SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                   FORM 10-Q/A
                                 AMENDMENT NO. 1

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

                    For the quarter ended September 30, 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)

                          13160 Mindanao Way, Suite 350
                            Marina del Rey, CA 90292
                    (Address of principal executive offices)

       Registrant's telephone number, including area code: (310) 577-0200


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 November 12, 1999, the  Registrant had 4,636,887  shares of its $.0001 par
value Common Stock issued and outstanding.


<PAGE>



                                Digital Lava Inc.

                                Table of Contents


Part I            FINANCIAL INFORMATION

         Item 1.  Financial Statements

                  Balance Sheet                                               3

                  Statement of Operations, Three Months ended September 30    4

                  Statement of Operations, Nine Months ended September 30     5

                  Statement of Cash Flows                                     6

                  Notes to Unaudited Financial Statements                     7

         Item 2.  Management's Discussion and Analysis of
                     Financial Condition and Results of Operations            10

Part II           OTHER INFORMATION

         Item 1.  Legal Proceedings                                           14

         Item 2.  Changes in Securities                                       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


<PAGE>



Part I.  Financial Information

Item 1.  Financial Statements



                                DIGITAL LAVA INC.
                                  Balance Sheet
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                  September 30,
                                                                                      1999          December 31,
                                                                                   As Restated         1998
                                                                                   ------------    ------------
<S>                                                                                <C>             <C>
                                     Assets
Current Assets:
      Cash and cash equivalents ................................................   $  1,690,847    $     30,893
      Short term investments ...................................................      4,580,614              --
      Accounts receivable ......................................................        400,133         204,196
      Other current assets .....................................................        198,212          16,731
      Deferred offering costs ..................................................             --         888,493
                                                                                   ------------    ------------
              Total current assets .............................................      6,869,806       1,140,313
Fixed assets, net ..............................................................        516,637          59,647
Restricted cash ................................................................        551,510              --
Other assets ...................................................................         27,119          16,965
                                                                                   ------------    ------------
                                                                                   $  7,965,072    $  1,216,925
                                                                                   ============    ============

                 Liabilities and Stockholders' Equity (Deficit)

Current liabilities:
      Accounts payable .........................................................   $    235,617    $    698,746
      Accrued interest .........................................................             --         998,619
      Accrued expenses and other current liabilities ...........................        262,602         404,537
      Notes payable, net of debt discount ......................................             --       5,008,634
      Deferred revenue .........................................................        207,615         186,909
                                                                                   ------------    ------------
              Total current liabilities ........................................        705,834       7,297,445
                                                                                   ------------    ------------

Long term portion of capital lease .............................................         23,744              --

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 September 30, 1999 .............             --               9
      Common stock, $0.0001 par value; 35,000,000 shares
            authorized; 4,636,887 and 131,524 shares issued
            and outstanding at September 30, 1999 and
            December 31, 1998, respectively ....................................            463              13
      Additional paid-in capital ...............................................     26,091,107       4,618,297
      Accumulated deficit ......................................................    (18,834,965)    (10,698,839)
      Accumulated other comprehensive loss .....................................        (21,111)             --
                                                                                   ------------    ------------
              Total stockholders' equity/(deficit) .............................      7,235,494      (6,080,520)
                                                                                   ------------    ------------
                                                                                   $  7,965,072    $  1,216,925
                                                                                   ============    ============
</TABLE>

See accompanying notes to the unaudited financial statements.



<PAGE>



                                DIGITAL LAVA INC.

                             Statement of Operations

                                   (Unaudited)

                                                Three Months Ended September 30,
                                                --------------------------------
                                                    1999
                                                 As Restated         1998
                                                 -----------      -----------
Revenues:
      Software licenses ....................     $    63,073      $   567,905
      Services .............................         219,895          187,830
                                                 -----------      -----------
              Total revenues ...............         282,968          755,735
                                                 -----------      -----------
Cost of revenues:
      Cost of software licenses ............          38,018              280
      Cost of services .....................          37,884          152,192
                                                 -----------      -----------
              Total cost of revenues .......          75,902          152,472
                                                 -----------      -----------
              Gross profit .................         207,066          603,263
                                                 -----------      -----------
Operating costs and expenses:
      Selling, general and administrative ..       1,754,946          770,176
      Research and development .............         292,856           66,628
                                                 -----------      -----------
              Total operating costs and
                  expenses .................       2,047,802          836,804
                                                 -----------      -----------
              Loss from operations .........      (1,840,736)        (233,541)

Other expense, net .........................         (60,034)        (247,666)
                                                 -----------      -----------
Net loss ...................................     ($1,900,770)     ($  481,207)
                                                 ===========      ===========
Basic and diluted net loss per share .......     $      (.41)     $     (3.66)
                                                 ===========      ===========

Weighed average common shares
      used in basic and diluted loss per
        share ..............................       4,636,887          131,524
                                                 ===========      ===========



See accompanying notes to the unaudited financial statements.



<PAGE>



                                DIGITAL LAVA INC.

                             Statement of Operations

                                   (Unaudited)

                                                          Nine Months Ended
                                                            September 30,
                                                     --------------------------
                                                        1999
                                                     As Restated       1998
                                                     -----------    -----------
Revenues:
      Software licenses ..........................   $   205,985    $   832,090
      Services ...................................       365,818        315,542
                                                     -----------    -----------
              Total revenues .....................       571,803      1,147,632
                                                     -----------    -----------
Cost of revenues:
      Cost of software licenses ..................        40,267          7,708
      Cost of services ...........................        89,962        236,631
                                                     -----------    -----------
              Total cost of revenues .............       130,229        244,339
                                                     -----------    -----------
              Gross profit .......................       441,574        903,293
                                                     -----------    -----------
Operating costs and expenses:
      Selling, general and administrative ........     4,137,165      2,773,240
      Research and development ...................       648,423        334,142
                                                     -----------    -----------
              Total operating costs and
                  expenses .......................     4,785,588      3,107,382
                                                     -----------    -----------
              Loss from operations ...............    (4,344,014)    (2,204,089)

Other expense, net ...............................      (119,453)    (1,057,131)
                                                     -----------    -----------
              Loss before extraordinary item .....    (4,463,467)    (3,261,220)
Extraordinary loss on extinguishment of debt .....    (3,672,656)            --

                                                     -----------    -----------
            Net loss .............................    (8,136,123)    (3,261,220)
                                                     ===========    ===========

Net loss available to common stockholders ........   ($8,796,136)   ($3,261,220)
                                                     ===========    ===========
Basic and diluted loss per share:
      Loss before extraordinary item .............   $     (1.37)   $    (24.80)
      Extraordinary loss on extinguishment of debt          (.99)            --
                                                     ===========    ===========
Net loss .........................................   $     (2.36)   $    (24.80)
                                                     ===========    ===========

Weighed average common shares
      used in basic and diluted loss per
        share ....................................     3,722,284        131,524
                                                     ===========    ===========



See accompanying notes to the unaudited financial statements.



<PAGE>



                                DIGITAL LAVA INC.

                             Statement of Cash Flows

                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                Nine Months Ended September 30,
                                                                -------------------------------
                                                                     1999
                                                                 As Restated         1998
                                                                 ------------    ------------
<S>                                                              <C>             <C>
Cash flows from operating activities:
    Net loss .................................................   $ (8,136,123)   $ (3,261,220)
    Adjustments to reconcile net loss
        to net cash used in operating activities:
           Extraordinary loss on extinguishment of debt ......      3,672,656              --
            Deferred revenues ................................         20,706         186,254
            Depreciation and amortization ....................         63,340         147,526
            Amortization of debt discount ....................        130,758         544,905
            Compensation from grant of
                non-employee stock options
                  and warrants ...............................             --         396,381
        Changes in assets and liabilities
            affecting operating cash flows:
                Accounts receivable ..........................       (195,937)        (16,840)
                Other assets .................................       (195,150)        (14,543)
                Accounts payable .............................       (463,129)         33,251
                Accrued interest .............................       (523,952)        634,737
                Accrued expenses and other current liabilities       (153,181)        451,177
                                                                 ------------    ------------
Net cash used in operating activities ........................     (5,780,012)       (898,372)
                                                                 ------------    ------------
Cash flows used in investing activities:
    Purchases of short term investments ......................     (8,144,829)             --
    Sales of short term investments ..........................      3,543,104              --
    Restricted cash ..........................................       (551,510)             --
    Deferred offering costs ..................................             --        (289,112)
    Acquisition of fixed assets ..............................       (481,828)        (23,992)
                                                                 ------------    ------------
Net cash used in investing activities ........................     (5,635,063)       (313,104)
                                                                 ------------    ------------
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 ....................     13,075,029       1,050,000
                                                                 ------------    ------------
Net increase/(decrease) in cash and cash equivalents .........      1,659,954        (161,476)
Cash and cash equivalents at beginning of
    period ...................................................         30,893         173,262
                                                                 ------------    ------------
Cash and cash equivalents at end of period ...................   $  1,690,847    $     11,786
                                                                 ============    ============
</TABLE>



See accompanying notes to the unaudited financial statements.



<PAGE>



                               DIGITAL LAVA INC.

                   Notes to (Unaudited) Financial Statements

1.   The Company

     Digital Lava Inc., a Delaware  corporation  (the  "Company"),  develops and
markets  rich  mixed  media  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 September 30, 1999 and the statements
of  operations  and cash  flows  for the  three  and nine  month  periods  ended
September 30, 1999 and 1998 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 and nine month periods ended  September 30, 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.   Restatement:

     The  Company  determined  that it was  necessary  to revise  its  unaudited
results  of  operations  as of and for the three and nine  month  periods  ended
September  30, 1999.  The  revisions  to the  financial  statements  reflect the
deferral of $17,999 and $101,462 of revenue  previously  recognized in three and
nine-months ended September 30, 1999,  respectively,  until the first quarter of
2000, and the reversal of $56,250 of revenue previously  recognized in the third
quarter of 1999 offset somewhat by reversal of related royalty costs of $28,250.
In addition,  the Company revised its  amortization of premiums and discounts on
purchases  of  investments  resulting  in a reduction  of  investment  income of
$20,638 and $53,108 for the three and  nine-months  ended  September  30,  1999,
respectively.

     A summary of the impact of such restatements on the unaudited  consolidated
financial  statements  as of and for the three-  and  nine-month  periods  ended
September 30, 1999 is as follows:

<TABLE>
<CAPTION>
                                    Three Months                    Nine Months
                                 Ended September 30            Ended September 30
                             --------------------------    --------------------------
                             As previously                 As previously
                               Reported      Restated        Reported        Restated
                             -----------    -----------    -----------    -----------
<S>                          <C>            <C>            <C>            <C>
Stockholders' equity         $ 7,524,907    $ 7,235,494    $ 7,524,907    $ 7,235,494
Revenues                         357,217        282,968        729,515        571,803
Other expense                    (39,396)       (60,034)       (66,345)      (119,453)
Net loss                      (1,834,133)    (1,900,770)    (7,953,553)    (8,136,123)
Basic and diluted net loss
           per share         $      (.40)   $      (.41)   $     (2.31)   $     (2.36)
</TABLE>

<PAGE>

4.   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 and nine  month  periods  ended
September  30, 1999 and 1998 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 September 30, 1998; 2) 712,570 and 59,618 of
stock options  outstanding as of September 30, 1999 and 1998,  respectively;  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 September 30, 1998, and
4) 2,272,575 and 446,254  warrants to purchase  common stock as of September 30,
1999 and 1998, respectively.

     Net loss available to common stockholders  represents net loss for the nine
months ended September 30, 1999 increased by a dividend of $660,013  recorded 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).

5.   Short Term Investments

     During the first nine  months of 1999,  the  Company  purchased  short-term
investments  comprised 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 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
are  reported  at fair  value.  The net  unrealized  gains  or  losses  on these
investments are reported as a separate component of stockholders' equity, net of
tax, and  represented  an  unrealized  loss of $21,111 at September 30, 1999. At
September 30, 1999,  available-for-sale securities were comprised of Euro Dollar
bonds  and  medium  and  short  term  notes  of   $2,943,932   and   $1,636,682,
respectively.

6.   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 $14,596,469.  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 $1,513,567.  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

<PAGE>

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 88,222 shares of
common stock) and 11,028 shares of common stock returned by certain  officers of
the Company.  This resulted in the cancellation of 99,250 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 $660,013.

Conversion of outstanding warrants

     In  conjunction  with the  completion  of the  IPO,  the  Company  canceled
warrants to acquire 148,434 shares of common stock in exchange for 45,005 shares
of common stock.

7.   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 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.

8.   Comprehensive Loss

     Statement of Financial  Accounting Standards No. 130 requires disclosure of
the total non-stockholder changes in equity resulting from revenue, expense, and
gains and losses,  including  those that do not affect  retained  earnings.  The
Company's accumulated other comprehensive loss included the following:

<PAGE>

<TABLE>
<CAPTION>
                                         Three Months                    Nine Months
                                      Ended September 30            Ended September 30
                                  --------------------------    --------------------------
                                     1999            1998           1999          1998
                                  -----------    -----------    -----------    -----------
                                 (As Restated)                 (As Restated)
<S>                               <C>            <C>            <C>            <C>
Net loss                          ($1,900,770)   ($  481,207)   ($8,136,123)   ($3,261,220)

Unrealized gain (loss) on
  available for sale securities           776             --        (21,111)            --
                                  -----------    -----------    -----------    -----------

Comprehensive loss                $(1,899,994)   ($  481,207)   $(8,157,234)   ($3,261,220)
                                  ===========    ===========    ===========    ===========
</TABLE>

<PAGE>

9.   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.

10.  Commitments and Contingencies

     Operating and capital leases

     The Company entered into a non-cancelable  operating lease for its facility
which  expires in August 2005.  Under the terms of this  agreement,  a letter of
credit  was  created as  security  for the lease.  Restricted  cash of  $437,500
invested in a  certificate  of deposit at September 30, 1999 secured that letter
of credit.  As part of the facility  transition,  the former operating lease was
retired at a cost of $40,880. The Company entered into a non-cancelable  capital
lease for  furniture and equipment  which expires in September  2002.  Under the
terms of this  agreement,  a letter of credit was  created as  security  for the
lease.  Restricted  cash of  $114,010  invested in a  certificate  of deposit at
September 30, 1999 secured that letter of credit . Future minimum lease payments
required under non-cancelable leases are $174,103, $526,393, $593,895, $613,235,
$625,584 and $623,114  for the three months  ending  December 31, 1999 and years
ending December 31, 2000, through 2004, respectively.

9.   Accrued expenses and other current liabilities

     Accrued  expenses  and  other  current  liabilities  is  comprised  of  the
following:

                                                      1999           1998
                                                    --------       --------
     Accrued salaries and wages                     $153,333       $189,628
     Deferred rent                                    46,430             --
     Other current liabilities                        62,839        214,909
                                                    --------       --------
                  Total                             $262,602       $404,537
                                                    ========       ========

<PAGE>

10.  Non-Cash Supplemental Disclosure

     Non-cash items occurring in the nine-month  period ended September 30, 1999
included  $1,690,556  related to conversion of debt and associated  interest and
conversion  of  outstanding  warrants  into  common  stock  which  resulted in a
non-cash  extraordinary loss of $3,672,656 (Note 6). Non-cash items occurring in
the  nine-month  period ended  September  30, 1999 also included a purchase of a
capital lease of $34,988 and unrealized loss on available-for-sale securities of
$21,111.

     Non-Cash items  occurring in the nine month period ended September 30, 1998
included the fair value of warrants issued to note holders of $294,245,  and the
fair value of warrants  issued to consultants in connection  with debt offerings
$42,204. Both fair value amounts were determined using the Black-Scholes model.



<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:  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.  Other risks
inherent  in the  business  of  the  Company  are  described  in  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,  and
development activities during the quarter ended September 30, 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,  growth in software  license fees and service revenue may not occur
in the future.  In light of Digital  Lava's  limited  operating  history,  rapid
changes in  technology  and increased  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  September  30,  1999,  had  an
accumulated  deficit of $18,834,965.  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 and nine months ended  September  30, 1999 to the three
and nine months ended September 30, 1998

     Revenues

     Revenues  decreased to $282,968 for the quarter  ended  September  30, 1999
from $755,735 for the quarter ended September 30, 1998. The decrease of $472,767
or  62.3%  was  primarily  due to a  decrease  in sales  of  software  licenses,
reflective  of a large  non-recurring  sale of software  licenses in the quarter
ended September 30, 1998,  partially offset by an increase in services  revenue.
Software  license  revenues  accounted  for  approximately  22.3%  and  75.1% of
revenues  for the  quarter  ended  September  30,  1999 and 1998,  respectively.
Consulting and services revenues accounted for approximately  77.7% and 24.9% of
revenues  for the  quarter  ended  September  30,  1999 and 1998,  respectively.
Digital  Lava's largest  customer  accounted for 39.0% and 89.0% of revenues for
the three months ended September 30, 1999 and 1998,  respectively.  Digital Lava
anticipates  that

<PAGE>

services  revenue will continue to account for an  increasing  share of revenues
for the  foreseeable  future  as the  Company's  focus  will  be on the  sale of
services related to the Company's VideoVisor Pro and VideoVisor Web .

     For the nine  months  ended  September  30,  1999,  revenues  decreased  to
$571,803  from  $1,147,632  for the nine months ended  September  30, 1998.  The
decrease of $575,829 or 50.2% was due to a decrease in software  license  sales,
reflective of a large non-recurring sale of software licenses in 1998, partially
offset by increased  services revenue.  Software license revenues  accounted for
approximately  36.0% and 72.5% of revenues for the nine months  ended  September
30, 1999 and 1998,  respectively.  Services revenues accounted for approximately
64.0% and 27.5% of revenues  for the nine months  ended  September  30, 1999 and
1998, respectively.

     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 $75,902,  or 26.8% of  revenues,  for the quarter  ended
September 30, 1999 from  $152,472,  or 20.2% of revenues,  for the quarter ended
September 30, 1998.  This decrease in absolute  dollars was primarily due to the
reduced level of revenue during the quarter.

     Costs of revenues decreased to $130,229, or 22.8% of revenues, for the nine
months ended  September 30, 1999 from  $244,339,  or 21.3% of revenues,  for the
same period in 1998.  This  decrease was  primarily  due to the reduced level of
revenue during the nine month period.

     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 $1,754,946  for the quarter ended  September 30, 1999 from $770,176
for the quarter  ended  September  30, 1998.  The increase was  primarily due to
increased spending on trade shows and 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 anticipated growth
of the  business  and its  operation  as a public  company ;  however,  selling,
general and  administrative  expense are presently  anticipated  to decline as a
percentage of revenues.

     Selling,  general and  administrative  expenses increased to $4,137,165 for
the nine months ended  September 30, 1999 from $2,773,240 for the same period in
1998.  The  increase  was  primarily  due to  increased  spending on  additional
personnel and sales and marketing  expenses  required to build an infrastructure
to support Digital Lava's products and anticipated growth.

     Research  and  Development  Expenses.  Research  and  development  expenses
consist of expenditures related to technology and software development expenses.
Research and development  expenses increased to $292,856,  or 82.0% of revenues,
for the quarter ended Septembr 30, 1999 from $66,628,  or 8.8% of revenues,  for
the quarter ended  September 30, 1998. The dollar  increase was primarily due to
the increased  level of personnel  employed in 1999.  Digital Lava believes that
significant  investments in technology and content  development  are required to
maintain a

<PAGE>

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 decline as a percentage of revenues.

     Research  and  development  expenses  increased  to  $648,423,  or 88.9% of
revenues,  for the nine months ended September 30, 1999 from $334,142,  or 29.1%
of revenues,  for the same period in 1998. The increase was primarily due to the
increased personnel hired during the first nine months of the year.

     Other Expense,  net. Other income  includes  interest  earned and gains and
losses  from the sale of the short  term  investments  of cash  balances.  Other
expense  includes  gains and losses on sales of  investments,  interest  expense
related to Digital Lava's  financing  obligations  and the  amortization of debt
discount in 1998.  Other  expense  decreased to a net expense of $60,034 for the
quarter  ended  September  30, 1999 from a net expense level of $247,666 for the
quarter  ended  September  30, 1998.  The decrease was  primarily due to reduced
interest  expense and  amortization  of debt  discount due to the  retirement of
notes payable issued by Digital Lava in  conjunction  with the completion of the
initial public  offering  offset by a loss on the sale of  investment's in short
term  marketable  securities  in 1999.  Interest  expense for the quarter  ended
September 30, 1998 included amortization of debt discount of $251,120.

     Other  expense  decreased  to  $119,453  for the nine  month  period  ended
September  30,  1999 from  $1,057,131  in the  first  nine  months of 1998.  The
decrease  was  primarily  due to the  retirement  of notes  payable in the first
quarter  of 1999 in  conjunction  with  the  completion  of the  initial  public
offering  and the  investment  of  cash in  short  term  marketable  securities.
Interest  expense  for  the  nine  months  ended  September  30,  1998  included
amortization of debt discount of $544,905.

     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 September 30, 1999,  Digital Lava
has used approximately 1) $4,489,000 of the proceeds to repay notes; 2) $648,000
for  product  development  expenses;  3)  $1,509,000  for  sales  and  marketing
expenses;  4) $954,000 for  facilities  and other capital  expenditures;  and 5)
$2,079,000 for working capital and general corporate purposes.

     Net cash used in operating  activities  was  $5,780,009 for the nine months
ended  September  30, 1999 as compared  to  $898,372  for the nine months  ended
September 30, 1998.  The increase in use of cash from  operations  was primarily
due to the net loss incurred and payment of accrued expenses partially offset by
the non-cash extraordinary loss.

     Cash flows used in investing  activities was $5,635,066 for the nine months
ended  September  30, 1999 as compared  to  $313,104  for the nine months  ended
September  30,  1998  resulting  primarily  from  the  purchase  of  short  term
securities, restriction of cash related to the Company's new

<PAGE>

operating lease and purchase of fixed assets.

     Net cash  provided by financing  activities  was  $13,075,029  for the nine
months ended  September  30, 1999 as compared to  $1,050,000  for the six months
ended  September 30, 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  operations  and  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,  however
the outcome of such efforts to raise working capital cannot be assured.

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 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.


<PAGE>



                                     Part II

                                Other Information

Item 1   Legal Proceedings                                                 NONE

Item 2   Changes in Securities                                             NONE

Item 3   Defaults upon Senior Securities                                   NONE

Item 4   Submission of Matters to Vote of Security Holders

             At Digital Lava's annual meeting of stockholders  held on July
             21,  1999,  the   stockholders  of  the  company  elected  the
             following  persons as directors of the company (each receiving
             the votes listed below),  to hold office until the next annual
             meeting of  stockholders  and until their  successors are duly
             elected and qualified:  James W. Stigler (3,271,145 votes for,
             and 29,205 votes withheld);  Robert F. Greene (3,271,145 votes
             for, and 29,205 votes withheld); Roger Berman (3,104,981 votes
             for, and 195,369 votes  withheld);  Gerald  Porter  (3,271,145
             votes for, and 29,205  votes  withheld);  and John  Carrington
             (3,271,145  votes  for,  and  29,205  votes   withheld).   The
             stockholders of the company also voted in favor (944,557 votes
             for,  310,344  votes  against,  and 20,998  abstentions)  of a
             resolution   adopting  an  amendment  to  the  company's  1996
             Incentive and  Non-Qualified  Stock Option Plan increasing the
             aggregate  number  of  shares  issuable  under  the plan  from
             250,000 to 1,000,000.

Item 5   Other Information                                                 NONE

Item 6   Exhibits and Reports on Form 8-K                                  NONE



<PAGE>



                                 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: November 12, 1999

                                           by: /s/ Danny Gampe

                                               Danny Gampe
                                               Chief Financial Officer
                                               (Principal Accounting and
                                               Financial Officer)
                                               and Vice President, Finance