<PAGE>   1
                       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 March 31, 1998 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 May 8, 1998, there were outstanding 23,659,165 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>   2




                            METACREATIONS CORPORATION

                                    FORM 10-Q

                                Table of Contents

<TABLE>
<CAPTION>

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

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

                     Consolidated Balance Sheets - March 31, 1998 and
                        December 31, 1997
                     Consolidated Statements of Operations - Three months
                        ended March 31, 1998 and 1997
                     Consolidated Statements of Cash Flows - Three months
                        ended March 31, 1998 and 1997
                     Notes to Consolidated Financial Statements

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

PART II.          OTHER INFORMATION

Item 6.           Exhibits and Reports on Form 8-K...........................       16

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



                                       2
<PAGE>   3

                          PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

                            METACREATIONS CORPORATION
                           CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                MARCH 31,   DECEMBER 31,
                                                                   1998         1997
                                                               -----------  ------------
                                                               (Unaudited)    (Audited)
<S>                                                            <C>           <C>      
ASSETS
Current assets:
  Cash and cash equivalents .............................      $  15,477       $   9,653
  Short-term investments ................................         36,007          40,349
  Accounts receivable, net ..............................         21,228          26,604
  Inventories ...........................................          1,445           1,667
  Income taxes receivable ...............................          3,606           3,324
  Deferred income taxes .................................          2,634           2,634
  Prepaid expenses ......................................          4,846           3,494
                                                               ---------       ---------
      Total current assets ..............................         85,243          87,725

Property and equipment, net .............................          8,081           7,577
Other assets ............................................          1,799           1,988
                                                               ---------       ---------
      Total assets ......................................      $  95,123       $  97,290
                                                               =========       =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable ......................................      $   4,313       $   4,860
  Accrued expenses ......................................          3,107           3,971
  Royalties payable .....................................          1,032           1,217
                                                               ---------       ---------
      Total current liabilities .........................          8,452          10,048

Stockholders' equity:
  Preferred stock, $.001 par value, 5,000 shares
    authorized - no shares issued and outstanding at
    March 31, 1998 and December 31, 1997, 
    respectively.........................................             --              --
  Common stock, $.001 par value; 75,000 shares authorized
    - 23,641 and 23,606 shares issued and outstanding 
    at March 31, 1998 and December 31, 1997, 
    respectively ........................................             24              24
  Paid-in capital .......................................        110,189         109,896
  Notes receivable from stockholders ....................         (3,212)         (3,170)
  Cumulative translation adjustment .....................           (134)           (135)
  Accumulated deficit ...................................        (20,196)        (19,373)
                                                               ---------       ---------
      Total stockholders' equity ........................         86,671          87,242
                                                               ---------       ---------
      Total liabilities and stockholders' equity ........      $  95,123       $  97,290
                                                               =========       =========
</TABLE>


                                       3
<PAGE>   4



                            METACREATIONS CORPORATION
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)


<TABLE>
<CAPTION>

                                                             THREE MONTHS ENDED
                                                                  MARCH 31,
                                                           -----------------------
                                                             1998           1997
                                                           --------       --------
<S>                                                        <C>            <C>     
Net revenues ........................................      $ 14,423       $ 13,252
Cost of revenues ....................................         2,331          2,668
                                                           --------       --------
Gross profit ........................................        12,092         10,584

Operating expenses:
  Sales and marketing ...............................         7,915          7,331
  Research and development ..........................         4,219          3,059
  General and administrative ........................         1,848          1,632
                                                           --------       --------
Total operating expenses ............................        13,982         12,022
                                                           --------       --------

Loss from operations ................................        (1,890)        (1,438)
Interest and investment income, net .................           714            811
                                                           --------       --------

Loss before benefit for income taxes ................        (1,176)          (627)
Benefit for income taxes ............................          (353)          (195)
                                                           --------       --------
Net loss ............................................      $   (823)      $   (432)
                                                           ========       ========

Net loss per common share - basic and diluted .......      $  (0.03)      $  (0.02)
                                                           ========       ========

Weighted average number of shares outstanding - basic
  and diluted .......................................        23,620         22,261
                                                           ========       ========
</TABLE>


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



                                       4
<PAGE>   5



                            METACREATIONS CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                                 THREE MONTHS ENDED
                                                                     MARCH 31,
                                                             -------------------------
                                                                1998            1997
                                                             ----------      ---------
<S>                                                          <C>             <C>  
Cash flows from operating activities:
  Net loss .............................................      $   (823)      $   (432)
  Adjustment to retained earnings as a result of .......            --            513
    business combination................................
  Adjustments to reconcile net loss to net cash provided
    by (used in) operating activities:
      Depreciation and amortization ....................           973            348
      Provision for losses on receivables and product            2,740            481
        returns.........................................
      Provision for losses on inventory ................           239             --
      Accrued interest income ..........................           (42)           (42)
      Changes in operating assets and liabilities:
        Accounts receivable ............................         2,636           (636)
        Inventories ....................................           (17)          (203)
        Income taxes receivable ........................          (185)           416
        Prepaid expenses and other assets ..............        (1,220)        (1,122)
        Accounts payable and accrued expenses ..........        (1,224)          (822)
        Royalties payable ..............................          (185)            97
                                                              --------       --------
         Net cash provided by (used in) operating                2,892         (1,402)
           activities...................................

Cash flows from investing activities:
  Purchases of short-term investments ..................       (14,427)        (7,813)
  Proceeds from sales and maturities of short-term 
    investments ........................................        18,769          2,324
  Purchases of property and equipment ..................        (1,245)        (1,244)
  Purchases of software technology and product rights ..          (175)             -
                                                              --------       --------
         Net cash provided by (used in) investing
          activities....................................         2,922         (6,733)

Cash flows from financing activities:
  Proceeds from exercise of stock options ..............             9             81
                                                              --------       --------
         Net cash provided by financing activities .....             9             81

Effect of exchange rates changes on cash ...............             1              -
                                                              --------       --------

Net increase (decrease) in cash and cash equivalents ...         5,824         (8,054)
Cash and cash equivalents at beginning of period .......         9,653         21,605
                                                              --------       --------
Cash and cash equivalents at end of period .............      $ 15,477       $ 13,551
                                                              ========       ========
</TABLE>


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



                                       5
<PAGE>   6



                            METACREATIONS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


1.  SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited consolidated financial statements include the
accounts of MetaCreations Corporation and its wholly-owned subsidiaries
(collectively "MetaCreations" or the "Company"). 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 March 31, 1998 are not necessarily indicative of
results to be expected for the year ending December 31, 1998. 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,
1997 and 1996, and for the three years in the period ended December 31, 1997, as
filed on Form 10-K.

Revenue Recognition

During the three months ended March 31, 1998, the Company adopted Statement of
Position ("SOP") 97-2, "Software Revenue Recognition," which superceded SOP
91-1. SOP 97-2 generally requires revenue earned on software arrangements
involving multiple elements (e.g., software products, upgrades/enhancements,
postcontract customer support, etc.) to be allocated to each element based on
the relative fair value of the elements. The fair value of an element must be
based on evidence which is specific to the Company. The revenue allocated to
software products (including specified upgrades/enhancements) generally is
recognized upon delivery of the products. The revenue allocated to postcontract
customer support generally is recognized ratably over the term of the support.
If the Company does not have evidence of the fair value for all elements in a
multiple-element arrangement, all revenue from the arrangement is deferred until
such evidence exists or until all elements are delivered. The impact of adopting
SOP 97-2 was not material to the Company's financial position, results of
operations or cash flows.

                                       6
<PAGE>   7



                            METACREATIONS CORPORATION
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                                   (UNAUDITED)



The Company provides an allowance for estimated returns at the time of product
shipments and adjusts this allowance as needed based on actual return history.
Such reserves as a percentage of net revenues have varied 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.

Comprehensive Income

During the three months ended March 31, 1998, the Company adopted Statement of
Financial Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive
Income." SFAS No. 130 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. Differences between comprehensive income
and net income were not material to the Company's financial position, results of
operations or cash flows for the three months ended March 31, 1998 and 1997.

Statement of Financial Accounting Standards Not Yet Adopted

In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 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 includes 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. SFAS No. 131 requires companies to adopt its provisions for fiscal
years beginning after December 15, 1997, but does not require that segment
information be reported in financial statements for interim periods in the
initial year of application. Management is currently evaluating the requirements
of adopting SFAS No. 131 and the effects, if any, on the Company's current
reporting and disclosures.


                                       7
<PAGE>   8
                           METACREATIONS CORPORATION
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                                  (UNAUDITED)


2.  INVENTORIES

Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>

                                                         MARCH 31,   DECEMBER 31,
                                                           1998         1997
                                                         ---------    ------------
<S>                                                      <C>           <C>     
    Finished goods....................................    $  1,188      $  1,465
    Materials and supplies............................         257           202
                                                          --------      --------
                                                          $  1,445      $  1,667
                                                          ========      ========
</TABLE>

3.  INCOME TAXES

The benefits for income taxes for the three months ended March 31, 1998 and 1997
are based on the Company's estimated annualized effective tax rate for the
respective years, after giving effect to the utilization of available tax
credits and tax planning opportunities.

4.  LOSS PER SHARE

The following table provides a reconciliation of the numerators and denominators
of the basic and diluted per-share computations for the three months ended March
31, 1998 and 1997 in accordance with SFAS No. 128, "Earnings per Share" (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
                                                LOSS         SHARES     PER-SHARE
                                             (NUMERATOR)  (DENOMINATOR)   AMOUNT
                                             -----------  ------------- ---------
<S>                                             <C>          <C>         <C>   

    Three Months Ended March 31, 1998:
      Basic EPS.............................    $(823)       23,620      $(.03)
      Effect of dilutive securities.........       --            --
                                                -----        ------      
      Diluted EPS...........................    $(823)       23,620      $(.03)
                                                =====        ======     

    Three Months Ended March 31, 1997:
      Basic EPS.............................    $(432)       22,261      $(.02)
      Effect of dilutive securities.........       --            --
                                                -----        ------      
      Diluted EPS...........................    $(432)       22,261      $(.02)
                                                =====        ======     
</TABLE>

The computation of the diluted number of shares excludes unexercised stock
options which are anti-dilutive. Stock options to purchase 6,749,000 and
4,610,000 shares of common stock were outstanding as of March 31, 1998 and 1997,
respectively, and excluded from the computation.


                                       8
<PAGE>   9




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, 1997 and 1996, and for the three years in the period ended December
31, 1997, as filed on Form 10-K.

OVERVIEW

MetaCreations was formed in May 1997, as a result of the merger of MetaTools,
Inc. and Fractal Design Corporation, and included the acquisitions of Real Time
Geometry Corp. in December 1996 and Specular International. Ltd. in April 1997,
as well as the previous merger of Fractal and Ray Dream, Inc. in May 1996. The
financial results for the three months ended March 31, 1997 include the pooled
financial statements of MetaTools, Inc. and Fractal Design Corporation.

Revenue growth for MetaCreations during the three months ended March 31, 1998
was substantially achieved through the Company's continued introduction of new
products and the release of enhanced versions of its existing products, as well
as significant investment in the expansion of its sales and marketing activities
to address broader distribution channels. While the Company has significantly
expanded its product line, the Company's future revenues are substantially
dependent upon the continued market acceptance of the Company's existing leading
products: Art Dabbler, Bryce, Kai's Photo Soap, Kai's Power GOO, Kai's Power
SHOW, Kai's Power Tools, Painter, Poser, and Ray Dream Studio. In this regard,
revenue from the sale of these products represented a substantial majority of
net revenues during this period. The Company also has a number of new product
development efforts under way, and a significant portion of future revenues is
dependent upon the timely introduction and ultimate success of these products.

The Company develops substantially all of its products either internally or
occasionally 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.




                                       9

<PAGE>   10
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 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, 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. The Company's
recent product development efforts have also entailed significant research and
development expenditures. These higher expense levels combined with costs
associated with periodic mergers and acquisitions, including the related
write-off of acquired in-process technology, 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.




                                       10
<PAGE>   11



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
                                                     MARCH 31,
                                                ------------------
                                                 1998        1997
                                                ------      ------
<S>                                              <C>         <C>    
      Net revenues...........................    100.0 %     100.0 %
      Cost of revenues.......................     16.2        20.1
                                                 -----       -----
         Gross margin........................     83.8        79.9

      Operating expenses:
      Sales and marketing....................     54.9        55.3
      Research and development...............     29.2        23.1
      General and administrative.............     12.8        12.3
                                                 -----       -----
         Total operating expenses............     96.9        90.7
                                                 -----       -----

      Loss from operations...................    (13.1)      (10.8)
      Interest and investment income, net....      5.0         6.1
                                                 -----       -----

      Net loss before benefit for income                           
      taxes..................................     (8.1)       (4.7)
      Benefit for income taxes...............     (2.4)       (1.5)
                                                 -----       -----

      Net loss...............................     (5.7)%      (3.2)%
                                                 =====       =====
</TABLE>

Net Revenues

Net revenues totaled $14.4 million for the three months ended March 31, 1998, an
increase of 9% over net revenues of $13.3 million for the three months ended
March 31, 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 sales through the domestic distribution
channel. The Company released Kai's Power SHOW, Painter 3D and Painter Classic
during the first quarter of 1998. International sales accounted for $4.7
million, or 33% of net revenues, for the three months ended March 31, 1998,
compared to $6.3 million, or 48% of net revenues, for the three months ended
March 31, 1997, primarily due to the low number of localized versions of
products scheduled for release in international markets in the first quarter of
1998.

The Company recognizes revenue from the sale of its products in accordance with
SOP 97-2, which generally requires revenue earned on software arrangements
involving multiple elements (e.g., software products, upgrades/enhancements,
postcontract customer support, etc.) to be allocated to each element based on
the relative fair value of the elements. The fair value of an element must be
based on evidence which is specific to the Company. The revenue allocated to
software products (including specified upgrades/enhancements) generally is
recognized upon delivery of the products. The revenue allocated to postcontract
customer support generally is recognized ratably over the term of the support.
If the Company does not have evidence of the 


                                       11
<PAGE>   12

fair value for all elements in a multiple-element arrangement, all revenue from
the arrangement is deferred until such evidence exists or until all elements are
delivered.

The Company provides an allowance for estimated returns at the time of product
shipments and adjusts this allowance as needed based on actual return history.
Such reserves as a percentage of net revenues have varied 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 totaled $2.3 million, or 16% of net
revenues, for the three months ended March 31, 1998, compared to $2.7 million,
or 20% of net revenues, for the three months ended March 31, 1997. The decrease
in cost of revenues resulted from the changing mix of product sales, as well as
efficiencies achieved in the costs of goods and management costs following the
merger of MetaTools, Inc. and Fractal Design Corporation in May 1997. Royalties
represented 3% of net revenues for the three months ended March 31, 1998, down
from 5% of net revenues for the three months ended March 31, 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 totaled $7.9
million for the three months ended March 31, 1998, compared to $7.3 million for
the three months ended March 31, 1997, but remained flat as a percentage of net
revenues at 55%. The increase in sales and marketing expenses resulted primarily
from increased marketing activities.

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.


                                       12
<PAGE>   13



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 totaled
$4.2 million, or 29% of net revenues, for the three months ended March 31, 1998,
compared to $3.1 million, or 23% of net revenues, for the three months ended
March 31, 1997. The increase was attributed to increased personnel costs,
including personnel obtained via the acquisition of Specular International, Ltd.
in April 1997.

The Company expects research and development expenses will continue to increase
in future periods, but 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 totaled $1.8 million,
or 13% of net revenues, for the three months ended March 31, 1998, compared to
$1.6 million, or 12% of net revenues, for the three months ended March 31, 1997.
The increase in expenses is due to increased administrative expenses related to
the continued growth of the Company.

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.

Benefit for Income Taxes

The benefits for income taxes for the three months ended March 31, 1998 and 1997
are based on the Company's estimated annualized effective tax rate for the
respective years, after giving effect to the utilization of available 
tax credits and tax planning opportunities.

Net Loss

Net loss was $823,000, or $0.03 per share, for the three months ended March 31,
1998, compared to a net loss of $432,000, or $0.02 per share, for the three
months ended March 31, 1997.

FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

Factors that may affect future operating results include, but are not limited
to, those discussed below, 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, 1997 and 1996, and for
the three years in the period ended December 31, 1997, as filed on Form 10-K.

                                       13

<PAGE>   14

Seasonality and 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 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 the ability to fulfill
orders received and the timing of and ability to close OEM and licensing
agreements with third parties 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 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 may 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.


                                       14
<PAGE>   15



Year 2000 Compliance

The Company has completed implementation of a year 2000 compliant
enterprise-wide information system. The Company has also initiated an assessment
project, both within the Company and with its business partners, which addresses
those other significant systems that may have year 2000 compliance issues. The
Company presently believes that with the implementation of the new system and
modification to existing software, year 2000 compliance will not pose a
significant operational challenge for the Company. However, if these
modifications are not completed on a timely basis, including implementation by
its business partners, the Company's financial position, results of operations
and cash flows will be materially and adversely affected.

LIQUIDITY AND CAPITAL RESOURCES

Historically, net cash used in operating activities and investing activities of
the Company has been significant due to operating losses from acquisitions and
mergers and working capital requirements resulting from the growth of the
Company. Cash and investments totaled $51.5 million at March 31, 1998, up from
$50.0 million at December 31, 1997. Net cash provided by operating activities of
the Company totaled $2.9 million for the three months ended March 31, 1998,
compared to net cash used in operating activities of $(1.4) million for the
three months ended March 31, 1997. The increase in cash provided by operating
activities is primarily attributed to the decrease in accounts receivable and
the provision for losses on receivables and product returns recorded during the
quarter ended March 31, 1998. Net cash provided by (used in) investing
activities totaled $2.9 million and $(6.7) million for the three months ended
March 31, 1998 and 1997, respectively. The change resulted primarily from net
sales and purchases of short-term investments during the respective periods. Net
cash provided by financing activities totaled $9,000 and $81,000 for the three
months ended March 31, 1998 and 1997, respectively, resulting from proceeds
received from the exercise of stock options by the Company's employees during
the respective periods.

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 and investment 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 June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 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 includes 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. SFAS No. 131 requires companies to adopt its provisions for fiscal
years beginning after December 15, 1997, but does not require that segment
information be reported in financial statements for interim 


                                       15
<PAGE>   16

periods in the initial year of application. Management is currently evaluating
the requirements of adopting SFAS No. 131 and the effects, if any, on the
Company's current reporting and disclosures.


                           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

    None

Item 5.  Other Information

    None

Item 6.  Exhibits and Reports on Form 8-K

(a) Exhibits

<TABLE>
<CAPTION>
      Exhibit
       Number                               Exhibit Title
        <S>      <C>
        10.5     1995 Stock Plan, as amended on May 6, 1998
        10.6     1995 Employee Stock Purchase Plan, as amended on May 6, 1998
        27.1     Financial Data Schedule
</TABLE>

(b) Reports on Form 8-K

    None





                                       16
<PAGE>   17



                                   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:  May 14, 1998                           /s/ TERANCE A. KINNINGER
                                               ------------------------
                                               Terance A. Kinninger
                                               Sr. Vice President and
                                                Chief Financial Officer


                                       17