<PAGE>
 
                       SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549
                                       
                                   FORM 10-Q/A     

(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, 1996 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

                                METATOOLS, INC.
             (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 8, 1996, there were outstanding 11,827,762 shares of the
registrants Common Stock, $0.001 par value, which is the only outstanding class
of common or voting stock of the registrant.

                                       1
<PAGE>
 
                                METATOOLS, INC.
                                      
                                  FORM 10-Q/A     

                               Table of Contents
<TABLE>   
<CAPTION>
                                                                       Page
                                                                       ----
<S>                                                                    <C>
PART I.     FINANCIAL INFORMATION


Item 1.     Financial Statements (Unaudited)..........................   3

            Balance sheets - June 30, 1996 and December 31, 1995
            Statements of operations - Three and six months ended
             June 30, 1996 and 1995
            Statements of cash flows - Six months ended June 30, 1996
             and 1995
            Notes to financial statements

Item 2.     Management's Discussion and Analysis of Financial
            Condition and Results of Operations.......................   8


PART II.    OTHER INFORMATION

Item 4.     Submission of Matters to a Vote of Security Holders........ 15

Item 6.     Exhibits and Reports on Form 8-K..........................  15

SIGNATURES............................................................  17
</TABLE>    


                                       2
<PAGE>
 
                         PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

                                METATOOLS, INC.

                                BALANCE SHEETS

                                  (Unaudited)
<TABLE> 
<CAPTION> 
                                                        June 30,   December 31,
                                                          1996         1995
                                                      -------------------------
<S>                                                   <C>          <C>  
ASSETS
Current assets:
  Cash and cash equivalents.......................     $14,296,000  $46,885,000
  Short-term investments..........................      31,540,000            -
  Accounts receivable, net........................       6,135,000    2,775,000
  Inventories.....................................         437,000      912,000
  Prepaid expenses and other current assets.......       1,334,000      890,000
                                                       ------------------------
         Total current assets.....................      53,742,000   51,462,000
 
Property and equipment, net.......................       1,791,000    1,577,000
Other assets......................................         629,000      496,000
                                                       ------------------------
         Total assets.............................     $56,162,000  $53,535,000
                                                       ========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable................................     $ 1,743,000  $ 1,795,000
  Accrued expenses................................       1,160,000      964,000
  Income taxes payable............................         421,000            -
  Royalties payable...............................         352,000      588,000
                                                       ------------------------
         Total current liabilities................       3,676,000    3,347,000
 
Stockholders' equity:
  Preferred stock, $.001 par value, 5,000,000 
    shares authorized - no shares issued and 
    outstanding at June 30, 1996 and December 31, 
    1995, respectively............................               -            -
  Common stock, $.001 par value; 30,000,000 shares
    authorized - 11,815,721 and 11,597,908 shares 
    issued and outstanding at June 30, 1996 and 
    December 31, 1995, respectively...............          12,000       12,000
  Paid-in capital.................................      55,001,000   54,429,000
  Accumulated deficit.............................      (2,527,000)  (4,253,000)
                                                       ------------------------
         Total stockholders' equity...............      52,486,000   50,188,000
                                                       ------------------------
         Total liabilities and stockholders' 
           equity                                      $56,162,000  $53,535,000
                                                       ========================
</TABLE> 

The accompanying notes are an integral part of these Financial Statements.

                                       3
<PAGE>
 
                                METATOOLS, INC.

                           STATEMENTS OF OPERATIONS

                                  (Unaudited)

<TABLE> 
<CAPTION> 
                                         Three Months Ended June 30,    Six Months Ended June 30,
                                         --------------------------    ----------------------------
                                             1996          1995            1996          1995  
                                         --------------------------    ----------------------------
<S>                                      <C>           <C>             <C>              <C>  
Net revenues...........................  $ 6,371,000     $3,971,000    $11,874,000      $ 7,391,000
Cost of revenues.......................    1,117,000      1,322,000      2,220,000        2,677,000
                                         --------------------------    ----------------------------
Gross profit...........................    5,254,000      2,649,000      9,654,000        4,714,000
                                                                     
Operating expenses:                                                  
  Sales and marketing..................    2,856,000      2,252,000      5,481,000        4,038,000
  General and administrative...........      734,000        496,000      1,336,000          904,000
  Research and development.............      814,000        332,000      1,552,000          641,000
                                         --------------------------    ----------------------------
Total operating expenses...............    4,404,000      3,080,000      8,369,000        5,583,000
                                         --------------------------    ----------------------------
Income (loss) from operations..........      850,000       (431,000)     1,285,000         (869,000)
                                                                     
Other income (expense):                                              
  Interest and investment income                                     
   (expense), net .....................      594,000        (11,000)     1,205,000            4,000
  Other income (expense), net..........      (15,000)         6,000        (12,000)          (1,000)
                                         --------------------------    ----------------------------
Income (loss) before provision for                                   
 income taxes..........................    1,429,000       (436,000)     2,478,000         (866,000)
Provision for income taxes.............      427,000              -        752,000                -
                                         --------------------------    ----------------------------
Net income (loss)......................  $ 1,002,000     $ (436,000)   $ 1,726,000      $  (866,000)
                                         ==========================    ============================
                                                                     
Net income (loss)......................  $ 1,002,000     $ (436,000)   $ 1,726,000      $  (866,000)
Amortization of costs related to the                                 
 issuance of mandatory redeemable                                    
 Series B convertible preferred stock..            -        (30,000)             -          (60,000)                             
Preferred stock dividend requirement...            -        (42,000)             -          (84,000)
                                         --------------------------    ----------------------------
Net income (loss) applicable to                                      
 common stockholders...................  $ 1,002,000     $ (508,000)   $ 1,726,000      $(1,010,000)
                                         ==========================    ============================

Net income (loss) per common share.....  $       .08     $     (.09)   $       .13      $      (.18)
                                         ==========================    ============================                            
Weighted average number of shares                                    
 outstanding...........................   13,114,000      5,643,000     13,040,000        5,624,000
                                         ==========================    ============================
 
</TABLE> 

The accompanying notes are an integral part of these Financial Statements.

                                       4
<PAGE>
 
                                METATOOLS, INC.

                            STATEMENT OF CASH FLOWS

                                  (Unaudited)

<TABLE> 
<CAPTION> 
                                                    Six Months Ended June 30,
                                                --------------------------------
                                                    1996                1995
                                                --------------------------------
<S>                                              <C>                <C>    
Cash flows from operating activities:
  Net income (loss)...........................   $  1,726,000       $  (866,000)
  Adjustments to reconcile net income (loss)
   to net cash used in operating activities:
     Depreciation and amortization............        326,000           114,000
     Provision for losses on receivables 
      and returns.............................        935,000         1,124,000
     Provision for losses on inventory........         39,000           593,000
     Changes in operating assets and 
      liabilities:                 
       Accounts receivable....................     (4,295,000)       (1,489,000)
       Inventories............................        436,000        (1,075,000)
       Prepaid expenses and other assets......       (559,000)         (327,000)
       Accounts payable and accrued expenses..        144,000           182,000
       Income taxes payable...................        674,000                 -
       Royalties payable......................       (236,000)           36,000
                                                 -------------------------------
        Net cash used in operating activities        (810,000)       (1,708,000)
                                                                
Cash flows from investing activities:      
  Purchases of short-term investments.........    (31,540,000)                -
  Purchase of property and equipment..........       (483,000)         (496,000)
  Purchase of software technology and 
   product rights.............................        (75,000)                -
                                                 -------------------------------
        Net cash used in investing activities     (32,098,000)         (496,000)
                                                                      
Cash flows from financing activities: 
  Increase in notes receivable from 
   stockholders...............................              -           (49,000)
  Proceeds from issuance of note payable to 
   stockholder................................              -             8,000
  Repayment of notes payable to stockholders..              -            (8,000)
  Proceeds from borrowings against notes 
   payable to bank............................              -           402,000
  Proceeds from exercise of stock warrants 
   and options................................        319,000            54,000
                                                 -------------------------------
        Net cash provided by financing 
        activities............................        319,000           407,000
                                                 -------------------------------

Net increase in cash and cash equivalents.....    (32,589,000)       (1,797,000)
Cash and cash equivalents at beginning 
 of period....................................     46,885,000         3,017,000
                                                 -------------------------------
Cash and cash equivalents at end of period....   $ 14,296,000       $ 1,220,000
                                                 ===============================
</TABLE>
The accompanying notes are an integral part of these Financial Statements.

                                       5
<PAGE>
 
                                METATOOLS, INC.

                         NOTES TO FINANCIAL STATEMENTS


1. SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying 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 statements. In the opinion
of management, the accompanying balance sheets and related interim 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 results of operations for
the period ended June 30, 1996 are not necessarily indicative of results to be
expected for the year ended December 31, 1996. The information included in this
Form 10-Q should be read in conjunction with Management's Discussion and
Analysis and the Company's audited financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1995.

Cash Equivalents and Short-term Investments

The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.

The Company considers its investment portfolio available for sale as defined in
Statement of Financial Accounting Standards ("SFAS") No. 115. The amortized cost
of securities are adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization, realized gains and losses, interest
and dividends, and declines in value judged to be other than temporary are
included in investment income. There were no material unrealized gains or losses
nor any material differences between the estimated fair values and costs of
securities in the investment portfolio at June 30, 1996. The cost of securities
sold is based on the specific identification method.

The Company invests its cash in accordance with a policy that seeks to maximize
returns while ensuring both liquidity and minimal risk of principal loss. The
policy limits investments to certain types of instruments issued by institutions
with investment grade credit ratings, and places restrictions on maturities and
concentration by type and issuer. The majority of the Company's portfolio is
composed of fixed income investments which are subject to the risk of market
interest rate fluctuations, and all the Company's investments are subject to
risks associated with the ability of the issuers to perform their obligations
under the instruments.

                                       6
<PAGE>
 
                                METATOOLS, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Net Income (Loss) 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, except that,
pursuant to the Securities and Exchange Commission Staff Accounting Bulletins,
common and common equivalent shares, issued at prices below the public offering
price during the twelve months immediately preceding the initial filing date of
the Company's initial public offering have been included in the calculation as
if they were outstanding for all periods presented, using the treasury stock
method and the initial public offering price.

2. INVENTORIES
 
Inventories consist of the following:

<TABLE> 
<CAPTION> 
                                              June 30,    December 31,
                                                1996          1995
                                           ---------------------------
 
   <S>                                        <C>         <C>
   Finished goods........................      $405,000    $488,000
   Materials and supplies................        32,000     424,000
                                           ---------------------------
                                               $437,000    $912,000
                                           ===========================
</TABLE>

3. INCOME TAXES
 
The provision for income taxes consists of the following:

<TABLE> 
<CAPTION> 
                         Three Months Ended       Six Months Ended
                               June 30,               June 30,
                        --------------------     ------------------
                           1996       1995         1996       1995
                        --------------------     ------------------
   <S>                  <C>          <C>         <C>         <C>  
   Federal............   $294,000     $  -       $518,000     $  -
   State..............    133,000        -        234,000        -
                        --------------------     ------------------   
                         $427,000     $  -       $752,000     $  -
                        ====================     ==================
</TABLE>

The provision for income taxes for the three and six months ended June 30, 1996
is based on the Company's estimated annualized effective tax rate for 1996 which
considers utilization of net operating loss and tax credit carryforwards. As a
result of net operating losses, the Company did not record any provision for
income taxes for the three and six months ended June 30, 1995.

                                       7
<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 condensed
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. 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 Companys SEC reports, including without limitation, its Annual
Report on Form 10-K for the year ended December 31, 1995.

OVERVIEW

The Company derives a substantial majority of its revenues from a limited number
of products. The Company's future revenues are substantially dependent upon the
continued market acceptance of Kai's Power Tools, Bryce, Convolver, Vector
Effects, KPT PowerPhotos, Final Effects, and a product released in the second
quarter of 1996, Kai's Power Goo. In this regard, revenue from the sale of Kai's
Power Tools was 28% and 26% of net revenues for the three months ended June 30,
1996 and 1995, respectively. 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.
The Company includes such royalty expenses in cost of revenues as such royalties
are earned.  The Company believes that co-development arrangements represent an
important component of the Company's research and development investment.  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 were 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 could have a material adverse
effect on the Company's business, operating results and financial condition.

The Company sells its products primarily to domestic and international
distributors, including mail order resellers and, to a lesser extent, retail
outlets. The Company also sells its products to 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

                                       8
<PAGE>
 
programs, anticipated product price increases, the Companys purchases
of display space at retail outlets and other factors.

Since 1992, 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 fluctuations in net revenues have contributed to
the Company's annual losses and quarterly losses through June 30, 1995, 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,
                                         --------------------  ------------------ 
                                          1996       1995        1996      1995   
                                         --------------------  ------------------ 
<S>                                       <C>        <C>        <C>       <C>    
Net revenues..........................    100.0%     100.0 %    100.0%    100.0 % 
Cost of revenues......................     17.5       33.3       18.7      36.2   
                                         -------------------   ------------------ 
     Gross margin.....................     82.5       66.7       81.3      63.8   
                                                                                  
Operating expenses:                                                               
  Sales and marketing.................     44.8       56.7       46.1      54.6   
  General and administrative..........     11.5       12.5       11.3      12.2   
  Research and development............     12.8        8.4       13.1       8.7   
                                         -------------------   ------------------ 
     Total operating expenses.........     69.1       77.6       70.5      75.5   
                                         -------------------   ------------------ 
                                                                                  
Income (loss) from operations.........     13.4      (10.9)      10.8     (11.7)  
Other income (expense), net...........      9.0       (0.1)      10.0       0.0   
                                         -------------------   ------------------ 
                                                                                  
Net income (loss) before provision for     22.4      (11.0)      20.8     (11.7)  
 income taxes.........................                                            
Provision for income taxes............      6.7        0.0        6.3       0.0   
                                         -------------------   ------------------ 
                                                                                  
Net income (loss).....................     15.7%     (11.0)%     14.5%    (11.7)% 
                                         ===================   ================== 
</TABLE>

Net Revenues

The Company recognizes revenue from the sale of its products upon shipment to
the customer and satisfaction of significant Company obligations, if any.  Net
revenues increased 60% from $4.0 million for the three months ended June 30,
1995 to $6.4 million for the three months ended June 30, 1996.  Net revenues
increased as a result of the Company's release of new products and new versions
of its existing products along with increased expansion of sales through its
domestic and international distribution channels.  In particular, since the
second quarter of 1995, the Company has released KPT PowerPhotos Series II, III
and IV, Final Effects, Final Effects

                                       9
<PAGE>
 
AP, Kai's Power Tools 3, Bryce 2 and Kai's Power Goo. International sales
increased from 20% of net revenues for the three months ended June 30, 1995 to
28% of net revenues for the three months ended June 30, 1996.

Net revenues increased 61% from $7.4 million for the six months ended June 30,
1995 to $11.9 million for the six months ended June 30, 1996. The increase in
net revenues was the result of the development and release of new products, the
enhancement and release of new versions of the Company's existing products, and
significant increases in the Company's distribution channels and marketing
activities.

The Company offers two principal product types consisting of plug-in extensions
(including Kai's Power Tools, Convolver, Vector Effects and Final Effects) and
stand-alone applications and application platforms (principally consisting of
Bryce and KPT PowerPhotos, and a new product released in the second quarter of
1996, Kai's Power Goo).  The following table reflects the net revenue
contribution by each product family for the fiscal periods presented:

<TABLE>
<CAPTION>

                                              Three Months Ended            Six Months Ended
                                                   June 30,                     June 30,
                                          --------------------------    -------------------------
                                              1996          1995           1996          1995
                                          --------------------------    -------------------------

<S>                                       <C>             <C>           <C>            <C>
Plug-in extensions......................    $2,965,000    $2,485,000    $ 5,618,000    $4,134,000
Stand-alone applications and
 application platforms..................     3,406,000     1,486,000      6,256,000     3,257,000
                                          --------------------------    -------------------------
 Total..................................    $6,371,000    $3,971,000    $11,874,000    $7,391,000
                                          ==========================    =========================
</TABLE>

The Company has migrated most of its existing products to run on Windows-based
computers as well as Macintosh, and recently it has begun bundling both Windows
and Macintosh versions on the same CD to minimize production and distribution
costs.  For the second quarter of 1996, cross platform and Windows products
represented 58% of net revenues, compared with 22% for the second quarter of
1995.  Cross platform and Windows products represented 50% and 23% of net
revenues for the six months ended June 30, 1996 and 1995, respectively.

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 expectations, the setting 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 paid to external
developers, inventory management costs, freight and handling costs and reserves
for inventory obsolescence.  Cost of revenues decreased from $1.3 million, or
33% of net revenues, for the three months ended June

                                       10
<PAGE>
 
30, 1995 to $1.1 million, or 18% of net revenues, for the three months ended
June 30, 1996. Cost of revenues as a percentage of net revenues decreased as a
result of a changing mix of product sales toward lower royalty products,
improved management of production and inventory levels, and higher OEM licensing
sales. Royalties represented 2% and 12% of net revenues for the three months
ended June 30, 1996 and 1995, respectively.

Cost of revenues decreased from $2.7 million to $2.2 million, or from 36% to 19%
of net revenues, for the six months ended June 30, 1995 and 1996, respectively.
The decrease in cost of revenues as a percentage of net revenues resulted from
increased sales of lower royalty products, improved production and inventory
management, and increased OEM licensing sales.  Royalties represented 3% and 13%
of net revenues for the six months ended June 30, 1996 and 1995, respectively.

Sales and Marketing

Sales and marketing expenses include advertising, promotional materials, mail
campaigns, tradeshows 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
$2.3 million to $2.9 million, but decreased as a percentage of net revenues from
57% to 45%, for the three months ended June 30, 1995 and 1996, respectively.
Such increase was a result of the continued efforts to expand sales and
marketing activities and distribution channels.  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.

Sales and marketing expenses increased from $4.0 million to $5.5 million for the
six months ended June 30, 1996 and 1995, respectively, but decreased as a
percentage of net revenues from 55% to 46%. 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, and tradeshow expenditures.

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 increased from
$496,000 to $734,000 for the three months ended June 30, 1995 and 1996,
respectively, but remained consistent as a percentage of net revenues at 12%.
The increase in general and administrative expenses resulted from additional
provisions for doubtful accounts commensurate with the increase in revenues and
accounts receivable, and to increased incentive compensation.  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
and to comply with the responsibilities of a public company, but may vary as a
percentage of net revenues.

General and administrative expenses increased from $904,000 to $1.3 million, but
decreased as a percentage of net revenues from 12% to 11%, for the six months
ended June 30, 1995 and 1996, respectively.  The increase in general and
administrative expenses reflects increased headcount and associated personnel
costs related to the expansion of the Company's executive, accounting, finance,
and administration staffing required to support the Company's growth.  The
decrease in

                                       11
<PAGE>
 
general and administrative expenses as a percentage of net revenues
is the result of the leverage of a larger business.

Research and Development

Research and development expenses consist primarily of personnel costs,
consultant fees the amortization of purchased technology, and required equipment
and facilities costs related to the Company's product development efforts.  To
date, the Company has not capitalized any internal software development costs
since costs qualifying for such capitalization have not been significant.

Research and development expenses increased from $332,000, or 8% of net
revenues, for the three months ended June 30, 1995 to $814,000, or 13% of net
revenues, for the three months ended June 30, 1996 as a result of the Company's
focus on expanding its product portfolio, enhancing its products and migrating
its existing products to multiple operating systems, which required the hiring
of additional personnel.  The Company expects research and development expenses
will continue to increase in future periods, but may vary as a percentage of net
revenues.

Research and development expenses increased from $641,000 to $1.6 million, or
from 9% to 13% of net revenues, for the six months ended June 30, 1995 and 1996,
respectively.  The increase in research and development expenses results from
the development and release of new products and the enhancement and release of
new versions of the Company's existing products, which required the hiring of
additional personnel.

Provisions for Income Taxes

The Company records income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." The provision for
income taxes for the three and six months ended June 30, 1996 are based on the
Company's estimated annualized effective tax rate for 1996 which considers
utilization of net operating loss and tax credit carryforwards. As a result of
net operating losses, the Company did not record any provision for income taxes
for the three and six months ended June 30, 1995.

FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

Limited Operating History; History of Losses; Variability of Operating Results

The Company was incorporated in March 1987 and did not introduce its first
internally developed product until January 1993. The Company experienced losses
in each quarter of 1994 and the first two quarters of 1995, and the Company's
revenues and operating results have varied substantially from period to period.
There can be no assurance that the Company's future revenue and operating
results will not also vary substantially. The Company's revenues are relatively
difficult to forecast due to a number of variable factors, including the timing
of the introduction of new products by the Company and its competitors,
seasonality of customer purchases, other general economic conditions, and the
Company's ability to capture sufficient interest and commitment by distributors
to market the Company's products or product enhancements. The Company's
operating results also vary significantly depending on changes in pricing,
changes in customer budgets and the volume and timing of orders received and
shipments made during a quarter, which are difficult to forecast. Customers
generally order on

                                       12
<PAGE>
 
an as-needed basis, and the Company's software generally is shipped as orders
are received. Consequently, the Company typically operates with little or no
backlog. The Company experiences some effect of seasonality in its business, as
demand for its products tends to increase during the fourth calendar quarter as
a result of the year-end holiday buying season. Further, as the Company has
recently released its first consumer product, Kai's Power Goo, the year-end
holiday buying season may have a larger impact on revenues in the future than in
the past. A disproportionate percentage of the Company's quarterly revenues is
typically generated in the last month of the quarter principally due to customer
buying patterns. As a result of the foregoing and other factors, the Company
anticipates that it may experience material and adverse fluctuations in future
operating results on a quarterly or annual basis. Therefore, the Company
believes that period to period comparisons of its revenues and operating results
are not necessarily meaningful and that such comparisons cannot be relied upon
as indicators of future performance.

Evolving Markets for Computer Graphic Imaging and Internet/Online Design
Tools; Rapid Technological Change

Since 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.
Additionally, since the computer graphic imaging and Internet/online design tool
markets, and the personal computer industry in general, are characterized by
rapidly changing technology, resulting in short product life cycles and price
declines, the Company must continuously update its existing products to keep
them current with changing technology and must develop new products to take
advantage of new technologies that could render the Company's existing products
obsolete.  The Company's future prospects are highly dependent on its ability to
keep pace with its competitors innovations, to adapt to new operating systems,
hardware platforms and emerging industry standards, and to provide additional
functionality to the Company's existing products.

Limited Product Lines; Risk of Product Delays

The Company's growth will be dependent upon the introduction of new products and
new versions of existing products.  There can be no assurance that any such new
products or versions will achieve market acceptance.  In addition, the Company
has in the past experienced delays in the development of new products and the
enhancement of existing products, and such delays may occur in the future.

                                       13
<PAGE>
 
Dependence on Third Parties

Certain of the Company's products operate as plug-in extensions and enhancements
for specific print, animation, video and multimedia 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.

Distribution Risks

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.  Accordingly, the Company is
dependent on the continued viability and financial stability of these third
parties, including certain of the traditional software distributors who have
recently experienced significant margin pressure.

Competition

The Company faces competition from a number of sources, including other vendors
of personal computer graphic imaging and Internet/online design application
platforms and tools, other personal computer software industry participants and
companies that offer graphic and Internet/online design solutions that are not
personal computer based.  If these or other competitors develop products,
technologies or solutions that offer significant performance, price or other
advantages over those of the Company, the Company's business, operating results
and financial condition would be materially affected.

LIQUIDITY AND CAPITAL RESOURCES

Historically, the Company satisfied its cash requirements principally through
the private sale of its securities, borrowings from stockholders and bank
borrowings.  In December 1995, the Company raised $45.2 million, net of offering
costs, in connection with an initial public offering of its common stock.

The Company has a $3.0 million revolving line of credit with a bank which
expires during December 1996 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, 1996, the Company had no outstanding borrowings under the line of
credit.

Historically, net cash used in operating activities has been significant due to
operating losses and working capital requirements resulting from the growth of
the Company.  Non-cash assets have increased significantly, particularly
accounts receivable.  Net cash used in investing activities has also increased
substantially due to the purchase of $31.5 million of short-term investments
during the second quarter of 1996.  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 and any cash provided by
future operations will be sufficient to meet its cash requirements through at
least the next twelve months.

                                       14
<PAGE>
 
                          PART II.  OTHER INFORMATION
    
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 13, 1996:     
           
     (a) The following directors were elected:     

<TABLE>     
<CAPTION> 
         Directors                     Votes For           Votes Withheld
         ---------                     ---------           --------------
         <S>                           <C>                 <C>

         John J. Wilczak               9,573,223           44,959
         Kai Krause                    9,573,467           44,715
         Samuel H. Jones, Jr.          9,573,223           44,959
         Bert Kolde                    9,548,223           69,959
         William H. Lane, III          9,568,023           50,159
         Howard L. Morgan              9,572,823           45,359
         William J. Schroeder          9,568,023           50,159
</TABLE>      
         
     (b) The stockholders ratified the appointment of Coopers & Lybrand L.L.P. 
     as independent accountants by the following vote:     

<TABLE>    
         <S>                           <C> 
         For:                          9,614,407
         Against:                            675
         Abstain:                          3,100
         No Vote:                              0
</TABLE>      

Item 6.  Exhibits and Reports on Form 8-K

 
(a) Exhibits


Exhibit
 Number                          Exhibit Title
-------                          -------------
  2.1   Form of Agreement and Plan of Merger by and between the Registrant and
        MetaTools, Inc., a California corporation (1)
  3.1   Amended and Restated Articles of Incorporation of California predecessor
        of Registrant (1)
  3.2   Certificate of Incorporation of Registrant (1)
  3.3   Amended and Restated Certificate of Incorporation of Registrant (3)
  3.4   Restated Certificate of Incorporation of Registrant (3)
  3.5   Bylaws of California predecessor of Registrant, as amended (1)
  3.6   Bylaws of Registrant, as amended (3)
  4.1   Specimen of Common Stock Certificate of Registrant (3)
 10.1   Indemnification Agreement for Executive Officers and Directors (1)
 10.2   Investors' Rights Agreement, as amended (1)
 10.3   1992 Incentive Stock Plan (1)
 10.4   1994 Incentive Stock Option, Non-Qualified Stock Option and Restricted
        Stock Purchase Plan (1)
 10.5   1995 Stock Plan (2)
 10.6   1995 Employee Stock Purchase Plan (2)
 10.7   1995 Director Option Plan (2)
 10.8   Employment Agreement between the Registrant and John J. Wilczak dated
        April 15, 1992, as amended (1)
 10.9   Employment Agreement between the Registrant and Kai Krause dated 
        January 26, 1994 (1)
10.10   Employment Agreement between the Registrant and Terance A. Kinninger
        dated June 27, 1995 (1)
10.11   Employment Agreement between the Registrant and James Mervis dated 
        April 3, 1995 (1)
10.13   Secured Promissory Note between the Registrant and Kai Krause dated
        November 28, 1994 (1)
10.14   Secured Promissory Note between the Registrant and Kai Krause dated
        November 28, 1994 (1)
10.15   Loan and Security Agreement between the Registrant and Silicon Valley
        Bank dated September 25, 1994, as amended on December 15, 1995 (3)
10.16*  Distribution Agreement between the Registrant and Ingram Micro Inc. 
        dated October 19, 1992, as amended (1)
10.17*  Distribution Agreement between the Registrant and Merisel Distributing
        (formerly, Softsel Computer Products, Inc.) dated March 12, 1990, as
        amended (1)
10.18   Sublease Agreement between Digital Sound Corporation and Registrant
        dated as of June 8, 1994 (1)
10.19   Form of Employee Invention, Copyright, and Secrecy Agreement (1)
10.20   Employment Agreement between the Registrant and Fred Brown dated
        November 13, 1995 (1)

                                       15
<PAGE>
 
10.21*  Software Licensing Agreement between the Registrant and Marubeni
        Corporation dated as of January 31, 1996 (3)
10.22   Turnkey/Inventory Agreement between the Registrant and Stream
        International Inc. dated as of April 18, 1996
11.1    Statement Regarding Computations of Earnings per Share
27.1    Financial Data Schedule
______________

*   Confidential treatment for this exhibit has been requested pursuant to Rule
    24b-2 under the Securities Exchange Act of 1934, as amended

(1) Incorporated by reference to the Company's Registration Statement on 
    Form SB-2, filed December 11, 1995, as amended (File No. 33-98628LA).
(2) Incorporated by reference to the Company's Registration Statement on 
    Form S-8, filed on or about April 1, 1996.
(3) Incorporated by reference to the Company's Annual Report on Form 10-K for
    the year ended December 31, 1995.

(b) Reports on Form 8-K

    The Company did not file any reports on Form 8-K with the Securities and
    Exchange Commission during the second quarter ended June 30, 1996.

                                       16
<PAGE>
 
                                   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.


                                 METATOOLS, INC.
                                 (Registrant)

     
Date:  November 27, 1996         /s/TERANCE A. KINNINGER
                                 -----------------------
                                 Terance A. Kinninger
                                 Vice President and
                                 Chief Financial Officer

                                       17