<PAGE>

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

                                   FORM 10-QSB
(Mark One)

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

                                  For the quarterly period ended March 31, 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.COM INC.
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)


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

145 Hudson Street                                           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 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. |_| Yes |_| No

                      APPLICABLE ONLY TO CORPORATE ISSUERS:



                                       -1-
<PAGE>

      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 May 8, 2001 was 30,738,233.

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



                                       -2-
<PAGE>


                                TABLE OF CONTENTS

PART I -- FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                                                                                               PAGE

<S>                                                                                                            <C>
Item 1.  Unaudited Condensed Consolidated Financial Statements.

Unaudited Condensed Consolidated Balance Sheets at March 31, 2001 and December 31, 2000........................  4
Unaudited Condensed Consolidated Statements of Operations,
  Three Months Ended March 31, 2001 and 2000...................................................................  5
Unaudited Condensed Consolidated Statements of Cash Flows
  Three Months Ended March 31, 2001 and 2000...................................................................  6
Notes to Unaudited Condensed Consolidated Financial Statements.................................................  8

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

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


PART II -- OTHER INFORMATION

Item 1.  Legal Proceedings..................................................................................... 23

Item 2.  Changes in Securities................................................................................. 23

Item 4.  Submission of Matters to a Vote of Security Holders................................................... 23

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

Signatures..................................................................................................... 24
</TABLE>



                                       -3-
<PAGE>


                         PART I -- FINANCIAL INFORMATION

Item 1.  Unaudited Condensed Consolidated Financial Statements

                                  ON2.COM INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                  March 31,        December 31,
                                                                                    2001              2000
                                                                                -------------     --------------
                                                                                 (unaudited)
                                    ASSETS

<S>                                                                             <C>               <C>
   Current assets:
     Cash and cash equivalents...............................................    $    245,339      $     1,561,495
     Accounts receivable......................................................        741,571              392,943
     Prepaid and other current assets.........................................        293,359              566,540
                                                                                 ------------      ---------------

        Total current assets..................................................      1,280,269            2,520,978

   Property and equipment, net................................................      2,173,169            2,522,188
   Goodwill and other intangible assets, net..................................      5,312,928            5,747,842
   Other assets...............................................................        509,765              419,049
                                                                                 ------------      ---------------
        Total assets.........................................................    $  9,276,131      $    11,210,057
                                                                                 ============      ===============

                     LIABILITIES AND STOCKHOLDERS' EQUITY

   Current liabilities:
     Accounts payable and accrued expenses...................................    $  1,379,173      $     2,278,622
     Notes payable............................................................         62,254              251,311
     Deferred revenue.........................................................        119,482               72,604
     Capital lease obligations................................................         12,837               26,100
                                                                                 ------------      ---------------
        Total current liabilities.............................................      1,573,746            2,628,637
   Convertible debentures.....................................................        354,067                   --

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

   Stockholders' equity:
     Preferred stock..........................................................         50,528               50,528
     Common stock.............................................................        299,279              276,842
     Additional paid-in                                                            90,441,180           86,293,786
     capital............................................... ..................
     Deferred compensation....................................................        (17,828)             (47,410)
     Accumulated other comprehensive loss.....................................        (10,513)              (3,966)
     Accumulated deficit......................................................    (83,414,328)         (77,988,360)
                                                                                 ------------      ---------------
       Total stockholders' equity.............................................      7,348,318            8,581,420
                                                                                 ------------      ---------------
       Total liabilities and stockholders' equity.............................   $  9,276,131      $    11,210,057
                                                                                 ============      ===============
</TABLE>



 SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



                                       -4-
<PAGE>


                                  ON2.COM INC.
            UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                       Three Months Ended March 31,
                                                                                  ---------------------------------------
                                                                                         2001                2000
                                                                                  ----------------     ------------------
<S>                                                                               <C>                 <C>
Revenues........................................................................   $       705,643     $       104,187

Operating expenses:
     Research and development...................................................         1,851,529           3,376,493
     Sales and marketing........................................................           717,462           2,487,451
     General and administrative.................................................         1,979,761           1,728,910
     Restructuring charge.......................................................           293,200                  --
     Non-cash stock based compensation..........................................            50,000           9,430,201
                                                                                  ----------------     ---------------

Total operating expenses........................................................         4,891,952          17,023,055
                                                                                  ----------------     ---------------

Loss from operations............................................................        (4,186,309)        (16,918,868)

Interest and other (expense) income, net........................................          (269,845)            140,927
                                                                                  ----------------     ---------------

Loss before provision for income taxes..........................................        (4,456,154)        (16,777,941)

Provision for income taxes......................................................            11,326              58,632
                                                                                  ----------------     ---------------

Net loss........................................................................        (4,467,480)        (16,836,573)

Non-cash convertible preferred stock dividend...................................           958,497                  --
                                                                                  ----------------     ---------------

Net loss attributable to common stockholders....................................   $    (5,425,977)    $   (16,836,573)
                                                                                  ================     ===============

Basic and diluted net loss per common share.....................................   $        (0.19)     $        (0.69)
                                                                                  ================     ===============
Weighted average basic and diluted common
  shares outstanding............................................................        29,016,304          24,380,933
                                                                                  ================     ===============
</TABLE>


 SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


                                       -5-
<PAGE>


                                  ON2.COM INC.
            UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                           Three Months Ended March 31,
                                                                                            2001                  2000
                                                                                       -------------------------------------

<S>                                                                                    <C>                   <C>
Cash flows from operating activities:

  Net .........................................................................         $ (4,467,480)         $(16,836,573)
  loss
    Adjustments to reconcile net loss to net cash used in operating activities:
     Non-cash stock based compensation ........................................               50,000             9,430,201
     Depreciation and amortization.............................................              848,005               527,579
     Amortization of debt discount ............................................              293,577                  --
     Deferred compensation ....................................................               26,742                  --
     Restructuring charges ....................................................              293,200                  --
   Changes in operating assets and liabilities, net of effect of acquisitions:
     Accounts receivable, net .................................................             (478,159)               55,745
     Prepaid and other current assets .........................................              273,180                (3,571)
     Other assets .............................................................               33,660                 4,878
     Accounts payable and accrued expenses ....................................             (884,044)            1,924,448
     Deferred revenue .........................................................               53,127                25,000
                                                                                        ------------          ------------

Net cash used in operating activities .........................................           (3,958,192)           (4,872,293)
                                                                                        ------------          ------------

Cash flows from investing activities:

  Purchases of property and equipment .........................................              (46,467)           (1,131,771)
  Advance to affiliated company ...............................................                 --                (110,000)
  Proceeds from the sale of fixed assets ......................................               25,000                  --
  Cash paid for acquisitions, net of cash acquired ............................              (42,131)                 --
                                                                                        ------------          ------------

Net cash used in investing activities .........................................              (63,598)           (1,241,771)
                                                                                        ------------          ------------

Cash flows from financing activities:

  Principal payments on capital lease obligations .............................              (13,263)              (11,871)
  Principal payments on notes payable .........................................             (189,056)                 --
  Principal payments on notes payable to stockholders .........................                 --                  (5,000)
  Proceeds from the sale of common stock ......................................            1,533,500                  --
  Proceeds from the issuance of convertible debentures ........................            1,375,000                  --
  Proceeds from exercise of common stock options and warrants .................                6,000                   664
                                                                                        ------------          ------------
Net cash provided by (used in) financing activities ...........................            2,712,181               (16,207)
                                                                                        ------------          ------------
Net change in cash and cash equivalents .......................................           (1,309,609)           (6,130,271)
                                                                                        ------------          ------------

Effect of exchange rate changes on cash and cash equivalents ..................               (6,547)                 --

Cash and cash equivalents, beginning of period ................................            1,561,495            15,083,419
                                                                                        ------------          ------------
Cash and cash equivalents, end of period ......................................         $    245,339          $  8,953,148
                                                                                        ============          ============
</TABLE>



                                       -6-
<PAGE>

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


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

<TABLE>
<CAPTION>
                                                                             Three Months Ended March 31,
                                                                             2001                  2000
                                                                     ---------------------------------------------


<S>                                                                    <C>                  <C>
Cash paid during the period for:
   Interest..........................................................   $          585       $        1,224
                                                                     ==============================================
   Taxes.............................................................   $        4,000       $       52,475
                                                                     ==============================================
 Acquisition of fixed assets under capital leases....................   $           --       $       72,750
                                                                     ==============================================
</TABLE>


 SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


                                       -7-
<PAGE>

                                  ON2.COM INC.
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(1)   ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a)   Description of On2.com Inc.

      On2.com 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 Internet 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.

      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.


                                       -8-
<PAGE>


(2)   PROPERTY AND EQUIPMENT

<TABLE>
<CAPTION>
                                                                      March 31, 2001         December 31, 2000
                                                                 -------------------------------------------------



<S>                                                                 <C>                     <C>
Furniture and fixtures............................................   $      277,997          $      277,997
Computer equipment................................................        2,789,429               2,775,296
Leasehold improvements............................................          527,348                 527,348
Licensed software.................................................          851,570                 851,570
                                                                 --------------------------------------------------

                                                                          4,446,344               4,432,211

Less accumulated depreciation and amortization....................        2,273,175               1,910,023
                                                                 --------------------------------------------------
   Total..........................................................  $     2,173,169          $    2,522,188
                                                                 ==================================================
</TABLE>


      As of March 31, 2001, property and equipment included assets under capital
leases of $90,721 with related accumulated depreciation of $40,251. 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 March 31, 2001, the Company had received $1,375,000 under the
Debenture agreement. The Company allocates 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 actual fair value of the debentures, based on the fair value of the
shares of Common Stock in which the Debentures could be converted on the date of
issuance, is recorded as a debt discount. The total amount of the debt discount
is limited to the relative fair value attributed to the Debentures. The



                                       -9-
<PAGE>

total amount of the debt discount recorded as of March 31, 2001 was $1,155,889.
Amortization of the debt discount included in interest expense was $293,577 for
the three months ended March 31, 2001.

(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 a result, the
conversion price of the Series C-IV Preferred Stock will be adjusted to $2.347,
the Company will issue 39,085 additional warrants and the exercise price of the
warrants will be reduced to $2.347. Additionally, the conversion price of the
Series C-V Preferred Stock will be adjusted to $1.166, the Company will issue
158,253 additional warrants and the exercise price of the warrants will be
reduced to $1.071. The Company recorded a deemed non-cash convertible preferred
stock dividend of $456,632 to record 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 a result, the conversion price
of the Series C-II Preferred Stock was adjusted to $2.347, the Company issued an
additional 33,485 warrants and the exercise price of the warrants was reduced to
$2.347. The Company recorded a deemed non-cash convertible preferred stock
dividend of $260,295 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 price of
the original warrants issued. The convertible debenture financing described in
Note 4 triggered the anti-dilution provision. As a result, the conversion price
of the Series C-III Preferred Stock was



                                       -10-
<PAGE>

adjusted to $1.071, the Company issued an additional 98,116 warrants and the
exercise price of the warrants was reduced to $1.071. The Company recorded a
deemed non-cash convertible preferred stock dividend of $241,570 to record the
additional benefit received by the Series C-III 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 March 31, 2001, the Company had sold approximately 1,945,200
shares of Common Stock for net proceeds of $1,533,500 under the Stock Purchase
Agreement.

(6)   RESTRUCTURING CHARGE

      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 for the three months ended March 31, 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 valued at December 31, 2000.

(7)   SUBSEQUENT EVENTS

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 is subject to shareholder
approval and will be voted on at the Company's Annual Meeting of Shareholders on
May 22, 2001.

                                       -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. In evaluating the
Company's business, you should give careful consideration to the information set
forth below under the caption "Risk Factors That May Affect Future Operating
Results," in addition to the other information set forth herein.

      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. 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 completed 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
March 31, 2001, the Company had an accumulated deficit of $83.4 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 March 31, 2001 were $705,643
as compared to $104,187 for the three months ended March 31, 2000. Revenues for
the three months ended March 31, 2001 were derived primarily from engineering
and consulting services, encoding services and the licensing of DVD assets.
Revenues for the three months ended March 31, 2000 were derived primarily from
historical licensing agreements. Through the first quarter of 2000, the Company
devoted substantially all its efforts to building the On2.com network and
developing the technology to operate a broadband content site. Commencing with
the second quarter of 2000, the Company made a strategic decision to
de-emphasize the development of its content site and re-directed its strategic
initiatives toward providing its proprietary broadband technology services and
applications to customers requiring television quality video signals for
distribution to their broadband Internet user base. The majority of the
Company's current and future revenue is and will be derived from broadband
Internet video encoding, streaming and hosting services, engineering and
consulting services and licensing its technology to video content owners who
want to use the Company's technology to distribute television quality video
images to broadband Internet users.

      OPERATING EXPENSES

      The Company's operating expenses consist of research and development,
sales and marketing, general and administrative expenses, 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. Research and development expenses were
$1,851,529 for the three months ended March 31, 2001 as compared to $3,376,493
for the three months ended March 31, 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



                                       -13-
<PAGE>

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 months ended March 31, 2000 include 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 for the three
months ended March 31, 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 applications.

      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 $717,462 for the three months ended March 31, 2001
as compared to $2,487,451 for the three months ended March 31, 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 $1,979,761 for the three months ended March 31, 2001
as compared to $1,728,910 for the three months ended March 31, 2000. The
period-to-period increase is primarily attributable to increased salaries and
related personnel costs to build our basic administrative infrastructure,
increases in certain professional fees and an increase in the deprecation of
fixed assets offset by decreases in legal fees, rent and general overhead costs
resulting from the Company's cost savings initiatives. The Company does not
anticipate significant fluctuations in its general and administrative costs in
future periods.

      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 for the three months ended March 31, 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 valued at December 31, 2000.

      NON-CASH STOCK BASED COMPENSATION. Non-cash stock based compensation was
$50,000 for the three months ended March 31, 2001 as compared to $9,430,201 for
the three months ended March 31, 2000. The non-cash stock based charge for the
three months ended March 31, 2001 is a result of shares of Common Stock issued
to the Company's Non-Executive Chairman in lieu of cash compensation. The



                                       14
<PAGE>

non-cash compensation for the three months ended March 31, 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 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. The non-cash stock based charge related to these
cashless exercises for the three months ended March 31, 2000 was $8,130,201.
Additionally, for the three months ended March 31, 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 (EXPENSE) INCOME, NET. Interest and other (expense)
income, 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 (expense) income, net was ($269,845) for the three months ended March
31, 2001 as compared to $140,927 for the three months ended March 31, 2000. The
period-to-period decrease for the three months ended is a result of a decrease
in the average balance of our cash and cash equivalents for the three months
ended March 31, 2001 as compared to same period in 2000, 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. Income taxes were $11,326 for the three months
ended March 31, 2001 as compared to $58,632 for the three months ended March 31,
2000. The period-to-period decrease is attributable to a decrease in the
Company's investment capital.



                                       -15-
<PAGE>


LIQUIDITY AND CAPITAL RESOURCES

      At March 31, 2001, the Company had cash and cash equivalents of $245,339
as compared to $1,561,495 at December 31, 2000.

      Net cash used in operating activities was $3,958,222 and $4,872,293 for
the three months ended March 31, 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 restructuring charges offset by an increase in
accounts receivable and a decrease in accounts payable.

      Net cash used in investing activities was $63,598 and $1,241,771 for the
three months ended March 31, 2001 and 2000, respectively. The period-to-period
decrease is primarily attributable to decreases in the purchases of property and
equipment and advances made to affiliates.

      Net cash provided by (used in) financing activities was $2,712,181 and
($16,207) for the three months ended March 31, 2001 and 2000, respectively. The
period-to-period increase is primarily attributable to proceeds received from
the issuance of Common Stock and convertible debentures offset by principal
payments of notes payable.

      The Company currently has no material commitments other than those under
our capital and 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.

      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



                                       -16-
<PAGE>

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. See "Risk Factors That May Affect Future Operating
Results."

IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

      In July 1999, the Financial Accounting Standards Board ("FASB") approved
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferred of the Effective date of FASB Statement No. 133." SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133")
establishes accounting and reporting standards requiring that every derivative
instrument, including certain derivative instruments embedded in other
contracts, be recorded in the balance sheet as either an asset or liability
measured at its fair value. The statement also requires that changes in the
derivatives fair value be recognized in earnings unless specific hedge
accounting criteria are met. The adoption of SFAS 133 did not have a material
effect on the Company's consolidated financial statements.

RISK FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

      In evaluating our business, prospective investors and shareholders should
carefully consider the following risks in addition to the other information in
this 10-QSB or in the documents referred to in this 10-QSB. Any of the following
risks could have a material adverse impact on our business, operating results
and financial condition and result in a complete loss of your investment.

WE NEED ADDITIONAL CASH TO OPERATE OUR BUSINESS AND OUR VIABILITY AS A GOING
CONCERN IS UNCERTAIN.

      Since our inception, we have incurred significant losses and negative cash
flow from operations, and as of March 31, 2001, we had an accumulated deficit of
approximately $83.4 million. Based on our present operating expenses, taking
into account available cash reserves, we will not be able to continue as a going
concern beyond the near future without an increase in cash flow from operations
and/or the infusion of addition capital to fund operations. During fiscal 2001,
we expect to meet our working capital obligations and other cash requirements
with cash derived from operations, from sales of our common stock under the
equity line of credit arrangement with Crossover Ventures, Inc., and other
financing as required. There can be no assurance however that we will be able to
continue as a going concern, that cash from operations and the other sources
described above will be achieved or will be sufficient for the Company's
operating needs or that the Company will be able to achieve profitability on a
consistent basis, if at all. In the event that cash flow from operations is less
than anticipated and we are unable to secure additional funding, in order to
preserve cash, we would be required to further reduce expenditures and effect
further reductions in our corporate infrastructure, either of which could have a
material adverse effect on our ability to continue our operations. Even if we
obtain additional working capital in the near future, to the extent that
operating expenses increase or we need additional funds to make acquisitions,
develop new technologies or acquire strategic assets, the need for additional
funding may be accelerated and there can be no assurances that any such
additional funding can be obtained on terms acceptable to us, if at all.

WE HAVE A HISTORY OF LOSSES AND NEGATIVE CASH FLOW AND ANTICIPATE CONTINUED
LOSSES.

      We have not achieved profitability, and we expect to continue to incur
operating losses for the foreseeable future as we fund operating and capital
expenditures in implementing our business plan. Our business model assumes that
consumers will be attracted to and use broadband-specific video compression
technology to access content available on customer Web sites that will, in turn,
allow us to provide our technology solutions to customers. Our business model is
not yet proven, and we cannot assure you that we will ever achieve or sustain
profitability or that our operating losses will not increase



                                       -17-
<PAGE>

in the future. Our business strategy may be unsuccessful and we may not be able
to adequately address all or any of these risks. Even if we are able to achieve
profitability, we may be unable to sustain or increase our profitability. In
either case, our business, financial conditions and results of operations will
be materially and adversely affected.

SINCE WE RECENTLY CHANGED OUR STRATEGIC OPERATING MODEL, WE ARE ESSENTIALLY A
NEW COMPANY AND ACCORDINGLY ARE SUBJECT TO THE RISKS ASSOCIATED WITH A NEW
COMPANY.

      Even though our business was founded in 1992, we have only recently
implemented our new business plan. As a result, our company is essentially a new
venture. Therefore, we do not have a significant operating history upon which
you can evaluate us and our prospects, and you should not rely upon our past
performance to predict our future performance. In transitioning to our new
business model, we are substantially changing our business operations, sales and
implementation practices, customer service and support operations and management
focus. We also face new risks and challenges, including a lack of meaningful
historical financial data upon which to plan future budgets, competition from a
new range of sources, the need to develop strategic relationships and other
risks described below. We cannot guarantee that we will be able to transition
successfully to our new business model.

      Our ability to generate profits, if any, will depend on our ability:

      o     to attract customers to use our technology infrastructure and
            support services;

      o     to generate revenues from software licensing and sales, broadband
            streaming services and consulting to developers of broadband
            content; and

      o     to control costs.

WE ANTICIPATE CONTINUED SIGNIFICANT OPERATING LOSSES FOR THE FORESEEABLE FUTURE,
AND WE CANNOT ASSURE YOU THAT PROFITABILITY WILL EVER BE ATTAINED.

      In light of the rapidly evolving nature of our business and its limited
operating history, we have little experience forecasting our revenues and
believe that period-to-period comparisons of financial results are not
necessarily meaningful. Therefore, you should not rely on period-to-period
comparisons of our historical financial results as an indication of our future
financial results. Moreover, our financial results may vary from period to
period due to the uncertainties of our business.

OUR STOCK PRICE IS VOLATILE.

      The market for our common stock has experienced extreme price and volume
fluctuations and may continue to be volatile in response to various factors,
including:

      o     quarterly variations in our operating results;

      o     competitive announcements;

      o     the operating and stock price performance of other companies that
            investors may deem comparable to us;

      o     news relating to trends in our markets; and

      o     changes in financial estimates by securities analysts or failure to
            meet analyst estimates.

      In addition, the stock market generally has experienced significant price
and volume fluctuations, and the market prices of companies in our industry have
been highly volatile. Due to the volatility of the stock market generally, the
price of our common stock could fluctuate for reasons beyond our control.



                                       -18-
<PAGE>

THE SALE OF SHARES ELIGIBLE FOR FUTURE SALE IN THE OPEN MARKET COULD DEPRESS OUR
STOCK PRICE.

      Sales of significant amounts of common stock in the public market in
the future, the perception that sales will occur or the registration of
shares could materially and adversely affect the market price of our common
stock or our future ability to raise capital through an offering of our
equity securities. As of May 8, 2001, there were outstanding approximately
17,764,625 shares of our common stock that are freely tradable. As of May 8,
2001, we issued approximately 30,738,233 shares of common stock, warrants to
purchase up to approximately 9,295,000 shares of our common stock upon
exercise, 5,052,770 shares of preferred stock that are convertible under
certain circumstances into our common stock and debentures in a principal
amount of $2,000,000 that are convertible into 4,444,444 shares of our common
stock, in private transactions since June of 1999. We have granted the
holders of those securities registration rights. Therefore, these shares of
common stock, warrants, preferred stock and debentures can be sold in
accordance with Rule 144 of the Securities Act or the holders thereof can
exercise their registration rights related thereto. In addition, as of May 8,
2001, there were outstanding options to purchase approximately 6,945,000
shares of common stock that become eligible for sale in the public market
from time to time depending on vesting. There are also 5,459,000 shares of
common stock which are issuable under the common stock purchase agreement and
under the warrants previously granted and which may be granted in the future
to Crossover Ventures, Inc. ("Crossover Ventures"). We may also issue
additional shares in acquisitions and may grant additional stock options to
our employees, officers, directors and consultants under our stock option
plans.

      The issuance or even the potential issuance of shares under the common
stock purchase agreement, in connection with any other additional financing, and
upon exercise of warrants, options or rights will have a dilutive impact on
other stockholders and could have a negative effect on the market price of our
common stock. In addition, the shares issuable to Crossover Ventures under the
common stock purchase agreement will be issued at a discount to the daily volume
weighted average prices of our common stock prior to the issuance to Crossover
Ventures. This will further dilute the interests of other stockholders.
Moreover, on January 19, 2001, we entered into a Deferred Pricing Agreement with
The Travelers Indemnity Company ("Travelers"), pursuant to which, upon the
earlier of (i) a change of control or (ii) December 31, 2001, we will (A) cancel
Travelers' existing 1,644,304 shares of Series C Preferred Stock and in its
place issue 1,849,057 shares of Series C-IV Preferred Stock and 4,099,678 shares
of Series C-V Preferred Stock, and (B) cancel Travelers' existing warrants to
purchase 205,538 shares of common stock at an exercise price of $8.69 per share
and warrants to purchase 205,538 shares of common stock at an exercise price of
$10.86 per share, and in their place issue warrants to purchase 462,264 shares
of common stock with an exercise price of $2.65 and warrants to purchase
1,024,920 shares of common stock with an exercise price of $1.14.

      As we sell shares of common stock to Crossover Ventures under the common
stock purchase agreement, and then Crossover Ventures sells the common stock to
third parties, our common stock price may decrease due to the additional shares
in the market. If we decide to draw down under the common stock purchase
agreement as the price of our common stock decreases, we will be required to
issue more shares of our common stock for any given dollar amount invested by
Crossover Ventures, subject to the minimum selling price we specify. The more
shares that are issued under the common stock purchase agreement, the more our
shares will be diluted and the more our stock price may decrease. This may
encourage short sales, which could place further downward pressure on the price
of our common stock.

WE DEPEND ON THE GROWTH OF BROADBAND INTERNET USAGE.

      Our technology works primarily over "broadband" Internet connections. The
main services we are building require high-bandwidth access to the Internet and
delivery of data volumes that are higher than most service providers are
presently delivering. While we are striving to overcome the technical and




                                       -19-
<PAGE>

business hurdles inherent in establishing a network of this nature, there can be
no assurance we will be successful in obtaining the bandwidth required to
provide our services, or obtain it at economical cost.

      Broadband web usage may be inhibited for a number of reasons, such as:

      o     inadequate network infrastructure;

      o     security concerns;

      o     inconsistent quality of service; and

      o     availability of cost-effective, high-speed service.

      Our business would be adversely affected if broadband web usage does not
continue to grow.

OUR SUCCESS DEPENDS ON OUR ABILITY TO CONTINUE TO ATTRACT, RETAIN AND MOTIVATE
HIGHLY SKILLED EMPLOYEES.

      Our ability to execute our growth plan and be successful depends on our
continuing ability to attract, retain and motivate highly skilled employees. As
we continue to grow, we will need to hire additional personnel in all
operational areas. Competition for personnel throughout the Internet industry is
intense. We may be unable to retain our key employees or attract, assimilate or
retain other highly qualified employees in the future. We have from time to time
in the past experienced, and we expect to continue to experience in the future,
difficulty in hiring and retaining highly skilled employees with appropriate
qualifications. If we do not succeed in attracting new personnel or retaining
and motivating our current personnel, our business will be adversely affected.

MUCH OF OUR TECHNOLOGY RELIES ON OWNED OR LICENSED INTELLECTUAL PROPERTY, AND WE
CANNOT BE SURE THAT SUCH RIGHTS ARE PROTECTED FROM THE USE OF OTHERS, INCLUDING
POTENTIAL COMPETITORS.

      We regard much of our technology as proprietary and try to protect it by
relying on trademarks, copyrights, patents, trade secret laws and
confidentiality agreements. In connection with our license agreements with third
parties, we seek to control access to and distribution of our technology,
documentation and other proprietary information. Even with all of these
precautions, it could be possible for someone else to either copy or otherwise
obtain and use our proprietary information without our authorization or to
develop similar technology independently. Effective trademark, copyright and
trade secret protection may not be available in every country in which our
services are made available through the Internet, and policing unauthorized use
of our proprietary information is difficult and expensive. We cannot be sure
that the steps we have taken will prevent misappropriation of our proprietary
information. Any misappropriation could have a material adverse effect on our
business. In the future, we may need to go to court to either enforce our
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of the proprietary rights of others. That litigation might
result in substantial costs and diversion of resources and management attention.

      We currently license from third parties technologies incorporated into
some of our products and services. As we continue to introduce new services that
incorporate new technologies, we may be required to license additional
technology from others. We cannot be sure that these third-party technology
licenses will continue to be available on commercially reasonable terms, if at
all.

OUR INDUSTRY IS HIGHLY COMPETITIVE.

      The Internet industry is highly competitive and affected by rapid change.
We believe that the principal competitive factors in our business include
technological innovation, pricing, customer service, network quality, service
offerings and the flexibility to adapt to changing market conditions. In
establishing our broadband strategy, we face a number of strong, firmly
entrenched competitors who are



                                      -20-
<PAGE>

currently providing similar services to low-bandwidth users and high-bandwidth
users. These and other companies have announced plans to provide broadband
video-based services and technology. In addition to competition from other
Internet content and technology companies, well-established media distribution
companies, particularly in the cable television and satellite markets, have
established, and continue to seek to establish, interactive, on-demand digital
services through the development of sophisticated digital set-top technology and
related back-end server systems. Many of our existing competitors have, and some
future competitors may have, significantly greater financial and technical
resources than we have.

WE MUST KEEP PACE WITH TECHNOLOGICAL CHANGE TO REMAIN COMPETITIVE.

      Our future success depends, in large part, on our ability to use leading
technologies effectively, to develop our technological expertise, to enhance our
existing services and to develop new services that meet changing customer needs
on a timely and cost-effective basis. We are unable to predict which
technological development will challenge our competitive position or the amount
of expenditures that will be required to respond to a rapidly changing
technological environment. Our failure to respond in a timely and effective
manner to new and evolving technologies could have a negative impact on our
operating results and financial condition.

INTERNET CAPACITY CONSTRAINTS MAY IMPAIR THE ABILITY OF CONSUMERS TO ACCESS OUR
WEB SITE OR OUR CUSTOMER'S WEB SITES, WHICH COULD HINDER OUR ABILITY TO GENERATE
REVENUE.

      Our success will depend, in large part, upon a robust communications
industry and infrastructure for providing Internet access and carrying Internet
traffic. The Internet may ultimately not prove to be a viable commercial medium
because of:

      o     inadequate development of the necessary infrastructure such as a
            reliable network backbone;

      o     failure to timely develop complementary products such as high speed
            modems that will enable broadband access for individuals;

      o     delays in the development or adoption of new standards and protocols
            required to handle increased levels of Internet activity; or

      o     increased government regulation.

      If the Internet continues to experience significant growth in the number
of users and the level of use, then the Internet infrastructure may not be able
to continue to support the demands placed on it.

WE FACE UNCERTAINTIES REGARDING GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES.

      We are not currently subject to direct regulation by any governmental
agency other than rules and regulations that apply to businesses generally,
except that certain U.S. export controls and import controls of other countries,
including controls on the use of encryption technologies, which may apply to our
products. Laws and regulations specifically pertaining to the Internet are new
and developing. These laws or regulations govern matters such as online content,
intellectual property, user privacy, e-commerce, information security and
taxation. In addition, the applicability of existing laws to the Internet is
uncertain and evolving. As a result of this uncertainty, it is difficult to
predict the impact, if any, that future regulation or changes in regulation may
have on our operations.

      Moreover, we may be liable to third parties for any content that we
encode, distribute or make available on our website if that content violates a
third party's intellectual property rights or violates any applicable laws, such
as obscenity laws or defamation laws. Although we try to mitigate this risk by
seeking indemnification from our customers and suppliers, we may still be
subject to liability if



                                       -21-
<PAGE>

indemnification is not obtained, is contested or does not provide us with enough
resources to cover any potential liability.

EFFECTS OF ANTI-TAKEOVER PROVISIONS COULD INHIBIT POTENTIAL INVESTORS.

      Some of the provisions of our certificate of incorporation, our bylaws and
Delaware law could, together or separately:

      o     discourage potential acquisition proposals;

      o     delay or prevent a change in control; and

      o     limit the price that investors might be willing to pay in the future
            for shares of our common stock.

      In particular, our board of directors is authorized to issue up to
20,000,000 shares of preferred stock (less any outstanding shares of preferred
stock) with rights and privileges that might be senior to our common stock,
without the consent of the holders of the common stock.

WE HAVE NEVER PAID DIVIDENDS.

      We currently intend to retain earnings, if any, to support our growth
strategy. We do not anticipate paying dividends on our stock in the foreseeable
future.

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.



                                       -22-
<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

     None.

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

(a)      Exhibits

         EXHIBIT NUMBER             DESCRIPTION
         --------------             -----------


(b)      Reports on Form 8-K

         Form 8-K, Item 5: Letter of Intent with Warner Bros. Online filed on
         January 17, 2001

         Form 8-K/A, Item 2: Acquisition of Eight Cylinder Studios, Inc. filed
         on January 17, 2001

         Form 8-K, Item 5: Deferred Pricing Agreement with The Travelers
         Indemnity Company filed on February 5, 2001



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<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.com Inc.
                          -----------------------------------------------------
                                                 (Registrant)



May 15, 2001              /s/ Mark J. Meagher
-----------------         -----------------------------------------------------
(Date)                                           (Signature)
                          Mark J. Meagher
                          Executive Vice President and Chief Financial Officer


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