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

                                    FORM 10-Q

(Mark One)

|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
                              For the quarterly period ended September 30, 2005.

|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
                                    For the transition period from ____ to ____.

Commission file number 1-15117.

                             On2 Technologies, Inc.
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

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

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

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


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

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


      Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).                       |_| Yes |X| No

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

      Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.                                             |X| Yes |_| No


                                      -1-
<PAGE>

--------------------------------------------------------------------------------

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

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

      The number of shares of the Registrant's Common Stock, par value $0.01
("Common Stock"), outstanding as of October 31, 2005, was 92,507,924.


                                      -2-
<PAGE>

                                Table of Contents

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

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

Condensed Consolidated Balance Sheets at September 30, 2005 (unaudited) and December 31, 2004........  4
Unaudited Condensed Consolidated Statements of Operations,
  Three and Nine Months Ended September 30, 2005 and 2004............................................  5
Unaudited Condensed Consolidated Statements of Comprehensive Loss
  Three and Nine Months Ended September 30, 2005 and 2004............................................  6
Unaudited Condensed Consolidated Statements of Cash Flows
  Nine Months Ended September 30, 2005 and 2004......................................................  7
Notes to Unaudited Condensed Consolidated Financial Statements.......................................  9

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations....... 13

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.................................. 22

Item 4.  Controls and Procedures..................................................................... 22

PART II -- OTHER INFORMATION

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

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

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


                                      -3-
<PAGE>

PART I -- FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

                             ON2 TECHNOLOGIES, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                             September 30,       December 31,
                                                                  2005               2004
                                                            --------------      --------------
                                                             (unaudited)
<S>                                                         <C>                 <C>
                                     ASSETS

Current assets:
  Cash and cash equivalents ..........................      $    4,552,000      $    5,418,000
  Marketable equity securities .......................             132,000             445,000
  Accounts receivable ................................             631,000             249,000
  Prepaid and other current assets ...................             186,000             156,000
                                                            --------------      --------------

     Total current assets ............................           5,501,000           6,268,000
                                                            --------------      --------------

Acquired software, net ...............................             716,000
Other acquired intangibles, net ......................             165,000
Goodwill .............................................             244,000

Property and equipment, net ..........................             147,000              87,000
Other assets .........................................              29,000              80,000
                                                            --------------      --------------

     Total assets ....................................      $    6,802,000      $    6,435,000
                                                            ==============      ==============

                  LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable ...................................      $       22,000      $      177,000
  Accrued expenses ...................................             210,000             393,000
  Deferred revenue ...................................             209,000             153,000
  Term-loan ..........................................                                  62,000
  Capital lease obligation ...........................              19,000              17,000
                                                            --------------      --------------
     Total current liabilities .......................             460,000             802,000

Capital lease obligation, excluding current portion ..              11,000              26,000
Convertible debentures ...............................             241,000             330,000
                                                            --------------      --------------

      Total liabilities ..............................             712,000           1,158,000
                                                            --------------      --------------

Commitments and contingencies

Stockholders' equity:
  Preferred stock ....................................              19,000              33,000
  Common stock .......................................             910,000             803,000
  Additional paid-in capital .........................         123,199,000         115,841,000
  Accumulated other comprehensive loss ...............             (41,000)            (42,000)
  Accumulated deficit ................................        (117,997,000)       (111,358,000)
                                                            --------------      --------------

    Total stockholders' equity .......................           6,090,000           5,277,000
                                                            --------------      --------------

    Total liabilities and stockholders' equity .......      $    6,802,000      $    6,435,000
                                                            ==============      ==============
</TABLE>

 See accompanying notes to unaudited condensed consolidated financial statements


                                      -4-
<PAGE>

                             ON2 TECHNOLOGIES, INC.
            UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                          Three Months Ended                    Nine Months Ended
                                                             September 30,                         September 30,
                                                   ---------------------------------     ---------------------------------
                                                        2005               2004               2005               2004
                                                   --------------     --------------     --------------     --------------
<S>                                                <C>                <C>                <C>                <C>
Revenue .....................................      $      507,000     $      762,000     $    1,206,000     $    2,926,000

Operating expenses:
     Cost of revenue (1) ....................             470,000            399,000          1,249,000          1,076,000
     Research and development (2) ...........             249,000            231,000            755,000            679,000
     Sales and marketing (2) ................             219,000            123,000            524,000            354,000
     General and administrative (2) .........             586,000          1,091,000          1,867,000          2,158,000
     Equity-based compensation:
         Research and development ...........                                 23,000                                53,000
         Sales and marketing ................                                  6,000                                15,000
         General and administrative .........                                194,000                               455,000
                                                   --------------     --------------     --------------     --------------

Total operating expenses ....................           1,524,000          2,067,000          4,395,000          4,790,000

Loss from operations ........................          (1,017,000)        (1,305,000)        (3,189,000)        (1,864,000)

Interest and other
  income (expense), net .....................             (14,000)           388,000           (273,000)           289,000
                                                   --------------     --------------     --------------     --------------

Loss before provision for income taxes ......          (1,031,000)          (917,000)        (3,462,000)        (1,575,000)

Provision for income taxes ..................              13,000                                25,000              3,000
                                                   --------------     --------------     --------------     --------------

Net loss ....................................      $   (1,044,000)    $     (917,000)    $   (3,487,000)    $   (1,578,000)

Convertible preferred stock deemed
   dividend .................................           2,484,000                             2,844,000
Convertible preferred stock 8%
   dividend .................................              81,000                               243,000
Accretion of costs associated with the Series
   D Preferred Stock ........................              22,000                                65,000
                                                   --------------     --------------     --------------     --------------

Net loss attributable to common
   shareholders .............................      $   (3,631,000)    $     (917,000)    $   (6,639,000)    $   (1,578,000)
                                                   ==============     ==============     ==============     ==============

Basic and diluted net loss attributable to
   common shareholders per common share .....      $        (0.04)    $        (0.01)    $        (0.08)    $        (0.02)
                                                   ==============     ==============     ==============     ==============

Weighted average basic and diluted common
shares outstanding: .........................          90,566,000         78,587,000         88,375,000         76,673,000
                                                   ==============     ==============     ==============     ==============
</TABLE>

      (1)   Includes equity-based compensation of $55,000 and $126,000 for the
            three and nine months ended September 30, 2004.

      (2)   Excludes equity-based compensation, which is presented separately
            for the three and nine months ended September 30, 2004.

 See accompanying notes to unaudited condensed consolidated financial statements


                                      -5-
<PAGE>

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

<TABLE>
<CAPTION>
                                                      Three Months Ended                    Nine Months Ended
                                                         September 30,                        September 30,
                                              ---------------------------------     ---------------------------------
                                                   2005               2004               2005               2004
                                              --------------     --------------     --------------     --------------
<S>                                           <C>                <C>                <C>                <C>
Net income (loss) .....................       $   (1,044,000)    $     (917,000)    $   (3,487,000)    $   (1,578,000)

Other comprehensive income (loss):

Foreign currency translation adjustment               (3,000)            (3,000)             1,000             20,000
                                              --------------     --------------     --------------     --------------

Comprehensive income (loss) ...........       $   (1,047,000)    $     (920,000)    $   (3,486,000)    $   (1,558,000)
                                              ==============     ==============     ==============     ==============
</TABLE>

 See accompanying notes to unaudited condensed consolidated financial statements


                                      -6-
<PAGE>

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

<TABLE>
<CAPTION>
                                                                         Nine Months Ended September 30,
                                                                             2005               2004
                                                                        --------------     --------------
<S>                                                                     <C>                <C>
Cash flows from operating activities:

  Net loss ......................................................       $   (3,487,000)    $   (1,578,000)
    Adjustments to reconcile net loss to net cash used in
     operating activities:
     Equity-based compensation ..................................                                 649,000
     Depreciation and amortization ..............................              160,000             90,000
     Write-off of fixed assets ..................................                                  20,000
     Amortization of debt discount ..............................               11,000             18,000
     Marketable equity securities received as payment for license                                (289,000)
     fee
     Unrealized (gain) loss on marketable equity securities .....              313,000           (344,000)
     Realized loss on the sale of marketable equity securities ..                                  15,000
   Changes in operating assets and liabilities:
     Accounts receivable, net ...................................             (382,000)           232,000
     Prepaid expenses and other current assets ..................              (30,000)           (16,000)
     Other assets ...............................................               51,000            (82,000)
     Accounts payable accrued expenses and other liabilities ....             (328,000)             5,000
     Deferred revenue ...........................................               56,000             91,000
                                                                        --------------     --------------

Net cash used in operating activities ...........................           (3,636,000)        (1,189,000)
                                                                        --------------     --------------

Cash flows from investing activities:

  Proceeds from the sale of marketable equity securities ........                                  67,000
  Acquisition of the Flix Software line .........................           (1,229,000)
  Purchases of property and equipment ...........................             (116,000)           (19,000)
                                                                        --------------     --------------

Net cash (used) in provided by investing activities .............           (1,345,000)            48,000
                                                                        --------------     --------------

Cash flows from financing activities:

  Principal payments on capital lease obligations ...............              (12,000)            (7,000)
  Proceeds from term-loan, net of repayments ....................              (62,000)            60,000
  Proceeds from the sale of common stock ........................
  Proceeds from exercise of common stock options and warrants ...            4,188,000            643,000
                                                                        --------------     --------------

Net cash provided by financing activities .......................            4,114,000            696,000
                                                                        --------------     --------------
Net change in cash and cash equivalents .........................             (867,000)          (445,000)

Effect of exchange rate changes on cash and cash equivalents ....                1,000             20,000

Cash and cash equivalents, beginning of period ..................            5,418,000          2,963,000
                                                                        --------------     --------------
Cash and cash equivalents, end of period ........................       $    4,552,000     $    2,538,000
                                                                        ==============     ==============
</TABLE>


                                      -7-
<PAGE>

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

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

<TABLE>
<CAPTION>
                                                                               Nine Months Ended September 30,
                                                                                 2005                  2004
                                                                            ---------------       ---------------
<S>                                                                         <C>                   <C>
 Cash paid during the period for:
    Interest ........................................................       $         6,000       $         8,000
                                                                            ===============       ===============
    Taxes ...........................................................       $        22,000       $         8,000
                                                                            ===============       ===============
  Acquisition of fixed assets under capital leases ..................                             $        54,000
                                                                                                  ===============
  Conversion of debentures into shares of common stock ..............       $       100,000       $       100,000
                                                                            ===============       ===============
  Conversion of preferred stock into shares of common stock .........       $        14,000       $        16,000
                                                                            ===============       ===============
  Marketable equity securities received for accounts receivable .....                             $       150,000
                                                                                                  ===============
  Unearned compensation from the issuance of restricted common
  stock, net of forfeiture ..........................................                             $       835,000
                                                                                                  ===============
  Common stock issued for interest on Series A Convertible Debentures       $        10,000
                                                                            ===============
  Common stock issued for dividends on Series D Preferred Stock .....       $       244,000
                                                                            ===============
  Accretion of costs associated with the issuance of Series D
  Preferred Stock ...................................................       $        65,000
                                                                            ===============
  Convertible Preferred Stock deemed dividend .......................       $     2,844,000
                                                                            ===============
</TABLE>

 See accompanying notes to unaudited condensed consolidated financial statements


                                      -8-
<PAGE>

                             ON2 TECHNOLOGIES, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1) Description of On2 Technologies, Inc.

      On2 Technologies, Inc. ("On2" or the "Company") is a leading video
compression technology firm. The Company has developed its proprietary
technology platform and video compression/decompression ("codec") software to
deliver high-quality video at the lowest possible data rates to intra- and
internets, such as set-top boxes, the Internet and wireless devices. The Company
offers a suite of products and professional services that encompass its
proprietary compression technology. The Company's professional service offerings
include customized engineering and consulting services and high-level video
encoding. In addition, the Company licenses its software products for use with
video delivery platforms.

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

      The Company's business is characterized by rapid technological change, new
product development and evolving industry standards. Inherent in the Company's
business model are various risks and uncertainties, including its limited
operating history, unproven business model and the limited history of the
industry in which it operates. The Company's success may depend, in part, upon
the wide adoption of video delivery mediums, prospective product and service
development efforts, and the acceptance of the Company's technology solutions by
the marketplace.

(2) Basis of Presentation

      The unaudited condensed consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All significant
inter-company balances and transactions have been eliminated in consolidation.

      The interim condensed consolidated financial statements are unaudited.
However, in the opinion of management, such financial statements contain all
adjustments necessary to present fairly the financial position of the Company
and its results of operations and cash flows for the interim periods presented.
The condensed consolidated financial statements included herein have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). Certain information and footnote disclosures normally
included in consolidated financial statements prepared in accordance with
accounting principals generally accepted in the United States of America have
been condensed or omitted pursuant to such rules and regulations. The Company
believes that the disclosures included herein are adequate to make the
information presented not misleading. These condensed consolidated financial
statements should be read in conjunction with the annual financial statements
and notes thereto included in the Company's Form 10-KSB/A Report filed with the
SEC on March 23, 2005.

(3) Stock-Based Compensation

      Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation" encourages the use of the fair value based method
of accounting for stock-based employee compensation. Alternatively, SFAS No.123
allows entities to continue to apply the intrinsic value method prescribed by
Accounting Principles Board ("APB") Opinion 25, "Accounting for Stock Issued to
Employees", and related interpretations and provide pro forma disclosures of net


                                      -9-
<PAGE>

income (loss) and earnings (loss) per share, as if the fair value based method
of accounting had been applied to employee awards. The Company has elected to
continue to apply the provisions of APB Opinion 25 and provide the disclosures
required by SFAS No. 123 and SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure". The following table illustrates the
effect on net loss and loss 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,
                                                    -----------------------------------     -----------------------------------
                                                          2005                2004                2005                2004
<S>                                                 <C>                 <C>                 <C>                 <C>
 Reported net loss attributable to common
 shareholders                                       $    (3,631,000)    $      (917,000)    $    (6,639,000)    $    (1,578,000)

Stock-based employee compensation determined
under the fair value-based method                          (325,000)           (522,000)         (1,461,000)           (880,000)
                                                    ---------------     ---------------     ---------------     ---------------

Pro forma net loss                                  $    (3,956,000)    $    (1,439,000)    $    (8,100,000)    $    (2,458,000)
                                                    ===============     ===============     ===============     ===============

Loss per common share (basic and diluted):

    As reported                                     $         (0.04)    $         (0.01)    $         (0.08)    $         (0.02)
                                                    ===============     ===============     ===============     ===============

    Pro forma                                       $         (0.04)    $         (0.02)    $         (0.09)    $         (0.03)
                                                    ===============     ===============     ===============     ===============
</TABLE>

      During the three months ended March 31, 2004 the Company granted 870,000
shares of restricted common stock to its employees and directors as incentive
compensation. The stock vested on December 1, 2004 and the total compensation
expense of $835,000 was amortized over the nine-month vesting period. The
related compensation expense of $278,000 and $649,000 for the three and nine
months ended September 30, 2004, respectively, is included in the determination
of reported net loss for those periods.

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

<TABLE>
<CAPTION>
                                Three months ended, September 30,        Nine months ended, September 30,
                               -----------------------------------     -----------------------------------
                                     2005                2004                2005                2004
<S>                                 <C>              <C>                 <C>                <C>
Volatility                             120%                128%          120 - 122%          127 - 131%
Expected life of options            5 years             5 years             5 years             5 years
Risk free interest rate                4.0%          3.4 - 3.7%          3.8 - 4.0%         3.1% - 3.9%
Dividend yield                           0%                  0%                  0%                  0%
</TABLE>

      The weighted average grant date fair value of options granted during the
three and nine months ended September 30, 2005 was $0.51 and $0.52,
respectively. The weighted average grant date fair value of options granted
during the three and nine months ended September 30, 2004 was $0.60 and $0.67,
respectively.

(4) Marketable Equity Securities

      As of December 31, 2004 the Company held 2,119,000 shares of a customer's
common stock with a market value of $445,000, which were received as payment of
license fees. The market value of these shares decreased to $132,000 ($0.062 per
share) as of September 30, 2005. The market value of these shares was $0.06 per
share as of October 28, 2005. The Company classifies these shares as trading
securities and pursuant to SFAS No. 115, "Accounting for Certain Investments in


                                      -10-
<PAGE>

Debt and Equity Securities", unrealized gains and losses are included in the
determination of net income (loss). Other income for the nine months ended
September 30, 2005 includes $313,000 of net unrealized loss on these securities.
The Company's Chief Executive Officer (who is a director and shareholder of the
Company) is a director of this customer.

(5) Common Stock Options and Warrants

      During the nine months ended September 30, 2005 the following common stock
warrants were exercised:

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

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

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

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

      One of the Company's directors exercised his warrants and the Company
received proceeds of $9,000 and issued 30,000 shares of Common Stock.

      Employees exercised stock options and the Company received proceeds of
$21,000 and issued 62,000 shares of Common Stock.

(6) Series A Secured Convertible Debentures

      During the nine months ended September 30, 2005 holders of Series A
Secured Convertible Debentures converted an aggregate of $100,000 of debentures
into 893,000 shares of the Company's common stock.

(7) Preferred Stock

      In connection with the issuance of its Series D Preferred Stock in October
2004 the Company measured aggregate deemed dividends of $2,964,000 related to
warrants and a beneficial conversion feature. During the three and nine months
ended September 30, 2005 the Company recognized $2,484,000 and $2,844,000,
respectively of these deemed dividends. Although the Series D Convertible
Preferred Stock has stated redemption dates, the Company may, at its option,
settle such redemptions by issuing common stock. The related discount was being
amortized over the redemption period since the redemption value exceeded the
fair value of the underlying convertible common shares. However as of September
30, 2005, the fair market value of the Company's common stock exceeded the
conversion price and as a result, the remaining unamortized balance of
$2,364,000 was included in the deemed dividend recognized in the quarter.


                                      -11-
<PAGE>

      During the second quarter of 2005, 1,450,000 shares of Series C-V
Preferred Stock were converted into 2,040,000 shares of common stock.

(8) Flix Acquisition

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

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

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

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

      The acquired software and other intangibles are being amortized over their
estimated useful lives of four years.

(9) Customer Concentration

      For the three months ended September 30, 2005, three customers accounted
for 25%, 17% and 16% of revenue and for the nine months ended September 30,
2005, three customers accounted for 20%, 12% and 10% of revenue. For the three
months ended September 30, 2004, four customers accounted for 38%, 17%, 16% and
13% of revenue and for the nine months ended September 30, 2004 three customers
accounted for 50%, 10% and 9%.


                                      -12-
<PAGE>

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

Forward-Looking Statement

      This document contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These statements relate to future events or our future
financial performance and are not statements of historical fact. In some cases,
you can identify forward-looking statements by terminology such as "may,"
"might," "will," "would," "could," "should," "expect," "foresee," "plan,"
"anticipate,' "assume," "believe," "estimate," "predict," "potential,"
"objective," "forecast," "goal" or "continue," the negative of such terms, their
cognates, or other comparable terminology. These statements are only
predictions, and actual events or results may differ materially. Although we
believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements, and in all cases, such statements are subject to the Company's
ability to secure additional financing or to increase revenues to support its
operations. We believe that we have sufficient funds and will generate
sufficient funds to finance our operations for the next 12 months. There is no
assurance that additional funds will not be required to support our operations.
In this regard, the business and operations of the Company are subject to
substantial risks that increase the uncertainty inherent in the forward-looking
statements contained in this Form 10-Q. You should consider the material
presented in this Form 10-Q in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Risk Factors That
May Affect Future Operating Results" in the Company's Form 10-KSB/A for the year
ended December 31, 2004.

      The inclusion of the forward-looking statements should not be regarded as
a representation by the Company, or any other person, that such forward-looking
statements will be achieved. We undertake no duty to update any of the
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of the foregoing, readers are cautioned not to
place undue reliance on the forward-looking statements contained in this report.

Overview

      We are a leading video compression technology firm. We have developed a
proprietary technology platform and the TrueMotion VPx family (e.g., VP5, VP6,
VP7) of video compression/decompression ("codec") software to deliver
high-quality video at the lowest possible data rates over proprietary networks
and the Internet to set-top boxes, personal computers and wireless devices.
Unlike other video codecs that are based on standard compression specifications
set by industry groups (e.g., MPEG and H.264), our video compression software is
based solely on intellectual property that we developed and own ourselves.


                                      -13-
<PAGE>

      We offer the following suite of products and services that incorporate our
proprietary compression technology:

            Products          o     video codecs;
                              o     audio codecs; and
                              o     encoding and server software, for use with
                                    video delivery platforms

            Services          o     customized engineering and consulting
                                    services;
                              o     technical support; and
                              o     high-level video encoding

      Many of our customers are software developers who use our products and
services chiefly to provide the following video-related products and services to
end users:

       TYPE OF CUSTOMER
          APPLICATION                               EXAMPLES
          -----------                               --------

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

Consumer Electronic Devices         o     digital video players
                                    o     digital video recorders

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

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

      In addition, as discussed at greater length below, we have recently begun
marketing encoding software for use either by end users or by developers who
want to add video-encoding functionality to the software they have developed.

      As discussed in greater detail below, we earn revenue chiefly through
licensing our software and providing specialized software engineering and
consulting services to customers. In addition to license fees, we often charge a
royalty fee based on the number of units of some or all of the customer's
products that contain the relevant On2 software products that are sold or
distributed. Some of our agreements with customers also require that the
customers pay us a percentage of the revenues that they earn from any of their
products or services that use our software. Royalties may be subject to
guaranteed minimum amounts and/or maximum amounts (e.g., annual caps).


                                      -14-
<PAGE>

      We have recently begun selling products and services, where the sales or
services relate to our existing relationships with licensees. For instance,
where a customer has licensed our software to develop its own proprietary video
format and video players, we may sell encoding software to users who want to
encode video for playback on our customers' players or we may provide
engineering services to companies that want to modify our customer's software
for use on a specific platform, such as a cell phone. As with royalties or
revenue share arrangements, complementary sales of encoding software or
engineering services should allow us to participate in the success of our
customers' products. For instance, if a customer's video platform does well, we
would expect there to be a market for encoding software and/or engineering
services in support of that platform.

      As part of our strategy to develop complementary products that could allow
us to capitalize on our customers' success, in April 2005 we completed the
acquisition from Wildform, Inc., of its Flix line of encoding software. The Flix
software allows users to prepare video and other multimedia content for playback
on the Macromedia(R) Flash(R) player, the widely distributed multimedia player.
Because Macromedia is currently using our VP6 software as the core video engine
for the Flash 8 player, we believed that there was an opportunity for us to sell
Flash 8 encoding software to end users, such as video professionals and web
designers, and to software development companies that wish to add Flash 8
encoding functionality to their software. We concluded that by taking the
well-regarded Flix software and updating it with Flash 8 encoding capability, we
could best take advantage of the anticipated success of Flash 8 - by combining
the most up-to-date Flash 8 encoding software straight from the company that
developed Flash 8 video with the already well-known Flix brand, which has
existed since the advent of Flash video and has a loyal following among users.

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

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

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


                                      -15-
<PAGE>

      One of the most significant recent trends in our business is our
increasing reliance on the success of the product deployments of our customers.
As referenced above, an increasing number of our license agreements with
customers provide for the payment of license fees that are dependent either on
the number of units of a customer's product incorporating our software that are
sold or on the amount of revenue generated by a customer from the sale of
products or services that incorporate our software. We have chosen this
royalty-dependent licensing model because, as a company of only approximately 37
employees, we generally do not have the product development or marketing
resources to develop and market end-to-end video solutions. Instead, our
software is primarily intended to be used as a building block for companies that
are developing end-to-end video products and/or services.

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

      Although we are confident that we have adopted the licensing model most
appropriate for a business of our size and expertise, a natural result of this
licensing model is that the amount of revenue we generate is highly dependent on
the success of our customers' product deployments. If the products of customers
with whom we have established per unit royalty or revenue sharing relationships
or for which we expect to market complementary products do not generate
significant sales, such revenue may not attain significant levels. Conversely,
if one or more of such customers' products are widely adopted, our revenues will
likely be enhanced.

      Another significant trend in our business is the emergence of Microsoft as
a principal competitor in the market for digital media creation and distribution
technology. Microsoft currently competes with us in the market for digital media
servers, players, codecs and other technology and services related to digital
distribution of media. Microsoft's commitment to and presence in the media
delivery industry has increased. Microsoft distributes its competing streaming
encoder, media server, player, tools and digital rights management products by
bundling them with its Windows operating systems and servers at no additional
cost or otherwise making them available free of charge or at a low cost.
Microsoft's practices have caused, and may continue to cause, pricing pressure
on our revenue generating products and services and may affect usage of our
competing products and formats. Microsoft's anticompetitive practices have led
in some cases, and could continue to lead to, longer sales cycles, decreased
sales, loss of existing and potential customers and reduced market share. In
addition, we believe that Microsoft has used and may continue to use its
monopoly position in the computer industry and its financial resources to secure
preferential or exclusive distribution, use and bundling contracts for its media
delivery technologies and products with third parties, such as ISPs, content
delivery networks, content providers, entertainment and media companies, VARs
and OEMs, including third parties with whom we have relationships.

      Another trend is the emergence of H.264 as a competitor in the video
compression field. H.264 is a standards-based codec that is the successor to
MPEG-4. We believe our technology is superior to H.264, and that we can offer
significantly more flexibility in licensing terms than customers will get when
licensing H.264. H.264 may nevertheless become widely adopted by potential
customers because, as a standards-based codec, it has the advantage of having
numerous developers who are programming to the H.264 standard and developing


                                      -16-
<PAGE>

products based on such standard and several manufacturers of multimedia
processors have done the work necessary to have H.264 operate on their chips.
These advantages may allow potential customers to implement a solution based on
H.264 with less initial development time and expense than a solution using On2
Video might require, and those upfront time- and cost-savings might convince
such customers to adopt a solution that, in the end, is less efficient and more
expensive than On2 Video. In addition, there are certain customers that prefer
to license standards-based codecs.

      The market for digital media creation and delivery technology is
constantly changing and intensely and increasingly competitive. We have taken
and continue to take a number of steps to address this competition. First and
foremost, we focus on providing our customers with video
compression/decompression technology that delivers the highest possible video
quality at the lowest possible data rates. In order to do this, we devote a
significant portion of our engineering capacity to research and development.
Although we expect that competition from Microsoft, H.264 developers, and others
will continue to intensify, we currently expect that our video compression
technology will remain competitive and that our relatively small size will allow
us to innovate in the video compression field and respond to emerging trends
more quickly than monolithic organizations such as Microsoft and the MPEG
consortium. We also address the competitive threats that we face by focusing on
developing relationships with customers who do not want to do business with
Microsoft and/or do not find the complex and rigid standards-based licenses and
fee structures appealing.

Critical Accounting Policies and Estimates

      This discussion and analysis of our financial condition and results of
operations are based on our condensed consolidated financial statements that
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). The preparation of our condensed consolidated
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could materially differ from those estimates.
The condensed consolidated financial statements and the related notes thereto
should be read in conjunction with the following discussion of our critical
accounting policies and our Form 10-KSB/A filed with the SEC on March 23, 2005.
Our critical accounting policies and estimates are:

            o     Revenue recognition
            o     Equity-based compensation
            o     Impairment of long-lived assets

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

      We recognize revenue in accordance with Statement of Position ("SOP")
97-2, "Software Revenue Recognition", as amended by SOP 98-4, "Deferral of the
Effective Date of SOP 97-2, Software Revenue Recognition" and SOP 98-9,
"Modification of SOP 97-2 with Respect to Certain Transactions". Under each
arrangement, revenues are recognized when a non-cancelable agreement has been
signed and the customer acknowledges an unconditional obligation to pay, the
products or applications have been delivered, there are no uncertainties
surrounding customer acceptance, the fees are fixed and determinable, and
collection is considered probable. Revenues recognized from multiple-element
software arrangements are allocated to each element of the arrangement based on
the fair values of the elements, such as product licenses, post-contract
customer support, or training. The determination of the fair value is based on
the vendor specific objective evidence available to us. If such evidence of the
fair value of each element of the arrangement does not exist, we defer all
revenue from the arrangement until such time that evidence of the fair value
does exist or until all elements of the arrangement are delivered.


                                      -17-
<PAGE>

      Our software licensing arrangements typically consist of two elements: a
software license and post-contract customer support ("PCS"). We recognize
license revenues based on the residual method after all elements other than PCS
have been delivered as prescribed by SOP 98-9. We recognize PCS revenues over
the term of the maintenance contract or on a "per usage" basis, depending upon
the terms of the contract. Vendor specific objective evidence of the fair value
of PCS is determined by reference to the price the customer will have to pay for
PCS when it is sold separately (i.e. the renewal rate). Most license agreements
offer additional PCS at a stated price. Revenue is recognized on a per copy
basis for licensed software when each copy of the licensed software purchased by
the customer or reseller is delivered. We do not allow returns, exchanges or
price protection for sales of software licenses to our customers or resellers,
and we do not allow our resellers to purchase software licenses under
consignment arrangements.

      When engineering and consulting services are sold together with a software
license, the arrangement typically requires customization and integration
(porting) of the software into a third party hardware platform. In these
arrangements, we require the customer to pay a fixed fee for the engineering and
consulting services and generally require a licensing fee in the form of a
per-unit royalty. We account for engineering and consulting arrangements in
accordance with SOP 81-1, "Accounting for Performance of Construction Type and
Certain Production Type Contracts". When reliable estimates are available for
the costs and efforts necessary to complete the engineering or consulting
services and those services do not include contractual milestones or other
acceptance criteria, we recognize revenue under the percentage of completion
contract method based upon input measures, such as hours. When such estimates
are not available, we defer all revenue recognition until we have completed the
contract and have no further obligations to the customer.

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

      Equity-based compensation. SFAS No. 123, "Accounting for Stock-Based
Compensation" encourages the use of the fair value based method of accounting
for stock-based employee compensation. Alternatively, SFAS No. 123 allows
entities to continue to apply the intrinsic value method prescribed by
Accounting Principles Board ("APB") Opinion 25, "Accounting for Stock Issued to
Employees," and related interpretations and provide pro forma disclosures of net
income (loss) and earnings (loss) per share, as if the fair value-based method
of accounting had been applied to employee awards. The Company has elected to
continue to apply the provisions of APB Opinion 25 and provide the disclosures
required by SFAS No. 123 and SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure."

      Impairment of Long-Lived Assets. The Company follows statement of
Financial Accounting Standard No 144 "Accounting for the Impairment of
Long-Lived Assets". Long-lived assets are reviewed for impairment whenever
events or changes in business circumstances indicate that the carrying amount of
the assets are no longer appropriate. Each impairment test is based on a
comparison of the undiscounted cash flow to the recorded value of the asset.
Subsequent impairment assessments could result in future impairment charges. Any
impairment charge results in the reduction in the carrying value of long-lived
assets and reduces our operating results in the period in which the charge
arose.


                                      -18-
<PAGE>

Results of Operations

Revenue. Revenue for the three months ended September 30, 2005 was $507,000 as
compared to $762,000 for the three months ended September 30, 2004. Revenue for
the nine months ended September 30, 2005 was $1,206,000 as compared to
$2,926,000 for the nine months ended September 30, 2004. Revenue for the three
and nine months ended September 30, 2005 and 2004 was derived primarily from the
sale of software licenses, engineering and consulting services and royalties.
The decrease in revenue for the three months ended September 30, 2005 is
primarily attributed to sales in 2004 to our Japanese reseller and an
electronics chip manufacturer that did not occur in 2005. The decrease in
revenue for the nine months ended September 30, 2005 is primarily attributed to
a $1,452,000 license of software to Macromedia, Inc in 2004.

Operating expenses

      The Company's operating expenses consist of cost of revenue, research and
development, sales and marketing and general and administrative expenses.
Operating expenses for the three months ended September 30, 2005 were $1,524,000
as compared to $2,067,000 for the three months ended September 30, 2004.
Operating expenses were $4,395,000 for the nine months ended September 30, 2005
as compared to $4,790,000 for the nine months ended September 30, 2004.

Cost of Revenue. Cost of revenue includes personnel and consulting compensation
costs, related overhead expenses, certain hardware costs, fees paid for licensed
technology, amortization of assets recorded in connection with the Flix
acquisition and depreciation costs. Cost of revenue for the three months ended
September 30, 2005 was $470,000 as compared to $399,000 for the three months
ended September 30, 2004. Cost of revenues for the nine months ended September
30, 2005 was $1,249,000 as compared to $1,076,000 for the nine months ended
September 30, 2004. The increase in expenses for the three and nine months ended
September 30, 2005 is primarily due to an increase in compensation costs from
the addition of technical personnel and the amortization of the acquired assets
recorded in connection with the Flix acquisition, partially offset by
equity-based compensation expenses in the three and nine month periods ended
September 30, 2004.

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, 2005 were $249,000 as compared to $231,000 for the three
months ended September 30, 2004. Research and development expenses for the nine
months ended September 30, 2005 were $755,000 as compared to $679,000 for the
nine months ended September 30, 2004. The increases in expenses were primarily
attributed to an increase in compensation costs due to the addition of certain
technical personnel.

Sales and Marketing. Sales and marketing expenses consist primarily of salaries
and related costs, business development and marketing personnel, tradeshow
costs, marketing and promotional costs incurred to create brand awareness and
public relations expenses. Sales and marketing expenses for the three months
ended September 30, 2005 were $219,000 as compared to $123,000 for the three
months ended September 30, 2004. Sales and marketing expenses for the nine
months ended September 30, 2005 were $524,000 as compared to $354,000 for the
nine months ended September 30, 2004. The increases were primarily attributed to
an increase in compensation and benefits costs due to the addition of two sales
persons and an increase in the number of trade shows the Company attended.


                                      -19-
<PAGE>

General and Administrative. General and administrative expenses consist
primarily of salaries and related personnel costs for general corporate
functions including finance, human resources, legal and certain facilities,
outside legal and other professional fees and insurance. General and
administrative expenses for the three months ended September 30, 2005 were
$586,000 as compared with $1,091,000 for the three months ended September 30,
2004. General and administrative expenses for the nine months ended September
30, 2005 were $1,867,000 as compared with $2,158,000 for the nine months ended
September 30, 2004. The decrease for the three and nine-month periods are
primarily due to a decrease in equity-based compensation of $455,000, insurance
premiums of $42,000 and professional fees of $13,000.

Equity-Based Compensation. During 2004 the company granted 870,000 shares of
restricted common stock, net of forfeitures of 20,000 shares, to its employees
and directors as compensation, which had a fair value of $835,000 on the date of
grant. The restricted stock vested over a period of nine months and required the
employee/director to be affiliated with the company on the vesting date. The
compensation expense was $278,000 and $649,000 for the three and nine months
ended September 30, 2004, respectively. Equity-based compensation of $55,000 and
$126,000 is included in cost of revenue for the three and nine months ended
September 30, 2004, respectively. Equity-based compensation of $23,000 and
$53,000 relating to research and development, $6,000 and $15,000 relating to
sales and marketing and $194,000 and $455,000 relating and general and
administrative costs for the three and nine months ended September 30, 2004,
respectively, have been presented separately.

Interest and other income (expense), net. Interest and other income (expense),
net was $(14,000) for the three months ended September 30, 2005 as compared to
$388,000 for the three months ended September 30, 2004. Interest and other
income (expense), net was $(273,000) for the nine months ended September 30,
2005 as compared to $289,000 for the nine months ended September 30, 2004.
Interest and other income (expense), net primarily consists of interest earned
on money market accounts, interest incurred for capital lease obligation,
term-loan, the interest and amortization of debt discount related to the Series
A Secured Convertible Debentures and gains and losses incurred on marketable
equity securities. The increase in interest and other expense, net for the three
and nine months ended September 30, 2005 is primarily attributable to the write
down, to market, of the publicly traded stock the company received in 2004 as
payment for a license.

At September 30, 2005, we had approximately 37 full-time employees. We expect to
hire employees as necessary in order to attain our strategic objectives.

Liquidity and Capital Resources

      At September 30, 2005, the Company had cash balances of $4,552,000 as
compared to $5,418,000 at December 31, 2004. At September 30, 2005, the Company
had working capital of $5,041,000 as compared with $5,466,000 at December 31,
2004.

      Net cash used in operating activities was $3,636,000 and $1,189,000 for
the nine months ended September 30, 2005 and 2004, respectively. The increase in
net cash used in operating activities is primarily attributable to an increase
in the net loss, a decrease in equity based compensation and changes in accounts
receivable, and accounts payable, accrued expenses and other liabilities,
partially offset by an increase in loss on marketable equity securities.

      Net cash (used) in provided by investing activities was $(1,345,000) and
$48,000 for the nine months ended September 30, 2005 and 2004, respectively,
reflecting the acquisition of the Flix product line and an increase in the
purchase of property and equipment.

      Net cash provided by financing activities was $4,114,000 and $696,000 for
the nine months ended September 30, 2005 and 2004, respectively. The increase is
attributable to an increase in proceeds received from the exercise of common
stock options and warrants.


                                      -20-
<PAGE>

      During the three months ended September 30, 2005 the Company received
$125,000 representing a partial payment under an agreement with Beijing Fastrend
Technology Ltd. (Fastrend). The payment is included in deferred revenue as of
September 30, 2005 as the related revenue has not yet been recognized.

      We currently have no material commitments for the next 12 months other
than those under our operating lease arrangements. These arrangements consist
primarily of lease arrangements for our office space in Clifton Park, New York
and New York City. The aggregate required payments for the next 12 months under
these arrangements are $210,000. Notwithstanding the above, our most significant
non-contractual operating costs for the next 12 months are compensation and
benefit costs, insurance costs and general overhead costs such as telephone and
utilities. During the next 12 months, we anticipate incurring approximately
$500,000 per month in cash operating costs.

      The Company believes that existing funds are sufficient to fund its
operations through 2006. The Company plans to increase cash flows from
operations principally from increases in revenue generated from its compression
technology services and products. The Company may also pursue additional
financings. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Risk Factors That May Affect Future Operating Results"
in the Company's 10-KSB/A for the year ended December 31, 2004.

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

Off-Balance Sheet Arrangements

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

Impact of Recently-Issued Accounting Pronouncements

      In December 2004, the FASB issued SFAS No. 123 (revised 2004) "Share-Based
Payment" ("SFAS 123(R)"). SFAS 123(R) addresses the accounting for transactions
in which an enterprise exchanges its equity instruments for employee services.
It also addresses transactions in which an enterprise incurs liabilities that
are based on the fair value of the enterprise's equity instruments or that may
be settled by the issuance of those equity instruments in exchange for employee
services. The cost of employee services received in exchange for equity
instruments, including employee stock options, is to be measured on the
grant-date fair value of those instruments. That cost will be recognized as
compensation expense over the service period, which would normally be the
vesting period. SFAS 123(R) is effective for the Company as of January 1, 2006.
We are currently evaluating the impact of adopting SFAS 123(R) on our financial
position and results of operations.


                                      -21-
<PAGE>

Item 3. Quantitative and Qualitative Disclosures About Market Risk

      The Company does not currently have any material exposure to interest rate
risk, foreign currency risk, exchange rate risk, commodity price risk or other
relevant market rate or price risks. However, the Company does have some
exposure to foreign currency rate fluctuations arising from maintaining an
office for the Company's U.K. based, wholly owned subsidiary which transacts
business in the local functional currency. The U.K. based subsidiary does not
conduct any sales and all their costs are funded in United States dollars. To
date, the Company has not entered into any derivative financial instrument to
manage foreign currency risk and is not currently evaluating the future use of
any such financial instruments.

Item 4. Controls and Procedures

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


                                      -22-
<PAGE>

                          PART II -- OTHER INFORMATION

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

      (a) Exhibits

10.1        Letter Agreement by and between the Company and Douglas A. McIntyre,
            dated as of May 11, 2005, extending the Company's employment
            contract with Mr. McIntyre for one year
10.2        Letter Agreement by and between the Company and Eric L. Ameres,
            dated as of May 11, 2005, extending the Company's employment
            contract with Mr. Ameres for one year
10.3        Letter Agreement by and between the Company and Timothy C. Reusing,
            dated as of May 11, 2005, extending the Company's employment
            contract with Mr. Reusing for one year
10.4        License Agreement by and between the Company and Bevmax Office
            Centers 1560, LLC
31.1        Certifications Of Chief Executive Officer Pursuant to Section 302 of
            the Sarbanes-Oxley Act Of 2002
31.2        Certifications Of Chief Financial Officer Pursuant to Section 302 of
            the Sarbanes-Oxley Act Of 2002
32.1        Certification of Chief Executive Officer Pursuant to 18 U.S.C.
            Section 1350, as Adopted Pursuant to Section 906 of the
            Sarbanes-Oxley Act of 2002.
32.2        Certification of Chief Financial Officer Pursuant to 18 U.S.C.
            Section 1350, as Adopted Pursuant to Section 906 of the
            Sarbanes-Oxley Act of 2002.

      (b) Reports on Form 8-K

            The Company filed Form 8-K on July 28, 2005, containing a press
      release announcing the Company's results of operations for the quarter
      ending June 30, 2005.


                                      -23-
<PAGE>

                                   SIGNATURES

      In accordance with the requirements of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.

                                                 On2 Technologies, Inc.
                                        ----------------------------------------
                                                      (Registrant)

October 31, 2005                                 /s/ Anthony Principe
----------------------                  ----------------------------------------
(Date)                                                (Signature)
                                        Anthony Principe
                                        Senior Vice President and Chief
                                        Financial Officer
                                            (Principal Financial Officer)


                                      -24-