SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-Q

               Quarterly Report Pursuant to Section 13 or 15(d) of
                       the Securities Exchange Act of 1934

                      For the quarter ended March 31, 1999

                         Commission file number: 1-14831


                                DIGITAL LAVA INC.
             (Exact name of registrant as specified in its charter)

            DELAWARE                                            95-4584080
(State or other jurisdiction of                           (IRS Employer Id. No.)
incorporation or organization)

                      10850 Wilshire Boulevard, Suite 1260
                              Los Angeles, CA 90024
                    (Address of principal executive offices)

       Registrant's telephone number, including area code: (310) 470-1149



Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 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 ___.


As of May 17, 1999,  the  Registrant  had  outstanding  4,634,387  shares of its
$.0001 par value  Common  Stock and no shares of  convertible  preferred  stock,
$.0001 par value, issued and outstanding.


<PAGE>



                                Digital Lava Inc.

                                Table of Contents


Part I              FINANCIAL INFORMATION

         Item 1.    Financial Statements

                    Balance Sheet                                              3

                    Statement of Operations                                    4

                    Statement of Cash Flows                                    5

                    Notes to Unaudited Financial Statements                    6

         Item 2.    Management's Discussion and Analysis of
                       Financial Condition and Results of Operations           9

Part II             OTHER INFORMATION

         Item 1.    Legal Proceedings                                         14

         Item 2.    Changes in Securites and Use of Proceeds                  14

         Item 3.    Defaults upon Senior Securities                           14

         Item 4.    Submission of Matters to Vote of Security Holders         14

         Item 5.    Other Information                                         14

         Item 6.    Exhibits and Reports on Form 8-K                          14

Signature


                                       2
<PAGE>

Part I.  Financial Information

Item 1.  Financial Statements

                                DIGITAL LAVA INC.

                                  Balance Sheet
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                     December 31,      March 31,
                                                                         1998            1999
                                                                     ------------    ------------
<S>                                                                  <C>             <C>         
                                     Assets
Current Assets:
      Cash and cash equivalents ..................................   $     30,893    $  5,151,113
      Short term investments .....................................             --       5,368,446
      Accounts receivable ........................................        204,196          93,790
      Other current assets .......................................         16,731          88,628
      Deferred Offering Costs ....................................        888,493              --
                                                                     ------------    ------------
              Total current assets ...............................      1,140,313      10,701,977
Fixed assets, net ................................................         59,647          97,259
Other assets .....................................................         16,965          19,616
                                                                     ------------    ------------
                                                                     $  1,216,925    $ 10,818,852
                                                                     ============    ============

                 Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
      Accounts payable ...........................................   $    698,746    $    143,740
      Accrued interest ...........................................        998,619              --
      Accrued expenses ...........................................        404,537          45,173
      Notes payable, net of debt discount ........................      5,008,634              --
      Deferred revenue ...........................................        186,909         151,605
                                                                     ------------    ------------
              Total current liabilities ..........................      7,297,445         340,518
                                                                     ------------    ------------
Stockholders' equity /deficit:
      Convertible preferred stock - Series A, B, B-1
            and C, $.0001 par value; 5,000,000 shares authorized;
            98,349 shares issued and outstanding
            (liquidation preference of $1,626,965) at December 31,
           1998; none issued and outstanding at March 31, 1999 ...              9              --
      Common stock, $0.0001 par value; 35,000,000 shares
              authorized; 131,524  and 4,634,387 shares issued
            and outstanding, respectively ........................             13             463
      Additional paid-in capital .................................      4,618,297      26,085,901
      Accumulated deficit ........................................    (10,698,839)    (15,608,030)
                                                                     ------------    ------------
              Total stockholders' equity(deficit) ................     (6,080,520)     10,478,334
                                                                     ------------    ------------
                                                                     $  1,216,925    $ 10,818,852
                                                                     ============    ============
</TABLE>


See accompanying notes to the unaudited financial statements.


                                       3
<PAGE>

                                DIGITAL LAVA INC.

                             Statement of Operations

                                   (Unaudited)

                                                    Three Months Ended March 31,
                                                    --------------------------
                                                       1998           1999
                                                    -----------    -----------
Revenues:
      Software licenses ..........................  $    39,350    $    92,158
      Consulting and services ....................       76,877         84,721
                                                    -----------    -----------
              Total revenues .....................      116,227        176,879
                                                    -----------    -----------
Cost of revenues:
      Cost of software licenses ..................          130          2,044
      Cost of consulting and services ............       46,323         38,426
                                                    -----------    -----------
              Total cost of revenues .............       46,453         40,470
                                                    -----------    -----------
              Gross profit .......................       69,774        136,409
                                                    -----------    -----------
Operating costs and expenses:
      Selling, general and administrative ........      746,010      1,061,047
      Research and development ...................      139,486        134,463
                                                    -----------    -----------
              Total operating costs and
                  expenses .......................      885,496      1,195,510
                                                    -----------    -----------
              Loss from operations ...............     (815,722)    (1,059,101)

Interest expense .................................     (456,741)      (177,434)
                                                    -----------    -----------
              Loss before extraordinary item .....   (1,272,463)    (1,236,535)
Extraordinary loss on extinguishment of debt .....           --     (3,672,656)

                                                    -----------    -----------
            Net loss .............................   (1,272,463)    (4,909,191)
                                                    ===========    ===========

Net loss available to common stockholders ........  ($1,272,463)   ($5,569,204)
                                                    ===========    ===========
Basic and diluted loss per share:
      Loss before extraordinary item .............  $     (8.60)   $     (0.99)
      Extraordinary loss on extinguishment of debt           --          (1.93)
                                                    ===========    ===========
Net loss .........................................  $     (8.60)   $     (2.92)
                                                    ===========    ===========

Weighed average common shares
      used in basic and diluted loss per
        share ....................................      147,933      1,904,783
                                                    ===========    ===========


See accompanying notes to the unaudited financial statements.


                                       4
<PAGE>

                                DIGITAL LAVA INC.

                             Statement of Cash Flows

                                   (Unaudited)

<TABLE>
<CAPTION>
                                                          Three Months Ended March 31,
                                                          ----------------------------
                                                              1998            1999
                                                          ------------    ------------
<S>                                                       <C>             <C>          
Cash flows from operating activities:
    Net loss ..........................................   $ (1,272,463)   $ (4,909,191)
    Adjustments to reconcile net loss
        to net cash used in operating activities:
           Extraordinary loss on extinguishment of debt             --       3,672,656
            Deferred revenues .........................             --         (35,304)
            Depreciation and amortization .............         67,781          13,177
            Amortization of debt discount .............        140,414         130,758
            Compensation from grant of
                non-employee stock options
                  and warrants ........................          3,960              --
        Changes in assets and liabilities
            affecting operating cash flows:
                Accounts receivable ...................         88,610         110,406
                Other assets ..........................         (8,594)        (78,065)
                Accounts payable ......................       (226,599)       (555,006)
                Accrued interest ......................        316,776        (523,952)
                Accrued expenses ......................         37,769        (359,364)
                                                          ------------    ------------
Net cash used in operating activities .................       (852,346)     (2,533,885)
                                                          ------------    ------------
Cash flows used in investing activities:
    Purchases of short term investments ...............                     (5,368,446)
    Acquisition of fixed assets .......................        (15,122)        (52,478)
                                                          ------------    ------------
Net cash used in investing activities .................        (15,122)     (5,420,924)
                                                          ------------    ------------
Cash flows from financing activities:
    Proceeds from notes payable .......................      1,050,000              --
    Repayment of notes payable ........................                     (3,923,500)
    Proceeds from issuance of common stock ............                     19,831,011
    Cost of common stock issuance .....................                     (2,832,482)
                                                          ------------    ------------
Net cash provided by financing activities .............      1,050,000      13,075,029
                                                          ------------    ------------
Net increase in cash and cash equivalents .............        182,532       5,120,220
Cash and cash equivalents at beginning of
    period ............................................        173,262          30,893
                                                          ------------    ------------
Cash and cash equivalents at end of period ............   $    355,794    $  5,151,113
                                                          ============    ============
</TABLE>


See accompanying notes to the unaudited financial statements.


                                       5
<PAGE>


                                DIGITAL LAVA INC.

                     Notes to Unaudited Financial Statements

1.   The Company

     Digital Lava Inc., a Delaware  corporation  (the  "Company"),  develops and
markets  video  publishing   software   applications  for  corporate   training,
communications,   distance  learning,  research  and  other  applications.   The
Company's  technology  allows users to organize and manage video  content,  link
video  to other  types  of  files  and  publish  video  with  all of the  linked
information on CD-ROM or DVD, corporate intranets or the public Internet.

2.   Basis of Presentation and Summary of Significant Accounting Policies

Basis of presentation

     The  accompanying  balance sheet as of March 31, 1999 and the statements of
operations  and cash flows for the three month  periods ended March 31, 1998 and
1999  have been  prepared  by the  Company  without  audit.  In the  opinion  of
management,   all  adjustments  (consisting  of  normal  recurring  adjustments)
necessary for a fair presentation have been included.  The results of operations
for the three month period ended March 31, 1999 are not  necessarily  indicative
of the operating results for the full year.

     Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting  principles
have been condensed or omitted.  These condensed financial  statements should be
read in conjunction with the financial  statements and notes thereto included in
the Company's Form 10-KSB for the year ended December 31, 1998.

3.   Net loss per share:

     The Company's net loss per share  calculations  are based upon the weighted
average number of shares of common stock outstanding.  Because their effects are
anti-dilutive, net loss per share for the three periods ended March 31, 1998 and
1999 does not include the effect of 1) 98,349 (983,490 shares of common stock on
an as-if converted basis) shares of convertible  preferred stock  outstanding as
of March 31,  1998;  2) 59,618 and 242,897 of stock  options  outstanding  as of
March  31,  1998 and 1999,  respectively;  and 3)  17,125  (171,250  on an as-if
converted  basis)  warrants  to  purchase  outstanding  shares  of  a  series  A
convertible  preferred  stock as of March 31,  1998,  and 446,254 and  1,921,421
warrants to purchase common stock as of March 31, 1998 and 1999, respectively.

     Net loss available to common stockholders represents net loss for the three
months  ended March 31,  1999  increased  by a dividend  of  $659,990  issued in
February 1999 to the then holders of Series B and C convertible  preferred stock
in conjunction with the change in conversion rates of such shares (Note 5).

4.   Short Term Investments

     During  the  first  quarter  of  1999,  the  Company  purchased  short-term
investments comprising of Euro Dollar bonds and medium and short term notes. The
Company  accounts for  short-term  investments  in accordance  with Statement of
Financial  Accounting  Standards No. 115 ("SFAS 115"),  "Accounting  for Certain
Investments  in Debt  and  Equity  Securities".  This  statement  addresses  the
accounting and reporting for investments in equity securities which have 


                                       6
<PAGE>

readily  determinable  fair values and all investments in debt  securities.  The
Company's short-term investments are classified as available-for-sale under SFAS
115 and reported at fair value, with changes in the unrealized  holding gains or
losses included in stockholders'  equity. At March 31, 1999,  available-for-sale
securities  comprised  of Euro  Dollar  bonds and medium and short term notes of
$4,337,899 and $1,030,547, respectively. Net unrealized gains or losses on these
investments were immaterial at March 31, 1999.

5.   Underwritten public offering

     On February 22, 1999, the Company completed an underwritten public offering
of  1,200,000  units at a price of $15.10 per unit.  Each unit  consists  of two
shares of common  stock and a warrant to purchase one share of common stock at a
price of $7.50 per share of common stock plus $.10 per warrant. Proceeds, net of
discounts and  commissions of $1,514,832,  and offering  expenses of $2,008,722,
totaled $14,596,446.  In addition,  on March 30, 1999 the underwriter  exercised
their  over-allotment  option to purchase an additional  113,312 units for total
proceeds net of discounts and commissions of $143,113,  and offering expenses of
$54,308 of $1,513,590.  Upon  completion of the Company's IPO, all shares of the
Company's  convertible  preferred stock and certain debt,  accrued  interest and
warrants  converted  into common  stock of the  Company.  This  transaction  was
reflected in the Company's first quarter 1999 results as follows:

Return of shares by officers of the Company

     In conjunction with the completion of the IPO, the Company  cancelled 8,824
of series A  convertible  preferred  stock (which  converted to 88,240 shares of
common stock) and 11,030 shares of common stock returned by certain  officers of
the Company.  This resulted in the cancellation of 99,270 shares of common stock
and was recorded as contributed capital.

Conversion of series A and B-1 convertible preferred stock

     Each share of the Company's  series A and B-1  convertible  preferred stock
outstanding   converted   into  797,600  and  20,411  shares  of  common  stock,
respectively.

Conversion of series B and C convertible preferred stock

     In  conjunction  with the  completion  of the IPO, the Company  changed the
conversion  rate for series B and C convertible  preferred stock to 20.3099 to 1
and 19.3702 to 1,  respectively.  As such, each share of the Company's  series B
and C convertible  preferred stock outstanding converted into 112,763 and 63,586
shares of common  stock,  respectively.  The value based on the IPO price of the
88,003  incremental  common  shares  issued to Series B and C preferred  holders
resulting from the change in conversion  rates was recorded as a dividend to the
preferred stockholders in the amount of $659,990.

Conversion of outstanding warrants

     In  conjunction  with the  completion  of the  IPO,  the  Company  canceled
warrants to acquire 107,687 shares of common stock in exchange for 30,836 shares
of common stock.

6.   Extraordinary Loss

     In  conjunction  with  the  completion  of  the  IPO,  the  Company  repaid
approximately  $4,489,000  in  principal  of notes  payable,  accrued but unpaid
interest  and other  related  fees.  The


                                       7
<PAGE>

Company also converted  approximately  $1,891,000 of principal of notes payable,
accrued  interest and  outstanding  warrants into 849,600 shares of common stock
and cancelled  warrants to purchase  series A  convertible  preferred and common
stock of 10,669 and 344,413, respectively, at exercise prices ranging from $6.85
to  $182.78.  The  Company  recorded  an  extraordinary  loss of  $3,672,656  on
extinguishment  of this debt based on the  difference  between (a) cash paid and
the value of stock issued and (b) the book value of debt,  accrued  interest and
warrants.

7.   Recent Accounting Pronouncements

     In December 1998, the Accounting  Standards  Executive  Committee  released
Statement of Position  ("SOP") No.  98-9,  "Modification  of SOP 97-2,  Software
Revenue Recognition,  with Respect to Certain Transactions." This SOP amends SOP
97-2 to provide a limited  exception  to the full  deferral of revenue  that the
provisions  of SOP 97-2 may  require.  Specifically,  for  software in which the
entity has a contracted  price for the entire  arrangement and  vendor-speicific
objective  evidence  ("VSOE")  of the  fair  value of each  undelivered  element
exists,  revenue for the delivered  element(s)  may be  recognized  based on the
difference  between  the  contract  price and the VSOE of the fair  value of the
undelivered element(s),  provided that all other revenue-recognition criteria of
SOP 97-2 are met and the total fair value of the undelivered  element(s) is less
than or equal to the price for the entire software  arrangement.  The provisions
of SOP 98-9 will be effective for  transactions  that are entered into in fiscal
years beginning after March 15, 1999. The Company does not believe that adoption
of SOP 98-9 will have a material impact on the Company's  financial  position or
results of operations.


                                       8
<PAGE>


Item 2. Management's  Discussion and Analysis of Financial Condition and Results
of Operations

     The  statements  contained in this document that are not purely  historical
are  forward-looking  statements  concerning  the  business  and products of the
company.  Actual  results  may differ  from those  projected  or implied by such
forward-looking  statements  depending  on a number of risks  and  uncertainties
including, but not limited to, the following:  development,  shipment and market
acceptance. Other risks inherent in the business of the company are described in
Securities and Exchange Commission filings,  including the Company's  prospectus
dated  February 17, 1999 on Form SB-2.  The Company  undertakes no obligation to
revise or update any forward-looking statements after the date hereof.

Overview

     Digital  Lava   invested   significant   resources  in  sales,   marketing,
development  and other  operating  activities  during the  quarter  ended  March
31,1999.  Digital Lava  believes  that its success  depends  largely on building
superior  technology and quality into its products,  extending its technological
lead on the competition and developing  brand  recognition  early in a product's
life cycle.  Accordingly,  Digital Lava expects to continue  spending heavily on
these  activities  in the  near  future.  Despite  these  heavy  investments  in
marketing and product  development,  the historical  growth in software  license
fees may not be  sustainable  in the future.  In light of Digital Lava's limited
operating  history and rapid  improvements  in  technology  and marketing of its
products,  Digital  Lava  believes  that  period-to-period  comparisons  of  its
revenues  and  operating  results,  including  its gross  profit  and  operating
expenses as a percentage of total net revenues,  are not necessarily  meaningful
and should not be relied upon as indications of future performance.

     Digital Lava has incurred  significant  net losses and negative  cash flows
from operations  since  inception,  and as of March 31, 1999, had an accumulated
deficit of  $15,608,030.  Digital Lava intends to continue to invest  heavily in
technology and  infrastructure  development,  and marketing and promotion.  As a
result,  Digital Lava believes that it will continue to incur  operating  losses
and negative cash flows from operations for the foreseeable  future and that the
rate at which these losses will be incurred may  increase  from current  levels.
There can be no  assurance  that Digital Lava will be able to achieve or sustain
revenue  growth,  profitability,  or positive cash flow on either a quarterly or
annual basis.

Results of Operations

Comparison  of the three  months  ended March 31, 1999 to the three months ended
March 31, 1998

     Revenues

     Revenues  increased to $176,879  for the quarter  ended March 31, 1999 from
$116,227 for the quarter ended March 31, 1998.  The increase of $60,652 or 52.2%
was  primarily  due  to  an  increase  in  sales  of  software  licenses  mainly
attributable to repeat business from the current customer base. Software license
revenues accounted for approximately 52.1% and 33.9% of revenues for the quarter
ended March 31, 1999 and 1998,  respectively.  Consulting and services  revenues
accounted  for  approximately  47.9% and 66.1% of revenues for the quarter ended
March 31, 1999 and 1998, respectively. Digital Lava's largest customer accounted
for 19.2% and 55.3% of revenues  for the three  months  ended March 31, 1999 and
1998, respectively.  Digital Lava anticipates that software license revenue will
continue to account for a larger share of revenues


                                       9
<PAGE>

for the foreseeable future.

     Cost of Revenues

     Cost of revenues  consist  primarily of the cost of materials,  freight and
applicable  labor incurred for the delivery of the product or service.  Costs of
revenues decreased to $40,470, or 22.9% of revenues, for quarter ended March 31,
1999 from $46,323,  or 39.9% of revenues,  for the quarter ended March 31, 1998.
This decrease was primarily due to decreased  costs  associated  with consulting
and services revenue in the first quarter of 1999. Digital Lava expects its cost
of revenue to  continue  to  increase  in dollar  amount  while  declining  as a
percentage of revenue as Digital Lava expands its customer base.

     Operating Costs and Expenses

     Selling,   General  and  Administrative  Expense.   Selling,   general  and
administrative  expenses consist  primarily of salaries,  taxes and benefits and
related costs for general corporate functions,  including executive  management,
finance,  accounting,  facilities,  legal,  fees for  professional  services and
depreciation and  amortization.  Selling,  general and  administrative  expenses
increased to $1,061,047,  or 599.9% of revenues, for the quarter ended March 31,
1999,  from  $746,140,  or 642.0% of revenues,  for the quarter  ended March 31,
1998.  The  increase was  primarily  due to  increased  compensation,  increased
spending on, trade shows, additional personnel and professional fees required to
build an  infrastructure  to support  Digital  Lava's  products and  anticipated
growth. Digital Lava expects that selling,  general and administrative  expenses
will increase in absolute  dollars as Digital Lava  continues to hire  personnel
and  incurs  expense  related  to the  further  growth of the  business  and its
operation as a public company.

     Research  and  Development  Expenses.  Research  and  development  expenses
consist of expenditures related to technology and software development expenses.
Research and development  expenses decreased to $134,463,  or 76.0% of revenues,
for the quarter ended March 31, 1999 from $139,486,  or 120.0% of revenues,  for
the quarter ended March 31, 1998.  The dollar  decrease was primarily due to the
reduced usage of outside  contractors in the first quarter of 1999. Research and
development  expenses decreased as a percentage of revenue because of the growth
level in revenues  relative to the growth in the cost structure for research and
development.  Digital Lava believes that  significant  investments in technology
and content development are required to maintain a technological lead and remain
competitive and, therefore,  expects that its research and development  expenses
will increase in absolute dollars for the foreseeable future; however,  research
and development  expenses are presently  anticipated to continue to decline as a
percentage of revenues.

     Interest  Expense.  Interest expense  includes  interest expense related to
Digital Lava's  financing  obligations  and the  amortization  of debt discount.
Interest expense decreased to $177,434 for the quarter ended March 31, 1999 from
$456,741 for the quarter ended March 31, 1998. The decrease was primarily due to
the retirement of notes payable  issued by Digital Lava in conjunction  with the
completion  of the initial  public  offering.  Interest  expense for the quarter
ended March 31, 1999 and march 31, 1998 included  amortization  of debt discount
of $130,758 and $140,414, respectively.

     Loss  before  extraordinary  item.  For the quarter  ended March 31,  1999,
Digital Lava's loss before  extraordinary item totaled $1,236,535 as compared to
$1,272,463 for the quarter ended March 31, 1998.



                                       10
<PAGE>

     Extraordinary  Item.  In the  quarter  ended  March 31,  1999,  the Company
recorded   an   extraordinary   charge  of   $3,672,656   associated   with  the
extinguishment of debt.

Liquidity and Capital Resources

     On February 22, 1999,  Digital Lava completed an initial public offering of
1,200,000  units,  each unit  consisting  of two shares of common  stock and one
redeemable  warrant,  and received  aggregate  proceeds of  $18,120,000  and net
proceeds of  $14,596,446.  On March 30, 1999 Digital Lava completed the exercise
by its  underwriter of the over  allotment  option of 113,312 units and received
aggregate  proceeds of  $1,711,011  and net proceeds of  $1,513,590.  During the
period from completion of the Offering through March 31, 1999,  Digital Lava has
used  approximately  1)  $4,489,000  of the proceeds to repay bridge  notes;  2)
$135,000 for product development  expenses;  3) $325,000 for sales and marketing
expenses;  4) $116,000 for  facilities  and other capital  expenditures;  and 5)
$558,000 for working capital and general corporate purposes. In addition, during
the first quarter of 1999,  Digital Lava used approximately $1.4 million of such
net proceeds to pay expenses of the offering.  None of the payments described in
this  paragraph  represented  a direct or  indirect  payment  to (i)  directors,
officers or general partners of the Company or to their associates, (ii) persons
owning  10% or more of any class of equity  securities  of the  Company or (iii)
affiliates of the Company.

     Net cash used in operating  activities was $2,533,885 for the quarter ended
March 31,  1999 as compared  to  $852,346  for the quarter  ended March 31, 1998
resulting  primarily from the net loss and payment of accrued expenses partially
offset by the non-cash extraordinary loss.

     Cash flows used in  investing  activities  was  $5,420,924  for the quarter
ended  March 31,  1999 as  compared  to  $15,122  for March 31,  1998  resulting
primarily from the purchase of short term securities.

     Net cash provided by financing  activities was  $13,075,029 for the quarter
ended March 31, 1999 as compared to  $1,050,000  for the quarter ended March 31,
1998. The increase was due to net proceeds received due to the completion of the
company's  initial  public  offering  and the  underwriter's  exercise  of their
over-allotment option offset by repayment of notes payable.

     Digital Lava's capital  requirements depend on numerous factors,  including
market  acceptance  of  Digital  Lava's  products  and  services,  the amount of
resources  Digital Lava devotes to  investments  in its products,  the resources
Digital  Lava  devotes to  marketing  and  selling  its  services  and its brand
promotions  and  other  factors.  Digital  Lava has  experienced  a  substantial
increase in its capital  expenditures  since its inception  consistent  with the
growth in Digital Lava's operations and staffing, and anticipates that this will
continue for the foreseeable future. Additionally, Digital Lava will continue to
evaluate  possible  investments in businesses,  products and  technologies,  and
plans to expand its sales and  marketing  programs and conduct  more  aggressive
brand promotions.

     Digital Lava currently  anticipates that current cash balances,  short-term
investments  and cash  provided by  operations  will be  sufficient  to meet its
anticipated needs for working capital and capital  expenditures for at least the
next 12 months.  Digital Lava anticipates it will be required to seek additional
funding either through  additional  public or private sales of its securities or
through debt financing. Such options are currently under consideration.

Year 2000 Risk

     Many currently  installed  computer systems and software products are coded
to accept only two digit entries in the date code field.  As a result,  software
that records  only the last two digits of the  calendar  year may not be able to
distinguish  whether  "00"  means  1900 or 2000.  This may  result  in  software
failures or the creation of erroneous results.  We believe that our products and
internal  systems are currently year 2000 compliant.  We have confirmed our year
2000  compliance  by obtaining  representations  by third party vendors of their
products' year 2000 


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<PAGE>

compliance,  as well as specific  testing of our products.  We have not incurred
significant  costs to date complying with year 2000  requirements  and we do not
believe  that  we  will  incur  significant  costs  for  these  purposes  in the
foreseeable  future.  However,  should  products or systems  maintained by third
parties or our products and systems fail to be year 2000 compliant,  despite the
representations of third parties and the testing of our products, we could incur
significant  expenses to remedy any problems and our business could be seriously
damaged.




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                                     Part II

                                Other Information

Item 1    Legal Proceedings                                                NONE

Item 2    Changes in Securities and Use of Proceeds                        
          
Use of Proceeds from IPO

     On February 22, 1999,  Digital Lava completed an initial public offering of
1,200,000  units,  each unit  consisting  of two shares of common  stock and one
redeemable  warrant,  and received  aggregate  proceeds of  $18,120,000  and net
proceeds of  $14,596,446.  On March 30, 1999 Digital Lava completed the exercise
by its  underwriter of the over  allotment  option of 113,312 units and received
aggregate  proceeds of  $1,711,011  and net proceeds of  $1,513,590.  During the
period from completion of the Offering through March 31, 1999,  Digital Lava has
used  approximately  1)  $4,489,000  of the proceeds to repay bridge  notes;  2)
$135,000 for product development  expenses;  3) $325,000 for sales and marketing
expenses;  4) $116,000 for  facilities  and other capital  expenditures;  and 5)
$558,000 for working capital and general corporate purposes. In addition, during
the first quarter of 1999,  Digital Lava used approximately $1.4 million of such
net proceeds to pay expenses of the offering.  None of these  offering  expenses
represented a direct or indirect  payment to (i) directors,  officers or general
partners of the Company or to their associates,  (ii) persons owning 10% or more
of any class of equity  securities  of the  Company or (iii)  affiliates  of the
Company.

Item 3    Defaults upon Senior Securities                                  NONE

Item 4    Submission of Matters to Vote of Security Holders                NONE

Item 5    Other Information                                                NONE

Item 6    Exhibits and Reports on Form 8-K                                 NONE


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                                 SIGNATURE PAGE


Pursuant  to the  requirements  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.


                             DIGITAL LAVA INC.
Dated: May 17, 1999

                             by:   /s/ Danny Gampe
                                   --------------------------------------------
                                   Danny Gampe
                                   Chief Financial Officer
                                   (Principal Accounting and Financial Officer)
                                   and Vice President, Finance





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