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 June 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 August 13, 1999,  the  Registrant  had 4,634,387  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 June 30         4

                   Statement of Operations, Six Months ended June 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>
                                                                                    June 30,
                                                                                       1999        December 31,
                                                                                   As Restated         1998
                                                                                   ------------    ------------
                                     Assets
<S>                                                                                <C>             <C>
Current Assets:
      Cash and cash equivalents ................................................   $    639,430    $     30,893
      Short term investments ...................................................      7,823,530            --
      Accounts receivable ......................................................        226,966         204,196
      Other current assets .....................................................        193,859          16,731
      Deferred Offering Costs ..................................................           --           888,493
                                                                                   ------------    ------------
              Total current assets .............................................      8,883,785       1,140,313
Fixed assets, net ..............................................................        161,710          59,647
Restricted cash ................................................................        437,500            --
Other assets ...................................................................         17,119          16,965
                                                                                   ------------    ------------
                                                                                   $  9,500,114    $  1,216,925
                                                                                   ============    ============

                 Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
      Accounts payable .........................................................   $     97,928    $    698,746
      Accrued interest .........................................................           --           998,619
      Accrued expenses and other current liabilites ............................         28,027         404,537
      Notes payable, net of debt discount ......................................           --         5,008,634
      Deferred revenue .........................................................        243,874         186,909
                                                                                   ------------    ------------
              Total current liabilities ........................................        369,829       7,297,445
                                                                                   ------------    ------------

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 June 30, 1999                              --                 9
      Common stock, $0.0001 par value; 35,000,000 shares
              authorized; 4,634,387 and 131,524 shares issued
            and outstanding at June 30,1999 and December 31,
            1998, respectively .................................................            463              13
      Additional paid-in capital ...............................................     26,085,901       4,618,297
     Accumulated deficit .......................................................    (16,934,192)    (10,698,839)
     Accumulated other comprehensive loss ......................................        (21,887)           --
                                                                                   ------------    ------------
              Total stockholders' equity (deficit) .............................      9,130,285      (6,080,520)
                                                                                   ------------    ------------
                                                                                   $  9,500,114    $  1,216,925
                                                                                   ============    ============
</TABLE>


See accompanying notes to the unaudited financial statements.

<PAGE>


                                DIGITAL LAVA INC.

                             Statement of Operations

                                   (Unaudited)

                                                    Three Months Ended June 30,
                                                   -----------------------------
                                                      1999
                                                   As Restated          1998
                                                   -----------      ------------
Revenues:
      Software licenses ......................     $    50,754      $   224,835
      Consulting and services ................          61,202           50,835
                                                   -----------      -----------
              Total revenues .................         111,956          275,670
                                                   -----------      -----------
Cost of revenues:
      Cost of software licenses ..............             205            7,428
      Cost of consulting and services ........          13,652           37,986
                                                   -----------      -----------
              Total cost of revenues .........          13,857           45,414
                                                   -----------      -----------
              Gross profit ...................          98,099          230,256
                                                   -----------      -----------
Operating costs and expenses:
      Selling, general and administrative ....       1,321,172        1,257,048
      Research and development ...............         221,104          128,028
                                                   -----------      -----------
              Total operating costs and
                  expenses ...................       1,542,276        1,385,076
                                                   -----------      -----------
              Loss from operations ...........      (1,444,177)      (1,154,820)

Other income(expense) ........................         118,015         (352,724)
                                                   -----------      -----------
Net loss .....................................     ($1,326,162)     ($1,507,544)
                                                   ===========      ===========
Basic and diluted net loss per share .........     $      (.29)     $    (11.46)
                                                   ===========      ===========

Weighed average common shares
      used in basic and diluted loss per
        share ................................       4,634,387          131,524
                                                   ===========      ===========


See accompanying notes to the unaudited financial statements.

<PAGE>


                                DIGITAL LAVA INC.

                             Statement of Operations

                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                    Six Months Ended June 30,
                                                              -------------------------------------
                                                                 1999
                                                              As Restated                  1998
                                                              -----------               -----------
<S>                                                           <C>                       <C>
Revenues:
      Software licenses .............................         $   142,912               $   264,185
      Consulting and services .......................             145,923                   127,712
                                                              -----------               -----------
              Total revenues ........................             288,835                   391,897
                                                              -----------               -----------
Cost of revenues:
      Cost of software licenses .....................               2,249                     7,558
      Cost of consulting and services ...............              52,078                    84,309
                                                              -----------               -----------
              Total cost of revenues ................              54,327                    91,867
                                                              -----------               -----------
              Gross profit ..........................             234,508                   300,030
                                                              -----------               -----------
Operating costs and expenses:
      Selling, general and administrative ...........           2,382,219                 2,003,058
      Research and development ......................             355,567                   267,514
                                                              -----------               -----------
              Total operating costs and
                  expenses ..........................           2,737,786                 2,270,572
                                                              -----------               -----------
              Loss from operations ..................          (2,503,278)               (1,970,542)

Other expense .......................................             (59,419)                 (809,465)
                                                              -----------               -----------
              Loss before extraordinary item ........          (2,562,697)               (2,780,007)
Extraordinary loss on extinguishment of debt ........          (3,672,656)                     --
                                                              -----------               -----------
            Net loss ................................          (6,235,353)               (2,780,007)
                                                              ===========               ===========

Net loss available to common stockholders ...........         ($6,895,366)              ($2,780,007)
                                                              ===========               ===========
Basic and diluted loss per share:
      Loss before extraordinary item ................         $      (.98)              $    (21.14)
      Extraordinary loss on extinguishment of debt ..               (1.13)                     --
                                                              ===========               ===========
Net loss ............................................         $     (2.11)              $    (21.14)
                                                              ===========               ===========

Weighed average common shares
      used in basic and diluted loss per
        share .......................................           3,263,223                   131,524
                                                              ===========               ===========
</TABLE>


See accompanying notes to the unaudited financial statements.

<PAGE>


                                DIGITAL LAVA INC.

                             Statement of Cash Flows

                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                              Six Months Ended June 30,
                                                                       --------------------------------------
                                                                            1999
                                                                        As Restated                  1998
                                                                       -------------             ------------
<S>                                                                    <C>                       <C>
Cash flows from operating activities:
    Net loss .............................................             $ (6,235,353)             $ (2,780,007)
    Adjustments to reconcile net loss
        to net cash used in operating activities:
           Extraordinary loss on extinguishment of debt ..                3,672,656                      --
            Deferred costs ...............................                                            (96,672)
            Deferred revenues ............................                   56,965                   733,121
            Depreciation and amortization ................                   30,482                   111,705
            Amortization of debt discount ................                  130,758                   293,785
            Compensation from grant of
                non-employee stock options
                  and warrants ...........................                     --                     392,420
        Changes in assets and liabilities
            affecting operating cash flows:
                Accounts receivable ......................                  (22,770)                 (458,742)
                Other assets .............................                 (180,799)                  (20,941)
                Accounts payable .........................                 (600,818)                  (87,824)
                Accrued interest .........................                 (523,954)                  517,630
                Accrued expenses .........................                 (376,510)                  240,442
                                                                       ------------              ------------
Net cash used in operating activities ....................               (4,049,343)               (1,155,083)
                                                                       ------------              ------------
Cash flows used in investing activities:
    Purchases of short term investments ..................               (8,144,829)                     --
    Sales of short term investments ......................                  299,412                      --
    Restricted cash ......................................                 (437,500)                     --
    Acquisition of fixed assets ..........................                 (134,232)                  (23,992)
                                                                       ------------              ------------
Net cash used in investing activities ....................               (8,417,149)                  (23,992)
                                                                       ------------              ------------
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 in cash and cash equivalents ................                  608,537                  (129,075)
Cash and cash equivalents at beginning of
    period ...............................................                   30,893                   173,262
                                                                       ------------              ------------
Cash and cash equivalents at end of period ...............             $    639,430              $     44,187
                                                                       ============              ============
</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 June 30, 1999 and the  statements of
operations  and cash  flows for the three and six month  periods  ended June 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 six month  periods  ended  June 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 six month periods ended June
30, 1999.  The  revisions to the  financial  statements  reflect the deferral of
$83,463 of revenue previously recognized in the second quarter of 1999 until the
first  quarter of 2000. In addition,  the company  revised its  amortization  of
premiums and discounts on purchases of  investments  resulting in a reduction of
investment income of $32,470 for the second quarter of 1999.

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


<TABLE>
<CAPTION>

                                                   Three Months                             Six Months
                                                  Ended June 30                           Ended June 30
                                                  -------------                           -------------
                                        As previously                           As previously
                                           Reported            Restated           Reported             Restated
                                        -------------          --------         -------------          --------
<S>                                      <C>                 <C>                 <C>                 <C>
     Stockholders' equity                $ 9,268,105         $ 9,130,285         $ 9,268,105         $ 9,130,285
     Revenues                                195,419             111,956             372,298             288,835
     Other income/(expense)                  150,485             118,015             (26,949)            (59,419)
     Net loss                             (1,210,229)         (1,326,162)         (6,119,420)         (6,235,353)
     Basic and diluted net loss
                per share                $      (.26)        $      (.29)        $     (2.08)        $     (2.11)
</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 six month periods ended June
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 June 30,  1998;  2)  250,000  and  59,618  of  stock  options
outstanding as of June 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 June 30,  1998,  and  2,272,694  and 446,254
warrants to purchase common stock as of June 30, 1999 and 1998, respectively.

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

5.   Short Term Investments

     During  the first six  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 are
reported  at  fair  value.  At  June  30,  1999,  available-for-sale  securities
comprised of Euro Dollar bonds and medium and short term notes of $4,823,547 and
$2,999,983, 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 $14,596,446.  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 11,028 shares of common stock returned by certain  officers of
the Company. This resulted in the cancellation of


<PAGE>


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:

<TABLE>
<CAPTION>
                                                     Three Months                         Six Months
                                                    Ended June 30                        Ended June 30
                                                    -------------                        -------------
                                            1999                1998                1999             1998
                                            ----                ----                ----             ----
                                        (As Restated)                           (As Restated)
<S>                                      <C>                <C>                <C>                <C>
     Net loss                            ($1,326,162)       ($  481,207)       ($6,235,353)       ($3,261,220)

     Unrealized loss on
       available for sale securities         (21,887)              --              (21,887)              --
                                                            -----------        -----------        -----------

     Comprehensive loss                  ($1,348,049)       ($  481,207)       ($6,257,240)       ($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 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
secured  that  letter  of  credit  at June  30,  1999.  As part of the  facility
transition,  the former operating lease was retired at a cost of $40,880. Future
minimum lease payments  required under the  non-cancelable  operating leases are
$198,017, $526,393, $593,895, $613,235, $625,584 and $623,114 for the six months
ending  December 31, 1999 and years ending  December  31,  2000,  through  2004,
respectively.

11.  Accrued expenses and other current liabilities

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

                                                     1999            1998
                                                     ----            ----
     Accrued salaries and wages                     $   --         $189,628
     Sales Tax Payable                                    27           --
     Other current liabilities                        28,000        214,909
                                                    --------       --------
                  Total                             $ 28,027       $404,537
                                                    ========       ========


12.  Non-Cash Items

     Non-cash  items  occurring  in the  six-month  period  ended June 30,  1999
included, unrealized loss on available-for-sale securities of $21,887,conversion
of debt  and  associated  interested  in  conjunction  with the  initial  public
offering in the first quarter of 1999 of $1,690,556,  and an extraordinary  loss
of  $3,672,656 in  conjunction  with the  conversion of the debt,  conversion of
warrants to purchase series A convertible preferred stock and common stock..

     Non-Cash  items  occurring  in the six month  period  ended  June 30,  1998
included the fair value


<PAGE>


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: development 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,  and
development  activities  during the quarter  ended June  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 be
sustainable in the future.  In light of Digital Lava's limited operating history
and 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 June 30, 1999, had an accumulated
deficit of  $16,934,192.  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 six months ended June 30, 1999 to the three and six
months ended June 30, 1998

  Revenues

     Revenues  decreased  to $111,956  for the quarter  ended June 30, 1999 from
$275,670 for the quarter ended June 30, 1998.  The decrease of $163,714 or 59.4%
was primarily due to a decrease in sales of software licenses.  Software license
revenues accounted for approximately 45.3% and 81.6% of revenues for the quarter
ended June 30, 1999 and 1998,  respectively.  Consulting  and services  revenues
accounted  for  approximately  54.7% and 18.4% of revenues for the quarter ended
June 30, 1999 and 1998, respectively.  Digital Lava's largest customer accounted
for 22.3% and 71.8% of  revenues  for the three  months  ended June 30, 1999 and
1998, respectively.  Digital Lava anticipates that services revenue will account
for an increasing share of revenues for the foreseeable future.

     For the six months ended June 30, 1999, revenues decreased to $288,835 from
$391,897 for the


<PAGE>


six months ended June 30,  1998.  The decrease of $103,062 or 26.3% was due to a
decrease in software  license sales.  Software  license  revenues  accounted for
approximately 49.5% and 67.4% of revenues for the six months ended June 30, 1999
and  1998,   respectively.   Consulting  and  services  revenues  accounted  for
approximately 50.5% and 32.6% of revenues for the six months ended June 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 $13,857,  or 7.1% of revenues,  for quarter ended June 30,
1999 from  $45,414,  or 16.5% of revenues,  for the quarter ended June 30, 1998.
This decrease was primarily due to decreased  costs  associated  with consulting
and  services  revenue  during the  quarter.  Digital  Lava  expects its cost of
revenue to increase in dollar amount while  declining as a percentage of revenue
as Digital Lava expands its customer base.

     Costs of revenues decreased to $54,327,  or 14.6% of revenues,  for the six
months  ended June 30, 1999 from  $91,867,  or 23.4% of  revenues,  for the same
period in 1998.  This decrease was primarily due to decreased  costs  associated
with consulting and services revenue during the six 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 $1,321,172 for the quarter ended June 30, 1999 from  $1,257,048 for
the quarter  ended June 30, 1998.  The increase was  primarily  due to 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.

     Selling,  general and  administrative  expenses increased to $2,382,219 for
the six months ended June 30, 1999 from  $2,003,058 for the same period in 1998.
The increase was  primarily due to increased  spending on additional  personnel,
sales and  marketing  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 $221,104,  or 113.1% of revenues,
for the quarter ended June 30, 1999 from $128,028, or 46.4% of revenues, for the
quarter  ended June 30,  1998.  The dollar  increase  was  primarily  due to the
increased  personnel  hired  during the second  quarter  of 1999.  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.

     Research  and  development  expenses  increased  to  $355,567,  or 95.5% of
revenues, for the six


<PAGE>


months ended June 30, 1999 from  $267,514,  or 68.3% of  revenues,  for the same
period in 1998. The increase was primarily due to the increased  personnel hired
during the first six months of the year.

     Other Income/(Expense). Other income includes interest earned and gains and
losses  from the sale of the short  term  investments  of cash  balances.  Other
expense   includes   interest   expense  related  to  Digital  Lava's  financing
obligations  and the  amortization  of  debt  discount  in  1998.  Other  income
(expense)  increased to income of $118,015  for the quarter  ended June 30, 1999
from an expense  level of $352,724  for the  quarter  ended June 30,  1998.  The
increase in income and decrease in expense was primarily  due to the  retirement
of notes payable  issued by Digital Lava in  conjunction  with the completion of
the initial public  offering and the investment of cash in short term marketable
securities.  Interest  expense  for the  quarter  ended June 30,  1998  included
amortization of debt discount of $153,373.

     Other expense  decreased to $59,419 for the six month period ended June 30,
1999 from  $809,465 in the first six 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
six  months  ended June 30,  1998  included  amortization  of debt  discount  of
$293,789.

     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.  Digital  Lava used  approximately  $4,489,000  of the
proceeds to repay bridge  notes.  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 June 30, 1999,  Digital Lava
has used  approximately  1) $4,489,000 of the proceeds to repay bridge notes; 2)
$356,000 for product development  expenses;  3) $785,000 for sales and marketing
expenses;  4) $278,000 for  facilities  and other capital  expenditures;  and 4)
$1,685,000 for working capital and general corporate purposes.

     Net cash used in operating  activities  was  $4,049,343  for the six months
ended June 30, 1999 as compared to $1,155,083  for the six months ended June 30,
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 $8,417,149 for the six months
ended June 30, 1999 as  compared  to $23,992  for the six months  ended June 30,
1998 resulting primarily from the purchase of short term securities.

     Net cash  provided by  financing  activities  was  $13,075,029  for the six
months  ended June 30, 1999 as compared to  $1,050,000  for the six months ended
June  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


<PAGE>


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 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         NONE

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: August 13, 1999

                               by: /s/ Danny Gampe
                                   ----------------------------------

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