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, 2001.

|_|   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)

 145 Hudson Street, New York, New York                                     10013
--------------------------------------------------------------------------------
(Address of principal executive offices)                              (Zip Code)

                                 (917) 237-0500
--------------------------------------------------------------------------------
              (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

                      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 10, 2001 was 35,368,624.

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


                                      -1-
<PAGE>

                                TABLE OF CONTENTS

PART I -- FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                                                                                                PAGE
                                                                                                                ----
<S>                                                                                                              <C>
Item 1.  Unaudited Condensed Consolidated Financial Statements.

Condensed Consolidated Balance Sheets at June 30, 2001 (Unaudited) and December 31, 2000.......................  3
Unaudited Condensed Consolidated Statements of Operations,
  Three and Six Months Ended June 30, 2001 and 2000............................................................  4
Unaudited Condensed Consolidated Statements of Cash Flows
  Six Months Ended June 30, 2001 and 2000......................................................................  5
Notes to Unaudited Condensed Consolidated Financial Statements.................................................  7

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations................. 12

Item 3.  Qualitative and Quantitative Disclosures About Market Risk............................................ 18

PART II -- OTHER INFORMATION

Item 1.  Legal Proceedings..................................................................................... 19

Item 2.  Changes in Securities................................................................................. 19

Item 4.  Submission of Matters to a Vote of Security Holders................................................... 19

Item 6.  Exhibits and Reports on Form 8-K...................................................................... 19

Signatures..................................................................................................... 20
</TABLE>


                                      -2-
<PAGE>

                         PART I -- FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

                             ON2 TECHNOLOGIES, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                            June 30,      December 31,
                                                              2001            2000
                                                         -------------   -------------
                                                          (unaudited)
<S>                                                      <C>             <C>
                     ASSETS
Current assets:
  Cash and cash equivalents ..........................   $     61,260    $  1,561,495
  Accounts receivable ................................        266,549         392,943
  Prepaid and other current assets ...................        333,155         566,540
                                                         ------------    ------------
     Total current assets ............................        660,964       2,520,978
Property and equipment, net ..........................      1,872,450       2,522,188
Goodwill and other intangible assets, net ............      4,393,040       5,747,842
Other assets .........................................        510,248         419,049
                                                         ------------    ------------
     Total assets ....................................   $  7,436,702    $ 11,210,057
                                                         ============    ============

                  LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable ...................................   $    916,799    $  1,509,401
  Accrued expenses ...................................      1,117,913         769,221
  Notes payable ......................................             --         251,311
  Deferred revenue ...................................          4,140          72,604
  Capital lease obligations ..........................             --          26,100
                                                         ------------    ------------
     Total current liabilities .......................      2,038,852       2,628,637
Convertible debentures ...............................      1,479,293              --

Commitments and contingencies.........................

Stockholders' equity:
  Preferred stock ....................................         50,528          50,528
  Common stock .......................................        325,364         276,842
  Additional paid-in capital .........................     92,671,084      86,293,786
  Deferred compensation ..............................             --         (47,410)
  Accumulated other comprehensive loss ...............         (7,851)         (3,966)
  Accumulated deficit ................................    (89,120,568)    (77,988,360)
                                                         ------------    ------------
    Total stockholders' equity .......................      3,918,557       8,581,420
                                                         ------------    ------------
    Total liabilities and stockholders' equity .......   $  7,436,702    $ 11,210,057
                                                         ============    ============
</TABLE>

 SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


                                      -3-
<PAGE>

                             ON2 TECHNOLOGIES, INC.
            UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                     Three Months Ended                 Six Months Ended
                                                          June 30,                         June 30,
                                                ----------------------------    ----------------------------
                                                     2001          2000             2001            2000
                                                ------------    ------------    ------------    ------------
<S>                                             <C>             <C>             <C>             <C>
Revenues ....................................   $     98,304    $    224,788    $    803,947    $    328,975

Operating expenses:
     Research and development ...............      1,542,844       3,101,935       3,394,373       6,478,428
     Sales and marketing ....................        694,349       1,896,160       1,411,811       4,383,611
     General and administrative .............      1,669,125       3,193,208       3,648,884       4,922,118
     Impairment charges .....................        450,000              --         450,000              --
     Restructuring charges ..................             --              --         293,200              --
     Non-cash stock based compensation ......         50,000       2,127,682         100,000      11,557,883
                                                ------------    ------------    ------------    ------------

Total operating expenses ....................      4,406,318      10,318,985       9,298,268      27,342,040
                                                ------------    ------------    ------------    ------------

Loss from operations ........................     (4,308,014)    (10,094,197)     (8,494,321)    (27,013,065)

Interest and other
  income (expense), net .....................       (808,255)        285,232      (1,078,099)        426,159
                                                ------------    ------------    ------------    ------------

Loss before provision for income taxes ......     (5,116,269)     (9,808,965)     (9,572,420)    (26,586,906)

Provision for income taxes ..................         19,524           9,380          30,850          68,012
                                                ------------    ------------    ------------    ------------

Net loss ....................................     (5,135,793)     (9,818,345)     (9,603,270)    (26,654,918)

Non-cash convertible preferred stock dividend        570,411       5,408,302       1,528,938       5,408,302
                                                ------------    ------------    ------------    ------------

Net loss attributable to common
   stockholders .............................   $ (5,706,204)   $(15,226,647)   $(11,132,208)   $(32,063,220)
                                                ============    ============    ============    ============

Basic and diluted net loss per common share .   $      (0.18)   $      (0.60)   $      (0.37)   $      (1.28)
                                                ============    ============    ============    ============

Weighted average basic and diluted common
   shares outstanding .......................     31,128,778      25,546,787      30,078,376      24,965,628
                                                ============    ============    ============    ============
</TABLE>

 SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


                                      -4-
<PAGE>

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

<TABLE>
<CAPTION>
                                                                 Six Months Ended June 30,
                                                                ---------------------------
                                                                    2001           2000
                                                                -----------    ------------
<S>                                                             <C>            <C>
Cash flows from operating activities:

  Net loss ..................................................   $(9,603,270)   $(26,654,918)
   Adjustments to reconcile net loss to net cash used in
        operating activities:
     Non-cash stock based compensation ......................       100,000      11,557,883
     Depreciation and amortization ..........................     1,668,147       1,450,638
     Amortization of debt discount ..........................     1,119,347              --
     Deferred compensation ..................................        44,570           9,387
     Restructuring and impairment charges ...................       743,200              --
     Reserve for bad debt ...................................        10,000              --
   Changes in operating assets and liabilities, net
        of effect of acquisitions:
     Accounts receivable, net ...............................        66,394        (164,780)
     Prepaid and other current assets .......................       133,385        (440,196)
     Other assets ...........................................        33,801         (52,922)
     Accounts payable and accrued expenses ..................      (226,943)         53,252
     Deferred revenue .......................................       (68,464)         95,835
                                                                -----------    ------------

Net cash used in operating activities .......................    (5,979,833)    (14,145,821)
                                                                -----------    ------------
Cash flows from investing activities:

  Purchases of property and equipment .......................       (71,191)     (1,910,742)
  Proceeds from the sale of fixed assets ....................        25,000              --
  Cash paid for acquisitions, net of cash acquired ..........       (42,415)       (241,551)
                                                                -----------    ------------

Net cash used in investing activities .......................       (88,606)     (2,152,293)
                                                                -----------    ------------
Cash flows from financing activities:

  Principal payments on capital lease obligations ...........       (26,100)        (11,266)
  Principal payments on notes payable .......................      (251,311)             --
  Principal payments on notes payable to stockholders .......            --          (5,000)
  Proceeds from the issuance of Series C Preferred Stock, net            --       9,990,825
  Proceeds from the sale of common stock ....................     2,843,500              --
  Proceeds from the issuance of convertible debentures ......     2,000,000              --
  Proceeds from exercise of common stock options and warrants         6,000         333,273
                                                                -----------    ------------

Net cash provided by financing activities ...................     4,572,089      10,307,832
Effect of exchange rate changes on cash and cash equivalents         (3,885)         (1,475)

Net change in cash and cash equivalents .....................    (1,496,350)     (5,990,282)
                                                                -----------    ------------

Cash and cash equivalents, beginning of period ..............     1,561,495      15,083,419
                                                                -----------    ------------

Cash and cash equivalents, end of period ....................   $    61,260    $  9,091,662
                                                                ===========    ============
</TABLE>

                                      -5-
<PAGE>

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

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

<TABLE>
<CAPTION>
                                                                 Six Months Ended June 30,
                                                                ---------------------------
                                                                    2001           2000
                                                                -----------    ------------
<S>                                                             <C>            <C>
Cash paid during the period for:
   Interest..................................................   $     7,620    $      4,436
                                                                ===========    ============
   Taxes.....................................................   $    19,524    $     61,850
                                                                ===========    ============
 Acquisition of fixed assets under capital leases............   $        --    $     72,750
                                                                ===========    ============
</TABLE>

 SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


                                      -6-
<PAGE>

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

(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Description of On2 Technologies, Inc.

     On2 Technologies, Inc. ("On2" or the "Company") has developed proprietary
video compression and streaming technology that combines the classic elements of
television with the interactivity of the Internet or consumer electronic devices
for delivery to broadband end users. The Company's business model is to provide
broadband video encoding, streaming and hosting services, broadband consulting
and engineering services and to license its proprietary broadband technology
solutions to owners of video content and consumer electronic devices who want to
distribute television quality video images to broadband end users. On May 22,
2001, the Company's shareholders approved changing the name of the Company from
On2.com Inc. to On2 Technologies, Inc.

     The Company's business is characterized by rapid technological change, new
product development and evolving industry standards. Inherent in the Company's
business model are various risks and uncertainties, including its limited
operating history, unproven business model and the limited history of broadband
technology services on the Internet. The Company's success may depend, in part,
upon the emergence of the Internet as a communications medium, prospective
product and service development efforts, and the acceptance of the Company's
broadband technology solutions by the marketplace.

(b) Basis of Presentation

     The 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 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 April 2, 2001.

 (c) Reclassifications

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


                                      -7-
<PAGE>

(2) PROPERTY AND EQUIPMENT

<TABLE>
<CAPTION>
                                               June 30, 2001   December 31, 2000
                                              ----------------------------------
<S>                                              <C>             <C>
Furniture and fixtures .......................   $  277,997      $  277,997
Computer equipment ...........................    2,839,704       2,775,296
Leasehold improvements .......................      487,348         527,348
Licensed software ............................      894,888         851,570
                                              ----------------------------------

                                                  4,499,937       4,432,211

Less accumulated depreciation and amortization    2,627,487       1,910,023
                                              ----------------------------------

   Total .....................................   $1,872,450      $2,522,188
                                              ==================================
</TABLE>

     As of June 30, 2001, property and equipment included assets under capital
leases of $90,721 with related accumulated depreciation of $47,214. As of
December 31, 2000, property and equipment included assets under capital leases
of $90,721 with related accumulated depreciation of $33,289.

(3) NOTES PAYABLE

     In connection with its acquisition of Eight Cylinder Studios, Inc. in
November 2000, the Company assumed a note payable in the amount of $325,254.
Based upon the terms of the note, the Company paid $75,000 on December 15, 2000,
at which time interest began to accrue at an annual rate of 9.50%. The Company
made payments of $65,000 on each of January 15, 2001, February 15, 2001 and
March 15, 2001. Final payment of $62,889 was made on April 15, 2001 and included
all unpaid principal and interest.

(4) CONVERTIBLE DEBENTURES

     In January 2001, the Company entered into a financing agreement with an
existing shareholder of the Company whereby the Company would receive up to
$2,000,000 in exchange for Series A Convertible Debentures ("Debentures") and
warrants to purchase shares of Common Stock. The timing of and the dollar value
of amounts received under this financing arrangement are required to equal
amounts received and coincide with investments by others in the Company, up to a
maximum of $2,000,000.

     Under the terms of the agreement, the Debentures consist of 200 units,
which are comprised of (1) $10,000 principal amount of Debentures and (2) one
warrant to purchase 6,667 shares of Common Stock at an exercise price of $1.68.
The principal amount of the Debentures can be converted into shares of Common
Stock at a conversion ratio of $0.45. The principal amount of the Debentures are
due 4 years from the date of issuance and can be converted into shares of Common
Stock six months after the date of issuance at the discretion of the holder.

     As of June 30, 2001, the Company had received the full $2,000,000 under the
Debenture agreement. The Company allocated the proceeds received to the
principal amount of the Debentures and the warrants based upon the relative fair
value method. The difference between the relative fair value of the Debentures
and the proceeds received was recorded as a debt discount. The total amount of
the debt discount is limited to the total proceeds received. The total amount of
the debt discount recorded as of


                                      -8-
<PAGE>

June 30, 2001 was $1,640,054. Amortization of the debt discount included in
interest expense for the three and six months ended June 30, 2001 was $825,770
and $1,119,347, respectively.

(5) STOCKHOLDERS' EQUITY

(a) Preferred Stock

Series C Convertible Preferred Stock

     The Travelers Indemnity Company ("Travelers"), the holders of the Series C
Preferred Stock, was granted pricing protection on its investment regarding
certain subsequent investments in the Company. These pricing protections were
triggered by the investments in the Series C-II and Series C-III Preferred Stock
described below and allows for the following:

     Upon the earlier of (i) a change of control or (ii) December 31, 2001, the
Company will (a) cancel the Series C Preferred and in its place issue 1,849,057
shares of Series C-IV Preferred Stock, par value $0.01 per share, with a
conversion price of $2.65, and 4,099,678 shares of Series C-V Preferred Stock,
par value $0.01 per share, with a conversion price of $1.244, and (b) cancel the
warrants issued in connection with the Series C Preferred Stock and in their
place issue 462,264 warrants with an exercise price of $2.65 and 1,024,920
warrants with an exercise price of $1.14. Travelers is not entitled to any
further pricing protections.

     Additionally, Travelers is entitled to certain anti-dilution protections.
The anti-dilution provisions primarily adjust the conversion price of the Series
C Preferred Stock and the number and exercise price of the warrants. The
convertible debenture financing described in Note 4 triggered the anti-dilution
provision with regard to the Series C Preferred Stock and also the Series C-IV
and C-V Preferred Stock to be issued as set forth below. As of June 30, 2001,
the conversion price of the Series C-IV Preferred Stock was adjusted to $2.2728,
the Company will issue 76,717 additional warrants and the exercise price of the
warrants will be reduced to $2.2728. Additionally, as of June 30, 2001, the
conversion price of the Series C-V Preferred Stock was adjusted to $1.1357, the
Company will issue 368,088 additional warrants and the exercise price of the
warrants will be reduced to $1.0442. The Company recorded a deemed non-cash
convertible preferred stock dividend for the three and six months ended June 30,
2001 of $293,089 and $749,751, respectively, to recognize the additional benefit
to be received by Travelers.

Series C-II Convertible Preferred Stock

     The holders of the Series C-II Preferred Stock are entitled to certain
anti-dilution protections, triggered by certain subsequent issuances of equity
by the Company. The anti-dilution provision primarily adjusts the conversion
price of the Series C-II Preferred Stock and the number and exercise price of
the original warrants issued. The convertible debenture financing described in
Note 4 triggered the anti-dilution provision. As of June 30, 2001, the
conversion price of the Series C-II Preferred Stock was adjusted to $2.2728, the
Company issued an additional 65,726 warrants and the exercise price of the
warrants was reduced to $2.2728. The Company recorded a deemed non-cash
convertible preferred stock dividend for the three and six months ended June 30,
2001 of $113,909 and $374,204, respectively, to record the additional benefit
received by the Series C-II Investors.

Series C-III Convertible Preferred Stock

     The holders of the Series C-III Preferred Stock are entitled to certain
anti-dilution protections, triggered by certain subsequent issuances of equity
by the Company. The anti-dilution provision primarily adjusts the conversion
price of the Series C-III Preferred Stock and the number and exercise


                                      -9-
<PAGE>

price of the original warrants issued. The convertible debenture financing
described in Note 4 triggered the anti-dilution provision. As of June 30, 2001,
the conversion price of the Series C-III Preferred Stock was adjusted to
$1.1357, the Company issued an additional 228,214 warrants and the exercise
price of the warrants was reduced to $1.0442. The Company recorded a deemed
non-cash convertible preferred stock dividend for the three and six months ended
June 30, 2001 of $163,413 and $404,983, respectively, to record the additional
benefit received by the Series C-II Investors.

(b) Common Stock

     In December 2000, the Company entered into a common stock purchase
agreement ("Stock Purchase Agreement") with an accredited investor ("Investor"),
for the sale, from time to time, of the Company's Common Stock. Pursuant to the
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 Stock Purchase
Agreement may also be limited or prohibited based on certain trading volumes and
weighted average market prices in the Company's Common Stock.

     Under the 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. As of June 30, 2001, the Company had sold approximately 4,469,430
shares of Common Stock for net proceeds of $2,843,500 under the Stock Purchase
Agreement. Additionally, the Company received approximately $350,000 on June 28,
2001 and issued the related shares of Common Stock on July 2, 2001. The $350,000
was recorded in accrued expenses as of June 30, 2001.

     On May 22, 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 Stock Purchase Agreement. The 15,500,000 shares include the
shares of Common Stock issued to the Investor and outstanding as of June 30,
2001.

(6) RESTRUCTURING AND IMPAIRMENT CHARGES

     In December 2000, in connection with certain cost saving and corporate
restructuring initiatives, the Company's Board of Director's approved a plan
that included the sale of certain content-related, non-strategic assets that
would no longer be used in the operations of the Company, closing the Company's
offices in San Francisco and Los Angeles and a reduction in the Company's
workforce.

     As a result of these initiatives, the Company recorded a non-cash
restructuring charge of $293,200 in the first quarter of 2001. The non-cash
restructuring charge was comprised of the following: (1) $210,000 related to the
termination of an employment contract which was satisfied through the issuance
of 150,000 shares of Common Stock in February 2001 and (2) $83,200 related to
the termination of a commercial lease obligation in San Francisco which was
satisfied through the issuance of 80,000 shares of Common Stock in March 2001.
The agreements were consummated subsequent to fiscal year end 2000 and the
obligations of the Company could not be measured at December 31, 2000.


                                      -10-
<PAGE>

     In the second quarter of 2001, the Company recorded an impairment charge of
$450,000 related to its Quickband content library. The Company is actively
pursuing the sale of its Quickband content library and recorded the impairment
charge to reflect the fair market value of the library as of June 30, 2001.

 (7) 2001 EMPLOYEE STOCK PURCHASE PLAN

     In February 2001, the Board of Directors adopted the 2001 Employee Stock
Purchase Plan ("ESPP"). The ESPP will provide eligible employees of the Company
the opportunity to apply a portion of their after tax compensation to the
purchase of shares of the Company's Common Stock at a 15% discount from market
value. The Company will reserve 4,000,000 authorized but unissued shares of
Common Stock for issuance under the ESPP. The ESPP was approved at the Company's
Annual Meeting of Shareholders on May 22, 2001.

(8) SUBSEQUENT EVENTS

      In July 2001, the Company entered into a Development and Services License
Agreement and a Common Stock Purchase Agreement with RealNetworks, Inc. whereby
RealNetworks will invest in the Company and license its proprietary VP4
compression technology. Pursuant to the agreements, RealNetworks will receive
1,785,714 shares of the Company's Common Stock, subject to adjustments to
prevent dilution, and the Company will receive net proceeds of $1,000,000.

      Also in July 2001, the Company entered into a Unit Purchase Agreement with
Travelers whereby it sold and aggregate of 3,571,429 units which consisted of
one share of the Company's Common Stock and a warrant to purchase 1.5 shares of
the Company's Common Stock. The Company received net proceeds of $2,000,000. On
August 10, 2001, the Company entered into a new agreement with Travelers,
rescinding the Unit Purchase Agreement and providing that Travelers would
receive 3,571,429 shares of preferred stock which were not convertible into the
Company's Common Stock for a period of six months. In addition, the Company
agreed to issue warrants to Travelers which cannot be exercised for a period of
six months.

                                      -11-
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS.

     This document contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These statements relate to future events or our future
financial performance and are not statements of historical fact. In some cases,
you can identify forward-looking statements by terminology such as "may,"
"will," "should," "expect," "plan," "anticipate," "believe," "estimate,"
"predict," "potential," "objective," "forecast," "goal" or "continue," the
negative of such terms, or other comparable terminology. These statements are
only predictions, and actual events or results may differ materially. Although
we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements, and in all cases, such statements are subject to the Company's
ability to secure additional financing or to increase revenues to support its
operations. If the Company cannot secure additional financing or increase its
revenues to support its operations, the Company's status as a going concern will
remain in doubt. In this regard, the business and operations of the Company are
subject to substantial risks that increase the uncertainty inherent in the
forward-looking statements contained in this Form 10-QSB.

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

OVERVIEW

     The Company is a leading technology firm for video compression. We have
developed a proprietary technology platform and video compression/decompression
software technology ("codecs") to deliver high quality video at the lowest
possible data rates via the Internet and over closed area networks. We offer a
suite of products and services, including high-level video encoding, encoding
workstations, hosting, streaming, interface design, customized technical
support, and consulting services. In addition, we license our high quality video
codecs for use in closed area networks such as set-top boxes, electronic gaming
devices and wireless applications.

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

     In June of 1999, The Duck Corporation was merged with and into a wholly
owned subsidiary of Applied Capital Funding, Inc., a public company whose name
was later changed to On2.com Inc. On May 22, 2001, the Company's shareholders
approved changing the name of the Company from On2.com Inc. to On2 Technologies,
Inc. Through the first quarter of 2000, the Company devoted substantially all of
its efforts to building a proprietary content network and developing the
technology to operate a broadband content site. In June of 2000, the Company
made a strategic decision to de-emphasize the development of its content site
and redirected its strategic operating focus toward providing its proprietary
broadband technology solutions to customers requiring television quality video
signals for distribution over the broadband Internet or to consumer electronic
devices.


                                      -12-
<PAGE>

     In December 2000, the Company initiated certain cost savings initiatives
that included a reduction in workforce, the closing of certain offices in San
Francisco and Los Angeles and the sale of certain content-related, non-strategic
assets associated with acquisitions made in connection with the development of a
broadband content site. The Company's strategic focus is to provide the highest
level of broadband technology services and products to customers for delivery of
DVD quality video over the Internet and to consumer electronic devices. The
Company believes that, subsequent to its restructuring and cost savings
initiatives, its has sufficient personnel to continue its research and
development efforts as well as to create products and perform services that
encompass its proprietary broadband technologies.

     In view of the rapidly evolving nature of its business and its limited
operating history, the Company has limited experience forecasting its revenues
and operating costs. Therefore, the Company believes that period-to-period
comparisons of financial results are not necessarily meaningful and should not
be relied upon as an indication of future performance. To date, the Company has
incurred substantial costs to create technology products and services. As of
June 30, 2001, the Company had an accumulated deficit of $89.1 million. The
Company will continue to incur costs to develop, introduce and enhance products
and services, build brand awareness and grow the business. The Company 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 the Company generates
sufficient revenue to offset such costs.

RESULTS OF OPERATIONS

     REVENUES. Revenues for the three months ended June 30, 2001 were $98,304 as
compared to $224,788 for the three months ended June 30, 2000. Revenues for both
periods were primarily derived from encoding services and licensing of the
Company's proprietary technology and products. The period-to-period decrease in
revenue is attributable to a general economic slowdown and a deferral in
spending by the Company's customers. Revenues for the six months ended June 30,
2001 were $803,947 as compared to $328,975 for the six months ended June 30,
2000. Revenues for 2001 were primarily derived from engineering fees, encoding
services and licensing of the Company's technology and products. Revenues for
2000 were primarily derived from encoding services and licensing fees. The
period-to-period increase is primarily attributable to certain engineering and
consulting projects that were completed in the first quarter of 2001. The
majority of the Company's current and future revenue is and will be derived from
broadband video encoding, streaming and hosting services, engineering and
consulting services and licensing its technology and products to video content
owners who want to use the Company's technology to distribute television quality
video images to broadband users.

     OPERATING EXPENSES

     The Company's operating expenses consist of research and development, sales
and marketing, general and administrative expenses, impairment and restructuring
charges and non-cash stock based compensation.

     RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of salaries and related expenses for personnel and consulting fees
associated with the development and enhancement of the Company's proprietary
broadband technology services and applications, hosting costs, depreciation and
operating leases for certain equipment. To date, all research and development
costs have been expensed as incurred because technological feasibility is
generally not established until substantially all development is complete.
Research and development expenses for the three months ended June 30, 2001 were
$1,542,844 as compared to $3,101,935 for the three months ended June 30, 2000.
Research and


                                      -13-
<PAGE>

development expenses for the six months ended June 30, 2001 were $3,394,373 as
compared to $6,478,428 for the six months ended June 30, 2000. The
period-to-period decrease in absolute dollars is primarily attributable to a
decrease in internal personnel and consulting fees associated with developing
and enhancing the new technology and products. Additionally, as a result of
certain cost-savings initiatives, the Company disposed of certain non-strategic,
content related assets that decreased certain personnel and production costs as
well. Moreover, research and development expenses for the three and six months
ended June 30, 2000 included costs associated with the development of a
broadband content Website and costs associated with producing, acquiring,
processing and distributing content for it. As a result of a strategic decision
to focus on providing services and products that include its proprietary
broadband technology solutions, the Company did not incur content development
and distribution costs during the first two quarters of 2001 nor does it expect
to incur such costs in future periods. The Company believes that continued
investments in research and development are necessary to maintain its
competitive advantage and meet its strategic objectives. Therefore, the Company
will hire additional engineers and consultants as necessary to develop and
enhance its broadband technology services and products.

     SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries and related costs of sales, business development and marketing
personnel, tradeshow expenses, advertising costs, marketing and promotional
costs incurred to create brand awareness and public relations expenses. Sales
and marketing expenses were $694,349 for the three months ended June 30, 2001 as
compared to $1,896,160 for the three months ended June 30, 2000. Sales and
marketing expenses were $1,411,811 for the six months ended June 30, 2001 as
compared to $4,383,611 for the six months ended June 30, 2000. The
period-to-period decrease is primarily attributable to a decrease in personnel,
advertising costs and tradeshow costs associated with the Company's cost saving
initiatives implemented in December 2000. However, the Company intends to
continue to recruit and hire experienced personnel, as necessary, to sell and
market its products and services.

     GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries and related personnel costs for general corporate
functions including MIS, finance, human resources, legal and facilities, outside
legal and professional fees, depreciation of fixed assets, amortization of
goodwill and other intangible assets and general operating overhead. General and
administrative costs were $1,669,125 for the three months ended June 30, 2001 as
compared to $3,193,208 for the three months ended June 30, 2000. General and
administrative costs were $3,648,884 for the six months ended June 30, 2001 as
compared to $4,922,118 for the six months ended June 30, 2000. The
period-to-period decrease is primarily attributable to a decrease is
administrative personnel, rent, legal and professional fees and amortization of
goodwill and intangible assets associated with the Company's cost saving
initiatives implemented in December 2000. The Company does not anticipate
significant fluctuations in its general and administrative costs in future
periods.

     IMPAIRMENT AND RESTRUCTURING CHARGES. In December 2000, in connection with
certain cost saving and corporate restructuring initiatives, the Company's Board
of Director's approved a plan that included the sale of certain content-related,
non-strategic assets that would no longer be used in the operations of the
Company, closing the Company's offices in San Francisco and Los Angeles and a
reduction in the Company's workforce.

     As a result of these initiatives, the Company recorded a non-cash
restructuring charge of $293,200 in the first quarter of 2001. The non-cash
restructuring charge was comprised of the following: (1) $210,000 related to the
termination of an employment contract which was satisfied through the issuance
of 150,000 shares of Common Stock in February 2001 and (2) $83,200 related to
the termination of a commercial lease obligation in San Francisco which was
satisfied through the issuance of 80,000 shares of Common


                                      -14-
<PAGE>

Stock in March 2001. The agreements were consummated subsequent to fiscal year
end 2000 and the obligations of the Company could not be measured at December
31, 2000.

     In the second quarter of 2001, the Company recorded an impairment charge of
$450,000 related to its Quickband content library. The Company is actively
pursuing the sale of its Quickband content library and recorded the impairment
charge to reflect the fair market value of the library as of June 30, 2001.

     NON-CASH STOCK BASED COMPENSATION. Non-cash stock based compensation was
$50,000 for the three months ended June 30, 2001 as compared to $2,127,682 for
the three months ended June 30, 2000. Non-cash stock based compensation was
$100,000 for the six months ended June 30, 2001 as compared to $11,557,883 for
the six months ended June 30, 2000. The non-cash stock based charge for the
three and six months ended June 30, 2001 is a result of shares of Common Stock
issued to the Company's Non-Executive Chairman in lieu of cash compensation. A
portion of the non-cash compensation for the three and six months ended June 30,
2000 is the result of cashless exercises of stock options granted to employees
under the Company's 1999 Amended and Restated Stock Option Plan (the "1999
Plan"). As the 1999 Plan was self-administered between January 2000 and May
2000, generally accepted accounting principles required the Company to recognize
the full fair market value of all shares exercised under the cashless provision
during that period. The non-cash stock based charge related to these cashless
exercises for the three and six months ended June 30, 2000 was $2,127,682 and
$10,257,883, respectively. The Company has now contracted with a third party to
administer all stock option exercises. Thus, the Company does not anticipate
non-cash charges from cashless exercises in future periods. Additionally, in the
first quarter of 2000, the Company recorded a non-cash stock based charge of
$1,300,000 in connection with the issuance of a warrant to a business partner
who agreed to sponsor the Company's web site.

     INTEREST AND OTHER INCOME (EXPENSE), NET. Interest and other income
(expense), net primarily consists of interest income earned on the Company's
cash and cash equivalents, interest expense incurred from the Company's capital
lease obligations and note payables and the amortization of debt discounts.
Interest and other income (expense), net was ($808,255) for the three months
ended June 30, 2001 as compared to $285,232 for the three months ended June 30,
2000. Interest and other income (expense), net was ($1,078,099) for the six
months ended June 30, 2001 as compared to $426,159 for the six months ended June
30, 2000. The period-to-period decrease is a result of a decrease in the average
balance of our cash and cash equivalents and the amortization of a debt discount
related to the Company's convertible debenture financing.

     INCOME TAXES. Income taxes are based solely on state and local taxes on
business and investment capital. The Company does not pay, nor does it
anticipate paying, significant state and local income taxes based on its
investment capital.


                                      -15-
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

      At June 30, 2001, the Company had cash and cash equivalents of $61,260 as
compared to $1,561,495 at December 31, 2000.

     Net cash used in operating activities was $5,979,833 and $14,145,821 for
the six months ended June 30, 2001 and 2000, respectively. The decrease in net
cash used in operating activities is primarily attributable to a decrease in the
Company's net operating losses, excluding depreciation and amortization,
non-cash stock based charges and impairment and restructuring charges and the
amortization of debt discounts and a decrease in accounts receivable and prepaid
and other current assets. These amounts were offset by a decrease in accounts
payable and accrued expenses.

     Net cash used in investing activities was $88,606 and $2,152,293 for the
six months ended June 30, 2001 and 2000, respectively. The period-to-period
decrease is primarily attributable to decreases in the purchases of property and
equipment and cash paid for acquisitions, net of cash acquired.

     Net cash provided by financing activities was $4,572,089 and $10,307,832
for the six months ended June 30, 2001 and 2000, respectively. The
period-to-period decrease is primarily attributable to a difference in the
proceeds received from the issuance of Preferred Stock, Common Stock and
convertible debentures, a decrease in proceeds received from the exercise of
stock options and warrants and principal payments of notes payable.

     The Company currently has no material commitments other than those under
our operating lease arrangements.

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

      The Company will require additional funding during the next 12 months to
finance the growth of its current operations and fulfillment of its strategic
objectives. Additionally, the Company may require more financing to fund
acquisitions, develop new technologies or acquire strategic assets.

     In December 2000, the Company entered into a common stock purchase
agreement ("Stock Purchase Agreement") with an accredited investor ("Investor"),
for the sale, from time to time, of the Company's Common Stock. Pursuant to the
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 Stock Purchase
Agreement may also be limited or prohibited based on certain trading volumes and
weighted average market prices in the Company's Common Stock.

      In connection with agreements entered into with RealNetworks, Inc., the
Company issued to RealNetworks 1,785,714 shares of its Common Stock in July
2001, and received proceeds of $1,000,000. Also, in July 2001, the Company
entered into an agreement with Travelers, which agreement was amended on August
10, 2001 to provide that Travelers would received 3,571,429 shares of preferred
stock and warrants. Each share of preferred stock is convertible into one share
of the Company's Common Stock after a period of six months, and each warrant is
exercisable into 1.5 shares of the Company's Common Stock after a period of six
months. The exercise price of the warrants is $0.56 per share. The Company
received proceeds of $2,000,000 from Travelers.


                                      -16-
<PAGE>

     Notwithstanding the above, management is actively pursuing increases to
cash flows and additional sources of financing and believes that such increases
and additional financing will generate sufficient cash flow to fund the
Company's operations through fiscal year 2001. Management's plan to increase the
Company's cash flows from operations relies significantly on increases in
revenue generated from its broadband technology services, products and licenses
and decreases in operating expenses. However, there are no assurances that such
matters will be successfully consummated. In such event, the Company could
reduce the development of its products and services, scale back current
operations until such funds become available on terms acceptable to the Company
and could potentially result in a modification to the auditor's report on the
Company's December 31, 2001 financial statements.

IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     During June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No.141, BUSINESS COMBINATION ("SFAS
No. 141") and No. 142 GOODWILL AND OTHER INTANGIBLE ASSETS ("SFAS No. 142").
SFAS No. 141 changes the accounting for business combinations, requiring that
all business combinations be accounted for using the purchase method and that
intangible assets be recognized as assets apart from goodwill if they arise from
contractual or other legal rights, or if they are separable or capable of being
separated from the acquired entity and sold, transferred, licensed, rented or
exchanged. SFAS No.141 is effective for all business combinations initiated
after June 30, 2001. SFAS No. 142 specifies that financial accounting and
reporting for acquired goodwill and other intangible assets. Goodwill and
intangible assets with indefinite useful lives will not be amortized but rather
will be tested at least annually for impairment. SFAS No. 142 is effective for
fiscal years beginning after December 15, 2001.

     SFAS No. 142 requires that the useful lives of intangible assets acquired
on or before June 30, 2001 be reassessed and the remaining amortization periods
adjusted accordingly. Previously recognized intangible assets deemed to have
indefinite lives shall be tested for impairment. Goodwill recognized on or
before June 30, 2001, shall be assigned to one or more reporting units and shall
be tested for impairment as of the beginning of the fiscal year in which SFAS
No. 142 is initially applied in its entirety.

     The Company has not fully assessed the potential impact of the adoption of
SFAS No. 142 which is effective for the Company as of January 1, 2002. The
reassessment of intangible assets must be completed during the first quarter of
2002 and the assignment of goodwill to the reporting units, along with the
completion of the first step of the transitional goodwill impairment tests, must
be completed during the first six months of 2002.


                                      -17-
<PAGE>

ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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


                                      -18-
<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 2. CHANGES IN SECURITIES

     Notes 4 and 5 to the interim consolidated financial statements in Part I of
this Form are hereby incorporated by reference.

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


(a)   The Annual Meeting of Stockholders was held on May 22, 2001.

(b)   The following directors were re-elected at the Annual Meeting of
      Stockholders and received the vote indicated:

<Table>
<Caption>
                                     FOR                  ABSTAIN         AGAINST
      <S>                            <C>                  <C>             <C>
      Douglas A. McIntyre            26,589,396           564             102,088
      Daniel B. Miller               26,589,396           564             102,088
      Stephen Klein                  26,586,617           3,343           102,088
      William Newman                 26,589,296           664             102,088
      Jack Rivkin                    24,239,298           2,350,662       102,088
      Strauss Zelnick                26,586,917           3,043           102,088
</Table>

(c)   The adoption of the Company's 2001 Employee Stock Purchase Plan was
      approved by the vote indicated:

<Table>
      <S>                            <C>
      For:                           14,271,258
      Against:                       819,304
      Abstain:                       90,228
      Broker non-votes:              11,511,258
</Table>

(d)   The approval of the sale of up to 15,500,000 shares of Common Stock to
      Crossover Ventures pursuant to the Common Stock Purchase Agreement was
      approved by the vote indicated:

<Table>
      <S>                            <C>
      For:                           14,298,029
      Against:                       797,482
      Abstain:                       85,279
      Broker non-votes:              11,511,258
</Table>

(e)   The approval to amend the Company's certificate of incorporation to change
      the name of the Company from On2.com Inc. to On2 Technologies, Inc. was
      approved by the vote indicated:

<Table>
      <S>                            <C>
      For:                           26,642,025
      Against:                       34,588
      Abstain:                       15,435
      Broker non-votes:              None
</Table>

(f)   The ratification of the appointment by the Board of Directors of Arthur
      Andersen LLP as the independent certified public accountants for the
      Company was approved by the vote indicated:

<Table>
      <S>                            <C>
      For:                           26,632,982
      Against:                       43,091
      Abstain:                       15,975
      Broker non-votes: None
</Table>

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

(a) Exhibits

<TABLE>
<S>                                 <C>
         EXHIBIT NUMBER             DESCRIPTION
         --------------             -----------
</TABLE>

(b) Reports on Form 8-K

     None.


                                      -19-
<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 14, 2001                                  /s/ Mark J. Meagher
---------------------------------       ----------------------------------------
(Date)                                                (Signature)
                                        Mark J. Meagher
                                        Executive Vice President and Chief
                                          Financial Officer


                                      -20-