DIGITAL LAVA INC, SB-2/A, 1999-11-02

DIGITAL LAVA INC
SB-2/A, 1999-11-02
COMPUTER PROGRAMMING SERVICES

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REGISTRATION NO. 333-66099

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

----------

POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

----------

DIGITAL LAVA INC.
(Name of small business issuer in its charter)

----------

Delaware 7371 95-4584080
(State or Other (Primary Standard (I.R.S.
Jurisdiction of Industrial Classification Employer identification
Incorporation Or Code Number) No.)
Organization)

13160 Mindanao Way, Suite 350 13160 Mindanao Way, Suite 350
Marina Del Rey, California 90292 Marina Del Rey, California 90292
(310) 577-0200 (Address of Principal Place or
(Address and Telephone Number Intended Principal Place
of Principal Executive Offices) of Business)

----------

Robert Greene
Chief Executive Officer
Digital Lava Inc.
13160 Mindanao Way, Suite 350
Marina Del Rey, California 90292
(310) 577-0200
(Name, Address, And Telephone Number Of Agent For Service)

COPIES TO:

Adam D. Eilenberg, Esq.
Ehrenreich Eilenberg Krause & Zivian LLP
11 East 44th Street
New York, New York 10017
(212) 986-9700

----------

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: From time to time
after this registration statement becomes effective.

<PAGE>

If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [_]

If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]

If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box: [_]

----------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8 (A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.

<PAGE>

LOGO

Digital Lava Inc.

880,436 shares of Common Stock

This prospectus relates to 880,436 shares of our common stock that may be
sold from time to time by certain of our security holders.

The selling security holders may sell shares of our common stock:

o through the American Stock Exchange, in the over-the-counter
market, in privately negotiated transactions or otherwise;

o directly to purchasers or through agents, brokers, dealers or
underwriters; and

o at market prices prevailing at the time of sale, at prices
related to such prevailing market prices, or at negotiated
prices.

Our common stock is traded on the American Stock Exchange under the symbol
"DGV."

See "Risk Factors" beginning on page 7 to read about certain factors you
should consider before buying our securities.

Neither the Securities and Exchange Commission nor any other regulatory
body has approved or disapproved of these securities or passed upon the adequacy
or accuracy of this prospectus. Any representation to the contrary is a criminal
offense.

The date of this prospectus is October 20, 1999.

<PAGE>

TABLE OF CONTENTS

SUMMARY FINANCIAL INFORMATION ............................................ 6

RISK FACTORS ............................................................. 7

USE OF PROCEEDS .......................................................... 9

SELLING SECURITY HOLDERS ................................................. 9

PLAN OF DISTRIBUTION ..................................................... 11

DIVIDEND POLICY .......................................................... 11

CAPITALIZATION ........................................................... 12

SELECTED FINANCIAL INFORMATION ........................................... 13

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS .............................................. 14

BUSINESS ................................................................. 19

MANAGEMENT ............................................................... 26

CERTAIN TRANSACTIONS ..................................................... 30

PRINCIPAL STOCKH0LDERS ................................................... 31

DESCRIPTION OF SECURITIES ............................................... 32

LEGAL MATTERS ............................................................ 34

EXPERTS .................................................................. 34

ADDITIONAL INFORMATION ................................................... 34

INDEX TO FINANCIAL STATEMENTS ............................................ F-1

<PAGE>

DIGITAL LAVA INC.

Digital Lava is a provider of software products and services related to the
use of rich mixed media for corporate training, communications, research and
other applications. Digital Lava's current product line includes VideoVisor
Professional (vvPro), VideoVisorWeb(vvWeb) and vPublisher.
VideoVisorProfessional and VideoVisorWeb are proprietary viewers that allow the
user to access the content published in the unique Digital Lava format.
vPublisher is a proprietary authoring software tool that allows the integration
of text, data, voice, video and web links into an interactive desktop
application, known as a VideoCapsule. VideoCapsule files are accessed by either
the vvPro software viewer on compact discs and private Intranets or via the
vvWeb software viewer on the internet. vvPro and vvWeb allow the user to
individually manage, manipulate and navigate the VideoCapsule information on
their computer screen both at home and in the office.

Streaming technology allows an Internet or intranet user to access
information in a file before the file is completely downloaded. As a result,
large files containing video and audio information can be heard or seen almost
immediately, even with slower connections. We believe that the continuing
emergence of the Internet as a mass communications medium and the advent of
related new technologies such as streaming presents a significant new market
opportunity for software applications that enhance the effectiveness and
productivity of persons who rely on video information. We believe that our
software technology provides a more compelling and productive user experience
than broadcast television and videotape, allowing the Internet to effectively
compete with these traditional video delivery methods.

We were formed as a limited liability company in July 1995 and merged into
a Delaware corporation in November 1996. Our address is 13160 Mindanao Way,
Suite 350, Marina del Rey, California 90292, and our telephone number is (310)
577-0200. Our Web site can be accessed at www.digitallava.com. Information
contained on our Web site is not part of this prospectus.

<PAGE>

SUMMARY FINANCIAL INFORMATION

<TABLE>
<CAPTION>
Year Ended Six Months Ended
---------------------- --------------------------
December 31, December 31, December 31, June 30, June 30,
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues ................................................ $ -- $ 564,572 $ 1,463,618 $ 391,897 $ 372,298
Cost of revenues ........................................ -- 122,976 288,778 91,867 54,327
----------- ----------- ----------- ----------- -----------
Gross profit ............................................ -- 441,596 1,174,840 300,030 317,971
----------- ----------- ----------- ----------- -----------
Operating costs and expenses:
Selling, general and administrative .............. 1,522,757 3,316,961 3,103,418 2,003,058 2,382,219
Research and development ......................... 421,087 445,162 442,718 267,514 355,567
----------- ----------- ----------- ----------- -----------
Total operating costs and expenses ........ 1,943,844 3,762,123 3,546,136 2,270,572 2,737,786
----------- ----------- ----------- ----------- -----------
Loss from operations .................................... (1,943,844) (3,320,527) (2,371,296) (1,970,542) (2,419,815)
Other income and interest expense ....................... 440,813 924,842 1,359,245 809,465 26,949
----------- ----------- ----------- ----------- -----------
Net loss before extreaorinary item ...................... (2,384,657) (4,245,369) (3,730,541) (2,780,007) (2,446,764)
Extraordinary loss on extinguishment of debt ............ -- -- -- -- (3,672,656)
----------- ----------- ----------- ----------- -----------
Net loss ................................................ $(2,384,657) $(4,245,369) $(3,730,541) $(2,780,007) $(6,119,420)
=========== =========== =========== =========== ===========
Net loss available to common shareholders ............... $(2,384,657) $(4,245,369) $(3,730,541) $(2,780,007) $(6,779,433)
=========== =========== =========== =========== ===========
Basic and diluted loss per share ........................ $ (93.00) $ (31.14) $ (25.22) $ (21.14) (2.08)
=========== =========== =========== =========== ===========
Weighted average common shares used in basic and
diluted loss per share .............................. 25,641 136,353 147,933 131,524 3,263,223
=========== =========== =========== =========== ===========
</TABLE>

June 30, 1999
-------------
Actual
------
Balance Sheet Data:
Cash and cash equivalents ............................... $ 639,430
Working capital ......................................... 8,656,979
Total assets ............................................ 9,559,672
Total liabilities ....................................... 286,364
Total stockholders' equity .............................. 9,273,308

<PAGE>

RISK FACTORS

Because we have a limited operating history, we may not achieve anticipated
revenues. We were originally formed as a limited liability company in July 1995
and were merged into a corporation in November 1996. We did not recognize any
revenue until 1997. Therefore, we have only a limited operating history upon
which you may judge our performance and prospects. As a result of our limited
operating history and the emerging nature of the markets in which we compete, we
may not be able to achieve anticipated revenues.

We sustained losses in the past and expect to sustain losses in the future.
We have incurred significant losses since inception and we expect to continue to
incur substantial operating losses for the foreseeable future. As of June 30,
1999, we had an accumulated deficit of $16,818,259.

Our future profitability is uncertain. We expect that our sales and
marketing, product development and administrative expenses will increase in the
future and, as a result, we will need to generate significant revenues to
achieve profitability. Despite significant investments in sales and marketing
and product development, we may not be able to sustain our growth in revenues,
including revenues from software license fees, in the future. To become
profitable, we must, among other things:

o successfully develop and deliver new products and services;

o respond quickly and effectively to competitive, market and technological
developments;

o expand sales and marketing operations;

o broaden customer support capabilities; and

o control expenses.

We may not be able to achieve profitability in the future.

We may be unable to obtain additional financing. We have suffered recurring
losses, negative cash flows from operations and increasing capital expenditures
since inception. With current cash balances, including the proceeds from our
initial public offering in February 1999, short-term investments and cash
provided by operations, we believe that such funds will be sufficient to meet
our anticipated needs for working capital and capital expenditures for at least
the next twelve months. However, we will eventually need to seek additional
funding either through additional public or private sales of securities or
through debt financing. If we are unable to obtain such additional financing,
this may impact our ability to continue as a going concern in the future.

The loss of a major customer may harm our business. In the past, we derived
a majority of our revenues in each period from one or two customers. For the six
months ended June 30, 1999, the largest customer accounted for approximately
23.9% of revenues. For the six months ended June 30, 1998, a separate customer
accounted for 50.5% of revenues. We do not have contracts with any of these
customers. Although the volume of sales for our customers varies from
year-to-year, the loss of a major customer could have a material adverse effect
on our business.

The market in which we compete is new and uncertain. The market for our
video-based products and services is in the early stage of development and is
evolving rapidly. The development of a market for our technology also depends on
increased use of the Internet and intranets for information, publication,
distribution and commerce relating to video and multimedia. Critical issues
concerning use of the Internet and intranets, including security, reliability,
cost, ease of use and quality of service, remain unresolved and may affect the
growth of and the degree to which business is conducted over the Internet and
intranets. As a result, demand and market acceptance for our technology is
uncertain. We cannot assure you that the market for our technology will continue
to emerge or become sustainable. If the market for our products and services
fails to grow, develops more slowly than expected or becomes saturated with
competing products or services, our business will be materially adversely
affected.

We are dependent on the continued employment of Greene and Sharfman. As an
emerging technology company, we are particularly dependent on the continued
employment and performance of Robert Greene, our Chief Executive Officer, who
has been integral in developing and implementing our sales and marketing
strategy, and Joshua Sharfman, our President, who has been instrumental in the
development and commercialization of our technology. We have entered into
employment agreements with Mr. Greene, which expires in July of 2002, and with
Mr. Sharfman, which expires in February of 2001. Mr.

<PAGE>

Greene receives an annual base salary of $300,000, and Mr. Sharfman receives an
annual base salary of $230,000. A state court may determine not to enforce, or
only partially enforce, certain provisions of these agreements. We do not
maintain any key man life insurance. The loss of the services any of our
executive officers or key employees could have a material adverse effect on our
business, financial condition and results of operations.

The representative from our initial public offering may continue to have
influence over us. The representative from our initial public offering, which
was completed in February of 1999, may designate one person for election to our
board of directors until February of 2004. The representative's interests may
not be consistent with those of our stockholders. The representative's designee
on our board of directors could be in a position to cast a deciding vote on a
matter of importance.

The representative's warrants may affect our ability to raise additional
capital. In connection with our initial public offering in February of 1999, we
sold to the representative, for nominal consideration, warrants to purchase up
to 240,000 shares of common stock and/or 120,000 warrants. The holders of the
representative's warrants will have, at nominal cost, the opportunity to profit
from a rise in the market price of the common stock and/or warrants without
assuming the risk of ownership, with a resulting dilution in the interest of
other security holders. As long as the representative's warrants remain
unexercised, our ability to obtain additional capital might be adversely
affected. Moreover, the representative may exercise the representative's
warrants at a time when we would, in all likelihood, be able to obtain any
needed capital through a new offering of our securities on terms more favorable
than those provided by the representative's warrants.

You should carefully consider the risk factors described above and other
information in this prospectus before deciding to make an investment. This
prospectus contains forward-looking statements that involve risks and
uncertainties. These statements can be identified by the use of words such as
"may," "will," "expect," "anticipate," "estimate," "continue," or other similar
words. These statements discuss future expectations, contain projections of
results of operations or of financial condition, or state other
"forward-looking" information. When considering these statements, you should
keep in mind the risk factors and other cautionary statements in this
prospectus. The risk factors and other factors noted throughout this prospectus,
including certain risks and uncertainties, could cause our actual results to
differ materially from those contained in any forward-looking statement.

<PAGE>

USE OF PROCEEDS

The securities covered by this prospectus are being offered by certain
selling security holders and not by our company. Consequently, our company will
not receive any proceeds from the sale of these securities.

SELLING SECURITY HOLDERS

Certain of our security holders may sell, from time to time, up to 880,436
shares of our common stock pursuant to this prospectus. The table below
identifies the selling security holders and indicates the number of securities
that each selling security holder may sell pursuant to this prospectus. If a
selling security holder transfers any of the securities shown in the table, the
transferee will be considered a selling security holder for purposes of this
prospectus, provided that the transfer was a private placement and that the
transferee is identified in a supplement to this prospectus.

The selling security holders indicated in the table with an asterisk (*)
are subject to lock-up agreements that prevent them from directly or indirectly
offering, selling, agreeing to offer or sell, transfering or otherwise
encumbering or disposing of any of their common stock until November 17, 1999.

None of the selling security holders has had any position with, held any
office of, or had any other material relationship with Digital Lava.

- -----------------------------------------------------------------------------
Number of Shares of
Name of Selling Security Holder Common Stock
- ------------------------------- -------------------
- -----------------------------------------------------------------------------
Richard Stone* ............................................... 161,250
- -----------------------------------------------------------------------------
Navida, Inc.* ................................................ 127,500
- -----------------------------------------------------------------------------
Dolphin Waves, Inc. .......................................... 60,000
- -----------------------------------------------------------------------------
Shahrokh Sedaghat* ........................................... 45,000
- -----------------------------------------------------------------------------
Shapour and Parvindokht Sedaghat* ............................ 45,000
- -----------------------------------------------------------------------------
Theodore Friedman* ........................................... 33,750
- -----------------------------------------------------------------------------
Eli Jacobsen* ................................................ 30,000
- -----------------------------------------------------------------------------
David Stone* ................................................. 30,000
- -----------------------------------------------------------------------------
Glen Sutton III .............................................. 30,000
- -----------------------------------------------------------------------------
Norman Veitzer* .............................................. 30,000
- -----------------------------------------------------------------------------
Harold Wrobel* ............................................... 30,000
- -----------------------------------------------------------------------------
Broadway Partners ............................................ 22,500
- -----------------------------------------------------------------------------
Christine Walley ............................................. 22,500
- -----------------------------------------------------------------------------
Sheila Sconiers* ............................................. 19,500
- -----------------------------------------------------------------------------
Stephanie Rubin .............................................. 7,500
- -----------------------------------------------------------------------------
John Hancock Global Technology Fund* ......................... 16,667
- -----------------------------------------------------------------------------
Joseph Habert* ............................................... 15,000
- -----------------------------------------------------------------------------
Georgia Schley* .............................................. 15,000
- -----------------------------------------------------------------------------
Arthur Steinberg IRA ......................................... 15,000
- -----------------------------------------------------------------------------
R. Steinberg Pension Trust ................................... 15,000
- -----------------------------------------------------------------------------
Grace Terry* ................................................. 15,000
- -----------------------------------------------------------------------------
Walter Terry* ................................................ 15,000
- -----------------------------------------------------------------------------
Eric Appell* ................................................. 8,100
- -----------------------------------------------------------------------------
Ester Dusi* .................................................. 7,500
- -----------------------------------------------------------------------------
John Glorieux* ............................................... 7,500
- -----------------------------------------------------------------------------

<PAGE>

- -----------------------------------------------------------------------------
Jerry Heymann* ............................................... 7,500
- -----------------------------------------------------------------------------
Andreas Iseli* ............................................... 7,500
- -----------------------------------------------------------------------------
Mitchell Steinberg ........................................... 7,500
- -----------------------------------------------------------------------------
Stephan Williams* ............................................ 7,500
- -----------------------------------------------------------------------------
Lawrence Manus ............................................... 5,000
- -----------------------------------------------------------------------------
John Musinsky* ............................................... 3,750
- -----------------------------------------------------------------------------
Michael Zylberman ............................................ 3,750
- -----------------------------------------------------------------------------
Frank Loccisano .............................................. 3,334
- -----------------------------------------------------------------------------
Christopher Creamer* ......................................... 3,000
- -----------------------------------------------------------------------------
Chana Sasha Foundation ....................................... 1,667
- -----------------------------------------------------------------------------
R. Merrill Hunter ............................................ 1,667
- -----------------------------------------------------------------------------
Marc Roberts ................................................. 1,667
- -----------------------------------------------------------------------------
Robert Steinberg ............................................. 1,500
- -----------------------------------------------------------------------------
Keith Alliotts ............................................... 417
- -----------------------------------------------------------------------------
Ryan Schinman ................................................ 417
- -----------------------------------------------------------------------------

- -----------------------------------------------------------------------------
Total 880,436
- -----------------------------------------------------------------------------

10
<PAGE>

PLAN OF DISTRIBUTION

The selling security holders may sell shares of our common stock:

o through the American Stock Exchange, in the over-the-counter
market, in privately negotiated transactions or otherwise;

o directly to purchasers or through agents, brokers, dealers or
underwriters; and

o at market prices prevailing at the time of sale, at prices
related to such prevailing market prices, or at negotiated
prices.

If a selling security holder sells securities through agents, brokers,
dealers or underwriters, such agents, brokers, dealers or underwriters may
receive compensation in the form of discounts, commissions or concessions. Such
compensation may be greater than customary compensation.

DIVIDEND POLICY

Digital Lava has never declared or paid any cash dividends on its capital
stock. Digital Lava presently intends to reinvest earnings to fund the
development and expansion of its business and, therefore, does not anticipate
paying cash dividends on its common stock in the foreseeable future. The
declaration of dividends in the future will be at the discretion of the board of
directors and will depend upon the earnings, capital requirements and financial
position of Digital Lava, general economic conditions and other pertinent
factors.

11
<PAGE>

CAPITALIZATION

The following table sets forth the capitalization of Digital Lava as of
June 30, 1999, on an actual basis.

Shares of common stock outstanding does not include 1,000,000 shares of
common stock reserved for issuance under Digital Lava's stock option plan (of
which 712,570 shares are subject to outstanding options) and 2,272,575 shares of
common stock issuable upon exercise of outstanding warrants as of June 30, 1999.
This table should be read in conjunction with Digital Lava's financial
statements and the notes to the financial statements appearing elsewhere in this
prospectus.

<TABLE>
<CAPTION>
June 30, 1999

Actual
------------
<S> <C>
Stockholders' equity:
Convertible Preferred stock, $.0001 par value; 5,000,000 shares
authorized; no shares issued and outstanding at June 30, 1999 ...................... --
Common stock, $.0001 par value; 35,000,000 shares
authorized; 4,636,887 issued and outstanding at June 30, 1999 ...................... 463
Additional paid-in capital ............................................................ 26,091,104
Accumulated deficit ................................................................... (16,818,259)
------------
Total stockholders' equity and total capitalization ............................ $ 9,273,308
============
</TABLE>

12
<PAGE>

SELECTED FINANCIAL INFORMATION

The following table presents selected financial data for Digital Lava. The
historical selected financial data as of December 31, 1998 and for the years
ended December 31, 1997 and 1998 are derived from and should be read in
conjunction with the audited financial statements of Digital Lava included
elsewhere in the prospectus. The historical selected financial data of Digital
Lava as of December 31, 1997 is derived from audited financial statements of
Digital Lava not included in this prospectus. The historical selected financial
data as of June 30, 1999 and for six months ended June 30, 1998 and 1999 are
derived from and should be read in conjunction with the unaudited financial
statements of Digital Lava included elsewhere in the prospectus. In the opinion
of management, the unaudited financial statements include all material
adjustments, consisting of only normal, recurring adjustments, necessary for a
fair presentation of the financial position and results of operations for the
period. The data presented below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and accompanying notes appearing
elsewhere in the prospectus.

For information concerning the computation of net loss per share, see
notes 2 and 13 of notes to financial statements.

<TABLE>
<CAPTION>
Year Ended Six Months Ended
------------------------------------ --------------------------------
December 31, 1997 December 31, 1998 June 30, 1998 June 30, 1999
----------------- ----------------- ------------- -------------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Software licenses ............................... $ 273,989 $ 1,057,794 $ 264,185 $ 232,024
Consulting and services ......................... 290,583 405,824 127,712 140,274
----------- ----------- ----------- -----------
Total revenues ........................... 564,572 1,463,618 391,897 372,298
----------- ----------- ----------- -----------
Cost of revenues:
Software licenses ............................... 1,968 13,168 7,558 2,249
Consulting and services ......................... 121,008 275,610 84,309 52,078
----------- ----------- ----------- -----------
Total cost of revenues ................... 122,976 288,778 91,867 54,327
----------- ----------- ----------- -----------
Gross profit ........................................... 441,596 1,174,840 300,030 317,971
----------- ----------- ----------- -----------
Operating costs and expenses:
Selling, general and administrative ............. 3,316,961 3,103,418 2,003,058 2,382,219
Research and development ........................ 445,162 442,718 267,514 355,567
----------- ----------- ----------- -----------
Total operating costs and
Expenses .............................. 3,762,123 3,546,136 2,270,572 2,737,786
----------- ----------- ----------- -----------
Loss from operations ................................... (3,320,527) (2,371,296) (1,970,542) (2,419,815)
Interest expense ............................. 924,842 1,359,245 809,465 26,949
----------- ----------- ----------- -----------
Loss before extraordinary item ......................... (4,245,369) (3,730,541) (2,780,007) (2,446,764)
Extraordinary loss on extinguishment of debt ........... -- -- -- (3,672,656)
----------- ----------- ----------- -----------
Net loss ............................................... $(4,245,369) $(3,730,541) $(2,780,007) $(6,119,420)
=========== =========== =========== ===========
Net loss available to common stockholders .............. $(4,245,369) $(3,730,541) $(2,780,007) $(6,779,433)
=========== =========== =========== ===========
Basic and diluted loss per share ....................... $ (31.14) $ (25.22) $ (21.14) $ (2.08)
=========== =========== =========== ===========
Weighted average common shares used in
basic and diluted loss per share ................... 136,353 147,933 131,524 3,263,223
=========== =========== =========== ===========

June 30,
1999
December 31, 1997 December 31, 1998 Actual
------------------ ------------------ -------------
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents ................................... $ 173,262 $ 30,893 $ 639,430
Working capital (deficit) ................................... (3,713,347) (6,157,132) 8,656,979
Total assets ................................................ 525,678 1,216,925 9,559,672
Total liabilities ........................................... 4,142,923 7,297,445 286,364
Total stockholders' equity (deficit) ........................ (3,617,245) (6,080,520) 9,273,308
</TABLE>

13
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following discussion and analysis of the financial condition and
results of operations of Digital Lava should be read in conjunction with Digital
Lava's financial statements and the notes to the financial statements and the
other financial information included elsewhere in this prospectus. In addition
to historical information, this Management's Discussion and Analysis of
Financial Condition and Results of Operations and other parts of this prospectus
contain forward-looking information that involve risks and uncertainties.
Digital Lava's actual results could differ materially from those anticipated by
forward-looking information as a result of certain factors, including but not
limited to, those set forth under "Risk Factors" and elsewhere in this
prospectus.

Overview

Digital Lava Inc. originally operated as LAVA, L.L.C., a New Jersey limited
liability company that was formed in July 1995. In November 1996, LAVA, L.L.C.
merged into Digital Lava Inc., a Delaware corporation. As part of such merger,
the ownership interests in LAVA, L.L.C. were exchanged for shares of Series A,
Series B, Series B-1 and Series C convertible preferred stock of Digital Lava
Inc.

Digital Lava has invested significant resources in sales, marketing,
development and other operating activities. Digital Lava believes that its
success depends largely on building superior technology and quality into its
products, extending its technological lead on the competition and developing
brand recognition early in a product's life cycle. Accordingly, Digital Lava
expects to continue spending heavily on these activities in the near future.
Despite these heavy investments in marketing and product development, the
historical growth in software license fees may not be sustainable in the future.
In light of Digital Lava's limited operating history and rapid improvements in
technology and marketing of its products, Digital Lava believes that
period-to-period comparisons of its revenues and operating results, including
its gross profit and operating expenses as a percentage of total net revenues,
are not necessarily meaningful and should not be relied upon as indications of
future performance.

Digital Lava has incurred significant net losses and negative cash flows
from operations since inception, and as of June 30, 1999, had an accumulated
deficit of $16,818,259. Digital Lava intends to continue to invest heavily in
technology and infrastructure development, and marketing and promotion. As a
result, Digital Lava believes that it will continue to incur operating losses
and negative cash flows from operations for the foreseeable future and that the
rate at which these losses will be incurred may increase from current levels.
There can be no assurance that Digital Lava will be able to achieve or sustain
revenue growth, profitability, or positive cash flow on either a quarterly or
annual basis.

Results of Operations

Comparison of the Six Months Ended June 30, 1999 to the Six Months Ended June
30, 1998

Revenues

For the six months ended June 30, 1999, revenues decreased to $372,298 from
$391,897 for the six months ended June 30, 1998. The decrease of $19,599 or 5.0%
was due to a decrease in software license sales. Software license revenues
accounted for approximately 62.3% and 67.4% of revenues for the six months ended
June 30, 1999 and 1998, respectively. Consulting and services revenues accounted
for approximately 37.7% and 32.6% of revenues for the six months ended June 30,
1999 and 1998, respectively. Digital Lava's largest customer accounted for 23.9%
and 50.5% of revenues for the six months ended June 30, 1999 and 1998,
respectively. Digital Lava anticipates that services revenue will account for an
increasing share of revenues for the foreseeable future.

14
<PAGE>

Cost of Revenues

Cost of revenues consists primarily of the cost of materials, freight and
applicable labor incurred for the delivery of the product or service. Costs of
revenues decreased to $54,327, or 14.6% of revenues, for the six months ended
June 30, 1999 from $91,867, or 23.4% of revenues, for the same period in 1998.
This decrease was primarily due to decreased costs associated with consulting
and services revenue during the six month period. Digital Lava expects its cost
of revenue to increase in dollar amount while declining as a percentage of
revenue as Digital Lava expands its customer base.

Operating Costs and Expenses

Research and Development Expenses. Research and development expenses
consist of expenditures related to technology and software development expenses.
Research and development expenses increased to $355,567, or 95.5% of revenues,
for the six months ended June 30, 1999 from $267,514, or 68.3% of revenues, for
the same period in 1998. The increase was primarily due to the increased
personnel hired during the first six months of 1999. Digital Lava believes that
significant investments in technology and content development are required to
maintain a technological lead and remain competitive and, therefore, expects
that its research and development expenses will increase in absolute dollars for
the foreseeable future; however, research and development expenses are presently
anticipated to decline as a percentage of revenues.

Interest Expense. Interest income includes income earned from the short
term investments of cash balances and interest expense includes interest expense
related to Digital Lava's financing obligations and the amortization of debt
discount in 1998. Interest expense decreased to $26,949 for the six month period
ended June 30, 1999 from $809,465 in the first six months of 1998. The decrease
was primarily due to the retirement of notes payable in the first quarter of
1999 in conjunction with the completion of the initial public offering and the
investment of cash in short term marketable securities. Interest expense for the
six months ended June 30, 1998 included amortization of debt discount of
$293,785.

Loss from Operations. For the six months ended June 30, 1999, Digital
Lava's loss from operations totaled $2,419,815 as compared to $1,970,542 for the
same period ended June 30, 1998.

Extraordinary Item. In the quarter ended March 31, 1999, the Company
recorded an extraordinary charge of $3,672,656 associated with the
extinguishment of debt.

Comparison of Year Ended December 31, 1998 to Year Ended December 31, 1997

Revenues

Revenues increased to $1,463,618 for the year ended December 31, 1998 from
$564,572 for the year ended December 31, 1997. The increase of $899,046 or
159.2% was primarily due to an increase in sales of Video Visor products to new
customers. Software license revenues accounted for approximately 72.3% and

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48.5% of revenues for the year ended December 31, 1998 and 1997, respectively.
Consulting and services revenues accounted for approximately 27.7% and 51.5% of
revenues for the year ended December 31, 1998 and 1997, respectively. Digital
Lava anticipates that services revenue will continue to account for a larger
share of revenues for the foreseeable future.

Cost of Revenues

Cost of revenues consist primarily of the cost of materials, freight and
applicable labor incurred for the delivery of the product or service. Costs of
revenues increased to $288,778, or 19.7% of revenues, for year ended December
31, 1998 from $122,976, or 21.8% of revenues, for the year ended December 31,
1997. This increase was primarily due to the increase in revenue in 1998.
Digital Lava expects its cost of revenue to continue to increase in dollar
amount while declining as a percentage of revenue as Digital Lava expands its
customer base.

Operating Costs and Expenses

Selling, General and Administrative Expense. Selling, general and
administrative expenses consist primarily of salaries, taxes and benefits and
related costs for general corporate functions, including executive management,
finance, accounting, facilities, legal, fees for professional services and
depreciation and amortization. Selling, general and administrative expenses
decreased to $3,103,418 for the year ended December 31, 1998, from $3,316,961
for the year ended December 31, 1997. The decrease was primarily due to
reductions in the use of consultants in 1998 versus 1997 while increasing public
relations efforts, trade shows, additional personnel and professional fees
required to build an infrastructure to support Digital Lava's products and
anticipated growth. In addition, selling, general and administrative expenses
for the year ended December 31, 1998 and December 31, 1997 included non-cash
compensation expenses of $559,101 and $886,589, respectively, which represent
the granting of stock options and warrants to non-employees in exchange for
services rendered to Digital Lava. Digital Lava expects that selling, general
and administrative expenses will increase in absolute dollars as Digital Lava
continues to hire personnel and incurs expense related to the further growth of
the business and its operation as a public company.

Research and Development Expenses. Research and development expenses
consist of expenditures related to technology and software development expenses.
Research and development expenses decreased to $442,718, or 30.2% of revenues,
for the year ended December 31, 1998 from $445,162, or 78.9% of revenues, for
the year ended December 31, 1997. The dollar decrease was primarily due to the
reduced usage of outside contractors. Research and development expenses
decreased as a percentage of revenue because of the growth level in revenues
relative to the growth in the cost structure for research and development.
Digital Lava believes that significant investments in technology and content
development are required to maintain a technological lead and remain competitive
and, therefore, expects that its research and development expenses will continue
to increase in absolute dollars for the foreseeable future; however, research
and development expenses are presently anticipated to decline as a percentage of
revenues.

Interest Expense. Interest expense includes interest expense related to
Digital Lava's financing obligations and the amortization of debt discount.
Interest expense increased to $1,359,245 for the year ended December 31, 1998
from $924,842 for the year ended December 31, 1997. The increase was primarily
due to the amount of notes payable issued by Digital Lava in the year ended
December 31, 1998 and additional interest incurred in exchange for forbearance
of defaults on notes payable. Interest expense for the year ended December 31,
1998 and December 31, 1997 included amortization of debt discount and issuance
costs related to warrants issued in connection with notes payable of $602,509
and $716,433, respectively.

Net Loss. For the year ended December 31, 1998, Digital Lava's net loss totaled
$3,730,541 as compared to $4,245,369 for the year ended December 31, 1997.

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Net Operating Loss Carryforwards. At December 31, 1998, Digital Lava had
available net operating loss carryforwards of approximately $8,062,000 to offset
future taxable income for federal and state tax purposes. The utilization of the
loss carryforwards to reduce future income taxes will depend upon Digital Lava's
ability to generate sufficient taxable income prior to the expiration of the net
operating loss carryforwards. The federal and state carryforwards expire
beginning in the years 2011 and 2005, respectively. However, the Internal
Revenue Code of 1986 limits the maximum annual use of net operating loss and tax
credit carryforwards in certain situations where changes occur in the stock
ownership of a corporation. As a result of the Company's February 1999 initial
public offering, a change in ownership occurred which will substantially
restrict Digital Lava's use of the net operating loss carryforwards for federal
and state income tax purposes.

Liquidity and Capital Resources

On February 22, 1999, Digital Lava completed an initial public offering of
1,200,000 units, each unit consisting of two shares of common stock and one
redeemable warrant, and received aggregate proceeds of $18,120,000 and net
proceeds of $14,596,469. Digital Lava used approximately $4,489,000 of the
proceeds to repay bridge notes. On March 30, 1999 Digital Lava completed the
exercise by its underwriter of the over allotment option of 113,312 units and
received aggregate proceeds of $1,711,011 and net proceeds of $1,513,545. During
the period from completion of the Offering through June 30, 1999, Digital Lava
has used approximately 1) $4,489,000 of the proceeds to repay bridge notes; 2)
$356,000 for product development expenses; 3) $785,000 for sales and marketing
expenses; 4) $278,000 for facilities and other capital expenditures; and 4)
$1,685,000 for working capital and general corporate purposes.

Net cash used in operating activities decreased to $849,884 for the year
ended December 31, 1998 from $2,195,803 for the year ended December 31, 1997
resulting primarily from decreasing net losses and increases in accrued interest
and accrued expenses. Net cash used in operating activities was $4,016,875 for
the six months ended June 30, 1999 as compared to $1,155,083 for the six months
ended June 30, 1998 resulting primarily from the net loss and payment of accrued
expenses partially offset by the non-cash extraordinary loss.

Cash flows used in investing activities increased to $912,485 for the year
ended December 31, 1998 from $55,620 for December 31, 1997 resulting primarily
from the cost incurred in connection with the completion of the company's IPO in
February 1999. Cash flows used in investing activities was $8,449,617 for the
six months ended June 30, 1999 as compared to $23,992 for the six months ended
June 30, 1998 resulting primarily from the purchase of short term securities.

Net cash provided by financing activities decreased to $1,620,000 for 1998
from $2,419,500 for 1997. The decrease was due to the reduction in the issuance
of notes payable. Net cash provided by financing activities was $13,075,029 for
the six months ended June 30, 1999 as compared to $1,050,000 for the six months
ended June 30, 1998. The increase was due to net proceeds received due to the
completion of the company's initial public offering and the underwriter's
exercise of their over-allotment option offset by repayment of notes payable.

Digital Lava's capital requirements depend on numerous factors, including
market acceptance of Digital Lava's products and services, the amount of
resources Digital Lava devotes to investments in its products, the resources
Digital Lava devotes to marketing and selling its services and its brand
promotions and other factors. Digital Lava has experienced a substantial
increase in its capital expenditures since its inception consistent with the
growth in Digital Lava's operations and staffing, and anticipates that this will
continue for the foreseeable future. Additionally, Digital Lava will continue to
evaluate possible

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investments in businesses, products and technologies, and plans to expand its
sales and marketing programs and conduct more aggressive brand promotions.

Digital Lava currently anticipates that current cash balances, short-term
investments and cash provided by operations will be sufficient to meet its
anticipated needs for working capital and capital expenditures for at least the
next 12 months. Digital Lava anticipates it will be required to seek additional
funding either through additional public or private sales of its securities or
through debt financing. Such options are currently under consideration.

Recently Issued Accounting Standards

In December 1998, the Accounting Standards Executive Committee released
Statement of Position ("SOP") No. 98-9, "Modification of SOP 97-2, Software
Revenue Recognition, with Respect to Certain Transactions." This SOP amends SOP
97-2 to provide a limited exception to the full deferral of revenue that the
provisions of SOP 97-2 may require. Specifically, for software in which the
entity has a contracted price for the entire arrangement and vendor-specific
objective evidence ("VSOE") of the fair value of each undelivered element
exists, revenue for the delivered element(s) may be recognized based on the
difference between the contract price and the VSOE of the fair value of the
undelivered element(s), provided that all other revenue-recognition criteria of
SOP 97-2 are met and the total fair value of the undelivered element(s) is less
than or equal to the price for the entire software arrangement. The provisions
of SOP 98-9 will be effective for transactions that are entered into in fiscal
years beginning after March 15, 1999. The Company does not believe that adoption
of SOP 98-9 will have a material impact on the Company's financial position or
results of operations.

Year 2000 Risk

Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. As a result, software
that records only the last two digits of the calendar year may not be able to
distinguish whether "00" means 1900 or 2000. This may result in software
failures or the creation of erroneous results. We believe that our products and
internal systems are currently year 2000 compliant. We have confirmed our year
2000 compliance by obtaining representations by third party vendors of their
products' year 2000 compliance, as well as specific testing of our products. We
have not incurred significant costs to date complying with year 2000
requirements and we do not believe that we will incur significant costs for
these purposes in the foreseeable future. However, should products or systems
maintained by third parties or our products and systems fail to be year 2000
compliant, despite the representations of third parties and the testing of our
products, we could incur significant expenses to remedy any problems and our
business could be seriously damaged.

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BUSINESS

Overview

Digital Lava is a provider of rich mixed media software products and
services for use in corporate training, communications and sales and marketing
applications. Each of these markets represent multibillion expenditures each
year by Fortune 1000 companies. The company is positioned within the developing
streaming media industry.

Rich media is defined as streaming video and streaming audio technology.
Streaming technology allows an Internet or intranet user to access information
in a file before the file is completely downloaded. As a result, large files
containing audio and video can be heard or seen almost immediately even with
slower connections. By combining streaming audio and video with traditional
media assets of slides, graphics, text animation and web links, Digital Lava has
created the next generation category of rich mixed media that can be delivered
via robust compact discs or the Internet.

Digital Lava's current product line includes VideoVisor Professional
(vvPro), VideoVisorWeb(vvWeb) and vPublisher. VideoVisorProfessional and
VideoVisorWeb are proprietary viewers that allow the user to access the content
published in the unique Digital Lava format. vPublisher is a proprietary
authoring software tool that allows the integration of text, data, voice, video
and web links into an interactive desktop application, known as a VideoCapsule.
VideoCapsule files are accessed by either the vvPro software viewer on compact
discs and private Intranets or via the vvWeb software viewer on the internet.
vvPro and vvWeb allow the user to individually manage, manipulate and navigate
the VideoCapsule information. This allows the user to experience a fully
integrated and interactive experience on their computer screen both at home and
in the office.

Digital Lava believes this new technology represents a significant new
market opportunity to shift activity and revenue from classic methods of
communicating product information, financial results, training content and
general information to a more interactive and effective software application. By
utilizing the development of streaming technology and the growth of the
Internet, Digital Lava sees corporations across all business sectors increasing
the effectiveness of their sales and marketing efforts, enhancing corporate
communications and delivering effective financial reporting while eliminating
the high cost of travel and executive down time.

Digital Lava generates revenues by providing publishing services and
software license sales of the vvPro viewer. There is an associated revenue
stream provided to Digital Lava by reselling the access to a video web hosting
service provider.

Digital Lava's customers include large corporations and business
enterprises, such as:

Lotus Development Corporation
Primedia
Ardent Software, Inc.
Dell Computers
Cisco
Zurich American Insurance

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Shell Chemical
ASI Entertainment
Vantive Software

Industry Background

Digital Lava believes the demand for its software applications in the
corporate training, communications and distance learning markets will be fueled
by trends and technologies that enable computer-based and Internet-based video
training and communications to be used increasingly as substitutes for
videotapes, instructor-led training, live meetings and other traditional forms
of communications and training. These trends and technologies include:

o the growth of multimedia-capable computers and sophisticated computer
networks;

o advances in personal computer processing power;

o high speed communications capabilities;

o the emergence of the Internet and corporate intranets for a wide variety of
business applications; and

o the continued growth of streaming media applications.

Streaming technology enables the transmission and playback of continuous
"streams" of multimedia content, such as audio and video, over a computer
network. The introduction of streaming media technology from companies such as
RealNetworks, Microsoft and Apple Computer are now providing software developers
the opportunity to efficiently deliver significant media content and
applications over the Internet and private intranets. On the Internet, many
businesses and content providers now offer audio, video and other multimedia
information. RealNetworks estimates that more than 145,000 hours per week of
live audio and video content are broadcast over the Internet using its streaming
technology, with a substantially greater amount of recorded media already stored
and available on the Internet.

Digital Lava believes that the use of streaming media by businesses and
other users is growing. Lotus Development Corporation, makers of Lotus Notes,
the market leader in collaborative software, recently announced its plan to
integrate RealNetworks' RealPlayer with Lotus Notes client software, enabling 25
million Lotus Notes users worldwide to view and hear streaming media content at
their desktops. Additionally, Netscape Communications Corporation recently
announced that it plans to distribute RealNetworks' RealPlayer software as an
integral part of its Netscape Communicator browser software, providing Netscape
users with access to streaming media content without separately having to
download the RealPlayer software.

The overall market for business and training software is expected to grow
over the next several years. According to International Data Corporation, a
leading information technology consulting company, the worldwide business
software applications market is expected to double over the next five years,
with license revenues from business software applications growing from $50
billion in 1997 to over $100 billion in 2002.

In the United States, corporations are making substantial investments to
train their employees. Video, in the form of videotapes, is already widely used
within corporations to record and distribute training and communications
content. A 1997 U.S. corporate training study conducted by Training Magazine
found that 74 percent of the respondents were using videotapes for training. The
same survey also found that U.S. companies budgeted an estimated $58.6 billion
for employer-provided training in 1997. Digital Lava believes that training on
new information technologies within corporations is growing rapidly worldwide.
According to a recent study published by International Data Corporation's
Information Technologies, Training and Education Services research program, the
information technologies' training and education market is expected to surpass
$28.3 billion by 2002.

Although there can be no assurance that the increased use of videotapes in
training will result in sales of its products, Digital Lava believes that its
technology can take advantage of the growing demand for business, video
training, communications and distance learning applications. Digital Lava's
software and services provide a rapid, flexible, and low-cost alternative to
videotapes, instructor-led training, live meetings, and other traditional forms
of communications and training.

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Digital Lava's Solution

Today, most streaming video applications provide the user with a passive
experience, similar to watching videotape. The ability to search within the
video stream for the location of desired information is limited to estimation.
This estimation may require several attempts before the correct information is
found. When viewing a Digital Lava VideoCapsule, the user will see a video
track, hear an audio track, view supporting slides and other graphics all at the
same time on their computer screen. Additionally, the user can watch the video
content in either a linear format or individually choose sections of the
presentation via a table of contents or a search engine. This allows the user to
have complete control of the content, order and frequency of the presentation.

By deploying the Digital Lava solution, users can instantly and seamlessly
navigate through the video, text and graphics to find and view the information
that will answer the question at hand. The time that was previously spent
searching is now applied to the learning process. Digital Lava believes this
personalized experience will increase the effectiveness of the end user to
understand and utilize the information that is presented.

As the average employee struggles to maintain contact with their work
through e-mail, pagers, cellular systems and hand held devices, they are facing
ever increasing demands on their available time. Users of the Digital Lava
solution can access the information when they want it, how they want it and as
often as they want it. This can improve the ability for a company to get its
critical message across to their employee or customer.

Clients provide Digital Lava with all the content. Once the media assets
are in place, Digital Lava will publish the content using the vPublisher tool
into a VideoCapsule and then provide the customer the option to deploy either on
the Internet utilizing the vvWeb software or via compact discs with the vvPro
software.

Digital Lava software products support the current defacto streaming
standards provided by Microsoft Windows Media Technology and Real Networks. The
implementation of a standards-based technology allows clients complete
flexibility in their choice of video hosting servers and architecture. Digital
Lava's solution maximizes a corporation's previous technological decision
without an additional hardware investment.

Digital Lava products have won multiple awards, including Desktop Video
Communications' "Best New Streaming Product" and "Networked Multimedia People's
Choice Award," the "NewMedia Invision 98 Award," and we are a four-time winner
of MultimediaCom's "Best Streaming Product Award."

Strategy

Digital Lava's objective is to be the leading provider of interactive and
on demand streaming content through the Internet and corporate Intranets. To
achieve this objective, Digital Lava's strategy includes the following key
elements:

Publishing Services Business Model. Digital Lava will provide all the
publishing services associated with the creation of interactive on demand
content. By eliminating the need for customers to purchase hardware and software
as well as the requirement of highly trained headcount, Digital Lava will offer
a one stop publishing service to potential customers. This will allow all sales
and marketing efforts to focus on establishing the benefits to utilizing a
streaming technology solution rather than the more traditional and expensive
methods. This also controls the quality of the produced content to insure a

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repeatable customer experience. Digital Lava believes that as the market matures
there may be a need to shift the business model to a higher mix of software
sales to publishing revenue.

Vertical Market Focus. The Digital Lava solution can be utilized in
virtually any corporate application across nearly all industry market segments.
This represents a long-term opportunity for the company to continue to expand
its customer base. In the near term, Digital Lava believes that the vertical
markets in the high technology, financial and healthcare industries provide the
most immediate revenue opportunities. Within these markets, Digital Lava will
focus on applications within the training, corporate communications and sales
and marketing departments.

Build Sales and Marketing Efforts. Digital Lava intends to generate revenue
growth through the deployment of a direct sales force and selected resellers.
The direct sales force will be comprised of both geographic as well as vertical
market specific territories. This will allow for the greatest sales coverage and
expansion capabilities. Strategic resellers will be contracted within specific
vertical markets in order to take advantage of previously established
relationships and contacts.

Strategic Partner Relationships. As advances in technology continue, it
will be important for Digital Lava to have strong relationships with various
companies throughout the technology chain. These strategic partners will provide
Digital Lava with access to software and business development assets outside of
the company.

Product Development. There will be a continued emphasis on the improvement
of current product offerings as well as the development of new and derivative
applications. Digital Lava believes that it will need to have solutions for both
the high end custom requirement as well as the low end desktop application.

Business Development. Through partnerships and relationships, Digital Lava
will explore opportunities associated with, but not limited to, emerging market
opportunities in digital set-tops and broadband delivery systems.

Products and Services

Digital Lava's current product line includes VideoVisor Professional
(vvPro), VideoVisorWeb(vvWeb) and vPublisher.

vPublisher. The vPublisher software assists in compiling digital video and
other information from diverse sources, organizes its content, creates links to
other important data, and then rapidly publishes the information in a
VideoCapsule file. VideoCapsules may be distributed on compact discs and digital
video discs and streamed over intranets and the Internet using technology
provided by RealNetworks, Silicon Graphics, InfoValue computing, Starlight
Networks and Microsoft.

Digital Lava does not currently make its proprietary vPublisher available
to the general marketplace. vPublisher provides Digital Lava with several key
benefits. First, the system simplifies the publishing process and does not
require personnel to be proficient in the use of programming, scripting or
authoring language. Second, vPublisher allows Digital Lava to rapidly create
powerful interactive content. Depending on the complexity and length of the
content, a VideoCapsule can be completed in less than 24 hours providing a very
quick turnaround time for clients. Third, due to the proprietary software,
Digital Lava is able to produce VideoCapsules at a very low cost relative to
other computer based editing tools.

VideoVisorProfessional(vvPro). vvPro is a computer software application
that allows access to VideoCapsule information on compact disc or through a
corporate Intranet. With vvPro loaded on the desktop, the user can individually
manipulate and navigate through all the content with the click of a mouse.

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The vvPro application provides the most robust experience including full screen
video, subtitles in multiple languages, reorganize video content, software
demonstrations, access notes, and extensive search and bookmark capabilities.
vvPro is licensed either as one time full desktop application or on a per CD
basis. The user needs to have the Windows Media Player or the Real Networks G2
player on the desktop in order to install the vvPro software.

VideoVisorWeb(vvWeb). vvWeb is an Internet application that allows access
to VideoCapsule information over the Internet. vvWeb content is hosted on video
server provided by either Microsoft or Real Networks. vvWeb utilizes browser
navigation from Microsoft or Netscape. The user experience is similar to vvPro
except for certain limitations on video screen size, notes and subtitling as
result of bandwidth considerations of the Internet. The video screen size is
scaled larger when the client has higher bandwidth access.

Consulting and Custom Services. Digital Lava provides a range of consulting
and programming services that principally relate to the creation and maintenance
of video content and applications based on Digital Lava's technology.

Customer Service and Support. Digital Lava currently makes available
customer support, a technical hotline and defect correction to all clients.
Digital Lava uses customer feedback as a source of ideas for product enhancement
and development.

Strategic Relationships

Microsoft. Digital Lava is a NetShow independent software vendor. NetShow
is Microsoft's proprietary software to view streaming media over the Internet
and Intranets. Digital Lava also licenses Microsoft's Internet Explorer
Administration Kit under a royalty free license and distribution agreement. This
agreement permits Digital Lava to customize Microsoft's Internet Explore web
browser for integration into vvProfessional and vvWeb software. The integrated
products allow end-users to view streamed video content that is linked with
other Web browser content.

RealNetworks. Digital Lava has entered into a consulting and development
agreement with RealNetworks,Inc. under which RealNetworks has developed custom
software to allow Digital Lava to integrate RealNetworks RealPlayer software
with vvPro and vvWeb.

INTERVU. Digital Lava has entered into a co-marketing agreement to promote
and sell a fully integrated solution for vvWeb content hosted on the INTERVU
network. The LAVA Hosting Services provides for an end to end solution that is
marketed by both Digital Lava and INTERVU. Digital Lava is licensed to resell
INTERVU hosting services and content management services. INTERVU is licensed to
sell Digital Lava's vvWeb application and publishing services.

Competition

The market for software and services for the Internet and intranets is
relatively new, constantly evolving and intensely competitive. Digital Lava
expects that competition will intensify in the future. Digital Lava's principal
competitors include:

o Eloquent, Inc.;

o Veon, Inc.;

o Vsoft, Inc.;

o VStream, Inc.;

o LiveNote, Inc.;

o Adobe Systems, Inc.; and

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o Visionary Information Systems, Inc.

Digital Lava also competes or may compete with computer-based training
software companies including Macromedia, Inc., Asymetrix Corporation, and Allen
Communications, Inc. Digital Lava also competes or may compete with more general
purpose audio and video streaming software companies including:

o Microsoft;

o RealNetworks;

o VDOnet Corporation;

o Xing Technology Corporation;

o Cubic VideoComm, Inc.;

o Motorola, Inc.;

o Vosaic LLC; and

o Oracle Corporation.

Digital Lava's vPrism and VideoVisor software also competes indirectly with
delivery systems for multimedia content other than audio and video, such as
Flash by Macromedia and Enliven by Narrative Communications Corp. Many of
Digital Lava's competitors have longer operating histories, greater name
recognition and significantly greater financial, technical and marketing
resources than Digital Lava. As a result, these competitors may be able to
develop products comparable or superior to Digital Lava's or adapt more quickly
to new technologies or evolving customer requirements.

Competitive factors in this market include:

o the quality and reliability of software;

o features for creating, editing and publishing video;

o ease of use and interactive user features;

o cost per user; and

o compatibility with the user's existing network components and software
systems.

To expand its user base and further enhance the user experience, Digital
Lava must continue to innovate and improve the performance of its software.
Digital Lava is committed to the continued market penetration of its brand,
products and services. Digital Lava may, as a strategic response to changes in
the competitive environment, implement pricing, licensing, service or marketing
changes designed to extend its current brand and technology franchise. For
example, Digital Lava may elect to reduce the price for select versions of its
software or even make select versions available for download free of charge.
Continued price concessions or the emergence of other pricing or distribution
strategies by competitors may have a material adverse effect on Digital Lava's
business, financial condition and results of operations.

Intellectual Property

Digital Lava's success depends in part on its ability to protect its
proprietary software and other intellectual property. To protect its proprietary
rights, Digital Lava relies generally on patent, copyright, trademark and trade
secret laws, confidentiality agreements with employees and third parties, and
license agreements with consultants, vendors and customers, although Digital
Lava has not signed an agreement in every case. Despite these protections, a
third party could copy or otherwise obtain and use Digital Lava's products or
technology, or develop similar technology independently.

Digital Lava currently has one patent pending in the U.S. relating to
its product architecture and technology. The pending patent application may not
be granted, or, if granted, may not provide any competitive advantage to Digital
Lava. Many of Digital Lava's current and potential competitors dedicate
substantially greater resources to protection and enforcement of intellectual
property rights, especially patents. If a patent has issued or issues in the
future which covers Digital Lava's products, Digital Lava would need to either
obtain a license or design around the patent. Digital Lava may not be able to
obtain a license on acceptable terms, if at all, nor design around the patent.

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Digital Lava attempts to avoid infringing known proprietary rights of third
parties in its product development efforts. However, Digital Lava has not
conducted and does not conduct comprehensive patent or trademark searches to
determine whether it infringes patents or other proprietary rights held by third
parties. In addition, it is difficult to proceed with certainty in a rapidly
evolving technological environment in which there may be numerous patent
applications pending, many of which are confidential when filed, with regard to
similar technologies.

If Digital Lava discovered that its products violated third-party
proprietary rights, there can be no assurance that it would be able to obtain
licenses to continue offering its products without substantial reengineering or
that reengineering would be successful, that a license would be available on
commercially reasonable terms, if at all, or that litigation could be avoided or
settled without substantial expense and damage awards. Any claims against
Digital Lava relating to the infringement of third-party proprietary rights,
even if not meritorious, could result in the expenditure of significant
financial and managerial resources and in injunctions preventing Digital Lava
from distributing certain products.

To license many of its products, Digital Lava relies in part on
"shrinkwrap" and "clickwrap" licenses that are not signed by the end user and,
therefore, may be unenforceable under the laws of certain jurisdictions. As with
other software products, Digital Lava's products are susceptible to unauthorized
copying and uses that may go undetected, and policing unauthorized use is
difficult. In general, Digital Lava's efforts to protect its intellectual
property rights may not be effective to prevent misappropriation of its
technology, or to prevent the development and design by others of products or
technologies similar to or competitive with those developed by Digital Lava.
Digital Lava's failure or inability to protect its proprietary rights could
materially adversely affect Digital Lava's business, financial condition and
results of operations.

Digital Lava also relies on certain technology that it licenses from third
parties, including software that is integrated with internally developed
software and used in Digital Lava's products, to perform key functions. In the
future, third-party technology licenses may not be available to Digital Lava on
commercially reasonable terms. The loss of any of these technologies could have
a material adverse effect on Digital Lava's business, financial condition and
results of operations.

Employees

Digital Lava currently has 35 full-time employees, including twelve in
product development, nine in customer service, nine in sales and marketing and
five in finance and administration. Employees are based at varying locations
nationwide while Digital Lava's executive offices are in Marina del Rey,
California.

Digital Lava has entered into an employment agreement with Robert Greene,
our Chief Executive Officer, which expires in July of 2002, and Joshua Sharfman,
our President, which expires in February of 2001. Mr. Greene receives an annual
base salary of $300,000, and Mr. Sharfman receives an annual base salary of
$230,000. Digital Lava intends to hire additional employees in product
development, sales and marketing. None of Digital Lava's employees is subject to
a collective bargaining agreement, and Digital Lava believes that its relations
with its employees are good.

Facilities

Digital Lava's executive offices are located in Marina del Rey, California
in an office building in which Digital Lava leases an aggregate of 24,698 square
feet at a current monthly rental of $33,657.37. The lease agreement is
non-cancelable and terminates on August 30, 2005. Digital Lava currently has no
option to extend the lease agreement past the origintal term. Digital Lava does
not own any real estate.

Legal Proceedings

Digital Lava is not currently subject to any material legal proceedings.
Digital Lava may from time to time become a party to various legal proceedings
arising in the ordinary course of its business.

25
<PAGE>

MANAGEMENT

Directors and Officers

Set forth below are the directors and officers of Digital Lava:

Name Age Position
---- --- --------

Robert Greene ............. 42 Chief Executive Officer and Director
Dr. James W. Stigler ...... 44 Chairman of the Board
Joshua D.J. Sharfman ...... 41 President
Roger Berman .............. 44 Director
John Carrington ........... 55 Director
Danny Gampe ............... 45 Chief Financial Officer
Michael Goodell ........... 43 Vice President of Consulting and Services

Robert Greene has served as Chief Executive Officer and a director of
Digital Lava since June 1999. From 1995 to June 1999, Mr. Greene served as
Senior Vice President of The Lightspan Partnership Inc., an interactive
educational software vendor. From 1982 to 1995, Mr. Greene served as Senior Vice
President and Zone General Manager of Showtime Networks, Inc., a cable
television network. Mr. Greene holds a B.A. degree from the University of
Virginia, a Certificate of Marketing Management and a Speakeasy Senior Executive
Certificate from the University of Denver.

Dr. James W. Stigler has served as Chairman of the Board for Digital Lava
since its inception in July 1995. He is currently a part-time employee of
Digital Lava. Dr. Stigler is a professor, author and researcher in the fields of
education, psychology and video research. Since 1991, Dr. Stigler has served as
a Professor at the University of California, Los Angeles. From 1983 to 1991, Dr.
Stigler served as an Associate Professor at the University of Chicago. Dr.
Stigler holds an A.B. degree from Brown University, a Masters degree from the
University of Pennsylvania and a Ph.D. from the University of Michigan. Dr.
Stigler is the brother of Thomas Stigler.

Joshua D.J. Sharfman has served as President of Digital Lava since February
1999. From May 1996 to June 1999, Mr. Sharfman served as Chief Executive Officer
and a director of Digital Lava. From 1994 to 1996, Mr. Sharfman served as Vice
President of Research and Development at ParcPlace-Digitalk, Inc., a
cross-platform object-oriented software firm. From 1993 to 1994, he operated his
own software development consulting firm. From 1984 to 1993, Mr. Sharfman served
as Executive Vice President of Research and Development at Dassault Systemes
USA, a wholly owned subsidiary of Dassault Systemes SARL, and in a variety of
marketing and development management functions at CADAM Inc., both of which are
CAD/CAM software vendors. From 1981 to 1984, Mr. Sharfman served as Section Head
of the Electro-Optical and Data Systems Group at Hughes Aircraft Company. Since
1980, Mr. Sharfman has also served as an Adjunct Professor of Engineering at the
University of Southern California. Mr. Sharfman holds a B.S. degree from the
University of California, Los Angeles and a M.S. degree from the University of
Southern California.

Roger Berman has served as a director of Digital Lava since its inception
in July 1995. He is currently a part-time employee of Digital Lava. From July
1995 to December 1997, Mr. Berman was the President of Digital Lava. Prior to
joining Digital Lava, Mr. Berman served as President of St. Eve International,
Inc., an apparel company, from May 1992 to July 1995 and Sherne Lingerie, Inc.
from January 1986 to December 1991. Mr. Berman holds a B.A degree from Hamilton
College and an MBA from New York University.

John Carrington has served as director of Digital Lava since April 1999.
From 1996 to 1998, Mr. Carrington served as Chairman, President and Chief
Executive Officer of Artios, Inc., a CAD/CAM software vendor. From 1991 to 1995,
he served as President and Chief Executive Officer of Digitalk, a cross-platform
object-oriented software firm. Prior to 1991, Mr. Carrington held several senior
positions in the computer software industry, including Chairman, President and
Chief Executive Officer of Cogensys Corporation and President and Chief
Executive Officer of Del Mar Group. Mr. Carrington holds a B.A. degree from the
University of Texas and an MBA from the Southern Methodist University.

26
<PAGE>

Danny Gampe has served as Chief Financial Officer of Digital Lava since
January 1998. From 1997 to January 1998, Mr. Gampe served as Vice President of
Finance and Administration for eShare Technologies, an Internet software
development firm. From 1992 to 1997, Mr. Gampe served as Chief Financial Officer
of Robbins Research International, a seminar development company. From 1991 to
1992, Mr. Gampe served as Manager of Financial Planning & Analysis at Wahlco
Environmental Systems, Inc. Mr. Gampe holds a B.A. degree from the University of
California at Long Beach and an MBA from the University of Redlands. In
addition, Mr. Gampe has been a Certified Management Accountant since 1993.

Michael Goodell has served as Vice President of Consulting and Services for
Digital Lava since October 1997. From June 1979 to September 1997, Mr. Goodell
held several positions at IBM Corporation, including Principal of Consulting,
Manager of Industry Marketing, Marketing Manager and Senior Sales
Representative. Mr. Goodell holds a B.S. and a M.S. degree from Rice University.

Directors' Compensation

Digital Lava's directors who are not full-time employees of Digital Lava
receive $1,000 for attendance at each meeting of the board of directors or any
committee of the board and are reimbursed for their out-of-pocket expenses in
connection with their attendance.

Committees of the Board

The board of directors has two standing committees: the Audit Committee and
the Compensation Committee. The Audit Committee reviews with Digital Lava's
independent public accountants the scope and adequacy of the audit to be
performed by the independent public accountants, the accounting practices,
procedures and policies of Digital Lava, and all related party transactions. The
Compensation Committee recommends to the board the compensation to be paid to
officers and directors, administers Digital Lava's stock option plan and
approves the grant of options under the stock option plan. Both committees are
comprised of at least two disinterested directors.

Executive Compensation

Summary Compensation. The following table sets forth the total compensation
paid during 1998 to Digital Lava's Chief Executive Officer and the other
executive officers whose 1998 compensation exceeded $100,000.

<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation Awards
------------------------ ----------------------------
Securities
Name and Underlying All Other
Principal Position Salary ($) Bonus ($) Options (#) Compensation
- ------------------ ---------- --------- ----------- ------------

<S> <C> <C> <C> <C>
Joshua Sharfman .............................................. $230,000 -- -- --
Chief Executive Officer
Thomas Stigler ............................................... 195,000 -- -- --
Vice President, Sales/Business Strategy
Patricia Bodner .............................................. 145,000 -- -- --
Vice President, Worldwide Marketing
Michael Goodell .............................................. 115,000 -- -- --
Vice President, Consulting/Services
Danny Gampe .................................................. 125,000 -- -- --
Chief Financial Officer
</TABLE>

Option Grants. No options were granted in 1998 to any of the officers named
in the above table.

27
<PAGE>

Option Exercises and Option Values. The following table sets forth certain
information with respect to stock options held by the above-named officers on
December 31, 1998. These officers did not exercise any options in 1998. The
value of the options was based on the assumed initial offering price per share
and the exercise price of the options at December 31, 1998. Upon completion of
the offering, all of these options will vest and the exercise price will be
reduced to the initial public offering price per share. Under their employment
agreements, Mr. Sharfman and Mr. Stigler will each receive options to purchase
40,000 shares of common stock at the initial public offering price per share
following the completion of this offering.

<TABLE>
<CAPTION>
Number of Shares
of Stock Underlying Value of Unexercised
Unexercised Options In-the-Money Options
at December 31, 1998 at December 31, 1998 ($)
-------------------- ------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Joshua Sharfman ............................. -- -- -- --
Thomas Stigler .............................. -- -- -- --
Patricia Bodner ............................. 3,830 3,830 -- --
Michael Goodell ............................. 8,207 8,207 -- --
Danny Gampe ................................. 1,368 4,104 -- --
</TABLE>

Employment and Consulting Agreements

Digital Lava has entered into an employment agreement with Robert Greene,
Chief Executive Officer, which expires on June 30, 2002. Under the terms of his
employment agreement, Mr. Greene receives an annual base salary of $300,000 and
stock options to purchase 5% of the equity of the company on a fully diluted
basis as of July 1, 1999. Subject to certain conditions, these stock options
will vest as follws: 40% on July 1, 2000, and 20% on each of the first, second
and third anniversaries of such date. Mr. Greene is eligible to receive an
annual bonus of up to $100,000 and future grants of stock options at the
discretion of the board of directors. A state court may determine not to
enforce, or only partially enforce, certain provisions of this agreement.

Digital Lava has entered into an employment agreement with Joshua Sharfman,
President, which expires on February 17, 2001. Under the terms of his employment
agreement, Mr. Sharfman receives an annual base salary of $230,000. Mr. Sharfman
is eligible to receive stock options, bonuses and a higher salary at the
discretion of the board of directors.

In addition, the agreement provides that if Mr. Sharfman is terminated
without cause or required to perform a material portion of his services at a
location more than 25 miles from Los Angeles, California, he will receive a
severance payment equal to his annual salary. Mr. Sharfman will receive a
severance payment equal to eight months' pay, or pay through the end of the term
if less than eight months, if he elects to resign after the appointment of an
executive officer senior in position or responsibility to him or designation of
another person as the President or Chief Executive Officer of Digital Lava. A
state court may determine not to enforce, or only partially enforce, certain
provisions of this agreement.

Digital Lava has entered into a consulting agreement with Roger Berman, a
director. The agreement expires in February 2001. Under the agreement, Mr.
Berman is to receive an annual fee of $60,000. At the closing of the Company's
initial public offering in February 1999, he ceased to be an employee of Digital
Lava.

Digital Lava has entered into a consulting agreement with James Stigler,
Chairman of the Board. The agreement expires in February 2001. Under the
agreement, Dr. Stigler receives an annual fee of $24,000.

Indemnification of Directors and Officers and Related Matters

The certificate of incorporation of Digital Lava provides that, to the
fullest extent permitted by applicable law, Digital Lava will indemnify any
person who was or is a party or is threatened to be made a party to an action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of

28
<PAGE>

the fact that the person is or was director, officer, employee or agent of
Digital Lava or serves or served any other enterprise at the request of Digital
Lava.

In addition, the certificate of incorporation provides that a director of
Digital Lava shall not be personally liable to Digital Lava or its stockholders
for monetary damages for breach of the director's fiduciary duty. However, the
certificate does not eliminate or limit the liability of a director for any of
the following reasons:

o a breach of the director's duty of loyalty to Digital Lava or its
stockholders;

o acts or omissions not in good faith or that involve intentional misconduct
or knowing violation of law;

o a transaction from which the director derived an improper personal benefit;
or

o for unlawful payments of dividends or unlawful stock redemptions or
repurchases.

Digital Lava will purchase and maintain directors' and officers' insurance
as soon as the board of directors determines practicable, in amounts which they
consider appropriate, insuring the directors against any liability arising out
of the director's status as a director of Digital Lava regardless of whether
Digital Lava has the power to indemnify the director against the liability under
applicable law.

Digital Lava has been advised that it is the position of the Commission
that insofar as provisions of the certificate of incorporation may be invoked to
disclaim liability for damages arising under the Securities Act, these
provisions are against public policy as expressed in the Securities Act and are,
therefore, unenforceable.

1996 Incentive and Non-Qualified Stock Option Plan

The board of directors has adopted Digital Lava's 1996 Incentive and
Non-Qualified Stock Option Plan. The plan provides for the grant of incentive
stock options to employees, including employee directors, and non-qualified
stock options to employees, directors and consultants. A total of 1,000,000
shares of common stock have been reserved for issuance under the plan.

As of October 15, 1999, 712,570 options were outstanding under the plan at
a weighted average exercise price per share of $6.35, and 195,743 of the
outstanding options were fully vested and exercisable. The plan is administered
by the Compensation Committee of the board. Options granted under the plan will
vest as determined by the Compensation Committee, and may accelerate and become
fully vested in the event of an acquisition of Digital Lava. The exercise of
options granted under the plan will be as determined by the Compensation
Committee, although the exercise price of incentive stock options must be at
least equal to the fair market value of the common stock on the date of grant.
The board of directors may amend or modify the plan at any time. The plan will
terminate in 2006 unless terminated earlier by the board of directors.

29
<PAGE>

CERTAIN TRANSACTIONS

The law firm of Ehrenreich Eilenberg Krause & Zivian LLP has performed
legal services for Digital Lava in connection with this prospectus and may
perform legal services for Digital Lava in the future. In 1996 and 1997, Digital
Lava issued to Eilenberg & Zivian, an affiliate of Ehrenreich Eilenberg Krause &
Zivian LLP, warrants to purchase an aggregate of 23,212 shares of common stock
at an exercise price of $6.46. Eilenberg & Zivian is also the owner of 9,334
shares of common stock which it received from Digital Lava in exchange for
services in 1995. Under an agreement dated as of December 1, 1997, E&Z
Investments, an affiliate of Ehrenreich Eilenberg Krause & Zivian LLP, has
currently exercisable options to purchase an aggregate of 16,420 shares of
common stock at an exercise price of $.91 per share from Messrs. James Stigler
and Berman. E&Z Investments also has currently exercisable options to purchase
an aggregate of 8,207 shares of common stock from Messrs. James Stigler, Thomas
Stigler, Berman and Sharfman at an exercise price of $.91 per share.

Digital Lava has entered into a consulting agreement with Roger Berman in
which Mr. Berman has agreed to provide Digital Lava with certain financial,
operational and strategic development services, including financing and credit
strategies, cash management and human resources. The agreement expires on
February 17, 2001, and provides for Mr. Berman to receive an annual fee of
$60,000. Mr. Berman is a director of Digital Lava.

Digital Lava has entered into a consulting agreement with James Stigler in
which Dr. Stigler has agreed to provide certain consulting services to Digital
Lava, including development, financial and strategic advisory services. The
agreement expires on February 17, 2001, and provides for Dr. Stigler to receive
an annual fee of $24,000. Dr. Stigler is the Chairman of the Board of Digital
Lava.

Each of the transactions described above was ratified by Digital Lava's
entire board of directors, a majority of whom did not have an interest in the
transactions. Digital Lava believes that the terms of the transactions described
above were no less favorable to Digital Lava than could have been obtained from
unaffiliated third parties. Digital Lava has adopted a policy that all future
transactions between it and its officers, directors and affiliates must (1) be
approved by a majority of those members of the board of directors that are not
parties, directly or indirectly through affiliates, to the transaction and (2)
be on terms no less favorable to Digital Lava than could be obtained from
unrelated third parties.

30
<PAGE>

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the common stock, as of October 15, 1999 by (1) each person known
by Digital Lava to be the beneficial owner of more than 5% of the outstanding
shares of common stock, (2) each director and executive officer of Digital Lava
and (3) all executive officers and directors of Digital Lava as a group.

Beneficial ownership has been determined in accordance with the rules of
the Securities and Exchange Commission and includes voting or investment power
with respect to shares. Unless otherwise indicated, the persons named in the
table have sole voting and investment power with respect to the number of shares
indicated as beneficially owned by them. The number of shares of common stock
outstanding used in calculating the percentage ownership for each listed person
includes the shares of common stock underlying options or warrants held by the
person and exercisable within 60 days of October 15, 1999 but excludes shares of
common stock underlying options or warrants held by any other person.

"Shares of Common Stock Beneficially Owned" includes "Shares Subject to
Options Held by Others" and "Shares Issuable Upon Exercise of Options." Unless
otherwise indicated, the address of each beneficial owner is 13160 Mindanao Way,
Suite 350, Marina del Rey, California 90292.

<TABLE>
<CAPTION>
Shares of Percentage of Shares Subject Shares
Common Stock Common Stock to Options Issuable
Beneficially Beneficially Held by Upon Exercise
Name and Address of Beneficial Owner Owned Owned Others of Options
------------------------------------ ------------ ------------ -------------- -------------
<S> <C> <C> <C> <C>
Dr. James W. Stigler ............................................. 254,246 5.5% 11,288 5,000
Roger Berman ..................................................... 171,164 3.7% 10,262 5,000
Joshua D.J. Sharfman ............................................. 123,083 2.6% 1,026 40,000
Michael Goodell .................................................. 17,610 * -- 17,610
Danny Gampe ...................................................... 10,315 * -- 10,315
John Carrington .................................................. 10,000 * -- 10,000
Robert Greene .................................................... -- -- -- --
All executive officers and directors as a group
(7 persons) .................................................. 586,418 12.4% 22,576 87,925
</TABLE>

- ----------
* less than 1%

31
<PAGE>

DESCRIPTION OF SECURITIES

The authorized capital stock of Digital Lava consists of 35,000,000 shares
of common stock, $.0001 par value and 5,000,000 shares of preferred stock,
$.0001 par value. As of October 15, 1999, there were 4,636,887 shares of common
stock issued and outstanding, no shares of preferred stock outstanding and
2,272,575 warrants issued and outstanding.

Recapitalization

In connection with our initial public offering in February 1999, Digital
Lava amended its certificate of incorporation to effect a 1 for 9.139 reverse
stock split and completed a recapitalization of its authorized, issued and
outstanding capital stock and debt. Prior to the reverse split and the
recapitalization, Digital Lava had outstanding: 1,201,960 shares of common
stock; 809,565 shares of Series A preferred stock; 50,740 shares of Series B
preferred stock; 8,500 shares of Series B-1 preferred stock; and 30,000 shares
of Series C preferred stock. All of the preferred stock automatically converted
to common stock.

In connection with the recapitalization:

o an aggregate principal amount of $187,500 of promissory notes, together
with accrued interest, was repaid;

o holders of an aggregate principal amount of $1,532,000 of promissory notes
agreed to convert one-half of the outstanding principal of their notes, the
accrued interest on the notes and warrants received in connection with the
issuance of the notes into an aggregate of 456,600 shares of common stock;
the remaining one-half of the principal amount of the notes was repaid;

o holders of an aggregate principal amount of $1,300,000 of promissory notes
agreed to convert one-half of the outstanding principal of their notes, the
accrued interest on the notes and warrants received in connection with the
issuance of the notes into an aggregate of 390,000 shares of common stock;
the remaining one-half of the principal amount of the notes (plus a success
fee) was repaid;

o 11,030 shares of common stock and an aggregate of 8,824 shares of Series A
preferred stock held by certain officers and directors and an employee of
Digital Lava were canceled;

o holders of outstanding warrants to acquire 107,687 shares of common stock
agreed to convert their warrants into 30,836 shares of common stock;

o holders of an aggregate of 3,000 shares of Series B-1 preferred stock
agreed to exchange their shares for an aggregate of 3,600 shares of Series
B preferred stock; and

o Digital Lava amended its certificate of incorporation to increase the
conversion ratios of the Series B and C preferred stock from 10:1 to
20.3099:1 and 19.3702:1, respectively. As a result of the change in
conversion ratios, Digital Lava recorded an imputed dividend of $660,013 to
the holders of the Series B and C preferred stock.

Common Stock

Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of common stock are entitled to receive ratably
dividends, if any, as may be declared by the board of directors out of funds
legally available therefor, subject to any preferential dividend rights of any
outstanding preferred stock. Upon the liquidation, dissolution or winding up of
Digital Lava, the holders of common stock are entitled to receive ratably the
net assets of Digital Lava available after the payment of all debts and other
liabilities and subject to the prior rights of any outstanding preferred stock.
Holders of common stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of common stock are fully paid and
nonassessable. The rights, preferences and privileges of holders of

32
<PAGE>

common stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any series of preferred stock which Digital Lava may
designate and issue in the future.

Preferred Stock

The board of directors has the authority, without further action by the
stockholders, to issue up to 5,000,000 shares of preferred stock in one or more
series and to fix the rights, preferences, privileges and restrictions of the
preferred stock, including:

o dividend rights;

o dividend rates;

o conversion rights;

o voting rights, which may be greater or lessor than the voting rights of the
common stock;

o rights and terms of redemption;

o liquidation preferences;

o sinking fund terms; and

o the number of shares constituting any series or the designation of a series
without any further vote or action by the stockholders.

The issuance of shares of preferred stock could adversely affect the voting
power of holders of common stock and the likelihood that these holders will
receive dividend payments and payments upon liquidation and could have the
effect of delaying, deferring or preventing a change in control of Digital Lava.
Digital Lava has no present plans to issue any additional shares of preferred
stock.

Outstanding Warrants

As of October 15, 1999, warrants to purchase an aggregate of 2,272,575
shares of common stock at a weighted average exercise price of $9.31 per share
were outstanding and exercisable.

Certain Charter and By-Law Provisions

Certain provisions of Digital Lava's certificate of incorporation and
bylaws may have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from attempting to acquire, control of
Digital Lava. These provisions could limit the price certain investors might be
willing to pay in the future for shares of Digital Lava's common stock. Certain
of these provisions allow Digital Lava to issue preferred stock without
stockholder approval and provide that special meetings of stockholders of
Digital Lava may be called only by the President of Digital Lava, the board of
directors or holders of not less than a majority of the votes entitled to be
cast at the special meeting. These provisions may make it more difficult for
stockholders to take certain corporate actions and could have the effect of
delaying or preventing a change in control of Digital Lava.

Transfer Agent And Registrar

The transfer agent and registrar for the common stock and the warrant agent
for the warrants is American Stock Transfer & Trust Company, New York, New York.

33
<PAGE>

LEGAL MATTERS

The validity of the securities being offered by this prospectus will be
passed upon for Digital Lava by Ehrenreich Eilenberg Krause & Zivian LLP, New
York, New York. This firm beneficially owns 57,273 shares of common stock.

EXPERTS

The financial statements of Digital Lava Inc. as of December 31, 1998 and
for the years ended December 31, 1998 and 1997 included in this prospectus have
been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.

ADDITIONAL INFORMATION

Digital Lava has filed with the Securities and Exchange Commission a
Post-Effective Amendment No. 1 to registration statement on Form SB-2 under the
Securities Act with respect to the securities to which this prospectus relates.
This prospectus, which forms a part of the registration statement, does not
contain all the information set forth in the registration statement, as
permitted by the rules and regulations of the Commission. For further
information with respect to Digital Lava and the securities offered in this
offering, reference is made to the registration statement. Statements contained
in this prospectus as to the contents of any contract or other document that has
been filed as an exhibit to the registration statement are qualified in their
entirety by reference to the exhibits for a complete statement of their terms
and conditions. The registration statement and other information may be read and
copied at the Commission's Public Reference Room at 450 Fifth Street N.W.,
Washington, D.C. 20549. The public may obtain information on the operation of
the Public Reference Room by calling the Commission at 1-800-SEC-0330. The
Commission maintains a Web site at http://www.sec.gov that contains reports,
proxy and information statements, and other information regarding issuers that
file electronically with the Commission. Digital Lava's Web site can be accessed
at www.digitallava.com.

Digital Lava is subject to the reporting and other requirements of the
Exchange Act and makes available quarterly reports containing unaudited
financial statements for each of the first three quarters of each year, as well
as furnishing its shareholders annual reports containing financial statements
audited by its independent auditors.

34
<PAGE>

DIGITAL LAVA INC.

Index to Financial Statements

Page
----
Report of Independent Accountants ........................................ F-2
Balance Sheet ............................................................ F-3
Statement of Operations .................................................. F-4
Statement of Stockholders' Equity(Deficit) ............................... F-5
Statement of Cash Flows .................................................. F-6
Notes to Financial Statements ............................................ F-7

F-1
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and
Stockholders of Digital Lava Inc.

In our opinion, the accompanying balance sheet and related statements of
operations, of stockholders' equity/(deficit) and of cash flows present fairly,
in all material respects, the financial position of Digital Lava Inc. at
December 31, 1998, and the results of its operations and its cash flows for the
years ended December 31, 1997 and 1998 in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.

PricewaterhouseCoopers LLP
New York, New York
March 15, 1999

F-2
<PAGE>

DIGITAL LAVA INC.

BALANCE SHEET

<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents .............................................. $ 30,893 $ 639,430
Short term investments ................................................. -- 7,883,088
Accounts receivable .................................................... 204,196 226,966
Other current assets ................................................... 16,731 193,859
Deferred offering costs ................................................ 888,493 --
------------ ------------
Total current assets ............................................ 1,140,313 8,943,343
Fixed assets, net ...................................................... 59,647 161,710
Restricted cash ........................................................ -- 437,500
Other assets ........................................................... 16,965 17,119
------------ ------------
$ 1,216,925 $ 9,559,672
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable ....................................................... $ 698,746 $ 97,928
Accrued interest ....................................................... 998,619 --
Accrued expenses ....................................................... 404,537 28,027
Notes payable, net of debt discount .................................... 5,008,634 --
Deferred revenue ....................................................... 186,909 160,409
------------ ------------
Total current liabilities ....................................... 7,297,445 286,364
------------ ------------

Commitments and contingencies (Note 11) Stockholders' equity (deficit):
Convertible preferred stock--Series A, B, B-1 and C, $.0001 par value;
5,000,000 shares authorized; 98,349 shares issued and outstanding at
December 31, 1998;
none issued and outstanding at June 30, 1999 ........................ 9 --
Common stock, $0.0001 par value; 35,000,000 shares
authorized; 131,524 shares issued and outstanding at
December 31, 1998; 4,636,887 shares issued and outstanding at
June 30, 1999 ....................................................... 13 463
Additional paid-in capital ............................................. 4,618,297 26,091,104
Accumulated deficit .................................................... (10,698,839) (16,818,259)
------------ ------------
Total stockholders' equity (deficit) ............................ (6,080,520) 9,273,308
------------ ------------
$ 1,216,925 $ 9,559,672
============ ============
</TABLE>

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

F-3
<PAGE>

DIGITAL LAVA INC.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
----------------------------- -----------------------------
1997 1998 1998 1999
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Software licenses ................................... $ 273,989 $ 1,057,794 $ 264,185 $ 232,024
Consulting and services ............................. 290,583 405,824 127,712 140,274
----------- ----------- ----------- -----------
Total revenues ............................... 564,572 1,463,618 391,897 372,298
----------- ----------- ----------- -----------
Cost of revenues:
Cost of software licenses ........................... 1,968 13,168 7,558 2,249
Cost of consulting and services ..................... 121,008 275,610 84,309 52,078
----------- ----------- ----------- -----------
Total cost of revenues ....................... 122,976 288,778 91,867 54,327
----------- ----------- ----------- -----------
Gross profit ................................. 441,596 1,174,840 300,030 317,971
----------- ----------- ----------- -----------
Operating costs and expenses:
Selling, general and administrative ................. 3,316,961 3,103,418 2,003,058 2,382,219
Research and development ............................ 445,162 442,718 267,514 355,567
----------- ----------- ----------- -----------
Total operating costs and expenses ........... 3,762,123 3,546,136 2,270,572 2,737,786
----------- ----------- ----------- -----------
Loss from operations ......................... (3,320,527) (2,371,296) (1,970,542) (2,419,815)
----------- ----------- ----------- -----------
Other income and expenses:
Interest expense .................................... (924,842) (1,359,245) (809,465) (26,949)
----------- ----------- ----------- -----------
Loss before extraordinary item ............... (4,245,369) (3,730,541) (2,780,007) (2,446,764)
Extraordinary loss on extinguishment of debt ........ -- -- -- (3,672,656)
----------- ----------- ----------- -----------
Net loss $(4,245,369) $(3,730,541) $(2,780,007) $(6,119,420)
=========== =========== =========== ===========

Net loss available to common stockholders $(4,245,369) $(3,730,541) $(2,780,007) $(6,779,433)
=========== =========== =========== ===========

Basic and diluted loss per share (Note 2) .................. $ (31.14) $ (25.22) $ (21.14) $ (2.08)
=========== =========== =========== ===========
Weighed average common shares used in basic and
diluted loss per share (Note 2) ........................ 136,353 147,933 131,524 3,263,223
=========== =========== =========== ===========
</TABLE>

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

F-4
<PAGE>

DIGITAL LAVA INC.

STATEMENT OF STOCKHOLDERS' EQUITY/(DEFICIT)

<TABLE>
<CAPTION>
Series A Series B
Convertible Convertible
Preferred Stock Preferred Stock
---------------- ----------------
Shares Amount Shares Amount
---------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 ................................................ 88,584 9 5,552 --
Issuance of common stock warrants in conjunction
with notes payable ................................................ -- -- -- --
Issuance of common stock warrants for services ........................ -- -- -- --
Modification of outstanding convertible preferred
stock warrants .................................................... -- -- -- --
Modification of outstanding common stock
Warrants .......................................................... -- -- -- --
Issuance of common stock for services ................................. -- -- -- --
Options issued by management and principal
stockholders for services performed by
consultants ....................................................... -- -- -- --
Issuance of common stock for elimination of anti-
dilution rights ................................................... -- -- -- --
Net loss .............................................................. -- -- -- --
---------- ------------ ------------ ----------
Balance, December 31, 1997 ................................................ 88,584 9 5,552 --
Modification of outstanding convertible preferred
stock warrants .................................................... -- -- -- --
Modification of outstanding common stock
Warrants .......................................................... -- -- -- --
Issuance of common stock warramnts for services ....................... -- -- -- --
Issuance of common stock warrants in conjunction
with notes payable ................................................ -- -- -- --
Modification of options issued by management and principal
stockholders for services performed by
consultants ....................................................... -- -- -- --
Net loss .............................................................. -- -- -- --
---------- ------------ ------------ ----------
Balance, December 31, 1998 ................................................ 88,584 9 5,552 --
Unaudited:
Conversion of preferred stock to common stock ........................ (79,760) (8) (5,552) --
Modification of Series B and Series C convertible preferred stock
conversion rates ...................................................... -- -- -- --
Dividend to Series B and Series C convertible preferred
stockholders in connection with modification of conversion rates ...... -- -- -- --
Series A convertible preferred stock contributed by founders .......... (8,824) (1) -- --
Common stock contributed by founders .................................. -- -- -- --
Conversion of notes payable, plus accrued interest, to common stock ... -- -- -- --
Issuance of common stock pursuant to public offering, net of expenes .. -- -- -- --
Issuance of common stock pursuant to public offering
overallotment option exercise, net of expenses ........................ -- -- -- --
Net loss .............................................................. -- -- -- --
---------- ------------ ------------ ----------
Balance, June 30, 1999 (unaudited) ........................................ -- $ -- -- $ --
========== ============ ============ ==========

<CAPTION>
Series B-1 Series C
Convertible Convertible
Preferred Stock Preferred Stock
---------------- ----------------
Shares Amount Shares Amount
------------ ------------ ------------ ---------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 ................................................ 930 -- 3,283 --
Issuance of common stock warrants in conjunction
with notes payable ................................................ -- -- -- --
Issuance of common stock warrants for services ........................ -- -- -- --
Modification of outstanding convertible preferred
stock warrants .................................................... -- -- -- --
Modification of outstanding common stock
Warrants .......................................................... -- -- -- --
Issuance of common stock for services ................................. -- -- -- --
Options issued by management and principal
stockholders for services performed by
consultants ....................................................... -- -- -- --
Issuance of common stock for elimination of anti-
dilution rights ................................................... -- -- -- --
Net loss .............................................................. -- -- -- --
------------ ------------ ------------ ---------
Balance, December 31, 1997 ................................................ 930 -- 3,283 --
Modification of outstanding convertible preferred
stock warrants .................................................... -- -- -- --
Modification of outstanding common stock
Warrants .......................................................... -- -- -- --
Issuance of common stock warramnts for services ....................... -- -- -- --
Issuance of common stock warrants in conjunction
with notes payable ................................................ -- -- -- --
Modification of options issued by management and principal
stockholders for services performed by
consultants ....................................................... -- -- -- --
Net loss .............................................................. -- -- -- --
------------ ------------ ------------ ---------
Balance, December 31, 1998 ................................................ 930 -- 3,283 --
Unaudited:
Conversion of preferred stock to common stock ........................ (930) -- (3,283) --
Modification of Series B and Series C convertible preferred stock
conversion rates ...................................................... -- -- -- --
Dividend to Series B and Series C convertible preferred
stockholders in connection with modification of conversion rates ..... -- -- -- --
Series A convertible preferred stock contributed by founders .......... -- -- -- --
Common stock contributed by founders .................................. -- -- -- --
Conversion of notes payable, plus accrued interest, to common stock ... -- -- -- --
Issuance of common stock pursuant to public offering, net of expenes .. -- -- -- --
Issuance of common stock pursuant to public offering
overallotment option exercise, net of expenses ........................ -- -- -- --
Net loss .............................................................. -- -- -- --
------------ ------------ ------------ ---------
Balance, June 30, 1999 (unaudited) ........................................ -- $ -- -- $ --
============ ============ ============ =========

<CAPTION>
Common Stock Additional
-------------- Paid-In
Shares Amount Capital
--------------- ------------ ------------
<S> <C> <C> <C>
Balance, December 31, 1996 ................................................ 110,732 11 1,789,327
Issuance of common stock warrants in conjunction
with notes payable ................................................ -- -- 501,319
Issuance of common stock warrants for services ........................ -- -- 5,100
Modification of outstanding convertible preferred
stock warrants .................................................... -- -- 153,535
Modification of outstanding common stock
Warrants .......................................................... -- -- 59,663
Issuance of common stock for services ................................. 4,378 -- 10,000
Options issued by management and principal
stockholders for services performed by
consultants ....................................................... -- -- 832,089
Issuance of common stock for elimination of anti-
dilution rights ................................................... 16,414 2 (2)
Net loss .............................................................. -- -- --
--------------- ------------ ------------
Balance, December 31, 1997 ................................................ 131,524 13 3,351,031
Modification of outstanding convertible preferred
stock warrants .................................................... -- -- 30,978
Modification of outstanding common stock
Warrants .......................................................... -- -- 10,050
Issuance of common stock warramnts for services ....................... -- -- 92,701
Issuance of common stock warrants in conjunction
with notes payable ................................................ -- -- 787,137
Modification of options issued by management and principal
stockholders for services performed by
consultants ....................................................... -- -- 346,400
Net loss .............................................................. -- -- --
--------------- ------------ ------------
Balance, December 31, 1998 ................................................ 131,524 13 4,618,297
Unaudited:
Conversion of preferred stock to common stock ........................ 907,156 91 (83)
Modification of Series B and Series C convertible preferred stock
conversion rates ...................................................... 88,003 9 660,014
Dividend to Series B and Series C convertible preferred
stockholders in connection with modification of conversion rates ..... -- -- (660,023)
Series A convertible preferred stock contributed by founders .......... -- -- 1
Common stock contributed by founders .................................. (11,028) (1) 1
Conversion of notes payable, plus accrued interest, to common stock ... 894,608 89 5,363,123
Issuance of common stock pursuant to public offering, net of expenes .. 2,400,000 240 14,596,229
Issuance of common stock pursuant to public offering
overallotment option exercise, net of expenses ........................ 226,624 22 1,513,545
Net loss .............................................................. -- -- --
--------------- ------------ ------------
Balance, June 30, 1999 (unaudited) ........................................ 4,636,887 $ 463 $ 26,091,104
=============== ============ ============

<CAPTION>
Accumulated
Deficit Total
------------ ------------
<S> <C> <C>
Balance, December 31, 1996 ................................................ (2,722,929) (933,582)
Issuance of common stock warrants in conjunction
with notes payable ................................................ -- 501,319
Issuance of common stock warrants for services ........................ -- 5,100
Modification of outstanding convertible preferred
stock warrants .................................................... -- 153,535
Modification of outstanding common stock
Warrants .......................................................... -- 59,663
Issuance of common stock for services ................................. -- 10,000
Options issued by management and principal
stockholders for services performed by
consultants ....................................................... -- 832,089
Issuance of common stock for elimination of anti-
dilution rights ................................................... -- --
Net loss .............................................................. (4,245,369) (4,245,369)
------------ ------------
Balance, December 31, 1997 ................................................ (6,968,298) (3,617,245)
Modification of outstanding convertible preferred
stock warrants .................................................... -- 30,978
Modification of outstanding common stock
Warrants .......................................................... -- 10,050
Issuance of common stock warramnts for services ....................... -- 92,701
Issuance of common stock warrants in conjunction
with notes payable ................................................ -- 787,137
Modification of options issued by management and principal
stockholders for services performed by
consultants ....................................................... -- 346,400
Net loss .............................................................. (3,730,541) (3,730,541)
------------ ------------
Balance, December 31, 1998 ................................................ (10,698,839) (6,080,520)
Unaudited:
Conversion of preferred stock to common stock ........................ -- --
Modification of Series B and Series C convertible preferred stock
conversion rates ...................................................... -- 660,023
Dividend to Series B and Series C convertible preferred
stockholders in connection with modification of conversion rates ..... -- (660,023)
Series A convertible preferred stock contributed by founders .......... -- --
Common stock contributed by founders .................................. -- --
Conversion of notes payable, plus accrued interest, to common stock ... -- 5,363,212
Issuance of common stock pursuant to public offering, net of expenes .. -- 14,596,469
Issuance of common stock pursuant to public offering
overallotment option exercise, net of expenses ........................ -- 1,513,567
Net loss .............................................................. (6,119,420) (6,119,420)
------------ ------------
Balance, June 30, 1999 (unaudited) ........................................ $(16,818,259) $ 9,273,308
============ ============
</TABLE>

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

F-5
<PAGE>

DIGITAL LAVA INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
---------------------------- --------------
1997 1998 1998 1999
------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss ....................................... $ (4,245,369) $ (3,730,541) $ (2,780,007) $ (6,119,420)
Adjustments to reconcile net loss to net cash
(Used in) operating activities:
Extraordinary loss on extinguishment of debt -- -- -- 3,672,656
Deferred costs .............................. -- -- (96,672) --
Deferred revenues ........................... -- 186,909 733,121 (26,500)
Depreciation and amortization ............... 104,890 182,963 111,705 30,482
Amortization of debt discount ............... 716,433 602,509 293,785 130,758
Compensation from grant of non-employee stock
options and warrants ..................... 866,589 559,101 392,420 --
Changes in assets and liabilities affecting
operating cash flows:
Accounts receivable ...................... (167,112) (37,084) (458,742) (22,770)
Other assets ............................. (3,406) (24,808) (20,941) (180,799)
Accounts payable ......................... 334,601 307,501 (87,824) (600,818)
Accrued interest ......................... 15,411 759,180 517,630 (523,954)
Accrued expenses ......................... 182,160 344,386 240,442 (376,510)
------------ ------------ ------------ ------------
Net cash used in operating activities .............. (2,195,803) (849,884) (1,155,083) (4,016,875)
------------ ------------ ------------ ------------

Cash flows used in investing activities:
Purchase of short term investments ............. -- -- -- (7,877,885)
Restricted cash ................................ -- -- -- (437,500)
Acquisition of fixed assets .................... (55,620) (23,992) (23,992) (134,232)
Deferred offering costs ........................ -- (888,493) -- --
------------ ------------ ------------ ------------
Net cash used in investing activities .............. (55,620) (912,485) (23,992) (8,449,617)
------------ ------------ ------------ ------------

Cash flows from financing activities:
Proceeds from notes payable .................... 2,869,500 1,620,000 1,050,000 --
Repayment of notes payable ..................... (450,000) -- -- (3,923,500)
Proceeds from issuance of common stock ......... -- -- -- 19,831,011
Cost of common stock issuance .................. -- -- -- (2,832,482)
------------ ------------ ------------ ------------
Net cash provided by financing activities .......... 2,419,500 1,620,000 1,050,000 13,075,029
------------ ------------ ------------ ------------

Net increase (decrease) in cash and cash
equivalents .................................... 168,077 (142,369) (129,075) 608,537
Cash and cash equivalents at beginning of period ... 5,185 173,262 173,262 30,893
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period ......... $ 173,262 $ 30,893 $ 44,187 $ 639,430
============ ============ ============ ============
</TABLE>

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

F-6
<PAGE>

DIGITAL LAVA INC.

NOTES TO FINANCIAL STATEMENTS

1. Nature of Business

Digital Lava Inc. (the "Company") develops and markets video publishing
software applications for corporate training, communications, distance learning,
research and other applications. The Company's technology allows users to
organize and manage video content, link video to other types of files and
publish video with all of the linked information on CD-ROM or DVD, corporate
intranets or the public Internet.

2. Summary of Significant Accounting Policies

Basis of presentation

The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. Since inception, the Company has
suffered recurring losses and negative cash flows from operations, has deficits
in working capital and stockholders' equity, and expects to incur future losses.
The Company completed an initial public offering of its common stock ("IPO",
Note 12) in February 1999 and believes that such financing, together with
existing cash balances and other sources of liquidity (i.e., debt, equity, etc),
will be sufficient to meet its cash needs for at least the next 12 months.

Reverse stock split

In February 1999, the Company effected a 1 for 9.139 reverse stock split
applicable to all issued and outstanding shares of the Company's common and
preferred stock. All common and preferred shares, stock options, warrants and
related per share data reflected in the accompanying financial statements and
notes thereto have been adjusted to give retroactive effect to the stock split.

Use of estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires the management of the Company to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.

Cash equivalents

The Company considers all highly liquid investments purchased with an
initial maturity of 90 days or less to be cash equivalents and investments with
original maturities of greater than 90 days to be short-term investments.

Fair value of financial instruments

All current assets and liabilities are carried at cost, which approximates
fair value because of the short maturity of those instruments.

Concentration of credit risk

Financial instruments which potentially subject the Company to
concentration of credit risk consists primarily of short term investments and
accounts receivable. Short term investments are maintained at one financial
institution. The company maintains an allowance for uncollectible accounts
receivable based upon expected collectibility and generally does not require
collateral. For the year ended December 31, 1998, no allowance for uncollectible
accounts was deemed necessary by management.

Property and equipment

Property and equipment comprises of computer and office equipment and is
stated at cost, less accumulated depreciation of $125,484 at December 31, 1998.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the assets, generally 3 to 7 years. Maintenance and repair
expenses are charged to operations as incurred.

Deferred offering costs

In connection with the Company's IPO, the Company has incurred costs of
$888,493 which have been deferred. As the Company completed an IPO in February
1999 (Note 12), such costs will be offset against proceeds received.

Revenue recognition

F-7
<PAGE>

In accordance with Statement of Position ("SOP") 97-2, "Software Revenue
Recognition," as amended by SOP 98-4, the Company generally recognizes revenue
from licensing of the Company's software products when all the following
criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery
has occurred, (3) the vendor's fee is fixed or determinable, and (4)
collectibility is probable. In addition, for licensing contracts with multiple
obligations (e.g. deliverable and undeliverable products, services and
maintenance), revenue is allocated to each component of the contract based on
evidence of fair value which is specific to the Company, or for products not
being sold separately, the price established by management.

Consulting and service revenues, which consist of short-term professional
service contracts, such as system development, consulting and video encoding and
capsule creation, are deferred until significant contractual obligations have
been fulfilled. Costs associated with professional service contracts, such as
salaries and materials, are deferred until the related revenue is recognized.

Software development costs

Development costs incurred in the research and development of new software
products and enhancements to existing software products are expensed as incurred
until technological feasibility has been established. After technological
feasibility is established, any additional costs are capitalized. Through
December 31, 1998, software development has been substantially completed
concurrently with the establishment of technological feasibility and,
accordingly, no costs have been capitalized.

Income taxes

Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. A valuation allowance is provided if it
is more likely than not that some or all of the deferred tax asset will not be
realized.

Stock based compensation

As permitted by Statement of Financial Accounting Standards ("SFAS") No.
123, Accounting for Stock-Based Compensation, the Company accounts for its
stock-based compensation arrangements pursuant to APB Opinion No. 25, Accounting
for Stock Issued to Employees. In accordance with the provisions of SFAS No.
123, the Company discloses the pro forma effects of accounting for these
arrangements using the minimum value method to determine fair value. In
connection with the Company's completion of an IPO in February 1999 (Note 12),
for future periods the Company will disclose the pro forma effects using the
fair value method in accordance with the provision of SFAS No. 123.

Segment reporting

In 1998, the Company adopted SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information" which requires the Company to disclose
certain segment information used by management for making operating decisions
and assessing the performance of the Company. Essentially, management evaluates
the performance of the Company primarily based on the overall results of the
Company.

The Company's revenues for the years ended December 31, 1997 and 1998 were
derived from customers based in the United States. For the years ended December
31, 1997 and 1998, one customer accounted for approximately 43% and 46%,
respectively, of the Company's total net revenues. At December 31, 1998, two
customers had receivable balances totaling $121,798 or 59.6% of total
receivables.

F-8
<PAGE>

Loss per share

Basic earnings per share ("Basic EPS") is computed by dividing net loss
available to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share ("Diluted EPS") gives
effect to all dilutive potential common shares outstanding during a period. In
computing Diluted EPS, the treasury stock method is used in determining the
number of shares assumed to be purchased from the conversion of common stock
equivalents. Pursuant to Securities and Exchange Commission Staff Accounting
Bulletin No. 98, common stock and convertible preferred stock issued for nominal
consideration prior to the anticipated effective date of the initial public
offering ("IPO"), are included in the calculation of basic and diluted net loss
per share as if they were outstanding for all periods presented.

Net loss per share for the years ended December 31, 1997 and 1998 does not
include the effect of 98,349 (983,490 shares of common stock on an as-if
converted basis) shares of convertible preferred stock outstanding, 42,237 and
59,618, respectively, of stock options outstanding with a weighted average
exercise price of $9.14 per share, 17,125 (171,250 on an as-if converted basis)
warrants to purchase outstanding shares of a series A convertible preferred
stock with exercise prices ranging from $38.84 to $182.78 per share, or 446,254
and 608,109 respectively, of warrants to purchase common stock with exercise
prices ranging from $3.88 to $11.42 per share, because their effects are
anti-dilutive.

Recent accounting pronouncements

3. Accrued Expenses

Accrued expenses is comprised of the following:

December 31,
1998
------------
Accrued payroll $189,627
Other accrued liabilities 214,910
--------
$404,537
========

4. Related Party Transactions

In January and December 1997, certain members of management and principal
stockholders of the Company granted a consultant options to acquire up to 15,600
of their shares of series A convertible preferred stock and 19,941 of their
shares of common stock in exchange for services provided to the Company. The
options have an exercise price of $45.70 per share of series A convertible
preferred stock and $4.57 per share of common stock. The Company has recorded
the fair value of the options, in the amount of $832,089, as a contribution of
capital by the stockholders and as general and administrative expense. Effective
May 1998, these options were amended. Under the revised terms and in exchange
for additional consulting services provided to the Company, the strike price of
the options were reduced to $9.14 per share of series A convertible preferred
and $.91 per share of common stock. The total incremental difference between the
value of the warrants before and after the modification of the warrant terms, as
determined using the Black-Scholes model, in the amount of $346,400, was
recorded as a contribution of capital by the stockholders and general and
administrative expense. The options are exercisable for a period of ten years.

Since inception, the Company has received ongoing consulting and legal
services from stockholders. Services rendered for years ended December 31, 1997
and 1998, amounted to $235,669 and $542,719, respectively, of which $401,194 is
included in accounts payable and $478,328 is included in deferred offering costs
at December 31, 1998.

F-9
<PAGE>

5. Notes Payable

During the period from March 1996 through December 1998, the Company issued
an aggregate of $3,117,500, $902,000 and $1,750,000 in notes payable,
convertible notes payable and secured convertible notes payable, respectively,
through various private placements including $300,000 issued to a family member
of two officers and principal stockholders of the Company. The notes, as amended
on various dates, bear interest at rates ranging from 6% to 12% per annum and
are due and payable on the earlier of (i) dates ranging from April 1997 through
December 31, 1998, (ii) upon the closing of an IPO, or (iii) upon the date the
Company obtains financing in which gross proceeds exceed amounts ranging from
$1.5 million to $5.0 million. In addition, an aggregate principal amount of
$3,050,000 of such notes contained a one-time fee of 10% of the principal amount
loaned ("10% Success Fee"), which is payable upon the payment of the note. In
April 1997 the Company repaid $450,000 of these notes. In addition, the
convertible notes payable and secured convertible notes payable were initially
convertible, at the option of the holder, into equity securities of the Company.
Due to defaults incurred in 1998, as described below, of the repayment terms of
these notes, such notes are no longer convertible. Total principal amount
outstanding for all notes at December 31, 1998 was $5,319,500. As more fully
discussed below and in Note 12, upon the completion of the Company's IPO in
February 1999, the Company either repaid or converted all of the notes
outstanding as of December 31, 1998.

In conjunction with the issuance of these notes, the holders were granted
warrants to purchase 15,601 and 728,287 shares of series A convertible preferred
and common stock, respectively, at exercise prices ranging from $68.54 to
$182.78 and $6.85 to $11.42 per share of series A convertible preferred and
common stock, respectively. The warrants are exercisable at any time prior to
dates ranging from February 2003 to March 2007. The total value of the warrants
at the time of issuance, as determined using the Black-Scholes model, was
$1,795,651 of which $365,565 and $633,217 was recorded during the years ended
December 31, 1997 and 1998, respectively, and is being amortized as interest
expense over the initial terms of the notes. In exchange for either waiving the
acceleration of the maturity date of the notes caused by the Company raising
additional financing in excess of a specified amount or extending the maturity
date, the exercise price of the warrants were reduced to prices ranging from
$45.70 to $68.54 and $4.57 to $8.23 per share of series A convertible preferred
and common stock, respectively. The total incremental difference between the
value of the warrants before and after the modifications of the terms, as
determined using the Black-Scholes model, was $269,826 of which $193,798 and
$41,028 was recorded during the years ended December 31, 1997 and 1998,
respectively, and is being amortized as interest expense over the remaining life
of the debt. None of the warrants have been exercised as of December 31, 1998.
As more fully discussed in Note 12, certain warrants were cancelled in
connection with the extinguishment of the related notes.

In August, September and December 1998, effective upon consummation of the
IPO, the Company renegotiated the terms of an aggregate of $2,832,000 of notes
with the holders. Under the revised terms, and in exchange for extending the
maturity date of such notes until December 31, 1998, the Company agreed to pay
one half of the face value of the notes and any 10% Success Fee in cash upon the
closing of the IPO. The remaining one-half of the face value of the notes,
accrued but unpaid interest and the outstanding warrants issued in connection
with the financing will convert into common stock equal to 225% of the original
principal amount of the note based upon the IPO price per share. As more fully
discussed in Note 12, the Company extinguished these promissory notes in
conjunction with the completion of an IPO.

In August and September 1998, the Company entered into agreements,
effective upon consummation of the IPO (Note 12), to convert certain outstanding
warrants to acquire 107,687 shares of common stock issued in connection with
notes issued in the aggregate principal amount of $630,000 in exchange for
30,836 shares of common stock.

As of December 31, 1998, the Company was in default of the repayment terms
of certain notes in the aggregate of $1,750,000. In January and February 1999,
the Company obtained waivers to extend the maturity date of these notes until
the earlier of February 19, 1999 or the consummation of the Company's proposed
IPO. As more fully discussed in Note 12, the Company extinguished these notes in
conjunction with the completion of an IPO.

In August and September 1998, the Company renegotiated the terms of an
aggregate of $187,500 of notes with the holders. The holders agreed to extend
the maturity date of their notes to June 30, 1999; however, because the closing
of the IPO did not occur by December 31, 1998, the entire principal amount of
their notes became due and payable. The holders agreed to waive the default and
in consideration the Company agreed to pay the entire principal amount of their
notes upon the completion of the IPO. As discussed in Note 12, these notes were
paid in full in connection with the completion of the IPO.

In October 1998, the Company issued a $20,000 note to a principal
stockholder. The note bears interest at 12% per annum and is due and payable on
October 1999. As more fully discussed in Note 12, the Company repaid this note
in

F-10
<PAGE>

conjunction with the completion of the IPO.

Amortization of debt discount for the years ended December 31, 1997 and
1998 was $716,433 and $602,509, respectively, and $330,866 of unamortized debt
discount is included in notes payable at December 31, 1998.

Finder warrants

In connection with the issuance of certain notes, the Company issued
warrants to purchase 438 and 108,237 of series A convertible preferred stock and
common stock, respectively, at exercise prices ranging from $114.24 to $182.78
and $8.68 to $11.42 per share of series A preferred stock and common stock,
respectively as a finder fee. The total value of the warrants granted as
determined using the Black-Scholes model was $306,757 of which $135,754 and
$162,203 was recorded during the years ended December 31, 1997 and 1998,
respectively, and is being amortized as debt issuance costs over the initial
maturity date of the related notes. The warrants are exercisable at any time
prior to dates ranging from February 2003 to July 2008. None of the warrants
have been exercised as of December 31, 1998.

In September 1998 and December 1998, the Company entered into agreements to
settle outstanding disputes regarding finder fees related to certain note
issuances. Under the terms of the agreements, the Company granted warrants to
acquire 27,884 shares of common stock at exercise prices ranging from $4.11 to
$7.38 per share and agreed to pay $62,500 in cash. The fair value of the
warrants as determined using the Black-Scholes model, in the amount of
approximately $120,000, was recorded as an expense. An additional $27,000 will
be recorded as an expense in 1999.

Amortization of debt issue costs for the years ended December 31, 1997 and
1998 was $59,889 and $124,481, respectively, and $3,517 of unamortized costs is
included in other current assets at December 31, 1998.

6. Convertible Preferred Stock

Convertible preferred stock, $.0001 par value, consists of the following:

Shares Issued Liquidation
and Outstanding Preference
December 31, December 31,
Series: Shares Authorized 1998 1998
----------------- --------------- -------------
A 966,065 88,584 $ 809,565
B 50,740 5,552 507,400
B-1 8,500 930 85,000
C 30,000 3,283 225,000
Undesignated 3,944,695 -- --
---------- ---------- ----------
5,000,000 98,349 $1,626,965
========== ========== ==========

The Company reserved 17,125 shares of series A preferred stock for the
exercise of series A warrants issued as of December 31, 1998. In connection with
the completion of the IPO (Note 12), all of the outstanding shares of Series A,
B, B-1 and C preferred stock automatically converted into shares of common
stock.

Conversion and voting rights

Each share of the Company's series A, B and C preferred stock was initially
convertible, in full and not in part, into ten shares of common stock at the
option of the holder and would automatically convert upon the completion of an
underwritten public offering. In September 1998, the Company's stockholders
authorized the Company to amend its Certificate of Incorporation to change the
conversion rates of series B and C convertible preferred stock to 20.3099 to 1
and 19.3702 to 1, respectively. In conjunction with the completion of the
Company's IPO (Note 12), the Company's Certificate of Incorporation was changed
to reflect these new conversion rates.

Each issued share of series B-1 convertible preferred stock was initially
convertible, in full and not in part, into ten shares of common stock, subject
to anti-dilution protection for issuances of additional equity shares by the
Company and automatically converted upon the completion of an underwritten
public offering. As of December 31, 1998, each share of series B-1 would
automatically convert into 21.9335 shares of common stock.

A total of 1,082,600 shares of common stock were reserved for issuance upon
the conversion of series A, B, B-1 and C convertible preferred stock. Each share
of preferred stock had a number of votes equal to the number of shares of common
stock into which it was convertible.

Dividends

F-11
<PAGE>

Each series of preferred stock issued was entitled to receive dividends
when and if declared by the Board. The dividends were noncumulative and payable
in preference to any dividends on common stock. As of December 31, 1998, the
Company had not declared any dividends.

Liquidation

In the event of liquidation, the series C preferred stockholders were
entitled to receive, prior to any distribution to any other stockholders,
approximately $68.54 per share plus all declared and unpaid dividends. The
series B and B-1 preferred stockholders were entitled to receive, after
distribution to series C preferred stockholders and prior to any distribution to
any other stockholders, approximately $91.39 per share plus all declared and
unpaid dividends. The series A preferred stockholders were entitled to receive,
after distribution to series C, B and B-1 preferred stockholders and prior to
any distribution to any other stockholders, approximately $9.14 per share plus
all declared and unpaid dividends. In addition, the series A preferred
stockholders were entitled to share ratably with the holders of common stock in
any remaining distribution.

Anti-dilution

Holders of series B, B-1 and C convertible preferred stock conversion
prices were subject to anti-dilution protection for issuances by the Company of
additional equity shares. In November 1996, in exchange for the issuance of 926
additional shares of series B convertible preferred stock, holders of the series
B convertible preferred stock agreed to cancel their anti-dilution protection
provision. In August 1997, in exchange for the issuance of 16,414 shares of
common stock and warrants to purchase 16,414 shares of common stock at an
exercise price of $9.14 per share, the holder of the series C convertible
preferred stock agreed to cancel the anti-dilution protection provision
contained in the original agreement.

7. Common Stock

In January and March 1997, the Company issued an aggregate of 4,378 shares
of common stock in exchange for consulting services. The fair market value of
the common stock at the time of issuance, based upon management's estimate, of
$10,000 was recognized as general and administrative expense.

In September 1998, officers of the Company agreed, effective upon
completion of an IPO, to return 11,030 shares of common stock and 8,824 shares
of series A convertible preferred stock to the Company. In conjunction with the
completion of an IPO (Note 12), the Company canceled these shares.

8. Warrants

In November 1996 and January 1997, in exchange for legal services provided,
the Company issued warrants to purchase 1,095 and 10,943, respectively, of
shares of series A convertible preferred stock and common stock at exercise
prices of $137.09 and $13.71 per share of series A preferred and common stock
respectively. The value of the warrants granted of $50,800 and $5,100,
respectively, was determined using the Black-Scholes model and was recognized as
general and administrative expense. In August 1997, in consideration for
additional legal services performed, the strike prices of the warrants were
reduced to prices of $68.54 and $6.85 per share of series A preferred stock and
common stock respectively. The incremental difference between the value of the
warrants before and after the modification of $13,000 and $6,400, respectively,
was recognized as general and administrative expense. The warrants are
exercisable at any time prior to dates ranging from June 2003 to November 2006.
None of the warrants have been exercised as of December 31, 1998.

In May 1998, the Company entered into a consulting agreement with the
Whitestone Group LLC ("Whitestone") for corporate finance, financial and
strategic advisory matters. Under the terms of the agreement, the Company issued
Whitestone warrants to acquire 10,943 shares of its common stock at an exercise
price of $4.57 per share. The value of the warrants granted of $38,100 was
determined using the Black-Scholes model and was recognized as general and
administrative expense. The warrants are exercisable at any time prior to May
2004. None of the warrants have been exercised as of December 31, 1998. In
February 1999, the Company and Whitestone agreed to terminate the consulting
agreement and cancel the warrants. A stockholder of the Company is an affiliate
of Whitestone.

In September 1998, the Company entered into a financial consulting
agreement with a noteholder. Under the terms of the agreement, the Company
issued a consultant warrants to acquire 20,000 shares of common stock at an
exercise price equal to 90% of the price obtained in the IPO.

In December 1998, the Company entered into a one-year consulting agreement
with an investor relations firm. Under the terms of the consulting agreement,
the investor relations firm is to receive warrants to acquire 13,131 shares

F-12
<PAGE>

of common stock at an exercise price of $9.14 per share. The fair value of the
warrants, in the amount of approximately $55,000, was recorded as general and
administrative expense. The warrants are exercisable at any time prior to
December 2003. None of the warrants have been exercised as of December 31, 1998.

A number of the warrants granted to consultants and in connection with the
debt offerings during 1996, 1997 and 1998 contain anti-dilution provisions
requiring adjustment, if at a later date, securities are issued at prices below
the respective warrants exercise price. In conjunction with the completion of
the Company's IPO (Note 12), certain of these warrants were cancelled. The
following table is a summary of the shares issuable upon exercise of warrants
outstanding as of December 31, 1998 as adjusted for events which have triggered
anti-dilution provisions contained in the respective warrant agreements:

<TABLE>
<CAPTION>
Common Exercise
Shares Price
Issuable Per
Expiration Upon Common
Issuance Date Date Exercise Share
-------------- --------- ---------
<S> <C> <C> <C>
March 1996 March 2006 54,712 $ 4.5695
July 1996 July 2006 51,975 4.5695
September 1996 September 2006 64,445 10.0282
September 1996 September 2006 2,971 14.8088
November 1996 November 2006 11,503 6.5198
December 1996 February 2007 21,884 6.8543
January 1997 January 2007 11,503 6.5198
February 1997 February 2007 16,413 6.8543
February 1997 March 2007 11,550 6.8543
March 1997 March 2007 11,550 6.8543
April 1997 April 2003 56,352 8.2251
May 1997 May 2003 33,100 8.2251
May 1997 May 2003 45,711 11.4238
June 1997 June 2005 43,890 7.4730
July 1997 July 2005 76,872 7.4730
August 1997 February 2003 16,413 9.1390
November 1997 February 2003 56,417 8.6172
December 1997 February 2003 52,311 8.6172
January 1998 January 2003 142,588 8.6172
January 1998 January 2003 13,131 9.139
May 1998 May 2003 10,943 4.5695
December 1998 December 2003 275,000 9.75
--------- --------
Total shares and average exercise
price 1,081,234 $ 8.3940
========= ========
</TABLE>

9. Employee Benefits

1996 stock option plan

The Company's 1996 Stock Option Plan (the "1996 Option Plan") permits the
grant of both "incentive stock options" designed to qualify under the Internal
Revenue Code Section 422 and non-qualified stock options. Incentive stock
options may only be granted to employees of the Company whereas non-qualified
stock options may be granted to non-employees, directors and consultants. A
total of 250,000 shares of Common Stock have been reserved for issuance under
the 1996 Option Plan. Each option, once vested, allows the optionee the right to
purchase one share of the Company's common stock. The Board of Directors
determines the exercise price of the options; options granted to date generally
vest ratably over four years and expire ten years from the date of grant.
Compensation expense equal to the difference between the assumed fair value of
the Company's common stock at the grant date and the exercise price of the
options, if any, is recognized ratably over the vesting period.

F-13
<PAGE>

Stock option activity can be summarized as follows:

<TABLE>
<CAPTION>
Options Outstanding
---------------------------------------------------------
Options Weighted Average
Available Shares Exercise Price
--------- ------ --------------
<S> <C> <C> <C>
Balance at December 31, 1996 158,661 5,471 $9.14
Granted (41,690) 41,690 9.14
Canceled 4,924 (4,924) 9.14
-------- -----
Balance at December 31, 1997 121,895 42,237 9.14
Additional authorization 85,868 -- 9.14
Granted (23,946) 23,946 9.14
Canceled 6,565 (6,565) 9.14
-------- -------- -----
Balance at December 31, 1998 190,382 59,618 $9.14
======== ======== =====
</TABLE>

At December 31, 1998, options to purchase 59,618 shares were exercisable of
which 32,881 shares were vested. Options outstanding at December 31, 1998 have a
weighted average remaining contractual life of 8.5 years and weighted average
exercise price of $9.14. Options granted through December 31, 1998 were granted
at exercise prices in excess of fair market value at grant date. The weighted
average grant-date fair value of such options granted during the years ended
December 31, 1997 and 1998 under the minimum value method was less than $.01 per
share.

In October 1997, the Company accelerated the vesting of options to purchase
2,462 shares of common stock, which were granted in March 1997, and granted
additional options to purchase 2,189 shares of common stock which were
immediately vested to a former employee in lieu of severance pay. The assumed
fair value of such options was less than $1,000 based on the Black Scholes
model.

The fair value of each option grant is estimated on the date of grant using
the minimum value method as prescribed in SFAS 123. Assumptions used for options
granted during the years ended December 31, 1997 and 1998 were as follows:

1997 1998
-------- --------
Risk free interest rate 6.183% 5.124%
Expected lives (years) 5 5
Expected dividends -- --

Pro forma information regarding net income or loss is required by SFAS 123.
For purposes of pro forma disclosure, the estimated fair value of the options is
amortized to expense over the options vesting period. Had compensation cost for
these options been determined consistent with the minimum value method pursuant
to SFAS No. 123, the difference between the Company's net income as reported and
as adjusted for the compensation costs for the years ended December 31, 1997 and
1998 would not have been material.

The minimum value method requires input of highly subjective assumptions in
which changes in those assumptions could materially effect the fair value
estimate. In addition, the minimum value method is only allowed for non-public
entities, as public entities are required to include an expected volatility
factor in addition to factors described above. As the Company completed an IPO
in February 1999 (Note 12), the effects on pro forma disclosures of applying
SFAS 123 are not likely to be representative of the effects on pro forma
disclosures of future years.

10. Income Taxes

There are no income tax assets, liabilities or income tax expense included
in the financial statements. The Company has incurred losses since inception for
both book and tax purposes and as of December 31, 1998, the Company has net
operating loss carryforwards for federal and state purposes of approximately
$8,062,000. Federal net operating loss carryforwards expire from 2008 through
2012 and state net operating loss carryforwards expire from 1999 through 2002.
These losses may be subject to limitation on future year's utilization should
certain ownership changes occur.

Temporary differences between the financial statement and tax bases of
assets and liabilities are primarily attributable to net operating loss
carryforwards of $3,225,000. A full valuation allowance has been provided for
the entire amount of the deferred tax assets arising from these differences as a
result of management's current belief that it

F-14
<PAGE>

is more likely than not that the benefits related to such temporary differences
will not be realized.

11. Commitments and Contingencies

Operating leases

The Company leases its facility under a non-cancelable operating lease
which expires in June 2000. The Company may extend the term of the lease for an
additional three-year period at the then current fair market value. Rent expense
under this lease was $51,169 and $81,738 for the years ended December 31, 1997
and 1998. The Company leases office equipment under a non-cancelable operating
lease which expires in January 2001. Lease expense under this lease was $3,741
for the year ended December 31, 1998. Future minimum lease payments required
under the non-cancelable operating leases are $85,479, $37,799, and $312 for the
years ending December 31, 1999, 2000 and 2001, respectively.

In March 1997, the Company entered into a development and two-year software
licensing agreement for the development and license of software to be included
and distributed with one of the Company's software products. Under the terms of
the agreement, royalties are payable on a per unit basis in relation to sales
volume and sales price, and include a one time payment and guaranteed minimum
annual commitment. At December 31, 1998, the Company is committed to payments of
$10,000 in respect of future minimum royalty obligations over the remainder of
this agreement.

Consulting Agreements

In September 1998, the Company and two members of management entered into
two-year consulting agreements for financial, operational and strategic
development services, effective upon the closing of the IPO. Under the terms of
the agreements, the Company is required to pay bonuses of $100,000 upon the
closing of the IPO and aggregate annual consulting fees of $84,000.

In September 1998, the Company entered into two-year employment agreements,
effective upon consummation of the IPO, with its Chief Executive Officer and its
Vice President of Sales. Pursuant to the agreements, upon consummation of the
IPO, the Company is required to pay an aggregate of $120,000 in bonuses and
issue options to purchase an aggregate of 80,000 shares of common stock at an
exercise price equal to the IPO price. In addition, the Company is required to
pay annual aggregate salaries of $460,000.

12. Subsequent Events

Finder Warrants

In February 1999, the Company and a finder who received warrants to
purchase 27,356 shares of common stock at an exercise price of $8.68 per share
as a finder fee in connection with the November and December 1997 bridge
financing agreed to cancel these warrants.

Waiver of default

In January and February 1999, the Company entered into agreements with the
holders of an aggregate principal amount of $4,769,500 of promissory notes to
extend the maturity date of their notes until the earlier of February 19, 1999
or the completion of the IPO.

Underwritten public offering

On February 12, 1999, the Company completed an underwritten public offering
of 1,200,000 units at a price of $15.10 per unit. Each unit consists of two
shares of common stock and warrant to purchase one share of common stock at a
price of $7.50 per share of common stock and $.10 per warrant. Proceeds, net of
discounts, commissions and offering expenses, totaled approximately $14.6
million. Upon completion of the Company's IPO, all shares of the Company's
convertible preferred stock and certain debt, accrued interest and warrants
converted into common stock of the Company. This transaction will be reflected
in the Company's first quarter results as follows:

Return of shares by officers of the Company

As described in Note 7, the Company will cancel 8,824 and 11,030
shares of series A convertible stock and common stock, respectively,
returned by certain officers of the Company. This will result in the
cancellation of 99,250 shares of common stock and will be recorded as
contributed capital.

F-15
<PAGE>

Conversion of series A and B-1 convertible preferred stock

Each share of the Company's series A and B-1 convertible preferred
stock will convert in accordance with conversion rates as per Note 6 into
797,600 and 20,411, respectively, of common stock.

Conversion of series B and C convertible preferred stock

Each share of the Company's series B and C convertible preferred stock
was initially convertible into ten shares of common stock or 55,520 and
32,826 shares, respectively. In conjunction with the completion of the IPO,
the Company changed the conversion rate for series B and C convertible
preferred stock to 20.3099 to 1 and 19.3702 to 1, respectively. As such,
each share of the Company's series B and C convertible preferred stock will
convert to 112,763 and 63,586 shares of common stock, respectively. The
fair value of the incremental number of 88,003 additional shares issued to
holders resulting from the change in conversion rates will be recorded as a
dividend in the amount of $660,023.

Repayment and conversion of debt, accrued interest and warrants

As more fully described in Note 5, the Company renegotiated the terms
of certain promissory notes. In conjunction with the completion of the IPO,
the Company repaid approximately $4,489,000 in principal, accrued but
unpaid interest and any 10% Success Fee and converted approximately
$1,891,000 of principal, accrued interest and outstanding warrants into
849,600 shares of common stock and cancelled warrants to purchase series A
convertible preferred and common stock of 10,669 and 344,413, respectively,
at exercise prices ranging from $6.85 to $182.78. The Company will record
an extraordinary loss of approximately $3,673,000 on extinguishment of this
debt based on the difference between (a) cash paid and the value of stock
issued and (b) the book value of debt and warrants.

Conversion of outstanding warrants

As more fully described in Note 5, in conjunction with the completion
of the IPO, the Company canceled warrants to acquire 148,434 shares of
common stock in exchange for 45,005 shares of common stock.

13. Interim Financial Statements (unaudited)

Unaudited interim information

The information presented as of June 30, 1999, and for the six month
periods ended June 30, 1998 and 1999, has not been audited. In the opinion of
management, the unaudited interim financial statements include all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly the
Company's financial position as of June 30, 1999, and the results of its
operations and its cash flows for the six months ended June 30, 1998 and 1999,
and the stockholders equity for the six months ended June 30, 1999.

Non-cash supplemental disclosure

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

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

Net loss per share

The Company's net loss per share calculations are based upon the weighted
average number of shares of common stock outstanding. Because their effects are
anti-dilutive, net loss per share for the six month periods ended June 30, 1999
and 1998 does not include the effects of 1) 98,349 (983,490 shares of common
stock on an as-if converted basis) shares of convertible preferred stock
outstanding as of June 30, 1998; 2) 250,000 and 59,618 of stock options

F-16
<PAGE>

outstanding as of June 30, 1999 and 1998, respectively; 3) 17,125 (171,250 on an
as-if converted basis) warrants to purchase outstanding shares of a series A
convertible preferred stock as of June 30, 1998, and 2,272,694 and 446,254
warrants to purchase common stock as of June 30, 1999 and 1998, respectively.

Net loss available to common stockholders represents net loss for the six
months ended June 30, 1999 increased by a dividend of $660,013 issued in
February 1999 to the then holders of Series B and C convertible preferred stock
in conjunction with the change in conversion rates of such shares.

Exercise of over-allotment

On March 30, 1999 the underwriter exercised their over-allotment option to
purchase an additional 113,312 units for total proceeds, net of discounts and
commissions of $143,113 and offering expenses of $54,308, of $1,513,545.

Extraordinary loss

In conjunction with the repayment and conversion of debt, accrued interest
and warrants, the Company recorded an extraordinary loss of $3,672,656 on
extinguishment of debt based on the difference between (a) cash paid and the
value of stock issued and (b) the book value of debt, accrued interest and
warrants.

Short term investments

During the first six months of 1999, the Company purchased short-term
investments comprised of Euro Dollar bonds and medium and short term notes. The
Company accounts for short-term investments in accordance with Statement of
Financial Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain
Investments in Debt and Equity Securities." This statement addresses the
accounting and reporting for investments in equity securities which have readily
determinable fair values and all investments in debt securities. The Company's
short-term investments are classified as available-for-sale under SFAS 115 and
are reported at fair value. At June 30, 1999, available-for-sale securities
comprised of Euro Dollar bonds and medium and short term notes $4,866,262 and
$3,011,623, respectively.

Facility lease

The Company entered into a non-cancelable operating lease for its facility
which expires in August 2005. Under the terms of this agreement, a letter of
credit was created as security for the lease. Restricted cash of $437,500
secured that letter of credit at June 30, 1999. As part of the facility
transition, the former operating lease was retired at a cost of $40,880. Future
minimum lease payments required under the non-cancelable operating leases are
$198,017, $525,118, $533,789, $553,235, $563,114 and $592,752 for the six months
ending December 31, 1999 and years ending December 31, 2000, through 2004,
respectively.

F-17
<PAGE>

We have not authorized any dealer, salesperson or other person to give any
information or represent anything not contained in this Prospectus. You must not
rely on any unauthorized information. This Prospectus does not offer to sell or
buy any shares in any jurisdiction where it is unlawful. The information in this
Prospectus is current only as of the date of this Prospectus.

LOGO

Digital Lava Inc.

880,436 shares of Common Stock

<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 24. Indemnification of Directors and Officers.

Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify directors and officers as well as other employees and
individuals against expenses (including attorneys' fees), judgements, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with any threatened, pending or completed actions, suits or
proceedings in which such person is made a party by reason of such person being
or having been a director, officer, employee or agent to the Registrant. The
Delaware General Corporation Law provides that Section 145 is not exclusive of
other rights to which those seeking indemnification may be entitled under any
bylaw, agreement, vote of stockholders or disinterested directors or otherwise.
Article __ of the Registrant's Bylaws provides for indemnification by the
Registrant of its directors, officers and employees to the fullest extent
permitted by the Delaware General Corporation Law.

Section 102(b)(7) of the Delaware General Corporation Law permits a
corporation to provide in its certificate of incorporation that a director of
the corporation shall not be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for
unlawful payments of dividends or unlawful stock repurchases, redemptions or
other distributions, or (iv) for any transaction from which the director derived
an improper personal benefit. The Registrant's Certificate of Incorporation
provides for such limitation of liability.

The Registrant intends to obtain directors, and officers, insurance
providing indemnification for certain of the Registrant's directors, officers
and employees for certain liabilities.

Item 25. Other Expenses of Issuance and Distribution.

Accounting Fees and Expenses* $ 5,000

Printing and Engraving* $ 10,000

Legal Fees and Expenses* $ 10,000

Miscellaneous Expenses* $ 2,000
--------
Total $ 27,000
========

- ----------
* Estimated.

Item 26. Recent Sales of Unregistered Securities.

<PAGE>

Since its organization in July 1995, the Company has sold and issued the
following unregistered securities in transactions which were exempt from
registration under the Securities Act of 1933, as amended, pursuant to Section
4(2) of the Securities Act, as they were transactions not involving a public
offering:

In July 1995, the Company issued an aggregate of 809,565 shares of Common
Stock to Roger Berman, James Stigler, Thomas Stigler and Kenneth Mendoza for
nominal consideration in connection with the formation of the Company.

From August 1995 to June 1996, the Company sold an aggregate of 200,826
shares of Common Stock to 26 individuals, 19 of whom were accredited investors
and 7 of whom were non-accredited investors for $686,599 in cash. Each of the
investors received an offering memorandum which contained appropriate risk
factors and a detailed description of the Company's business. Each of the
investors completed a questionnaire regarding their financial status and
investment history which enabled the Company to determine which investors were
accredited investors.

From March to June 1996, the Company issued an aggregate of 29,334 shares
of Common Stock to a consultant and its legal counsel, Eilenberg & Zivian, in
consideration for services performed for the Company.

In September 1996, in connection with a $450,000 bridge financing completed
in such month, the Company issued warrants to purchase an aggregate of 70,265
shares of Common Stock to two accredited investors, one of which received a
portion of its warrants as a finder. Each of the investors received an offering
memorandum which contained appropriate risk factors and a detailed description
of the Company's business. Each of the investors completed a questionnaire
regarding their financial status and investment history which enabled the
Company to determine that the investors were accredited investors.

In November 1996, the Company issued 110,732 shares of Common Stock to
Joshua Sharfman, Chief Executive Officer of the Company, in consideration for
services performed for the Company.

In November 1996 and January 1997, the Company issued warrants to purchase
an aggregate of 23,212 shares of Common Stock to Eilenberg & Zivian in
consideration for services performed for the Company.

In January and March 1997, the Company issued 4,377 shares of common stock
to two consultants for services performed for the Company.

In May 1997, in connection with the issuance of an aggregate principal
amount of $187,500 of promissory notes, the Company issued warrants to purchase
an aggregate of 20,520 shares of Common Stock to five accredited investors. Each
of the investors received an offering memorandum which contained appropriate
risk factors and a detailed description of the Company's business. Each of the
investors completed a questionnaire regarding their financial status and
investment history which enabled the Company to determine that such investors
were accredited investors.

In May 1997, in connection with a $817,500 bridge financing completed in
April and May 1997, the Company issued warrants to purchase an aggregate of
45,712 shares of Common Stock to three individuals who acted as finders in
connection with such financing. Each of the investors who participated in the
financing received an offering memorandum which contained appropriate risk
factors and a detailed description of the Company's business. Each of the
investors completed a questionnaire regarding their financial status and
investment history which enabled the Company to determine that such investors
were accredited investors

In July 1997, in connection with a $902,000 bridge financing completed in
June and July 1997, the Company issued warrants to purchase an aggregate of
15,957 shares of Common Stock to three individuals who acted as finders in
connection with such financing. Each of the investors who participated in the
financing received an offering memorandum which contained appropriate risk
factors and a detailed

<PAGE>

description of the Company's business. Each of the investors completed a
questionnaire regarding their financial status and investment history which
enabled the Company to determine that such investors were accredited investors

In February 1998, in connection with the issuance of an aggregate principal
amount of $775,000 of promissory notes, the Company issued warrants to purchase
an aggregate of 96,233 shares of Common Stock to ten accredited investors. Each
of the investors received an offering memorandum which contained appropriate
risk factors and a detailed description of the Company's business. Each of the
investors completed a questionnaire regarding their financial status and
investment history which enabled the Company to determine that such investors
were accredited investors.

In February 1998, in connection with a $1,750,000 bridge financing
completed from December 1997 to February 1998, the Company issued warrants to
purchase an aggregate of 47,730 shares of Common Stock to two finders. Each of
the investors in the financing received an offering memorandum which contained
appropriate risk factors and a detailed description of the Company's business.
Each of the investors completed a questionnaire regarding their financial status
and investment history which enabled the Company to determine that such
investors were accredited investors.

In May 1998, the Company issued warrants to purchase an aggregate of 10,943
shares of Common Stock to the Whitestone Group, in consideration for services
performed for the Company.

In September 1998, the Company issued warrants to purchase an aggregate of
21,885 shares of Common Stock to a finder in consideration for such finder's
release of any claims against the Company under the finder's agreement with the
Company.

In October 1998, the Company issued warrants to purchase an aggregate of
20,000 shares of Common Stock to a Shahrokh Sedaghat in consideration for
services performed for the Company.

In December 1998, the Company issued warrants to purchase an aggregate of
13,131 shares of Common Stock to a Schwartz Communications in consideration for
services performed for the Company.

In December 1998, the Company issued warrants to purchase an aggregate of
6,000 shares of Common Stock to four investors in consideration for such
investors' release of any claims against the Company.

In December 1998, in connection with the issuance of an aggregate principal
amount of $550,000 of promissory notes, the Company issued warrants to purchase
an aggregate of 275,000 shares of Common Stock to ten accredited investors. Each
of the investors received an offering memorandum which contained appropriate
risk factors and a detailed description of the Company's business. Each of the
investors completed a questionnaire regarding their financial status and
investment history which enabled the Company to determine that such investors
were accredited investors.

In connection with the recapitalization completed immediately prior to the
completion of the Company's initial public offering in February 1999, the
Company issued an aggregate of 846,600 shares of Common Stock to holders of an
aggregate principal amount of $2,832,000 of promissory notes in exchange for
one-half of the outstanding principal of their notes, the accrued interest on
such notes and the warrants received in connection with the issuance of such
notes. All of such holders received their notes and warrants in connection with
bridge financings completed from March 1996 through July 1997. In connection
with such financings, each holder received an offering memorandum which
contained appropriate risk factors and a detailed description of the Company's
business. Each holder completed a questionnaire regarding their financial status
and investment history which enabled the Company to determine that such holders
were accredited investors.

In connection with the recapitalization to be completed immediately prior
to the completion of the Company's initial public offering in February 1999, the
Company issued an aggregate of 30,836 shares of Common Stock to holders of an
aggregate principal amount of $925,000 of promissory notes in exchange

<PAGE>

for outstanding warrants to acquire 107,689 shares of Common Stock received in
connection with the issuance of such notes. All of such holders received their
notes and warrants in connection a bridge financing completed from December 1997
to February 1998. In connection with such financing, each holder received an
offering memorandum which contained appropriate risk factors and a detailed
description of the Company's business. Each holder completed a questionnaire
regarding their financial status and investment history which enabled the
Company to determine that such holders were accredited investors.

II-1

<PAGE>

Item 27. Exhibits.

Exhibit
Number Description of Exhibits
- ------- -----------------------

3(a)* Amended and Restated Certificate of Incorporation, in effect as of the
date hereof

3(b)* Form of Amendment to Amended and Restated Certificate of Incorporation

3(c)* Form of Amended and Restated Certificate of Incorporation

3(d)* Bylaws of the Company, in effect as of the date hereof

3(e)* Form of Amended and Restated Bylaws of the Company

4(a)* Form of Common Stock Certificate

4(b)* Form of Warrant Agreement

4(d)* 1996 Incentive and Non-Qualified Stock Option Plan (1)

4(e)* Warrant Agreement dated as of September 30, 1996 between the Company
and Millenium Capital Management (2)

4(f)* Warrant Agreement dated as of September 30, 1996 between the Company
and Miracle Investments Co. (2)

4(g)* Registration Rights Agreement between the Company, Miracle Investments
Co. and Millenium Capital Management

4(h)* Warrant Agreement dated November 1, 1996 between the Company and
Eilenberg & Zivian(2)(3)

4(i)* Warrant Agreement dated January 27, 1997 between the Company and
Eilenberg & Zivian (2)(3)

4(j)* Warrant Agreement dated May 30, 1997 between the Company and certain
investors and finders(2)

4(k)* Registration Rights Agreement dated May 30, 1997 between the Company
and certain investors and finders

4(l)* Letter Agreement dated October 6, 1998 between the Company and certain
investors

4(m)* Warrant Agreement dated July 11, 1997 between the Company and certain
investors and finders(2)

4(n)* Registration Rights Agreement dated July 11, 1997 between the Company
and certain investors and finders

II-2

<PAGE>

4(o)* Warrant Agreement between the Company and Schwartz Communications

4(p)* Warrant Agreement dated February 19, 1998 between the Company and
certain investors and finders (2)

4(q)* Registration Rights Agreement dated February 19, 1998 between the
Company and certain investors and finders

4(r)* Form of Promissory Note dated February 19, 1998 between the Company
and certain investors

4(s)* Warrant Agreement dated May 1, 1998 between the Company and The
Whitestone Group (2)

4(t)* Registration Rights Agreement dated May 1, 1998 between the Company
and The Whitestone Group

4(u)* Letter Agreement between the Company and certain investors and finders
dated July 15, 1998

4(v)* Letter Agreement between the Company and certain investors and finders
dated July 16, 1998

4(w)* Letter Agreement between the Company and certain investors and finders
dated July 29, 1998

4(x)* Warrant Agreement dated as of October 7, 1998 between the Company and
certain consultants

4(y)* Registration Rights Agreement dated as of October 7, 1998 between the
Company and certain consultants

4(z)* Letter Agreement as of October 7, 1998 between the Company and certain
investors

4(aa)* Amended and Restated Option Agreement dated as of May 1, 1998 between
the Company, Judson Cooper and certain founders of the Company (2)

4(ab)* Amended and Restated Option Agreement dated as of May 1, 1998 between
the Company, E&Z Investments and certain founders of the Company (2)

4(ac)* Warrant Agreement between the Company and United Resources Partners

4(ad)* Warrant Agreement dated January 7, 1999 between the Company and
certain investors

4(ae)* Warrant Agreement between the Company and certain investors dated
December 7, 1998

4(af)* Registration Rights Agreement between the Company and certain
investors dated December 7, 1998.

4(ag) Warrant Agreement between the Company and Marc Daniels, dated
September 1, 1999

5(a) Opinion of Ehrenreich Eilenberg Krause & Zivian LLP

II-3

<PAGE>

10(a)* Employment Agreement dated September 1, 1998 between the Company and
Thomas Stigler

10(b)* Employment Agreement dated September 1, 1998 between the Company and
Joshua D.J. Sharfman

10(c)* Consulting Agreement dated September 1, 1998 between the Company and
Roger Berman

10(d)* Consulting Agreement dated September 1, 1998 between the Company and
Dr. James Stigler

10(e)* Consulting Agreement dated September 1, 1998 between the Company and
Prism Ventures LLC

10(f)* Consulting Agreement dated May 1, 1998 between the Company and the
Whitestone Group

10(g)* Consulting Agreement dated October 7, 1998 between the Company and
Shahrokh "Shawn" Sedaghat

10(h)* Agreement dated January 8, 1998 between the Company and RealNetworks,
Inc. (4)

10(i)* Agreement dated April 1, 1998 between the Company and RealNetworks,
Inc.(4)

10(j)* Software License Agreement dated March 31, 1997 between the Company
and Cinax Designs, Inc.(4)

10(k)* Agreement dated August 8, 1998 between the Company and Lesson Lab

10(l) Employment Letter Agreement dated June 3, 1999 between the Company and
Robert Greene

23(a) Consent of Ehrenreich Eilenberg Krause & Zivian LLP (included in
opinion filed as Exhibit 5(a))

23(b) Consent of PricewaterhouseCoopers LLP

24(a)* Power of Attorney (included in Part II of the Registration Statement
under the caption Signatures")

27(a) Financial Data Schedule

- ----------
* Previously filed.

(1) Does not reflect increase in number of shares issuable under the Plan
pursuant to resolution of Board of Directors.

(2) These agreements were entered into prior to the reverse split of the
Company's Common Stock and, therefore, do not reflect such reverse split.

(3) These warrant agreements do not reflect exercise price changes made
pursuant to resolutions of the Board of Directors.

II-4

<PAGE>

(4) Confidential information is omitted and identified by a * and filed
separately with the SEC pursuant to a request for Confidential Treatment.

Item 28. Undertakings.

(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the small business issuer pursuant to the foregoing provisions, or otherwise,
the undersigned Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the undersigned Registrant of expenses incurred or paid by a director, officer
or controlling person of the undersigned Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
undersigned Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

(b) The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus
filed as part of a registration statement in reliance upon Rule
430A and contained in the form of prospectus filed by the
undersigned Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act of 1933 shall be deemed to be
part of the registration statement as of the time it was declared
effective; and

(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.

(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:

(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;

(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in
the information in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was
registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the
form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration
statement; and

(iii) Include any additional or changed material information on
the plan of distribution.

II-5

<PAGE>

(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that
time to be the initial bona fide offering.

(3) File a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the offering.

II-6

<PAGE>

SIGNATURES

In accordance with the requirements of the Securities Act of 1933, the
undersigned Registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form SB-2 and has authorized this
Post-Effective Amendment No. 1 to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Marina Del
Rey, State of California, on the 23rd day of October, 1999.

DIGITAL LAVA INC.

By: /s/ Robert Greene
----------------------------
Robert Greene
Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 1 to Registration Statement has been signed by the
following persons in their respective capacities and on the respective dates set
forth opposite their names.

Signatures Title Date
- ---------- ----- ----

/s/ James Stigler
- ------------------------
James Stigler Chairman and Director October 23, 1999

/s/ Joshua D.J. Sharfman
- ------------------------
Joshua D.J. Sharfman President October 23, 1999

/s/ Danny Gampe
- ------------------------
Danny Gampe Chief Financial Officer October 23, 1999
(Principal Financial and
Accounting Officer)

/s/ Michael Goodell
- ------------------------
Michael Goodell Vice President of October 23, 1999
Consulting and Services

/s/ Roger Berman
- ------------------------
Roger Berman Director October 23, 1999

/s/ John Carrington
- ------------------------
John Carrington Director October 23, 1999

/s/ Robert Greene
- ------------------------
Robert Greene Chief Executive Officer October 23, 1999
and Director (Principal
Executive Officer)

II-7

WARRANT AGREEMENT

WARRANT AGREEMENT, dated as of September 1, 1999, between DIGITAL LAVA
INC., a Delaware corporation (the "Company"), and Marc Daniels (the
"Holder").

W I T N E S S E T H:

WHEREAS, Holder has provided consulting services to the Company during
1999 and pursuant to an agreement dated September 1, 1999 between the Holder and
the Company (the "Letter Agreement"), Holder agreed to receive partial
compensation in consideration therefor of 10,000 warrants per month, for an
aggregate of 10,000 warrants to purchase an aggregate of 10,000 shares of the
Company's common stock, par value $.0001 per share ("Common Stock," shares of
Common Stock shall be referred to as "Shares" or "Common Shares"), at an
exercise price of $4.3125 per share (the "Warrants").

NOW THEREFORE, in consideration of the premises herein set forth and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:

1. Issue. The Company shall issue to Holder a certificate (the "Warrant
Certificate") dated as of the date hereof providing such Holder with the right
to purchase, at any time, from the date hereof until 5:30 p.m., New York time,
on September 1, 2004, 10,000 Common Shares (the "Warrant Shares") (subject to
adjustment as provided in Section 9 hereof), at an exercise price (subject to
adjustment as provided in Section 9 hereof) of $4.3125 per Common Share.

2. Warrant Certificate. The Warrant Certificate to be delivered pursuant to
this Agreement shall be in the form set forth in Exhibit X, attached hereto and
made a part hereof, with such appropriate insertions, omissions, substitutions
and other variations as are required or permitted by this Agreement.

3. Exercisability of Warrants. The Warrants shall be exercisable at any
time until 5:30 p.m., New York time, on September 1, 2004.

4. Procedure for Exercise of Warrants.

4.1 Cash Exercise. The Warrants are exercisable at an aggregate initial
exercise price per Common Share set forth in Section 7 hereof payable by
certified check or official bank check in New York Clearing House funds. Upon
surrender of a Warrant Certificate with the annexed Form of Election to Purchase
duly executed, together with payment of the Exercise Price (as hereinafter
defined) for the Warrant Shares purchased, at the Company's principal offices in
Los Angeles, California (presently located at 10850 Wilshire Boulevard,

<PAGE>

Suite 1260, Los Angeles, CA 90024) the registered holder of a Warrant
Certificate (the "Holder") shall be entitled to receive a certificate for the
Warrant Shares so purchased. The purchase rights represented by the Warrant
Certificate are exercisable at the option of the Holder thereof, in whole or in
part (but not as to fractional Common Shares underlying the Warrants). In the
case of the purchase of less than all the Warrant Shares purchasable under the
Warrant Certificate, the Company shall cancel said Warrant Certificate upon the
surrender thereof and shall execute and deliver a new Warrant Certificate of
like tenor for the balance of the Warrant Shares purchasable thereunder.

4.2 Cashless Exercise. In addition to the exercise of all or a portion of
the Warrants by the payment of the Exercise Price in cash or check as set forth
in Section 4.1 above, and in lieu of any such payment, the Holder has the right
to exercise the Warrants, in full or in part, by surrendering the Warrant
Certificate with the annexed Form of Election to Purchase duly executed, in
exchange for the number of Common Shares equal to the product of (x) the number
of Common Shares as to which the Warrants are being exercised multiplied by (y)
a fraction, the numerator of which is the Current Market Price of the Common
Shares (as defined below) less the Exercise Price then in effect and the
denominator of which is the Current Market Price.

4.3 Current Market Price. The term "Current Market Price" shall mean at any
date the last reported sale price of the Common Stock for the three trading days
immediately preceding the date of exercise, as officially reported by the
principal securities exchange on which the Common Stock is listed or admitted to
trading or by the Nasdaq SmallCap Market ("Nasdaq Small Cap") or by the National
Association of Securities Dealers Automated Quotation System ("Nasdaq"), or, if
the Common Stock is not listed or admitted to trading on any national securities
exchange or quoted by Nasdaq, the closing bid price for such immediately
preceding days as furnished by the National Association of Securities Dealers,
Inc. ("NASD") through Nasdaq or similar organization if Nasdaq is no longer
reporting such information, or if the Common Stock is not quoted on Nasdaq, as
determined in good faith (using customary valuation methods) by resolution of
the members of the Board of Directors of the Company, based on the best
information available to it.

5. Issuance of Certificate. Upon the exercise of the Warrants, the issuance
of a certificate for Warrant Shares (or Other Securities) shall be made
forthwith (and in any event within five (5) business days thereafter) without
charge to the Holder thereof including, without limitation, any tax which may be
payable in respect of the issuance thereof, and such certificate shall (subject
to the provisions of Sections 6 and 8 hereof) be issued in the name of, or in
such names as may be directed by, the Holder thereof; provided, however, that
the Company shall not be required to pay any tax which may be payable in respect
of any transfer involved in the issuance and delivery of any such certificate in
a name other than that of the Holder and the Company shall not be required to
issue or deliver such certificate unless or until the person or persons
requesting the issuance thereof shall have paid to the Company the amount of
such tax or shall have established to the satisfaction of the Company that such
tax has been paid.

The Warrant Certificate and the certificate representing the Warrant Shares
(or Other Securities) shall be executed on behalf of the Company by the manual
or facsimile signature of the then present Chairman or Vice Chairman of the
Board of Directors or President or any Vice President of the Company under its
corporate seal reproduced thereon, attested to by the manual or facsimile
signature of the then present Secretary or any Assistant Secretary of the
Company. The Warrant Certificate shall be dated the date of execution by the
Company upon initial issuance, division, exchange, substitution or transfer.

6. Transfer of Warrants. The Holder of the Warrant Certificate, by its
acceptance thereof, covenants and agrees that the Warrants are being acquired as
an investment and not with a view to the distribution thereof. The Warrants may
be sold, transferred, assigned, hypothecated or otherwise disposed of, in whole
or in part, without restriction, subject to compliance with applicable
securities laws.

<PAGE>

7. Exercise Price.

7.1 Initial and Adjusted Exercise Price. Except as otherwise provided in
Section 9 hereof, the initial exercise price of each Warrant shall be the price
set forth in Section 1 hereof per Warrant Shares issued thereunder. The adjusted
exercise price shall be the price which shall result from time to time from any
and all adjustments of the initial exercise price in accordance with the
provisions of Section 9 hereof.

7.2 Exercise Price. The term "Exercise Price" herein shall mean the initial
exercise price or the adjusted exercise price, depending upon the context.

8. Registration Under the Securities Act of 1933. The Warrants, the Warrant
Shares and any of the Other Securities issuable upon exercise of the Warrants
have not been registered under the Securities Act of 1933, as amended (the
"Act"). Upon exercise, in whole or in part, of the Warrants, a certificate
representing the Warrant Shares underlying the Warrants, and any of the Other
Securities issuable upon exercise of the Warrants (collectively, the "Warrant
Securities") shall bear the following legend unless such Warrant Shares
previously have been registered under the Act in accordance with the terms
hereof:

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("ACT"), AND MAY NOT BE
OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE ACT, (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER THE ACT (OR
ANY SIMILAR RULE UNDER THE ACT RELATING TO THE DISPOSITION OF SECURITIES),
OR (iii) AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY
SATISFACTORY TO COUNSEL TO THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION
UNDER THE ACT IS AVAILABLE.

9. Adjustments to Exercise Price and Number of Securities. The Exercise
Price and, in some cases, the number of Warrant Shares purchasable upon the
exercise of the Warrants, shall be subject to adjustment from time to time upon
the occurrence of certain events described in this Section 9.

9.1 Subdivision or Combination of Common Shares and Common Share Dividend.
In case the Company shall at any time subdivide its outstanding Common Shares
into a greater number of Common Shares or declare a dividend upon its Common
Shares payable solely in Common Shares, the Exercise Price in effect immediately
prior to such subdivision or declaration shall be proportionately reduced, and
the number of Warrant Shares issuable upon exercise of the Warrants shall be
proportionately increased. Conversely, in case the outstanding Common Shares of
the Company shall be combined into a smaller number of Common Shares, the
Exercise Price in effect immediately prior to such combination shall be
proportionately increased, and the number of Warrant Shares issuable upon
exercise of the Warrants shall be proportionately reduced.

<PAGE>

9.2 Notice of Adjustment. Promptly after adjustment of the Exercise Price
or any increase or decrease in the number of Warrant Shares purchasable upon the
exercise of this Warrant, the Company shall give written notice thereof, by
first class mail, postage prepaid, addressed to the registered holder of this
Warrant at the address of such holder as shown on the books of the Company. The
notice shall be signed by the Company's chief financial officer and shall state
(i) the effective date of the adjustment and the Exercise Price resulting from
such adjustment and (ii) the increase or decrease, if any, in the number of
Common Shares purchasable at such price upon the exercise of this Warrant,
setting forth in reasonable detail the method of calculation and the facts upon
which such calculation is based.

9.3 Other Notices. If at any time:

(a) the Company shall declare any cash dividend upon its Common Shares;

(b) the Company shall declare any dividend upon its Common Shares payable
in securities (other than a dividend payable solely in Common Shares)
or make any special dividend or other distribution to the holders of
its Common Shares;

(c) there shall be any consolidation or merger of the Company with another
corporation, or a sale of all or substantially all of the Company's
assets to another corporation; or

(d) there shall be a voluntary or involuntary dissolution, liquidation or
winding-up of the Company;

then, in any one or more of said cases, the Company shall give, by certified or
registered mail, postage prepaid, addressed to the registered holder of this
Warrant at the address of such holder as shown on the books of the Company, (i)
at least 15 days' prior written notice of the date on which the books of the
Company shall close or a record shall be taken for such dividend, distribution
or subscription rights or for determining rights to vote in respect of any such
dissolution, liquidation or winding-up; (ii) at least 10 days' prior written
notice of the date on which the books of the Company shall close or a record
shall be taken for determining rights to vote in respect of any such
reorganization, reclassification, consolidation, merger or sale, and (iii) in
the case of any such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding-up, at least 15 days' written notice
of the date when the same shall take place. Any notice given in accordance with
clause (i) above shall also specify, in the case of any such dividend,
distribution or option rights, the date on which the holders of Common Shares
shall be entitled thereto. Any notice given in accordance with clause (iii)
above shall also specify the date on which the holders of Common Shares shall be
entitled to exchange their Common Shares for securities or other property
deliverable upon such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding-up, as the case may be. If the Holder
of the Warrant does not exercise this Warrant prior to the occurrence of an
event described above, except as provided in Sections 9.1 and 9.4, the Holder
shall not be entitled to receive the benefits accruing to existing holders of
the

<PAGE>

Common Shares in such event.

9.4 Changes in Common Shares. In case at any time the Company shall be a
party to any transaction (including, without limitation, a merger,
consolidation, sale of all or substantially all of the Company's assets or
recapitalization of the Common Shares) in which the previously outstanding
Common Shares shall be changed into or exchanged for different securities of the
Company or common stock or other securities of another corporation or interests
in a non-corporate entity or other property (including cash) or any combination
of any of the foregoing (each such transaction being herein called the
"Transaction" and the date of consummation of the Transaction being herein
called the "Consummation Date"), then, as a condition of the consummation of the
Transaction, lawful and adequate provisions shall be made so that the Holder,
upon the exercise hereof at any time on or after the Consummation Date, shall be
entitled to receive, and this Warrant shall thereafter represent the right to
receive, in lieu of the Common Shares issuable upon such exercise prior to the
Consummation Date, the highest amount of securities or other property to which
the Holder would actually have been entitled as a holder of an Common Share upon
the consummation of the Transaction if the Holder had exercised such Warrant
immediately prior thereto. The provisions of this Section 9.4 shall similarly
apply to successive Transactions.

10. Exchange and Replacement of Warrant Certificate. The Warrant
Certificate is exchangeable without expense, upon the surrender thereof by the
registered Holder at the principal executive office of the Company, for a new
Warrant Certificate of like tenor and date representing in the aggregate the
right to purchase the same number of Warrant Shares in such denominations as
shall be designated by the Holder thereof at the time of such surrender.

Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of the Warrant Certificate, and, in
case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of the Warrants, if
mutilated, the Company will make and deliver a new Warrant Certificate of like
tenor, in lieu thereof.

11. Elimination of Fractional Interests. The Company shall not be required
to issue certificates representing fractions of Common Shares upon the exercise
of the Warrants, nor shall it be required to issue scrip or pay cash in lieu of
fractional interests, it being the intent of the parties that all fractional
interests shall be eliminated by rounding any fraction up to the nearest whole
number of Common Shares or Other Securities.

12. Reservation of Securities. The Company shall at all times reserve and
keep available out of its authorized Common Shares, solely for the purpose of
issuance upon the exercise of the Warrants, such number of Common Shares or
Other Securities as shall be issuable upon the exercise thereof. The Company
covenants and agrees that, upon exercise of the Warrants and payment of the
Exercise Price therefor, all Common Shares or Other Securities issuable upon
such exercise shall be duly and validly issued, fully paid, non-assessable and
not subject to the preemptive rights of any holder of Common Shares.

<PAGE>

13. Notices to Warrant Holder. Except as otherwise provided in Section 9.4,
nothing contained in this Agreement shall be construed as conferring upon the
Holder by virtue of his holding the Warrant the right to vote or to consent or
to receive notice as a holder of an Common Share in respect of any meetings of
such holders for the election of directors or any other matter, or as having any
rights whatsoever as such a holder of the Company.

14. Notices.

All notices, requests, consents and other communications hereunder shall be
in writing and shall be deemed to have been duly made and sent when delivered,
or mailed by registered or certified mail, return receipt requested:

(a) If to the registered Holder of the Warrants, to the address of
such Holder as shown on the books of the Company; or

(b) If to the Company, to the address set forth in Section 4 hereof
(with copy to: Ehrenreich Eilenberg Krause & Zivian LLP, 11 East 44th
Street, 17th Floor, New York, NY 10017/Attn. Jeffrey D. Abbey, Esq.) or to
such other address as the Company may designate by notice to the Holder.

15. Supplements and Amendments. The Company and Holder may from time to
time supplement or amend this Agreement in order to cure any ambiguity, to
correct or supplement any provision contained herein which may be defective or
inconsistent with any provisions herein, or to make any other provisions in
regard to matters or questions arising hereunder which the Company and Holder
may deem necessary or desirable.

16. Successors. All the covenants and provisions of this Agreement shall be
binding upon and inure to the benefit of the Company, the Holder and their
respective successors and assigns hereunder.

17. Termination. This Agreement shall terminate at the close of business on
the tenth anniversary of the issuance of the Warrants.

18. Governing Law. This Agreement and the Warrant Certificate issued
hereunder shall be deemed to be a contract made under the laws of the State of
New York and for all purposes shall be construed in accordance with the laws of
the State of New York without giving effect to the rules of the State of New
York governing the conflicts of laws.

19. Entire Agreement; Modification. This Agreement supersedes any prior
agreements between the parties with respect to the subject matter hereof,
including without limitation, the Letter Agreement, and contains the entire
understanding between the parties hereto with respect to the subject matter
hereof and may not be modified or amended except by a writing duly signed by the
party against whom enforcement of the modification or amendment is sought.

<PAGE>

20. Severability. If any provision of this Agreement shall be held to be
invalid or unenforceable, such invalidity or unenforceability shall not affect
any other provision of this Agreement.

21. Captions. The caption headings of the Sections of this Agreement are
for convenience of reference only and are not intended, nor should they be
construed as, a part of this Agreement and shall be given no substantive effect.

22. Benefits of this Agreement. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company and Holder
any legal or equitable right, remedy or claim under this Agreement; and this
Agreement shall be for the sole and exclusive benefit of the Company and Holder.

23. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.

IN WITNESS WHEREOF, the parties hereto have caused this Warrant Agreement to be
duly executed, as of the day and year first above written.

Very truly yours,

DIGITAL LAVA INC.

By: _____________________________
Authorized Officer

ACCEPTED AND AGREED TO:

MARC DANIELS

By:___________________________________
Name: Marc Daniels

<PAGE>

[FORM OF WARRANT CERTIFICATE]

THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT") (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER THE ACT (OR ANY
SIMILAR RULE UNDER THE ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii)
AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO
COUNSEL FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER THE ACT IS
AVAILABLE.

EXERCISABLE
UNTIL
September 1, 2004 5:30 P.M., NEW YORK TIME,

No. W-LAVA-98-SCH-1 10,000 Warrants

WARRANT CERTIFICATE

This Warrant Certificate certifies that Marc Daniels or its registered
assigns ("Holder"), is the registered holder of 120,000 Warrants to purchase
initially at any time until 5:30 p.m. New York time on September 1, 2004
("Expiration Date"), up to 10,000 fully-paid and non-assessable shares of common
stock, par value $.0001 per share ("Common Shares") of DIGITAL LAVA INC., a
Delaware corporation (the "Company"), at an initial exercise price, subject to
adjustment in certain events (the "Exercise Price"), equal to $4.3125 per Common
Share, upon surrender of this Warrant Certificate and payment of the initial
exercise price at an office or agency of the Company, but subject to the
conditions set forth herein and in the Warrant Agreement dated as of the date
hereof between the Company and Holder (the "Warrant Agreement"). Payment of the
Exercise Price shall be made by certified check or official bank check in New
York Clearing House funds payable to the order of the Company, unless exercise
is made pursuant to Section 4.2 of the Warrant Agreement.

No Warrant may be exercised after 5:30 p.m., New York time, on the
Expiration Date, at which time all Warrants evidenced hereby, unless exercised
prior thereto, shall thereafter be void.

The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to the Warrant Agreement, which
Warrant Agreement is hereby incorporated by reference in and made a part of this
instrument and is hereby referred to for a description of the rights, limitation
of rights, obligations, duties and immunities thereunder of the Company and the
Holder (the word "Holder" meaning the registered holder) of the Warrants.

<PAGE>

The Warrant Agreement provides that upon the occurrence of certain events
the Exercise Price and the type and/or number of the Company's securities
issuable thereupon may, subject to certain conditions, be adjusted. In such
event, the Company will, at the request of the holder, issue a new Warrant
Certificate evidencing the adjustment in the Exercise Price and the number
and/or type of securities issuable upon the exercise of the Warrants; provided,
however, that the failure of the Company to issue such new Warrant Certificate
shall not in any way change, alter, or otherwise impair, the rights of the
holder as set forth in the Warrant Agreement.

Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrants shall be issued to the transferee(s) in exchange for this Warrant
Certificate, subject to the limitations provided herein and in the Warrant
Agreement, without any charge except for any tax or other governmental charge
imposed in connection with such transfer.

Upon the exercise of less than all of the Warrants evidenced by this
Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.

The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.

All terms used in this Warrant Certificate which are defined in the Warrant
Agreement shall have the meanings assigned to them in the Warrant Agreement.

IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed.

Dated as of September 1, 1999

DIGITAL LAVA INC.

By: ___________________________
Authorized Officer

<PAGE>

[FORM OF ELECTION TO PURCHASE]

The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase _________ Common Shares and
herewith tenders in payment for such securities a certified check or official
bank check payable in New York Clearing House Funds to the order of DIGITAL LAVA
INC. in the amount of $__________ , all in accordance with the terms of Section
4 of the Warrant Agreement dated as of September 1, 1999 between DIGITAL LAVA
INC. and the undersigned (or its assignor). The undersigned requests that a
certificate for such securities be registered in the name of __________ whose
address is ____________ and that such Certificate be delivered to ___________
whose address is _______________.

Dated:
Signature ________________________________________
(Signature must conform in all respects to name of
holder as specified on the face of the Warrant Certificate.)

_____________________________________
(Insert Social Security or Other Identifying Number of Holder)

<PAGE>

[FORM OF ASSIGNMENT]

(To be executed by the registered holder if such
holder desires to transfer the Warrant Certificate.)

FOR VALUE RECEIVED ________________________ hereby sells, assigns and
transfers unto

_______________________________________________________

(Please print name and address of transferee)

this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint ______________ Attorney, to
transfer the within Warrant Certificate on the books of the within-named
Company, with full power of substitution.

Dated:
Signature: _________________________
(Signature must conform in all respects to name of holder as
specified on the face of the Warrant Certificate.)

_____________________________________
(Insert Social Security or Other Identifying Number of Assignee)

[Letterhead of Ehrenreich Eilenberg Krause & Zivian LLP]

Exhibit 5(a)

October 25, 1999

Digital Lava, Inc.
13160 Mindanao Way, Suite 350
Marina Del Rey, California 90292

Re: Post-Effective Amendment No.1 to
Registration Statement on Form SB-2
Relating to 880,436 Shares of Common Stock

Gentlemen:

You have requested our opinion in connection with the above-referenced
registration statement (the "Registration Statement") relating to up to 880,436
shares of Common Stock, par value $.0001 per share, of Digital Lava, Inc. (the
"Company") that may from time to time be sold by the holders thereof (the
"Selling Security Holders"). Such 880,436 shares are referred to as the
"Securities."

We have reviewed copies of the Amended and Restated Certificate of
Incorporation of the Company (including amendments thereto), the Amended and
Restated By-laws of the Company, the Registration Statement and exhibits thereto
and have examined such corporate documents and records and other certificates,
and have made such investigations of law, as we have deemed necessary in order
to render the opinion hereinafter set forth. As to certain questions of fact
material to our opinion, we have relied upon the certificate of an officer of
the Company and upon certificates of public officials.

Based upon and subject to the foregoing, we are of the opinion that the
Securities have been duly authorized and are validly issued, fully paid and
non-assessable.

We hereby consent to the reference to us under the caption "Legal Matters"
in the Registration Statement and to the use of this opinion as an exhibit to
the Registration Statement. In giving this consent, we do not hereby admit that
we come within the category of persons whose consent is required under Section 7
of the Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder.

Very truly yours,
Ehrenreich Eilenberg Krause & Zivian LLP

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the use in this Registration Statement on Form SB-2 of our
report dated March 15, 1999, relating to the financial statements of Digital
Lava Inc., which appears in such Registration Statement. We also consent to the
reference to us under the heading "Experts" in such Registration Statement.

PricewaterhouseCoopers LLP
Costa Mesa, California
November 1, 1999

DIGITAL LAVA INC.
10850 Wilshire Boulevard, Suite 1260
Los Angeles, CA 90024

June 3, 1999

Robert Greene
17507 Luna de Miel
P.O. Box 7147
Rancho Santa Fe, CA 92067

Dear Bob:

On behalf of Digital Lava Inc. ("the Company"), I am pleased to extend to
you an offer of employment as Chief Executive Officer of the Company on the
terms set forth below. If you agree to these terms, please sign and date this
letter as indicated below, and return it to us by Friday, June 4, 1999. This
offer will expire at 5:00 p.m. P.S.T. on June 4, 1999.

I. Position and Duties. The Company offers to employ you as the Chief Executive
Officer of the Company. You will report directly to the Board of Directors of
the Company. You will devote all of your business time and best efforts to your
duties as an employee of the Company.

II. Compensation.

A. Base Salary. The Company shall pay you a base salary of $300,000 per
annum, payable at least monthly on the Company's regular pay cycle for
professional employees.

B. Term. Your employment will begin on July 1, 1999 (or earlier) and the
term will be 3 years. If you are terminated without cause prior to the end of
term, you will receive a severance payment equal to your annual base salary.

C. Equity. You will receive options to purchase 5% of the equity of the
Company on a fully diluted basis as of July 1, 1999 (or your start date). The
options will vest as follows: 40% on the first anniversary of your start date
and 20% on each of the second, third and fourth anniversaries of such date;
provided, however, that in the case of a sale, merger or other change of control
of the Company, your options will vest immediately prior to the occurrence of
such event. In addition, if the Company completes a financing transaction within
6 months of your start date, then the options will have weighted average
anti-dilution protection.

<PAGE>

D. Apartment. The Company will provide you with a studio or 1 bedroom
apartment in the Los Angeles area with maximum annual rent in an amount to be
determined.

E. Bonus. You will be eligible to receive an annual bonus of up to $100,000
which will be based on criteria to be mutually determined by you and the Board.
You will also be eligible to receive future grants of options subject to Board
approval.

III. Employee Benefits. You will be entitled to the employee benefits, including
vacation, health and other insurance benefits made available by the Company to
any other employee of the Company. In addition, you will be covered by the
Company's Directors and Officers insurance policy.

Bob, on behalf of the entire company, we are very excited about having you
join Digital Lava. We look forward to working with you as soon possible.

Very truly yours,

/s/ Roger Berman

Roger Berman, for the Board of Directors

Accepted and Agreed To:

/s/ Robert Greene 6/3/99
Robert Greene Date

<ARTICLE> 5

<S> <C> <C>
<PERIOD-TYPE> 12-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 JUN-30-1999
<CASH> 30,893 639,430
<SECURITIES> 0 7,883,088
<RECEIVABLES> 204,196 226,966
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 1,140,313 8,943,343
<PP&E> 185,131 319,362
<DEPRECIATION> 125,484 157,652
<TOTAL-ASSETS> 1,216,925 9,559,672
<CURRENT-LIABILITIES> 7,297,445 286,364
<BONDS> 0 0
0 0
9 0
<COMMON> 13 463
<OTHER-SE> (6,080,542) (9,272,845)
<TOTAL-LIABILITY-AND-EQUITY> 1,216,925 9,559,672
<SALES> 1,463,618 372,298
<TOTAL-REVENUES> 1,463,618 372,298
<CGS> 288,778 54,327
<TOTAL-COSTS> 3,546,136 2,737,786
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,359,245 26,949
<INCOME-PRETAX> (3,730,541) (2,446,764)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (3,730,541) (2,446,764)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 (3,672,656)
<CHANGES> 0 0
<NET-INCOME> (3,730,541) (6,119,420)
<EPS-BASIC> (25.22) (2.08)
<EPS-DILUTED> (25.22) (2.08)

</TABLE>