On2 Technologies Acquires Hantro Products

On2
Technologies, Inc. announced that it has entered into a definitive agreement to
acquire Finland-based Hantro Products Oy, a provider of video technology for
mobile devices. The acquisition is intended to accelerate the deployment
of On2’s technology on semiconductor chipsets that power mobile and embedded
devices and to further On2’s strategy for establishing a leadership position in
the distribution and consumption of video on all three major device platforms
used by consumers: PCs, mobile/portable devices and television.

Hantro
provides optimized video compression implementations for mobile, digital
consumer-electronics and IPTV devices. The company’s customers include Nokia,
Freescale, LSI, Vimicro, Sanyo and over 20 other leading global device and
semiconductor manufacturers. Hantro’s technology has been implemented on
more than 200 million devices to date and in mobile phones produced by 5 of the
top 6 handset manufacturers. Hantro is recognized as the market leader in
wireless video intellectual property as measured in revenue, number of shipped
devices, and number of customers.

Under the
terms of the agreement, On2 will acquire Hantro in a share exchange directly
with the holders of all of Hantro’s equity securities for a combination of cash
and shares of On2’s common stock, par value $.01 per share. Immediately
after the closing, the Hantro stockholders would own approximately 12% of the
combined company on a pro forma basis, based on On2’s closing share price of
$3.38 on May 18, 2007, and Hantro would become a wholly-owned subsidiary of
On2.

The cash
component of the acquisition price is approximately $6,800,000. If the
volume-weighted average price for shares of On2 for the 10 trading days prior
to closing is between $1.50 and $2.50 per share, the total value of the shares
to be issued at the closing will equal $45,000,000 less the cash component.
If the 10-day volume-weighted average share price prior to closing is
$1.50 or less, the Company will pay the cash component and issue approximately
25,440,000 shares. If the 10-day volume-weighted average share price prior to
closing is $2.50 per share or more, the Company will pay the cash component and
issue approximately 15,300,000 shares. The number of On2 shares to be issued at
closing is subject to adjustment, based on Hantro’s stockholders’ equity as of
the date of the closing. Based on On2’s closing share price of $3.38 on May
18, 2007, the total value of the acquisition at closing, before any
adjustments, would be approximately $58,400,000. After giving effect to
contingent consideration of up to an additional 12.5 million On2 shares based
on the level of 2007 revenues from Hantro’s business lines, ownership of the
combined company by Hantro’s shareholders could be a maximum of approximately
19% on a pro forma basis. Hantro’s balance sheet as of March 31, 2007
includes approximately $4,900,000 of debt owed to Finnish financial institutions
and governmental agencies. Hantro expects to generate revenues of between
€6,000,000 and €9,000,000 (approximately $8,100,000 and $12,200,000) on an
annualized basis for 2007, determined according to

U.S. generally accepted accounting
principles. On2 is currently unable to provide GAAP estimates on future
earnings. On2 nevertheless anticipates that the transaction will produce
break-even to slightly accretive results in 2008 on a non-GAAP basis.

“We have
long set the standard for excellence in video with our codec technology.
By gaining access to Hantro’s technology and expertise in chip implementation,
we expect to be able to extend our reach on devices,” said Bill Joll, president
and CEO of On2. “This acquisition should speed the deployment of VP6™ and
VP7™ by industry-leading embedded platform suppliers. For device
manufacturers, this should mean that On2’s video technology can be easily
implemented on devices with low silicon costs, lower power demands and
increased performance. Users of mobile and other embedded devices should
soon benefit from On2’s unsurpassed video quality on all their video screens.
Finally, consumer electronic equipment suppliers should soon be able to deliver
devices that can play longer high quality videos at a significantly lower
cost.”

“We are
looking forward to giving our current customers access to On2’s best-of-breed
technology and to making the On2 TrueMotion codecs available for the first
time at the hardware level,” said Eero Kaikkonen, president and CEO of
Hantro. “In the device industry, ease of implementation, low power
consumption, high performance and low bill of materials are important factors
when evaluating technology. By combining Hantro’s longstanding expertise
in low power consumption hardware video designs with On2’s cutting-edge video
technology, we expect On2’s TrueMotion codecs will become an easy choice for
embedded and mobile manufactures and service providers. By adding On2’s
codecs to Hantro’s current offerings, we will lead the industry in highly
optimized, scalable and economically viable solutions for cross-platform
applications that are shaping the future of video.”

As a
result of the On2 acquisition, the combined company will have a comprehensive
portfolio of highly optimized VP6 and VP7 codecs and standards-based video
compression technologies. The combined company will continue to
support Hantro’s customers with Hantro’s market leading multi-format hardware
video IP products offering the widest range of options for semiconductor companies
developing multimedia chipsets. The combined company will offer a full range of
products and capabilities for video applications ranging from very low data
rates to high-definition video across web, embedded devices, consumer devices
and mobile/Wi-fi applications.

The
acquisition by share exchange is expected to close before mid-August 2007 and
is subject to approval by On2’s stockholders and subject to On2 raising
$20,000,000 through sales of On2’s equity securities prior to the closing of
the acquisition of Hantro, as well as to customary closing conditions. The
purpose of the equity offering is to generate working capital for the combined
companies.

Oppenheimer
& Co. Inc. and WR Hambrecht + Co served as financial advisors to On2
Technologies, Inc. on this transaction.

Mooreland
Partners LLP served as financial advisors to Hantro Products Oy on this
transaction.

The share
exchange with the securityholders of Hantro has not been registered under the
Securities Act of 1933, as amended, and will not be consummated in the

United States
absent registration under the Securities Act or an applicable exemption from
the registration requirements of the Securities Act. This press release
does not constitute an offer to sell any securities of On2.

On2, together
with the other participants as indicated below, intends to file with the SEC a
proxy statement and accompanying proxy card to be used to solicit votes for the
proposed Share Exchange at the 2007 Annual Meeting of Stockholders of On2,
which has not yet been scheduled. On2 urges its stockholders to read the
proxy statement in its entirety, including the Share Exchange Agreement, when
it becomes available because it will contain important information, including
information on their participants and their interests in On2. When filed,
the proxy statement will be available at no charge at the SEC’s website at
http://www.sec.gov. The participants will provide copies of the proxy
statement without charge upon request made to On2 at

21 Corporate Drive,
Clifton Park,

New York
12065
(518) 348-0099. The participants in this proxy solicitation are anticipated to
be On2, its directors and Pekka Salonoja, a nominee to the board of directors
of On2. Mr. Salonoja is acting on behalf of the Nexit Ventures funds,
which are one of the principal stockholders of Hantro that will accordingly
receive a portion of the consideration to be paid and issued by On2 in the
proposed Share Exchange with the securityholders of Hantro.

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