**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**


**Form 10-K/A**


**(Amendment
      No. 1)**





(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, 2006**o
            
            **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 of incorporation or organization)*
            
            *(I.R.S.
                Employer Identification No.)***21
                Corporate Drive, Suite 103, Clifton Park, NY**
              *(Address
                of principal executive offices)*
            
            **12065**
              *(Zip
                Code)*





**Registrant’s
      telephone number, including area code:**


**(518) 348-0099**





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





**Title
                of Each Class**
            
            **Name(s)
                of Each Exchange on Which Listed**Common
                Stock
            
            American
                Stock Exchange





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


**NONE**





Indicate
      by check mark if the registrant is a well-seasoned issuer, as defined in Rule
      405 of the Securities Act. Yes o No
x




Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act. Yes oNo
x




Indicate
      by check mark whether the registrant (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.  Yes x No
o




Indicate
      by check mark if disclosure of delinquent filers in response to Item 405 of
      Regulation S-K is not contained herein, and will not 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-K or
      any amendment to this Form 10-K. x




Indicate
      by check mark whether the registrant is a large accelerated filer, and
      accelerated filer, or a non-accelerated filer. (Check one):




Large
                Accelerated Filer o
            Accelerated
                Filer o
            Non-Accelerated
                Filer x









Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act. Yes oNo
x




The
      aggregate market value of the voting and non-voting common equity held by
      stockholders of the registrant as of June 30, 2006, was approximately
      $66,930,000.




**(APPLICABLE
      ONLY TO CORPORATE REGISTRANTS)**




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: 110,524,925
      shares as of April 30, 2007.




**EXPLANATORY
      NOTE**




This
      Amendment No. 1 on Form 10-K/A amends our Annual Report on Form 10-K for the
      year ended December 31, 2006 originally filed on March 23, 2007 (“Original
      Annual Report”) solely to incorporate information previously omitted from Part
      III, Items 10, 11, 12, 13 and 14. Other than as set forth herein, the
      registrant has not undertaken to update any information provided in the Original
      Annual Report.







**Table
      of Contents**





**PART
                III**
            
            1Item
                10.
            
            Directors,
                Executive Officers, Promoters and Control Persons; Compliance with
                Section 16(a) of the Exchange Act
            
            1Item
                11.
            
            Executive
                Compensation
            
            5Item
                12.
            
            Security
                Ownership Of Certain Beneficial Owners And Management and Related
                Stockholder Matters
            
            19Item
                13.
            
            Certain
                Relationships And Related Transactions
            
            22Item
                14.
            
            Principal
                Accounting Fees And Services
            
            22**SIGNATURES**
            
            24**INDEX
                TO EXHIBITS**
            
            25










**PART
      III**





**Item
                10.**
            ***Directors,
                Executive Officers and Corporate
                Governance***




**DIRECTORS
      AND EXECUTIVE OFFICERS**




The
      following sets forth the names, ages and title of the directors and the
      executive officers of On2 Technologies, Inc. (“On2”):




NAME
            
            AGE
            
            TITLEBill
                Joll
            
            
            50
            
            
            President
                and Chief Executive Officer, DirectorAnthony
                Principe
            
            
            54
            
            
            Executive
                Vice President and Chief Financial OfficerEric
                Ameres
            
            
            40
            
            
            Executive
                Vice President and Chief Technology OfficerMatthew
                Frost
            
            
            39
            
            
            Executive
                Vice President and General CounselJ.
                Allen Kosowsky
            
            
            58
            
            
            Chairman
                of the Board of DirectorsWilliam
                A. Newman
            
            
            58
            
            
            DirectorThomas
                Weigman
            
            
            58
            
            
            DirectorMike
                Kopetski
            
            
            56
            
            
            DirectorMike
                Alfant
            
            
            44
            
            
            DirectorAfsaneh
                Naimollah
            
            
            48
            
            
            DirectorJames
                Meyer
            
            
            48
            
            
            Director




No
      family
      relationship exists between any of the directors or executive officers of
      On2.





Mr.
      Joll
      has served as President and CEO of the Company since May 8, 2006. From April
      2005 to November 2005, Mr. Joll was a vice-president at RealNetworks, Inc.
      Prior
      to that, Mr. Joll served as CEO of Maple Optical from June 2000 to February
      2002, and of Threshold Networks from September 2002 to April 2005.





Mr.
      Principe has been the Company's Chief Financial Officer since September 2003.
      Prior to that Mr. Principe served as the Company's Corporate Controller from
      August 2002. From January 1999 to February 2002, Mr. Principe was the Corporate
      Controller for Wolf-tec, Inc. a leader in the meat-processing machine
      manufacturing industry. From December 1997 to December 1999, Mr. Principe was
      the controller of Energy Answers Corp., a holding company in the solid waste
      and
      waste-to-energy business.





Mr.
      Ameres has worked for the Company since 1994. He has been the Company's Chief
      Technology Officer since 2003. Prior to that, Mr. Ameres worked as a software
      developer for the Company.





Mr.
      Frost
      has been the Company's General Counsel since February 2006. From December 2003
      to February 2006, he was Deputy General Counsel of the Company. Prior to working
      at the Company, Mr. Frost was associated with the law firms of Robison &
Cole, LLP, from March 2003 to December 2003, and Pillsbury Winthrop LLP from
      2000 to March 2003.




1





Mr.
      Kosowsky has served as a Director of On2 since January 2003 and as the Chairman
      of the Board since February 2007, and is the Chairman of On2’s Audit Committee
      and its financial expert. Since 1992, Mr. Kosowsky has run J. Allen Kosowsky,
      CPA, P.C., a firm in Shelton, Connecticut that specializes in forensic
      accounting and analysis, business valuations, and interim management services.
      From November 1995 to April 2002, he was a director of Webster Bank. He has
      also served as interim CFO of FIND/SVP and Memry Corporation. In addition,
      until
      2003, Mr. Kosowsky served as an Advisory Board Member of the Digital Angel
      Trust, which oversaw financial interests in Digital Angel
      Corporation.





Mr.
      Newman has served as a Director of On2 since August of 2000. From November
      of
      1999 until the present, Mr. Newman has been the Managing Partner of the New
      York
      office of the law firm of McGuireWoods LLP.





Mr.
      Weigman has served as a Director of On2 since February 25, 2002. Since September
      2006, Mr. Weigman has been the Senior Vice President of Wireless Services at
      AirCell, a firm soon to introduce internet and communications services to US
      airlines. Between September 2000 and September 2006, Mr. Weigman was a principal
      at two consulting practices Riverstone Weston and MCAworks -- aimed at providing
      marketing counsel to technology oriented companies. From September 2003 until
      January 2004, Mr. Weigman was the Chief Marketing Officer of Intuit Inc., a
      software development company. From February 1999 to July 2000, Mr. Weigman
      was
      Senior Vice President, Consumer Strategy and Communications, of the Sprint
      Corporation. From January of 1995 to February of 1999 Mr. Weigman was the
      President of the Consumer Services Group--Long Distance Division of the Sprint
      Corporation. Since October 2005, Mr. Weigman has served on the board of
      directors of MDC Partners, a publicly-traded company.





Mr.
      Kopetski has served as a Director of On2 since August 2003. Mr. Kopetski has
      worked as an international trade consultant since January 1996. From 1991 to
      1995, he served as a member of the US House of Representatives from the 5th
      District of Oregon, where he served on the House Ways and Means
      Committee.





Mr.
      Alfant has served as a Director of On2 since May 2004. Since March 2000, Mr.
      Alfant has worked as a founder and partner in Building2, a technology investment
      company located in Tokyo and Boston. From 1992 to 1999, Mr. Alfant was president
      of Fusion Systems Japan, an IT solutions company that he founded and that was
      eventually acquired by IMRglobal Corporation. Mr. Alfant has chaired the High
      Technology committee of the American Chamber of Commerce in Japan (ACCJ) since
      January 1998.





Ms.
      Naimollah has served as a Director of On2 since May 2005. From January of 2000
      until the present, Ms. Naimollah has been the Managing Partner of Chela
      Technology Partners, a mergers and acquisition advisory firm that she
      founded.





Mr.
      Meyer
      has been a Director of On2 since May of 2005. From May 6, 2006 until the
      present, he has served as CEO of Mindset Media, LLC, an internet ad network,
      in
      Tarrytown, NY. From February 2006 to May 2006, he served as Interim President
      and Chief Executive Officer of On2. Previously, Mr. Meyer served as a managing
      director of Novantas, a consulting firm in New York, where he specialized in
      customer management, marketing strategy, and pricing. Prior to joining Novantas
      in 2002, Mr. Meyer was president of Golden Square, a branding and marketing
      consulting firm he founded, and senior advisor to The Cambridge Group, a
      strategy consulting firm. From January 1999 to February 2001, he served as
      president and chief strategy officer of M&C Saatchi, an advertising agency
      in New York.





**SECTION
      16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE**




Section
      16(a) of the Securities Exchange Act of 1934 (the "Exchange Act") requires
      our
      directors, executive officers and persons who own more than 10% of any class
      of
      our capital stock to file with the Securities and Exchange Commission initial
      reports of ownership and reports of changes in ownership and to provide copies
      of such reports to us. Based solely on a review of the copies of such reports
      furnished to us and written representations that no other reports were required
      to be filed during the fiscal year ended December 31, 2006, we believe that
      all
      filing requirements applicable to our officers, directors and beneficial owners
      of greater than 10% of our Common Stock have been complied with during the
      most
      recent fiscal year.




2





**CODE
      OF** **** **ETHICS**




On
      May
      25, 2005, the Board of Directors of On2 adopted a new Code of Ethics. The Code
      of Ethics applies to all employees and directors of On2, including the Chief
      Executive Officer, the Chief Financial Officer and all other executives of
      On2.
      On2 believes the Code of Ethics is reasonably designed to deter wrongdoing
      and
      to promote honest and ethical conduct, including: the ethical handling of
      conflicts of interest; compliance with applicable laws; protection of
      confidential information; prompt internal reporting of violations of the Code
      of
      Ethics; and accountability for adherence to the Code of Ethics. A copy of the
      Code of Ethics is available on our website at www.on2.com by first
      clicking on "Company" and then "Investors."




**CORPORATE
      GOVERNANCE**




The
      Compensation Committee of the Board (the “Compensation Committee”) was
      established by the Board to oversee our executive compensation plans and
      programs. The Compensation Committee comprises two non-employee Directors,
      James
      Meyer and Mike Alfant. The Board has determined each member of the Compensation
      Committee to be independent under the American Stock Exchange’s listing
      requirements. The Board has adopted a charter for the Compensation Committee,
      which is available on our website at www.on2.com by first
      clicking on “Company” and then “Investors.” The charter is also available in
      print to any stockholder by making a written request to Matthew Frost,
      Secretary, On2 Technologies, Inc., 21 Corporate Drive, Suite 103, Clifton Park,
      New York 12045.





The
      Compensation Committee’s responsibilities, which are discussed in detail in its
      charter, include the following:





·
            To
                recommend compensation philosophy and major compensation programs,
                and to
                administer particular programs for which the Compensation Committee
                is the
                designated administrator;




·
            To
                establish all components of the compensation of the chief executive
                officer;




·
            To
                set aggregate guidelines for the compensation of all our other officers,
                and to consult with the chief executive officer on the salary and
                total
                compensation of individual
                officers;




·
            To
                administer our 2005 Incentive Compensation
                Plan;




·
            With
                respect to stock option grants and other equity compensation, to
                establish
                maximum aggregate award levels; to set threshold levels for individual
                awards each year; to delegate to the chief executive officer the
                authority
                to make individual awards at or below that threshold; and to approve
                all
                individual awards above that threshold
                level;




·
            To
                determine whether a plan for bonuses to officers is desirable and,
                if so,
                to establish and administer such a plan or otherwise approve bonus
                grant
                to officers;




·
            To
                review and consider appropriate compensation for outside directors
                and
                make recommendations to the Board regarding Board compensation;
                and




·
            To
                review the Compensation Committee Charter annually and recommend
                any
                changes to the Board for approval.




In
      accordance with these responsibilities, the Compensation Committee makes
      decisions regarding the compensation of our chief executive officer. Decisions
      regarding non-equity compensation of our other officers are made by our chief
      executive officer pursuant to guidelines set by the Compensation Committee.
      In
      past years, we granted bonuses and equity compensation at year’s end. For 2006,
      however, we will make bonus and equity grants in the first half of 2007, based
      on the performance of the Company and individual Named Executives in 2006.
      We
      anticipate that we will continue to make bonus and equity grants based on the
      previous year’s performance in the first few months of the following
      year.




3





In
      January 2007, the Compensation Committee engaged James F. Reda & Associates,
      LLC (“James Reda”), an independent compensation consulting firm, to help On2
      identify a peer group of companies for reference purposes. This engagement
      was
      envisioned as the first of a series of projects connected with a review of
      our
      total compensation program for executive officers, and we thus expect James
      Reda
      to provide continuing advice and counsel to the Compensation Committee. The
      Compensation Committee believes that it is important to obtain and consider
      executive compensation market data, particularly with regard to a relevant
      peer
      group of companies. The Compensation Committee further believes that an
      independent compensation consulting firm can best provide and objectively
      analyze and interpret such benchmark data. James Reda will report directly
      to
      the Compensation Committee and the Compensation Committee will approve the
      scope
      of James Reda’s work and fees.





Historically,
      compensation was set according the employment agreement with the relevant
      executive officer at the time that executive was hired for or promoted to their
      position. Because most of the Named Executive have employment contracts with
      us,
      the Compensation Committee generally is not in a position to reduce an
      executive’s salary except upon re-negotiation of the contract. The Compensation
      Committee or the chief executive officer may from time to time increase an
      executive’s salary upon promotion, in response to a request from an executive
      or, on occasion, unilaterally based on performance.





When
      setting compensation for Named Executives, the Compensation Committee considers
      all elements of the executives’ compensation, with the overarching philosophy of
      setting total compensation that is competitive with executive salaries at
      comparable companies. The Compensation Committee believes that:





·
            Salaries
                should support a reasonable standard of living for the
                executive;


·
            Cash
                bonuses should reward achievement of annual performance goals;
                and


·
            Grants
                of equity should recognize long-term contribution and align the interests
                of executives with the interests of our shareholders.





In
      February 2006, our former Chief Executive Officer resigned and the Board of
      Directors appointed an interim Chief Executive Officer who served until May
      8,
      2006. In May 2006, we entered into an employment agreement with Bill Joll to
      serve as our Chief Executive Officer. In selecting Bill Joll as the successor
      Chief Executive Officer, the Compensation Committee relied heavily on the advice
      of various executive recruiting firms to negotiate the compensation of the
      Chief
      Executive Officer.





The
      Compensation Committee formally meets several times each year (4 times in 2006).
      The Compensation Committee meets informally more frequently, and consults
      informally with management, including the chief executive officer. Members
      of
      the Committee establish the agendas for their meetings, which are held in
      executive session. The Committee’s Chairman reports the Committee’s decisions on
      executive compensation to the Board. The General Counsel supports the
      Compensation Committee in its duties and, along with the chief executive
      officer, may be delegated authority to fulfill certain administrative duties
      regarding executive compensation programs. The Compensation Committee does
      not
      have authority under its charter to retain, approve fees for and terminate
      advisors, consultants, attorneys, and agents, but seeks agreement with the
      chief
      executive officer on funding as necessary to help it fulfill its
      responsibilities. As noted above, the Compensation Committee monitors the work
      that outside consultants perform for it and the fees paid for such work to
      ensure that those consultants maintain objectivity and independence when
      rendering advice to the committee. Additional information concerning the
      processes used by the Compensation Committee in setting executive compensation
      and the role of management in those processes is contained in the Compensation
      Discussion and Analysis.





In
      addition to these functions, the Compensation Committee has responsibility
      to
      review and approve, or recommend to the Board for its approval, the appropriate
      level of compensation for Directors. The compensation paid to non-management
      directors in 2006 is described below.




4





**Item
                11.**
            ***Executive
                Compensation***





**EXECUTIVE** **COMPENSATION**




**Compensation
      Discussion and Analysis**





**Overview
      of our Compensation Program**





The
      Compensation Committee oversees our executive compensation plans and general
      compensation and employee benefit plans, including incentive and equity-based
      plans. Information concerning the Compensation Committee, the scope of its
      authority and responsibilities, and its processes and procedures are described
      in the “Compensation Committee” section of the corporate governance
      discussion.





The
      individuals who served as our chief executive officer and our chief financial
      officer during fiscal year ended December 31, 2006, as well as the other
      individuals included in the Summary Compensation Table, are referred to in
      this
      proxy statement as the “Named Executive Officers.”





**Compensation
      Philosophy and Objectives**





Our
      compensation program for the Named Executive Officers is intended to attract,
      retain, motivate and appropriately reward talented executives who can contribute
      significantly to our financial growth and success, and thereby build value
      for
      our stockholders over the long term. The program has the following specific
      goals:





·
            To
                offer a total compensation package to the Named Executive Officers
                that is
                competitive in the marketplace for executive
                talent.





·
            To
                motivate the Named Executive Officers to achieve our business objectives
                by providing incentive compensation awards that take into account
                our
                overall performance and that measure performance against those business
                objectives.





·
            To
                provide equity-based, long-term compensation arrangements that create
                meaningful incentives for the Named Executive Officers to maximize
                our
                near and long-term future performance, that align their interests
                with our
                shareholders', and encourage the Named Executive Officers to remain
                with
                the Company.





To
      achieve these objectives, the Compensation Committee is developing certain
      processes for setting Named Executive Officer compensation and is constructing
      an overall compensation program that consists of a number of elements, as
      described below.





**Setting
      Executive Compensation**





*General
      Processes*





In
      establishing compensation of Named Executives, the Compensation Committee has
      relied heavily on the terms of existing employment agreements with executive
      officers to establish executive compensation. Those agreements were entered
      into
      before the Company had articulated its current compensation philosophy, and
      thus, do not fully reflect the compensation principles that the Committee has
      since established. As we renew our executives’ employment agreements, we will
      work to ensure that the terms of the agreements dovetail with our compensation
      philosophy.





The
      Compensation Committee intends to use certain performance measures as the bases
      for determining annual cash incentive compensation. The Compensation Committee
      intends for annual cash incentive compensation to be linked to attainment of
      specific target performance measures. The specific target performance measure
      for 2007 will be cash flow. Further, the Named Executive Officers will not
      receive a bonus unless we have positive cash flow, and the payment of bonuses
      may not result in negative cash flow for us.




5





Generally,
      the bonus for each Named Executive Officer will be based on a percentage of
      his
      salary. The minimum amount of cash incentive compensation that Named Executive
      Officer can achieve will be $0 and will increase up to 20% of the Named
      Executive Officer’s salary on a schedule as our cash flow increases up to a
      pre-determined target amount. Thereafter, the cash incentive compensation will
      be based on performance toward a second, higher target amount, up to a maximum
      amount of cash incentive compensation equal to 50% of the Named Executive
      Officer’s salary, again on a schedule that links actual cash flow achieved with
      percentage of salary payable as bonus. The Compensation Committee will make
      subjective determinations as to the cash flow performance targets that must
      be
      attained for the Named Executive Officers to earn each of the two tiers of
      cash
      incentive compensation. In addition to this programmatic approach, the committee
      retains the discretion to grant cash bonuses as necessary to account for special
      circumstances or extraordinary individual or company performance.





The
      Compensation Committee intends annually to review and benchmark the total
      compensation program for the Named Executive Officers against relevant market
      data. The Compensation Committee anticipates retaining James Reda to assist
      in
      the benchmarking process, which will involve a comparison of various components
      of total compensation against a peer group of publicly traded companies (the
      “Peer Group”). The Compensation Committee has selected the Peer Group companies
      based on their similarities to us in revenue, earnings and capital and
      management structures, and the Board has adopted the Peer Group based on the
      Compensation Committee’s recommendation. The Compensation Committee included in
      the Peer Group some companies that, because of their recent acquisition or
      changes in ownership structure, have recently ceased to be publicly traded.
      The
      Peer Group will be reviewed periodically by the Compensation Committee and
      Board
      and updated as necessary to maintain comparability, including to remove those
      companies that have recently ceased to be publicly traded. The companies
      currently composing the Peer Group are:





·
            Audible
                Inc.


·
            Broadcaster
                Inc.


·
            CaminoSoft
                Corp.


·
            DG
                FastChannel Inc.


·
            DivX,
                Inc.


·
            eGames
                Inc.


·
            Global
                Entertainment Holdings/Equities


·
            Loudeye
                Corp.


·
            OpenTV
                Corp.


·
            SmartVideo
                Technologies, Inc.


·
            Sonic
                Foundry, Inc.


·
            SRS
                Labs, Inc.


·
            TouchStone
                Software Corp.


·
            VitalStream
                Holdings, Inc.


·
            Wizzard
                Software Corp.





The
      Compensation Committee will compare its executive compensation programs as
      a
      whole to those maintained by the members of the Peer Group to determine whether
      our programs are reasonable in the aggregate. In addition, the Compensation
      Committee will compare the pay of its individual Named Executive Officers with
      that of executives of the Peer Group companies who hold functionally comparable
      positions.





*Allocating
      Between Different Types of Compensation*





The
      Compensation Committee believes that executive compensation should include
      a mix
      of different types of compensation and takes this consideration into account
      when structuring the total compensation for each Named Executive Officer. The
      allocation among different types of compensation is based on the employment
      agreement with the Named Executive Officer, where such agreements exist. Within
      the parameters set by the employment agreements, if any, the Compensation
      Committee intends to reward recent performance and create incentives for
      long-term enhancements in shareholder value. For example, the Compensation
      Committee allocates a portion of each Named Executive Officer’s total
      compensation to an annual variable compensation program that links the amount
      of
      bonus pay directly to the annual performance of On2. This is achieved through
      our annual cash incentive plan, which is further described below. In setting
      the
      amounts potentially payable under the annual cash incentive plan, the
      Compensation Committee takes into account other annual cash compensation payable
      to each Named Executive Officer and how that compensation compares to the amount
      of annual cash compensation paid by companies in the Peer Group. In setting
      the
      terms of the future employment agreements and when setting future compensation,
      the Compensation Committee anticipates setting total annual cash compensation
      in
      the middle percentile of the Peer Group for performance that meets our annual
      business objectives and between the 50 th and
      80 th percentile of the Peer Group for performance that substantially exceeds annual
      business objectives.




6





The
      Compensation Committee also seeks to allocate a portion of total compensation
      to
      long-term, equity-based compensation. Equity-based compensation is designed
      to
      motivate the creation of long-term shareholder value and simultaneously enhance
      executive retention. The Compensation Committee typically uses stock options
      because this form of equity compensation provides the executive with value
      only
      if the price of our stock when the option is exercised exceeds the option’s
      exercise price. This provides an incentive to increase stock price over the
      term
      of the option. To enhance retention goals and provide balance with stock
      options, the Compensation Committee may also grant restricted stock. The
      Compensation Committee anticipates that long-term, equity based compensation
      will constitute a larger percentage of each Named Executive Officer’s total
      compensation in future years as the Compensation Committee has additional
      opportunity to structure appropriately targeted awards of this
      type.





*Role
      of Executive Officers in Compensation Decisions*





Decisions
      on the compensation of the chief executive officer are made by the Compensation
      Committee. Compensation decisions on the other Named Executive Officers are
      made
      by the chief executive officer, pursuant to guidelines established by the
      Compensation Committee. Decisions regarding non-equity compensation of employees
      who are not Named Executive Officers are made by our chief executive officer
      in
      consultation with other members of management and the Compensation Committee.
      The chief executive officer, in consultation with the Compensation Committee,
      annually reviews the performance of the other Named Executive Officers. The
      Compensation Committee may exercise discretion to modify any recommended salary
      adjustment or award as it deems appropriate under the
      circumstances.





**2006
      Executive Compensation Components**





For
      the
      2006 fiscal year, the principal components of compensation for the Named
      Executive Officers were:





·
            base
                salary;





·
            performance-based
                incentive compensation; and





·
            long-term
                equity incentive compensation.





In
      addition, employment agreements with three of our Named Executive Officers
      provide for certain potential payments upon termination of employment for a
      variety of reasons, as well as certain payments and benefits during the
      executive’s employment. The Compensation Committee does not currently believe
      that perquisites, such as club memberships or automobile allowances, have a
      significant role to play in executive compensation. Each of the elements of
      the
      executive compensation program is discussed in the following paragraphs.





*Base
      Salary*





Base
      salaries are designed to compensate the Named Executive Officers for faithful
      execution of their individual responsibilities. The base salaries of the chief
      executive officer, executive vice president and chief technology officer, and
      the executive vice president and general counsel are set forth in the applicable
      employment agreement with the executive. The employment agreement of the chief
      executive officer will expire on May 1, 2008. The employment agreement of the
      executive vice president and general counsel will expire on February 8, 2008.
      The employment agreement of the executive vice president and chief technology
      officer will expire on September 15, 2009. When we enter into new or amended
      employment agreements with such Named Executive Officers, or if we enter into
      an
      employment agreement with another executive officer, the Compensation Committee
      will review the base salaries and adjust them based on a number of relevant
      factors. During its review of base salaries, the Compensation Committee
      primarily considers the following:




7





·
            relevant
                market data developed in connection with the benchmarking process
                described above;





·
            the
                executive’s role and
                responsibilities;





·
            and,
                in cases of renewal, the past performance of the
                executive.





Of
      the
      factors described above, primary consideration will be given to relevant market
      data in setting base salaries because the Compensation Committee believes that
      base compensation for executives should be close to the fiftieth percentile
      of
      the peer group and that upside potential in total compensation is achieved
      through the performance-based and long-term incentive compensation programs.
      Factors, other than those listed above, that may cause the Compensation
      Committee to deviate from the benchmarking salary data include an executive’s
      experience in a particular role, retention concerns, and the Compensation
      Committee’s judgment based on an executive’s leadership qualities, career with
      us, and long-term potential to enhance shareholder value.





Base
      salaries for other Named Executive Officers are set by the chief executive
      officer, within the guidelines established by the Compensation Committee. Those
      guidelines are based on the salaries set by the Compensation Committee for
      those
      Named Executive Officers that have employment agreements with us.





In
      setting base salaries for the chief executive officer in 2006, the Compensation
      Committee primarily relied upon the assistance of the executive search firm
      that
      assisted us in locating a suitable replacement for the chief executive officer
      who resigned in 2006. The data relied upon included the base salaries and total
      compensation for recently placed chief executive officers in technology business
      of similar size and lifestage.





*Annual
      Cash Incentive Compensation*





Our
      annual cash incentive plan is designed to reinforce the importance of both
      teamwork and individual initiative and effort, and to provide an incentive
      for
      employees to achieve and surpass targeted performance goals. As described below,
      bonuses to officers are based on a percentage of salary and are linked to
      metrics established by the Board. Bonuses to other employees are payable from
      a
      bonus pool that is budgeted for at the beginning of the fiscal year and are
      based on individual performance or achievement of technical goals. ****





For
      2007,
      the annual bonus amount for Named Executive Officers will be based on one or
      more Company-wide performance measures. The specific target performance measure
      for 2007 will be cash flow, that is, revenue minus operating expenses. Under
      the
      plan, Named Executive Officers will not receive a bonus unless we have positive
      cash flow, and the payment of bonuses may not result in negative cash flow
      for
      us.





Generally,
      the bonus for each Named Executive Officer will be based on a percentage of
      the
      participant’s base salary. This year, the minimum threshold for cash incentive
      compensation will be $0 and will increase up to 20% of the Employee/Named
      Executive Officer’s salary as our cash flow increases up to a pre-determined
      target amount. Thereafter, the cash incentive compensation will be based on
      performance toward a second, higher target amount, up to a maximum amount of
      cash incentive compensation equal to 50% of the Employee/Named Executive
      Officer’s salary.





Each
      year, the Compensation Committee will consider how to structure performance
      measures to ensure that the amount of the cash incentive potentially payable
      under the plan is properly aligned with our business objectives and strategic
      initiatives. As noted above, for 2007, the Compensation Committee has determined
      that cash flow is the primary financial measure that should be used to measure
      performance with regard to the annual cash incentive compensation plan.





The
      annual bonus amount paid in 2006 was for the 2005 year. Eric Ameres received
      a
      discretionary bonus of $9,000 and Tim Reusing received a discretionary bonus
      of
      $10,000. None of our other Named Executive Officers received annual cash
      incentive compensation during 2006 for their performance during the 2005 year.
      The amounts of the cash incentive compensation paid for the 2005 year reflected
      the Company’s continued negative cash flow situation.




8





Company-wide
      performance measures for the 2006 cash incentive plan were not defined prior
      to
      the end of 2006. The Compensation Committee intended to establish the target
      performance levels for 2006 based on a budget target. The 2006 plan funding
      was
      based on base salaries for all eligible employees as of December 31, 2006.
      The
      level of total funding for the plan for 2006 was determined during conversations
      between the Board and the Chief Executive Officer regarding the Company's
      performance in 2006.





*Long-Term
      Equity Incentive Compensation*





Consistent
      with our compensation philosophy, long-term equity incentives are an important
      component of each Named Executive Officer’s total compensation package. We have
      generally awarded stock options to the Named Executive Officers and other key
      management employees. These stock option awards are designed to:





·
            reward
                and encourage long-term contribution to the
                Company




·
            align
                executives' interests with the interests of
                shareholders;




·
            help
                achieve competitive levels of total
                compensation.





During
      2006, the Company only awarded long-term equity compensation only to Mr. Joll
      and Mr. Frost. Mr. Joll was awarded options to purchase 1,350,000 shares of
      common stock at an exercise price of $.90 per share. The options were issued
      to
      Mr. Joll in connection with the commencement of his employment with the Company.
      The options vested in one installment of 333, 334 shares on May 1, 2006, one
      installment of 333,333 shares on November 8, 2006, with the remainder to vest
      in
      one installment of 333,333 shares on May 8, 2007 and one installment of 500,000
      shares on May 8, 2008.





Mr.
      Frost
      was awarded options to purchase 75,000 shares of common stock at an exercise
      price of $0.82 per share. The options were issued to Mr. Frost in connection
      with his promotion to General Counsel. The options vested in one installment
      of
      37,500 shares on April 3, 2006 and one installment of 37,500 shares on February
      28, 2007.





The
      Compensation Committee intends to determine stock option award levels based
      on
      consideration of a number of factors, including discussions with the chief
      executive officer and other executives. For 2006, stock option awards were
      approved in the first quarter of 2007 and will be granted in the second quarter
      of 2007. However, newly appointed or promoted executives or management personnel
      may receive an additional stock grant at other times during the year.





Grants
      are not directly connected to an executive’s salary or bonus. Grants of stock
      options or restricted stock awards will usually be subject to less dramatic
      variation than cash incentive compensation. For instance, in a year when an
      executive’s performance evaluation was good, he might receive an equity award
      that is slightly larger than that received by other executives. But if, in
      that
      same year, our financial performance did not meet targets, then the executive
      would not receive a bonus. If, however, in the following year, the executive’s
      performance evaluation was again good and our financial performance exceeded
      targets, then the executive would receive an equity award that, while higher
      than other executives’, was approximately the same as in the previous year. On
      account of our financial performance in that year, however, he would also
      receive a bonus; like the award of equity, that bonus would also be adjusted
      upward because of the employee’s exceptional performance.





Grants
      will generally be awarded during the first quarter of the fiscal year in order
      to coincide with the timing of annual reviews and compensation determinations,
      and because our fiscal year-end results have generally been announced by this
      time. Equity awards are awarded under our 2005 Incentive Compensation Plan,
      which requires that the option exercise price be based on the average of the
      high and low price of our common stock on the trading day preceding the date
      the
      option is granted. The Compensation Committee does not grant options with an
      exercise price that is less than the fair market value of our common stock,
      as
      determined according to the 2005 Incentive Compensation Plan, or grant options
      which are priced on a date other than the grant date, unless for some reason
      the
      date proceeding the date is not a trading date, in which case the average of
      the
      high and low price of our common stock on the preceeding trading day is
      used.




9





*Retirement
      and Other Benefits*





We
      maintain a tax-qualified Section 401(k) savings plan available to all of our
      employees, including the Named Executive Officers. The plan provides a matching
      contribution equal to 100% of an employee’s contributions, up to a maximum
      contribution of $1,000. All contributions to the Section 401(k) savings plan,
      including the matching contributions, are fully-vested upon
      contribution.





Our
      other
      benefit plans primarily include medical and other health care benefits, group
      life insurance, disability and tuition assistance. The Compensation Committee
      has reviewed these other components of compensation in relation to the total
      compensation of the Named Executive Officers, and determined that they are
      reasonable and appropriate.





We
      do not
      maintain any defined benefit pension plans or any nonqualified deferred
      compensation arrangements.





*Perquisites
      and Other Personal Benefits*





We
      do not
      provide the Named Executive Officers with any perquisites or other similar
      personal benefits and the Compensation Committee does not currently believe
      that
      perquisites, such as club memberships or automobile allowances, have a
      significant role to play in executive compensation.





*Employment
      Agreements*





Mr.
      Joll, Mr. Ameres and Mr. Frost are parties to employment agreements with us. Each
      of
      these agreements provides for certain payments and other benefits if the
      executive’s employment terminates under specified circumstances, as well as
      certain payments and benefits during the executive’s employment. The
      Compensation Committee believed that these employment arrangements were an
      important part of our overall executive compensation program at that time
      because they served as a recruitment and retention device. However, the
      Compensation Committee has not determined that it is necessary to enter into
      employment agreements with other executives at this time. More information
      concerning these employment agreements is contained in the “Employment
      Agreements” section and in the “Potential Payments Upon Termination”
section.





**COMPENSATION
      COMMITTEE REPORT**





The
      Compensation Committee oversees On2’s executive compensation program on behalf
      of the Board. In fulfilling its oversight responsibilities, the Compensation
      Committee reviewed and discussed with On2 management the Compensation Discussion
      and Analysis set forth in this proxy statement. Based on such review and
      discussions, the Compensation Committee recommended to the Board that the
      Compensation Discussion and Analysis be included in this proxy
      statement.




James Meyer, ChairmanMichael Alfant




10


**SUMMARY
      COMPENSATION TABLE**





The
      following table provides summary information regarding compensation earned
      by
      the Named Executive Officers during the fiscal year ended December 31, 2006.





**Name
                and Principal Position**
            
            **Year**
            
            **Salary**
            
            **Bonus**
            
            **Option
                Awards****2******
            
            **All
                Other Compensation****3******
            
            **Total**Douglas
                A. McIntyre
              Chief
                Executive Officer, President and Chairman, Former
            
            
            2006
            
            $
            36,000
            
            $
            175,000
            
            
            
            
            $
            27,0005
            
            $
            238,000James
                Meyer
              Interim
                Chief Executive Officer, Former4
            
            
            2006
            
            $
            109,000
            
            
            
            
            
            
            
            
            
            
            
            109,000Bill
                Joll
              Chief
                Executive Officer and President1
            
            
            2006
            
            $
            211,000
            
            
            
            
            $
            784,000
            
            
            
            
            
            995,000Anthony
                Principe
              Executive
                Vice President and Chief Financial Officer
            
            
            2006
            
            $
            120,000
            
            
            
            
            
            
            
            
            1,000
            
            
            121,000Eric
                L. Ameres
              Executive
                Vice Presidentand
                Chief Technology Officer
            
            
            2006
            
            $
            190,000
            
            $
            9,000
            
            
            
            
            
            1,000
            
            
            200,000Matthew
                Frost
              Executive
                Vice President and General Counsel
            
            
            2006
            
            $
            179,000
            
            
            
            
            
            46,000
            
            
            1,000
            
            
            226,000Timothy
                C. Reusing
              Executive
                Vice President - Legal and Business Affairs, Former
            
            
            2006
            
            $
            233,000
            
            $
            10,000
            
            
            
            
            
            1,000
            
            
            244,000





1 Mr. Joll
      commenced employment on May 8, 2006 at an annual
      base salary of $325,000. His salary for 2006 was prorated to reflect his
      employment for only the relevant portion of the year.





2 This
      column represents the dollar amount recognized for financial statement reporting
      purposes with respect to the 2006 fiscal year for the fair value of stock
      options granted to each of the Named Executive Officers in 2006 as well as
      prior
      fiscal years, determined in accordance with SFAS 123R. The amounts shown exclude
      the impact of estimated forfeitures related to service-based vesting conditions.
      For additional information on the valuation assumptions with respect to the
      2006
      grants, refer to note 1(k) of our financial statements in the Form 10-K for
      the
      year ended December 31, 2006, as filed with the SEC. See the Grants of
      Plan-Based Awards Table at page 12 for information on options granted in 2006.
      These amounts reflect our accounting expense for these awards, and do not
      correspond to the actual value that may be recognized by the Named Executive
      Officers. Options awarded to Mr. Joll during the 2006 fiscal year were granted
      on May 1, 2006. Options awarded to Mr. Frost during the 2006 fiscal year were
      granted on April 3, 2006.





3 See the
      All Other Compensation Table for additional information.





4 Mr.
      Meyer also received compensation in 2006 for his service on On2’s Board of
      Directors. See page 19.





5 Mr.
      McIntyre received this compensation for consulting services provided after
      termination of his employment as President, Chairman and Chief Executive
      Officer.




11


**All
      Other Compensation Table**





The
      All
      Other Compensation in the Summary Compensation Table reports the company
      matching contributions to the named executive’s section 401(k) savings plan
      account of up to $1,000 (subject to the limitations imposed by
      law).





**GRANTS
      OF PLAN-BASED AWARDS IN 2006**





The
      following table provides information about equity and non-equity awards granted
      to the Named Executive Officers in 2006. This information includes (1) the
      grant
      date of the award; (2) the estimated payouts under non-equity incentive plan
      awards, which consist of the potential payout levels under the 2006 annual
      performance-based incentive plan; (3) the number of shares underlying restricted
      stock awards; (4) the number of shares underlying stock option awards; (5)
      the
      exercise price of the stock option awards, based on closing price of our common
      stock on the date of grant and (6) the grant date fair value of each equity
      award, computed under SFAS 123R.


**Name**
              
              
              **Grant
                  Date**
              
              
              **All
                  Option Awards: Number of Securities Underlying
                  Options**1
              
              
              **Exercise
                  or Base Price of Option Awards)****2**
              
              
              **Grant
                  Date Fair Value of Stock and Option Awards****3**Douglas
                  A. McIntyre
              
              
              
              
              
              _____James
                  Meyer
              
              
              
              
              
              _____Bill
                  Joll
              
              
              May
                  9, 2006
              
              
              1,500,000
              
              $
              0.90
              
              $
              1,114,000Anthony
                  Principe
              
              
              
              
              
              _____Eric
                  L. Ameres
              
              
              
              
              
              _____Matthew
                  Frost
              
              
              April
                  3, 2006
              
              
              75,000
              
              $
              0.82
              
              $
              51,000Timothy
                  Reusing
              
              
              
              
              
              _____





1 This
      column shows the number of stock options granted in 2006 to the Named Executive
      Officers. The 1,500,000 options issued to Mr. Joll vested in one installment
      of
      333, 334 shares on May 1, 2006, one installment of 333,333 shares on November
      8,
      2006, with the remainder to vest in one installment of 333,333 shares on May
      8,
      2007 and one installment of 500,000 shares on May 8, 2008. The options issued
      to
      Mr. Frost vested in one installment of 37,500 shares on April 3, 2006 and one
      installment of 37,500 shares on February 28, 2007.





2 This
      column shows the exercise price (per share) for the stock options granted,
      which
      was the average of the high and low prices of a share of our common
      stock **** on
      the
      last date on which our stock was traded prior to the date on which the
      Compensation Committee granted the options.





3 This
      column shows the full grant date fair value of stock options under SFAS 123R
      granted to each of the Named Executive Officers in 2006. Generally, the full
      grant date fair value is the amount that we would expense in our financial
      statements over the award’s vesting schedule. For stock options, fair value is
      calculated using the Black-Scholes option-pricing model which takes into account
      volatility in the price of our stock, the risk-free interest rate, the estimated
      life of the award, the closing market price of our stock on the date of grant
      and the exercise price. For additional information on the valuation assumptions,
      refer to note 1(k) of our financial statements in the Form 10-K for the year
      ended December 31, 2006, as filed with the SEC. These amounts reflect our
      accounting expense, and do not correspond to the actual value that may be
      recognized by the Named Executive Officers.




12


**Narrative
      to Summary Compensation Table and Plan-Based Awards Table**





*Employment
      Agreements.* During
      2006, Mr. Joll, Mr. Ameres and Mr. Frost were employed pursuant to employment
      agreements with us .
      Each
      agreement specifies the Named Executive Officer’s base salary, annual bonus
      opportunity, benefits during employment and post-termination benefits. The
      employment agreements also impose on each Named Executive Officer certain
      obligations following termination of their employment.





Mr. Joll’s
      employment agreement has an initial term that ends on May 7, 2008. The term
      will
      be automatically extended thereafter for a one-year term unless either party
      provides notice of non-extension at least ninety days prior to the expiration
      of
      the original term. Mr. Joll’s agreement provides for an initial base salary
      of $325,000. The agreement provides for a discretionary bonus for the fiscal
      year ending December 31, 2006, ranging from 33% of base salary based on
      attainment of an agreed-upon budget to 67% of base salary. A threshold budget
      was adopted by the Compensation Committee after the end of the 2006 fiscal
      year;
      the target budget specified under the Agreement that would have entitled Mr.
      Joll to receive the 67% bonus was achievement of positive earnings before
      interest, taxes, depreciation and amortization. We did not achieve positive
      earnings before interest, taxes, depreciation and amortization in fiscal 2006,
      so the discretionary bonus of 33% of base salary, $107,250, will be paid to
      Bill
      Joll based upon the budget adopted by the Compensation Committee at the end
      of
      the 2006 fiscal year.





Pursuant
      to the agreement with Mr. Joll, we granted to him options to purchase 1,500,000
      shares of our common stock at an exercise price of $.90 per share. The options
      vested in one installment of 333,334 shares on May 1, 2006, one installment
      of
      333,333 shares on November 8, 2006, with the remainder to vest in one
      installment of 333,333 shares on May 8, 2007 and one installment of 500,000
      shares on May 8, 2008. The exercise price of $0.90 for the stock options granted
      was the average of the high and low price of our common stock on April 28,
      2006,
      the trading day preceeding the date on which the Compensation Committee approved
      the grant of the options.





In
      addition, the agreement also entitles Mr. Joll to participate in employee
      benefit plans which are available to our other senior executives, annual
      vacation and reimbursement of reasonable travel and other business
      expenses.





Mr.
      Frost’s employment agreement has an initial term that ends on February 28, 2008.
      The term may be extended upon our agreement with Mr. Frost. Mr. Frost’s
      agreement provides for an annual base salary of $182,500 per year and an annual
      discretionary bonus pursuant to the bonus plan available to the most senior
      members of our management. Mr. Frost also received stock options to purchase
      75,000 shares of our common stock, to be granted under our 2005 Incentive
      Compensation Plan. One-half of the options vested on March 8, 2006, the date
      of
      grant, and the other half of the options vested on February 28, 2007. The
      exercise price was $0.82, which was the average of the high and low price of
      our
      common stock on March 31, 2006, the trading day preceeding the date on which
      the
      Compensation Committee granted the options. The agreement also provides that
      Mr.
      Frost is entitled to participate in employee benefit plans which are available
      to our other senior executives, annual vacation and reimbursement of reasonable
      business expenses.





Mr.
      Joll, Mr. Ameres and Mr. Frost are entitled to certain payments and benefits
      under their employment agreements if they are terminated by us without cause.
      For additional information concerning these payments and benefits, see Potential
      Payments Upon Termination on page 16.





*Salary
      and Cash Incentive Awards in Proportion to Total Compensation.* As noted in the Compensation Discussion and Analysis, the Compensation Committee
      believes that a portion of each Named Executive Officer’s compensation should be
      in the form of equity awards; however, the Compensation Committee awarded very
      little cash incentive compensation and long-term equity incentive compensation
      as a result of the Company’s continued negative cash flow in 2005. The following
      table sets forth the percentage of each Named Executive Officer’s total
      compensation that was paid in the form of base salary and cash incentive award
      under the 2006 performance-based incentive plan. The Compensation Committee
      anticipates that salary and cash incentive awards will constitute a smaller
      percentage of each Named Executive Officer’s total compensation in future years
      as the Compensation Committee has additional opportunity to structure
      appropriately targeted long-term equity-based incentive awards, such as stock
      options and restricted stock and the Company achieves
      profitability.




13





**Name**
            
            **Percentage
                of Total Compensation**Douglas
                A. McIntyre
            
            
            100
            %James
                Meyer
            
            
            100
            %Bill
                Joll
            
            
            21
            %Anthony
                Principe
            
            
            100
            %Eric
                Ameres
            
            
            100
            %Matthew
                Frost
            
            
            80
            %Timothy
                C. Reusing
            
            
            100
            %





As
      described above, we have moved from a practice of awarding cash bonuses and
      equity compensation at the end of a fiscal year to a practice of making such
      awards at the beginning of a fiscal year, based upon the previous year’s
      performance. Accordingly, the amount of equity compensation awarded to Named
      Executive Officers in 2006, other than to those officers who received promotions
      or were newly hired, is significantly lower than it has been in past years,
      or
      will likely be in the future.





**OUTSTANDING
      EQUITY AWARDS AT 2006 FISCAL YEAR-END**





The
      following table provides information about the stock option awards held by
      the
      Named Executive Officers as of December 31, 2006. This information includes
      unexercised and unvested stock options. Each equity award is separately shown
      for each Named Executive Officer. The vesting schedule for each stock option
      award is shown immediately following the table based on the date on which the
      stock option award was granted.





**Option
                Awards****Name**
            
            **Option
                Grant Date**
            
            **Number
                of Securities Underlying Unexercised Options
                Exercisable**
            
            **Number
                of Securities Underlying Unexercised Options
                Unexercisable**
            
            **Equity
                Incentive Plan Awards: Number of Securities Underlying Unexercised
                Unearned Options**
            
            **Option
                Exercise Price**
            
            **Option
                Expiration Date**
            
            **Option
                Awards Vesting Schedule**Bill
                Joll
            
            
            5/1/2006
            
            
            666,667
            
            
            333,333
            
            
            
            
            $
            0.90
            
            
            5/1/2014
            
            
            33.34%
                vests on 5/1/06; 33.33% vests on 11/8/06; 33.33% vests on
                5/8/075/1/2006
            
            
            
            
            
            500,000
            
            
            
            
            $
            0.90
            
            
            5/1/2014
            
            
            100%
                vests on 5/8/08Anthony
                Principe
            
            
            8/26/2002
            
            
            12,500
            
            
            
            
            
            
            
            $
            014
            
            
            8/26/2012
            
            
            25%
                immediately; 25% 1 year after grant; 25% 2 years after grant; 25%
                3 years
                after grant10/1/2002
            
            
            10,000
            
            
            
            
            
            
            
            $
            0.32
            
            
            10/1/2012
            
            
            50%
                in 6 months; 50% 1 year after grant11/15/2003
            
            
            50,000
            
            
            
            
            
            
            
            $
            1.25
            
            
            11/15/2013
            
            
            50%
                immediately; 50% 1 year after grant5/13/04
            
            
            35,000
            
            
            
            
            
            
            
            $
            0.66
            
            
            5/13/2014
            
            
            50%
                immediately; 50% 1 year after grant12/3/2004
            
            
            40.000
            
            
            
            
            
            
            
            $
            0.57
            
            
            12/3/2014
            
            
            100%
                1 year after grant6/27/2005
            
            
            40,000
            
            
            
            
            
            
            
            $
            0.59
            
            
            6/27/2013
            
            
            50%
                immediately; 50% 1 year after grant11/18/2005
            
            
            100,000
            
            
            
            
            
            
            
            $
            0.79
            
            
            11/18/2013
            
            
            50%
                immediately; 50% 1 year after grantEric
                Ameres
            
            
            7/27/1999
            
            
            50,000
            
            
            
            
            
            
            
            $
            16.63
            
            
            7/27/2009
            
            
            33%
                1 year after grant; 33.33% 2 years after grant; 33.34% 3 years after
                grant5/17/2000
            
            
            100,000
            
            
            
            
            
            
            
            $
            11.81
            
            
            5/17/2010
            
            
            33%
                1 year after grant; 33.33% 2 years after grant; 33.34% 3 years after
                grant4/1/2003
            
            
            100.000
            
            
            
            
            
            
            
            $
            0.40
            
            
            4/1/2013
            
            
            33%
                1 year after grant; 33.33% 2 years after grant; 33.34% 3 years after
                grant




14




8/9/2001
            
            
            50,000
            
            
            
            
            
            
            
            $
            0.80
            
            
            8/9/2011
            
            
            50%
                immediately; 50% 1 year after grant7/2/2004
            
            
            200,000
            
            
            
            
            
            
            
            $
            0.68
            
            
            7/2/2014
            
            
            50%
                immediately; 50% 1 year after grant5/5/2005
            
            
            200,000
            
            
            
            
            
            
            
            $
            0.57
            
            
            5/5/2013
            
            
            100%
                on 12/3/0511/18/2007
            
            
            200,000
            
            
            
            
            
            
            
            $
            0.79
            
            
            11/18/2013
            
            
            50%
                immediately; 50% 1 year after grantMatthew
                Frost
            
            
            12/15/2003
            
            
            75,000
            
            
            
            
            
            
            
            $
            1.36
            
            
            12/15/2013
            
            
            33.33%
                immediately; 33.33% 1 year after grant; 33.34% 2 years after
                grant5/13/2004
            
            
            35,000
            
            
            
            
            
            
            
            $
            0.66
            
            
            5/13/2014
            
            
            50%
                immediately; 50% 1 year after grant12/3/2004
            
            
            140,000
            
            
            
            
            
            
            
            $
            0.57
            
            
            12/3/2014
            
            
            100%
                1 year after grant11/18/2005
            
            
            100,000
            
            
            
            
            
            
            
            $
            0.79
            
            
            11/18/2013
            
            
            50%
                immediately; 50% 1 year after grant4/3/2006
            
            
            37,500
            
            
            37,500
            
            
            
            
            $
            0.81
            
            
            4/3/2014Douglas
                A. McIntyreJames
                Meyer
            
            
            5/11/2005
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            100%
                immediately11/18/2005
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            100%
                immediatelyTimothy
                Reusing
            
            
            4/1/2003
            
            
            33,334
            
            
            
            
            
            
            
            $
            0.40
            
            
            4/1/2013
            
            
            33%
                1 year after grant; 33.33% 2 years after grant; 33.34% in 3
                years11/5/2003
            
            
            84,000
            
            
            
            
            
            
            
            $
            1.25
            
            
            11/5/2013
            
            
            50%
                immediately; 50% 1 year after grant7/2/2004
            
            
            200,000
            
            
            
            
            
            
            
            $
            0.68
            
            
            7/2/2014
            
            
            50%
                immediately; 50% 1 year after grant6/15/2005
            
            
            200,000
            
            
            
            
            
            
            
            $
            0.57
            
            
            5/5/2013
            
            
            100%
                on 12/3/0511/18/2005
            
            
            100,000
            
            
            
            
            
            
            
            $
            0.79
            
            
            11/18/2013
            
            
            100%
                1 year after grant





**OPTION
      EXERCISES AND STOCK VESTED IN FISCAL 2006**





The
      following table provides information for the Named Executive Officers regarding
      stock options that were exercised during fiscal 2006.





**Option
                  Awards**
            
            **Stock
              Awards****Name**
            
            **Number
                of Shares Acquired on Exercise**
            
            **Value
                Realized on Exercise**
            
            **Number
                of Shares Acquired on Vesting**
            
            **Value
                Realized on Vesting**Bill
                JollAnthony
                PrincipeEric
                AmeresMatthew
                FrostDouglas
                A. McIntyre1
            
            
            1,475,000
            
            $
            1,138,433James
                MeyerTimothy
                C.
              Reusing2
            
            
            193,332
            
            $
            210,332





1 Douglas
      A. McIntyre exercised the following stock options in 2006:




15




·
            125,000
                stock options on May 16, 2006. The stock options had an exercise
                price of
                $28,250 and a market price of $98,750 on the date of
                exercise.


·
            500,000
                stock options on May 26, 2006. The stock options had an exercise
                price of
                $165,000 and a market price of $385,000 on the date of
                exercise.


·
            356,700
                stock options on September 28, 2006. The stock options had an exercise
                price of $228,288 and a market price of $246,123 on the date of
                exercise.


·
            243,300
                stock options on September 20, 2006. The stock options had an exercise
                price of $155,712 and a market price of $177,609 on the date of
                exercise.


·
            100,000
                stock options on November 2, 2006. The stock options had an exercise
                price
                of $64,000 and a market price of $86,000 on the date of
                exercise.


·
            81,700
                stock options on December 15, 2006. The stock options had an exercise
                price of $64,543 and a market price of $80,066 on the date of
                exercise.


·
            68,300
                stock options on December 18, 2006. The stock options had an exercise
                price of $53,957 and a market price of $64,885 on the date of
                exercise.





2 Timothy
      C. Reusing exercised the following options in 2006:




·
            93,332
                stock options on December 14, 2006. The stock options had an exercise
                price of $47,533 and a market price of $93,332 on the date of
                exercise.


·
            100,000
                stock options on December 21, 2006. The stock options had an exercise
                price of $79,000 and a market price of $117,000 on the date of
                exercise.





**POTENTIAL
      PAYMENTS UPON TERMINATION**





*Employment
      Agreements* *.* As
      explained in the Narrative to the Summary Compensation Table and Plan-Based
      Award Table on pages 11 and 12, we have entered into employment agreements
      with
      Mr. Joll, Mr. Ameres and Mr. Frost. The agreements provide for certain payments
      and other benefits if their employment with us is terminated under circumstances
      described in the agreements. The specific payments and benefits depend on the
      type of termination event. The standard definitions for the various types of
      termination events covered under the agreements are described below, although
      the exact definitions may vary by agreement and by Named Executive Officer.





·
            “Resignation
                for Good Reason” means a termination that the executive initiates if we,
                without the executive’s consent, fail to continue to employ him in his
                position; there is a material diminution in the nature or scope of
                his
                responsibilities, duties or authority; or we fail to make any payment
                or
                provide any benefit due under the agreement 15 days after notice
                of such
                has been made to us.





·
            “Resignation
                without Good Reason” means a termination initiated by the Named Executive
                Officer that is not a Resignation for Good
                Reason.





·
            “Termination
                for Cause” means termination of the Named Executive Officer’s employment
                by us due to his failure to satisfactorily perform material services
                required by the Board; conviction of a felony or any act of material
                fraud
                or dishonesty; willful misconduct or gross negligence in the performance
                of his duties; disregard or violation of the legal rights of our
                employees
                or of our written policy regarding harassment or discrimination;
                or a
                breach of any material provision of the executive’s employment
                agreement.





·
            “Termination
                without Cause” means a termination by us of the Named Executive Officer’s
                employment that is not a Termination for Cause.





·
            “Non-extension
                of Term by the Company” means termination initiated by us by providing
                notice to the Named Executive Officer that the current term of the
                agreement will not be automatically extended beyond its scheduled
                end
                date.





·
            “Disability
                Termination” means termination of the executive’s employment by us because
                of his failure to perform his material duties for a period of 26
                consecutive weeks or an aggregate of 40 weeks during any twelve month
                period, in the case of Bill Joll, or six consecutive weeks or an
                aggregate
                of twelve weeks during any twelve month period, in the case of Matt
                Frost
                as a result of disability or incapacity.




16




·
            “Death
                Termination” means the automatic termination of the agreement upon the
                Named Executive Officer’s death.




Bill
      Joll
      is subject to non-competition and non-solicitation restrictions following
      termination of his employment for any reason. These restrictions apply for
      12
      months. In addition, Mr. Joll and Mr. Frost are entitled to continue coverage
      under company-sponsored group health plans following termination of employment
      for a period of six months.





The
      following tables describe the potential payments and benefits under each
      employment agreement. The agreements vary as to whether a particular type of
      termination event entitles the Named Executive Officer to any benefits or
      payments.





**Bill
      Joll**


**Chief
      Executive Officer**


**and
      President**





**Executive
                Benefits and Payments Upon Separation****1**
            
            **Resignation
                for Good Reason**
            
            **Non-extension
                of Term by the Executive**
            
            **Resignation
                without Good Reason**
            
            **Termination
                for Cause**
            
            **Termination
                without Cause**
            
            **Non-extension
                of Term by the Company**
            
            **Disability
                Termination**
            
            **Death
                Termination****Compensation:**Severance2
            
            $
            341,700
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            341,700
            
            $
            162,500
            
            $
            27,083
            
            $
            0Bonus3
            
            $
            325,000
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            325,000
            
            $
            0
            
            $
            0
            
            $
            0**Benefits
                & Perquisites:**4Health
                Plan Continuation5
            
            $
            31,941
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            31,941
            
            $
            0
            
            $
            0
            
            $
            0**Total**
            
            $
            698,641
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            698,641
            
            $
            162,500
            
            $
            27,083
            
            $
            0





1 The
      amounts shown in this table were computed based on the following assumptions:
      the termination date is December 31, 2006; Mr. Joll’s base salary is $325,000;
      and Mr. Joll’s target percentage is 100% for purposes of our 2007 Cash Incentive
      plan.





2 For *Resignation
      for Good Reason or*  *Termination
      without Cause,* severance is one year of his base salary at termination and is paid in a single
      lump. For a *Non-extension
      of Term* by the
      Company, severance is continued payment of base salary for six (6) months
      following the date on which Mr. Joll receives the notice of non-renewal. For
      a *Disability
      Termination,* severance is continued payment of base salary for thirty (30) days following
      the
      notice of termination by us.





3 The
      bonus amount shown in the event of a *Resignation
      for Good Reason or*  *Termination
      without Cause* is an
      amount that the Board determines is their good-faith estimate of the pro rata
      amount of the bonus that would become payable for that year in which the
      termination or resignation occurs, based upon the goals agreed to by us and
      Mr.
      Joll for that year, payable at the end of the year.




17


**Eric
      Ameres**


**Executive
      Vice President and Chief Technical Officer**





**Executive
                Benefits and Payments Upon Separation****1**
            
            **Resignation
                for Good Reason**
            
            **Non-extension
                of Term by the Executive**
            
            **Resignation
                without Good Reason**
            
            **Termination
                for Cause**
            
            **Termination
                without Cause**
            
            **Non-extension
                of Term by the Company**
            
            **Disability
                Termination**
            
            **Death
                Termination****Compensation:**Severance2
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            1,800
            
            $
            96,250
            
            $
            0
            
            $
            1,800
            
            $
            1,800Bonus3
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0**Benefits
                & Perquisites:**4Health
                Plan Continuation5
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            7,150
            
            $
            0
            
            $
            0
            
            $
            0**Total**
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            1,800
            
            $
            103,400
            
            $
            96,250
            
            $
            1,800
            
            $
            1,800





1 The
      amounts shown in the above tables were computed based on the following
      assumptions: the termination date was December 31, 2006; Mr. Ameres’s base
      salary was $190,000.





2 Severance is continuation
      of annual base salary for one (1) year from the date of termination in
      the
      event of a *Termination
      without Cause* .





**Matthew
      Frost**


**Executive
      Vice President and General Counsel**





**Executive
                Benefits and Payments Upon Separation****1**
            
            **Resignation
                for Good Reason**
            
            **Non-extension
                of Term by the Executive**
            
            **Resignation
                without Good Reason**
            
            **Termination
                for Cause**
            
            **Termination
                without Cause**
            
            **Non-extension
                of Term by the Company**
            
            **Disability
                Termination**
            
            **Death
                Termination****Compensation:**Severance2
            
            $
            212,000
            
            $
            0
            
            $
            0
            
            $
            9,600
            
            $
            91,250
            
            $
            0
            
            $
            9,600
            
            $
            9,600Bonus3
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0**Benefits
                & Perquisites:**4Health
                Plan Continuation5
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            11,650
            
            $
            11,650
            
            $
            0
            
            $
            11,650
            
            $
            11,650**Total**
            
            $
            212,000
            
            $
            0
            
            $
            0
            
            $
            21,250
            
            $
            102,900
            
            $
            0
            
            $
            21,250
            
            $
            21,250




18




1 The
      amounts shown in the above tables were computed based on the following
      assumptions: the termination date was December 31, 2006; Mr. Frost’s base salary
      was $182,500.





2 Severance is continuation
      of annual base salary for one (1) year from the date of termination in
      the
      event of a *Termination
      without Cause* .





*Life
      Insurance Benefit* *.* If
      Mr.
      Joll had died on December 31, 2006, his survivor would have received $250,000
      under the supplemental term life insurance policy for which we annually
      reimburse premiums. If Mr. Ameres had died on December 31, 2006, his survivor
      would have received $190,004.88 under the supplemental term life insurance
      policy for which we annually reimburse premiums. If Mr. Frost had died on
      December 31, 2006, his survivor would have received $182,500.08 under the
      supplemental term life insurance policy for which we annually reimburse
      premiums. If Mr. Principe had died on December 31, 2006, his survivor would
      have
      received $138,450.24 under the supplemental term life insurance policy for
      which
      we annually reimburse premiums.





**NON-MANAGEMENT
      DIRECTOR COMPENSATION FOR FISCAL 2006**




We
      use a
      combination of cash and equity-based incentive compensation to attract and
      retain qualified candidates to serve as non-management directors on the Board.
      Director compensation is reviewed annually by the Compensation Committee and
      changes are made to the total director compensation package when the Board
      determines that such changes are appropriate. The Compensation Committee may
      from time to time engage independent compensation consultants to evaluate our
      director compensation program relative to the same Peer Group of companies
      that
      the Compensation Committee will consider in setting executive compensation,
      as
      described in the Compensation Discussion and Analysis on page 5. During the
      fiscal year ended December 31, 2006, each non-management director received
      an
      annual retainer fee of $10,000 for service on the Board and $5,000 for each
      committee on which they serve, except that non-management directors who are
      chairmen of committees shall $10,000 for their service on each such committee.
      In addition, a non-management chairman of the Board receives an annual cash
      retainer fee of $10,000 for service as chairman. All members of the Board are
      reimbursed for actual expenses incurred in connection with attendance at Board
      meetings and committee meetings.





**Name**
            
            **Fees
                Earned or Paid in Cash**
            
            **Option
                Awards**
            
            **Total**James
                Meyer1
            
            $
            14,167.00
            
            
            
            
            $
            14,167.00William
                Newman
            
            
            15,000.00
            
            
            
            
            $
            15,000.00Thomas
                Weigman
            
            
            15,000.00
            
            
            
            
            $
            15,000.00J.
                Allen Kosowsky
            
            
            40,000.00
            
            $
            87,400
            
            $
            112,000.00Mike
                Kopetski
            
            
            15,000.00
            
            
            
            
            $
            15,000.00Mike
                Alfant
            
            
            15,000.00
            
            
            
            
            $
            15,000.00Afsaneh
                Naimollah
            
            
            17,917.00
            
            
            
            
            $
            17,917.00





1 Mr.
      Meyer also received compensation for his service as Interim Chief Executive
      Officer. See page 11. He did not receive a fee for his service on the Board
      during the term of his employment as Interim Chief Executive
      Officer.





**Item
                12.**
            ***Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters***




**SECURITY
      OWNERSHIP OF PRINCIPAL STOCKHOLDERS**




We
      are
      not aware of any stockholder who was the beneficial owner of more than 5% of
      the
      outstanding shares of common stock on April 30, 2007.




19


**SECURITY
      OWNERSHIP OF EXECUTIVE OFFICERS AND DIRECTORS**





The
      following information with respect to beneficial ownership, as of April 30,
      2007, of shares of Common Stock is furnished with respect to (i) each director
      of our company, (ii) each Named Executive Officer of the our company and (iii)
      all current directors and Named Executive Officers as a group, together with
      their respective percentages. All ownership information is based upon filings
      made by those persons with the Securities and Exchange Commission or upon
      information provided to us. Unless otherwise indicated below, the address of
      each person named in the table below is in the care of On2 Technologies, Inc.,
      21 Corporate Drive, Suite 103, Clifton Park, New York 12065.





**Amount
                and Nature of**
              **Beneficial
                Ownership**
              **(Number
                of Shares)****(1)****Name
                and Address of Beneficial Owner**
            
            **Title
                of Class**
            
            **Total**
            
            **Percent
                of Class**Bill
                Joll(2)
              President
                and Chief Executive Officer
            
            
            Common
            
            
            1,000,000
            
            
            *Eric
                Ameres(3)
              Executive
                Vice President and Chief Technology
              Officer
            
            
            Common
            
            
            788,026
            
            
            *Matthew
                Frost(4)
              Executive
                Vice President, Legal and Business Affairs
            
            
            Common
            
            
            446,508
            
            
            *James
                Meyer(5)
              Director
            
            
            Common
            
            
            239,173
            
            
            *Anthony
                Principe(6)
              Senior
                Vice President and Chief Financial Officer
            
            
            Common
            
            
            316,700
            
            
            *William
                A. Newman(7)
              Director
            
            
            Common
            
            
            556,811
            
            
            *J.
                Allen Kosowsky(8)
              Director
            
            
            Common
            
            
            824,743
            
            
            *Michael
                Kopetski(9)
              Director
            
            
            Common
            
            
            331,811
            
            
            *Thomas
                Weigman(10)
              Director
            
            
            Common
            
            
            496,811
            
            
            *Michael
                J. Alfant(11)
              Director
            
            
            Common
            
            
            216,811
            
            
            *Afsaneh
                Naimollah(12)
              Director
            
            
            Common
            
            
            166,811
            
            
            *All
                current directors and Named Executive Officers as a group (11
                persons)
            
            
            Common
            
            
            5,384,205
            
            
            4.9
            %




20


*
      Represents less than one percent (1%) of outstanding shares of Common
      Stock.




·
            Pursuant
                to current regulations of the Securities and Exchange Commission,
                securities must be listed as "beneficially owned" by a person who
                directly
                or indirectly has or shares voting power or dispositive power with
                respect
                to the securities, whether or not the person has any economic interest
                in
                the securities. In addition, a person is deemed a beneficial owner
                if he
                has the right to acquire beneficial ownership within 60 days, whether
                upon
                the exercise of a stock option or warrant, conversion of a convertible
                security or otherwise.




(1)
            Includes
                options to purchase 1,000,000 shares of Common Stock that are exercisable
                within 60 days.




(2)
            Includes
                238,026 shares of Common Stock and options to purchase 550,000 shares
                of
                Common Stock that are exercisable within 60
                days.




(3)
            Includes
                21,508 shares of Common Stock and options to purchase 425,000 shares
                of
                Common Stock that are exercisable within 60
                days.




(4)
            Includes
                59,173 shares of Common Stock, of which 40,173 shares are held directly,
                10,000 shares are held as trustee for the trust beneficially owned
                by Sara
                Meyer, and 9,000 shares are held indirectly by trust for his sons.
                James
                Meyer disclaims beneficial ownership of the securities held in trust
                for
                his sons. Also includes options to purchase 180,000 shares of Common
                Stock
                that are exercisable within 60 days.




(5)
            Includes
                29,200 shares of Common Stock and options to purchase 287,500 shares
                of
                Common Stock that are exercisable within 60
                days.




(6)
            Includes
                16,811 shares of Common Stock and options to purchase 540,000 shares
                of
                Common Stock that are exercisable within 60
                days.




(7)
            Includes
                214,743 shares of Common Stock and options to purchase 610,000 shares
                of
                Common Stock that are exercisable within 60
                days.




(8)
            Includes
                41,811 shares of Common Stock and options to purchase 290,000 shares
                of
                Common Stock that are exercisable within 60
                days.




(9)
            Includes
                56,811 shares of Common Stock and options to purchase 440,000 shares
                of
                Common Stock that are exercisable within 60
                days.




(10)
            Includes
                16,811 shares of Common Stock and options to purchase 200,000 shares
                of
                Common Stock that are exercisable within 60
                days.




(11)
            Includes
                16,811 shares of Common Stock and options to purchase 150,000 shares
                of
                Common Stock that are exercisable within 60
                days.




**SECURITIES
      AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS**




Securities
      authorized for issuance under equity compensation plans as of April 30, 2007
      are
      as follows:




21





**Plan
                Category**
            
            **Number
                of securities to be issued upon exercise of outstanding options,
                warrants
                and rights**
            
            **Weighted-average
                exercise price of outstanding options, warrants and
                rights**
            
            **Number
                of securities remaining available for future issuance under equity
                compensation plans (excluding securities reflected in the second
                column)**Equity
                compensation plans approved by security holders
            
            
            9,357,639
            
            $
            .08622
            
            
            297,914Equity
                compensation plans not approved by security holdersTotal





**Item
                13.**
            ***Certain
                Relationships and Related Transactions, and Director
                Independence***





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, 2006, 2005 and 2004, we retained McGuireWoods
      LLP
      to perform certain legal services on our behalf and incurred approximately
      $150,000, $13,000 and $38,000 respectively for such legal services. William
      A.
      Newman, a director of our company, is a partner of McGuireWoods
      LLP.




During
      the years ended December 31, 2005 and 2004, we retained Mike Kopetski, an
      independent international business consultant, to facilitate entering into
      a
      contract with a customer and incurred approximately $34,000 and $122,000,
      respectively, for such services. Mike Kopetski became a director of our company
      in August 2003.




**Review,
      Approval or Ratification of Transactions with Related Persons**




We
      do not
      have a written policy concerning transactions between us and any director or
      executive officer, nominee for director, 5% stockholder or member of the
      immediate family of any such person. However, our policy is that such
      transactions shall be reviewed by our Board of Directors and found to be fair
      to
      the Company prior to entering into any such transaction, except for (i)
      executive officers’ participation in employee benefits which are available to
      all employees generally and (ii) compensation decisions with respect to
      executive officers other than the CEO, which are made by the Compensation
      Committee pursuant to recommendations of the CEO, as is described under
“Compensation Discussion and Analysis” on page 5.





**Item
                14.**
            ***Principal
                Accounting Fees and Services.***





**AUDIT** **FEES**




Audit
      fees billed (or expected to be billed) to us by Eisner LLP for the audit of
      our
      annual financial statements included in our annual report on 10-K for the 2006
      fiscal year and reviews of the quarterly financial statements included in our
      quarterly reports on Form 10-Q for the 2006 fiscal year totaled approximately
      $132,000. Audit fees billed to us by Eisner LLP for the audit of our annual
      financial statements included in our annual report on 10-KSB for the 2005 fiscal
      year and reviews of the quarterly financial statements included in our quarterly
      reports on Form 10-QSB for the 2005 fiscal year totaled approximately
      $139,000.




22




**AUDIT-RELATED
      FEES**




In
      the
      last two fiscal years, Eisner LLP did not bill us for any assurance and related
      services that are reasonably related to the performance of the audit or review
      of our financial statements.




**TAX** **FEES**




In
      the
      fiscal year ending December 31, 2006, Eisner LLP billed the company
      approximately $115,000 for professional services for tax compliance, tax advice,
      and tax planning. In the fiscal year ending December 31, 2005, Eisner LLP billed
      the company approximately $15,000 for professional services for tax compliance,
      tax advice, and tax planning.




**FINANCIAL
      INFORMATION SYSTEMS** **DESIGN
      AND IMPLEMENTATION FEES**




In
      the
      last two fiscal years, we did not engage Eisner LLP to provide advice to us
      regarding financial information systems design and implementation.




**ALL
      OTHER FEES**




In
      the
      fiscal year ending December 31, 2006, Eisner LLP billed us $0 for non-audit
      services. In the fiscal year ending December 31, 2005, Eisner LLP billed us
      approximately $13,000 for non-audit services.




23


**SIGNATURES**





Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, the registrant has duly caused this report to be signed on its behalf
      by
      the undersigned, thereunto duly authorized.




ON2
              TECHNOLOGIES,
              INC.By:
            /s/
              Bill
              JollBill
              Joll*Director,
              President**and Chief Executive Officer**(Principal Executive Officer)*Date: April 30,
              2007




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.





**Signature**
            
            
            **Title**
            
            **Date**




/s/
                Anthony Principe
            
            Senior
                Vice President and Chief Financial Officer (Principal Financial and
                Accounting Officer)
            April
                30, 2007(Anthony
                Principe)/s/
                J. Allen Kosowsky
            
            Chairman
                of the Board and Director
            April
                30, 2007(J.
                Allen Kosowsky)/s/
                William A. Newman
            
            Director
            April
                30, 2007(William
                A. Newman)/s/
                Mike Kopetski
            
            Director
            April
                30, 2007(Mike
                Kopetski )/s/
                Thomas Weigman
            
            Director
            April
                30, 2007(Thomas
                Weigman)/s/
                Michael J. Alfant
            
            Director
            April
                30, 2007(Michael
                J. Alfant)/s/
                Afsaneh Naimollah
            
            Director
            April
                30, 2007(Afsaneh
                Naimollah)/s/
                James Meyer
            
            Director
            April
                30, 2007(James
                Meyer)




24




**INDEX
      TO EXHIBITS**





**Incorporated
                by Reference****Exhibit
                Number**
            
            **Exhibit
                Description**
            
            **Form**
            
            **Date
                Filed**
            
            **Filed
                Herewith**3.1
            
            Certificate
                of Incorporation of the Company
            
            10-K
            
            April
                2, 20013.2
            
            Bylaws
                of the Company
            
            8-K
            
            Feb.
                8, 20064.1
            
            Securityholders
                Agreement, dated as of Dec. 1, 1999, between the Company and thirteen
                securityholders party thereto
            
            10-K
            
            March
                30, 20004.2
            
            Form
                of Investor Rights Agreement, dated as of Dec. 1, 1999,between the
                Company and each of nine investors
            
            10-K
            
            March
                30, 20004.3
            
            Form
                of Warrant issued to the investors party to the Investor Rights Agreement
            
            10-K
            
            March
                30, 20004.4
            
            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
            
            S-3
            
            Dec.
                8, 20004.5
            
            Certificate
                of Designations for the Company’s Series C Preferred Stock
            
            10-K
            
            April
                2, 20014.6
            
            Certificate
                of Designations for the Company’s Series C-II Preferred Stock
            
            10-K
            
            April
                2, 20014.7
            
            Certificate
                of Designations for the Company’s Series C-III Preferred Stock
            
            10-K
            
            April
                2, 20014.8
            
            Form
                of Warrant issued to the holders of Series C, Series C-II and Series
                C-III Preferred Stock
            
            10-K
            
            April
                2, 20014.9
            
            Common
                Stock Purchase Agreement, dated as of July 18, 2001 by and between
                the Company and Real.
            
            SB-2/A
            
            Sept.
                13, 20014.10
            
            Investor
                Rights Agreement, dated as of July 18, 2001, between Real and the
                Company
            
            SB-2/A
            
            Sept.
                13, 20014.11
            
            Indemnity
                Agreement, dated as of January 28, 2002, by and among The Travelers
                Insurance Company, Travelers Indemnity Company, and the
                Company
            
            S-3
            
            July
                11, 20034.12
            
            Investor’s
                Rights Agreement, dated as of January 29, 2001, between the Company
                and
                Abanat Limited
            
            S-3
            
            Oct.
                1, 20034.13
            
            Common
                Stock Purchase Warrant, dated as of August 24, 2006
            
            10-K
            
            August
                25, 200610.1
            
            License
                Agreement by and between the Company and Bevmax Office Centers 1560,
                LLC
            
            10-K
            
            March
                15, 200610.2
            
            Restated
                Lease Agreement by and between the Company and Sitterly Associates
                II
            
            10-K
            
            March
                15, 200610.3
            
            Separation
                and Consultancy Agreement by and between the Company and Douglas
                A.
                McIntyre, dated as of February 2, 2006
            
            10-K
            
            March
                15, 200610.4
            
            Employment
                Agreement, dated May 1, 2006, by and between the Company and Bill
                Joll
            
            10-Q
            
            May
                5, 200610.5
            
            Amended
                and Restated Employment Agreement, dated May 1, 2006, by and between
                the
                Company and Tim Reusing
            
            10-Q
            
            Aug.
                2, 200610.6
            
            Securities
                Purchase Agreement, dated as of August 24, 2006
            
            8-K
            
            Aug.
                25, 200610.7
            
            Registration
                Rights Agreement, dated as of August 24, 2006
            
            8-K
            
            Aug.
                25, 200610.8
            
            Stockholder
                Voting Agreement
            
            8-K
            
            Aug.
                25, 200610.9
            
            Asset
                Purchase Agreement (Confidential Treatment Requested as to Redacted
                Portions)
            
            8-K/A
            
            Nov.
                17, 200610.10
            
            Exhibit
                B [sic] to Asset Purchase Agreement (Form of Escrow
                Agreement)
            
            8-K/A
            
            Nov.
                17, 200610.11
            
            Exhibit
                C [sic] to Asset Purchase Agreement (Form of Support and Maintenance
                Agreement)
            
            8-K/A
            
            Nov.
                17, 200610.12
            
            Exhibit
                D [sic] to Asset Purchase Agreement (Form of Registration Rights
                Agreement)
            
            8-K/A
            
            Nov.
                17, 200610.13
            
            Employment
                Agreement, dated as of February 28, 2006, by and between the Company
                and
                Matt Frost
            
            
            
            *21
            
            Subsidiaries
            
            10-K
            
            March
                31, 200323.1
            
            Consent
                of Eisner LLP
            
            
            
            *31.1
            
            Certification
                of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
                Action of 2002
            
            
            
            
            
            X31.2
            
            Certification
                of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
                Action of 2002
            
            
            
            
            
            X32.1
            
            Certification
                of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as
                Adopted
                Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
            
            
            
            
            
            X32.2
            
            Certification
                of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as
                Adopted
                Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
            
            
            
            
            
            X





*
      Previously Filed.




25