<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549

                                   FORM 10-Q

(Mark One)

[X]  Quarterly Report pursuant to Section 13 or 15(d) of the Securities and
     Exchange Act of 1934 For the quarterly period ended June 30, 1997 or

[_]  Transition Report pursuant to Section 13 or 15(d) of the Securities and
     Exchange Act of 1934 For the transition period from ______ to ______.

                         Commission file number 0-27168

                           METACREATIONS CORPORATION
             (Exact name of registrant as specified in its charter)

            Delaware                               95-4102687
   (State of incorporation)          (I.R.S. Employer Identification Number)

                  6303 Carpinteria Ave, Carpinteria, CA 93013
                    (Address of principal executive offices)

                                 (805) 566-6200
              (Registrant's telephone number, including area code)

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 reports), and (2) has been subject to such filing
requirements for the past 90 days.   Yes  [X]        No  [_]

As of August 11, 1997, there were outstanding 23,061,851 shares of the
registrant's Common Stock, $0.001 par value per share, which is the only
outstanding class of common or voting stock of the registrant.

                                       1
<PAGE>
 
                           METACREATIONS CORPORATION

                                   FORM 10-Q

                               Table of Contents
<TABLE>
<CAPTION>


                                                                                                  Page
                                                                                                  ----
<C>              <S>                                                                              <C>    
PART I.          FINANCIAL INFORMATION

Item 1.          Financial Statements.........................................................       3

                   Consolidated Balance Sheets - June 30, 1997 and
                     December 31, 1996
                   Consolidated Statements of Operations - Three and six
                     months ended June 30, 1997 and 1996
                   Consolidated Statements of Cash Flows - Six months ended
                     June 30, 1997 and 1996
                   Notes to Consolidated Financial Statements

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

PART II.         OTHER INFORMATION

Item 4           Submission of Matters to a Vote of Security Holders..........................      22

Item 6.          Exhibits and Reports on Form 8-K.............................................      23

SIGNATURES       .............................................................................      24
</TABLE>
 

                                       2
<PAGE>
 
                        PART I. FINANCIAL INFORMATION 

Item 1. Financial Statements

                           METACREATIONS CORPORATION
                          CONSOLIDATED BALANCE SHEETS
                     (In thousands, except share amounts)

<TABLE>
<CAPTION>
                                                                                             JUNE 30,       DECEMBER 31,
                                                                                               1997            1996
                                                                                            ----------------------------
                                                                                            (Unaudited)      (Audited)
<S>                                                                                         <C>            <C>
ASSETS
Current assets:
 Cash and cash equivalents............................................................      $   19,567     $      21,605
 Short-term investments...............................................................          33,227            44,688
 Accounts receivable, net.............................................................          20,851            16,619
 Inventories..........................................................................           1,790             1,512
 Income taxes receivable..............................................................           1,874                --
 Deferred income taxes................................................................           3,727             2,827
 Prepaid expenses.....................................................................           3,431             3,826
                                                                                            -----------------------------
   Total current assets...............................................................          84,467            91,077

Property and equipment, net...........................................................           6,801             5,581
Other assets..........................................................................           1,440             1,277
                                                                                            -----------------------------
   Total assets.......................................................................      $   92,708     $      97,935
                                                                                            =============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 Accounts payable.....................................................................      $    5,008     $       4,490
 Accrued expenses.....................................................................           4,676             6,427
 Accrued merger costs.................................................................           2,575                --
 Income taxes payable.................................................................              --               150
 Royalties payable....................................................................             991               756
                                                                                            -----------------------------
   Total current liabilities..........................................................          13,250            11,823

Long-term liabilities.................................................................             400                --

Stockholders' equity:
 Preferred stock, $.001 par value, 5,000,000 shares authorized -
  no shares issued and outstanding at June 30, 1997 and December
  31, 1996, respectively..............................................................              --                --
 Common stock, $.001 par value; 75,000,000 shares authorized - 22,985,450 and
  22,274,398 shares issued and outstanding at June 30, 1997 and
  December 31, 1996, respectively.....................................................              23                22
 Paid-in capital......................................................................         106,243           100,956
 Notes receivable from stockholders...................................................          (3,084)           (3,000)
 Cumulative translation loss..........................................................            (143)             (158)
 Accumulated deficit..................................................................         (23,981)          (11,708)
                                                                                            -----------------------------
   Total stockholders' equity.........................................................          79,058            86,112
                                                                                            -----------------------------
   Total liabilities and stockholders' equity.........................................      $   92,708     $      97,935
                                                                                            =============================
</TABLE>

 
The accompanying notes are an integral part of these consolidated financial
statements.

                                       3
<PAGE>
 
                           METACREATIONS CORPORATION
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                   (In thousands, except per share amounts)
                                  (Unaudited)

<TABLE> 
<CAPTION> 

                                                          THREE MONTHS ENDED                        SIX MONTHS ENDED
                                                               JUNE 30,                                 JUNE 30,
                                                       ---------------------------              -------------------------
                                                             1997           1996                       1997         1996
                                                       ----------------------------             -------------------------
<S>                                                      <C>             <C>                      <C>            <C> 
Net revenues.....................................        $ 18,749        $ 14,854                  $ 32,001      $28,837
Cost of revenues.................................           3,563           2,718                     6,231        5,411
                                                       ---------------------------               -------------------------
Gross profit.....................................          15,186          12,136                    25,770       23,426

Operating expenses:
 Sales and marketing.............................           8,550           7,003                    15,881       13,345
 General and administrative......................           1,409           1,394                     3,041        2,680
 Research and development........................           3,561           2,071                     6,620        3,905
 Write-off of acquired in-process technology
  and other merger costs.........................          16,185              --                    16,185        1,865
                                                        ---------------------------               ------------------------
Total operating expenses.........................          29,705          10,468                    41,727       21,795
                                                        ---------------------------               ------------------------

Income (loss) from operations....................         (14,519)          1,668                   (15,957)       1,631
Interest and investment income, net..............             778             859                     1,589        1,747
                                                       ----------------------------           ---------------------------

Income (loss) before provision (benefit) for
 income taxes....................................         (13,741)          2,527                   (14,368)       3,378
Provision (benefit) for income taxes.............          (1,387)            767                    (1,582)       1,343
                                                        --------------------------            ----------------------------

Net income (loss)................................        $(12,354)       $  1,760                  $(12,786)     $ 2,035
                                                        ==========================             ============================

Net income (loss) per common share...............        $  (0.54)       $   0.08                  $  (0.57)     $  0.09
                                                        ==========================             ============================

Weighted average number of
 shares outstanding..............................          22,825          22,793                    22,549       22,770
                                                        ==========================              ===========================

</TABLE> 

The accompanying notes are an integral part of these consolidated financial
 statements.

                                       4
<PAGE>
 
                           METACREATIONS CORPORATION
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (In thousands)
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                                      SIX MONTHS ENDED
                                                                                          JUNE 30,
                                                                               ------------------------------
                                                                                    1997              1996
                                                                               -------------------------------
<S>                                                                             <C>              <C>

Cash flows from operating activities:
 Net income (loss).....................................................           $(12,786)      $     2,035
 Adjustment to retained earnings as a result of business combination...                513                --
 Adjustments to reconcile net income to net cash provided by
  (used) in operating activities:
    Write-off of acquired in-process technology........................              5,575                --
    Depreciation and amortization......................................              1,048               615
    Reserves for receivables and product returns.......................              1,640             3,046
    Reserves for inventory.............................................                270               192
    Accrued interest income............................................                (84)               --
    Loss on disposal of property and equipment.........................                (93)               --
    Changes in operating assets and liabilities:
      Accounts receivable..............................................             (5,832)           (5,425)
      Inventories......................................................               (505)              153
      Prepaid expenses and other assets................................              1,188               407
      Accounts payable and accrued expenses............................             (2,452)             (818)
      Accrued merger costs.............................................              2,575                --
      Royalties payable................................................                235              (114)
      Income taxes payable.............................................             (2,024)              259
      Long-term liabilities............................................                400                --
                                                                               ---------------------------------
         Net cash provided by (used in) operating activities...........            (10,332)              350

Cash flows from investing activities:
 Purchases of short-term investments...................................            (17,578)          (58,557)
 Proceeds from sales and maturities of short-term investments..........             29,039            27,207
 Purchases of property and equipment...................................             (1,920)           (2,226)
 Purchases of software technology and product rights...................                (25)              (75)
 Payments in connection with acquisition...............................             (1,233)               --
                                                                                -------------------------------
      Net cash provided by (used in) investing activities..............              8,283           (33,651)

Cash flows from financing activities:
 Repayment of notes payable............................................               (274)             (417)
 Proceeds from exercise of stock options...............................                270               427
                                                                                 ------------------------------
      Net cash provided by (used in) financing activities..............                 (4)               10

Effect of exchange rates on cash.......................................                 15               (23)
                                                                                 -------------------------------

Net decrease in cash and cash equivalents..............................             (2,038)          (33,314)
Cash and cash equivalents at beginning of period.......................             21,605            54,038
                                                                                 -------------------------------
Cash and cash equivalents at end of period.............................           $ 19,567       $    20,724
                                                                                 ===============================


</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.

                                       5
<PAGE>
 
                           METACREATIONS CORPORATION
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)

1. SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

In May 1997, the stockholders of MetaTools, Inc. ("MetaTools") approved the
Amendment to Restated Articles of Incorporation, changing the name of the
Company to MetaCreations Corporation ("MetaCreations").  Accordingly, the term
"Company," as used herein, refers to either MetaTools or MetaCreations,
depending on the context of the discussion.

The accompanying unaudited consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries.  All significant
intercompany accounts and transactions have been eliminated in consolidation.

The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statement presentation. In the opinion of management, the accompanying
consolidated balance sheets and related interim consolidated statements of
operations and cash flows include all adjustments (consisting only of normal
recurring items) considered necessary for their fair presentation. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses.
Actual results could differ from those estimates. The consolidated results of
operations for the period ended June 30, 1997 are not necessarily indicative of
results to be expected for the year ended December 31, 1997. The information
included in this Form 10-Q should be read in conjunction with the Company's
audited consolidated financial statements and notes thereto as of December 31,
1996 and 1995, and for the three years in the period ended December 31, 1996, as
filed on Form 8-K/A.

In May 1997, the stockholders of MetaCreations and Fractal Design Corporation
("Fractal") approved the merger of the two companies.  As a result of the
merger, the Company issued approximately 9,055,000 shares of MetaCreations
common stock for all of the outstanding shares of Fractal.  The merger was
accounted for as a pooling of interests and, accordingly, the consolidated
financial statements were restated to include the accounts of Fractal for all
periods presented.  The Company charged approximately $9.8 million against
earnings during the three months ended June 30, 1997 related to transaction
costs and other costs associated with integrating the two companies.

The Company reports its financial results on a December 31 fiscal year end
basis, whereas Fractal reported its financial results on a March 31 fiscal year
end basis.  For the purposes of pooling-of-interests accounting, the balance
sheet of the Company as of December 31, 1996 has been combined with that of
Fractal as of March 31, 1997.  The statements of operations of the Company for
the three and six months ended June 30, 1996 have been combined with that of
Fractal for the three and six months ended September 30, 1996.  As a result of
the presentation 

                                       6
<PAGE>
 
                           METACREATIONS CORPORATION
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                                  (Unaudited)

above, Fractal's net loss of $513,000 for the three months ended March 31, 1997
is reflected as an adjustment to retained earnings.

Separate results of operations for the periods presented are as follows (in
thousands):

<TABLE>
<CAPTION>
                         THREE MONTHS         SIX MONTHS 
                             ENDED               ENDED
                         JUNE 30, 1996       JUNE 30, 1996
                        ---------------     ---------------
 
<S>                    <C>                  <C>
Net revenues:
 MetaCreations...              $ 6,371            $11,874
 Fractal.........                8,483             16,963
                        --------------      -------------
                               $14,854            $28,837
                        ==============      =============
 
Net income:
 MetaCreations...              $ 1,002            $ 1,726
 Fractal.........                  758                309
                        --------------      -------------
                               $ 1,760            $ 2,035
                        ==============      =============
</TABLE>

Net Income Per Common Share

Net income (loss) per common share is computed using the weighted average number
of shares of common stock and common equivalent shares outstanding. Common
equivalent shares related to stock options, warrants and preferred stock are
excluded from the computation when their effect is antidilutive.

Statement of Financial Accounting Standards Not Yet Adopted

In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." SFAS No. 128 requires companies to adopt its provisions for fiscal years
ending after December 15, 1997 and requires restatement of all prior period
earnings per share ("EPS") data presented. Earlier application is not permitted.
SFAS No. 128 specifies the computation, presentation, and disclosure
requirements for EPS. The implementation of SFAS No. 128 is not expected to have
a material effect on the EPS data previously presented by the Company.

In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130, which requires companies to adopt its provisions for fiscal years
ending after December 15, 1997, establishes standards for the reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements.  Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources.  The impact of adopting SFAS No.
130 has not been determined by the Company.

                                       7
<PAGE>
 
                           METACREATIONS CORPORATION
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                                  (Unaudited)

In June 1997, the FASB also issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131, which requires companies
to adopt its provisions for fiscal years ending after December 15, 1997,
requires publicly-held companies to report financial and other information about
key revenue-producing segments of the entity for which such information is
available and is utilized by the chief operating decision maker.  Specific
information to be reported for individual segments include profit or loss,
certain revenue and expense items and total assets.  A reconciliation of segment
financial information to amounts reported in the financial statements would be
provided.  The impact on the Company of adopting SFAS No. 131 has not been
determined.

2. INVENTORIES

Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
                            JUNE 30,   DECEMBER 31,
                              1997         1996
                         --------------------------
 
<S>                         <C>        <C>
Finished goods...........     $1,415         $  814
Materials and supplies...        375            698
                         --------------------------
                              $1,790         $1,512
                         ==========================
</TABLE>

3. INCOME TAXES

The provisions for income taxes for the three and six months ended June 30, 1997
and 1996 are based on the Company's estimated annualized effective tax rate for
the respective years, after giving effect to the utilization of available net
operating losses and tax credits and available tax planning opportunities.  In
addition, the provisions for income taxes for the three and six months ended
June 30, 1997 are net of tax benefits relating to deductible expenses incurred
in connection with the merger with Fractal and the acquisition of Specular
International Ltd. ("Specular").

4. ACQUISITIONS

On April 15, 1997, the Company completed the acquisition of Specular, a
privately held software development company based in Amherst, Massachusetts,
which develops and markets 3-D animation and graphic design tools for
professionals and prosumers. Under the terms of the Purchase Agreement, the
stockholders of Specular received approximately 547,000 shares of the Company's
common stock, valued at approximately $4.1 million, and $1 million in cash in
exchange for all of the outstanding shares of Specular. The Company also issued
450,000 non-qualified stock options to purchase shares of the Company's common
stock to Specular employees at an exercise price of $7 per share, the fair
market value of the Company's common stock on April 16, 1997. The Company has
relocated approximately 13 of Specular's existing engineering and product
management personnel to its Real Time Geometry ("RTG") facilities in Princeton,
New Jersey, closed Specular's Amherst headquarters, and laid-off and provided
severance to approximately 22 of Specular's existing operations, accounting, and
sales personnel. In addition, the Company assumed the net liabilities of
Specular, which totaled $1.6 million at April 15, 1997.  The Company charged
approximately $6.4 million against earnings during the 

                                       8
<PAGE>
 
                           METACREATIONS CORPORATION
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                                  (Unaudited)

three months ended June 30, 1997, comprised of the write-off of acquired in-
process technology of $5.6 million, transaction costs of $300,000, and
relocation and severance costs of $555,000. In addition, the Company recognized
a deferred income tax asset of $900,000 relating to Federal net operating losses
and tax credits of Specular. In accordance with SFAS No. 109, the tax benefits
were first applied to reduce to zero goodwill totaling $280,000, with the
remainder applied against current technology acquired from Specular. After
recognition of the deferred tax asset, acquired current technology totaled
$280,000.

                                       9
<PAGE>
 
Item 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

The following discussion should be read in conjunction with the unaudited
consolidated financial statements and notes thereto.

The discussion and analysis below contains trend analysis and other forward-
looking statements within the meaning of Section 27A of the Securities Act of
1933, and Section 21E of the Securities Exchange Act of 1934, as amended. The
Company's actual results could differ materially from those projected in the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in the section
entitled "Factors That May Affect Future Operating Results," as well as those
discussed elsewhere in the Company's SEC reports, including without limitation,
the Company's audited consolidated financial statements and notes thereto as of
December 31, 1996 and 1995, and for the three years in the period ended December
31, 1996, as filed on Form 8-K/A.

OVERVIEW

In connection with the merger of Fractal with MetaCreations in May 1997 and
MetaCreations' acquisition of Specular in April 1997, the Company has
significantly expanded its product line.  However, the Company's future revenues
are substantially dependent upon the continued market acceptance of the
Company's existing leading products: Bryce, Expression, Kai's Photo Soap, Kai's
Power Goo, Kai's Power Tools, Painter, Poser, and Studio.  In this regard,
revenue from the sale of these products represented a substantial majority of
revenues during the three and six months ended June 30, 1997.  The Company also
has a number of new product development efforts under way, and a significant
portion of future revenues is dependent upon the success of these activities.

The Company develops its products either internally or through co-development
arrangements with third parties.  These co-development arrangements generally
provide the Company with certain exclusive proprietary, copyright or marketing
rights for developed products in exchange for the payment of one-time and/or
ongoing royalties.  The Company expects to continue fostering arrangements with
external developers as part of its strategy of expanding its product portfolio.
There can be no assurance, however, that the Company will be able to continue to
supplement its product development efforts in the future through such
relationships on favorable terms or at all.  If the Company becomes unable to
maintain its existing co-development arrangements or to attract new co-
development partners, the Company would, at a minimum, have to increase its
research and development expenditures, which would have a material adverse
effect on the Company's financial position, results of operations, and cash
flows.

The Company sells its products primarily to domestic and international
distributors, including mail order resellers and retail outlets.  The Company
also sells its products to Original Equipment Manufacturers ("OEMs") for
bundling with their hardware or software products and directly to end users,
generally through telesales and direct mail campaigns.  Fluctuations in
distributor purchases can cause significant volatility in the Company's
revenues.  Distributors generally stock the Company's products at levels which
may fluctuate significantly for a variety of reasons, including the
distributors' ability to finance the purchase of products and to devote shelf
space, catalog space or attention to the products.  Distributor purchases may
also be affected by the Company's introduction of a new product or new version
of a product, the Company's end user promotions programs, anticipated product
price increases, the Company's 

                                       10
<PAGE>
 
purchases of display space at retail outlets and other factors. Further, OEM
agreements, which generally provide for minimum guaranteed non-refundable
payments to the Company, are typically coincide with the planned introduction of
OEM bundled products and are often entered into at the end of the quarter. The
timing of the execution of such agreements can fluctuate substantially
throughout the year, causing volatility in the Company's revenues, operating
results, and cash flows.

Since its inception, the Company has focused on building its product portfolio
and establishing brandname awareness of its products.  These activities have
resulted in significant increases in all expense categories.  In particular, the
Company's shift from direct sales to end users toward expanded indirect
distribution channels has required a substantial increase in the Company's sales
and marketing activities.  The Company's recent product development efforts have
also entailed significant research and development expenditures.  These higher
expense levels combined with the write-off of acquired in-process research and
development and other costs associated with periodic mergers and acquisitions
and quarterly fluctuations in net revenues have contributed to the Company's
periodic annual and quarterly losses, as well as fluctuations in its operating
results.  The Company intends to continue to invest significant amounts both in
expanding its product portfolio and in maintaining and enhancing brand awareness
of its products, and accordingly may continue to experience losses and
volatility of net revenues and operating results in future periods.

OPERATING RESULTS

The following table sets forth certain selected financial information expressed
as a percentage of net revenues for the periods indicated:

<TABLE>
<CAPTION>
                                            THREE MONTHS ENDED     SIX MONTHS ENDED
                                                 JUNE 30,              JUNE 30,
                                        -----------------------  --------------------
                                             1997       1996        1997      1996
                                        -----------------------  --------------------
 
<S>                                        <C>         <C>        <C>        <C>
Net revenues............................      100.0 %    100.0 %    100.0 %   100.0 %
Cost of revenues........................       19.0       18.3       19.5      18.8
                                        -----------------------  --------------------
 Gross margin...........................       81.0       81.7       80.5      81.2
 
Operating expenses:
 Sales and marketing....................       45.6       47.1       49.6      46.3
 General and administrative.............        7.5        9.5        9.5       9.3
 Research and development...............       19.0       13.9       20.7      13.5
 Write-off of acquired in-process
  technology and other merger costs.....       86.3        --        50.6       6.5
                                        -----------------------  --------------------
   Total operating expenses.............      158.4       70.5      130.4      75.6
                                        -----------------------  --------------------
 
Income (loss) from operations...........      (77.4)      11.2      (49.9)      5.6
Interest and investment income, net.....        4.1        5.8        5.0       6.1
                                        -----------------------  --------------------
 
Net income (loss) before provision
 (benefit) for income taxes.............      (73.3)      17.0      (44.9)     11.7
Provision (benefit) for income taxes....       (7.4)       5.2       (4.9)      4.6
                                        -----------------------  --------------------
 
Net income (loss).......................      (65.9)%     11.8 %    (40.0)%     7.1 %
                                        =======================  ====================
</TABLE>

                                       11
<PAGE>
 
Net Revenues

Net revenues increased 26% from $14.9 million for the three months ended June
30, 1996 to $18.7 million for the three months ended June 30, 1997. Net revenues
increased as a result of the Company's release of new products and new versions
of its existing products, increased expansion of sales through OEM's, and
increased international sales. The Company released Bryce 2 for Windows,
Expression for Macintosh, Details for Windows, Poser 2 for Macintosh, and
MetaPhotos in the third quarter of 1996; Poser 2 for Windows in the fourth
quarter of 1996; Life in the Universe in the first quarter of 1997; and Painter
5, Kai's Photo Soap and Infini-D 4.0 in the second quarter of 1997.
International sales accounted for $6.6 million, or 35% of net revenues, for the
three months ended June 30, 1997, compared $5.4 million, or 36% of net revenues,
for the three months ended June 30, 1996.

Net revenues totaled $32.0 million for the six months ended June 30, 1997,
compared to $28.8 million for the six months ended June 30, 1996, an increase of
11%.  The increase in net revenues is attributed to the Company's release of new
products and new versions of its existing products, increased expansion of sales
through OEM's, and increased international sales. International sales accounted
for $12.9 million, or 40% of net revenues, for the six months ended June 30,
1997, compared $10.2 million, or 35% of net revenues, for the six months ended
June 30, 1996.

The Company offers three principal product types consisting of professional 2-D
products (principally consisting of Painter, Expression, and Kai's Power Tools),
professional 3-D products (including Poser, Bryce, Studio, Detailer, Designer,
and Infini-D), and consumer products (including Kai's Photo Soap, Kai's Power
Goo, and Dabbler).  The Company recognizes revenue from the sale of its products
upon shipment to the customer and satisfaction of significant Company
obligations, if any.

The Company provides an allowance for estimated returns at the time of product
shipments and adjusts this allowance as needed based on actual returns history.
Such reserves as a percentage of net revenues have varied significantly over
recent years, reflecting the Company's experience in product returns as it has
significantly expanded the proportion of its sales through third-party
distribution channels and increased its product portfolio.  The Company expects
reserves will continue to vary in the future.  The Company's agreements with its
distributors generally provide the distributors with limited rights to return
unsold inventories under a stock balancing program.  The Company monitors the
activities of its distributors in an effort to minimize excessive returns and
establishes its reserves based on its estimates of expected returns.  While
historically the Company's returns have been within management's expectations,
the establishment of reserves requires judgments regarding such factors as
future competitive conditions and product life cycles, which can be difficult to
predict.  As a result, there can be no assurance that established reserves will
be adequate to cover actual future returns.

Cost of Revenues

Cost of revenues includes the costs of goods sold, royalties due to external
developers, inventory management costs, freight and handling costs and reserves
for inventory obsolescence.  Cost of revenues increased from $2.7 million, or
18% of net revenues, for the three months ended June 30, 1996, to $3.6 million,
or 19% of net revenues, for the three months ended June 30, 1997.  The increase
in cost of revenues resulted from the changing mix of product sales and
increased royalties to third-party software developers.  Royalties represented
3% of net revenues for both the three months ended June 30, 1996 and 1997.

                                       12
<PAGE>
 
Cost of revenues increased from $5.4 million for the six months ended June 30,
1996, to $6.2 million for the six months ended June 30, 1997, but remained
consistent at 19% of net revenues. Royalties represented 4% of net revenues for
both the six months ended June 30, 1996 and 1997.  The Company expects that cost
of revenues will increase in the future commensurate with the increase in net
revenues, but may vary as a percentage of net revenues.

Sales and Marketing

Sales and marketing expenses include advertising, promotional materials, mail
campaigns, trade shows and the compensation costs of sales, marketing, customer
service and public relations personnel who promote the Company's products,
including related facilities costs.  Sales and marketing expenses increased from
$7.0 million for the three months ended June 30, 1996 to $8.6 million for the
three months ended June 30, 1997, but decreased as a percentage of net revenues
from 47% to 46%, respectively.  The increase in sales and marketing expenses
resulted from the continued efforts to expand sales and marketing activities and
distribution channels, both domestically and internationally, through the hiring
of additional personnel.

Sales and marketing expenses increased from $13.3 million, or 46% of net
revenues, for the six months ended June 30, 1996, to $15.9 million, or 50% of
net revenues, for the six months ended June 30, 1997.  The increase reflected
the Company's efforts to expand its sales and marketing presence and
distribution channels through the hiring of additional personnel and increased
advertising, mail campaigns, public relations, and tradeshow expenditures.  The
Company intends to continue such expansion and anticipates that sales and
marketing expenses will continue to increase significantly in future periods as
the Company's product offerings expand, although they may vary as a percentage
of net revenues.

General and Administrative

General and administrative expenses include compensation costs related to
executive management, finance and administration personnel of the Company along
with other administrative costs including legal and accounting fees, insurance,
and bad debt expenses.  General and administrative expenses remained flat at
$1.4 million, but decreased as a percentage of net revenues from 10% to 8% for
the three months ended June 30, 1996 and 1997, respectively.  Expenses remained
consistent between years due to comparable headcount and more efficient
operations.

For the six months ended June 30, 1997, general and administrative expenses
totaled $3.0 million, or 9% of net revenues, an increase of 13% over general and
administrative expenses of $2.7 million, or 9% of net revenues, for the six
months ended June 30, 1996.  The increase in general and administrative expenses
resulted from increased internal staffing to support the Company's growth since
the second quarter of 1996. The Company expects that its general and
administrative expenses will continue to increase in the future as the Company
expands its staffing to support expanded operations, but may vary as a
percentage of net revenues.

Research and Development

Research and development expenses consist primarily of personnel costs,
consultant fees and required equipment and facilities costs related to the
Company's product development efforts. Research and development expenses
increased from $2.1 million, or 14% of net revenues, for the 

                                       13
<PAGE>
 
three months ended June 30, 1996, to $3.6 million, or 19% of net revenues, for
the three months ended June 30, 1997, as a result of operating expenses related
to the increased headcount resulting from the acquisitions of RTG in December
1996 and Specular in April 1997.

For the six months ended June 30, 1997, research and development expenses
totaled $6.6 million, or 21% of net revenues, an increase of 70% over research
and development expenses of $3.9 million, or 14% of net revenues, for the six
months ended June 30, 1996.  The increase was attributed to the additional RTG
and Specular employees as well as additional personnel hired to expand the
Company's product portfolio, enhance its existing products, migrate its products
to the Windows operating system, and translate its products to foreign
languages. The Company expects research and development expenses will continue
to increase in future periods, but may vary as a percentage of net revenues.

Write-off of Acquired In-process Technology and Other Merger Costs

In May 1997, the stockholders of MetaCreations and Fractal approved the merger
of the two companies.  As a result of the merger, the Company issued
approximately 9,055,000 shares of MetaCreations common stock for all of the
outstanding shares of Fractal.  The Company charged approximately $9.8 million
against earnings during the three months ended June 30, 1997 related to
transaction costs and other costs associated with integrating the two companies.

On April 15, 1997, the Company completed the acquisition of Specular, a
privately held software development company based in Amherst, Massachusetts,
which develops and markets 3-D animation and graphic design tools for
professionals and prosumers. Under the terms of the Purchase Agreement, the
stockholders of Specular received approximately 547,000 shares of the Company's
common stock, valued at approximately $4.1 million, and $1 million in cash in
exchange for all of the outstanding shares of Specular. The Company also issued
450,000 non-qualified stock options to purchase shares of the Company's common
stock to Specular employees at an exercise price of $7 per share, the fair
market value of the Company's common stock on April 16, 1997. The Company has
relocated approximately 13 of Specular's existing engineering and product
management personnel to its Real Time Geometry ("RTG") facilities in Princeton,
New Jersey, closed Specular's Amherst headquarters, and laid-off and provided
severance to approximately 22 of Specular's existing operations, accounting, and
sales personnel. In addition, the Company assumed the net liabilities of
Specular, which totaled $1.6 million at April 15, 1997. The Company charged
approximately $6.4 million against earnings during the three months ended June
30, 1997, comprised of the write-off of acquired in-process technology of $5.6
million, transaction costs of $300,000, and relocation and severance costs of
$555,000.  In addition, the Company recognized a deferred income tax asset of
$900,000 relating to Federal net operating losses and tax credits of Specular.
In accordance with SFAS No. 109, the tax benefits were first applied to reduce
to zero goodwill totaling 280,000, with the remainder applied against current
technology acquired from Specular.  After recognition of the deferred tax asset,
acquired current technology totaled $280,000.

Provision for Income Taxes

The Company records income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes."  The provisions for
income taxes for the three and six months ended June 30, 1997 and 1996 are based
on the Company's estimated annualized effective tax rate for the respective
years, after giving effect to the utilization of available net operating loss
and tax credit carryforwards.  In addition, the provisions for income 

                                       14
<PAGE>
 
taxes for the three and six months ended June 30, 1997 are net of tax benefits
relating to deductible expenses incurred in connection with the merger with
Fractal and the acquisition of Specular.

Net Income

Net loss was $12.4 million, or $0.54 per share, for the three months ended June
30, 1997, compared to net income of $1.8 million, or $0.08 per share, for the
three months ended June 30, 1996.  For the six months ended June 30, 1997, net
loss was $12.8 million, or $0.57 per share, compared to net income of $2.0
million, or $0.09 per share, for the six months ended June 30, 1996.

FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

Integration of Operations; Management of Potential Growth, Integration of
Potential Acquisitions, Adverse Effect of Financial Results

In recent years, the Company has experienced expansion of its operations that
have placed significant demands on its administrative, operational and financial
resources. In addition, the Company's acquisitions of RTG in December 1996 and
Specular in April 1997 and its merger with Fractal in May 1997, have placed
significant demands on these resources. To manage future growth, if any, the
Company must assimilate its acquired operations; improve its financial and
management controls, management processes, business and management information
systems and procedures on a timely basis; and expand, train and manage its work
force. There can be no assurance that the Company will be able to perform such
actions successfully.

The realization of the benefits sought from the merger of MetaCreations with
Fractal depends on the ability of the Company to utilize product development
capabilities, sales and marketing capabilities, administrative organizations,
and facilities better that either company could do separately.  There can be no
assurance that these benefits will be achieved or that the activities of
MetaCreations and Fractal will be integrated in a coordinated, timely, and
efficient manner.  The combination of the two organizations also will require
the dedication of management resources, which will temporarily detract such
persons' attention from the day-to-day business of the Company.  There can be no
assurance that the integration will be completed without disrupting the
Company's business.  The inability of the Company to better utilize resources
and to achieve integration in a timely and coordinated fashion could result in a
material adverse effect on the Company's financial condition, results of
operations, and cash flows.  The Company intends to seek to reduce operating
costs over time by eliminating duplicative operations and facilities that would
otherwise have been required by the two companies operating on a stand-alone
basis.  There can be no assurance that these steps actually will reduce costs to
the extent, or as quickly, as planned or that these steps will not adversely
affect future revenues and results of operations.  These reductions also could
have a material adverse effect on employee morale and on the ability of the
Company to retain key management, engineering, and sales and marketing personnel
critical to the Company's future operations.

Fluctuations in Quarterly Results

The Company has experienced in the past and expects in the future to continue to
experience significant fluctuations in quarterly operating results. There can be
no assurance that the Company's future revenues, operating results and cash
flows will not also vary substantially. The 

                                       15
<PAGE>
 
Company generally ships products as orders are received and, therefore, has
little or no backlog. As a result, quarterly revenues, operating results and
cash flows of the Company will generally depend on a number of factors that are
difficult to forecast, including, among others, the volume and timing of and
ability to fulfill orders received within a quarter. Quarterly revenues,
operating results and cash flows also may fluctuate due to factors such as
demand for the Company's products; introduction, localization or enhancement of
products by the Company and its competitors; customer or distributor order
deferrals in anticipation of new versions of products; market acceptance of new
products; reviews in the industry press concerning the products of the Company
or its competitors; changes or anticipated changes in pricing by the Company or
its competitors; the mix of distribution channels through which products are
sold; the mix of products sold; returns from distributors; and general economic
conditions. Revenues, operating results and cash flows from the Company's
products also may be negatively affected by delays in the introduction or
availability of new hardware and software products from third parties. The
Company experiences some effect of seasonality in its business, as demand for
its products tends to increase during the quarter ending December 31 as a result
of timing of year-end holiday season buying.

As is common in the software industry, the Company's experience has been that a
disproportionately large percentage of revenues in each fiscal quarter occurs in
the latter half of the third month of that quarter. Because the Company's
staffing and other operating expenses are based in part on anticipated net
revenues, a substantial portion of which may not be realized until shortly
before the end of each fiscal quarter, delays in the receipt and shipment of
orders, including delays that may be occasioned by failures of third party
product fulfillment firms to produce and ship products, and delays or deferrals
in the execution of OEM arrangements can cause significant variations in the
Company's financial position, results of operations, and cash flows from quarter
to quarter. The Company will most likely be unable to adjust spending in a
timely manner to compensate for any unexpected revenue shortfall. Accordingly,
any significant shortfall in revenues from the Company's products in relation to
expectations could have an immediate adverse impact on Company's financial
position, results of operations, and cash flows. In addition, the Company
currently intends to increase its operating expenses to fund greater levels of
research and product development, to increase its sales and marketing operations
and to expand its distribution channels. To the extent that such expenses
precede, or are not subsequently followed by, increased revenues, the Company's
financial position, results of operations, and cash flows will be materially and
adversely affected.

Due to the foregoing factors, it is likely that the operating results of the
Company for some future quarters will fall below the expectations of securities
analysts and investors. In such event, the trading price of the Company's Common
Stock could be materially and adversely affected.

Uncertainty as to the Future of the Macintosh Platform and Apple Computer

Apple Computer, Inc. ("Apple Computer") has recently experienced significant
financial difficulties and losses in market share and acceptance. On April 16,
1997, Apple Computer announced a substantial loss of approximately $708 million
for its second fiscal quarter of 1997 due to the purchase of NeXT Software Inc.
and certain restructuring charges including layoffs. Additionally, on July 16,
1997, Apple Computer reported a net loss of $56 million for its third fiscal
quarter of 1997.  This and previous announcements, and the overall perception of
Apple Computer's prospects and continuing commercial vitality, may negatively
impact the Company's Macintosh-based business.

                                       16
<PAGE>
 
Product Transitions and Product Returns

From time to time, the Company and its competitors may announce new products,
product versions, capabilities or technologies that have the potential to
replace or shorten the life cycles of the Company's existing products. The
Company has historically experienced increased returns of a particular product
version following the announcement of a planned release of a new version of that
product. Although the Company provides allowances for anticipated returns, there
can be no assurance that product returns will not exceed such allowances in the
future.

Product Concentration; Lack of Product Revenue Diversification

A substantial percentage of the Company's revenues to date have been derived
from a limited number of products, and such products are expected to continue to
account for a substantial majority of the Company's revenues in the near term.
Collective sales of Bryce, Expression, Kai's Photo Soap, Kai's Power Goo, Kai's
Power Tools, Painter, Poser, and Studio accounted for a substantial majority of
the Company's net revenues for the three and six months ended June 30, 1997.
Continued market acceptance of the Company's primary products are therefore
critical to the future success of the Company. Any decline in demand for or
failure to achieve continued market acceptance of such products or any new
version of these products, if any, as a result of competition, technological
change, failure of the Company to timely release new versions of these products,
or otherwise, could have a material adverse effect on the Company's financial
position, results of operations, and cash flows.

Rapid Technological Change; Dependence on and Need for New Products and Product
Versions; Potential Delays in Product Releases

The market for visual computing graphics software products, and the personal
computer industry in general, is characterized by rapidly changing technology,
resulting in short product life cycles and strong pricing pressures. As a
result, the success of the Company depends substantially upon its ability to
continue to enhance its existing products, to develop and introduce in a timely
manner new products incorporating technological advances and to meet increasing
customer expectations. To the extent one or more competitors introduce products
that better address customer needs, the Company's business could be adversely
affected.

The Company depends upon internal efforts for the development of new products
and product enhancements. The Company has in the past experienced delays in the
development of new products and product versions. There can be no assurance that
the Company will not experience further delays in connection with the current
product development or future development activities.

The Company is also expending significant resources to develop the in-process
research and development obtained in the acquisitions of RTG and Specular. There
can be no assurances that the further development of the in-process research and
development of the Company will result in commercially viable products.

Dependence Upon Third Party Software Developers

The Company uses certain products and technologies of both domestic and foreign
third party software developers, including both complete products offered as
extensions of the Company's product lines and technologies used in the
enhancement of internally developed products. Such 

                                       17
<PAGE>
 
products and technologies are obtained from third party providers under
contractual license agreements, which in some cases are for limited time periods
and may be terminated under certain circumstances. There can be no assurance
that the Company will be able to maintain adequate relationships with any such
third party providers, that these third party providers will commit adequate
development resources to maintain these products and technologies, or that any
license agreement for a limited time period will be renewed upon termination.

Limited Operating History; Uncertain Profitability; Fluctuating Rates of Growth

The Company has only limited operating history on which an evaluation of its
business and prospects can be based. Since its inception, the Company has
focused on building its product portfolio and establishing brandname awareness
of its products.  These activities have resulted in significant increases in all
expense categories.  In particular, the Company's shift from direct sales to end
users toward expanded indirect distribution channels has required a substantial
increase in the Company's sales and marketing activities.  The Company's recent
product development efforts have also entailed significant research and
development expenditures.  These higher expense levels combined with the write-
off of acquired in-process research and development and other costs associated
with periodic mergers and acquisitions and quarterly fluctuations in net
revenues have contributed to the Company's periodic annual and quarterly losses,
as well as fluctuations in its operating results.  Consequently, there can be no
assurance that the net revenues of the Company will continue at their current
level or will grow, or that the Company will be able to achieve sustained
profitability on a quarterly or annual basis. The Company's historical net
revenue growth rates, both domestically and internationally, have varied
significantly between monthly and quarterly periods. Therefore, recent net
revenue comparisons should not be taken as indicative of the rate of net revenue
growth, if any, that can be expected in the future.

Dependence on Key Personnel and Difficulty of Identifying and Hiring Certain
Personnel

The future performance of the Company is substantially dependent on the
performance of its executive officers and key employees. The loss of the
services of any of the executive officers or other key employees of the Company
for any reason could have a material adverse effect on the Company's financial
position, results of operations, and cash flows.

The future success of the Company also depends on its continuing ability to
identify, hire, train and retain other highly qualified technical and managerial
personnel. Competition for such personnel is intense, and the Company has
experienced difficulty in identifying and hiring qualified engineering
personnel. There can be no assurance that the Company will be able to attract,
assimilate or retain other highly qualified technical and managerial personnel
in the future.

Highly Competitive Markets

The markets for graphics software products such as those offered by the Company
are intensely competitive, subject to rapid change and characterized by constant
demand for new product features, pressure to accelerate the release of new
products and product enhancements and pressure to reduce prices. A number of
companies currently offer products that compete directly or indirectly with one
or more the Company's products. Many of the Company's competitors or potential
competitors have significantly greater financial, managerial, technical, and
marketing resources. A variety of potential actions by any of these competitors,
including a reduction of 

                                       18
<PAGE>
 
product prices, increased promotion, announcement or accelerated introduction of
new or enhanced products or features, acquisitions of software applications or
technologies from third parties, product giveaways or product bundling could
have a material adverse effect on the Company's financial position, results of
operations, and cash flows.

Dependence on Distributors and on Other Third Parties

While the Company derives some revenues from direct sales, most of its revenues
are derived from the sale of products through third parties. The Company sells
its products worldwide through multiple distribution channels, including
traditional software distributors, hardware and software OEMs, international
distributors, educational distributors, VARs, hardware superstores, retail
dealers, and direct marketers. In addition, the Company's products are
manufactured by third party manufacturing and fulfillment providers.  The
Company will be dependent on the continued viability and financial stability of
these third parties. Any termination or significant disruption of the Company's
relationship with any major distributor or retailer, or a significant reduction
in sales volume attributable to the Company's principal resellers could
materially and adversely affect the Company's financial position, results of
operations, and cash flows.

An integral element of the Company's strategy is to enhance and diversify its
channels of distribution both domestically and internationally. The Company is
currently investing, and the Company plans to continue to invest, a significant
portion of its cash and personnel resources to expand its domestic and
international direct sales and marketing force and develop distribution
relationships with additional third-party distributors and resellers. The
Company's ability to achieve significant revenue growth in the future will
depend in large part on its success in recruiting and training sufficient sales
personnel, distributors and resellers.

Certain of the Company's products operate as plug-in extensions and enhancements
for specific print, animation, video and multimedia application platforms,
including Adobe's PhotoShop, Illustrator, After Effects and Premiere; Autodesk's
Animator Studio and 3D Studio; Corel's PhotoPaint; Macromedia's Freehand;
Micrografx's Picture Publisher; and other application platforms. Market
acceptance of the Company's plug-in products is dependent upon market acceptance
of these third-party application platforms as well as the willingness of the
manufacturers of such platforms to permit their platforms to be extended and
enhanced by plug-in products such as those of the Company.

Evolving Markets for Computer Graphic Imaging and Internet/Online Design Tools

The markets for computer graphic imaging and Internet/online design tools are
still emerging. There can be no assurance that the markets for the Company's
existing products will grow, that digital graphic and Internet/online content
developers will adopt the Company's products, that sufficient distribution
resources will be available to market the Company's products in a timely manner
or that such products will be successful in achieving market acceptance.

International Operations and Expansion

A key component of the Company's strategy is continued expansion into
international markets, primarily Japan and Western Europe, and the Company
currently anticipates that international sales will represent an increasing
portion of the Company's net revenues. The Company will need to retain effective
distributors and hire, retain and motivate qualified personnel internationally
to expand its international presence. There can be no assurance that the Company

                                       19
<PAGE>
 
will be able to successfully market, sell, localize and deliver its products in
these international markets.

In addition to the uncertainty as to the Company's ability to expand its
international presence, there are certain risks inherent in doing business on an
international level, such as unexpected changes in regulatory requirements,
problems and delays in collecting accounts receivable, tariffs and other trade
barriers, difficulties in staffing and managing foreign operations, longer
payment cycles, political instability, fluctuations in currency exchange rates,
seasonal reductions in business activity during summer months in Europe and
certain other parts of the world and potentially adverse tax consequences, any
of which could adversely impact the success of international operations.

Proprietary Rights and Licenses

The Company relies on a combination of copyright, trademark, patent, trade
secret laws, employee and third-party nondisclosure agreements and exclusive
contracts to protect its intellectual and proprietary rights and products. The
Company distributes its software under shrinkwrap license agreements but
generally does not obtain signed license agreements from its end users. In
keeping with software industry standards, the Company does not copy protect
their software. Accordingly, it may be possible for unauthorized third parties
to copy or reverse engineer the Company's products or otherwise obtain and use
information that the Company regards as proprietary. Furthermore, there can be
no assurance that competitors will not independently develop technologies that
are substantially equivalent or superior to the technologies of the Company.

Possible Volatility of Stock Price

The price of the Company's Common Stock has fluctuated significantly in the
past. The management of the Company believes that such fluctuations may have
been caused by announcements of new products, quarterly fluctuations in the
results of operations and other factors. Stock markets in general have also
experienced extreme price volatility in recent years. This volatility has had a
substantial effect on the market prices of securities issued by the Company and
other software companies, particularly graphics software companies, often for
reasons unrelated to the operating performance of the specific companies. The
Company anticipates that prices for the Company's Common Stock will continue to
be volatile in the future.

LIQUIDITY AND CAPITAL RESOURCES

The Company has a $3.0 million revolving line of credit with a bank which
expires during November 1997, if not renewed, and is collateralized by
substantially all of the assets of the Company.  Borrowings under the credit
facility are limited to a percentage of eligible accounts receivable, as defined
in the credit agreement.  As of June 30, 1997, the Company had no outstanding
borrowings under the line of credit.

Historically, net cash used in operating activities and investing activities of
the Company has been significant due to operating losses and working capital
requirements resulting from the growth of the Company, including increases in
accounts receivable.  Net cash provided by (used in) operating activities of the
Company totaled $(10.3) million and $350,000 for the six months ended June 30,
1997 and 1996, respectively.  The increase in cash used in operating activities
is 

                                       20
<PAGE>
 
primarily attributed to the approximately $8.6 million paid in connection
with the merger with Fractal and the acquisition of Specular, the increase in
accounts receivable resulting from increased product offerings and the growth in
revenues since June 30, 1996, and the increase in income taxes receivable
relating to tax benefits resulting from deductible expenses incurred in
connection with the $16.2 million write-off of acquired in-process technology
and other costs resulting from the merger with Fractal and acquisition of
Specular.  Net cash provided by (used in) investing activities totaled $8.3
million and $(33.7) million for the six months ended June 30, 1997 and 1996.
The change resulted from the net sales and maturities of short-term investments,
the proceeds from which were used to pay merger and acquisition costs during the
six months ended June 30, 1997.

The Company anticipates investing a significant amount of working capital during
1997 for upgraded management information systems; equipment and software for
development purposes; and leasehold improvements, furniture, and fixtures
related to expansion of the Company's facilities.  In addition, the Company
expects that its working capital requirements will continue to increase to the
extent the Company continues to grow.

The Company believes that its current cash balances, cash provided by future
operations, if any, and available borrowings under the Company's line of credit
are sufficient to meet its working capital needs and anticipated capital
expenditure requirements through at least the next twelve months.


STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NOT YET ADOPTED

In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share." SFAS No.
128 requires companies to adopt its provisions for fiscal years ending after
December 15, 1997 and requires restatement of all prior period earnings per
share ("EPS") data presented. Earlier application is not permitted. SFAS No. 128
specifies the computation, presentation, and disclosure requirements for EPS.
The implementation of SFAS No. 128 is not expected to have a material effect on
the EPS data previously presented by the Company.

In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130, which requires companies to adopt its provisions for fiscal years
ending after December 15, 1997, establishes standards for the reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements.  Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources.  The impact of adopting SFAS No.
130 has not been determined by the Company.

In June 1997, the FASB also issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131, which requires companies
to adopt its provisions for fiscal years ending after December 15, 1997,
requires publicly-held companies to report financial and other information about
key revenue-producing segments of the entity for which such information is
available and is utilized by the chief operating decision maker.  Specific
information to be reported for individual segments include profit or loss,
certain revenue and expense items and total assets.  A reconciliation of segment
financial information to amounts reported in the financial statements would be
provided.  The impact on the Company of adopting SFAS No. 131 has not been
determined.

                                       21
<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 a Vote of Security Holders

  The following matters were approved at the Company's Annual Meeting of
  Stockholders held on May 29, 1997:

     (a) The stockholders approved the Company's merger with Fractal Design
         Corporation by the following vote:
<TABLE>
<CAPTION>

              <S>            <C>
              For:           8,081,368
              Against:          22,982
              Abstain:           9,784
              No Vote:       2,130,913
</TABLE>

     (b) The stockholders approved the Amendment to Restated Articles of
         Incorporation to change the name of the Company to MetaCreations
         Corporation by the following vote:
<TABLE>
<CAPTION>

              <S>            <C>
              For:           9,913,229
              Against:          96,082
              Abstain:          42,986
              No Vote:         192,750
</TABLE>
     (c) The stockholders approved the Amendment to Restated Articles of
         Incorporation to increase the authorized common stock of the Company by
         the following vote:
<TABLE>
<CAPTION>

              <S>            <C>
              For:           9,177,307
              Against:         802,297
              Abstain:          14,326
              No Vote:         251,117
</TABLE>

                                       22
<PAGE>
 
     (d) The following directors were elected:
<TABLE>
<CAPTION>

              Directors                 Votes For    Votes Withheld
              -----------------------   ----------   --------------

              <S>                       <C>          <C>
              John J. Wilczak           10,182,238           62,809
              Kai Krause                10,211,172           33,875
              Samuel H. Jones, Jr.      10,211,272           33,775
              Bert Kolde                10,210,447           34,600
              William H. Lane, III      10,205,072           39,975
              Howard L. Morgan          10,211,272           33,775
              </TABLE>

     (e) The stockholders approved the Amendment to MetaTools 1995 Stock Plan to
         increase the shares reserved for issuance thereunder by the following
         vote:
<TABLE>
<CAPTION>

              <S>            <C>
              For:           6,263,270
              Against:       1,014,840
              Abstain:         836,024
              No Vote:       2,130,913
</TABLE>
     (f) The stockholders ratified the appointment of Coopers & Lybrand L.L.P.
         as independent accountants by the following vote:
<TABLE>
<CAPTION>

              <S>             <C>
              For:            10,178,424
              Against:            20,285
              Abstain:            46,338
              No Vote:                --

</TABLE>
 
Item 5.  Other Information
 
  None
 
Item 6.  Exhibits and Reports on Form 8-K
 
(a) Exhibits
 
        Exhibit 
         Number                  Exhibit Title
        -------                  -------------
 
          11.1      Statement Regarding Computation of Net Income (Loss) 
                     per Common Share
          27.1      Financial Data Schedule

                                       23
<PAGE>
 
(b)  Reports on Form 8-K

     On May 29, 1997, the Company filed a report on Form 8-K to announce its
     merger with Fractal Design Corporation. On June 13, 1997, the Company filed
     a report on Form 8-K to report the consolidated statements of operations of
     MetaCreations for the two years in the period ended December 31, 1996 and
     for the nine quarter in the period ended March 31, 1997, reflecting its
     merger with Fractal. On August 12, 1997, the Company filed a report on Form
     8-K/A to file the consolidated financial statements of Fractal as of March
     31, 1997 and 1996, and for the two years in the period ended March 31,
     1997, and the consolidated financial statements of MetaCreations as of
     December 31, 1996 and 1995, and for the three years in the period ended
     December 31, 1996, reflecting its merger with Fractal.



                                   SIGNATURES

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.


                                 METACREATIONS CORPORATION
                                 (Registrant)

 
 
Date:  August 14, 1997           /s/ TERANCE A. KINNINGER
                                 ---------------------------
                                 Terance A. Kinninger
                                 Sr. Vice President and
                                 Chief Financial Officer

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