<PAGE>

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

                                  FORM 10-QSB

(Mark One)

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

                                   For the quarterly period ended June 30, 1999.

/ /  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 0-23171.


                                 ON2.COM INC.
--------------------------------------------------------------------------------
            (Exact name of registrant as specified in its charter)


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

375 Greenwich Street, New York, NY                                         10013
--------------------------------------------------------------------------------
(Address of principal executive offices)                              (Zip Code)

                                (212) 941-2400
--------------------------------------------------------------------------------
             (Registrant's telephone number, including area code)
                         Applied Capital Funding, Inc.
      Suite 2000, 1177 West Hastings Street, Vancouver, BC Canada V6E 2K3
--------------------------------------------------------------------------------
             (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

<PAGE>

                     APPLICABLE ONLY TO CORPORATE ISSUERS:

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

23,000,000 as of June 30, 1999.

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


                                      -2-

<PAGE>

                        PART I -- FINANCIAL INFORMATION

ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS.

The unaudited financial statements follow:

<TABLE>
<CAPTION>

                                   CONTENTS
                                                                                                            Page
<S>                                                                                                         <C>
Consolidated Balance Sheets.............................................................................      4
Consolidated Statements of Operations, Six Months Ended June 30, 1999 and 1998..........................      5
Consolidated Statements of Operations, Three Months Ended June 30, 1999 and 1998........................      6
Consolidated Statements of Stockholders' Equity.........................................................      7
Consolidated Statements of Cash Flows...................................................................      8
Notes to Consolidated Financial Statements..............................................................     10

</TABLE>


                                      -3-

<PAGE>

                                 ON2.COM INC.
                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

                                                                             June 30, 1999         December 31, 1998
                                                                               Unaudited               Unaudited
                                                                             ---------------------------------------
<S>                                                                          <C>                   <C>
ASSETS
Current assets:
   Cash and cash equivalents                                                  $13,685,073             $ 1,227,706
   Accounts receivable                                                                600                  13,762
   Loans receivable from stockholders                                             302,614                 292,088
   Prepaid income taxes                                                            18,291                  15,342
   Prepaid expenses and other current assets                                      151,269                  10,959
                                                                             ---------------------------------------
Total current assets                                                           14,157,847               1,559,857

Fixed assets, net                                                                 302,786                 335,417
Licensed software, net of accumulated amortization of $33,333 and $25,000
   at June 30, 1999 and December 31, 1998 respectively.                            16,666                  25,000
Patent and Trademark costs, net of accumulated amortization of $145,973
   and $123,004 at June 30, 1999 December 31, 1998                                167,055                  90,024
Other assets                                                                      116,076                 116,076
                                                                             ---------------------------------------
Total assets                                                                  $14,760,430              $2,126,374
                                                                             ---------------------------------------
                                                                             ---------------------------------------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Note payable to stockholder                                                $   329,624                $      -
   Accounts payable and accrued expenses                                          374,317                 190,614
                                                                             ---------------------------------------
Total current liabilities                                                         703,941                 190,614

Commitments and contingency - Note 5

Stockholders' equity:
   Series A Convertible preferred stock, no par value; 5,000,000 shares
     authorized; 2,000,000 shares issued and outstanding, (stated at
     liquidation value of $7.50 per share) (Note 3)                            15,000,000                       -
   Common Stock, no par value; 50,000,000 shares authorized:
     23,000,000 outstanding at June 30, 1999; 15,302,374 shares
     outstanding at December 31, 1998 - Notes 2 and 3                           6,480,246               7,171,013
   Accumulated deficit                                                         (7,423,757)             (5,235,253)
                                                                             ---------------------------------------
Total stockholders' equity                                                     14,056,489               1,935,760
                                                                             ---------------------------------------
Total liabilities and stockholders' equity                                    $14,760,430              $2,126,374
                                                                             ---------------------------------------
                                                                             ---------------------------------------

</TABLE>

SEE ACCOMPANYING NOTES.


                                      -4-

<PAGE>

                                 ON2.COM INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

                                                                 Six Months Ended June 30
                                                                  1999              1998
                                                               Unaudited         Unaudited
                                                              ------------------------------
<S>                                                           <C>               <C>
Revenues                                                      $    16,633       $   719,742
                                                              ------------------------------
Operating expenses
    Research and development                                      679,322           616,302
    Sales and marketing                                           478,766           546,190
    General and administrative                                  1,045,665         1,055,574
                                                              ------------------------------
       Total operating expenses                                 2,203,753         2,218,066
                                                              ------------------------------

Loss from operations                                           (2,187,120)       (1,498,324)

Other income (expense):
   Interest expense                                                  (754)             -
   Interest income and other                                       35,609            96,642
                                                              ------------------------------
                                                                   34,855            96,642
                                                              ------------------------------
Loss before provision for income taxes                         (2,152,265)       (1,401,682)
Provision for income taxes                                          2,119            49,902
                                                              ------------------------------
Net loss                                                      $(2,154,384)      $(1,451,584)
                                                              ------------------------------
                                                              ------------------------------

Loss per share - basic and diluted                                 $(0.13)           $(0.09)

Weighted average shares outstanding - basic and diluted        15,972,804        15,302,374

</TABLE>

SEE ACCOMPANYING NOTES.


                                      -5-

<PAGE>

                                 ON2.COM INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

                                                                Three Months Ended June 30
                                                                  1999              1998
                                                               Unaudited         Unaudited
                                                              ------------------------------
<S>                                                           <C>               <C>
Revenues                                                      $     9,015       $   474,673
                                                              ------------------------------
Operating expenses
    Research and development                                      376,042           317,189
    Sales and marketing                                           236,246           309,759
    General and administrative                                    584,663           499,649
                                                              ------------------------------
       Total operating expenses                                 1,196,951         1,126,597
                                                              ------------------------------

Loss from operations                                           (1,187,936)         (651,924)

Other income (expense):
   Interest expense                                                  -                 -
   Interest income and other                                       24,257            45,919
                                                              ------------------------------
                                                                   24,257            45,919
                                                              ------------------------------
Loss before provision for income taxes                         (1,163,679)         (606,005)
Provision for income taxes                                          2,005            26,027
                                                              ------------------------------
Net loss                                                      $(1,165,684)      $  (632,032)
                                                              ------------------------------
                                                              ------------------------------

Loss per share - basic and diluted                                 $(0.07)           $(0.04)

Weighted average shares outstanding - basic and diluted        16,635,866        15,302,374

</TABLE>

SEE ACCOMPANYING NOTES.


                                      -6-

<PAGE>

                                 ON2.COM INC.
                CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                        SIX MONTHS ENDED JUNE 30, 1999

<TABLE>
<CAPTION>

                                                   SERIES A
                                                  CONVERTIBLE
                                                PREFERRED STOCK                COMMON STOCK                                TOTAL
                                            ------------------------     -------------------------     ACCUMULATED     STOCKHOLDERS'
                                              SHARES        AMOUNT         SHARES         AMOUNT         DEFICIT          EQUITY
                                                                          (Note 3)
                                            ---------    -----------     ----------     ----------     -----------     -----------
<S>                                         <C>          <C>             <C>            <C>            <C>             <C>
Balance at December 31, 1998 -
  Notes 2 and 3                                                          15,302,374     $7,171,013     $(5,235,253)    $ 1,935,760

Sale of warrant to purchase Common Stock                                                     1,000                           1,000
Purchase and retirement Common Stock                          -            (302,374)      (340,000)                       (340,000)
Reverse merger with The Duck Corporation                                  8,000,000         34,120         (34,120)          -
Issuance of Series A Convertible
  preferred shares                          2,000,000    $15,000,000                                                    15,000,000
Expenses related to Series A Preferred
  share issuance                                                                          (385,887)                       (385,887)
Net loss for the period                                                                                 (2,154,384)     (2,154,384)
                                            ---------    -----------     ----------     ----------     -----------     -----------
Balance at June 30, 1999                    2,000,000    $15,000,000     23,000,000     $6,480,246     $(7,423,757)    $14,056,489
                                            ---------    -----------     ----------     ----------     -----------     -----------
                                            ---------    -----------     ----------     ----------     -----------     -----------

</TABLE>

SEE ACCOMPANYING NOTES.


                                      -7-

<PAGE>

                                 ON2.COM INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

                                                                           Six Months Ended June 30
                                                                           1999                1998
                                                                         Unaudited           Unaudited
                                                                        --------------------------------
<S>                                                                     <C>                 <C>
OPERATING ACTIVITIES
Net loss                                                                $(2,154,384)        $(1,451,584)
Adjustments to reconcile net loss to
   net cash used in operating activities:
     Depreciation and amortization                                          107,325             108,240
     Changes in operating assets and liabilities:
       Accounts receivable                                                   13,162             (78,348)
       Prepaid income taxes                                                  (2,950)             (4,861)
       Prepaid expenses and other current assets                           (140,310)              9,600
       Other assets                                                             -              (100,000)
       Accounts payable and accrued expenses                                108,705            (178,112)
                                                                        --------------------------------
Net cash used in operating activities                                    (2,068,452)         (1,695,065)

INVESTING ACTIVITIES
Purchase of fixed assets                                                    (43,393)           (191,115)
Patents and trademarks                                                      (25,000)                -
Security deposits                                                               -                 4,924
                                                                        --------------------------------
Net cash used in investing activities                                       (68,393)           (186,191)

FINANCING ACTIVITIES
Proceeds from warrant to purchase Common Stock                                1,000                 -
Proceeds from sale of Series A Convertible preferred stock, net of
  expenses                                                               14,614,113                 -
Payments on note payable to stockholder                                     (10,375)                -
Loans to stockholders                                                       (10,526)             31,510
                                                                        --------------------------------
Net cash provided by financing activities                                14,594,212              31,510
                                                                        --------------------------------
Net (decrease) increase in cash and cash equivalents                     12,457,367          (1,849,746)
Cash and cash equivalents at beginning of period                          1,227,706           4,866,680
                                                                        --------------------------------
Cash and cash equivalents at end of period                              $13,685,073         $ 3,016,934
                                                                        --------------------------------
                                                                        --------------------------------

</TABLE>


                                      -8-

<PAGE>

                                 ON2.COM INC.
               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,
                                                                           1999                1998
                                                                         Unaudited           Unaudited
                                                                        -------------------------------
<S>                                                                     <C>                 <C>
Cash paid during the year for:
  Interest                                                              $       754         $       -
                                                                        -------------------------------
                                                                        -------------------------------
  Taxes                                                                 $     7,169         $    59,346
                                                                        -------------------------------
                                                                        -------------------------------

</TABLE>

Effective June 9, 1999, the On2.com Inc. (the "Company") entered into a
Separation and Release Agreement with an officer and shareholder. In
connection with the agreement, the Company agreed to, among other things,
repurchase 302,374 shares of the Company's Common Stock from the officer and
shareholder at a price of $1.12 per share. The consideration to be paid for
such shares will be used to offset certain notes and advances due from the
officer and shareholder.

At June 30, 1999, $75,000 had been accrued as payable in regard to the
purchase of a trade-name. The total cost of the trade-name was $100,000. The
trade-name is being amortized over ten years.

SEE ACCOMPANYING NOTES.


                                      -9-

<PAGE>

                                 ON2.COM INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1  UNAUDITED FINANCIAL INFORMATION

The interim consolidated financial data are unaudited. However, in the
opinion of management, the interim data include all adjustments, consisting
only of normal, recurring adjustments, necessary for a fair statement of the
results for the interim periods. The financial statements included herein
have been prepared by On2.com Inc. (the "Company") pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures included herein are adequate to make
the information presented not misleading. These financial statements should
be read in conjunction with the annual financial statements and notes thereto
included in the Company's Form 8-K Report filed with the Securities and
Exchange Commission on June 22, 1999 and amended on August 13, 1999.

NOTE 2  ORGANIZATION AND OPERATIONS

The Company, formed by the merger of The Duck Corporation ("Duck") into and
with a subsidiary of Applied Capital Funding, Inc., a Colorado corporation,
is developing a network of Web channels for broadband-enabled internet users,
combining the classic elements of television with the interactivity of the
Internet, utilizing proprietary video compression and streaming technology.

In connection with the merger, the Company changed its name from Applied
Capital Funding, Inc. ("Applied") to On2.com Inc. The consolidated balance
sheet at June 30, 1999 includes the accounts of On2.com Inc. and its wholly
owned-subsidiary, The Duck Corporation. All intercompany accounts and
transactions have been eliminated in consolidation.

The Company's Common Stock was listed on the American Stock Exchange on
June 30, 1999 and currently trades under the symbol "ONT." Prior to that time
it was traded on the Over-the-Counter Bulletin Board operated by the National
Association of Securities Dealers, Inc.

NOTE 3  MERGER WITH THE DUCK CORPORATION AND PRIVATE OFFERING OF PREFERRED STOCK

On June 15, 1999, Applied Capital Acquisition Corp., a Delaware corporation,
a wholly-owned subsidiary of Applied Capital Funding, Inc., a Colorado
corporation, merged (the "Merger") with and into The Duck Corporation, a
Delaware corporation ("Duck"). On June 15, 1999, the Company issued
15,000,000 shares of its Common Stock to the holders of Duck's issued and
outstanding shares of common stock in exchange for 100% of the issued and
outstanding common stock of Duck. After the Merger, former Duck stockholders
owned approximately 65%


                                     -10-

<PAGE>

of the issued and outstanding Common Stock of the Company. The Merger has
been accounted for as a reverse merger in which Duck is the accounting
acquirer. The historical records of Duck became the historical records of the
Company. Following the Merger, the business conducted by the Company is the
business conducted by Duck prior to the Merger.

Prior to the Merger, the Company was a non-operating "shell" corporation.
Pursuant to SEC rules, the Merger of a private operating company (Duck) into
a non-operating public shell corporation with nominal net assets is
considered a capital transaction and has the consequences referred to in the
following paragraph. The accounting is identical to that of a reverse merger
but there are no material assets, liabilities or operations included with
those of Duck beginning June 15, 1999.

Historical operations of the Company include only those operations of Duck.
Historical stockholders' equity and loss per share prior to the Merger have
been retroactively restated for the equivalent number of shares received in
the merger after giving effect to the difference in par value of Duck's
common stock ($.001 par value) and Applied's Common Stock (no par value).
Duck common stock outstanding prior to the Merger has been converted, as of
December 31, 1998, to an equivalent number of shares of On2.com Inc. that
were issued to Duck stockholders as a consequence of the Merger. Common stock
acquired by Duck prior to the merger from an officer and stockholder,
pursuant to the Separation and Release Agreement, was converted to equivalent
On2.com Inc. common shares at December 31, 1998.

Coincident with the Merger, the Company issued 2,000,000 preferred stock
purchase units (the "Units") pursuant to Rule 506 under the Securities Act of
1933, as amended, for an aggregate purchase price of $15,000,000 (the "Unit
Offering") in a private offering.

Each Unit consists of one share of no par value, Series A Convertible
Preferred Stock and a warrant to purchase 1.114404 shares of Common Stock of
the Company at an exercise price of $3.14 per share. Each share of Series A
Preferred Stock is non-voting and may be converted at the holder's option, at
any time, into one share of Common Stock of the Company. The conversion rate
will be adjusted for stock splits, stock dividends and similar events.

The Series A Convertible Preferred Stock includes a liquidation preference.
In the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, the holders of shares of Series A
Convertible Preferred Stock are entitled to receive an amount per share equal
to the original purchase price of $7.50. The current total liquidation
preference is $15,000,000.

Prior to the Merger, The Travelers Insurance Company ("Travelers"), a
subsidiary of Citigroup Inc., held approximately 27% of Duck's voting equity
securities on a fully diluted basis. In connection with the offering of the
Units, Travelers purchased from the Company 400,000 Units for an aggregate
purchase price of $3,000,000. In addition, prior to the Merger, Travelers
purchased 1,600,000 shares of Common Stock of the Company from existing
stockholders in privately negotiated transactions. Following consummation of
the Merger and after giving effect to the foregoing purchases, Travelers
holds approximately 20.4% of the outstanding Common Stock of the Company and
20.4% of the total outstanding voting stock of the Company. Prior to


                                     -11-

<PAGE>

the Merger, Jack L. Rivkin, Executive Vice President of Citigroup
Investments, Inc., was a member of the board of directors of Duck. Pursuant
to the terms of the Merger agreement, Mr. Rivkin was appointed to serve on
the board of directors of the Company.

Costs of $385,887 related to the issuance of the Series A Convertible Preferred
Stock were paid at the closing.

NOTE 4  FISCAL YEAR END

The Company's fiscal year end is December 31. The fiscal year end of Duck was
September 30. After the Merger the Company will continue to report on its
December 31 fiscal year-end schedule. Under SEC reporting rules, this results
in the requirement for a "transition report" to reconcile Duck's audited
twelve months results to the December 31 year-end. The report will include
audited financial statements for the three months ended December 31, 1998.
The transition report will be filed within 90 days of the Merger.

NOTE 5  CONTINGENCY

The Company was a defendant in a lawsuit regarding an alleged breach of
contract that sought damages in the millions of dollars. The Company denied
the substantive allegations and contested the case vigorously. In September
1998, the court ruled in the Company's favor on most issues and awarded the
plaintiff $60,000, plus interest. Accordingly, prior to the period covered by
this report, the Company accrued and paid $88,976 relating to this matter.
However, the plaintiff has appealed the ruling. An unfavorable result on
appeal could have a material adverse effect on the Company's results of
operations, cash flows and financial condition. See Item 1, "Legal
Proceedings" in Part II of this filing.

NOTE 6  STOCK OPTIONS

Effective May 25, 1999, the Company adopted its 1999 Stock Option Plan (the
"Plan") and reserved for issuance thereunder 4,000,000 shares of the
Company's Common Stock. The options may be granted to employees, consultants,
advisors and other persons providing goods or services and may be granted at
not less than the fair market value of the Common Stock at the date of grant.
Cancelled options are available for future grant. The number of options
granted, the option price, the term of the option and the vesting periods are
determined by the board of directors.

As of the Merger date, all outstanding options to purchase Duck common stock
were converted into options to purchase Common Stock of the Company. Duck
employee stock options to purchase an aggregate of 1,802,000 shares of Duck
common stock were converted into options to purchase 1,602,580 shares of the
Company's Common Stock. The number of options and exercise price for
converted options were determined according to the same formula that was used
to convert issued and outstanding Duck Common Stock in connection with the
Merger. Options were converted as follows:


                                     -12-

<PAGE>

(i)    557,613 shares of Company Common Stock at an exercise price of $.88
       per share
(ii)   570,952 shares of Company Common Stock at an exercise price of $1.12
       per share
(iii)  474,014 shares of Company Common Stock at an exercise price of $2.25
       per share

In addition, in conjunction with the Merger, the Company granted 455,000
options to new employees at an exercise price of $1.50 per share
(representing fair market value at the time of the grants).

The outstanding options vest over a period of 3 to 36 months. At June 30,
1999, 765,319 options were vested.

The Company measures compensation cost for employee stock options under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees". Compensation expense is recognized only if the market price of
the underlying stock exceeds the exercise price of stock options on the date
of grant.

NOTE 7  WARRANTS

As of the Merger, all outstanding warrants to purchase Duck common stock were
converted into warrants to purchase Common Stock of the Company. Warrants to
purchase an aggregate of 2,552,974 shares of Duck common stock at an exercise
price of $3.917 and one warrant to purchase 175,000 shares of Duck common
stock at an exercise price of $2.79 were, after giving effect to certain
anti-dilutive provisions, converted into warrants to purchase an aggregate of
3,343,211 shares of the Company's Common Stock at an exercise price of $3.14.

At June 30, 1999, the Company has reserved 5,572,019 shares of its Common
Stock for issuance upon exercise of outstanding warrants.


                                     -13-

<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. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "expect," "plan,"
"anticipate," "believe," "estimate," "predict," "potential" or "continue,"
the negative of such terms, or other comparable terminology. These statements
are only predictions. 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. In this regard, the business and
operations of the Company are subject to substantial risks which 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. Although we believe the that the expectations
reflected in the forward-looking statements are reasonable, we cannot
guarantee future results, levels of activity, performance, or achievements.
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

On2.com Inc. is developing a network of Web channels for broadband-enabled
consumers combining the classic elements of television with the interactivity
of the Internet. Leveraging proprietary video streaming and compression
technology, the On2.com network will initially provide a range of
video-centric information and entertainment in such areas as movies, games,
music and travel. The Company plans to launch its initial Web channel,
On2Movies, in the fourth quarter of 1999. Additional Web channels will follow
in 2000.

Founded in 1992, the Company developed and marketed video
compression/decompression software technology ("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 proprietary video streaming technology, enabling delivery of high quality
video signals over high bandwidth networks. Additionally, the Company
developed technology allowing for real-time capture, compression and storage
of digital video signals.


                                     -14-

<PAGE>

Historically, substantially all of the Company's revenue was derived from a
few large technology licensing agreements whereby the Company received
non-refundable advances against future royalties based on sales by the
licensee, or outright license of certain elements of the Company's
technology. With video codecs rapidly becoming a low-priced or even free
commodity, the Company determined that reliance on its historical business
model placed serious constraints on potential growth. The Company's current
software technology enables distribution of television quality video signals
to broadband Internet users (those with Internet connections faster than 250
kilobits per second). Perceiving consumer broadband Internet usage to be the
next high growth Internet market, the Company elected to exploit its
technology's commercial possibilities by creating a unique,
broadband-focused, video-enhanced, advertiser and e-commerce supported Web
destination, rather than to rely solely on its existing technology licensing
model. Management recognized that directing the Company's efforts to build
the On2.com network would have a negative short-term impact on revenue, but
believed it was warranted by the potential long-term opportunity.

On June 15, 1999, Applied Capital Acquisition Corp., a Delaware corporation,
a wholly-owned subsidiary of Applied Capital Funding, Inc., a Colorado
corporation, merged (the "Merger") with and into The Duck Corporation, a
Delaware corporation ("Duck"). On June 15, 1999, the Company issued
15 million shares of its Common Stock to the holders of Duck's issued and
outstanding shares of common stock in exchange for 100% of the issued and
outstanding common stock of Duck. After the merger, former Duck stockholders
owned approximately 65% of the issued and outstanding Common Stock of the
Company. The merger has been accounted for as a reverse merger in which Duck
is the accounting acquirer. The historical records of Duck became the
historical records of the Company.

Following the Merger, the business conducted by the Company is the business
conducted by Duck prior to the Merger. In conjunction with the Merger, the
Company changed its name to "On2.com Inc." Additionally, on June 30, 1999,
the Company listed its shares on the American Stock Exchange under the
symbol, "ONT." Prior to that time its shares were traded on the Over the
Counter Bulletin Board operated by the National Association of Securities
Dealers, Inc.

In view of the rapidly evolving nature of its business and its limited
operating history, the Company has little experience forecasting its
revenues. 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 and services. The Company
will continue to incur costs to develop content, introduce and enhance
services, build brand awareness and grow the business. The Company may also
incur significant additional costs and expenses related to content creation,
technology, marketing or acquisitions of businesses and technologies to
respond to changes in this rapidly changing industry. These costs may not
correspond with any meaningful increases in revenues in the near term.

                                     -15-

<PAGE>

RESULTS OF OPERATIONS

Six Months Ended June 30, 1999 Compared To Six Months Ended June 30, 1998

Revenue

Net revenues of $16,663 and $719,742 for the six months ended June 30, 1999
and 1998 respectively, were derived primarily from the sale and/or licensing
of the Company's TrueMotion-Registered Trademark- technology. For the six
months ended June 30, 1998, approximately 84% of the Company's revenue was
derived from one customer, Sega Enterprises, Ltd. and its subidiaries
("Sega"). 46% of revenue was earned from royalties paid pursuant to license
agreements with Sega, and 38% of revenue was a non-refundable advance from
Sega against future royalties. Future royalty payments from Sega are
dependent on Sega recouping its advances to the Company. There can be no
assurance that Sega will use the Company's technology in developing content
for its systems, nor is it possible to predict when, if ever, Sega will
recoup the advances already paid. An additional customer accounted for 10% of
the Company's revenue. The balance of revenue was sales of individual
licenses to content developers.

During the six months ended June 30, 1999, the Company devoted substantially
all its efforts to building the On2.com network, developing the technology to
operate the site, attracting the investment to fund its efforts and hiring
the required staff.

Future revenue will be derived from the On2.com network and the licensing of
the associated technology to other companies. The Company's business model is
based on deriving revenue from advertising and sponsorship agreements with
major product and brand advertisers on the On2.com network, from the sales of
goods and services to users and from sales commissions from the sale of goods
and services on behalf of other companies. In addition, the Company expects
to generate revenue from the licensing of the Company's technology to other
companies, and providing consulting services to these licensees and other
services, including hosting video for others on the Company's server network.
The Company plans to introduce its first Web channel, On2Movies, in the
fourth quarter of 1999.

Operating expenses

The Company's operating expenses consist of research and development, sales
and marketing, and general and administrative expenses. Operating expenses of
$2,203,753 for the six months ended June 30, 1999 decreased less than 1% from
the same period in 1998.

Research and development expenses consist primarily of salaries and related
expenses for personnel and fees to outside contractors and consultants.
Research and development expenses for the six months ended June 30, 1999 of
$679,322 increased approximately $63,020 or 10% from the same period in 1998,
reflecting the additional costs incurred in developing new technology.

Research and development expenses to date have been focused on continuing
development of technology to deliver television quality video signals to
broadband Internet users, and the


                                     -16-

<PAGE>

construction of the On2.com network. For the six months ended June 30, 1999,
substantially all of the Company's research and development effort was
directed to these activities. For the six months ended June 30, 1998, the
Company's efforts were primarily directed to completing development of
technology licensed to Sega and continuing development of technology to be
used on the On2.com network. The Company expects research and development
costs to continue to increase in coming periods as development efforts
continue on the On2.com network Web channels and on the technology to operate
the business.

Sales and marketing expenses for the six months ended June 30, 1999 of
$478,766 decreased $67,424 or 12% from the year earlier period as the Company
reduced the number of employees engaged in marketing activities as it
redirected its efforts to develop the On2.com network. The sales and
marketing expenses consist primarily of salaries related to developing
business arrangements with prospective partners, creating awareness of new
services and costs of communicating to the industry and potential users.

General and administrative expenses consist primarily of salaries and related
personnel expenses, rent, accounting and legal services and general operating
expenses. For the six months ended June 30, 1999, general and administrative
expenses decreased $9,909 or less than 1% due to general cost controls
employed by the Company.

As the Company expands its business in 1999 and beyond, its research and
development, sales and marketing, and general and administrative expenses
will increase substantially. Research and development expenses will increase
as the company adds engineers and outside consultants to its technology and
Web development teams. Sales and marketing expenses will increase as the
Company adds additional business development, sales and marketing personnel
to build business relationships, sell advertising time and build brand
awareness. In addition, advertising and public relations expenses will
increase as the Company invests to grow its business. General and
administrative expenses will increase as the Company continues to build its
management infrastructure, including additional personnel, office space and
internal information systems.

From January 1999 to May 1999, the Company added three additional employees.
In June 1999, the Company hired nine additional employees in order to
accelerate the growth of the business. The Company expects this trend to
continue.

Other income (expense)

Other income (primarily interest income) of $35,609 for the six months ended
June 30, 1999 decreased $61,033 or 63% from $96,642 for the same period last
year primarily from the use of cash to support the operations of the business
prior to the issuance of 2,000,000 preferred stock Units on June 15, 1999.
See notes 2 and 3 to Financial Statements included herein.


                                     -17-

<PAGE>

Provision for income taxes

The provision for income taxes consists of foreign taxes withheld at source
upon payment of royalties by a foreign licensee. The decrease in taxes from
$49,902 for the six months ended June 30, 1998 to $2,119 for the six months
ended June 30, 1999, a decrease of $47,783 or 96%, reflects the decrease in
revenue received from Sega noted under the caption "Revenue" above.


Three Months Ended June 30, 1999 and 1998

Revenue

Net revenues for the three months ended June 30, 1999 of $9,015 decreased
$467,658 or 99% from the same period in 1998 for the same reasons disclosed
above in the discussion of results for the six months ended June 30, 1999.

For the three months ended June 30, 1999, substantially all of our revenue
was derived from sales of individual licenses to content developers. During
this period, the Company devoted substantially all its efforts to building
the On2.com network, developing the technology to operate the site,
attracting the investment to fund its efforts and hiring the required staff.

Operating expenses

Operating expenses of $1,196,951 for the three months ended June 30, 1999
increased $70,354 or 6% from the same period in 1998.

Research and development expenses, which consist primarily of salaries and
related expenses for personnel and fees to outside contractors and consultants,
of $376,042 for the three months ended June 30, 1999, increased approximately
$58,853 or 19% from $317,189 for the three months ended June 30, 1998,
reflecting the additional costs incurred in developing new technology.

Sales and marketing expenses for the three months ended June 30, 1999 of
$236,246 decreased $73,513 or 24% from $309,759 for the year earlier period
as the Company reduced the number of employees engaged in marketing
activities as it redirected its efforts to develop the On2.com network. The
sales and marketing expenses consist primarily of salaries and personnel
related expenses related to developing business arrangements with prospective
partners, creating awareness of its new services and costs of communicating
to the industry and potential users and is expected to increase as we build
the business.

General and administrative expenses, which consist primarily of salaries and
related personnel expenses, rent, accounting and legal services and general
operating expenses, were $584,663 for the three months ended June 30, 1999,
an increase of $85,014 or 17% from $499,649 for the same period in the prior
year. The increase is due primarily to the costs of recruiting additional
staff added in June. These costs are expected to continue to increase as we
grow the Company.


                                     -18-

<PAGE>

Other income (expense)

Other income, primarily interest income, of $24,257 for the three months
ended June 30, 1999 decreased $21,662 or 47% from $45,919 for the same period
last year, primarily from the use of cash to support the operations of the
business prior to the issuance of 2,000,000 preferred stock Units on June 15,
1999. See notes 2 and 3 to Financial Statements included herein.


Provision for income taxes

The provision for income taxes consisting primarily of foreign taxes withheld
at source, of $2,005 for the three months ended June 30, 1999 decreased
$24,022 or 92% from $26,027 for the same period in 1998, reflecting the
decrease in revenue received from the major foreign customer noted under the
caption "Revenue" above for the six months ended June 30, 1999.


LIQUIDITY AND CAPITAL RESOURCES

At June 30, 1999, the Company had cash and cash equivalents of $13,685,073
compared to $1,227,706 at December 31, 1998.

The Company's capital requirements have been, and will continue to be,
significant. Since inception, On2.com Inc. has financed its operations
primarily through sales of stock. Through June 30, 1999, On2.com Inc. had
raised $22,000,000 from the sale of preferred stock and Common Stock. At
June 30, 1999, the principal source of liquidity for the Company was
$13,685,073 of cash and cash equivalents.

For the six months ended June 30, 1999 and 1998, the Company used significant
cash in operating activities. Cash used in operating activities for the six
months ended June 30, 1999 and 1998 was $2,068,452 and $1,695,065
respectively. Cash used in operating activities in the first six months of
1999 compared to 1998 increased primarily as a result of reduced revenue to
offset expenses.

Cash used by investing activities for the six months ended June 30,1999 of
$68,393 was used for the acquisition of fixed assets and the initial payment
for the acquisition of a trade name. Cash used in investing activities for
the six months ended June 30, 1998 of $186,191 primarily was used for the
acquisition of fixed assets, offset by the refund of a security deposit. The
Company expects to expend significant amounts for equipment, software and
fixtures over the next 24 months.

Cash provided by financing activities was $14,594,212 for the six months
ended June 30, 1999 and represents the proceeds received from the preferred
stock offering reduced by payments on a note to a stockholder and increased
loans to a stockholder. For the six months ended June 30, 1998, cash from
financing activities consisted of a reduction in a loan to a stockholder.


                                     -19-

<PAGE>

The Company will continue to build the On2.com network, develop its
technology and hire additional employees. Thus, the Company expects its
monthly operating costs to increase substantially. To finance expenses, the
Company intends to rely on its existing cash and cash equivalents, which the
Company believes will be sufficient to meet the Company's currently
foreseeable working capital and capital expenditure requirements for the next
12 months. During this period, there can be no assurance that the Company
will not require additional funding. The Company may pursue additional public
or private debt or equity financing to finance future growth. There can be no
assurance that the Company will be able to acquire such additional funding on
terms acceptable to the Company, or at all.

IMPACT OF YEAR 2000

Many computer systems and software products are coded to accept only
two-digit entries in date code fields. Beginning the year 2000, these date
code fields will need to distinguish 21st century dates from 20th century
dates. As a result, computer systems and/or software used by many companies
may need to be upgraded to comply with "Year 2000" requirements. Although the
Company believes that its network is Year 2000 compliant, it may discover
coding errors or other defects in the future.

The Company provides technology and applications to others and also relies on
third party off-the-shelf operating systems and applications from others in
the operation of its business. The Company has substantially completed
assessment of its internal and external (third-party) computer systems and
products. At this point in this assessment, the Company is not aware of any
Year 2000 problems relating to systems that it operates or that are operated
by third parties that would have a material effect on the Company's business,
results of operations or financial condition, without taking into account
efforts to avoid such problems. Based on the Company's assessment to date, it
does not anticipate that costs associated with remediating any non-compliant
computer systems or products will exceed $100,000, although there can be no
assurance to that effect. Any such cost will be funded through operating cash
flows. To date, the Company has not incurred any significant costs related to
the assessment of, and preliminary efforts to comply with, its Year 2000
review and the development of a remediation plan. The Company does not
currently expect that the Year 2000 issue will materially adversely affect
its financial condition or results of operations.

The Company also relies on third party software and hardware systems to
operate its internal network, some or all of which could contain coding which
is not Year 2000 compliant. These systems include server software used to
operate the network servers, software controlled routers, switches and other
components of the data network, firewall, security, monitoring and back-up
software used by the Company. In each case, the Company employs widely
available software applications from leading third-party vendors and expects
that such vendors will provide any required upgrades or modifications in a
timely fashion. However, if any third party software suppliers fail to
provide Year 2000 compliant versions of the software, the Company's
operations, including its internal network, could be disrupted.

Year 2000 compliance problems also could undermine the general infrastructure
necessary to support the Company's broadband Internet operations. For
instance, the Company depends on


                                     -20-

<PAGE>

third-party Internet service providers ("ISPs") and hosting centers to
provide connections to the Internet and to customers. Any interruption of
service from ISPs or hosting centers could result in a temporary interruption
of our services. The Company has attempted to address this risk by obtaining
the same service capacity from multiple ISPs. Any interruption in the
security, access, monitoring or power systems at the ISPs or hosting centers
could result in an interruption of services. Moreover, it is difficult to
predict what effects Year 2000 compliance problems will have on the integrity
and stability of the Internet. If businesses and consumers are not able to
reliably access the Internet, the demand for the Company's services could be
disrupted, resulting in an adverse impact to the Company's business,
financial condition and results of operations.


RISK FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS


Potential Fluctuations of Quarterly Operating Results; Unpredictability Of
Future Revenue; Expected Future Losses

Our quarterly operating results may fluctuate significantly in the future as
a result of a variety of factors, many of which are outside our control.
These factors include:

     - the early stage of our development
     - the level of Web usage;
     - the level of broadband usage;
     - traffic levels on our Web channels;
     - the demand for advertising on our Web channels as well as on the Web in
         general;
     - our ability to enter into or renew key agreements;
     - fees we may pay for distribution or content agreements or other costs we
         incur as we expand our operations;
     - competitive factors;
     - technical difficulties or system downtime affecting the Web generally or
         the operation of our Web channels; or
     - economic conditions specific to the Web as well as general economic
         conditions.

As a result of these factors, our operating results for any particular
quarter may not be indicative of future operating results.

We expect that over time our revenues will come from a mix of advertising,
e-commerce relationships, licensing of our technology, consulting services
and hosting of video on our network of servers. Initially, our quarterly
revenues and operating results are likely to be particularly affected by the
level of our advertising revenue in each quarter. Our cost structure could
also change dramatically as we increase the number of Web channels in
operation. Any shortfall in our revenues would have a direct impact on our
operating results for a particular quarter and these fluctuations could
affect the market price of our Common Stock in a manner unrelated to our
long-term operating performance.


                                     -21-

<PAGE>

We have incurred operating losses in each fiscal quarter in the last twelve
months. We expect operating losses and negative cash flows to continue for
the foreseeable future as we intend to increase significantly our operating
expenses to grow our business.


Dependence on Growth In Broadband Internet Usage

Our market is new and rapidly evolving. Our business would be adversely
affected if broadband Web usage does not continue to grow. Broadband Web
usage may be inhibited for a number of reasons, such as 1) inadequate network
infrastructure; 2) security concerns; 3) inconsistent quality of service; and
4) availability of cost-effective, high-speed service.


Need To Establish And Maintain Strategic Relationships With Content Providers

To build our broadband network, we must:

-    present sufficiently attractive content to draw broadband users to our
     network on a regular basis,
-    keep broadband users at our site long enough on each visit to expose them
     to targeted advertising and e-commerce opportunities, and
-    develop relationships with content owners to obtain sufficient and current
     content.

There is no assurance that we will be successful in obtaining the content
needed to build and maintain an attractive destination Web site.


Broadband Network Costs and Management

The services we are building require high-bandwidth access to the Internet
and delivery of data volumes that may be higher than most service providers
are commonly delivering. While we are confident we can overcome the technical
and 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.


Technology Development

Launch of the On2.com network requires completion of our proprietary
technology. While management is confident the technology development can be
completed on schedule, there can be no assurance we will be able to complete
our development in time or acquire alternate technology adequate to launch
our services without delays.


                                     -22-

<PAGE>

PART II -- OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

The Duck Corporation ("Duck") is a defendant in a litigation matter entitled
EDWARD BOTWINICK V. THE DUCK CORPORATION ET AL., Index No. 60250/96. The
matter was commenced on or about May 14, 1996 in Supreme Court, New York
County.

The underlying basis of Botwinick's complaint was that Duck allegedly
breached an agreement entered into between Duck and Botwinick, pursuant to
which Botwinick agreed to act on behalf of Duck as Chairman of the Board, in
exchange for shares of stock in Duck.

The plaintiff's complaint contains four causes of action: (1) breach of
contract, (2) unjust enrichment by Duck, (3) fraud, and (4) unjust enrichment
by certain individual defendants. The complaint seeks damages in the amount
of $1,950,000 for each cause of action, together with punitive damages in the
amount of $2,000,000.

The defendants filed an answer denying the substantive allegations of the
complaint and moved for an order granting partial summary judgement
dismissing Botwinick's second, third and fourth causes of action. In
addition, the motion sought to set the valuation date of any percentage
entitlement at October 18, 1993, rather than a current valuation. Defendants'
motion was granted in all respects.

The remaining matter was tried in September, 1998, at which time Botwinick
was found to have been validly terminated by Duck. The Court found that
Botwinick's damages were limited to $60,000, together with interest from
October 18, 1993. Pursuant to this judgement, the Company accrued and paid to
Botwinick $88,976.

Botwinick has filed notices of appeal with respect to the dismissal of his
causes of action, as well as the trial decision as it relates to the
valuation of Duck and Botwinick's termination by Duck. Duck has
cross-appealed with respect to its valuation and denial of its application
for legal fees. An unfavorable result could have a material adverse effect on
the Company's results of operations, cash flows and financial condition.


ITEM 2.  CHANGES IN SECURITIES

The description of the preferred stock units issued on June 15, 1999, included
in the footnotes to the financial statements of Item 1 of Part I, to this
Form 10-QSB, is incorporated by reference, pursuant to the provisions of this
Form.

The preferred stock units were sold to accredited investors, without
registration, pursuant to Rule 506 under the Securities Act of 1933.


                                     -23-

<PAGE>

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

A special meeting of shareholders was held, pursuant to a proxy statement
mailed on May 22, 1999. The meeting occurred on June 1, 1999. The sole item
of business was approval of an amendment to the Company's articles of
incorporation to change the Company's name from Applied Capital Funding, Inc.
to On2.com Inc. The matter passed by a majority of eligible votes, as
required by Colorado law.

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

(b) REPORTS ON FORM 8-K.  State whether any reports on Form 8-K were filed
during the quarter for which this report is filed, listing the items
reported, any financial statements filed and the dates of such reports.

The Company filed a Current Report on Form 8-K on June 22, 1999 in connection
with the Company's merger with The Duck Corporation. Items reported included
details of the merger transaction, audited financial statements for the
fiscal year ended September 30, 1998 of The Duck Corporation, the acquired
company, unaudited interim financial statements of The Duck Corporation for
the quarter ended March 31, 1999, and proforma conformed Statements of
Operations of the combined companies for the years ended December 31, 1998
and 1997. This filing was amended on August 13, 1999.

The Company filed a Current Report on Form 8-K on July 7, 1999 in connection
with the listing of its Common Stock on the American Stock Exchange.

The Company filed a Current Report on Form 8-K on August 2, 1999 in
connection with its change in auditors. This filing was amended on August 9,
1999.


                                     -24-

<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)


August 23, 1999                        /s/ Barry M. Shereck
------------------------               -----------------------------------------
(Date)                                               (Signature)
                                       Barry M. Shereck
                                       Chief Financial Officer


                                     -25-