<Page>

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

                                   FORM 10-KSB
                                   (Mark One)

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

|_|      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
         EXCHANGE ACT OF 1934.


                         Commission file number 1-15117.

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


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

   145 Hudson Street, New York, NY                                      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)


Securities Registered Pursuant to Section 12(b) of the Act:

Title of each class:  COMMON STOCK

Name(s) of each exchange on which listed:  AMERICAN STOCK EXCHANGE

Securities Registered Pursuant to Section 12(g) of the Act:  NONE

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         Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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

         Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |_|

         Issuer's revenues for the year ended December 31, 2001 were
approximately $2,220,101.

         The aggregate market value of the voting stock held by non-affiliates
of the registrant, based on the closing price on the American Stock Exchange on
March 13, 2002 was approximately $14,448,000.

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

         State the number of shares outstanding of each of the issuer's classes
of common stock, $0.01 par value ("Common Stock"), as of the latest practicable
date:

43,968,621 shares as of March 13, 2002.

                       DOCUMENTS INCORPORATED BY REFERENCE

         Items 9, 10, 11, and 12 of Part III are incorporated by reference from
the Company's definitive Proxy Statement for the Annual Meeting of Stockholders,
to be held on April 30, 2002. Registrant's definitive Proxy Statement will be
filed with the Securities and Exchange Commission on or before 120 days after
December 31, 2001.

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


                                      -2-
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                                TABLE OF CONTENTS

PART I

   ITEM 1.      DESCRIPTION OF BUSINESS.......................................4
   ITEM 2.      DESCRIPTION OF PROPERTY......................................11
   ITEM 3.      LEGAL PROCEEDINGS............................................11
   ITEM 4.      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..........11

PART II

   ITEM 5.      MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.....12
   ITEM 6.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS..................................14
   ITEM 7.      FINANCIAL STATEMENTS.........................................31
   ITEM 8.      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                  ACCOUNTING AND FINANCIAL DISCLOSURE........................31

PART III

   ITEM 9.      DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
                  CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF
                  THE EXCHANGE ACT...........................................32
   ITEM 10.     EXECUTIVE COMPENSATION.......................................32
   ITEM 11.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                  MANAGEMENT.................................................32
   ITEM 12      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............32
   ITEM 13      EXHIBITS AND REPORTS ON FORM 8-K.............................32

   Signatures................................................................34





                                      -3-
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                                     PART I

ITEM 1.   DESCRIPTION OF BUSINESS

FORWARD-LOOKING STATEMENTS

         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 our ability to
secure sufficient financing or to increase revenues to support our operations.
If we cannot secure sufficient financing or increase revenues to support our
operations, our status as a going concern will remain in doubt. In this regard,
our business and operations are subject to substantial risks that increase the
uncertainty inherent in the forward-looking statements contained in this Form
10-KSB. In evaluating our business, you should give careful consideration to the
information set forth below under the caption "Management's Discussion and
Analysis-- 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 us, or any other person, that such forward-looking statements
will be achieved. We undertake no duty to update any of the forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of the foregoing, readers are cautioned not to place undue reliance on
the forward-looking statements contained in this report.

OVERVIEW

      We are a leading video compression technology firm. We have developed a
proprietary technology platform and video compression/decompression software
("codec") to deliver high quality video at the lowest possible data rates to
closed area networks, such as set-top boxes, the Internet and wireless devices.
We offer a suite of products and services that encompass our proprietary
compression technology. Our service offerings include customized engineering and
consulting services and technical support and high-level video encoding. In
addition, we license our software products, which include video and audio codecs
and encoding and server software, for use with video delivery platforms.

BUSINESS STRATEGY

     Our strategy is to be the premier provider of video
compression/decompression software technology and compression tools. We are
striving to achieve our goals by implementing the following key strategies:

         o        developing and expanding our expertise in video compression
                  and streaming software;
         o        continuing our research and development efforts to increase
                  the quality of video technology in order to improve the
                  experience of end users;
         o        leveraging our existing products and services to support new
                  products and services and to expand our presence in multiple
                  industries, including the Internet, wireless applications and
                  consumer electronics; and
         o        expanding into international markets by contracting resellers
                  of our products and services.



                                      -4-
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OUR TECHNOLOGY AND PRODUCTS

     PRODUCTS

     Our technology is designed to deliver the highest quality video at the
lowest possible data rates. We currently license and develop a number of
products related to our TrueMotion line of codecs and TrueCast line of server
products for closed area networks, the Internet and consumer electronic
industries.

TRUEMOTION VP3 SERIES

     Our TrueMotion VP3 series of codecs includes VP3, VP3.1 and VP3.2. VP3 was
introduced in January of 2000 and was the original codec used on our website at
data rates between 300 and 400 kbps. VP3.1 was launched in June of 2000 and
provided for full-motion, full-screen television quality video over the Internet
at data rates as low as 250 kbps, scaling dynamically to 500 kbps and more.
Introduced in August of 2000, VP3.2 is designed to offer the highest quality
video transmission over broadband Internet connections and supply television
quality at data rates as low as 200 kbps. VP3 files are encoded in multiple bit
rates and at optimum frame rates (usually 29.97 fps) within a single file. This
multiple bit rate file is designed to work optimally with both our TrueCast
server and RealServers running the VP3 plug-in for Real.

OPEN SOURCE VP3.2

     VP3.2 was made available to the open-source community on September 7, 2001,
in order to provide software developers an efficient, open source video codec
with no platform limitations or restrictive license fees. VP3 became the first
true common format that is open, documented and free. Nearly 12,000 people have
registered for the license and source code as of the end of February 2002.

     We created VP3-based plug-ins for other media formats, such as Apple's
QuickTime. With these plug-ins, users can encode content using VP3 plug-in
technology engineered to play that content back through these other popular
player-formats.

VP3 FORAPPLE'S QUICKTIME

     Our plug-in for Apple's QuickTime 5 enables Internet users to view
full-screen, full-motion, television quality VP3 encoded video through the
QuickTime player. Our VP3 for QuickTime plug-in is available on our website
located at www.on2.com and as part of QuickTime 5's component download feature.
After installing the VP3 for QuickTime codec, it becomes compatible with all
QuickTime applications. VP3 for QuickTime encoded video files may be streamed
from the QuickTime StreamServer or may be transmitted from a web server for
progressive download.

VP4 CODEC

     VP4, our flagship product, was released in the second quarter of 2001.
Initially optimized for set-top boxes and closed area environments, VP4 is
widely recognized as the most efficient video compression technology available.
VP4 achieves near-DVD quality at 450 kbps and near-VHS quality at 150 kbps at
full-screen and full-motion. VP4 offers a 60-70% bandwidth reduction over some
of our competitor's technologies allowing for greatly reduced costs for
comparable quality video.

     The VP4 codec is the first compression technology to break the 1-megabit
barrier for full-resolution, 60 field-per-second digital video delivery -
achieving comparable quality to MPEG-2 at significantly lower data rates.

                                      -5-
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     VP4 was integrated in (i.e. "ported") Equator Technologies' MAP-CA digital
signal processor and is currently being used to power Video-On-Demand
initiatives in Japan and Korea. Additionally, we ported VP4 onto Texas
Instruments' fully programmable C6200 DSP, which creates processor options for
potential clients. As set-top box and consumer device deployment increases
throughout 2002, the recurring licensing fees have the potential to generate
significant revenues.

ON2'S VP4 FOR REAL

     RealNetworks(R) has licensed On2's VP4 video compression technology for the
internet, set-top boxes and other consumer devices. Under the agreement, On2 and
Real have agreed that On2 will enable RealPlayer(R) as the exclusive media
player for the VP4 codec, and the RealSystem(R) IQ architecture will become the
only streaming media platform capable of delivering the VP4 codec other than
TrueCast. As a result, our sales and marketing efforts will include the
licensing of products that contain or use Real Networks' RealSystem(R)
architecture and components including On2's software. On2 has developed two
components for video delivery through the RealSystem architecture:

         o        VP4 for RealPlayer Plug-in - Provides support in RealPlayer or
                  RealOne for playback of files compressed with On2's VP4 video
                  codec and AVC audio codec, and

         o        VP4 for RealSystem Server Plug-in - Provides support for
                  streaming VP4 files using RealSystem 8 media servers (Windows
                  2000, NT and Linux).

     The combination of the RealPlayer, RealSystem iQ and the VP4 codec enables
consumers to have the highest quality playback experience currently available.
RealSystem IQ is robust, standards-based, end-to-end system architecture that
can provide a single common framework for global Internet media delivery - from
any platform, in any format and to any device. As a result, On2 believes that
its customers will be able to deliver their video and audio in an optimized
format to the largest possible audience.

VP5

     As of March 2002, VP4, our current flagship product is still the only video
compression technology to break the 1-megabit barrier for full resolution, 60
field-per-second digital video delivery. We believe that VP5 will allow a 50%
reduction over the bandwidth required to show comparable quality video using
VP4. Additional features offered by VP5 include real-time encoding and the
ability to handle interlaced content, making it the first codec on the market to
offer true broadcast-quality, real-time compression of difficult live material
such as sports and action footage at sub-megabit data rates. In tests across a
broad spectrum of content, competitive codecs typically require data rates 50%
higher than VP5 to achieve comparable quality. VP5 also outperforms the proposed
H.26L standard (even with all of its advanced options enabled) in quality, data
rate and performance while maintaining lower decode and encode complexity. The
ability to handle interlaced content sets VP5 apart from the litany of internet
codecs that are available.

     VP5 will be available for license in the summer of 2002.

TRUEMOTION 2X (TM2X)

     Originally developed as our state of the art video compression codec in
1998, the TM2X codec is optimized for hard-drive, Kiosk, or CD-ROM based video
playback. The TM2X video delivery algorithm was licensed for use in Sega's
Dreamcast and Saturn and is also licensed to gaming developers and manufacturers
interested in high quality video on machines with limited processing
capabilities.



                                      -6-
<Page>

     TM2X offers high resolutions (320x240, 640x480) and high bit-rates, that
can play back smoothly on a wide range of CPUs. The product was part of
QuickTime and Video for Windows and can be used in programs such as Adobe
Premiere and Terran's Media Cleaner Pro. It is also a cross platform codec, with
QuickTime working on both MacIntosh computers and personal computers.

AUDIO FOR VIDEO CODING TECHNOLOGY (AVC)

     AVC is an advanced compression algorithm that is ideal for a variety of
audio sources, including music, human speech, film and broadcast television. AVC
can achieve very high quality audio at bit rates lower than current standards
such as MP3 or AC-3. This algorithm is designed for easy portability to embedded
devices and can be licensed for a lower per-unit cost than other audio codecs on
the market. AVC has been optimized to run with the VP3 and VP4 video codecs, and
this combination can provide a seamless low-bit-rate multimedia experience. VP4
combined with AVC is comparable to MPEG2 combined with AC-3, but with a
substantial data rate savings. It is ideal for VOD deployment over DSL or cable
networks. AVC also allows for less transfer time and storage space for
downloaded files.

ON2'S VP4 ENCODER

     The VP4 Encoder enables content owners to efficiently re-master and
compress their assets into the VP4 format at their own convenience. Beginning
with capturing uncompressed video through high quality SDI inputs, users can
create an optimized digital file using our proprietary re-mastering tools. These
tools are geared toward the video professional that wants exact control over the
optimization process. Once the raw file has been optimized, our compression
software has the capability of creating multiple data rate compressed files.

TRUECAST SERVER SOFTWARE

     TrueCast(R) Server Software is designed to take full advantage of our
industry-leading VP line of codecs and to guarantee the smoothest delivery of
compelling multi-media presentations over private networks (i.e. set-top boxes),
embedded platforms or the Internet.

     TrueCast comes optimized in two manners: one for transport using our own
proprietary protocol, TrueCast Transport Protocol (TTP), and one for RTSP/RTP to
various set-top box platforms. TrueCast and VP4 are an ideal combination for
low-bit-rate Video-On-Demand systems. Our TrueCast Servers and the VP4 Encoder
provide the necessary tools for high-quality video over low speed IP
connections.

SERVICES

     In addition to licensing our software, we offer the following professional
services to our customers.

CUSTOM ENGINEERING AND CONSULTING SERVICES

     We provide custom engineering and consulting services designed to support
customers that are interested in porting and optimizing our technology platform
and algorithm libraries into set-top boxes, gaming and wireless devices and
other closed network applications.

ENCODING SERVICES

     Our core competence is in the development and implementation of
high-quality video compression technology. We encode video assets into our
proprietary formats or into a variety of other formats including
RealNetworks' Real, Apple's QuickTime, and Microsoft's Windows Media, in a
range of data rates, from narrowband to broadband. Our quality video encoding
service includes remastering our


                                      -7-
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clients' video files before they are compressed for frame rate optimization,
color correction and balancing, audio optimization and scene-by-scene
preprocessing.

RESEARCH AND DEVELOPMENT

     The focus of our research and development activities is to improve and
expand upon our core codec technology, which improves the video experience for
end users. Our research and development efforts have enabled us to provide
quality video compression and decompression at lower broadband data rates and
certain narrowband data rates. We believe that continued advances in our
technology are key to the success of our business. Consequently, we devote a
substantial portion of our resources to our research and development efforts.
Research and development expenses for the year ended December 31, 2001 were
$3,856,244 as compared to $8,004,932 for the year ended December 31, 2000.
Research and development expenses for the year ended December 31, 2000 also
included costs associated with the development of a content network. As our
current business strategy is the distribution of our compression technologies,
we did not incur significant costs associated with production of a content
network in 2001 nor do we expect to incur such costs in future periods.

     In January 2002, we announced the completion of our integration of our VP4
compression technology into RealNetworks' RealOne and RealPlayer. This includes
the development of VP4 "plug-ins" for the RealPlayer and the RealSystem Server
that enables VP4 content to be streamed over the RealNetworks' streaming
architecture. RealNetworks is currently certifying the software under our
Development and Services License Agreement. Once certified, we will begin
licensing this software with the RealNetworks system.

     Also in January 2002, we announced the upcoming release of VP4i, our
next-generation compression technology that enables real-time capture and
encoding. The development of VP4i is complete and we are demonstrating it to
customers. We will base additional engineering requirements on customer
feedback.

     In February 2002, we announced the introduction of a preview version of
VP5, our latest generation of compression technology. VP5 achieves similar
picture quality of VP4 at a significant reduction in bandwidth requirements and
provides the ability to stream interlaced content. We intend to fully deploy VP5
in the summer of 2002.

SALES AND BUSINESS DEVELOPMENT

     The goal of our sales and business development departments is to build
relationships that fall into two basic categories: professional services and
product licensing. Professional services primarily focus on porting or
optimizing our compression technologies to multiple hardware platforms used in
video delivery solutions. Our sales and business development teams focus on
engaging chip-set manufacturers, global cable and telecommunication companies
and manufacturers of hardware platforms for consumer electronic and wireless
devices. Additionally, our sales and business development teams focus on selling
encoding and streaming software licenses to content providers who are delivering
video over closed area networks and to IP-based end users.

INTERNATIONAL

     We believe that we are well positioned to selectively expand our business
internationally. With its vast amount of broadband networks, we believe Asia is
one of the strongest markets for video-on-demand initiatives. Our International
sales and business development efforts have been focused in this region to date.
We are currently involved with several Asian entities in which we have designed
and engineered set-top box deployments. An additional method for international
expansion is the appointment of resellers of our products and services whereby
such resellers purchase software licenses from us and sell


                                      -8-
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them in a designated international market. To date, we have signed reseller
agreements for both the Japanese and Korean markets.

     For the year ended December 31, 2001, foreign customers accounted for
approximately 67% of total revenue. These customers are primarily located in
Asia. For the year ended December 31, 2000, the Company did not generate revenue
from foreign customers. We did not generate revenue from our reseller agreements
for any of the periods presented.

     Additionally, all of the Company's assets and operations have been and
are currently based within the United States, except for two research and
development employees located in the United Kingdom. There was no revenue
generated from the United Kingdom operations for the years ended December 31,
2001 and 2000.

COMPETITION

     We believe that our principal competitive advantage is our ability to
deliver video that is comparable in quality to other compression technologies at
significantly lower data rates. This attribute significantly reduces the amount
of bandwidth necessary to deliver video of similar quality and allows our
customers to realize a greater profit on their video delivery initiatives.

     Our business is highly competitive and affected by rapid change. We believe
that the principal competitive factors in our business include technological
innovation, versatility of products, pricing, customer service, network quality,
service offerings and the flexibility to adapt to changing market conditions. In
the broadband codec market, we compete with companies such as Microsoft, Intel,
RealNetworks, Apple and Sorenson, and in the closed-area networks market, we
compete with MPEG2 and MPEG4 and several codecs that position themselves as
"MPEG4-based". We also compete with companies that provide encoding services and
companies that encode their content in-house. In establishing our business
strategy, we face a number of strong, firmly entrenched competitors who are
currently providing similar services to low-bandwidth and high-bandwidth users.
These and other companies are already providing broadband video-based services
and technology. In addition to competition from other 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.

CUSTOMERS

     Our customers, and the potential customers of our resellers, typically
are large digital communication and media companies, entertainment companies,
telecommunication companies and other global corporations that operate within
the digital media industry. For the year ended December 31, 2001, four
customers accounted for 26%, 23%, 13% and 13% of the Company's total
revenues. For the year ended December 31, 2000, four customers accounted for
19%, 15%, 10% and 10% of the Company's total revenues.

INTELLECTUAL PROPERTY

     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. We regard our copyrights, service marks, trademarks,
trade secrets, proprietary technology and similar intellectual property as
critical to our success. We currently hold several U.S. patents and have some
U.S. patent applications pending. We believe that the patents that are currently
issued are not material to our business. While we try to assure


                                      -9-
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that the quality of the On2 brand is maintained through such measures, there can
be no assurance that steps we have taken and continue to take to protect our
proprietary rights will be adequate or that third parties will not infringe on
our intellectual property. In addition, there can be no assurance that third
parties will not assert infringement claims against us which, even if not
meritorious, could result in the expenditure of substantial resources and
management effort.

     In connection with our software 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.

     From time to time, we license from third parties technologies incorporated
into some of our products and services. Although we do not currently have
material third party technology licenses, 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.

GOVERNMENT REGULATION

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

EMPLOYEES

     As of December 31, 2001, we had approximately 47 full-time employees. Of
the total employees, 26 were engineering and product development personnel, 7
were sales and marketing personnel and 14 were general and administrative
personnel.

     None of our employees are represented by a labor union, and we consider our
relationship with our employees to be good. We supplement our work force from
time to time with contractors, administrative personnel through employment
agencies, and part time employees.



                                      -10-
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ITEM 2.  DESCRIPTION OF PROPERTY.

         We do not own any real property. We lease approximately 12,200 square
feet of space where our principal executive and administrative offices are
located at 145 Hudson Street, New York, NY 10013 at an annual rental of
approximately $330,000. This lease expires on December 31, 2003. We maintain an
engineering office in the Albany, New York area of 4,680 square feet at an
annual rental of approximately $67,500. This lease expires on November 30, 2002.
Management believes these facilities are all in usable condition and that these
facilities are sufficient to meet our needs for the immediate future.

ITEM 3.  LEGAL PROCEEDINGS.

     The Company sued Ecoin Co. Ltd. ("Ecoin") on April 30, 2001 in the United
States Court for the Southern District of New York. Our complaint alleged breach
of contract arising from the failure of Ecoin to pay approximately $400,000 owed
to On2 under a Technology License and Reseller Agreement that On2 and Ecoin
entered into on February 20, 2001. Ecoin counterclaimed on December 17, 2001 for
an amount to be determined at trial, but in no event less than $100,000,
alleging fraudulent inducement and demanding rescission. The Company believes
that the counterclaims of Ecoin are without merit and intends to vigorously
pursue our claim and defend against the counterclaim.

     From time to time we have been named in other claims arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these other matters will not have a material adverse effect on
our consolidated financial position, results of operations or liquidity.

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

     None.



                                      -11-
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                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

     Our common stock is traded on the American Stock Exchange under the symbol
"ONT". The following table sets forth for the fiscal periods indicated the high
and low bid prices of our common stock, as reported on the American Stock
Exchange, since our inception on June 15, 1999:
<Table>
<Caption>

                                                                High       Low
                                                                ----       ---
<S>                                                            <C>        <C>
FISCAL YEAR 2002

                  First Quarter (through March 13, 2002)       $0.52      $0.37
FISCAL YEAR 2001

                  First Quarter                                $2.05      $0.46
                  Second Quarter                               $0.85      $0.43
                  Third Quarter                                $0.87      $0.46
                  Fourth Quarter                               $0.41      $0.29
FISCAL YEAR 2000

                  First Quarter                                $31.87     $13.00
                  Second Quarter                               $14.88     $5.25
                  Third Quarter                                $6.75      $2.40
                  Fourth Quarter                               $4.30      $0.33
FISCAL YEAR 1999

                  June 15, 1999 to June 30, 1999               $6.38      $5.56
                  Third Quarter                                $15.00     $5.00
                  Fourth Quarter                               $36.25     $10.63

</Table>

     There were approximately 249 stockholders of record of our common stock as
of February 28, 2002.

     It is our present policy not to pay cash dividends and to retain future
earnings to support our growth. We do not anticipate paying any cash dividends
in the foreseeable future.

RECENT ISSUANCES OF UNREGISTERED SECURITIES

     Effective as of February 1, 2001, we executed a General Release and
Separation Agreement with two former employees, Dera Revel and Don McLaughlin,
pursuant to which we agreed to issue to each of them warrants to purchase 3,000
and 7,500 shares of common stock, respectively, upon the execution and delivery
of their respective agreement to us. The exercise price of the warrants is
$1.34, and they expire on February 14, 2004. The aggregate value of the warrants
issued was approximately $7,400 and represented a portion of the severance
package offered to the former employees. We relied on Section (4)(2) of the
Securities Act in issuing the shares without registration. The former employees
were neither accredited nor sophisticated investors. They had access to and
general knowledge of our business in their capacity as employees of us.

     On February 15, 2001, we entered into a Settlement Agreement with
Technology Resource Partners, pursuant to which we issued 32,328 shares of our
common stock to it. Technology Resource Partners is not an accredited investor
and, to our knowledge, the partners of that partnership are neither accredited
investors nor sophisticated investors. The partnership had access to all
documents filed by us with the SEC pursuant to section 13(A), 13(C), 14 and
15(D) of the Securities Exchange Act of 1934. The shares were issued to settle a
claim against us by Technology Resources Partners for services rendered to one
of


                                      -12-
<Page>

our subsidiaries. The total value of the claim was approximately $64,000, of
which $30,000 was paid in cash and the remaining portion of the claim was
satisfied through the issuance of our common stock. We relied on Section (4)(2)
of the Securities Act in issuing the shares without registration.

     On February 21, 2001, we entered into a Lease Termination Agreement with
Montgomery Lands, Inc. pursuant to which we issued 80,000 shares of our common
stock to it. Montgomery Lands, Inc. is not an accredited investor, and to our
knowledge, its shareholders are neither accredited investors nor sophisticated
investors. Montgomery Lands, Inc. had access to all documents filed by us with
SEC pursuant to section 13(A), 13(C), 14 and 15(D) of the Securities Exchange
Act of 1934. We did not receive any cash proceeds from the issuance of share
shares to Montgomery Lands, Inc. In consideration for the issuance of such
shares, Montgomery Lands, Inc. terminated our obligations under the lease
agreement with it. That lease required us to rent approximately 3,900 square
feet of office space at a monthly rate of approximately $24,000. The fair value
of the 80,000 shares of common stock issued was approximately $83,200 based upon
the closing price of our common stock on the date the termination agreement was
consummated. The $83,200 was a negotiated settlement that represented lost
rental income from lease termination date until the landlord procured a new
tenant. We relied on Section (4)(2) of the Securities Act in issuing the shares
without registration.

     On July 18, 2001, we issued 1,785,714 shares of our common stock to
RealNetworks, Inc. in connection with a Development Services and License
Agreement and a Common Stock Purchase Agreement. RealNetworks invested
$1,000,000 in us. In addition, RealNetworks entered into a strategic
relationship with us that provided for licensing of our technology to
RealNetworks. RealNetworks Inc., an accredited investor, is a strategic partner
of ours and we relied on Section 4(2) of the Securities Act and on Rule 506 of
Regulation D in issuing the shares without registering the offering under the
Securities Act.

     On July 18, 2001, we entered into a Unit Purchase Agreement with Travelers
whereby we agreed to sell, but did not issue, 3,571,429 units which consisted of
one share and a warrant to purchase 1.5 shares of our common stock. On August
10, 2001, we entered into a new agreement with Travelers, rescinding the Unit
Purchase Agreement. Pursuant to the August 10, 2001 agreement, we issued
3,571,429 shares of preferred stock to Travelers and a warrant to purchase
5,357,144 shares of our common stock. The preferred stock could not be converted
and the warrant could not be exercised until February 10, 2002. Each share of
preferred stock is convertible into one share of common stock. The exercise
price of the warrants is $0.56, and they expire on August 10, 2005. In
connection with the issuance of the shares and the warrants to Travelers, we
received proceeds of $2,000,000. Travelers, an accredited investor, is a
strategic partner of ours and we relied on Section 4(2) of the Securities Act
and on Rule 506 of Regulation D in issuing the shares without registering the
offering under the Securities Act.

     On November 21, 2001, we entered into a second common stock purchase
agreement with Crossover Ventures, Inc. ("Crossover"), an accredited investor,
for the sale of additional shares of our common stock from time to time. On
December 1, 2000, we entered into an earlier common stock purchase agreement
with Crossover for the sale of our common stock, from time to time. Under each
common stock purchase agreement, we can sell up to $23,000,000 of our common
stock solely at our discretion. Crossover is required to purchase an additional
$17,000,000 under each agreement upon the attainment of certain weighted average
price and trading volume thresholds. The amount of securities issued for a
particular draw down is based on the volume weighted average price of our common
stock during any given draw down period. As of March 5, 2002 we had sold
12,010,252 shares pursuant to that common stock purchase agreement. In the case
of both agreements, we relied on Section 4(2) of the Securities Act and on Rule
506 of Regulation D in issuing the shares without registering the offering under
the Securities Act.



                                      -13-
<Page>



 ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS

     The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with the consolidated
financial statements, including the notes thereto, appearing elsewhere in this
report.

OVERVIEW

     We are a leading video compression technology firm. We have developed a
proprietary technology platform and video compression/decompression software
("codec") to deliver high quality video at the lowest possible data rates to
closed area networks, such as set-top boxes, the Internet and wireless devices.
We offer a suite of products and services that encompass our proprietary
compression technology. Our service offerings include customized engineering and
consulting services and technical support and high-level video encoding. In
addition, we license our software products, which include video and audio codecs
and encoding and server software, for use with video delivery platforms.

     As a result of our July 2001 transactions with Real, we now offer and
license our principle technologies in combination with Real's video and audio
platform, known as Real System(R) IQ, including Real Server Real Player and Real
Producer. Our arrangements contemplated that until July 2006 that RealPlayer(R)
will be the exclusive media player for the VP4 codec, and the RealSystem(R) IQ
architecture will become the only streaming media platform capable of delivering
the VP4 codec in Real's platform.

COMPANY HISTORY

     Founded in 1992 as The Duck Corporation, a privately owned entity, we
originally developed and marketed compression technology 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.

     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 concurrently changed to On2.com Inc. and subsequently changed to On2
Technologies, Inc. At that time, we had developed proprietary technology that
enabled the compression, storage and streaming of high quality video signals
over high bandwidth networks (i.e. broadband). We adopted a business model in
which we would develop our own broadband content network powered by our
proprietary technology. We intended to generate revenue through advertising
sales and electronic commerce. Through the first quarter of 2000, we devoted
substantially all of our efforts to building a content network and enhancing the
technology to operate it. In that time, we made three acquisitions: MetaVisual
Creations Limited ("Metavisual"), Celebrity Interviews ("CII") and Quickband
Networks, Inc. ("Quickband"). Metavisual was a compression technology firm
located in the United Kingdom and had developed its own video compression
technology. That technology is instrumental in the compression technology we
offer today. CII and Quickband were entities that had created, and had the
resources to continue to create, content that we had intended to incorporate
into our content network. Through CII and Quickband, we primarily acquired
produced content, certain distribution arrangements and certain production
personnel.

     By the second quarter of 2000, with the rapid decline in the Internet
industry and the lack of interest in content networks, we determined that
operating a content network would not be profitable for the foreseeable future.
This was evident through rapid declines in Internet advertising and electronic
commerce, the two areas in which we intended to generate our revenues. At no
time did we generate any revenues from the content network. Revenues generated
from any content related assets were the result of legacy arrangements in place
prior to our acquisitions of CII and Quickband. As such, we decided to


                                      -14-
<Page>

cease production on our content network and developed a strategic business model
to distribute our video compression technology to IP based clients as well as
those offering video through closed area networks and consumer electronics and
wireless devices. This is the business model under which we are currently
operating.

     In December 2000, our Board of Directors approved management's plan to
significantly reduce costs through certain restructuring initiatives. These
initiatives included the sale or disposal of certain content-related,
non-strategic assets associated with the development of our content network, the
closing of certain offices in San Francisco and Los Angeles and a reduction in
workforce. These initiatives were intended to reduce our operating expenses by
approximately $5.7 million to $6.0 million annually. As of December 31, 2001, we
had achieved those cost savings. As a result of this plan, we recorded
restructuring charges of $293,200 and $2,968,665 for the years ended December
31, 2001 and 2000, respectively. These amounts primarily related to the
write-down of goodwill and certain intangible and fixed assets, lease
termination costs, employment contract termination costs and other miscellaneous
costs.

     Excluded from restructuring charges for the year ended December 31, 2000
were severance and personnel costs of approximately $395,000 related to the
reduction in workforce. These amounts were recorded in their respective expense
categories in the statement of operations. The reduction in workforce amounted
to approximately 52 employees and primarily related to content production,
engineering, sales and marketing and Internet design personnel. The reduction in
workforce was estimated to save us approximately $3.6 million to $3.8 million in
compensation and benefit costs on an annual basis. These amounts were included
in the total costs savings as described above.

     In view of the rapidly evolving nature of our business and our limited
operating history, we have limited experience forecasting our revenues and
operating costs. Therefore, we believe that period-to-period comparisons of
financial results are not necessarily meaningful and should not be relied upon
as an indication of our future performance. To date, we have incurred
substantial costs to create technology products and services. As of December 31,
2001, we had an accumulated deficit of $99.2 million. We will continue to incur
costs to develop, introduce and enhance products and services, build brand
awareness and grow our business. We may also incur significant additional costs
related to technology, marketing or acquisitions of businesses and technologies
to respond to changes in this rapidly developing industry. These costs may not
correspond with any meaningful increases in revenues in the near term, if at
all. As such, these costs may result in negative operating cash flows until such
time as we generate sufficient revenues to offset such costs.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

     This discussion and analysis of our financial condition and results of
operations are based on our consolidated financial statements that have been
prepared under generally accepted accounting principles. The preparation of
financial statements in conformity with generally accepted accounting principles
requires our management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results
could materially differ from those estimates. We have disclosed all significant
accounting policies in note 1 to the consolidated financial statements included
in this Form 10-KSB. The consolidated financial statements and the related notes
thereto should be read in conjunction with the following discussion of our
critical accounting policies. Our critical accounting policies and estimates
are:

         o        Revenue recognition

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



                                      -15-
<Page>

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

     We recognize revenue in accordance with SOP 97-2, "SOFTWARE REVENUE
RECOGNITION" ("SOP 97-2"), as amended by SOP 98-4, "DEFERRAL OF THE EFFECTIVE
DATE OF SOP 97-2, SOFTWARE REVENUE RECOGNITION" and SOP 98-9, "MODIFICATION OF
SOP 97-2 WITH RESPECT TO CERTAIN TRANSACTIONS" ("SOP 98-9"). Under each
arrangement, revenues are recognized when a non-cancelable agreement has been
signed and the customer acknowledges an unconditional obligation to pay, the
products or applications have been delivered, there are no uncertainties
surrounding customer acceptance, the fees are fixed and determinable, and
collection is considered probable. Revenues recognized from multiple-element
software arrangements are allocated to each element of the arrangement based on
the fair values of the elements, such as product licenses, post-contract
customer support, or training. The determination of the fair value is based on
the vendor specific objective evidence available to us. If such evidence of the
fair value of each element of the arrangement does not exist, we defer all
revenue from the arrangement until such time that evidence of the fair value
does exist or until all elements of the arrangement are delivered.

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

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

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

     VALUATION OF GOODWILL AND INTANGIBLE ASSETS. We evaluate our long-lived
assets in accordance with SFAS No. 121, "ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF" ("SFAS No. 121").
Long-lived assets that are not identified with an impaired asset are


                                      -16-
<Page>

reviewed for impairment whenever events or changes in circumstances indicate
that the net carrying value of the asset may not be recoverable. Certain
circumstances include a deterioration of our financial resources, poor economic
trends within the industry, significant changes in our business model or a
significant decline in the demand for video delivery solutions. In such
circumstances, the net carrying value of the asset is compared to the
undiscounted future cash flows of the business segment to which that asset is
attributable. As we operate under one business segment, the net carrying value
of all long-lived assets are compared to our consolidated undiscounted future
cash flows. Impairment losses are measured by the amount in which the net
carrying value of the assets exceed the fair value.

     In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, "GOODWILL AND
OTHER INTANGIBLE ASSETS" ("SFAS No. 142"). SFAS 142 requires goodwill and other
intangible assets to be tested for impairment at least annually, and written off
when impaired, rather than being amortized as previously required. As of
December 31, 2001, we had no recorded goodwill. As of December 31, 2001, our
intangible assets consisted primarily of purchased technology, which we will
continue to amortize over its remaining useful life. The purchased technology
will be fully amortized as of December 31, 2002. Therefore, we believe that the
adoption of SFAS 142 will not have a significant impact on our results of
operations or financial position.

RESULTS OF OPERATIONS

     REVENUES. Revenues for the year ended December 31, 2001 were $2,220,101 as
compared to $1,003,566 for the year ended December 31, 2000. Revenues for the
year ended December 31, 2001 were derived primarily from engineering and
consulting services, encoding services and the sale of software licenses.
Revenues for the year ended December 31, 2000 were primarily derived from
encoding services, distribution of content acquired in connection with the
acquisition of CII and Quickband, the licensing of certain legacy compression
technologies no longer distributed by us and creative design services. The
following table sets forth the allocation of revenues, in terms of percentages,
for the years ended December 31, 2001 and 2000:

<Table>
<Caption>

                                                             2001       2000
                                                             ----       ----
<S>                                                         <C>         <C>
          Engineering and Consulting..............           65%          6%
          Licensing...............................           17%         22%
          Encoding................................           15%         30%
          Content.................................            3%         34%
          Creative Design.........................           --           8%

             Total................................          100%        100%
</Table>

     The shift in our revenue streams is indicative of the shift in our business
model in the second quarter of 2000. For the year ended December 31, 2001,
engineering and consulting revenues, software licenses and encoding services
were the significant revenue streams. Engineering and consulting services and
the sale of software licenses will be the significant future revenue steams as
we continue to provide these services and products to clients who deliver high
quality video to closed area networks, consumer electronic devices, wireless
applications and IP based end users. We believe that the shift from video
delivery over IP-based networks to closed area networks and wireless devices
will continue to reduce the amount of encoding services we provide as we foresee
content providers purchasing our encoding software as opposed to contracting
with us to perform the services in-house.

     For the year ended December 31, 2000, revenues primarily related to
licensing of our legacy compression technologies, encoding services and the sale
of content through distribution channels acquired with CII and Quickband. We no
longer distribute the technologies associated with these licensing agreements
nor do we plan on distributing acquired content in future periods. As such, we
will no longer generate revenues from these items.

                                      -17-
<Page>

     OPERATING EXPENSES

     The Company's operating expenses consist of cost of revenues, research and
development, sales and marketing, general and administrative expenses,
amortization of goodwill and intangible assets, restructuring and impairment
charges and non-cash stock based compensation. Operating expenses for the year
ended December 31, 2001 were $17,599,275 as compared to $45,051,628 for the year
ended December 31, 2000.

     COST OF REVENUES. Cost of revenues includes personnel and consulting
compensation costs, related overhead expenses, bandwidth costs, fees paid for
licensed technology, depreciation costs and the amortization of purchased
technology. Cost of revenues was $2,233,223 for the year ended December 31, 2001
as compared to $4,813,611 for the year ended December 31, 2000. Included in cost
of revenue for the year ended December 31, 2000 were approximately $2,500,000
related to compensation, production costs and content licensing fees
attributable to our broadband content network which ceased operations in the
first quarter of 2000. Similar costs for the year ended December 31, 2001 were
$200,000 and related strictly to the fulfillment of certain content distribution
obligations. We do not intend to incur any future costs associated with the
production or distribution of content. Future costs of revenues will consist
primarily of compensation costs for engineering and consulting personnel,
bandwidth costs, depreciation costs and any licensing fees or royalties paid for
third party software products. We did not have material third party licensing
fees for the periods presented. Amortization of purchased technology was
$627,322 and $627,322 for the years ended December 31, 2001 and 2000,
respectively.

     RESEARCH AND DEVELOPMENT. Research and development expenses primarily
consist of salaries and related expenses and consulting fees for research and
product development personnel associated with the development and production of
our products and services, operating lease costs and depreciation costs.
Research and development expenses for the year ended December 31, 2001 were
$3,856,244 as compared to $8,004,932 for the year ended December 31, 2000. The
period-to-period decrease in absolute dollars is primarily attributed to a
reduction in research and development personnel attributed to our cost savings
initiatives in December 2000. Additionally, we had a reduction in our operating
lease costs resulting from a termination in an operating lease in April 2001 and
a decrease in depreciation costs. Included in research and development costs for
the year ended December 31, 2000 were approximately $1,300,000 related to
software development consulting costs paid for the development and production of
our content network in the first quarter of 2000. We did not incur significant
website development costs in 2001 nor do we intend to incur such costs in the
future. We believe that continued investments in research and development are
necessary to maintain our competitive advantage and we will continue to invest
in such costs as considered necessary.

     SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries and related costs of sales, business development and marketing
personnel, tradeshow costs, marketing and promotional costs incurred to create
brand awareness and public relations expenses. Sales and marketing expenses for
the year ended December 31, 2001 were $2,295,046 as compared to $7,046,601 for
the year ended December 31, 2000. The period-to-period decrease in absolute
dollars is primarily attributable to a decrease in our personnel and a decrease
in our tradeshow costs and marketing efforts. Included in sales and marketing
expenses for the year ended December 31, 2000 were approximately $2.1 million in
traditional media advertising costs incurred to promote our content network. We
did not incur significant traditional media advertising costs in 2001 nor do we
intend to in future periods. We intend to continue to recruit and hire
experienced personnel, as necessary, to sell and market our products and
services.

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


                                      -18-
<Page>

ended December 31, 2001 were $4,692,516 as compared to $8,215,752 for the year
ended December 31, 2000. The period-to-period decrease in absolute dollars is
attributable to decreased personnel, a decrease in legal and professional fees
resulting from a decrease in M&A and financing activity and a general decrease
in unallocated operating overhead attributable to an entity-wide decrease in
personnel. We do not anticipate significant fluctuations in general and
administrative expenses in the foreseeable future.

     AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS. The amortization of
goodwill and other intangible assets primarily relates to our acquisitions CII,
Quickband and Eight Cylinder Studios Inc. Amortization of goodwill and other
intangibles assets excludes the amortization of purchased technology, which is
recorded in cost of revenues. Amortization of goodwill and intangible assets was
$1,154,418 for the year ended December 31, 2001 as compared to $1,677,286 for
the year ended December 31, 2000. The period-to-period decrease in absolute
dollars is the result of the write-down of certain goodwill and intangible
assets related to CII and Quickband as of December 31, 2000 in connection with
our restructuring.

     RESTRUCTURING AND IMPAIRMENT CHARGES. Restructuring and impairment charges
for the year ended December 31, 2001 consisted of $293,200 of restructuring
charges and $2,930,921 of impairment charges. For the year ended December 31,
2000, restructuring charges were $2,968,665. There were no impairment charges in
2000.

     (a) Restructuring Charges

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

     For the year ended December 31, 2000, we recorded a non-cash restructuring
charge of $2,968,665. The non-cash restructuring charge was comprised of the
following: (1) $2,539,134 related to the write-off of goodwill and certain
intangible assets associated with our acquisitions of content-related entities
that are being disposed of (2) $235,759 related to the write-off of certain
fixed assets, consisting primarily of furniture and fixtures and leasehold
improvements, associated with closing offices in San Francisco and Los Angeles
and (3) $193,772 related to the write-off of certain office security deposits
and prepaid assets from which we would not derive any future benefit.

     In 2001, we completed additional restructuring initiatives that were
related to the plan established by the Board of Directors in December 2000.
Although identified as of December 31, 2000, our obligations could not be
measured at that time. As a result, we recorded a non-cash restructuring charge
of $293,200 for the year ended December 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.

     (b) Impairment Charges

     For the year ended December 31, 2001, we recorded an impairment charge of
$470,000, related to our Quickband content library. We acquired the content
library, consisting primarily of licensed content for distribution through DVD
sales and the Internet, in April 2000. The library was originally acquired for
our broadband content network, which ceased operations in the second quarter of
2000. However, we continued to sell the licensed Quickband content, via DVD
sales, through a distribution agreement acquired in connection with the library.
As of December 31, 2000, we terminated all operations related to


                                      -19-
<Page>

our content assets. At that time, we determined that further distribution of the
Quickband content would result in recurring losses. We made the decision to sell
the library and reduced the carrying value of the library to $500,000 at
December 31, 2000. This amount represented the estimated fair value based upon
interest in the library at that time from several potential buyers, which never
materialized. We periodically reviewed the value of the library against market
demand and recorded a subsequent impairment charge of $470,000 in 2001 based
upon the perceived value of the library and its content in the market. There are
no additional charges related to the write-down or sale of the content library.

     For the year ended December 31, 2001, we recorded an impairment charge
$2,344,068 related to our acquisition of Eight Cylinder Studios, Inc. ("8CS") in
November 2000. The impairment charge represented the net carrying value of the
goodwill and intangible assets recorded in connection with the acquisition. 8CS
was a developer of three-dimensional graphic interface software. The intention
of the acquisition was to integrate our video compression technology with a
three-dimensional web browser to provide a PC-based video delivery solution. As
a result of the economic downturn and the reduction in our operational and
financial resources, we determined that additional development of the 8CS
technology was not cost beneficial. Furthermore, we were unsuccessful in our
attempts to sell the technology or create a strategic partnership for further
development. As we reached the one-year anniversary of the 8CS acquisition in
the fourth quarter of 2001, we concluded that the 8CS acquisition would provide
no future benefit or value to us and wrote-off the remaining goodwill and
intangible assets. As of December 31, 2001, there were no material tangible
assets related to 8CS. Furthermore, we would not incur any additional costs
related to 8CS. Additionally, we did not recognize any revenue related to 8CS
since it was acquired.

     For the year ended December 31, 2001, we recorded an impairment charge of
$116,853 related to certain intangible assets from which we would no longer
derive benefit. The write-off reflected the net book value of the assets at the
time they were no longer deemed to have value.

     NON-CASH STOCK BASED COMPENSATION. Non-cash stock based compensation was
$143,707 for the year ended December 31, 2001 as compared to $12,324,781 for the
year ended December 31, 2000. Non-cash stock based compensation for the year
ended December 31, 2001 represents shares of common stock issued to our
Non-Executive Chairman in lieu of cash compensation and options to purchase
shares of Common Stock granted to certain consultants. Non-cash stock based
compensation for the year ended December 31, 2000 is primarily the result of
cashless exercises of stock options granted to employees under our 1999 Amended
and Restated Incentive and Nonqualified Stock Option Plan ("1999 Plan"). As the
1999 Plan was self-administered between January 2000 and May 2000, generally
accepted accounting principles required us to recognize the full fair market
value of all options exercised under the cashless exercise provision during that
period. We have now contracted with a third party to administer all exercises of
stock options. Thus, we do not anticipate non-cash charges from cashless
exercises of stock options in future periods. The non-cash stock based charge
related to these cashless exercises for the year ended December 31, 2000 was
$10,257,883. We also 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 our content network and $766,898 in connection with the acceleration of
certain options granted to employees that were terminated in 2000.

     INTEREST AND OTHER INCOME (EXPENSE), NET. Interest and other income
(expense) was ($1,589,199) for the year ended December 31, 2001 as compared to
$506,693 for the year ended December 31, 2000. Interest and other income
(expense) primarily consists of interest earned on our cash and cash equivalent
balances, interest paid for capital lease obligations and notes payable and the
amortization of debt discounts. The period-to-period decrease is a result of a
decrease in the average balance of our cash and cash equivalents and
approximately $1,640,054 of debt discount amortization related to our
convertible debenture financing. The debt discount was fully amortized as of
December 31, 2001.

                                      -20-
<Page>

     INCOME TAXES. Income taxes are based solely on state and local taxes on
business and investment capital. Income taxes for the year ended December 31,
2001 were $63,678 as compared to $102,089 for the year ended December 31, 2000.
The period-to-period decrease is attributable to decrease in our investment
capital.

     At December 31, 2001, we had approximately 47 full-time employees. We
expect to hire employees as necessary in order to attain our strategic
objectives.

LIQUIDITY AND CAPITAL RESOURCES

         At December 31, 2001, we had cash reserves of $215,726 as compared to
$1,561,495 at December 31, 2000. At February 28, 2002, we had cash reserves
of approximately $380,000.

     Net cash used in operating activities was $10,087,947 and $24,417,074 for
the years ended December 31, 2001 and 2000, respectively. The decrease in net
cash used in operating activities is primarily attributable to a decrease in our
net operating losses, excluding depreciation and amortization, non-cash stock
based charges, impairment and restructuring charges and the amortization of debt
discounts, and a decrease in prepaid and other current assets. These amounts
were offset by an increase in accounts receivable and a decrease in accounts
payable and accrued expenses.

     Net cash used in investing activities was $168,450 and $4,085,065 for the
years ended December 31, 2001 and 2000, respectively. The period-to-period
decrease is primarily attributable to decreases in the purchases of property and
equipment and cash paid for acquisitions, net of cash acquired.

     Net cash provided by financing activities was $8,916,730 and $14,983,922
for the years ended December 31, 2001 and 2000, respectively. The
period-to-period decrease is primarily attributable to a difference in the
amount of net proceeds received from the issuance of Preferred Stock, Common
Stock and convertible debentures and a decrease in proceeds received from the
exercise of stock options.

     We currently have no material commitments for the next 12 months other than
those under our operating lease arrangements. These arrangements consist
primarily of lease arrangements for our office space in New York City, New York
and Albany, New York. The aggregate required payments for the next 12 months
under these arrangements are $392,000. Additionally, we have an operating lease
related to certain engineering equipment that requires an aggregate payment of
approximately $55,000 over the next 12 months. Notwithstanding the above, our
most significant non-contractual operating costs for the next 12 months are
compensation and benefit costs, insurance costs and general overhead costs such
as telephone and utilities. During 2002, we anticipate incurring approximately
$650,000 to $700,000 per month in cash operating costs.

     We have received a report from our Independent Public Accountants
containing an explanatory paragraph stating that our recurring losses raise
doubt about our ability to continue as a going concern. Based on our current
working capital requirements, we will require additional funding during the
next 12 months to finance our current level of operations. Additionally, we
may require additional financing to fund revenue growth, develop new
technologies or acquire strategic assets. Our management is actively pursuing
increases to our net cash flows through increases in revenues and additional
sources of financing beyond our equity lines of credit. Management believes
that a combination of increases to operating cash flow, primarily through
revenue growth, and funds received from our equity lines of credit or
additional financing will generate sufficient cash flow to fund our
operations through 2002. However, there are no assurances that such matters
will be successfully consummated. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Risk Factors That May
Affect Future Operating Results."

     In July 2001 we entered into a Software Development and License Agreement
with Real Networks, Inc. Under our four-year arrangement with Real, we have the
ability to license our VP4 and VP5 software technologies in conjunction with
Real's RealSystem(R) IQ architecture. Our arrangements with Real are exclusive
in certain respects and, as a result, during the term of the agreement we are
restricted from supporting other software platforms, including certain
components of our own software platforms.


                                      -21-
<Page>

Under terms of the agreement, On2 has agreed to develop a software plug-in to
RealPlayer that will allow consumers to play files encoded in On2's proprietary
VP4 format using the RealPlayer. In conjunction with the development of the
codec software, On2 has also agreed to develop a software plug-in to the
RealSystem Server that will enable broadcasters to stream VP4 encoded files. To
date, although we have completed our developmental work, Real and we have not
completed the certification process that is necessary in order for us to market
these integrated software products. Although management believes that such
certification is forthcoming, it is difficult to estimate when we will begin to
generate revenues from sales or licenses of the integrated software products,
and the degree of customer acceptance of the products or the exact pricing of
and margins of the products. To the extent that the development of our own
codecs and software or the arrangements with Real result in a delay or deferral
of operating revenues, we will rely to a greater extent on the financing
provided under our equity lines of credit. Both the current equity line, and its
replacement, limit the amount of funds available thereunder based on the trading
performance of our stock.

     We currently have two equity lines of credit. In December 2000, we entered
into a common stock purchase agreement (the "Initial Stock Purchase Agreement")
with an accredited investor (the "Investor"), for the sale, from time to time,
of our Common Stock. Pursuant to the Initial Stock Purchase Agreement, the
Investor has committed to purchase up to $23,000,000 of our Common Stock over a
36-month period. The Investor is also required to invest an additional
$17,000,000 upon the attainment of certain trading volumes and weighted average
market prices in our Common Stock. However, our ability to procure funds through
the Initial Stock Purchase Agreement is limited depending on the trading volumes
and the weighted average market prices of our Common Stock.

     As a result of the price and volume limitations contained in the Initial
Stock Purchase Agreement, in November 2001 we entered into a second common stock
purchase agreement (the "Second Stock Purchase Agreement") with the Investor,
for sale, from time to time, of our Common Stock. Under the Second Stock
Purchase Agreement, the Investor has committed to purchase an additional
$23,000,000 over a 36-month period, with an additional commitment for
$17,000,000 upon the attainment of certain price and volume thresholds. Under
the Second Stock Purchase Agreement, as long as the volume weighted average
price of our stock for the 30-day period preceding a draw-down notice is at
least $0.30, we may request, and the Investor is obligated to fund, an amount
between (a) a minimum of $300,000 or (b) a maximum equal to the greater of
$500,000 or $300,000 plus 4.5% of the volume weighted average stock price for
the preceding 30-day period multiplied by the total trading volume for the
preceding three-month period. If the volume weighted average price of our stock
is below $0.30 and greater than $0.10, the minimum amount that we may request
and, if requested, that the Investor must provide is ratably reduced from
$300,000 to $100,000. We are obligated to register the shares issued under the
Second Stock Purchase Agreement with the Securities and Exchange Commission. We
are in the process of effecting the registration and are not permitted to issue
shares under the Second Stock Purchase Agreement until the registration
statement is effective. Presently, we may sell a total of 15,500,000 shares of
our common stock under both stock purchase agreeements. We are seeking the
approval of our stockholders to sell an additional 9,000,000 shares under the
Second Stock Purchase Agreement, and cannot sell those 9,000,000 shares under
the Second Stock Purchsae Agreement unless we receive shareholder consent.

     As we cannot predict the price of our common stock, there can be no
assurances that we will be able to request the maximum amount of funds through
our equity lines, if at all.

     We have experienced significant operating losses and negative operating
cash flows to date. Our management's plan to increase our cash flows from
operations relies significantly on increases in revenue generated from our
broadband technology services, products and licenses and decreases in operating
expenses. However, there are no assurances that we will be successful in
effecting such increases. The market for distribution of broadband technology
services is highly competitive. Additionally, our capital


                                      -22-
<Page>

requirements depend on numerous factors, including market acceptance of our
technology and services, research and development costs and the resources we
spend on marketing and selling our products and services. Additionally, we
continue to evaluate investments in complementary businesses, products and
services, some of which may be significant.

     In the event we cannot procure appropriate capital resources, through our
equity lines, net operating cash flows or some combination of both, we may be
required to reduce the development of our products and services or scale back
current operations until funds become available on terms acceptable to us.

IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     In June 2001, the FASB issued SFAS No. 141, "BUSINESS COMBINATIONS" ("SFAS
No. 141"). SFAS No. 141 changes the accounting for business combinations,
requiring that all business combinations be accounted for using the purchase
method and that intangible assets be recognized as assets apart from goodwill if
they arise from contractual or other legal rights, or if they are separable or
capable of being separated from the acquired entity and sold, transferred,
licensed, rented or exchanged. SFAS No. 141 is effective for all business
combinations initiated after June 30, 2001. The adoption of SFAS No. 141 did not
have a material impact on our financial statements.

     In July 2001, the FASB issued SFAS 142, "GOODWILL AND OTHER INTANGIBLES"
("SFAS No. 142"). SFAS No. 142 specifies financial accounting and reporting for
acquired goodwill and other intangible assets. Goodwill and intangible assets
with indefinite useful lives will not be amortized but rather will be tested at
least annually for impairment. SFAS No. 142 is effective for fiscal years
beginning after December 15, 2001. SFAS No. 142 requires that the useful lives
of intangible assets acquired on or before June 30, 2001 be reassessed and that
the remaining amortization periods be adjusted accordingly. SFAS No. 142 also
requires that previously recognized intangible assets deemed to have indefinite
lives are to be tested for impairment. Goodwill recognized on or before June 30,
2001, is to be assigned to one or more reporting units and is to be tested for
impairment as of the beginning of the fiscal year in which SFAS No. 142 is
initially applied in its entirety. As of December 31, 2001, we had no recorded
goodwill or indefinite lived intangibles. As of December 31, 2001, our
intangible assets consisted primarily of purchased technology, which we will
continue to amortize over its remaining useful life through September 2003.
Therefore, we believe that the adoption of SFAS 142 will not have a significant
impact on our results of operations or our financial position.

     In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS No. 143"), which is effective October 1, 2003.
SFAS No. 143 requires, among other things, the accounting and reporting of legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development, or normal operation of a long-lived
asset. We are currently assessing, and have not yet determined, the effect of
SFAS No. 143 on our financial position and results of operations.

     In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," ("SFAS No. 144"). SFAS 144 is
effective October 1, 2002, but may be early adopted. SFAS No. 144 addresses
accounting and reporting of all long-lived assets, except goodwill, that are
either held and used or disposed of through sale or other means. We are
currently assessing the impact of SFAS 144 on our financial position and results
of operations, but believe its adoption will not have a material impact on our
results of operation or financial position.

LIMITATION ON USE OF NET OPERATING LOSS AND OTHER TAX CREDIT CARRY-FORWARDS

                                      -23-
<Page>

         At December 31, 2001, we had available net operating loss
carry-forwards of approximately $93,000,000 for federal income tax purposes. The
net operating loss carry-forwards expire at various dates through 2021.

         Section 382 of the Internal Revenue Code provides that when a
corporation undergoes an "ownership change," the corporation's use of its net
operating losses is limited in each subsequent year. An "ownership change"
occurs when, as of any testing date, the sum of the increases in ownership of
each shareholder that owns five percent or more of the value of a company's
stock as compared to that shareholder's lowest percentage ownership during the
preceding three-year period exceeds fifty percentage points. For purposes of
this rule, certain shareholders who own less than five percent of a company's
stock are aggregated and treated as a single five-percent stockholder.

         The merger of The Duck Corporation with and into a wholly owned
subsidiary of Applied Capital Funding, Inc. may have involved an "ownership
change" and thus we may be unable to use a material portion of our available
federal net operating loss carry-forwards. Furthermore, in the ordinary course
of the Company's future business operations, it could become necessary to issue
shares in conjunction with acquisitions or additional financing, in order to
meet the Company's growth objectives and liquidity constraints. In addition, the
exercise of outstanding warrants and certain options to purchase shares of
Common Stock may require us to issue additional shares of Common Stock. The
issuance of a significant number of shares of Common Stock could result in an
"ownership change." If we were to experience such an "ownership change," we
might not be able to use a substantial amount of our available federal net
operating loss carry-forwards to reduce future taxable income.

         The extent of the actual future use of our federal net operating loss
carry-forwards is subject to inherent uncertainty because it depends on the
amount of otherwise taxable income we may earn. We cannot give any assurance
that we will have sufficient taxable income in future years to use any of our
federal net operating loss carry-forwards before they would otherwise expire.



                                      -24-
<Page>



              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-KSB or in the documents referred to in this 10-KSB. 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.

IF WE DO NOT OBTAIN ADDITIONAL CASH TO OPERATE OUR BUSINESS, WE MAY NOT BE ABLE
TO EXECUTE OUR BUSINESS PLAN AND MAY NOT ACHIEVE PROFITABILITY.

     Since our inception, we have incurred significant losses and negative
cash flow from operations, and as of December 31, 2001, we had an accumulated
deficit of approximately $99.2 million. On February 28, 2002, we had cash
reserves of approximately $380,000. During fiscal 2002, 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 arrangements with Crossover Ventures, Inc., and other financing as
required. There can be no assurance, however, that cash from operations and
the other sources described above will be achieved or will be sufficient for
our operating needs or that we 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
current level of 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.

IF WE CANNOT OPERATE AS GOING CONCERN, OUR STOCK PRICE WILL DECLINE AND YOU MAY
LOSE YOUR ENTIRE INVESTMENT.

     In February, 2002, our auditors expressed doubt about our viability as a
going concern. Our auditors have included an explanatory paragraph in their
report on our financial statements for the year ended December 31, 2001 which
states that, due to recurring losses from operations, there is substantial doubt
about our ability to continue as a going concern. Our financial statements for
the year ended December 31, 2001 do not include any adjustments that might
result from our inability to continue as a going concern. These adjustments
could include additional liabilities and the impairment of certain assets. If we
had adjusted our financial statements for these uncertainties, our operating
results and financial condition would have been harmed.

     If we are not able to generate sufficient capital, either from operations
or through additional financing, to fund our current operations, we may not be
able to continue as a going concern. If we are unable to continue as a going
concern, we may be forced to significantly reduce or cease our current
operations. This could significantly reduce the value of our securities, which
could result in our de-listing from the American Stock Exchange and cause
investment losses for our shareholders.

IF WE CANNOT GENERATE SUFFICIENT POSITIVE CASH FLOWS FROM OUR OPERATIONS, OUR
OPERATING RESULTS AND OUR STOCK PRICE MAY BE HARMED.

     Although we have significantly decreased our operating expenses throughout
2001, we are still incurring approximately $650,000 to $700,000 of monthly
operating costs. We currently do not generate sufficient revenues to offset our
operating costs. Our current sources of financing are two common stock purchase
agreements entered into in December 2000 and November 2001 as well as any
additional financings into which we may enter. However, our current commitments
for capital do not guarantee us enough cash to cover our current level of
operating expenses. Moreover, as we continue to expand our


                                      -25-
<Page>

product and service offerings to maintain our competitive advantage, we may be
required to incur additional costs to hire and retain additional personnel,
license complementary third party technology for use in our proprietary software
or expand both our international and domestic presence to enter new markets.
These costs may significantly increase our current level of monthly operating
expenses. Failure to generate sufficient capital through both our revenue
streams and financings may require us to execute additional corporate
restructurings, scale back our product or service offerings or limit the markets
into which we enter. Any of these items, or a combination thereof, could have a
harmful effect on our operating results and our stock price.

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 or over closed area
networks 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 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 operating results and liquidity would be
harmed.

BECAUSE WE RECENTLY CHANGED OUR STRATEGIC OPERATING MODEL, WE ARE ESSENTIALLY A
NEW COMPANY AND WE MAY BE UNABLE TO MAKE THE CHANGES NECESSARY TO OPERATE AS A
NEW COMPANY AND EXECUTE OUR BUSINESS PLAN.

     From June 1999 to April 2000, we were primarily engaged in the development
of interactive, broadband web channels with television-quality video. In April
2000, we implemented a new business plan focusing on the distribution of our
video compression technology for use over the Internet and in closed area
networks, such as those networks, which include set-top boxes. As a result, our
company is essentially a new venture. 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. If we are not successful, we may not achieve profitability. To implement
our business plan and achieve profitability, we will 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.

     Our ability to generate profits 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 and engineering
                  services for customers wishing to deliver broadband content to
                  end users; and
         o        to control costs.

     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.

WE ANTICIPATE CONTINUED SIGNIFICANT OPERATING LOSSES FOR THE FORESEEABLE FUTURE
AND OUR FINANCIAL RESULTS ARE UNCERTAIN AND ARE DIFFICULT TO PREDICT.

                                      -26-
<Page>

     We have experienced significant operating losses and anticipate continued
losses for the foreseeable future. For the year ended December 31, 2001, we had
a loss from operations of approximately $15.4 million and for the year December
31, 2000, we had a loss from operations of approximately $44.0 million. The
decrease in the loss is primarily attributable to cost-saving measures
implemented by us, but we expect to experience continuing losses for the
foreseeable future. In addition, as a result of our 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 MAY FLUCTUATE FOR REASONS BEYOND OUR CONTROL, WHICH COULD RESULT
IN LOSSES ON YOUR INVESTMENT IN OUR STOCK.

     Fluctuations in the market price of our common stock may adversely affect
our access to capital and financing and our ability to attract and retain
qualified personnel. Historically, our common stock price has fluctuated widely,
with a 52-week range as of March 1, 2002 of $1.04 to $0.29. We expect
fluctuations to continue in the future for a number of reasons, 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.

THE SALE OF SHARES ELIGIBLE FOR FUTURE SALE IN THE OPEN MARKET MAY CAUSE OUR
STOCK PRICE TO DECLINE AND COULD HINDER OUR FUTURE ABILITY TO RAISE CAPITAL.

     Sales of significant amounts of our common stock in the public market in
the future, the perception that sales will occur or the registration of shares
could significantly depress the market price of our common stock or hinder our
future ability to raise capital. We have granted some of the holders of those
securities demand registration rights. We may also issue additional shares in
acquisitions and may grant additional stock options to our employees, officers,
directors and consultants under the stock option plans.

     In addition, we have entered into two common stock purchase agreements with
Crossover Ventures for the sale of up to 15,500,000 shares of common stock. We
may sell those 15,500,000 shares pursuant to either common stock purchase
agreement, based upon formulas and limitations contained in the common stock
purchase agreements. Those shares may be offered for resale pursuant to a prior
registration statement or the registration statement of which this prospectus is
a part.

     In addition, the shares issuable to Crossover Ventures under the common
stock purchase agreements will be issued at a discount to the daily volume
weighted average prices of our common stock. As we sell shares of common stock
to Crossover Ventures under the common stock purchase agreements, 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 agreements as the price of our common
stock decreases, we will be required to issue more shares of our


                                      -27-
<Page>

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 agreements, the more our shares will be diluted and
the more our stock price may decline. The following table represents the number
of shares of common stock we would be required to issue to Crossover Ventures at
price levels ranging from $2.75 to $0.25 (adjusted for contractual discounts)
which approximates the high and low price of our common stock since December
2000. This analysis assumes we request a draw down of $300,000 for a 20-day
period.

<Table>
<Caption>

                        VOLUME WEIGHTED                   NUMBER OF SHARES OF COMMON
                AVERAGE PRICE FOR 20-DAY PERIOD                STOCK ISSUED TO
                -------------------------------               CROSSOVER VENTURES
                                                              ------------------

<S>                                                              <C>
                             $2.75                                 109,091
                             $2.25                                 133,333
                             $1.75                                 171,429
                             $1.25                                 240,000
                             $0.75                                 400,000
                             $0.25                               1,200,000
</Table>


     This may encourage short sales, which could place further downward pressure
on the price of our common stock.

     Additionally, on January 19, 2001, we entered into a Deferred Pricing
Agreement with Travelers, pursuant to which, upon the earlier of (i) a change of
control or (ii) December 31, 2001, we were required to (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. We effected
the exchange of preferred shares and warrants as of December 31, 2001. The newly
issued shares of Series C-IV and C-V Preferred Stock are also subject to certain
anti-dilution provisions. As of January 15, 2002, the Series C-IV and C-V
Preferred Stock were convertible into 2,578,947 and 5,227,553 shares of common
stock, respectively. The Series C-IV and C-V warrants had an exercise price of
$1.90 and $0.9012 and were exercisable into 644,741 and 1,296,463 shares of
common stock, respectively.

BECAUSE WE DEPEND ON THE GROWTH OF BROADBAND INTERNET USE, AS GROWTH FOR
BROADBAND DECLINES, OUR REVENUE MAY DECLINE AND WE MAY NOT ACHIEVE
PROFITABILITY.

     We derive, and expect to continue to derive substantially all of our
revenue from the sale of technology and services used over Internet connections
and closed area networks that require broadband access. If the long-term growth
in demand for broadband access does not grow as we expect, the demand for many
of our products and services may decline or grow more slowly than we expect. As
a result, we may not be able to grow our business, and our revenue and
profitability may decline from current levels.

     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.



                                      -28-
<Page>

IF WE ARE UNABLE TO CONTINUE TO ATTRACT, RETAIN AND MOTIVATE HIGHLY SKILLED
EMPLOYEES, WE MAY NOT BE ABLE TO EXECUTE OUR BUSINESS PLAN.

     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. 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, customers could
experience delays in service, which could, in turn, adversely affect our
operating results and revenue. Additionally, retention of highly skilled
employees may require additional personnel costs or the issuance of certain
equity compensation. These factors would reduce profitability and the price of
our common stock.

MUCH OF OUR TECHNOLOGY RELIES ON OWNED OR LICENSED INTELLECTUAL PROPERTY, AND IF
SUCH RIGHTS ARE NOT PROTECTED FROM THE USE OF OTHERS, INCLUDING POTENTIAL
COMPETITORS, OUR BUSINESS PROSPECTS MAY BE HARMED.

     The failure to protect our intellectual property could seriously harm our
businesses and prospects because we believe that our technology is unique and
that its proprietary nature is critical to our success. If our prospects are
harmed, the price of our common stock may decline because we may be less
attractive to investors. Our efforts to protect our intellectual property
through trademarks, copyrights, patents, trade secret laws, access to
information and confidentiality agreements may not be adequate to protect our
proprietary rights. 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. In addition, effective trademark, copyright and trade secret
protection may not be available in every country in which our products and
services are made available, 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. 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.

     Although we do not currently license material third party technologies the
loss of which could adversely effect our business, we do from time to time
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.

THE BROADBAND VIDEO SERVICES AND TECHNOLOGY MARKETS ARE HIGHLY COMPETITIVE, AND
OUR FAILURE TO COMPETE EFFECTIVELY COULD HURT OUR REVENUE AND REDUCE OUR GROSS
MARGINS AND PROFITABILITY.

     We face significant competition in the market for our technology and
services. In establishing our broadband strategy, we face a number of strong,
firmly entrenched competitors, who are currently providing similar services to
low-bandwidth users and high-bandwidth users and have greater financial,
technical and marketing resources than us. 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


                                      -29-
<Page>

related back-end server systems. Those competitors could cause us to lose
customers and impair our ability to attract new customers.

IF WE FAIL TO KEEP PACE WITH TECHNOLOGICAL ADVANCES IN OUR INDUSTRY OR IF WE
PURSUE TECHNOLOGIES THAT DO NOT BECOME COMMERCIALLY ACCEPTED, CUSTOMERS MAY NOT
BUY OUR PRODUCTS AND OUR REVENUE AND PROFITABILITY MAY DECLINE.

     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 developments 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.

POTENTIAL CUSTOMERS MAY NOT PURCHASE OUR TECHNOLOGY AND SERVICES AT ANTICIPATED
LEVELS IF INTERNET CAPACITY CONSTRAINTS CONTINUE TO 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. Lack of the necessary infrastructure or broadband capacity will limit
our ability to generate revenue from encoding and streaming services. 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.

TECHNICAL AND OPERATING MATTERS MAY IMPAIR THE VALUE OF OUR ARRANGEMENTS WITH
REAL NETWORKS, INC. AND OUR ABILITY TO DISTRIBUTE OUR SOFTWARE.

     As a result of our July 2001 transactions with Real Networks, Inc., we are
obligated to develop plug-ins for our VP4 and VP5 codecs that are to be
integrated into Real's RealSystem(R) architecture. Our arrangements with Real
are exclusive in certain respects and, as a result, during the term of the
agreement, which now ends in July 2005, we are restricted from supporting other
software platforms, including certain components of our own software platforms.
If our products do not interoperate satisfactorily with Real's products, we may
encounter difficulty in selling or licensing our products. Similarly, if Real
does not provide us with technical and other support for the distribution of our
software, our revenues may not achieve expected levels. We are in ongoing
discussions with Real regarding software integration and marketing and the sales
of integrated products.

REGULATORY CHANGES IN THE INTERNET INDUSTRY INVOLVE UNCERTAINTIES, AND THE
RESOLUTION OF THESE UNCERTAINTIES COULD ADVERSELY AFFECT OUR BUSINESS BY RAISING
OUR COSTS OR REDUCING POTENTIAL REVENUES.



                                      -30-
<Page>

     Although we are not currently subject to direct regulation by any
governmental agency other than rules and regulations that apply to businesses
generally and any export and import controls which may apply to our products,
laws and regulations specifically pertaining to the Internet are new and
developing. These laws, when enacted may require us to comply with new
procedures or limit the scope of our technology or services, which could raise
our expenses or reduce our revenues. The developing laws and regulations govern
matters such as online content, intellectual property, user privacy, e-commerce,
information security and taxation. 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. In addition, the
applicability of existing laws to the Internet is uncertain and evolving.

EFFECTS OF ANTI-TAKEOVER PROVISIONS COULD INHIBIT POTENTIAL INVESTORS OR DELAY
OR PREVENT A CHANGE OF CONTROL THAT MAY FAVOR YOU.

     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 AND DO NOT ANTICIPATE PAYING DIVIDENDS IN THE
FORESEEABLE FUTURE.

     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 7.  FINANCIAL STATEMENTS.

     The consolidated financial statements and related financial statement
schedule are included herein and filed as a part of this report. See Index on
page F-1.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE.

         None.


                                      -31-
<Page>


                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
        WITH SECTION 16(A) OF THE EXCHANGE ACT.

     The information required is incorporated by reference from the sections
entitled "Directors and Executive Officers", "The Board of Directors" and
"Compliance with Section 16(a) of the Exchange Act" contained in the Proxy
Statement for the Annual Meeting of Stockholders to be held on April 30, 2002
(the "Proxy Statement"), which is to be filed with the Securities and Exchange
Commission.

ITEM 10. EXECUTIVE COMPENSATION.

     The information required is incorporated by reference from the section
entitled "Executive Compensation" contained in the Proxy Statement, which is to
be filed with the Securities and Exchange Commission.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     The information required is incorporated by reference from the sections
entitled "Security Ownership of Principal Stockholders" and "Security Ownership
of Executive Officers and Directors" contained in the Proxy Statement, which is
to be filed with the Securities and Exchange Commission.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     The information required is incorporated by reference from the section
entitled "Certain Relationships and Related Transactions" contained in the Proxy
Statement, which is to be filed with the Securities and Exchange Commission.

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K.

(a)      The following exhibits are to be filed as part of this report:

EXHIBIT NO.                IDENTIFICATION OF EXHIBIT

3.1 ****   Certificate of Incorporation of the Company
3.2        Bylaws of the Company
4.1 *      Securityholders Agreement, dated as of December 1, 1999, between the
           Company and thirteen securityholders party thereto
4.2 *      Form of Investor Rights Agreement, dated as of December 1, 1999,
           between the Company and each of nine investors
4.3 *      Form of Warrant issued to the investors party to the Investor Rights
           Agreement
4.4 ****   Form of Investors' Rights Agreement between the Company and the
           holders of Series C Preferred Stock, Series C-II Preferred Stock and
           Series C-III Preferred Stock
4.5 ****   Certificate of Designations for the Company's Series C Preferred
           Stock
4.6 ****   Certificate of Designations for the Company's Series C-II Preferred
           Stock
4.7 ****   Certificate of Designations for the Company's Series C-III Preferred
           Stock
4.8 ****   Form of Warrant issued to the holders of Series C Preferred Stock,
           Series C-II Preferred Stockand Series C-III Preferred Stock
4.10*****  Common Stock Purchase Agreement, dated as of July 18, 2001 by and
           between the Company and Real.
4.11*****  Investor Rights Agreement, dated as of July 18, 2001, between Real
           and the Company
10.1 **    Employment Agreement with Douglas McIntyre


                                      -32-
<Page>

10.2 **    Employment Agreement with Mark Meagher
10.3 ***   Common Stock Purchase Agreement, dated as of December 1, 2000,
           between the Company and Crossover Ventures, Inc.
10.4****   Deferred Pricing  Agreement, dated as of January 19, 2001, between
           the Company and The Travelers Indemnity Company
10.5*****  Development Services and License Agreement dated July 18, 2001
           between the Company and RealNetworks, Inc., subject to an Order
           Granting Confidential Treatment under The Securities Exchange Act of
           1933 (CF #11815).
10.6****** Common Stock Purchase Agreement, dated as of November 21, 2001,
           between the Company and Crossover Ventures, Inc.
21         Subsidiaries

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

         *        Filed as an exhibit to the Company's Annual Report on Form
                  10-KSB for the fiscal year ended December 31, 1999 and
                  incorporated by reference herein.

         **       Filed as an exhibit to the Company's Current Report on Form
                  10-QSB for the period ended June 30, 2000 and incorporated by
                  reference herein.

         ***      Filed as an exhibit to the Company Registration on Form S-3,
                  filed with the SEC on December 8, 2000 and incorporated by
                  reference herein.

         ****     Filed as an exhibit to the Company's Annual Report on Form
                  10-KSB for the fiscal year ended December 31, 2000 and
                  incorporated by reference herein

         *****    Filed as an exhibit to the Company's Registration on Form
                  SB-2/A, filed with the SEC on September 13, 2001 and
                  incorporated by reference herein.

         ******   Filed as an exhibit to the Company's Registration on Form
                  SB-2, filed with the SEC on November 29, 2001 and incorporated
                  by reference herein.

(b)      Reports filed on Form 8-K for the three months ended December 31, 2001.

         None.



                                      -33-
<Page>


                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Company has duly caused this report to be
signed on its behalf by the undersigned, thereby duly authorized on March 15,
2002.

                                       ON2 TECHNOLOGIES, INC.

                                       By: /s/ Douglas A. McIntyre
                                       -----------------------------------------
                                       Douglas A. McIntyre
                                       President and Chief Executive Officer

     Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed by the following persons on behalf of the
Company and in the capacities and on the dates indicated.

<Table>
<Caption>

                SIGNATURE                                  TITLE                                   DATE
                ---------                                  -----                                   ----
<S>                                         <C>                                               <C>
         /s/ Douglas A. Mcintyre            President, Chief Executive Officer
         -----------------------                       and Director                           March 15, 2002
          (Douglas A. McIntyre)


          /s/ Daniel B. Miller               Founder, Chief Technology Officer
          --------------------                         and Director                           March 15, 2002
           (Daniel B. Miller)


           /s/ Mark J. Meagher                   Executive Vice President,
           -------------------              Chief Financial Officer (Principal                March 15, 2002
            (Mark J. Meagher)                 Financial Officer) and Director

      /s/ Christopher J. Acquaviva            Vice President, Controller and
      ----------------------------             Principal Accounting Officer                   March 15, 2002
       (Christopher J. Acquaviva)


           /s/ Strauss Zelnick              Director and Non-Executive Chairman
          ---------------------                        of the Board                           March 15, 2002
            (Strauss Zelnick)


          /s/ Stephen D. Klein
          ---------------------
           (Stephen D. Klein)                            Director                             March 15, 2002


          /s/ William A. Newman
          ---------------------
           (William A. Newman)                           Director                             March 15, 2002



                                      -34-
<Page>


           /s/ Jack L. Rivkin
          ---------------------
            (Jack L. Rivkin)                             Director                             March 15, 2002


           /s/ Thomas Weigman
          --------------------
            (Thomas Weigman)                             Director                             March 15, 2002
</Table>





                                      -35-
<Page>




                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                            Page
                                                                            ----

Report of Independent Public Accountants...............................    F-2

Consolidated Balance Sheets as of December 31, 2001 and 2000...........    F-3
Consolidated Statements of Operations for the
   years ended December 31, 2001 and 2000..............................    F-4
Consolidated Statements of Stockholders' Equity
   for the years ended December 31, 2001 and 2000......................    F-5
Consolidated Statements of Cash Flows for the
   years ended December 31, 2001 and 2000..............................    F-8

Notes to Consolidated Financial Statements.............................   F-10

Report of Independent Public Accountants...............................    S-1
Schedule II - Valuation and Qualifying Accounts........................    S-2







                                      F-1
<Page>



                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To On2 Technologies, Inc.:


We have audited the accompanying consolidated balance sheets of On2
Technologies, Inc. (a Delaware corporation) and subsidiaries as of December 31,
2001 and 2000 and the related consolidated statements of operations,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of On2 Technologies, Inc. and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from operations that raise substantial doubt about its ability to continue as a
going concern. Management's plans in regard to this matter are also described in
Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

                                                     /s/  Arthur Andersen LLP

New York, New York
February 21, 2002



                                      F-2
<Page>


                             ON2 TECHNOLOGIES, INC.
                           CONSOLIDATED BALANCE SHEETS

<Table>
<Caption>

                                                                          December 31,
                                                               -----------------------------
                                                                    2001            2000
                                                               ------------    -------------
<S>                                                            <C>             <C>

                                     ASSETS

Current assets:
  Cash .....................................................   $    215,726    $  1,561,495
  Accounts receivable, less allowance for doubtful
    accounts of $135,663 and $25,000 as of December 31, ....
    2001 and 2000, respectively ............................        678,920         392,943
  Prepaid and other current assets .........................        222,950         566,540

     Total current assets ..................................      1,117,596       2,520,978

Property and equipment, net ................................      1,406,143       2,522,188
Goodwill and other intangible assets,
  net ......................................................      1,120,843       5,747,842
Other assets ...............................................        282,080         419,049
                                                               ------------    ------------
     Total assets ..........................................   $  3,926,662    $ 11,210,057
                                                               ============    ============

                   LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable .........................................   $    498,670    $    883,741
  Accrued expenses .........................................        489,307       1,394,881
  Deferred revenue .........................................         35,047          72,604
  Notes payable ............................................             --         251,311
  Capital lease obligations ................................             --          26,100
                                                               ------------    ------------
     Total current liabilities .............................      1,023,024       2,628,637

Convertible debentures .....................................      2,000,000              --

Commitments and contingencies

Stockholders' equity:
  Preferred stock, $0.01 par value; 20,000,000 shares
     authorized; 12,928,630 and 5,052,770 shares issued and
     outstanding at December 31, 2001 and 2000,
     respectively ..........................................        129,286          50,528
  Common stock, $0.01 par value; 100,000,000 shares
     authorized; 38,565,039 and 27,684,171 shares issued and
     outstanding at December 31, 2001 and 2000,
     respectively ..........................................        385,650         276,842
  Additional paid-in capital................................     99,548,997      86,293,786
  Deferred compensation ....................................             --         (47,410)
  Accumulated other comprehensive loss .....................        (10,068)         (3,966)
  Accumulated deficit ......................................    (99,150,227)    (77,988,360)
                                                               ------------    ------------
    Total stockholders' equity .............................        903,638       8,581,420
                                                               ------------    ------------
    Total liabilities and stockholders' equity .............   $  3,926,662    $ 11,210,057
                                                               ============    ============
</Table>

           SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                      F-3
<Page>

                             ON2 TECHNOLOGIES, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<Table>
<Caption>

                                                                Year Ended December 31,
                                                            -----------------------------
                                                                 2001            2000
                                                            ------------    -------------
<S>                                                         <C>             <C>
Revenues ................................................   $  2,220,101    $  1,003,566

Operating expenses:
     Cost of revenues (1) ...............................      2,233,223       4,813,611
     Research and development (2) .......................      3,856,244       8,004,932
     Sales and marketing (3) ............................      2,295,046       7,046,601
     General and administrative (4) .....................      4,692,516       8,215,752
     Amortization of goodwill and other intangible assets      1,154,418       1,677,286
     Restructuring and impairment charges ...............      3,224,121       2,968,665
     Non-cash stock based compensation ..................        143,707      12,324,781
                                                            ------------    ------------

Total operating expenses ................................     17,599,275      45,051,628
                                                            ------------    ------------

Loss from operations ....................................    (15,379,174)    (44,048,062)

Interest and other income (expense), net ................     (1,589,199)        506,693
                                                            ------------    ------------

Loss before provision for income taxes ..................    (16,968,373)    (43,541,369)

Provision for income taxes ..............................         63,678         102,089
                                                            ------------    ------------

Net loss ................................................    (17,032,051)    (43,643,458)

Non-cash convertible preferred stock dividend ...........      4,129,816      18,987,986

Net loss attributable to common stockholders ............   $(21,161,867)   $(62,631,444)
                                                            ============    ============
Basic and diluted net loss per common share .............   $      (0.64)   $      (2.40)
                                                            ============    ============
Weighted average basic and diluted common
  shares outstanding ....................................     33,120,166      26,067,668
                                                            ============    ============
</Table>

(1)  Excluding $-0- and $632,880 of non-cash stock based compensation for the
     years ended December 31, 2001 and 2000, respectively.

(2)  Excluding $-0- and $4,857,811 of non-cash stock based compensation for the
     years ended December 31, 2001 and 2000, respectively.

(3)  Excluding $9,428 and $4,714,376 of non-cash stock based compensation for
     the years ended December 31, 2001 and 2000, respectively.

(4)  Excluding $134,279 and $2,119,714 of non-cash stock based compensation for
     the years ended December 31, 2001 and 2000, respectively.

           SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                      F-4
<Page>


                             ON2 TECHNOLOGIES, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<Table>
<Caption>


                           Convertible Preferred                               Additional
                                   Stock                Common Stock             Paid-In
                            Shares       Amount     Shares         Amount        Capital
                            ------       ------     ------         ------        -------
<S>                         <C>         <C>         <C>          <C>          <C>
Balance at December 31,
  1999....................  2,000,000   $   20,000  24,286,596   $  242,866   $  35,457,250

Net loss..................
Foreign currency
  translation adjustment..

  Comprehensive loss......

Non-cash stock based
  compensation............                             542,876        5,429      12,319,352
Issuance of common stock
  in connection with the
  exercise of stock
  options.................                             369,722        3,697         490,746
Issuance of warrants to
  purchase common
  stock...................                                                          112,646
Amortization of deferred
  compensation............
Conversion of Series A
  convertible preferred
  stock to common
  stock................... (1,600,000)     (16,000)  1,600,000       16,000
Issuance of Series B
  convertible preferred
  stock in connection with
  an acquisition..........     34,100          341                                  468,106
Issuance of common stock in
  connection with
  acquisitions............                             884,977        8,850       3,538,062
Issuance of Series C
  convertible preferred
  stock and warrants, net
  of expenses.............  1,644,304       16,443                                9,974,382
Issuance of Series C-II
  convertible preferred
  stock and warrants,
  net of expenses.........    924,527        9,245                                2,440,755
Issuance of Series C-III
  convertible preferred
  stock and warrants,
  net of expenses.........  2,049,839       20,499                                2,529,501

<Caption>


                                               Other                              Total
                               Deferred    Comprehensive     Accumulated       Stockholders'
                             Compensation      Loss            Deficit            Equity
                             ------------      ----            -------            ------
<S>                          <C>            <C>             <C>              <C>
Balance at December 31,
  1999....................   $        --    $      (259)    $   (15,356,916) $    20,362,941

Net loss..................                                      (43,643,458)     (43,643,458)
Foreign currency
  translation adjustment..                       (3,707)                              (3,707)
                                                                             ---------------
  Comprehensive loss......                                                       (43,647,156)
                                                                             ---------------
Non-cash stock based
  compensation............                                                        12,324,781
Issuance of common stock
  in connection with the
  exercise of stock
  options.................                                                           494,443
Issuance of warrants to
  purchase common
  stock...................      (112,646)                                                 --
Amortization of deferred
  compensation............        65,236                                              65,236
Conversion of Series A
  convertible preferred
  stock to common
  stock...................                                                                --
Issuance of Series B
  convertible preferred
  stock in connection with
  an acquisition..........                                                           468,447
Issuance of common stock in
  connection with
  acquisitions............                                                         3,546,912
Issuance of Series C
  convertible preferred
  stock and warrants, net
  of expenses.............                                                         9,990,825
Issuance of Series C-II
  convertible preferred
  stock and warrants,
  net of expenses.........                                                         2,450,000
Issuance of Series C-III
  convertible preferred
  stock and warrants,
  net of expenses.........                                                         2,550,000


                                      F-5
<Page>

Transaction costs paid in
  connection with equity
  credit line..............                                                         (25,000)
Non-cash convertible
  preferred stock
  dividends................                                                      18,987,986
                           ------------------------------------------------------------------
Balance at December 31,
  2000........              5,052,770   $   50,528  27,684,171    $ 276,842   $  86,293,786

Net loss..................
Foreign currency
  translation adjustment..

  Comprehensive loss......

Non-cash stock based
  compensation............                             199,732        1,997         141,710
Issuance of common
  stock in connection
  with the exercise of
  stock options...........                              16,500          165          13,335
Amortization of deferred
  compensation............
Adjustment for cancellation
  of warrant..............                                                           (2,840)
Cancellation of Series C
  convertible
  preferred stock......... (1,644,304)     (16,443)                                  16,443
Issuance Series C-IV and
  Series C-V convertible
  preferred stock to
  replace Series C
  convertible
  preferred  stock........  5,948,735       59,487                                  (59,487)
Issuance of Series C-VI
  convertible preferred
  stock and warrants, net
  of expenses.............  3,571,429       35,714                                1,964,286
Issuance of common stock
  in connection with the
  equity line of credit...                           8,475,521       84,755       4,105,885
Issuance of common stock in
  connection with the
  employee stock purchase
  plan....................                              41,073          411          12,158
Issuance of common stock to
  settle certain
  compensation and
  lease arrangements......                             262,328        2,623         324,208
Common stock issued in
connection with private
placement.................                           1,785,714       17,857         982,143


Transaction costs paid in
  connection with equity
  credit line..............                                                        (25,000)
Non-cash convertible
  preferred stock
  dividends................                                                    (18,987,986)
                           ---------------------------------------------------------------
Balance at December 31,
  2000........             $   (47,410)  $     (3,966)     $  (77,988,360) $     8,581,420

Net loss..................                                    (17,032,051)     (17,032,051)
Foreign currency
  translation adjustment..                     (6,102)                              (6,102)
                                                                           ---------------
  Comprehensive loss......                                                     (17,038,153)
                                                                           ---------------
Non-cash stock based
  compensation............                                                         143,707
Issuance of common
  stock in connection
  with the exercise of
  stock options...........                                                          13,500
Amortization of deferred
  compensation............      44,570                                              44,570
Adjustment for cancellation
  of warrant..............       2,840                                                  --
Cancellation of Series C
  convertible
  preferred stock.........                                                              --
Issuance Series C-IV and
  Series C-V convertible
  preferred stock to
  replace Series C
  convertible
  preferred  stock........                                                              --
Issuance of Series C-VI
  convertible preferred
  stock and warrants, net
  of expenses.............                                                       2,000,000
Issuance of common stock
  in connection with the
  equity line of credit...                                                       4,190,640
Issuance of common stock in
  connection with the
  employee stock purchase
  plan....................                                                          12,569
Issuance of common stock to
  settle certain
  compensation and
  lease arrangements......                                                         326,831
Common stock issued in
connection with private
placement.................                                                       1,000,000

                                      F-6
<Page>

Transaction costs paid in
  connection with equity
  credit line.............                             100,000        1,000         (12,500)
Warrants issued and
  discount recognized in
  connection with
  issuance of convertible
  debentures..............                                                        1,640,054
Non-cash convertible
  preferred stock
  dividends...............                                                        4,129,816
                          -------------------------------------------------------------------
Balance at
  December 31, 2001....... 12,928,630   $  129,286  38,565,039  $   385,650   $  99,548,997
                          ===================================================================

Transaction costs paid in
  connection with equity
  credit line.............                                                         (11,500)
Warrants issued and
  discount recognized in
  connection with
  issuance of convertible
  debentures..............                                                       1,640,054
Non-cash convertible
  preferred stock
  dividends...............                                     (4,129,816)              --
                          ----------------------------------------------------------------
Balance at
  December 31, 2001....... $   (10,068) $          --        $(99,150,227)    $    903,638
                          ================================================================

</Table>

           SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                      F-7
<Page>



                             ON2 TECHNOLOGIES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<Table>
<Caption>

                                                                                     Year Ended December 31,
                                                                                  -----------------------------
                                                                                       2001           2000
                                                                                  ------------    -------------
<S>                                                                               <C>             <C>
Cash flows from operating activities:

  Net loss ....................................................................   $(17,032,051)   $(43,643,458)
    Adjustments to reconcile net loss to net cash used in operating activities:

     Non-cash stock based charges .............................................        143,707      12,324,781
     Restructuring and impairment .............................................      3,224,121       2,968,665
     charges
     Depreciation and .........................................................      2,986,943       3,588,905
     amortization
     Deferred compensation ....................................................         44,570          65,236
       Reserve for bad debts ..................................................        125,396          25,000
     Loss on sale of assets ...................................................             --          16,904
     Amortization of debt discount ............................................      1,640,054              --
     Impairment of equity investments .........................................        125,000              --
   Changes in operating assets and liabilities, net of effect of acquisitions:

     Accounts receivable ......................................................       (446,374)         (5,386)
     Prepaid and other current assets .........................................        228,590        (240,713)
     Other assets .............................................................        137,895         (88,933)
     Accounts payable and accrued expenses ....................................     (1,240,809)        499,321
     Deferred revenue .........................................................        (37,557)         72,604
                                                                                  ------------    ------------
       Net cash used in operating activities ..................................    (10,100,515)    (24,417,074)
                                                                                  ------------    ------------
Cash flows from investing activities:

  Purchases of property and equipment .........................................       (142,676)     (2,392,271)
  Proceeds from the sale of fixed assets ......................................         25,000              --
  Purchase of long-term equity investment .....................................         (8,359)             --
  Cash paid for acquisitions, net of cash acquired ............................        (42,415)     (1,692,794)
                                                                                  ------------    ------------
       Net cash used in investing activities ..................................       (168,450)     (4,085,065)
                                                                                  ------------    ------------

Cash flows from financing activities:

  Principal payments on capital lease obligations .............................        (26,100)        (47,403)
  Principal payments on notes payable to stockholders .........................             --        (355,000)
  Principal payments on notes payable .........................................       (251,311)        (73,943)
  Financing costs .............................................................        (10,000)        (25,000)
  Proceeds from the issuance of Series C-VI Preferred Stock, net ..............      2,000,000              --
  Proceeds from the sale of common stock, net .................................      5,203,209              --
  Proceeds from the issuance of convertible debentures ........................      2,000,000
  Proceeds from the issuance of Series C Preferred Stock, net .................             --       9,990,825
  Proceeds from the issuance of Series C-II Preferred Stock, net ..............             --       2,450,000
  Proceeds from the issuance of Series C-III Preferred Stock, net .............             --       2,550,000
  Proceeds from exercise of common stock options and warrants .................         13,500         494,443
                                                                                  ------------    ------------
       Net cash provided by financing activities ..............................      8,929,298      14,983,922
                                                                                  ------------    ------------
Net change in cash and cash equivalents .......................................     (1,339,667)    (13,518,217)

Effect of exchange rate changes on cash and cash equivalents ..................         (6,102)         (3,707)

Cash and cash equivalents, beginning of period ................................      1,561,495      15,083,419
                                                                                  ------------    ------------
Cash and cash equivalents, end of period ......................................   $    215,726    $  1,561,495
                                                                                  ============    ============
</Table>


                                      F-8
<Page>


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

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND NON-CASH TRANSACTIONS:

<Table>
<Caption>

                                                                 Year Ended December 31,
                                                                ------------------------
                                                                    2001        2000
                                                                ----------   ----------
<S>                                                             <C>          <C>
Cash paid during the period for:
   Interest .................................................   $    6,664   $   32,395
                                                                ==========   ==========
   Taxes ....................................................   $   54,507   $   82,027
                                                                ==========   ==========
Non-cash transactions:
   Issuance of common stock to settle contractual obligations   $   33,631   $       --
                                                                ==========   ==========
   Shares issued in connection with
   common stock purchase agreement ..........................   $   33,000   $       --
                                                                ==========   ==========
   Acquisition of fixed assets under capital leases .........   $       --   $   72,750
                                                                ==========   ==========
   Issuance of Series B Preferred Stock in connection
     with acquisitions ......................................   $       --   $  468,447
                                                                ==========   ==========
   Issuance of common stock in connection with acquisitions .   $       --   $3,546,912
                                                                ==========   ==========
</Table>


           SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                      F-9
<Page>


                             ON2 TECHNOLOGIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2001 AND 2000

(1)  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     (A) DESCRIPTION OF THE BUSINESS

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

     The Company's consolidated financial statements have been prepared assuming
that it will continue as a going concern. The Company has incurred recurring
operating losses and negative operating cash flows since its inception and,
based on its current working capital requirements, will require additional
funding during the next 12 months to finance its current level of operations.
Additionally, the Company may require additional financing to fund revenue
growth, develop new technologies or acquire strategic assets. These factors
raise doubt about the Company's ability to continue as a going concern. The
Company is actively pursuing increases to its net cash flows through increases
in revenues and additional sources of financing beyond its equity lines of
credit (see note 9). The Company believes that a combination of increases to
operating cash flow, primarily through revenue growth, and funds received from
its equity lines of credit or additional financing will generate sufficient cash
flow to fund its operations through 2002. The Company's plan to increase cash
flows from operations relies significantly on increases in revenue generated
from its compression technology services, products and licenses. However, there
are no assurances that such matters will be successfully consummated. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Risk Factors That May Affect Future Operating Results."

     (B)  BASIS OF PRESENTATION

     The consolidated financial statements include the accounts of the Company
and its wholly owned-subsidiaries from their respective dates of acquisition.
All intercompany accounts and transactions have been eliminated in
consolidation.

     (C)  PROPERTY AND EQUIPMENT

     Property and equipment is stated at cost, net of accumulated depreciation
and amortization. Property and equipment is depreciated using the straight-line
method over the estimated useful lives of the related assets, generally three to
five years for equipment and software and five to seven years for furniture and
fixtures. Leasehold improvements are amortized using the straight-line method
over the shorter of the lease term or the estimated useful life of the asset.
Equipment under capital leases is stated at the present value of the minimum
lease payments and is depreciated using the straight-line method over the
estimated useful life of the asset.

     (D)  GOODWILL AND OTHER INTANGIBLE ASSETS

     Goodwill and other intangible assets consist of goodwill, purchased
technology and certain other intangible assets that are stated at cost less
accumulated amortization. Goodwill and other intangible assets are amortized
using the straight-line method over the expected period of benefit of the
respective asset, ranging from 3 to 15 years. In June 2001, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 142, "GOODWILL AND OTHER INTANGIBLE ASSETS" ("SFAS No.
142"). SFAS 142 requires goodwill and other intangible assets to be tested for
impairment at least annually, and written off when impaired, rather than being
amortized as previously required. As of December 31, 2001, the Company had no
recorded goodwill or indefinite lived intangibles. As of December 31, 2001, the
Company's intangible assets consisted primarily of purchased technology, which
the Company will continue to amortize over its remaining useful life through
September 2003. The Company anticipates recording amortization of purchased
technology of approximately $627,322 and $463,521 for the years ended December
31, 2002 and 2003, respectively. However, the Company will continually evaluate
its purchased technology upon significant changes in certain circumstances that
may result in an impairment of the net carrying value. Therefore, the Company
believes that the adoption of SFAS 142 will not have a significant impact on its
results of operations or financial position.


                                      F-10
<Page>

     (E)  IMPAIRMENT OF LONG-LIVED ASSETS

     The Company evaluates its long-lived assets in accordance with SFAS No.
121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF" ("SFAS No. 121"). Long-lived assets that are not
identified with an impaired asset are reviewed for impairment whenever events or
changes in circumstances indicate that the net carrying value of the asset may
not be recoverable. In such circumstances, the net carrying value of the asset
is compared to the undiscounted future cash flows of the business segment to
which that asset is attributable. As the Company operates under one business
segment, the net carrying value of all long-lived assets are compared to the
Company's consolidated undiscounted future cash flows. Impairment losses are
measured by the amount in which the net carrying value of the assets exceed the
fair value. In October 2001, the FASB issued SFAS No. 144, "ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS," ("SFAS No. 144") which supersedes
SFAS No. 121. SFAS No. 144 addresses the financial accounting and reporting of
all long-lived assets, except goodwill, that are either held and used or
disposed of through sale or other means. The Company will adopt SFAS 144
beginning in its fiscal year 2002, but does not expect its adoption to have a
material impact on its operating results or its financial position.

     (F)  FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK

     The fair values of cash and cash equivalents, accounts receivables and
accounts payables approximate their carrying values based on the short-term
maturities of these financial instruments.

     The Company performs ongoing credit evaluations of its customers' financial
condition and establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of customers, historical trends and other
information; to date, such losses have been within management's expectations.

     (G)  INCOME TAXES

     The Company accounts for income taxes using the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the consolidated
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases for operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the
consolidated results of operations in the period that the tax change occurs.
Valuation allowances are established, when necessary, to reduce deferred tax
assets to the amount expected to be realized.

     (H)  REVENUE RECOGNITION

     The Company primarily generates revenue from the sale of its software
licenses and its professional service offerings.

     The Company's revenue recognition policies are in accordance with SOP 97-2,
"SOFTWARE REVENUE RECOGNITION" ("SOP 97-2"), as amended by SOP 98-4, "DEFERRAL
OF THE EFFECTIVE DATE OF SOP 97-2, SOFTWARE REVENUE RECOGNITION" and SOP 98-9,
"MODIFICATION OF SOP 97-2 WITH RESPECT TO CERTAIN TRANSACTIONS" ("SOP 98-9").
Under each arrangement, revenues are recognized when a non-cancelable agreement
has been signed and the customer acknowledges an unconditional obligation to
pay, the products or applications have been delivered, there are no
uncertainties surrounding customer acceptance, the fees are fixed and
determinable, and collection is considered probable. Revenues recognized from
multiple-element software arrangements are allocated to each element of the
arrangement based on the fair values of the elements, such as product licenses,
post-contract customer support, or training. The determination of the fair value
is based on the vendor specific objective evidence available to the


                                      F-11
<Page>

Company. If such evidence of the fair value of each element of the arrangement
does not exist, all revenue from the arrangement is deferred until such time
that evidence of the fair value does exist or until all elements of the
arrangement are delivered.

Software Licenses

     The Company's software licensing arrangements typically consist of two
elements: a software license and post-contract customer support ("PCS"). The
Company recognizes license revenues based on the residual method after all
elements other than PCS have been delivered as prescribed by SOP 98-9. The
Company recognizes PCS revenues over the term of the maintenance contract or on
a "per usage" basis, whichever is stated in the contract. In accordance with SOP
97-2, vendor specific objective evidence of the fair value of PCS is determined
by reference to the price the customer will have to pay for PCS when it is sold
separately (i.e. the renewal rate). Each license agreement offers additional PCS
at a stated price. Revenue is recognized on a per copy basis for licensed
software when each copy of the licensed software purchased by the customer or
reseller is delivered. The Company does not allow returns, exchanges or price
protection for sales to its customers or its resellers nor does it allow its
resellers to purchase software licenses under consignment arrangements.

Professional Services

     Professional services consist of customized engineering and consulting
services and encoding services.

     When customized engineering and consulting services are sold together with
a software license, the arrangement typically requires customization and
integration of the software into a third party hardware platform. In these
arrangements, the Company requires the customer to pay a fixed fee for the
engineering and consulting services and a licensing fee in the form of a
per-unit royalty. The Company accounts for its engineering and consulting
arrangements in accordance with SOP 81-1, "ACCOUNTING FOR PERFORMANCE OF
CONSTRUCTION TYPE AND CERTAIN PRODUCTION TYPE CONTRACTS," ("SOP 81-1"). When
reliable estimates are available for the costs and efforts necessary to complete
the engineering or consulting services and those services do not include
contractual milestones or other acceptance criteria, the Company accounts for
the arrangements under the percentage of completion contract method pursuant to
SOP 81-1 based upon input measures such as hours. When such estimates are not
available, the completed contract method is utilized.

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

     (I)  COST OF REVENUES

     Cost of revenues primarily includes compensation costs for engineering and
consulting personnel, bandwidth costs, depreciation costs, licensing fees or
royalties paid for third party software products and the amortization of
purchased technology.

     (J)  SOFTWARE DEVELOPMENT COSTS

     The Company recognizes costs associated with new software or product
development and/or significant enhancements to current software or products in
accordance with SFAS No. 86, "SOFTWARE DEVELOPMENT COSTS" ("SFAS 86"). Under
SFAS 86, these costs are expensed until technological feasibility has been
established, at which time any additional costs are capitalized. The Company
essentially has completed its software development concurrently with
technological feasibility and, accordingly, has not capitalized any software
development costs to date.

                                      F-12
<Page>

     Software developed for internal use is recognized in accordance with SOP
98-1, "ACCOUNTING FOR THE COST OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR
INTERNAL USE" ("SOP 98-1"). SOP 98-1 requires all costs related to the
development of internal use software other than those incurred during the
application development stage to be expensed as incurred. It also provides
guidance on the capitalization of costs incurred during the application
development stage for computer software developed or obtained for internal use.
SOP 98-1 has not had a material impact on the Company's operating results or
financial position.

     (K)  STOCK-BASED COMPENSATION

     The Company follows the provisions of SFAS No. 123, "ACCOUNTING FOR
STOCK-BASED COMPENSATION" ("SFAS 123"), which permits entities to recognize as
expense over the vesting period the fair value of all stock-based awards on the
date of grant. Alternatively, SFAS 123 allows entities to continue to apply the
provisions of APB Opinion No. 25 ("APB 25") and provide pro forma net earnings
disclosures for employee stock option grants as if the fair-value-based method
defined in SFAS 123 had been applied. The Company has elected to continue to
apply the provisions of APB Opinion 25 and provide the pro forma disclosure
provisions of SFAS 123.

     (L)  NET LOSS PER COMMON SHARE

     The Company computes net loss per common share in accordance with Statement
of Financial Accounting Standard No. 128, "COMPUTATION OF EARNINGS PER SHARE,"
("SFAS 128"). In accordance with SFAS 128, basic earnings per share is computed
using the weighted average number of common shares outstanding during the
period. Common equivalent shares consist of the incremental common shares
issuable upon the conversion of the preferred stock and convertible debentures
(using the if-converted method) and shares issuable upon the exercise of stock
options and warrants (using the Treasury Stock method); common equivalent shares
are excluded from the calculation if their effect is anti-dilutive.

     Diluted loss per share has not been presented separately, as the
convertible preferred stock, convertible debentures and the outstanding stock
options and warrants are anti-dilutive for each of the periods presented.

     (M)  USE OF ESTIMATES

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.

      (N)  SEGMENT REPORTING

     The Company adopted the provisions of SFAS No. 131, "DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION" ("SFAS 131"). The Company
operates in one business segment, the sale of video compression software and
related services, for which it receives revenues from its customers. The
Company's Chief Operating Decision Maker is the Company's Chief Executive
Officer ("CEO"), who receives consolidated financial information for purposes of
evaluating the Company's operational and financial performance. The CEO does not
receive discrete financial information regarding the operating results of the
Company's individual products and services.

     Our customers typically represent large digital communication and media
companies, entertainment companies, telecommunication companies and other global
corporations that operate within the digital media industry. For the year ended
December 31, 2001, four customers accounted for 26%, 23%, 13% and 13% of the
Company's total revenues. For the year ended December 31, 2000, four customers


                                      F-13
<Page>

accounted for 19%, 15%, 10% and 10% of the Company's total revenues. As of
December 31, 2001, three customers accounted for 42%, 31% and 21% of total
accounts receivable. As of December 31, 2000, four customers accounted for 32%,
15%, 13% and 10% of total accounts receivable.

     For the year ended December 31, 2001, foreign customers accounted for
approximately 67% of total revenue. These customers are primarily located in
Asia. For the year ended December 31, 2000, the Company did not generate revenue
from foreign customers.

     Additionally, all of the Company's assets and operations have been and are
currently based within in the United States, except for two research and
development employees located in the United Kingdom. There was no significant
revenue generate from the United Kingdom operations for the years ended December
31, 2001 and 2000.

     (O)  RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     In July 2001, the FASB issued SFAS No. 141, "BUSINESS COMBINATIONS" ("SFAS
No. 141"). SFAS No. 141 changes the accounting for business combinations
initiated after June 30, 2001, requiring that all business combinations be
accounted for using the purchase method and that intangible assets be recognized
as assets apart from goodwill if they arise from contractual or other legal
rights, or if they are separable or capable of being separated from the acquired
entity and sold, transferred, licensed, rented or exchanged. SFAS No. 141 is
effective for all business combinations initiated after June 30, 2001. The
adoption of SFAS No. 141 did not have a material impact on the Company's
financial statements.

     In July 2001, the FASB issued SFAS 142, "GOODWILL AND OTHER INTANGIBLES"
("SFAS No. 142"). SFAS No. 142 specifies the financial accounting and reporting
for acquired goodwill and other intangible assets. Goodwill and intangible
assets with indefinite useful lives will not be amortized but rather will be
tested at least annually for impairment. SFAS No. 142 is effective for fiscal
years beginning after December 15, 2001. SFAS No. 142 requires that the useful
lives of intangible assets acquired on or before June 30, 2001 be reassessed and
the remaining amortization periods adjusted accordingly. Previously recognized
intangible assets deemed to have indefinite lives shall be tested for
impairment. Goodwill recognized on or before June 30, 2001, shall be assigned to
one or more reporting units and shall be tested for impairment as of the
beginning of the fiscal year in which SFAS No. 142 is initially applied in its
entirety. As of December 31, 2001, the Company had no recorded goodwill or
indefinite lived intangibles. As of December 31, 2001, the Company's intangible
assets consisted primarily purchased technology, which the Company will continue
to amortize over its remaining useful life through September 2003. The Company
anticipates recording amortization of purchased technology of approximately
$627,322 and $463,521 for the years ended December 31, 2002 and 2003,
respectively. However, the Company will continually evaluate its purchased
technology upon significant changes in certain circumstances that may result in
an impairment of the net carrying value. Therefore, the Company believes that
the adoption of SFAS 142 will not have a significant impact on its results of
operations or financial position.

         In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS No. 143"), which is effective October 1, 2003.
SFAS No. 143 requires, among other things, the accounting and reporting of legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development, or normal operation of a long-lived
asset. The Company is currently assessing, but has not yet determined, the
effect of SFAS No. 143 on its financial position or results of operations.

         In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," ("SFAS No. 144"). SFAS 144 is
effective October 1, 2002, but may be early adopted. SFAS No. 144 addresses
accounting and reporting of all long-lived assets, except goodwill, that are
either held and used or disposed of through sale or other means. The Company is
currently assessing


                                      F-14
<Page>

the impact of SFAS 144, but believes that its adoption will not have a material
impact on its operating results or financial position.

      (P)RECLASSIFICATIONS

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

(2)  PROPERTY AND EQUIPMENT

<Table>
<Caption>

                                                 December 31, December 31,
                                                    2001          2000
                                                 ------------ ----------
<S>                                              <C>          <C>
Furniture and fixtures .......................   $  277,997   $  277,997
Computer equipment ...........................    2,895,367    2,775,296
Leasehold improvements .......................      487,348      527,348
Licensed software ............................      857,388      851,570
                                                 ----------   ----------
                                                  4,518,100    4,432,211

Less accumulated depreciation and amortization    3,111,957    1,910,023
                                                 ----------   ----------

   Total .....................................   $1,406,143   $2,522,188
                                                 ==========   ==========
</Table>

     As of December 31, 2001, property and equipment included assets under
capital leases of $90,721 with related accumulated depreciation of $61,139. As
of December 31, 2000, property and equipment included assets under capital
leases of $90,721 with related accumulated depreciation of $33,289. Depreciation
expense was $1,205,203 and $1,284,297 for the years ended December 31, 2001 and
2000, respectively.

(3)  GOODWILL AND OTHER INTANGIBLE ASSETS

<Table>
<Caption>

                                December 31, December 31,
                                    2001        2002
                                ------------ -----------

<S>                             <C>          <C>
Goodwill ....................   $       --   $3,654,559
Purchased technology ........    2,509,287    2,509,287
Other intangible assets .....       30,000      813,028
                                ----------   ----------

                                 2,539,287    6,976,874

Less accumulated amortization    1,418,444    1,229,032
                                ----------   ----------

   Total ....................   $1,120,843   $5,747,842
                                ==========   ==========
</Table>

     As of December 31, 2001, other intangibles consisted of a content library
of $30,000. As of December 31, 2000, other intangible assets primarily consisted
of a content library of $500,000 and other intangible assets of $313,028.
Amortization of goodwill and other intangible assets was $1,154,418 and
$1,677,286 for the years ended December 31, 2001 and 2000, respectively. These
amounts exclude amortization of purchased technology of $627,322 and $627,322
for the years ended December 31, 2001 and 2000, respectively, that was included
in cost of revenues.


                                      F-15
<Page>


(4)  ACCRUED EXPENSES

<Table>
<Caption>

                                                                       December 31,  December 31,
                                                                           2001          2002
                                                                       -----------   ------------

<S>                                                                      <C>          <C>
Accrued compensation .................................................   $   95,952   $  940,647
Accrued professional fees ............................................      150,000      150,050
Accrued acquisition costs ............................................           --      161,655
Other accrued expenses ...............................................       93,355      142,529
Funds received prior to issuance of
   shares under common stock purchase agreement ......................      150,000           --
                                                                         ----------   ----------

       Total.........................................................$      489,307   $1,394,881
                                                                         ==========   ==========
</Table>

 (5)  ACQUISITIONS

      (A)  ASSET PURCHASE OF DVD MAGS, INC.

     On April 4, 2000, Quickband, Inc. ("Quickband"), a wholly owned subsidiary
of the Company, acquired substantially all of the assets of DVD Mags, Inc. ("DVD
Mags"), a California corporation in the business of aggregating and producing
short-form entertainment content for distribution across digital and traditional
channels (the "Quickband Acquisition"). The Quickband Acquisition was effected
pursuant to an Asset Purchase Agreement ("Purchase Agreement") dated as of March
9, 2000 by and among the Company, Quickband and DVD Mags. The assets acquired in
connection with the Quickband Acquisition consisted primarily of a short form
entertainment content library and other physical property used in connection
with the production of the short-form entertainment content.

     The Company issued 136,339 shares of Common Stock, valued at $1,872,957,
and 34,100 shares of Series B Convertible Preferred Stock (see note 9), valued
at $468,447, in connection with the Purchase Agreement. In addition to the
issuance of common and convertible preferred stock, the Company incurred $47,993
of acquisitions costs.

     The Quickband Acquisition was accounted for as an asset acquisition. The
purchase price was allocated to tangible assets and the identifiable intangible
assets, based on their fair values, as follows:

<Table>

<S>                                                                    <C>
     Purchase Price:                                                   $    2,389,397
                                                                       ==============

     Accounts receivable                                               $      272,530
     Fixed assets                                                             140,587
     Other assets                                                             122,350
     Assumed liabilities                                                     (230,008)
     Goodwill and library content                                           2,083,938
                                                                       --------------

     Total                                                             $    2,389,397
                                                                       ==============
</Table>

     The historical carrying amounts of the net tangible assets acquired
approximated their fair market value on the date of acquisition. The goodwill
and library content was being amortized under the straight-line method over an
estimated useful life of three years, the expected period of benefit.

     As part of a restructuring plan approved by the Board of Directors in
December 2000 in which the Company would dispose of its non-strategic, content
related assets, the Company decided to sell the content acquired and created in
connection with the Quickband library. The Company recorded non-cash
restructuring and impairment charges of $470,000 and $1,007,673 for the years
ended December 31, 2001 and 2000, respectively, related to the Quickband content
library (see note 12).

                                      F-16
<Page>

     (B)  EIGHT CYLINDER STUDIOS, INC.

     The Company acquired Eight Cylinder Studios, Inc. ("8CS"), a California
corporation pursuant to the terms of an Agreement and Plan of Merger, dated as
of July 13, 2000, as amended on September 29, 2000, October 26, 2000 and October
31, 2000 (as amended, the "8CS Merger Agreement"), by and among the Company, 8C
Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of the
Company, 8CS and certain shareholders of 8CS whereby 8CS was merged with and
into 8C Acquisition Corp. The merger was completed on November 3, 2000. 8CS was
a California corporation that offered content development and interface
technologies solutions for the broadband Internet market.

     Pursuant to the 8CS Merger Agreement, the Company issued approximately
598,428 shares of Common Stock. In addition, the Company issued approximately
150,210 shares of Common Stock in exchange for all outstanding shares of 8CS
preferred stock. The total Common Stock issued was valued at approximately
$1,673,955. Additionally, the Company incurred approximately $499,029 of
transaction costs.

     The merger was accounted for under the purchase method of accounting. The
preliminary purchase price was allocated to tangible assets and the goodwill and
other intangible assets, based on their fair values, as follows:

<Table>

<S>                                                                    <C>
     Purchase Price:                                                   $    2,172,984
                                                                       ==============

     Cash                                                              $       28,131
     Fixed assets                                                             111,170
     Other assets                                                              14,825
     Assumed liabilities                                                   (1,635,701)
     Goodwill and other intangible assets                                   3,654,559
                                                                       --------------

     Total                                                             $    2,172,984
                                                                       ==============
</Table>

     The Company had determined that the historical carrying amounts of the net
tangible assets acquired approximated their fair market value on the date of
acquisition. The goodwill and other intangible assets were being amortized under
the straight-line method over an estimated useful life of three years, the
expected period of benefit. In the first quarter of 2001, the Company recorded
additional goodwill of $42,415 related to certain legal costs incurred in
connection with the acquisition of 8CS.

     For the year ended December 31, 2001, the Company recorded an impairment
charge of $2,344,066 to write-off the net carrying values of the goodwill and
other intangible assets related to 8CS (see note 12).

     The following unaudited pro forma consolidated financial information gives
effect to the 8CS merger and the Quickband Acquisition as if they had occurred
on January 1, 2000 by consolidating the results of operations of the Company,
Quickband and 8CS for the year ended December 31, 2000.

<Table>
<Caption>

                                                                    DECEMBER 31,
                                                                        2000
                                                                    ------------

<S>                                                               <C>
Revenues......................................................    $    1,018,139
Net loss attributable to common stockholders..................       (65,046,155)
Net loss per share-basic and diluted..........................    $        (2.47)
Weighted average basic and diluted shares outstanding.........        26,732,476

</Table>


                                      F-17
<Page>

(6)  NOTES PAYABLE

     In connection with its acquisition of 8CS 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.

(7)  INCOME TAXES

     The asset and liability method is used in accounting for income taxes.
Under this method, deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.

     For Federal income tax purposes, the Company has net operating loss
carryforwards of approximately $93,000,000 which expire at various dates through
2021.

     In accordance with SFAS 109 "ACCOUNTING FOR INCOME TAXES", the Company
recognized a deferred tax asset of approximately $32,552,000, primarily
resulting from the above net operating loss carryforwards. A full valuation
allowance has been recorded related to the deferred tax asset as a result of
management's uncertainty as to the realization of such asset. Accordingly, no
provision for federal income taxes has been recognized. There are no other
significant temporary differences. The tax provisions of $63,678 and $102,089
for the years ended December 31, 2001 and 2000, respectively, relate primarily
to various state and local taxes.

(8)  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 were 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
per share. The principal amount of the Debentures can be converted into shares
of Common Stock at a conversion price of $0.45 six months after the date of
issuance at the discretion of the holder. The principal amount of the Debentures
is due 4 years from the date of issuance and is non-interest bearing.

     As of December 31, 2001, the Company had received the full $2,000,000 under
the Debenture agreement. The Company allocated the proceeds received to the
principal amount of the Debentures and the warrants based upon the relative fair
value method. The difference between the relative fair value of the Debentures
and the proceeds received was recorded as a debt discount. The total amount of
the debt discount is limited to the total proceeds received. The total amount of
the debt discount was $1,640,054 and was fully amortized as of December 31,
2001.

(9)  STOCKHOLDERS' EQUITY

     (a)  Authorized Shares

     On November 17, 2000, the Company's shareholders agreed to increase the
Company's Common Stock authorized for issuance from 50,000,000 shares to
100,000,000 shares.

                                      F-18
<Page>

     (b)  Preferred Stock

     The Company has 20,000,000 shares of preferred stock authorized for
 issuance and, as of December 31, 2001, seven series of convertible preferred
 stock (collectively "Preferred Stock") were issued and outstanding. Pursuant to
 its Certificate of Incorporation, the Company may serially designate separate
 classes of preferred stock up to the aggregate of its authorized limit. The
 holders of the various series of Preferred Stock generally have similar rights
 and privileges. Each class of the Preferred Stock is convertible into shares of
 the Company's Common Stock based on a conversion rate and has rights and
 preferences which are generally more senior to the Company's Common Stock and
 are more fully described in the Company's Certificate of Incorporation.

Series A Convertible Preferred Stock

     On June 15, 1999, the Company issued in a private offering 2,000,000
preferred stock purchase units (the "Units") pursuant to Rule 506 under the
Securities Act of 1933, as amended, for $7.50 per unit. The Company received
proceeds, net of transaction costs, of $14,614,113.

     Each Unit consisted of one share of Series A Convertible Preferred Stock,
$0.01 par value, 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 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 equal to $7.50 per share. The
liquidation price per share would be paid out of the assets of the Company
available for distribution prior to any payments made on any shares of the
Company's Common Stock or any other capital stock other than the Preferred
Stock.

     On May 25, 2000 and June 2, 2000, approximately 1,066,667 and 533,333
shares of Series A Preferred Stock, respectively, were converted into equivalent
shares of the Company's Common Stock.

Series B Convertible Preferred Stock

     In April 2000, the Company designated and issued 34,100 shares of its
authorized preferred stock as Series B Preferred Stock, $0.01 par value ("Series
B Preferred"), in connection with the Quickband Acquisition. Each share of
Series B Preferred converts into one share of the Company's Common Stock. The
fair market value of the Series B Preferred on the closing date of the Quickband
Acquisition was $468,447, as determined by the fair market value of the
Company's Common Stock on such date. In the event of any liquidation,
dissolution or winding up of the Company, either voluntary or involuntary, the
holders of the Series B Preferred are entitled to receive an amount equal to
$23.46875 per share. The liquidation price per share would be paid out of the
assets of the Company available for distribution prior to any payments made on
any shares of the Company's Common Stock or any other capital stock other than
the Preferred Stock.

Series C, C-IV and C-V Convertible Preferred Stock

     In June 2000, the Company designated 4,285,715 shares of its authorized
preferred stock as Series C Preferred Stock, $0.01 par value ("Series C
Preferred"). On June 8, 2000, the Company completed a private placement of
1,644,304 shares of the Series C Preferred with detachable warrants for an
aggregate purchase price of $10,000,000, in connection with an investment by The
Travelers Indemnity Company ("Travelers"). The Company incurred transaction
costs of $9,175 in connection with the transaction. This investment was part of
an aggregate financing of $15,000,000. The original conversion price was $6.082.
The additional $5,000,000 was received and satisfied through the issuance of the
Company's Series


                                      F-19
<Page>

C-II and Series C-III Convertible Preferred Stock as described below. In the
event of any liquidation, dissolution or winding up of the Company, either
voluntary or involuntary, the holders of the Series C Preferred are entitled to
receive a liquidation amount of $6.082 per share. The liquidation price per
share would be paid out of the assets of the Company available for distribution
prior to any payments made on any shares of the Company's Common Stock or any
other capital stock that ranks junior to the Preferred Stock.

     In addition to the Series C Preferred, Travelers received detachable
warrants which provide them the right to purchase 205,538 shares of the
Company's Common Stock at an exercise price of $8.69 per share and 205,538
shares at of the Company's Common Stock at an exercise price of $10.86 per share
(collectively "Travelers' Warrants").

     The aggregate fair market value of the Series C Preferred on the closing
date of the Travelers private placement was $14,284,891 based upon the fair
market value of the Company's Common Stock on that date. Additionally, the fair
market value of the warrants issued, as calculated using the Black Scholes
pricing model, was $1,793,113. In accordance with EITF Issue No. 98-5,
"ACCOUNTING FOR CONVERTIBLE SECURITIES WITH BENEFICIAL CONVERSION FEATURES OR
CONTINGENTLY ADJUSTABLE CONVERSION RATIOS" ("EITF 98-5"), the Company allocated
the net proceeds between the Series C Preferred and the detachable warrants
based on the relative fair value method as described in APB Opinion No. 14,
"ACCOUNTING FOR CONVERTIBLE DEBT AND DEBT ISSUED WITH STOCK PURCHASE WARRANTS"
("APB No. 14"). The Company allocated $8,876,589 to the Series C Preferred and
recorded $1,114,236 of additional paid-in-capital to account for the issuance of
the warrants. The difference between the net proceeds allocated to, and the fair
market value of, the Series C Preferred on the closing date, which amounted to
$5,408,302, was recorded as a deemed non-cash convertible preferred stock
dividend as of December 31, 2000.

     Concurrently with its investment in June 2000, Travelers was granted
pricing protection on its $10,000,000 investment regarding the subsequent
investments in the Series C-II and Series C-III Preferred Stock that allowed for
the following:

     Upon the earlier of (i) a change of control or (ii) December 31, 2001, the
Company would (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 per share, and 4,099,678 shares of Series C-V
Preferred Stock, par value $0.01 per share, with a conversion price of $1.244
per share, and (b) cancel the Travelers Warrants and in their place issue
462,264 warrants with an exercise price of $2.65 per share and 1,024,920
warrants with an exercise price of $1.14 per share. For the year ended December
31, 2000, the Company recorded a deemed non-cash convertible preferred stock
dividend of $12,757,019 for the additional benefit to be received by Travelers
upon the issuance of the Series C-IV and Series C-V Preferred Stock and the
related warrants. Travelers was not entitled to any further pricing protections.
On December 31, 2001, the Company canceled the Series C Preferred and issued the
Series C-IV and C-V Preferred Stock and the new warrants to Travelers. The
warrants are currently exerciseable and expire on June 7, 2003.

     Additionally, Travelers is entitled to certain anti-dilution protections on
its Series C-IV and C-V Preferred Stock. The anti-dilution provisions primarily
adjust the conversion price of the Series C-IV and Series C-V Preferred Stock
and the number and exercise price of the warrants. The anti-dilution provision
for the Series C-IV and Series C-V Preferred Stock was triggered by certain
subsequent debt and equity financings consummated by the Company. Although the
Series C-IV and C-V Preferred Stock was not issued until December 31, 2001, the
Company recognized the additional benefit to be received by Travelers as if the
Series C-IV and C-V Preferred Stock had been issued in June 2000. As of December
31, 2001, the conversion price of the Series C-IV Preferred Stock was adjusted
to $1.90 per share, the Company issued 182,477 additional warrants and the
exercise price of the warrants was reduced to $1.90 per share. Additionally, as
of December 31, 2001, the conversion price of the Series C-V Preferred Stock was
adjusted to $0.9756 per share, the Company issued 271,543 additional warrants
and the exercise price of the warrants was reduced to $0.9012 per share. The
Company recorded a deemed non-cash convertible


                                      F-20
<Page>

preferred stock dividend of $1,160,032 and $165,657 for the years ended December
31, 2001 and 2000, respectively, to recognize the additional benefit received by
Travelers for their anti-dilution provisions.

Series C-II Convertible Preferred Stock

     In September 2000, the Company designated 924,527 shares of its authorized
preferred stock as Series C-II Preferred Stock, $0.01 par value ("Series C-II
Preferred"). On September 29, 2000, the Company completed a private placement of
924,527 shares of the Series C-II Preferred with detachable warrants for an
aggregate purchase price of $2,450,000 with three investors (the "Series C-II
Investors"). The original conversion price of the Series C-II Preferred is $2.65
per share. In the event of any liquidation, dissolution or winding up of the
Company, either voluntary or involuntary, the holders of the Series C-II
Preferred are entitled to receive an amount equal to $2.65 per share. The
liquidation price per share would be paid out of the assets of the Company
available for distribution prior to any payments made on any shares of the
Company's Common Stock or any other capital stock that ranks junior to the
Preferred Stock.

     In addition to the Series C-II Preferred, the Series C-II Investors
received detachable warrants which provide them the right to purchase an
aggregate of 396,037 shares of the Company's Common Stock at an exercise price
of $2.65 per share. The warrants were immediately exerciseable and expire on
September 28, 2003.

     The aggregate fair market value of the Series C-II Preferred on September
29, 2000 was $2,302,072, based upon the fair market value of the Company's
Common Stock on that date. Additionally, the fair market value of the warrants
issued, as calculated using the Black Scholes pricing model, was $504,706. In
accordance with EITF 98-5, the Company allocated the net proceeds between the
Series C-II Preferred and the detachable warrants based on the relative fair
value method as described in APB No. 14. The Company allocated $2,009,448 to the
Series C-II Preferred and recorded $440,552 of additional paid-in-capital to
account for the issuance of the warrants. The difference between the net
proceeds allocated to, and the fair market value of, the Series C-II Preferred
on the closing date, which amounted to $292,624, was recorded as a deemed
non-cash preferred stock dividend for the year ended December 31, 2000.

     The holders of the Series C-II Preferred Stock are entitled to certain
anti-dilution protections, triggered by certain subsequent issuances of debt or
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 anti-dilution provision for the
Series C-II Preferred Stock was triggered by certain subsequent debt and equity
financings consummated by the Company. As of December 31, 2001, the conversion
price of the Series C-II Preferred Stock was adjusted to $1.90 per share, the
Company issued an additional 156,334 warrants and the exercise price of the
warrants was reduced to $1.90 per share. The Company recorded a deemed non-cash
convertible preferred stock dividend of $1,086,206 and $136,505 for the years
ended December 31, 2001 and 2000, respectively, to record the additional benefit
received by the Series C-II Investors.

Series C-III Convertible Preferred Stock

     In December 2000, the Company designated 2,049,839 shares of its authorized
preferred stock as Series C-III Preferred Stock, $0.01 par value ("Series C-III
Preferred"). On December 8, 2000, the Company completed a private placement of
the 2,049,839 shares of the Series C-III Preferred with detachable warrants for
an aggregate purchase price of $2,550,000 with two investors (the "Series C-III
Investors"). The original conversion price of the Series III Preferred is $1.244
per share. In the event of any liquidation, dissolution or winding up of the
Company, either voluntary or involuntary, the holders of the Series C-III
Preferred are entitled to receive an amount equal to $1.244 per share. The
liquidation price per share would be paid out of the assets of the Company
available for distribution prior to any payments made on any shares of the
Company's Common Stock or any other capital stock that ranks junior to the
Preferred Stock.

                                      F-21
<Page>

     In addition to the Series C-III Preferred, the Series C-III Investors
received detachable warrants which provide them the right to purchase an
aggregate of 635,450 shares of the Company's Common Stock at an exercise price
of $1.14 per share. The warrants were immediately exerciseable and expire on
December 7, 2003.

     The aggregate fair market value of the Series C-III Preferred on December
8, 2000 was $2,459,807, based upon the fair market value of the Company's Common
Stock on that date. Additionally, the fair market value of the warrants issued,
as calculated using the Black Scholes pricing model, was $350,458. In accordance
with EITF 98-5, the Company allocated the net proceeds between the Series C-III
Preferred and the detachable warrants based on the relative fair value method as
described in APB No. 14. The Company allocated $2,231,928 to the Series C-III
Preferred and recorded $318,072 of additional paid-in-capital to account for the
issuance of the warrants. The difference between the net proceeds allocated to,
and the fair market value of, the Series C-III Preferred on the closing date,
which amounted to $227,879, was recorded as a deemed preferred stock dividend
for the year ended December 31, 2000.

     The holders of the Series C-III Preferred Stock are entitled to certain
anti-dilution protections, triggered by certain subsequent issuances of debt or
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 anti-dilution provision for the
Series C-III Preferred Stock was triggered by certain subsequent debt and equity
financings consummated by the Company. As of December 31, 2001, the conversion
price of the Series C-III Preferred Stock was adjusted to $0.9756 per share, the
Company issued an additional 168,357 warrants and the exercise price of the
warrants was reduced to $0.9012 per share. The Company recorded a deemed
non-cash convertible preferred stock dividend of $956,244 for the year ended
December 31, 2001 to record the additional benefit received by the Series C-III
Investors. There were no triggering events for the Series C-III Preferred
Stock's anti-dilution provision for the year ended December 31, 2000.

Series C-VI Convertible Preferred Stock

     On July 18, 2001, the Company entered into a Unit Purchase Agreement with
Travelers whereby it sold an aggregate of 3,571,429 units that consisted of one
share of the Company's Common Stock and a warrant to purchase 1.5 shares of the
Company's Common Stock. The Company received net proceeds of $2,000,000. On
August 10, 2001, the Company entered into a new agreement with Travelers,
rescinding the Unit Purchase Agreement and providing that Travelers receive
3,571,429 shares of preferred stock, which were not convertible into the
Company's Common Stock for a period of six months. Each share of Series C-VI
Preferred Stock converts on a one-for-one basis into shares of the Company's
Common Stock. In addition, the Company issued to Travelers a warrant to purchase
5,357,144 shares of the Company's Common Stock that cannot be exercised for a
period of six months. The exercise price of the warrant is $0.56 per share and
the warrant expires on August 9, 2005.

     The Series C-VI 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 C-VI
Convertible Preferred Stock are entitled to receive an amount equal to $0.56 per
share. The liquidation price per share would be paid out of the assets of the
Company available for distribution prior to any payments made on any shares of
the Company's Common Stock or any other capital stock other than the Preferred
Stock.

     The aggregate fair market value of the Series C-VI Preferred on July 18,
2001 was $2,000,000, based upon the fair market value of the Company's Common
Stock on that date. Additionally, the fair market value of the warrants issued,
as calculated using the Black Scholes pricing model, was $1,729,027. In
accordance with EITF 98-5, the Company allocated the net proceeds between the
Series C-VI Preferred Stock and the warrants based on the relative fair value
method as described in APB No. 14. The Company allocated $1,072,666 to the
Series C-VI Preferred and recorded $927,334 of additional paid-in-capital to
account for the issuance of the warrants. The difference between the net
proceeds allocated to,


                                      F-22
<Page>

and the fair market value of, the Series C-VI Preferred on the closing date,
which amounted to $927,334, was recorded as a non-cash convertible preferred
stock dividend for the year ended December 31, 2001.

     The following table summarizes the common stock issuable upon conversion of
all outstanding Preferred Stock and related warrants at December 31, 2001:

<Table>
<Caption>

                                                        CONVERSION OR                     SHARES OF COMMON STOCK
          CONVERTIBLE SECURITY                         EXERCISE PRICE                    ISSUABLE UPON CONVERSION
          --------------------                         --------------                    ------------------------

<S>                                                    <C>                                     <C>
  Series A Preferred Stock                             $7.50 per share                           400,000
  Series B Preferred Stock                           $23.46875 per share                          34,100
  Series C-II Preferred Stock                          $1.90 per share                          1,289,474
  Series C-II Warrants                                 $1.90 per share                           552,367
  Series C-III Preferred Stock                        $0.9756 per share                         2,613,776
  Series C-III Warrants                               $0.9012 per share                          803,807
  Series C-IV Preferred Stock                          $1.90 per share                          2,578,947
  Series C-IV Warrants                                 $1.90 per share                           644,741
  Series C-V Preferred Stock                          $0.9756 per share                         5,227,552
  Series C-V Warrants                                 $0.9012 per share                         1,296,463
  Series C-VI Preferred Stock                          $0.56 per share                          3,571,429
  Series C-VI Warrants                                 $0.56 per share                          5,357,143
</Table>


      (c) Common Stock

Equity-Line of Credit

     In December 2000, the Company entered into a common stock purchase
agreement ("Initial Stock Purchase Agreement") with an accredited investor
("Investor"), for the sale, from time to time, of the Company's Common Stock.
Pursuant to the Initial Stock Purchase Agreement, the Investor has committed to
purchase up to $23,000,000 of Common Stock over a 36-month period. The Investor
may be required to invest an additional $17,000,000 upon the attainment of
certain trading volumes and weighted average market prices in the Company's
Common Stock. However, the Company's ability to procure funds through the
Initial Stock Purchase Agreement may be limited or prohibited based on certain
trading volumes and weighted average market prices in the Company's Common
Stock.

     Under the Initial Stock Purchase Agreement, shares of Common Stock are
periodically sold to the Investor at a discount from market value ranging from
6%-10%, depending on the closing price of the Company's Common Stock. The amount
of Common Stock sold is at the sole discretion of the Company and at no time
throughout the term of the Stock Purchase Agreement is the Company obligated to
sell its Common Stock, unless the Company issues a drawdown 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.

     On May 22, 2001, the Company's shareholders approved the sale, at the sole
discretion of the Company, of up to 15,500,000 shares of Common Stock in
connection with the Initial Stock Purchase Agreement. As of December 31, 2001,
the Company had sold 8,475,521 shares of Common Stock for net proceeds of
approximately $4,190,640 under the Initial Stock Purchase Agreement.

     In November 2001, the Company entered into a second common stock purchase
agreement ("Second Stock Purchase Agreement") with the Investor, for sale, from
time to time, of the Company's Common Stock. Under the Second Stock Purchase
Agreement, the Investor has committed to purchase an additional $23,000,000
million over a 36-month period, with an additional commitment for $17,000,000
million upon the attainment of certain price and volume thresholds. Under the
Second Stock Purchase Agreement, providing that the volume weighted average
stock price for the 30-day period preceding a


                                      F-23
<Page>

draw-down notice is at least $0.30, the Company may request (a) a minimum amount
of $300,000 or (b) a maximum amount equal to the greater of $500,000 or $300,000
plus 4.5% of the volume weighted average stock price for the preceding 30-day
period multiplied by the total trading volume for the preceding 3-month period.
If the volume weighted average stock price is below $0.30 and greater than
$0.10, the minimum draw down amount is pro-ratably reduced from $300,000 to
$100,000. The Company is obligated to register the shares to be issued under the
Second Stock Purchase Agreement. The Company is in the process of effectuating
the registration statement and cannot issue shares under the Second Stock
Purchase Agreement until the registration statement is effective.

     Under the Second Stock Purchase Agreement, shares of Common Stock are
periodically sold to the Investor at a discount from market value ranging from
6%-10%, depending on the closing price of the Company's Common Stock. The amount
of Common Stock sold is at the sole discretion of the Company and at no time
throughout the term of the Stock Purchase Agreement is the Company obligated to
sell its Common Stock, unless the Company issues a drawdown notice. The Company
issued 100,000 shares of unrestricted Common Stock and incurred approximately
$10,000 of transaction costs in connection with the Second Stock Purchase
Agreement.

     The Company can sell up to an aggregate of 15,500,000 shares of Common
Stock under both common stock purchase agreements.

Investment by RealNetworks, Inc.

     On July 18, 2001, the Company entered into a Common Stock Purchase
Agreement with RealNetworks, Inc. ("Real") whereby Real purchased 1,785,714
shares of the Company's Common Stock for net proceeds of $1,000,000. The shares
were issued to RealNetworks, Inc. at the fair market value at the time of the
transaction.

     Additionally, on July 18, 2001, the Company entered into a Development and
Services License Agreement whereby Real received an exclusive license to the
Company's proprietary video compression technology. The term of the license is 4
years.

     (d)  Warrants

     The Company has issued common stock purchase warrants to various
consultants, strategic partners and investors. The following table summarizes
information about the common stock purchase warrants outstanding as of December
31, 2001. All warrants, excluding 5,357,143 at an exercise price of $0.56, were
exerciseable as of December 31, 2001.

<Table>
<Caption>

          Range of                Number of            Weighted Average Exercise
      Exercise Prices        Warrants Outstanding                Price                   Expiration Dates
   --------------------------------------------------------------------------------------------------------------
<S>                                 <C>                            <C>                        <C>    <C>
        $0.56 - $0.90                7,463,876                     $0.66                      2003 - 2005
       $1.52 - $1.90                 2,982,232                     $1.76                      2003 - 2006
       $6.08 - $11.25                 32,500                       $7.77                      2003 - 2004
      $19.89 - $28.38                 221,826                      $24.55                     2004 - 2005
   --------------------------------------------------------------------------------------------------------------
       $0.56 - $28.38               10,700,434                     $1.48                      2003 - 2006
   ==============================================================================================================
</Table>

(10)  STOCK OPTION PLANS

    In June of 1999, the Company adopted the 1999 Stock Option Plan that
replaced all outstanding option plans to date. Under the 1999 Stock Option Plan,
all options issued under prior plans were recognized as issued and outstanding
under the original terms granted. The Company had originally reserved 4,000,000
shares of Common Stock for issuance under the 1999 Stock Option Plan.

                                      F-24
<Page>

    In February of 2000, the Company amended the 1999 Stock Option Plan to
create the 1999 Amended and Restated Incentive and Nonqualified Stock Option
Plan (the "1999 Plan"). The 1999 Plan increased the shares of Common Stock
reserved for issuance from 4,000,000 to 5,500,000. The Company's stockholders
approved the 1999 Plan in May 2000. The 1999 Plan provides for the issuance of
incentive stock options, which are intended to qualify under section 422 of the
Internal Revenue Service Code, non-qualified stock options and restricted stock
grants. The granting of incentive stock options is subject to the limitations as
set forth in the 1999 Plan. Directors, officers, employees and consultants are
eligible to receive grants under the 1999 Plan. A committee selected by the
Company's Board of Directors has the authority to approve option grants and the
terms, which include the option price and the vesting terms. Options granted
under the 1999 Plan expire after a ten-year period and are subject to
acceleration upon the occurrence of certain events.

    In September 2000, the Board of Directors adopted the 2000 Nonqualified
Stock Option Plan (the "2000 Plan"). The 2000 Plan reserved for issuance
5,000,000 shares of the Company's Common Stock. The 2000 Plan authorizes the
Board of Directors to issue nonqualified stock options as provided in section
422 of the Internal Revenue Code, restricted stock and stock appreciation
rights. Only employees, including officers, of the Company and its subsidiaries
are eligible to receive grants under the 2000 Plan. A committee selected by the
Company's Board of Directors has the authority to approve option grants and the
terms, which include the option price and the vesting terms. Options granted
under the 2000 Plan expire after a ten-year period and are subject to
acceleration upon the occurrence of certain events.

     The following table summarizes the stock option activity under all plans
from inception:

<Table>
<Caption>

                                                                                          Weighted Average
                                                                     Options Granted       Exercise Price
                                                                     -----------------    ------------------
<S>                                                                     <C>                       <C>
     Outstanding December 31, 1999................................       2,865,229                $5.25

        Granted..................................................        6,491,698                 7.34
        Exercised................................................         (912,600)                1.28
        Canceled.................................................       (1,619,551)                9.58
                                                                     -----------------    ------------------

     Outstanding December 31, 2000................................       6,824,776                 6.79

        Granted..................................................        3,585,232                 0.59
        Exercised................................................         (366,232)                0.82
        Canceled.................................................       (2,791,019)                4.42
                                                                     -----------------    ------------------

     Outstanding at December 31, 2001.............................       7,252,757                $4.97
                                                                     =================    ==================

     Vested at December 31, 2000.................................        1,099,616
                                                                     =================

     Vested at December 31, 2001.................................        3,088,433
                                                                     =================

     Options available for grant at December 31, 2001............        1,947,661
                                                                     =================
</Table>

     Included in the 366,232 options exercised in 2001 are 150,000 shares of
Common Stock issued to a former employee to terminate his employment contract
(see note 12) and 199,732 shares of Common Stock issued to the Company's
non-executive Chairman of the Board of Directors as compensation. The related
expense amounts of $210,000 and $133,336, respectively, have been recognized in
the appropriate expense categories in the Company's consolidated financial
statements. These amounts were excluded from the calculations of the weighted
average exercise price, the weighted average remaining contractual life and the
pro forma expense amounts disclosed herein.

                                      F-25
<Page>

     The following table summarizes information about stock options outstanding
as of December 31, 2001:

<Table>
<Caption>

                                                                                      Options Exercisable
                                                                                ---------------------------------
                                              Weighted      Weighted Average                        Weighted
                              Number          Average           Remaining           Number          Average
     Range of Exercise       of Shares     Exercise Price Contractual Life (in     of Shares     Exercise Price
           Prices           Outstanding                          years)           Outstanding
   --------------------------------------------------------------------------------------------------------------
<S>                          <C>               <C>                 <C>             <C>               <C>
       $0.32 - $0.88           3,130,474       $0.67               9.2             1,288,474         $0.79
       $1.05 - $3.88         1,610,219         $2.83               8.7              754,912          $2.58
       $6.00 - $11.82        2,201,328         $10.79              8.3              880,388          $10.76
      $12.25 - $27.75         310,736          $18.33              8.0              164,659          $18.29
   --------------------------------------------------------------------------------------------------------------
       $0.32 - $27.75          7,252,757       $4.97               8.8             3,088,433         $5.00
   ==============================================================================================================
</Table>


     The Company applies APB No. 25 in accounting for its stock options granted
to employees and accordingly, no compensation expense has been recognized in the
consolidated financial statements. Had the Company determined compensation
expense based on the fair value at the grant date for its stock options issued
to its employees under SFAS 123, the net loss would have been adjusted to the
pro forma amounts indicated below:

<Table>
<Caption>

                                                   Year ended     Year ended
                                                  December 31,    December 31,
                                                     2001             2002
                                                  ------------   --------------
<S>                                            <C>                  <C>
Net loss attributable to common stockholders:
  As reported ...............................   $(21,161,867)    $(62,631,444)
  Pro forma .................................    (28,411,932)     (67,339,278)

Basic and diluted net loss per common share:

  As reported ...............................          (0.64)           (2.40)

  Pro forma .................................          (0.86)           (2.58)

Expected dividend yield .....................              0%
                                                                            0%

Weighted average risk free interest rate ....           3.49%             5.1%
Volatility ..................................            106%              75%
Weighted average expected life ..............        3 years          3 years
</Table>


     The per share weighted average fair value of the stock options granted
during 2001 and 2000 was $0.43 and $3.73, respectively, on the date of grant
using the option-pricing method with the weighted average assumptions noted in
the table above.

(11)  EMPLOYEE STOCK PURCHASE PLAN

     In February 2001, the Board of Directors adopted the 2001 Employee Stock
Purchase Plan ("ESPP"). The ESPP provides 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 reserved 4,000,000 authorized but unissued shares of Common Stock for
issuance under the ESPP. The ESPP was approved at the Company's Annual Meeting
of Shareholders on May 22, 2001. As of December 31, 2001, the Company had issued
41,073 shares of Common Stock under the ESPP.



                                      F-26
<Page>

(12)  RESTRUCTURING AND IMPAIRMENT CHARGES

     (a) Restructuring Charges

     In December 2000, in connection with certain cost saving and corporate
restructuring initiatives, the Company's Board of Directors 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 offices in San
Francisco and Los Angeles and a reduction in the Company's workforce.

     For the year ended December 31, 2000, the Company recorded a non-cash
restructuring charge of $2,968,665. The non-cash restructuring charge was
comprised of the following: (1) $2,539,134 related to the write-off of goodwill
and certain intangible assets associated with the Company's acquisitions of
content-related entities that are being disposed of (2) $235,759 related to the
write-off of certain fixed assets, consisting primarily of furniture and
fixtures and leasehold improvements, associated with the closing offices in San
Francisco and Los Angeles and (3) $193,772 related to the write-off of certain
office security deposits and prepaid assets from which the Company would not
derive any future benefit.

     In 2001, the Company completed additional restructuring initiatives that
were related the plan established by the Board of Directors in December 2000.
Although the items were identified as of December 31, 2000, the obligations of
the Company could not be measured at that time. As a result, the Company
recorded a non-cash restructuring charge of $293,200 for the year ended December
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.

     (b) Impairment Charges

     For the year ended December 31, 2001, the Company recorded an impairment
charge of $470,000, related to its Quickband content library. The Company
acquired the content library, consisting primarily of licensed content for
distribution through DVD sales and the Internet, in April 2000. The library was
originally acquired for the Company's broadband content network, which ceased
operations in the second quarter of 2000. However, the Company continued to sell
the licensed Quickband content, via DVD sales, through a distribution agreement
acquired in connection with the library. As of December 31, 2000, the Company
terminated all operations related to its content assets. At that time, the
Company determined that further distribution of the Quickband content would
result in recurring losses. The Company made the decision to sell the library
and reduced the carrying value of the library to $500,000 at December 31, 2000.
This amount represented the estimated fair value based upon interest in the
library at that time from several potential buyers, which never materialized.
The Company periodically reviewed the value of the library against market demand
and recorded a subsequent impairment charge of $470,000 in 2001 based upon the
perceived value of the library and its content in the market. There are no
additional charges related to the write-down or sale of the content library.

     For the year ended December 31, 2001, the Company recorded an impairment
charge $2,344,068 related to its acquisition of 8CS in November 2000. The
impairment charge represented the net carrying value of the goodwill and
intangible assets recorded in connection with the acquisition. 8CS was a
developer of three-dimensional graphic interface software. The intention of the
acquisition was to integrate the Company's video compression technology with a
three-dimensional web browser to provide a PC-based video delivery solution. As
a result of the economic downturn and the reduction in its financial resources,
the Company determined that additional development of the 8CS technology was not
cost beneficial. Furthermore, the Company was unsuccessful in its attempts to
sell the technology or create a strategic partnership for further development.
As the Company reached the one-year anniversary of the 8CS acquisition in the
fourth quarter of 2001, the Company concluded that the 8CS acquisition would
provide no future benefit or value and wrote-off the remaining goodwill and
intangible assets. As


                                      F-27
<Page>

of December 31, 2001, there were no material tangible assets related to 8CS nor
would the Company incur additional costs. Additionally, the Company did not
recognize any revenue related to 8CS since it was acquired.

     The Company recorded a charge of $116,853 related to certain intangible
assets from which the Company would no longer derive a benefit. The write-off
reflected the net book value of the assets at the time they were no longer
deemed to have value.

(13)  NON-CASH STOCK BASED COMPENSATION

     Non-cash stock based compensation for the year ended December 31, 2001 was
$143,707 and represented shares of Common Stock issued to our Non-Executive
Chairman in lieu of cash compensation and options to purchase shares of Common
Stock granted to certain consultants.

     Pursuant to the Company's 1999 Amended and Restated Incentive and
Nonqualified Stock Option Plan (the "1999 Plan"), employees of the Company were
granted options to purchase shares of Common Stock. The terms of the options
granted to employees under the 1999 Plan, including exercise price and number of
shares granted, were fixed on the date of grant and remain the same throughout
the duration of the 1999 Plan. In June 2000, the Company contracted with a third
party broker to settle all exercises under the 1999 Plan. Concurrently, the
Company required all employees to exercise stock options through the use of a
third-party broker, effectively eliminating the ability execute a cashless
exercise of stock options. Accordingly, the Company is applying fixed accounting
to all outstanding stock options.

     The Company accounts for stock-based compensation agreements in accordance
with the provisions of APB Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES," ("APB No. 25"). Under APB No. 25, fixed option plans for
employees--that is those plans whose terms, including price and number of shares
granted, remain the same throughout the duration of the plan--have no
compensation expense associated with the options when the exercise price is
equal to the fair value of the stock at the grant date. All options granted
under the 1999 Plan were at fair market value on the date of grant. Accordingly,
compensation expense was not recorded for options awarded to employees.

     For the period January 2000 through May 2000, the Company chose to
self-administer the 1999 Plan. Also during the period, various employees began
to exercise a vested portion of their options. Pursuant to the "cashless
exercise" provisions of the 1999 Plan, the employees were permitted to pay the
exercise price with cash, or "by surrendering, in addition to the options
representing the shares being purchased, unexercised, vested options with a net
fair market value equal to the price of the shares being purchased." The
employees chose to surrender unexercised options, from their fixed grant total,
with a fair market value equivalent to the cash exercise price.

     Under an interpretation of generally accepted accounting principles related
to stock-based compensation, the employees' surrendering of unexercised, vested
options in satisfaction of the exercise price, in lieu of cash, under a
self-administered plan, resulted in the requirement to recognize the entire
exercise value of the shares as non-cash stock based compensation expense.

     The number of shares, the range of exercise prices and the range of market
values for the cashless exercises for January through May 2000 are as follows:

<Table>
<Caption>

              Number of Shares
       (Includes Shares Surrendered)   Range of Exercise Prices   Range of Market Values
       -----------------------------   ------------------------   ----------------------

<S>                                       <C>                       <C>
                586,359                   $0.88 - $2.25             $10.75 - $23.375
</Table>


     The total non-cash compensation charge related to these exercises for the
year ended December 31, 2000 was $10,257,883.

                                      F-28
<Page>

     On January 31, 2000, the Company issued a warrant to purchase 100,000
shares of its Common Stock to a business partner, in exchange for the partner's
commitment to be a sponsor of the Company's Web site. The warrant has a
five-year life and is immediately exercisable at an exercise price of $19.8875.
The fair market value of the Company's Common Stock at the date of issue was
$19.75.

     The sponsorship agreement is renewable annually and may be terminated at
such time by either the Company or the business partner upon notice. The fair
market value of the warrant was $1,300,000, calculated under the Black-Scholes
pricing model using the following assumptions: risk-free interest rate of 6%,
volatility of 75% and a 5-year term. As the warrant is immediately exercisable,
the Company recorded a non-cash compensation charge of $1,300,000 for the year
ended December 31, 2000.

     In connection with the termination of certain employees during 2000, the
Company elected to accelerate the vesting schedule of certain stock options
granted to these employees. In accordance with FIN 44, a company must recognize
compensation expense if the vesting of a fixed award is modified such that,
under the original terms, the award would have expired unexerciseable.
Compensation expense is measured as the difference between the intrinsic value
on the date of termination and the intrinsic value on the original measurement
date. The Company recognized compensation expense of $766,898 for the year ended
December 31, 2000 in connection with these accelerated options.

(14)  COMMITMENTS AND CONTINGENCIES

     (a)  Operating Leases

     The Company has entered into several non-cancelable leases, primarily
related to the rental of certain facilities and equipment. Future minimum lease
payments, by year and in the aggregate, under material operating leases with
initial or remaining terms in excess of one year consisted of the following at
December 31, 2001:

<Table>
<Caption>

         Year ended December 31,                               Amount

<S>      <C>                                             <C>
         2002........................................... $         447,175
         2003  .........................................            330,000
                                                         -------------------
              Total minimum lease payments.............. $          777,175
                                                         ===================
</Table>

     Rent expense under operating leases was approximately $850,821 and
$1,092,547 for the years ended December 31, 2001 and 2000, respectively.

     (b)      Employment Agreements

     The Company maintains employment agreements, expiring at various intervals,
with three executives and several non-executive employees of the Company. The
employment agreements provide for a minimum salary, incentive compensation and
certain benefits, among other items.

     (c)      Litigation

     The Company sued Ecoin Co. Ltd. ("Ecoin") on April 30, 2001 in the United
States Court for the Southern District of New York. Our complaint alleged breach
of contract arising from the failure of Ecoin to pay approximately $400,000 owed
to On2 under a Technology License and Reseller Agreement that On2 and Ecoin
entered into on February 20, 2001. Ecoin counterclaimed on December 17, 2001 for
an amount to be determined at trial, but in no event less than $100,000,
alleging fraudulent inducement


                                      F-29
<Page>

and demanding rescission. The Company believes that the counterclaims of Ecoin
are without merit and intends to vigorously pursue our claim and defend against
the counterclaim.

     From time to time the Company has been named in other claims 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.

(15) RELATED PARTY TRANSACTIONS

     We believe that the terms of each transaction described below are
comparable to, or more favorable to, us than the terms that would have been
obtained in an arms' length transaction with an unaffiliated party.

     During the years ended December 31, 2001 and December 31, 2000, the Company
retained McGuireWoods LLC to perform certain legal services on its behalf and
incurred approximately $340,000 and $970,000, respectively, for such legal
services. McGuireWoods LLP provided the same hourly fee structure to us that
they provide to their other clients, which hourly fees are customary for legal
services rendered in their geographic and practice area markets. William A.
Newman, a director, is a partner at McGuireWoods LLC.

     On July 18, 2001, the Company entered into a Unit Purchase Agreement with
Travelers whereby it sold an aggregate of 3,571,429 units that consisted of one
share of the Company's Common Stock and a warrant to purchase 1.5 shares of the
Company's Common Stock. The Company received net proceeds of $2,000,000. On
August 10, 2001, the Company entered into a new agreement with Travelers,
rescinding the Unit Purchase Agreement and providing that Travelers receive
3,571,429 shares of preferred stock, which are not convertible into the
Company's Common Stock until February 9, 2002. Each share of Series C-VI
Preferred Stock converts on a one-for-one basis into shares of the Company's
Common Stock. In addition, the Company issued to Travelers a warrant to purchase
5,357,144 shares of the Company's Common Stock that cannot be exercised until
February 9, 2002. The exercise price of the warrant is $0.56 and the warrant
expires on August 9, 2005. The warrants were issued to compensate the investor
for purchasing shares that are not registered for resale under the Securities
Act. The price per unit paid by Travelers was approximately $0.56 per share. The
average closing price of our common stock for the 10 days prior to July 18, 2001
was approximately $0.51 per share. Jack L. Rivkin, a director, was an officer of
an affiliate of Travelers until December 31, 2001 and Travelers is a beneficial
owner of more than 10% of the Company's Common Stock.

         Also on July 18, 2001, the Company entered into a Development Services
and License Agreement and a Common Stock Purchase Agreement with Real whereby it
agreed to use Real as its exclusive delivery platform for streamed content over
the internet in exchange for which Real acquired 1,785,714 shares of the
Company's common stock and became a holder of 5.05% of the Company's common
stock. In connection with the Company's agreements with Real, On2 will license
its proprietary VP4 compression technology for use in Real's proprietary media
delivery products and services. The Company's agreements with Real have a term
of 4 years and contemplate payments to On2 for the license and other services to
be provided by the Company. Management believes that the contract with Real is
of significant benefit to the Company. Real was not a related party prior to
entering into this transaction with it, and the arrangement with it was
negotiated at arms' length.

     For the year ended December 31, 2000, the Company purchased $377,500 of
Internet advertising services from iBalls LLC, an interactive media buying and
marketing services company, of which Stephen D. Klein, a director, is chairman.
These services were used to purchase advertising space on the Company's behalf
on third party Internet publishers' websites. The advertising was to promote the
Company's content network, which ceased operations in the first quarter of 2000.
Like its other advertising suppliers, the Company based its advertising on
short-term purchase contracts and do not have any long-term arrangements with
iBalls. In addition, the amount spent for advertising from iBalls was


                                      F-30
<Page>

consistent with the amount spent by the Company for other advertising suppliers
and was for a proportionately similar amount of advertising.

         In June of 2000, the Company issued 1,644,304 shares of Series C
Preferred Stock and warrants to purchase 411,076 shares of its common stock to
Travelers. In addition, on January 19, 2001, the Company and Travelers entered
into a Deferred Pricing Agreement whereby as of December 31, 2001, the Company
(A) canceled the Series C Preferred Stock and in its place issued 1,849,057
shares of Series C-IV Preferred Stock, par value $0.01 per share, and 4,099,678
shares of Series C-V Preferred Stock, par value $0.01 per share, and (B)
canceled the Series C warrants and in their place issued 462,264 warrants with
an exercise price of $2.65 and 1,024,920 warrants with an exercise price of
$1.14. Jack L. Rivkin, a director, was an officer of an affiliate of Travelers
until December 31, 2001 and Travelers is a beneficial owner of more than 10% of
the Company's Common Stock.

     A former member of the Company's Board of Directors owns all of the
securities of Verus Capital Corporation ("Verus"), a diversified investment
group that is also a shareholder of the Company. On June 15, 1999, the Company
entered into a two-year consulting contract with Verus whereby the Company
agreed to pay Verus $12,500 per month in exchange for management and consulting
services. The Company paid to Verus $150,000 and $75,000 in consulting fees for
the years ended December 31, 2000 and 1999, respectively.



                                      F-31
<Page>


                    Report of Independent Public Accountants

To On2 Technologies, Inc:

     We have audited in accordance with auditing standards generally accepted in
the United States, the consolidated financial statements of On2 Technologies,
Inc., included in this Form 10-KSB and have issued our report thereon, dated
February 21, 2002. Our audit was made for the purpose of forming an opinion on
the basic financial statements taken as a whole. The schedule listed in the
Index to the Consolidated Financial Statements is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states, in all material respects, the financial data required to
be set forth in relation to the basic financial statements taken as a whole.

                                                        /s/ Arthur Andersen LLP


New York, New York
February 21, 2002



                                      S-1

<Page>


                                   SCHEDULE II

                        VALUATION AND QUALIFYING ACCOUNTS
                         ALLOWANCE FOR DOUBTFUL ACCOUNTS

<Table>
<Caption>

                                BALANCE AT        ADDITIONS CHARGED TO
                            BEGINNING OF PERIOD         EXPENSE                                      BALANCE AT
       YEAR ENDED,                                                            DEDUCTIONS            END OF PERIOD

<S>                            <C>                  <C>                     <C>                    <C>
December 31, 2000              $             --     $         25,000        $             --       $         25,000
December 31, 2001              $         25,000     $        125,396        $         14,733       $        135,663
</Table>



                                      S-2