On2 Technologies Announces Third Quarter 2009 Financial Results

CLIFTON PARK, N.Y., Oct. 29 /PRNewswire-FirstCall/ -- On2 Technologies, Inc.
(NYSE Amex: ONT), a leader in video compression solutions, today announced
quarterly results for the period ending September 30, 2009. Revenue in the
third quarter of 2009 was $5.3 million, an increase of 6% from the third
quarter of 2008, and an increase of 5% from the prior quarter. On a GAAP
basis, third quarter net loss was ($1.6) million, or ($0.01) per share,
compared to a net loss of ($29.1) million, or ($0.17), in the third quarter of
2008. Net loss in the third quarter of 2009 includes $2.0 million in costs
associated with the previously announced merger agreement with Google Inc. and
$146,000 in restructuring expenses. Net loss in the third quarter of 2008
includes $26.2 million in non-cash asset impairment charges.

Matt Frost, Chief Operating Officer and interim Chief Executive Officer of On2
Technologies said, "We delivered a solid third quarter with revenue growth
again driven largely by a strong performance for Hantro(TM) products from our
On2 Finland operation. While we are pleased with our third quarter
performance, we recognize that our revenue is still subject to
quarter-to-quarter variability. For instance, in the third quarter, we closed
a $1.4 million Hantro licensing transaction with a top 5 semiconductor company
that had been in our pipeline for several quarters. Deals of that magnitude,
which unfortunately do not arise every quarter, have a significant effect on
quarterly revenue."

"We believe the macro environment has created pent-up demand in the
semiconductor industry, which has benefited our On2 Finland operation and may
contribute to the period-to-period variability. The announcement of the
proposed acquisition of On2 by Google also appears to have had a modest
positive impact on sales in the third quarter."

"We remain excited about our proposed merger with Google, but are continuing
to manage the company in a business-as-usual manner as we await our
shareholder vote on the deal. While we are still in the process of finalizing
the definitive Proxy Statement/Prospectus to be mailed to On2 stockholders
prior to the On2 special meeting, we continue to anticipate completing our
proposed merger with Google during the fourth quarter of 2009, subject to
stockholder approval and satisfaction of other closing conditions."

Third Quarter Business Highlights
-- Royalties were $750,000 in the third quarter, a decrease of 22%
year-over-year and 36% sequentially. Royalties represented 14% of
revenue in the quarter, compared with 19% of revenue in the third
quarter of 2008 and 24% of revenue in the second quarter of 2009.
-- In the third quarter of 2009, On2 added 31 new customers, excluding
online sales, with 14 transactions in the quarter that contributed
over
$50,000 each to revenue. While the number of new customers decreased
from 57 a year ago and 40 in the prior quarter, the number of
transactions over $50,000 increased from 9 a year ago and 13 in the
prior quarter.
-- In September, On2 announced that videantis, a provider of programmable
video engines, licensed VP6® video decoder source code from On2 for
implementation in the videantis v-MPx programmable processor platform.

-- Since the end of the third quarter, in October, On2 announced the
release of the Hantro 9190 Multi-format Hardware Decoder. The 9190 is
the tenth generation of the Hantro line of decoders, and supports
video
playback up to full HD (1080p) resolution at 60 frames per second
(fps)
in multiple formats, including On2 VP6 for Adobe® Flash Player and Sun
JavaFX®, DivX® 3, 4, 5, 6, H.264, H.263, Sorenson® Spark, MPEG-1,
MPEG-2, MPEG-4, VC-1/WMV9 and RealVideo® 8, 9 & 10, as well as up to
66
megapixel JPEG still images.

On2 will not host a conference call in connection with the announcement of its
third quarter results in light of the proposed merger with Google.

About On2

On2 (NYSE Amex: ONT) creates advanced video compression technologies that
power the video in today's leading desktop and mobile applications and
devices. On2 customers include Adobe, Skype, Nokia, Infineon, Sun
Microsystems, Mediatek, Sony, Brightcove, and Move Networks. On2 is also an
industry leader in server-based video transcoding software. The On2 VP6 video
format provides web and HD-quality video for leading sites such as Hulu,
Vimeo, Yahoo! Video, Dailymotion, CCTV.com, 56.com, Tudou.com and
Eurosport.com. On2 Technologies is headquartered in Clifton Park, NY USA. For
more information, visit www.on2.com.

All trademarks mentioned in this document are the property of their respective
owners.

Forward-Looking and Cautionary Statements

Except for historical information and discussions contained herein, certain
statements included in this press release may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. All statements included in this document, other than statements of
historical fact, that address activities, events or developments that
management expects, believes or anticipates will or may occur in the future
are forward-looking statements. These statements represent our reasonable
judgment on the future based on various factors and using numerous assumptions
and are subject to known and unknown risks, uncertainties and other factors
that could cause actual outcomes and/or our financial position to differ
materially from those contemplated by the statements. You can identify these
statements by the fact that they do not relate strictly to historical or
current facts. They use words such as "believe," "expect," "will,"
"anticipate," 'should," "plans" and other words of similar meaning. Such
statements include, but are not limited to, our statements regarding the
macroeconomic environment, that revenue is still subject to quarter-to-quarter
variability and that we continue to anticipate completing our proposed merger
with Google during the fourth quarter of 2009. Investors should not rely on
forward-looking statements because they are subject to a variety of risks and
uncertainties and other factors that could cause actual results to differ
materially from the Company's expectation. Risks and uncertainties include,
among others: the risk that the conditions to merger set forth in the
agreement and plan of merger will not be satisfied and the transaction will
not be consummated; uncertainties as to the timing of the merger;
uncertainties as to whether holders of On2 common stock will approve the
merger proposal at the On2 special meeting; changes in On2's business during
the period between now and the effective time of the merger that could cause a
condition to closing not to be satisfied; as well as other factors detailed in
On2's and Google's filings with the SEC, including the Proxy
Statement/Prospectus, and subsequent SEC filings.

Additional information concerning risk factors is contained from time to time
in the Company's SEC filings. The Company expressly disclaims any obligation
to update the information contained in this release.

Additional Information and Where to Find It

Google has filed a Registration Statement with the SEC in connection with the
proposed merger, which includes a preliminary Proxy Statement of On2 and also
constitutes a Prospectus of Google. The definitive Proxy Statement/Prospectus
will be mailed to On2 stockholders prior to the On2 special meeting. The
Registration Statement and the Proxy Statement/Prospectus contain important
information about Google, On2, the proposed merger and related matters.
Investors and security holders are urged to read the Registration Statement
and the Proxy Statement/Prospectus (including all amendments and supplements
to it) carefully. Investors and security holders may also obtain free copies
of the Registration Statement and the Proxy Statement/Prospectus and other
documents filed with the SEC by Google and On2 through the web site maintained
by the SEC at www.sec.gov and by contacting Google Investor Relations at
+1-650-253-7663 or On2 Investor Relations at +1-518-881-4299. In addition,
investors and security holders can obtain free copies of the documents filed
with the SEC on Google's website at investor.google.com and on On2's website
at www.on2.com.

Participants in the Solicitation

Google, On2 and their respective directors and executive officers may be
deemed to be participants in the solicitation of proxies in respect of the
proposed merger. Information regarding Google's executive officers and
directors is included in Google's definitive proxy statement, which was filed
with the SEC on March 24, 2009, and information regarding On2's executive
officers and directors is included in On2's definitive proxy statement, which
was filed with the SEC on April 7, 2009. The Proxy Statement/Prospectus for
the proposed merger also provides additional information about participants in
the solicitation of proxies from On2 stockholders, which participants'
interests may differ from On2 stockholders generally. You can obtain free
copies of these documents from Google or On2 using the contact information
below.

On2 Technologies, Inc.
Unaudited Condensed Consolidated Statements of Operations

Three months ended Nine months ended
September 30, September 30,
2009 2008 2009 2008
---- ---- ---- ----
Revenue $5,259,000 $4,971,000 $14,271,000 $12,688,000

Operating expenses:
Cost of revenue (1) 561,000 940,000 1,579,000 3,564,000
Research and
development(2) 1,560,000 2,848,000 5,445,000 8,665,000
Sales and
marketing(2) 841,000 2,018,000 2,743,000 5,782,000
General and
administrative(2) 1,380,000 1,946,000 5,002,000 8,640,000
Asset
impairments - 26,245,000 - 26,245,000
Restructuring
expense 146,000 - 1,178,000 -
Costs associated
with proposed
merger 1,989,000 - 2,409,000 -
Litigation
settlement costs - - 523,000 -
Equity-based
compensation:
Research and
development 167,000 101,000 478,000 325,000
Sales and
marketing 77,000 35,000 196,000 147,000
General and
administrative 190,000 257,000 616,000 728,000
------- ------- ------- -------

Total operating
expenses 6,911,000 34,390,000 20,169,000 54,096,000
--------- ---------- ---------- ----------

Income (loss)
from operations (1,652,000) (29,419,000) (5,898,000) (41,408,000)

Interest and
other (expense)
income, net 65,000 304,000 430,000 -
Gain from
forgiveness of debt - - 669,000 379,000
--------- ---------- ---------- ----------

Loss before
provision for
income taxes (1,587,000) (29,115,000) (4,799,000) (41,029,000)

Provision for
income taxes - - - -
--------- ---------- ---------- ----------

Net loss $(1,587,000)$(29,115,000) $(4,799,000) $(41,029,000)

Convertible
preferred stock
8% dividend - - - -
--------- ---------- ---------- ----------

Net loss
attributable to
common
stockholders $(1,587,000)$(29,115,000) $(4,799,000) $(41,029,000)
=========== ============ =========== ============

Basic and
diluted net loss
per common share $(0.01) $(0.17) $(0.03) $(0.24)
====== ====== ====== ======

Weighted
average basic
and diluted
common shares
outstanding 175,960,000 171,613,000 174,952,000 171,028,000
=========== =========== =========== ===========

(1) Includes equity-based compensation of $78,000 and $53,000 for the
three months ended September 30, 2009 and 2008, respectively
(1) Includes equity-based compensation of $208,000 and $215,000 for the
nine months ended September 30, 2009 and 2008, respectively
(2) Excludes equity-based compensation, which is presented separately

On2 Technologies, Inc.
Condensed Consolidated Balance Sheets

September 30, December 31,
ASSETS 2009 2008
------------- ------------
(unaudited)
Current assets:
Cash and cash equivalents $2,070,000 $4,157,000
Short-term investments 131,000 132,000
Accounts receivable 4,254,000 2,730,000
Prepaid expenses and other current
assets 323,000 439,000
------- -------

Total current assets 6,778,000 7,458,000

Intangible assets, net 16,179,000 16,587,000
Property and equipment, net 952,000 1,401,000
Other assets 382,000 430,000
------- -------

Total assets $24,291,000 $25,876,000
=========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable & accrued expenses $6,319,000 $5,720,000
Accrued restructuring expenses 898,000 -
Deferred revenue 2,422,000 2,133,000
Short-term borrowings 256,000 63,000
Note payable 508,000 -
Current portion of long-term debt 177,000 1,148,000
Capital lease obligation 263,000 260,000
------- -------

Total current liabilities 10,843,000 9,324,000

Capital lease obligation, excluding
current portion 253,000 432,000
Long-term debt 1,967,000 1,802,000
Warrant derivative liability 153,000 -
------- -
Total liabilities 13,216,000 11,558,000

Commitments and contingencies - -

Total stockholders' equity 11,075,000 14,318,000
---------- ----------

Total liabilities and stockholders'
equity $24,291,000 $25,876,000
=========== ===========

SOURCE On2 Technologies, Inc.

Investor, Garo Toomajanian of ICR, LLC , +1-518-881-4299, invest@on2.com