On2 Technologies, Inc. is a video compression technology firm that has developed a proprietary technology platform and the TrueMotion VPx family (VP5, VP6, VP7) of video compression/decompression (codec) software to deliver video over proprietary networks and the Internet to set-top boxes, personal computers (PCs) and wireless devices. The Company's video compression software is based solely on intellectual property that it developed and owns. Its service offerings include customized engineering, consulting services, technical support and high-level video encoding. The Company earns revenue chiefly through licensing its software. In addition to licensing its software, to software developers and end users for their own use, it sells licenses to certain third-party resellers. It licenses and develops a number of products related to TrueMotion line of codecs and TrueCast line of server and player products for proprietary networks, the Internet and consumer electronic industries. The licensing of its proprietary TrueMotion codec and TrueCast server technology accounted for 29% of revenue for the year ended December 31, 2005. Many of the customers who use the Company's products and services are software developers who provide video-related products and services to end users. In 2005, foreign customers accounted for approximately 27% of total revenue. These customers are primarily located in Asia. The TM2X codec is optimized for hard-drive, kiosk, or compact disc read-only-memory (CD-ROM)-based video playback. The TM2X video delivery algorithm was licensed for use in Sega's Dreamcast and Saturn and has also been licensed to gaming developers and manufacturers interested in high-quality video on machines with limited processing capabilities. The product was part of QuickTime and Video for Windows and can be used in programs such as Adobe Premiere and Terran's Media Cleaner Pro. It is also a cross-platform codec. TrueMotion VP3 series of codecs includes VP3, VP3.1 and VP3.2. VP3.1 provided for full-motion, full-screen television-quality video over the Internet at data rates as low as 250 kilobits per second, scaling to 500 kilobits per second and more. VP3.2 was designed to offer high-quality video transmission over broadband Internet connections and supply television-quality video at data rates as low as 200 kilobits per second. VP3 files are encoded in multiple bit rates and at optimum frame rates (usually 29.97 frames per second) within a single file. VP3.2 provides software developers, an open source video codec with no platform limitations or restrictive license fees. VP4 achieves near-digital versatile disc (DVD) quality at 450 kilobits per second and near-video home system (VHS) quality at 150 kilobits per second at full-screen and full-motion. VP5 offered a 50% reduction over the bandwidth required to show comparable quality video using VP4. Additional features offered by VP5 include real-time encoding and the ability to handle interlaced content. VP6 improves upon all the features contained in VP5 and supports real-time encoding at full D1 resolution. TrueMotion VP7 codec was introduced in March 2005. Audio for Video Codec Technology (AVC) is an advanced compression algorithm for a variety of audio sources, including music, human speech, film and broadcast television. AVC runs with the Company's video codecs, and this combination provides a low-bit-rate multimedia experience. TrueCast Server Software is designed to take advantage of VP line of codecs and deliver multimedia presentations over private networks (example, set-top boxes), embedded platforms or the Internet. In 2005, the Company entered the business of selling video encoding software that allows users to encode video in formats used by two of its customers, Macromedia (now Adobe) and AOL. The Company sells two types of Flash encoding tools. It distributes end user software, such as its desktop Flix encoding tools (Flix Pro and Flix Standard) and Flix Engine software, which can operate in desktop or server environments. The Company off

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