiatives in Asia.

     On June 21, 2003, On2 entered into two source code license and software
distribution agreements with E-World, a company organized under the laws of the
People's Republic of China (PRC), with its principal offices and operations
located in the Xicheng District of Beijing, PRC. The two separate license
arrangements extended E-World rights for use of On2's source code in its EVD and
non-EVD/HDTV products. "EVD" means the Enhanced Versatile Disc Technology System
being developed by E-world as a national industrial standard for China that will
be used to record and playback video/audio/data

                                      -13-
<PAGE>
(multimedia) using the EVD Equipment. "Non-EVD/HDTV Product" means a platform or
device that E-world desires to port or use On2's Encoder and/or Decoder to or
with other than the EVD/HDTV Products.

     The EVD arrangement requires E-World to pay a license fee of $50,000 within
10 days of the effective date of the agreement and also establishes a royalty
rate of $2.00 for each unit manufactured that contains a Decoder and $4.00 for
each unit manufactured that contains a Decoder and an Encoder. The arrangement
also designates minimum numbers of units manufactured in 2004 and 2005 (with
excess actual units manufactured in 2004 reducing the subsequent year minimum
obligation). The total two year minimum royalty value due to On2 is
approximately $4,900,000. E-world has provided us with an estimate indicating
that it expects to manufacture a total of between 10,000,000 and 20,000,000 EVD
units in the two-year period beginning January 2004 and ending December 2005.
However, On2 cannot predict the number of units that may be manufactured.
Nonrefundable payments for royalties, including minimum royalties, are payable
quarterly, beginning with the quarter ending March 31, 2004.

     The non-EVD/HDTV license requires E-World to pay On2 a license fee of
$1,000,000 as follows: (1) $250,000 within 10 days of the effective date of the
agreement; (2) $400,000 upon completion of the Initial Port (porting of the
Encoder and Decoder to the Chips by E-World); and (3) $350,000 within 6 months
of completion of the Initial Port. The non-EVD/HDTV license arrangement also
establishes a royalty rate of $2 for each unit manufactured that contains a
Decoder and $4 for each unit manufactured that contains an Encoder and Decoder.
The non-EVD/HDTV license arrangement also establishes minimum numbers of units
manufactured for royalties in 2004 and 2005 (with excess actual units
manufactured in 2004 reducing the subsequent year minimum obligation). The total
two-year minimum royalty value to On2 for the non-EVD HDTV license is
approximately $100,000. E-world has not supplied us with an estimate of the
number of non-EVD/HDTV products it expects to manufacture and On2 cannot predict
the actual number of units that will be manufactured. Nonrefundable payments for
royalties, including minimum royalties, are payable quarterly beginning with the
quarter ending March 31, 2004.

     The initial license fee payments of $300,000 were received in June 2003.
All payments are non-refundable and On2 delivered the source code under the
arrangements in June 2003.

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

    In the three months ended June 30, 2003, pursuant to guidance provided by
SOP 97-2, "Software Revenue Recognition" and SOP 98-9, "Modification of SOP 97-2
with Respect to Certain Transactions" On2 recognized $244,000 as revenue, which
reflects the $300,000 non-refundable initial license fee payment less $56,000
related to the technical support. The total value of technical support over the
two-year term of the arrangements is $150,000, which has been allocated from the
license fees based on vendor specific objective evidence (the renewal rate of
the technical support of $37,500 per year under each of the two agreements). The
$150,000 will be recognized ratably over the 24 months of the arrangements
($6,250/month) beginning in July 2003. The remainder of the technical support
balance ($94,000) will be deducted from subsequent proceeds, as received.

     The nonrefundable minimum royalties under both arrangements will be accrued
and recognized quarterly throughout their term, beginning March 31, 2004.
Royalties in excess of guaranteed minimums will be accrued and recognized in the
periods when they become fixed and determinable.

                                      -14-
<PAGE>
     On2 has sold and delivered a completed source code product to E-World that
does not require additional, continued or follow-up development to satisfy the
E-World arrangements. The Initial Porting is being performed by E-World. On2 has
no further obligations to E-World, other than telephone and email based porting
and technical support.

     In June 2003, On2 entered into an unrelated Source Code License and
Software Distribution Agreement and a Software Distribution Agreement with the
Sony Corporation. These agreements extend Sony the right to use the VP4, VP5 or
VP6 Decoder in certain television receiver products manufactured by Sony or
Sony's subsidiaries and sold under the Sony brand or the brand of a third party.
These agreements also extend Sony the right to use our media player software and
a modified version of our server software in any television receiver product
manufactured by Sony or Sony's subsidiaries and sold under the Sony brand or the
brand of a third party. The agreements provide for the payment by Sony of a
specified license fee and also establish royalty rates for each product
manufactured.

     Operating expenses

     The Company's operating expenses consist of cost of revenue, research and
development, sales and marketing, general and administrative expenses and
impairment charges. Operating expenses for the three months ended June 30, 2003
were $1,398,000 as compared to $2,787,000 for the three months ended June 30,
2002. Operating expenses were $2,833,000 for the six months ended June 30, 2003
as compared to $5,359,000 for the six months ended June 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
June 30, 2003 was $438,000 as compared to $736,000 for the three months ended
June 30, 2002. Cost of revenues for the six months ended June 30, 2003 was
$842,000 as compared to $1,208,000 for the six months ended June 30, 2002. The
decrease in expenses for the three and six months ended June 30, 2003 is
primarily due to a reduction in headcount and depreciation.

     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 June 30, 2003 were $291,000 as compared to $701,000 for the three months
ended June 30, 2002. Research and development expenses for the six months ended
June 30, 2003 were $616,000 as compared to $1,392,000 for the six months ended
June 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 June 30, 2003 were $107,000 as compared to $369,000 for
the three months ended June 30, 2002. Sales and marketing expenses for the six
months ended June 30, 2003 were $192,000 as compared to $739,000 for the six
months ended June 30, 2002. The decreases were primarily attributed to a
reduction in compensation and benefits costs due to a reduction in headcount and
a decrease in advertising and marketing costs.

     General and Administrative. General and administrative expenses consist
primarily of salaries and related personnel costs for general corporate
functions including finance, human resources, legal and facilities, outside
legal and professional fees and insurance. General and administrative expenses
for the

                                      -15-
<PAGE>
three months ended June 30, 2003 were $562,000 as compared to $951,000 for the
three months ended June 30, 2002. General and administrative expenses for the
six months ended June 30, 2003 were $1,183,000 as compared to $1,990,000 for the
six months ended June 30, 2002. The decreases were primarily attributable to
decreased personnel, and a general decrease in unallocated operating overhead
attributable to an entity-wide decrease in personnel.

     Impairment Charges. We did not incur impairment charges for the three and
six months ended June 30, 2003. Impairment charges were $30,000 for the three
and six months ended June 30, 2002. The charges relate to the write-down of the
value of a content library. We acquired the content library, consisting
primarily of licensed content for distribution through DVD sales and the
Internet, in April 2000. The library was originally acquired for the Company's
broadband content network, which ceased operations in the second quarter of
2000. However, the Company continued to sell the licensed Quickband content, via
DVD sales, through a distribution agreement acquired in connection with the
library. As of December 31, 2000, we terminated all operations related to our
content assets. At that time, we determined that further distribution of the
Quickband content would result in recurring losses. We made the decision to sell
the library and reduced the carrying value of the library to $500,000 at
December 31, 2000. This amount represented the estimated fair value based upon
interest in the library at that time from several potential buyers, which never
materialized. We periodically reviewed the value of the library against market
demand and recorded the subsequent impairment charges based upon the perceived
value of the library and its content in the market. There will no additional
charges related to the impairment of the content library in future periods.

     Interest and other income (expense), net. Interest and other income
(expense), net was $57,000 for the three months ended June 30, 2003 as compared
to $1,000 for the three months ended June 30, 2002. Interest and other income
(expense), net was $42,000 for the six months ended June 30, 2003 as compared to
$(10,000) for the six months ended June 30, 2002. 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. For the six months ended June 30, 2002,
interest and other income (expense), net includes a charge of $24,000 related to
the conversion of our Series A Convertible Debentures into common stock. The
increase in interest and other income, net for the three and six months ended
June 30, 2003 is primarily attributable to the receipt of $70,000 that
represents the final installment in the legal settlement with E-Coin.

     As of June 30, 2003, we had approximately 25 full-time employees.

LIQUIDITY AND CAPITAL RESOURCES

     As of June 30, 2003, we had cash reserves and working capital of $1,012,000
and $1,910,000, respectively as compared to $553,000 and $731,000 at December
31, 2002.

     Net cash used in operating activities was $929,000 and $2,453,000 for the
six months ended June 30, 2003 and 2002, respectively. The decrease in net cash
used in operating activities was primarily attributable to a decrease in our net
operating losses, offset by a decrease in depreciation and amortization and
changes in accounts payable, accrued expenses and other liabilities and accounts
receivable.

     Net cash used in investing activities was $17,000 and $67,000 for the six
months ended June 30, 2003 and 2002, respectively, which relates to purchases of
property and equipment.

                                      -16-
<PAGE>
     Net cash provided by financing activities was $1,406,000 and $2,627,000 for
the six months ended June 30, 2003 and 2002, respectively, which primarily
relates to proceeds received from the sale of common stock.

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

     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

                                      -17-
<PAGE>
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.

     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.

     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.

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

                                      -18-
<PAGE>
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.

                                      -19-
<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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company's 2003 Annual Meeting of Stockholders was held on May 21, 2003.
Represented at the Annual Meeting, either in person or by proxy, were 53,175,904
voting shares. The following actions were taken by a vote of the Company's
stockholders at the Annual Meeting:

Messrs. Doug McIntyre, Tom Weigman, Stephen Klein, J. Allen Kosowsky, William A.
Newman and Mark J. Meagher were elected to serve as members of the Company's
Board of Directors, with each receiving 53,133,637 votes in favor of election,
3,931 votes against election and with 38,336 votes abstaining. There were no
votes withheld and no broker non-votes.

The appointment of Eisner LLP as the Company's independent certified public
accountants for the fiscal year ending December 31, 2003 was ratified;
53,031,569 votes were cast for the ratification; 53,690 votes were cast against
the ratification; and there were 90,645 abstentions. There were no votes
withheld and no broker non-votes.

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

(a) Exhibits

<TABLE>
<S>     <C>
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.
</TABLE>


(b)  Reports on Form 8-K

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

Current Report on Form 8-K filed on June 24, 2003

                                      -20-
<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 13, 2003             /s/ Mark J. Meagher
---------------             ----------------------------------------------------
(Date)                                         (Signature)
                            Mark J. Meagher
                            Executive Vice President and Chief Financial Officer
                                       (Principal Financial Officer)






August 13, 2003             /s/ Anthony Principe
---------------             ----------------------------------------------------
(Date)                                         (Signature)
                            Anthony Principe
                            Vice President and Controller
                                          (Principal Accounting Officer)

                                      -21-