Registration No. 333-25987
                                               Filed Pursuant to Rule 424(b)(1)
PROSPECTUS
 
                                516,387 SHARES
 
                                METATOOLS, INC.
 
                               ----------------
 
                                 COMMON STOCK
 
                               ----------------
 
  This Prospectus relates to the public offering, which is not being
underwritten, of up to 516,387 shares of Common Stock, par value $0.001 per
share (the "Shares"), of MetaTools, Inc. ("MetaTools" or the "Company"), which
may be offered from time to time by certain stockholders of the Company or by
pledgees, donees, transferees or other successors in interest that receive
such shares as a gift, partnership distribution or other non-sale related
transfer (the "Selling Stockholders"). The Company will receive no part of the
proceeds of such sales. All of the Shares were originally issued by the
Company in connection with the Company's acquisition of Real Time Geometry
Corp. ("RTG") pursuant to an exemption from the registration requirements of
the Securities Act of 1933, as amended (the "Securities Act"), provided by
Section 4(2) thereof. None of the Shares offered pursuant to this Prospectus
have been registered prior to the filing of the Registration Statement of
which this Prospectus is a part.
 
  The Shares may be offered by the Selling Stockholders from time to time in
one or more transactions in the over-the-counter market, in negotiated
transactions, or otherwise. See "Plan of Distribution." The price at which any
of the Shares may be sold, and the commissions, if any, paid in connection
with any such sale, are unknown and may vary from transaction to transaction.
The Company will pay all expenses incident to the offering and sale of the
Shares to the public other than any commissions and discounts of underwriters,
dealers or agents and any transfer taxes. See "Selling Stockholders" and "Plan
of Distribution."
 
  The Company is in the process of obtaining stockholder consent in order to
merge with Fractal Design Corporation, a California corporation ("Fractal").
See "Recent Developments--Fractal Merger."
 
  The Company's Common Stock is listed on the Nasdaq National Market under the
symbol "MTLS." On May 2, 1997, the last sale price of the Company's Common
Stock was $10 7/8 per share.
 
                               ----------------
 
 SEE "RISK FACTORS" ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD
                    BE CONSIDERED BY PROSPECTIVE INVESTORS.
 
                               ----------------
 
  The Securities and Exchange Commission (the "Commission") may take the view
that, under certain circumstances, the Selling Stockholders and any broker-
dealers or agents that participate with the Selling Stockholders in the
distribution of the Shares may be deemed to be "underwriters" within the
meaning of the Securities Act. Commissions, discounts or concessions received
by any such broker-dealer or agent may be deemed to be underwriting
commissions under the Securities Act. The Company and the Selling Stockholders
have agreed to certain indemnification arrangements. See "Plan of
Distribution."
 
                               ----------------
 
   THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
    AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
     SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
         PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
             REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
 
                  The date of this Prospectus is May 5, 1997.

 
                             AVAILABLE INFORMATION
 
  The Company is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy and information statements and other
information with the Commission. Such reports, proxy and information
statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following
Regional Offices of the Commission: New York Regional Office, Seven World
Trade Center, Suite 1300, New York, New York 10048, and Chicago Regional
Office, Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material may be obtained by mail at prescribed
rates from the Public Reference Section of the Commission, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549. The Commission also maintains
a Web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission
at the address http://www.sec.gov. The Common Stock of the Company is listed
on the Nasdaq National Market, and such reports, proxy and information
statements and other information concerning the Company may be inspected at
the offices of Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006.
 
                            ADDITIONAL INFORMATION
 
  This Prospectus constitutes a part of a Registration Statement on Form S-3
(herein, together with all amendments and exhibits, referred to as the
"Registration Statement") filed by the Company with the Commission under the
Securities Act. This Prospectus does not contain all of the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to the Company and the shares of Common Stock offered
hereby, reference is made to the Registration Statement. The Registration
Statement may be inspected at the public reference facilities maintained by
the Commission at the addresses set forth in the preceding paragraph.
Statements contained herein concerning the provisions of any document are not
necessarily complete, and each such statement is qualified in its entirety by
reference to the copy of such document filed with the Commission.
 
                                       2

 
                INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
 
  The following documents filed with the Commission by the Company (File No.
0-27168) pursuant to the Exchange Act are hereby incorporated by reference in
this Prospectus:
 
    (1) The Company's Annual Report on Form 10-K for the year ended December
  31, 1996, as amended on April 25, 1997;
 
    (2) The Company's Joint Proxy Statement/Prospectus dated April 25, 1997;
 
    (3) The Company's Current Report on Form 8-K, filed with the Commission
  on January 15, 1997 and amended on March 11, 1997; and
 
    (4) The description of the Company's Common Stock contained in its
  Registration Statement on Form 8-A, filed with the Commission on October
  25, 1995.
 
  All reports and other documents filed by the Company pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Prospectus and prior to the termination of this offering shall be deemed to be
incorporated by reference into this Prospectus to the extent required and to
be a part of this Prospectus from the date of filing of such reports and
documents.
 
  Any statement contained in a document incorporated by reference into this
Prospectus shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained herein or in any other
subsequently filed document that also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of the Registration Statement or this
Prospectus.
 
  The Company hereby undertakes to provide without charge to each person,
including any beneficial owner, to whom a copy of this Prospectus is
delivered, upon written or oral request of such person, a copy of any and all
of the information that has been or may be incorporated by reference into this
Prospectus, other than exhibits to such documents (unless such exhibits are
specifically incorporated by reference into such documents). Requests for such
copies should be directed to MetaTools, Inc., 6303 Carpinteria Avenue,
Carpinteria, California 93013, Attn: Investor Relations (telephone (805) 566-
2600).
 
                                       3

 
                                  THE COMPANY
 
  MetaTools, Inc. ("MetaTools" or the "Company") is a leading provider of
visual computing and graphics software and technologies for professionals and
consumers for Windows, Macintosh and other digital editing operating systems.
MetaTools designs, develops, publishes, markets and supports visual computing
software tools and technologies for the creation, editing, and manipulation of
computer graphic images, digital art, and Internet/online content. These tools
enable desktop publishers, production artists, multimedia developers, creative
directors, film and video producers, web site designers, digital imagers and
photographers (collectively, "Creative Professionals") and consumers to
produce and enhance still images, animations, 2D and 3D graphics, digital
video and special effects. Uses of the materials produced include print and
broadcast advertising, merchandising materials, electronic entertainment,
business presentations, film and video special effects, games and
Internet/online graphics, such as for web sites. The Company offers two
principal product types consisting of stand-alone applications and plug-in
extensions. The Company's plug-in extensions work with and extend the
capabilities of widely available computer graphic imaging and Internet/online
design application platforms, including Adobe Systems, Inc.'s PhotoShop,
Illustrator, After Effects, and Premiere products; Autodesk, Inc.'s Animator
Studio and 3D Studio products; Corel Corporation's PhotoPaint; Fractal Design
Corporation's Painter; Macromedia, Inc.'s Freehand and X-Res products; and
Micrografx, Inc.'s Picture Publisher.
 
  The Company was founded in March 1987 as Harvard Systems Corp., a California
corporation, and shortened its name to HSC Software Corp. in August 1993. The
Company changed its name to MetaTools, Inc. in September 1995 and
reincorporated into Delaware in December 1995.
 
                                       4

 
                              RECENT DEVELOPMENTS
 
FRACTAL MERGER
 
  MetaTools and Fractal have entered into an Agreement and Plan of
Reorganization, dated as of February 11, 1997 (the "Reorganization Agreement")
among MetaTools, Fractal and Rook Acquisition Corp., a wholly-owned subsidiary
of MetaTools ("Merger Sub"). Pursuant to the Reorganization Agreement, Merger
Sub will merge with and into Fractal, Fractal will become a wholly-owned
subsidiary of MetaTools, the name of MetaTools will be changed to
"MetaCreations Corporation" (the "Combined Company"), and each outstanding
share of Common Stock of Fractal, $0.001 par value ("Fractal Common Stock")
will be converted into 0.749 shares of the Common Stock of MetaTools (the
"Exchange Ratio") (collectively, the "Merger"). Each outstanding option to
purchase Fractal Common Stock under Fractal's stock option plans will be
assumed by MetaTools and will become an option to purchase Common Stock of
MetaTools, with appropriate adjustments to be made to the number of shares
issuable thereunder and the exercise price thereof based on the Exchange
Ratio. Based on the number of shares of Fractal Common Stock outstanding as of
April 21, 1997, a total of 9,021,080 shares of MetaTools Common Stock will be
issued in connection with the Merger. The Merger is expected to be consummated
on or about May 29, 1997.
 
  Fractal is a publicly held software company based in Scotts Valley,
California that provides software tools for the creation, editing and
manipulation of computer graphics images and digital art. Fractal's principal
product, Painter for Macintosh and Windows, is used primarily by artists,
graphics professionals and animators in a number of industries, including
print and electronic publishing, print and broadcast advertising and
entertainment and content development. Creative Professionals use Painter and
other Fractal products, such as Ray Dream Studio and Expression, to create and
modify images for brochures, books, magazines and print and broadcast
advertisements, to provide on-screen graphics for television broadcasts, to
edit digital video projects and create animation, to develop multimedia
content and to author web pages for the Internet.
 
  On May 2, 1997, the last practicable date prior to the filing of this
Registration Statement, the closing price per share of MetaTools Common Stock
as reported on Nasdaq was $10 7/8 and the closing price of Fractal Common
Stock as reported on Nasdaq was $5.00. The acquisition of Fractal will be
accounted for by MetaTools by using the pooling of interests method of
accounting.
 
  The acquisition of Fractal is subject to certain risks. These risks include
(i) difficulty in the integration of operations of MetaTools and Fractal, (ii)
a potential adverse effect on the Company's financial results and (iii) a
potential dilutive effect to the Company's stockholders. See the Company's
Joint Proxy Statement/Prospectus dated April 25, 1997, including under the
heading "Risk Factors." See also "Risk Factors--Managements of Potential
Growth; Integration of Potential Acquisitions" and "--Uncertainty as to the
Future of the Macintosh Platform and Apple Computer" herein.
 
  Effective upon the closing of the Merger, the Company intends to change its
Nasdaq listing symbol from "MTLS" to "MCRE."
 
  The respective obligations of each party to the Reorganization Agreement to
effect the Merger are subject to the satisfaction at or prior to the effective
time of the Merger of the following conditions: (a) certain approvals by the
stockholders of MetaTools and the shareholders of Fractal shall have been
obtained, (b) the SEC shall have declared the Company's Registration Statement
on Form S-4 effective and no stop order suspending the effectiveness of the
Registration Statement on Form S-4 or any part thereof shall have been issued
and no proceeding for that purpose, and no similar proceeding in respect of
the MetaTools/Fractal Joint Proxy Statement shall have been initiated or
threatened in writing by the SEC, (c) no Governmental Entity shall have
enacted, issued, promulgated, enforced or entered any statute, rule,
regulation, executive order, decree, injunction or other order (whether
temporary, preliminary or permanent) which is in effect and which has the
effect of making the Merger illegal or otherwise prohibiting consummation of
the Merger and all waiting periods, if any, under the Hart Scott Rodino Act
relating to the transactions contemplated by the Reorganization Agreement will
have expired or terminated early, (d) MetaTools and Fractal each shall have
received written opinions from legal
 
                                       5

 
counsel to the effect that the Merger will constitute a reorganization within
the meaning of Section 368(a) of the Internal Revenue Code, (e) the shares of
Combined Company Common Stock issuable to shareholders of Fractal pursuant to
the Reorganization Agreement and such other shares required to be reserved for
issuance in connection with the Merger shall have been authorized for listing
on the Nasdaq and (f) each of MetaTools and Fractal shall have received a
letter from its outside auditor regarding the appropriateness of pooling of
interest accounting for the Merger.
 
  In addition, the obligation of Fractal to consummate and effect the Merger
is subject to the satisfaction at or prior to the Effective Time of each of
the following conditions, any of which may be waived, in writing, exclusively
by Fractal: (a) the representations and warranties of MetaTools and Merger Sub
contained in the Reorganization Agreement shall be true and correct, (b)
MetaTools and Merger Sub shall have performed or complied in all material
respects with all agreements and covenants required by the Reorganization
Agreement to be performed or complied with by them on or prior to the
effective time of the Merger, and (c) no material adverse effect with respect
to MetaTools shall have occurred since the date of the Reorganization
Agreement.
 
  Further, the obligations of MetaTools and Merger Sub to consummate and
effect the Merger are subject to the satisfaction at or prior to the Effective
Time of each of the following conditions, any of which may be waived, in
writing, exclusively by MetaTools: (a) the representations and warranties of
Fractal contained in the Reorganization Agreement shall be true and correct,
(b) Fractal shall have performed or complied in all material respects with all
agreements and covenants required by the Reorganization Agreement to be
performed or complied with by it on or prior to the effective time of the
Merger, (c) no material adverse effect with respect to Fractal shall have
occurred since the date of the Reorganization Agreement, (d) holders of more
than 4.9% of the outstanding shares of Fractal Common Stock shall not have
exercised, nor shall they have a continued right to exercise, appraisal,
dissenters' or similar rights under applicable law with respect to their
shares by virtue of the Merger and (e) certain Fractal employees shall have
entered into noncompetition agreements and such agreements shall be in full
force and effect.
 
SPECULAR ACQUISITION
 
  On April 6, 1997, MetaTools entered into an agreement (the "Specular
Acquisition Agreement") to acquire Specular International Ltd. ("Specular"), a
privately held software company based in Amherst, Massachusetts, which
develops and markets 3D animation and graphic design tools for professionals
and consumers. The acquisition of Specular was consummated on April 15, 1997.
MetaTools believes that the acquisition of Specular will help accelerate the
adoption of MetaTools' RTG technology in the marketplace. The acquisition is
intended to further extend MetaTools' professional 3D graphic design tools as
well as its ability to participate in the expansion of broad application areas
that will utilize 3D graphics technology. Specular's software technologies are
currently available on the Windows and Macintosh platforms through products
such as "Infini-D" and "LogoMotion."
 
  In order to acquire Specular, MetaTools issued 546,781 shares of MetaTools
Common Stock, plus $1,000,000 in cash, in exchange for all outstanding shares
of Specular capital stock. MetaTools also issued 450,000 non-qualified stock
options to purchase MetaTools Common Stock to Specular employees. The options
issued in this transaction have an exercise price of $7 per share, the fair
market value of the MetaTools Common Stock on April 14, 1997, the trading date
immediately prior to the issuance date and will vest over three or four years.
The acquisition of Specular will be accounted for by MetaTools by using the
purchase method of accounting. MetaTools expects to incur expenses of
approximately $7 million during its second quarter ended June 30, 1997,
related to the write-off of acquired in-process research and development, the
closing of Specular's Amherst facility and other costs related to the
transaction. MetaTools plans to relocate approximately 17 of Specular's
existing engineering and product management personnel to Princeton, New Jersey
for consolidation with MetaTools' RTG lab and facilities. MetaTools will
continue to market Specular's professional 3D modeling software targeted at
video professionals while expanding distribution of certain Specular consumer
products. MetaTools plans to close Specular's Amherst, Massachusetts
headquarters and lay-off and provide severance to approximately 18 personnel
in operations, accounting and sales positions. Pursuant to the Agreement of
Merger, Fractal has provided its written consent to the acquisition of
Specular.
 
                                       6

 
  The acquisition of Specular is subject to certain risks. These risks include
(i) Specular's experience of net losses in each of the 1992, 1993, 1995 and
1996 fiscal years, (ii) the fact that during fiscal 1996 approximately 94% of
Specular's net revenues were from sales of products for use on the Macintosh
platform and (iii) the potential disruptive impact of the relocation of the
Specular personnel from Amherst, Massachusetts to Princeton, New Jersey. See
"Risk Factors--Managements of Potential Growth; Integration of Potential
Acquisitions" and "--Uncertainty as to the Future of the Macintosh Platform
and Apple Computer."
 
METATOOLS QUARTERLY RESULTS
 
  On April 17, 1997, MetaTools announced its final earnings for its first
quarter ended March 31, 1997. Net revenues for the first quarter ended March
31, 1997, were $6.2 million, as compared to $5.5 million for the quarter ended
March 31, 1996, and gross profit for the quarter ended March 31, 1997 was $5.4
million, or 87% of net revenues, as compared to $4.4 million, or 80% of net
revenues, for the quarter ended March 31, 1996. Net income for the quarter
ended March 31, 1997, was $81,000, or $0.01 per share, compared with net
income of $724,000 or $0.06 per share, for the quarter ended March 31, 1996.
 
  MetaTools experienced slower revenue growth in the first quarter of 1997
compared with 1996 due to the delay in expected shipment of the OEM version of
MetaTools' new consumer digital photo product, Kai's Photo Soap, to the second
quarter of 1997, combined with the general weakness in the domestic retail
software market for graphics products. Expected increased operating expenses
from the acquisition of RTG in December 1996 also contributed to lower
earnings in the first quarter of 1997 compared to 1996.
 
  In addition, Fractal currently estimates that net revenue for its fourth
quarter ended March 31, 1997 will be between $6.7 and $7.2 million compared to
$9.3 million for the quarter ended March 31, 1996. Fractal currently estimates
that it will report a net loss between $(0.05) and $(0.0l) per share compared
to earnings of $0.10 per share for the quarter ended March 31, 1996. Fractal
attributes the lower fourth quarter results to lower than anticipated order
volume in the fourth quarter and an unexpected disruption at its manufacturing
and fullfillment provider, which caused up to $2 million in customer orders to
remain unshipped prior to the close of the quarter.
 
  Fractal's sole third-party manufacturing and fullfillment provider ceased
operations unexpectedly near the end of the quarter. Although Fractal was able
to relocate its inventory and resume manufacturing and fullfillment functions
with another manufacturer, it was determined after the end of the quarter
that, due to the high volume of manufacturing and shipments in the final week
of the quarter, orders in the aggregate of approximately $2 million were not
shipped prior to the end of the quarter. After completing a physical
inventory, the manufacturer has been instructed to ship the remaining orders
as quickly as possible. See "Risk Factors--Fluctuations in Quarterly Results"
and "Dependence on Distributors and on Other Third Parties."
 
  Fractal's final results for its fourth quarter ended March 31, 1997 are
expected to be announced on or about April 28, 1997.
 
  The above quarterly results of Fractal are preliminary and constitute
forward-looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995. Among the factors which could affect final
operating results are any accounting adjustments required in connection with
Fractal's closing of financial results for its quarter ended March 31, 1997.
See also "Risk Factors."
 
                                       7

 
                          FORWARD-LOOKING STATEMENTS
 
  This Prospectus and the documents incorporated herein by reference contain
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act. Words such as "anticipates,"
"expects," "intends," "plans," "believes," "seeks," "estimates," variations of
such words and similar expressions are intended to identify such forward-
looking statements. These statements are not guarantees of future performance
and are subject to certain risks, uncertainties and assumptions that are
difficult to predict. Therefore, actual results could differ materially from
those expressed or forecasted in any such forward-looking statements as a
result of certain factors, including those set forth in "Risk Factors," as
well as those noted in the documents incorporated herein by reference. In
connection with forward-looking statements which appear in these disclosures,
investors should carefully review the factors set forth in this Prospectus
under "Risk Factors."
 
                                       8

 
                                 RISK FACTORS
 
  The Shares offered hereby are speculative in nature and involve a high
degree of risk. The following risk factors should be considered carefully, in
addition to the other information contained in the documents incorporated by
reference herein, before purchasing the Common Stock offered hereby:
 
INTEGRATION OF METATOOLS AND FRACTAL OPERATIONS; ADVERSE EFFECT ON FINANCIAL
RESULTS
 
  The consummation of the Merger is subject to several conditions, including
the approval of MetaTools stockholders and Fractal shareholders, and there can
be no assurance that the Merger will be approved. See "Recent Developments--
Fractal Merger." In addition, the realization of the benefits sought from the
Merger depends on the ability of the Combined Company to utilize product
development capabilities, sales and marketing capabilities, administrative
organizations and facilities better than either MetaTools or Fractal could do
separately. There can be no assurance that these benefits will be achieved or
that the activities of MetaTools and Fractal will be integrated in a
coordinated, timely and efficient manner. The combination of the two
organizations also will require the dedication of management resources, which
will temporarily detract such persons' attention from the day-to-day business
of the Combined Company. There can be no assurance that the integration will
be completed without disrupting MetaTools' and Fractal's businesses. The
inability of MetaTools and Fractal to better utilize resources and to achieve
integration in a timely and coordinated fashion could result in a material
adverse effect on the Combined Company's financial condition, operating
results and cash flows. Following the Merger, the Combined Company intends to
seek to reduce operating costs over time by eliminating duplicative operations
and facilities that would otherwise have been required by each of the two
companies operating on a stand-alone basis. There can be no assurance that
these steps actually will reduce costs to the extent, or as quickly, as
planned or that these steps will not adversely affect future revenues and
results of operations. These reductions also could have a material adverse
effect on employee morale and on the ability of the Combined Company to retain
key management, engineering and sales and marketing personnel critical to the
Combined Company's future operations.
 
  MetaTools and Fractal estimate that in connection with the Merger they will
incur direct transaction costs that currently are estimated to be
approximately $4.2 million, which primarily represent fees and expenses of
investment bankers, attorneys, accountants, consultants and financial
printers. In addition, MetaTools anticipates incurring an additional charge
upon consummation of the Merger of approximately $4.8 million to reflect costs
and expenses relating to integrating the two companies. All transaction costs
will be charged to the Combined Company's operations upon consummation of the
Merger or as incurred. Should the Merger not be consummated, each company will
charge its operations with its own direct transaction expenses in the period
incurred. These fees (excluding any breakup fees payable) are estimated to be
approximately $1,000,000 and $500,000 for MetaTools and Fractal, respectively.
These estimates are preliminary and therefore subject to change. In addition,
if approved by the stockholders of MetaTools, MetaTools will undergo a name
change in connection with the Merger. Such name change may cause confusion in
the marketplace and will result in an increase in near-term costs,
attributable to repackaging and redistributing the products of the Combined
Company and various other costs associated with the name change. Going
forward, if the anticipated savings in operating costs are not achieved, or if
the Merger has other adverse effects that are not currently anticipated, the
Merger could result in a reduction in per share earnings of the Combined
Company as compared to the per share earnings that either or both of the
companies would have achieved if the Merger had not occurred. Furthermore,
even if the effects of the Merger prove to be as anticipated, there can be no
assurance that future earnings will not be adversely affected by any number of
economic, market or other factors that are not related to the Merger.
 
  The Combined Company also expects to incur expenses of approximately $7
million during the quarter ending June 30, 1997, related to the write-off of
acquired in-process research and development, the closing of Specular's
Amherst, Massachusetts facility and other costs related to the transaction.
Separately, given the recent general weakness in the domestic retail software
market for graphic products, MetaTools and Fractal believe that near-term
benefits from the Merger may be more difficult to achieve.
 
                                       9

 
POTENTIAL DILUTIVE EFFECT OF MERGER TO STOCKHOLDERS
 
  Although MetaTools and Fractal believe that beneficial synergies will result
from the Merger, there can be no assurance that the combining of the two
companies' businesses, even if achieved in an efficient, effective and timely
manner, will result in combined results of operations and financial condition
superior to what would have been achieved by each company independently, or as
to the period of time required to achieve such result. The issuance of Common
Stock of MetaTools in connection with the Merger may have the effect of
reducing the Combined Company's net income per share from levels otherwise
expected and could reduce the market price of the Combined Company's Common
Stock unless revenue growth or cost savings and other business synergies
sufficient to offset the effect of such issuance can be achieved.
 
FLUCTUATIONS IN QUARTERLY RESULTS
 
  MetaTools and Fractal have experienced in the past and expect in the future
to continue to experience significant fluctuations in quarterly operating
results. For example, MetaTools announced net revenues for the quarter ended
March 31, 1997 of $6.2 million compared to $5.5 million for the quarter ended
March 31, 1996, and earnings per share for the quarter ended March 31, 1997 of
$0.01 per share compared to $0.06 for the quarter ended March 31, 1996.
Fractal currently estimates that net revenues for the quarter ended March 31,
1997 will be between $6.7 and $7.2 million compared to $9.3 million for the
quarter ended March 31, 1996 and loss per share for the quarter ended March
31, 1997 is expected to be between $(0.05) and $(0.01) cents compared to
earnings of $0.10 per share for the quarter ended March 31, 1996. There can be
no assurance that the Company's future revenues, operating results and cash
flows will not also vary substantially. The Company generally ships products
as orders are received and, therefore, has little or no backlog. As a result,
quarterly revenues, operating results and cash flows of the Company will
generally depend on a number of factors that are difficult to forecast,
including, among others, the volume and timing of and ability to fulfill
orders received within a quarter. Quarterly revenues, operating results and
cash flows also may fluctuate due to factors such as demand for the Company's
products; introduction, localization or enhancement of products by the Company
and its competitors; customer or distributor order deferrals in anticipation
of new versions of products; market acceptance of new products; reviews in the
industry press concerning the products of the Company or its competitors;
changes or anticipated changes in pricing by the Company or its competitors;
the mix of distribution channels through which products are sold; the mix of
products sold; returns from distributors; and general economic conditions.
Revenues, operating results and cash flows from the Company's products also
may be negatively affected by delays in the introduction or availability of
new hardware and software products from third parties. The Company experiences
some effect of seasonality in its business, as demand for its products tends
to increase during the quarter ending December 31 as a result of timing of
year-end holiday season buying. Quarterly revenues, operating results and cash
flows may also be adversely affected by financial and other difficulties of
the Company's third party manufacturers and fulfillment providers. Quarterly
revenues, operating results and cash flows may also be adversely affected by
financial and other difficulties of the Company's third party manufacturers
and fulfillment providers.
 
  As is common in the software industry, the Company's experience has been
that a disproportionately large percentage of shipments in each fiscal quarter
occurs in the latter half of the third month of that quarter. Because the
Company's staffing and other operating expenses are based in part on
anticipated net revenues, a substantial portion of which may not be realized
until shortly before the end of each fiscal quarter, delays in the receipt or
shipment of orders, including delays that may be occasioned by failures of
third party product fulfillment firms to produce and ship products, can cause
significant variations in revenues, operating results and cash flows from
quarter to quarter. The Company may also be unable to adjust spending in a
timely manner to compensate for any unexpected revenue shortfall. Accordingly,
any significant shortfall in revenues from the Company's products in relation
to expectations could have an immediate adverse impact on business, operating
results, financial condition and cash flows of the Company. In addition, the
Company currently intends to increase its operating expenses to fund greater
levels of research and product development, to increase its sales and
marketing operations and to expand distribution channels. To the extent that
such expenses precede, or are not subsequently followed by, increased
revenues, the business, operating results, financial condition and cash flows
of the Company will be materially and adversely affected.
 
                                      10

 
  Due to the foregoing factors, operating results for the Company have in the
past fallen below the expectations of securities analysts and investors, and
it is likely that the operating results of the Company for some future
quarters will again fall below the expectations of securities analysts and
investors. In such event, the trading price of the Company's Common Stock
could be materially and adversely affected.
 
UNCERTAINTY AS TO THE FUTURE OF THE MACINTOSH PLATFORM AND APPLE COMPUTER
 
  Apple Computer, Inc. ("Apple Computer") has recently experienced significant
financial difficulties and losses in market share and acceptance. On April 16,
1997, Apple Computer announced a substantial loss of approximately $708
million for its second fiscal quarter of 1997 due to the purchase of NeXT
Software Inc. and certain restructuring charges including layoffs. This and
previous announcements, and the overall perception of Apple Computer's
prospects and continuing commercial vitality, may negatively affect the
Company's Macintosh-based business. In particular, the Company has experienced
declining momentum in sales of its Macintosh-based products compared to sales
of its Windows-based products and historic Macintosh sales. The Company
attributes this decline in part to uncertainty regarding the future of Apple
Computer and the Macintosh environment.
 
  Although the Company offers its principal products on both the Windows and
Macintosh platforms, a significant percentage of the sales of its products to
date has been for the Macintosh platform, which historically has been a
popular platform among art and graphics professionals. During calendar 1996
approximately 37% of the Company's net revenues were from the sales of product
versions for use exclusively on the Macintosh platform. To the extent that
other operating systems, such as Windows 95 and Windows NT, continue to become
more prevalent among the Company's customers, the Company will be required to
modify its development, personnel recruiting, marketing and distribution
efforts to more effectively address these platforms; however, there can be no
assurance that the Company will be able effectively to do so. In addition, on
April 16, 1997, the Company acquired Specular, and the Company expects its
merger with Fractal to be consummated on May 29, 1997. During fiscal 1996,
approximately 94% of Specular's and 63% of Fractal's net revenues were from
the sales of products for use on the Macintosh platform, respectively. See
"Recent Developments--Fractal Merger and --Specular Acquisition."
 
  Fractal and Specular depend upon Altura Software ("Altura") for software and
technical assistance in the porting of software applications from the
Macintosh to other platforms, including Windows 95 and Windows NT. To the
extent that the decline in the Macintosh platform adversely affects Altura and
its ability to provide these services to Fractal and Specular, the Company's
ability to introduce versions of its products on these platforms on a timely
basis would be substantially impaired. See "--Dependence on Distributors and
on Other Third Parties."
 
MANAGEMENT OF POTENTIAL GROWTH; INTEGRATION OF POTENTIAL ACQUISITIONS
 
  In recent years, the Company has experienced expansion of its operations
that have placed significant demands on its administrative, operational and
financial resources. The Company's acquisition of RTG in December 1996 has
placed significant demands on the Company's administrative, operational and
financial resources, which demands will affect the Company. On April 5, 1997,
MetaTools acquired Specular. The acquisition of Specular is subject to certain
risks. These risks include (i) Specular's experience of net losses in each of
the 1992, 1993, 1995 and 1996 fiscal years; (ii) the fact that during fiscal
1996 approximately 94% of Specular's net revenues were from the sales of
products for use on the Macintosh platform and (iii) the potential disruptive
impact of the relocation of the Specular personnel from Amherst, Massachusetts
to Princeton, New Jersey. See "Recent Developments--Specular Acquisition." In
addition, the Company's proposed merger with Fractal is subject to certain
risks. These risks include (i) difficulty in the integration of operations of
MetaTools and Fractal, (ii) a potential adverse effect on the Company's
financial results and (iii) a potential dilutive effect to the Company's
stockholders. See "--Integration of MetaTools and Fractal Operations; Adverse
Effect on Financial Results" and "Recent Developments--Fractal Merger." To
manage future growth, if any, the Company must improve its financial and
management controls, management processes, business and management information
systems and procedures on a timely basis and expand, train and manage its work
force.
 
                                      11

 
There can be no assurance that the Company will be able to perform such
actions successfully. The Company intends to continue to invest in improving
its financial systems and controls in connection with higher levels of
operations. In the future, the Company may make additional acquisitions of
complementary companies, products or technologies. Managing acquired
businesses entails numerous operational and financial risks, including
difficulties in assimilating acquired operations, diversion of management's
attention to other business concerns, amortization of acquired intangible
assets and potential loss of key employees or customers of acquired
operations. The Company's success will depend, to a significant extent, on the
ability of its executive officers and other members of senior management to
respond to these challenges effectively. There can be no assurance that the
Company will be able to effectively achieve and manage any such growth, or
that its management, personnel or systems will be adequate to support the
Company's operations. Any such inabilities or inadequacies would have a
material adverse effect on the Company's business, operating results,
financial condition and cash flows.
 
PRODUCT TRANSITIONS AND PRODUCT RETURNS
 
  From time to time, the Company and its competitors may announce new
products, product versions, capabilities or technologies that have the
potential to replace or shorten the life cycles of the Company's existing
products. MetaTools and Fractal have historically experienced increased
returns of a particular product version following the announcement of a
planned release of a new version of that product. Although the Company
provides allowances for anticipated returns, there can be no assurance that
product returns will not exceed such allowances in the future. The Company has
from time to time offered free upgrades to customers who purchased a product
following announcement of a new release and before shipment of the new version
of that product. Such offers can have a negative effect on revenues, operating
results and cash flows. In addition, the Company may offer price discounts for
new products and product releases in order to facilitate market acceptance,
which also negatively impacts revenue, operating results and cash flows.
Moreover, the announcement of currently planned or other new products may
cause customers to delay their purchasing decisions in anticipation of such
products. Any of the foregoing could have a material adverse effect on the
business, operating results, financial condition and cash flows of the
Company.
 
PRODUCT CONCENTRATION; LACK OF PRODUCT REVENUE DIVERSIFICATION
 
  A substantial percentage of MetaTools' and Fractal's revenues to date have
been derived from a limited number of products, and such products are expected
to continue to account for a substantial majority of the Company's revenues in
the near term. Fractal currently markets six products, Painter, Ray Dream
Studio/Designer, Expression, Detailer, Dabbler and Poser. Revenues from
Painter have been the primary source of Fractal's net revenues since inception
and currently are expected to constitute a substantial portion of Fractal's
net revenues for the foreseeable future. Collective sales of Kai's Power Goo,
Kai's Power Tools and Bryce accounted for a substantial majority of the
Company's net revenues in 1996. Continued market acceptance of MetaTools' and
Fractal's primary products are therefore critical to the future success of the
Company. Any decline in demand for or failure to achieve continued market
acceptance of such products or any new version of these products, if any, as a
result of competition, technological change, failure of the Company to timely
release new versions of these products, or otherwise, could have a material
adverse effect on the business, operating results, financial condition and
cash flows of the Company.
 
RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON AND NEED FOR NEW PRODUCTS AND
PRODUCT VERSIONS; POTENTIAL DELAYS IN PRODUCT RELEASES
 
  The market for visual computing graphics software products, and the personal
computer industry in general, is characterized by rapidly changing technology,
resulting in short product life cycles and strong pricing pressures. As a
result, the success of the Company depends substantially upon its ability to
continue to enhance its existing products, to develop and introduce in a
timely manner new products incorporating technological advances and to meet
increasing customer expectations. To the extent one or more competitors
introduce products that better address customer needs, the Company's business
could be adversely affected. There can be
 
                                      12

 
no assurance that the Company will be successful in developing and marketing
enhancements to its existing products or new products on a timely basis or
that any new or enhanced products will adequately address the changing needs
of the marketplace. Also, negative reviews of the Company's new products or
product versions in industry publications could have a material adverse effect
on product sales.
 
  The Company intends to continue to significantly increase its research and
development expenditures. For example, the RTG and Specular acquisitions will
result in an increase in research and development costs as compared to prior
periods. To the extent such increases are not accompanied by increased
revenues, the Company's business, operating results, financial condition and
cash flows would be materially adversely affected. The Company has
supplemented its research and development efforts by exclusively licensing
products developed by or co-developed with third parties. There can be no
assurance that the Company will be able to continue to obtain such outside
product development capabilities on terms favorable to the Company or at all.
If the Company was unable to maintain existing development arrangements or to
attract new product development partners, then the Company would, at a
minimum, have to further increase its research and development expenditures,
which could have a material adverse effect on the Company's business,
operating results, financial condition and cash flows. In addition, there can
be no assurance that such additional research and development expenditures
would result in the production of commercially acceptable products.
 
  The Company also depends upon internal efforts for the development of new
products and product enhancements. The Company has in the past experienced
delays in the development of new products and product versions. There can be
no assurance that the Company will not experience further delays in connection
with the current product development or future development activities. Also,
software products as complex as those offered by the Company may contain
undetected errors when first introduced or as new versions are released. The
Company has in the past discovered software errors in certain of their new
products and enhancements after the introduction of these products. There can
be no assurance that errors will not be found in new products or releases
after commencement of commercial shipments, resulting in adverse product
reviews and a loss of or delay in market acceptance, which could have a
material adverse effect upon the Company's business, operating results,
financial condition and cash flows.
 
  The Company is expending significant resources to develop the in-process
research and development obtained in the acquisition of RTG. Presently, the
Company employs 22 people and leases a 6,000 square foot office in Princeton,
New Jersey, dedicated toward these activities. In addition, the Company
anticipates capital expenditures in excess of $1 million during 1997 for
computer and office equipment and furniture to support these development
activities. The market for visual computing graphics software products, and
the personal computer industry in general, is characterized by rapidly
changing technology. There can be no assurances that the further development
of the in-process research and development of the Company will result in
commercially viable products.
 
DEPENDENCE UPON THIRD PARTY SOFTWARE DEVELOPERS
 
  MetaTools and Fractal use certain products and technologies of both domestic
and foreign third party software developers, including both complete products
offered as extensions of the companies' product lines and technologies used in
the enhancement of internally developed products. For example, Fractal
licenses its Expression and Poser products from third party software
developers, and MetaTools licenses Final Effects, Studio Effects and the
MetaPhotos collection of royalty free photographs from third party software
developers. Such products and technologies are obtained from third party
providers under contractual license agreements, which in some cases are for
limited time periods and may be terminated under certain circumstances. There
can be no assurance that the Company will be able to maintain adequate
relationships with any such third party providers (including, in particular,
those Fractal relationships that will be maintained by the Company after the
Merger), that these third party providers will commit adequate development
resources to maintain these products and technologies, or that any license
agreement for a limited time period will be renewed upon termination. In such
circumstances, the Company's inability to obtain or develop substitute
technology could adversely affect the business, results of operations,
financial condition and cash flows of the Company. Unlike internally developed
products, these license arrangements also may limit the Company's ability to
timely create and release product upgrades and to effectively control the
product development process.
 
                                      13

 
LIMITED OPERATING HISTORY; UNCERTAIN PROFITABILITY; FLUCTUATING RATES OF
GROWTH
 
  MetaTools and Fractal have only limited operating histories on which an
evaluation of their businesses and prospects can be based. MetaTools was
incorporated in March 1987 and did not introduce its first internally
developed product until January 1993. Fractal was incorporated in April 1991
and commenced shipment of its initial product in August 1991. MetaTools
experienced losses in each quarter of 1994 and in the first two quarters of
1995. MetaTools also realized a loss in the fourth quarter of 1996 due to a
one-time write-off of acquired in-process technology and other acquisition
costs charge related to the acquisition of RTG. Fractal had experienced
revenue growth in recent fiscal periods but in April announced preliminary net
revenue estimates for its fourth quarter of fiscal 1997 that are less than net
revenues for the comparable period in fiscal 1996. Fractal experienced a loss
in its first quarter of fiscal 1997 as a result of one-time acquisition
charges in connection with the acquisition of Ray Dream, and announced
preliminary estimates of a loss in the fourth quarter of fiscal 1997. There
can be no assurance that the net revenues of the Company will continue at
their current level or will grow, or that the Company will be able to achieve
sustained profitability on a quarterly or annual basis. MetaTools' and
Fractal's historical net revenue growth rates, both domestically and
internationally, have varied significantly between monthly and quarterly
periods. Therefore, recent net revenue comparisons should not be taken as
indicative of the rate of net revenue growth, if any, that can be expected in
the future. See "Recent Developments--MetaTools Quarterly Results."
 
DEPENDENCE ON KEY PERSONNEL AND DIFFICULTY OF IDENTIFYING AND HIRING CERTAIN
PERSONNEL
 
  The future performance of the Company is substantially dependent on the
performance of its executive officers and key employees. The loss of the
services of any of the executive officers or other key employees of the
Company for any reason could have a material adverse effect on the business,
operating results, financial condition and cash flows of the Company.
 
  The future success of the Company also depends on its continuing ability to
identify, hire, train and retain other highly qualified technical and
managerial personnel. In that regard, the Company anticipates that the
operations of the Company may require the hiring and retaining of additional
senior management. Competition for such personnel is intense, and the Company
has experienced difficulty in identifying and hiring qualified engineering
personnel. There can be no assurance that the Company will be able to attract,
assimilate or retain other highly qualified technical and managerial personnel
in the future. The inability to attract and retain the necessary technical and
managerial personnel could have a material adverse effect upon the Company's
business, operating results, financial condition and cash flows.
 
HIGHLY COMPETITIVE MARKETS
 
  The markets for graphics software products such as those offered by the
Company are intensely competitive, subject to rapid change and characterized
by constant demand for new product features, pressure to accelerate the
release of new products and product enhancements and pressure to reduce
prices. A number of companies currently offer products that compete directly
or indirectly with one or more the Company's products. Competitors include,
among others, Adobe Systems Incorporated ("Adobe"), Corel Corporation
("Corel"), Micrografx Incorporated ("Micrografx"), Macromedia, Inc.
("Macromedia"), Silicon Graphics, Inc. (through its Alias/Wavefront division),
Microsoft Corporation ("Microsoft") and Broderbund Software, Inc.
("Broderbund"). Many of the Company's competitors or potential competitors
have significantly greater financial, managerial, technical, and marketing
resources. A variety of potential actions by any of these competitors,
including a reduction of product prices, increased promotion, announcement or
accelerated introduction of new or enhanced products or features, acquisitions
of software applications or technologies from third parties, product giveaways
or product bundling could have a material adverse effect on the business,
operating results, financial condition and cash flows of the Company. In the
event of price erosion, the Company may be unable to successfully reposition
itself to accommodate these actions.
 
  Present or future competitors may be able to develop products comparable or
superior to those offered by the Company or adapt more quickly to new
technologies or evolving customer requirements. In addition,
 
                                      14

 
developers of personal computer operating systems, including Microsoft and
Apple Computer, may incorporate 3D functionality into their operating systems,
which may be superior to or incompatible with the products of the Company,
thus adversely affecting the Company's operating results. In particular, while
the Company currently is developing additional product enhancements that they
believe address customer requirements, there can be no assurance that the
development or introduction of these additional product enhancements will be
successfully completed on a timely basis or that these product enhancements
will achieve market acceptance. Accordingly, there can be no assurance that
the Company will be able to continue to compete effectively in its markets,
that competition will not intensify or that future competition will not have a
material adverse effect on the business, operating results, financial
condition and cash flows of the Company.
 
DEPENDENCE ON DISTRIBUTORS AND ON OTHER THIRD PARTIES
 
  While each of MetaTools and Fractal derives some revenues from direct sales,
most of their respective revenues are derived from the sale of products
through third parties. The companies sell their products worldwide through
multiple distribution channels, including traditional software distributors,
hardware and software OEMs, international distributors, educational
distributors, VARs, hardware superstores, retail dealers, and direct
marketers. In addition, the companies' products are manufactured by third
party manufacturing and fulfillment providers. Ingram Micro, Inc. ("Ingram")
and Prisma Distributionsgesellschaft GmbH, MetaTools' principal distributors,
accounted for approximately 26% and 1% of net revenues, respectively, for the
fiscal year ended December 31, 1995, and approximately 18% and 15% of net
revenues, respectively, for the fiscal year ended December 31, 1996. For the
fiscal year ended March 31, 1996 and the nine months ended December 31, 1996,
aggregate sales to Fractal's five principal distributors, including Ingram,
represented approximately 46% and 55%, respectively, of Fractal's net
revenues, and sales to Ingram represented approximately 16% and 23%,
respectively, of Fractal's net revenues.
 
  The Company will be dependent on the continued viability and financial
stability of these third parties. Any termination or significant disruption of
the Company's relationship with any major distributor or retailer, or a
significant reduction in sales volume attributable to the Company's principal
resellers could materially and adversely affect the business, operating
results, financial condition and cash flows of the Company. The distribution
channels through which the Company's software products are sold have been
characterized by rapid change, significant margin pressures, consolidation and
financial difficulties, including certain of the Company's current
distributors and retailers. In addition, new distribution channels may develop
and there can be no assurance that the Company will be able to effectively
distribute its products through such channels. The bankruptcy, deterioration
in financial condition or other business difficulties of a distributor or
retailer could render the Company's accounts receivable from such entity
uncollectible, which could result in a material adverse effect on the
Company's business, operating results, financial condition and cash flows. The
bankruptcy, deterioration in financial condition or other business
difficulties of a third party manufacturer and fulfillment provider could lead
to delays in fulfilling and shipping orders for the Company's products, which
could result in a material adverse effect on the Company's business, operating
results, financial condition and cash flows. Retailers of the Company's
products typically have a limited amount of shelf space and promotional
resources for which there is intense competition, and the Company depends in
part upon promotional efforts of distributors in placing products with
retailers. There can be no assurance that distributors and retailers will
continue to purchase the Company's products or provide the Company's products
with adequate levels of shelf space and promotional support. Failure of
distributors or retailers to do so could have a material adverse effect on the
business, operating results, financial condition and cash flows of the
Company.
 
  An integral element of the Company's strategy is to enhance and diversify
its channels of distribution both domestically and internationally. The
Company is currently investing, and the Company plans to continue to invest, a
significant portion of its cash and personnel resources to expand its domestic
and international direct sales and marketing force and develop distribution
relationships with additional third-party distributors and resellers. The
Company's ability to achieve significant revenue growth in the future will
depend in large part on its success in recruiting and training sufficient
sales personnel, distributors and resellers.
 
                                      15

 
  Certain of the Company's products operate as plug-in extensions and
enhancements for specific print, animation, video and multimedia application
platforms, including Adobe's PhotoShop, Illustrator, After Effects and
Premiere; Autodesk's Animator Studio and 3D Studio; Corel's PhotoPaint;
Macromedia's Freehand; Micrografx's Picture Publisher; and other application
platforms. Market acceptance of the Company's plug-in products is dependent
upon market acceptance of these third-party application platforms as well as
the willingness of the manufacturers of such platforms to permit their
platforms to be extended and enhanced by plug-in products such as those of the
Company. A decline in demand for any such platforms or exclusionary practices
by the manufacturers of such platforms would have a material adverse effect on
the Company's business, operating results, financial condition and cash flows.
 
EVOLVING MARKETS FOR COMPUTER GRAPHIC IMAGING AND INTERNET/ONLINE DESIGN TOOLS
 
  The markets for computer graphic imaging and Internet/online design tools
are still emerging. There can be no assurance that the markets for the
Company's existing products will grow, that digital graphic and
Internet/online content developers will adopt the Company's products, that
sufficient distribution resources will be available to market the Company's
products in a timely manner or that such products will be successful in
achieving market acceptance. The demand for computer graphic imaging and
Internet/online design tools is dependent upon a number of variables,
including the installed base of digital graphic and multimedia capable
personal computers, the widespread availability of digital media and the
number and expertise of skilled content producers. If the markets for such
tools fail to grow or grow more slowly than the Company currently anticipates,
or if the Company's products fail to achieve market acceptance, the Company's
business, operating results, financial condition and cash flows would be
materially adversely affected.
 
INTERNATIONAL OPERATIONS AND EXPANSION
 
  International sales represented approximately 28% of the Company's net
revenues in the fiscal year ended December 31, 1995 and approximately 36% of
net revenues in the fiscal year ended December 31, 1996. International sales
represented approximately 41% of Fractal's net revenues in the fiscal year
ended March 31, 1996, and approximately 41 % of net revenues in the nine
months ended December 31, 1996. A key component of the Company's strategy is
continued expansion into international markets, primarily Japan and Western
Europe, and the Company currently anticipates that international sales will
represent an increasing portion of the Company's net revenues. The Company
will need to retain effective distributors and hire, retain and motivate
qualified personnel internationally to expand its international presence.
There can be no assurance that the Company will be able to successfully
market, sell, localize and deliver its products in these international
markets.
 
  In addition to the uncertainty as to the Company's ability to expand its
international presence, there are certain risks inherent in doing business on
an international level, such as unexpected changes in regulatory requirements,
problems and delays in collecting accounts receivable, tariffs and other trade
barriers, difficulties in staffing and managing foreign operations, longer
payment cycles, political instability, fluctuations in currency exchange
rates, seasonal reductions in business activity during summer months in Europe
and certain other parts of the world and potentially adverse tax consequences,
any of which could adversely impact the success of international operations.
Sales of products by the Company currently are denominated in U.S. dollars.
Accordingly, any increase in the value of the U.S. dollar as compared to
currencies in the Company's principal overseas markets would increase the
foreign currency-denominated cost of the Company's products, which may
negatively affect the Company's sales in those markets. The Japanese yen has
decreased in value relative to the U.S. dollar in recent months. In addition
to the potential impact on the pricing of the Company's products, this decline
will likely lower the rate of dollar revenue growth, operating results and
cash flow. To date, the Company has not engaged in currency hedging
transactions to reduce the effect of currency exchange rate fluctuations. In
addition, effective copyright and trade secret protection may be limited or
unavailable under the laws of certain foreign jurisdictions. There can be no
assurance that one or more of such factors will not have a material adverse
effect on the Company's international operations and, consequently, on the
business, operating results, financial condition and cash flows of the
Company.
 
                                      16

 
PROPRIETARY RIGHTS AND LICENSES
 
  The Company relies on a combination of copyright, trademark, patent, trade
secret laws, employee and third-party nondisclosure agreements and exclusive
contracts to protect its intellectual and proprietary rights and products. The
Company distributes its software under shrinkwrap license agreements but
generally does not obtain signed license agreements from its end users. In
keeping with software industry standards, the Company does not copy protect
their software. Accordingly, it may be possible for unauthorized third parties
to copy or reverse engineer the Company's products or otherwise obtain and use
information that the Company regards as proprietary. Furthermore, there can be
no assurance that competitors will not independently develop technologies that
are substantially equivalent or superior to the technologies of the Company.
Policing unauthorized use of the Company's products is difficult, and while
the Company is unable to determine the extent to which software piracy of
their products exists, software piracy can be expected to be a persistent
problem. In addition, the laws of certain countries in which the Company's
products are or may be distributed do not protect products and the
intellectual rights to the same extent as do laws in the United States.
 
  As the number of software products in the industry increases and the
functionality of these products further overlaps, the Company believes that
software increasingly will become the subject of claims that such software
infringes the rights of others. There can be no assurance that third parties
will not assert infringement claims against the Company in the future or that
any such assertions will not result in costly litigation or require the
Company to obtain a license to intellectual property rights of third parties.
There can be no assurance that such licenses will be available on reasonable
terms or at all. Furthermore, the Company licenses certain software products
from other companies for distribution or inclusion in their own products.
There can be no assurance that upon the expiration of these licenses, such
licenses will be available again on reasonable terms or at all, or that
similar products could be obtained to substitute for these products. The
inability to license such products could have a material adverse effect on the
Company's business, operating results, financial condition and cash flows.
 
VOLATILITY OF METATOOLS STOCK PRICE
 
  The prices of MetaTools and Fractal Common Stock have fluctuated
significantly in the past and continue to fluctuate significantly. For
example, on February 11, 1997, the last full trading day prior to the public
announcement of the execution of the Reorganization Agreement, the closing
sale prices on Nasdaq were $15.00 per share of MetaTools Common Stock and
$8.125 per share of Fractal Common Stock. Between February 11, 1997 and April
21, 1997, MetaTools Common Stock has closed as high as $14.63 per share and
has closed as low as $6.94 per share, and was $7.25 per share on April 21,
1997, the most recent practicable date prior to the printing of this
Registration Statement. Furthermore, between February 11, 1997 and April 21,
1997 the Fractal Common Stock has closed as high as $10.38 per share and as
low as $4.88 share. On April 21, 1997, the closing price of Fractal Common
Stock was $5.00 per share. The managements of MetaTools and Fractal each
believe that such recent fluctuations may have been caused by a number of
factors, including the volatility in technology markets generally, the general
weakness in the domestic retail software market for graphics products, the
weakness in retail software distribution channels, recent announcements by
each company of preliminary financial results below the expectations of
industry analysts, the uncertainty in the future of the Macintosh platform and
volatility in the stock prices of a number of publicly-traded companies in
industries similar to that of MetaTools and Fractal. The companies anticipate
that prices for their respective common stocks prior to consummation of the
proposed merger, including during the periods between stockholder/shareholder
approvals and consummation of the Merger, and the price for the Company Common
Stock will continue to be volatile due to those factors discussed above, as
well as announcement of new products, quarterly fluctuations, fluctuations in
results of operations, continued volatility in the stock market and other
factors. In addition, in the quarter ending June 30, 1997, MetaTools is
expected to ship Kai's Photo Soap and Fractal is expected to ship Painter 5.0.
Should either company not meet these expected shipment dates, it could have a
material adverse affect on the Company's stock price. See "--Fluctuations in
Quarterly Results."
 
                                      17

 
CONCENTRATION OF STOCK OWNERSHIP
 
  As of February 28, 1997, the directors and executive officers of the Company
and their respective affiliates beneficially own approximately 45% of the
Company's outstanding Common Stock. As a result, these stockholders will be
able to exercise significant influence over all matters requiring stockholder
approval, including the election of directors and approval of significant
corporate transactions.
 
                                USE OF PROCEEDS
 
  The Company will not receive any of the proceeds from the sale of the
Shares. All proceeds from the sale of the Shares will be for the account of
the Selling Stockholders, as described below. See "Selling Stockholders" and
"Plan of Distribution."
 
                             SELLING STOCKHOLDERS
 
  The following table sets forth as of the date of this Prospectus, the name
of each of the Selling Stockholders, the number of shares of Common Stock that
each such Selling Stockholder owns as of such date, the number of shares of
Common Stock owned by each Selling Stockholder that may be offered for sale
from time to time by this Prospectus, and the number of shares of Common Stock
to be held by each such Selling Stockholder assuming the sale of all the
Common Stock offered hereby. None of the Selling Stockholders has held any
position or office or had a material relationship with the Company or any of
its affiliates within the past three years other than as a result of the
ownership of the Company's Common Stock. The Company may amend or supplement
this Prospectus from time to time to update the disclosure set forth herein.


                          SHARES BENEFICIALLY OWNED                    SHARES BENEFICIALLY
                              PRIOR TO OFFERING                        OWNED AFTER OFFERING
                          ----------------------------                 -----------------------   ---
                                                           NUMBER OF
    NAME OF SELLING                                         SHARES
      STOCKHOLDER            NUMBER        PERCENT       BEING OFFERED  NUMBER       PERCENT
    ---------------       -------------- -------------   ------------- ----------   ----------
                                                                               
Alexei Lebedev..........          91,283            *        91,283            --            --
Boris Lipovsky..........          30,427            *        30,427         --           --
Michael Petrov..........          30,427            *        30,427         --           --
Wexford Overseas
Partners I, L.P.........          69,207            *        69,207         --           --
Wexford Capital Partners
II, L.P.................         295,043          2.1(1)    295,043         --           --

- --------
*Less than 1%.
 
(1) After the consummation of the Merger, Wexford Capital Partners II, L.P.
    will own 1.3% of the Company assuming no sales hereunder.
 
                                      18

 
                             PLAN OF DISTRIBUTION
 
  The Shares covered by this Prospectus may be offered and sold from time to
time by the Selling Stockholders. The Selling Stockholders will act
independently of the Company in making decisions with respect to the timing,
manner and size of each sale. The Selling Stockholders may sell the Shares
being offered hereby on the Nasdaq National Market, or otherwise, at prices
and under terms then prevailing or at prices related to the then current
market price, at varying prices or at negotiated prices. The Shares may be
sold, without limitation, by one or more of the following means of
distribution: (a) a block trade in which the broker-dealer so engaged will
attempt to sell Shares as agent, but may position and resell a portion of the
block as principal; (b) purchases by a broker-dealer as principal and resale
by such broker-dealer for its own account pursuant to this Prospectus; (c) an
over-the-counter distribution in accordance with the rules of the Nasdaq
National Market; (d) ordinary brokerage transactions and transactions in which
the broker solicits purchasers; and (e) in privately negotiated transactions.
To the extent required, this Prospectus may be amended and supplemented from
time to time to describe a specific plan of distribution.
 
  In connection with distributions of the Shares or otherwise, the Selling
Stockholders may enter into hedging transactions with broker-dealers or other
financial institutions. In connection with such transactions, broker-dealers
or other financial institutions may engage in short sales of the Company's
Common Stock in the course of hedging the positions they assume with Selling
Stockholders. The Selling Stockholders may also sell the Company's Common
Stock short and deliver the Shares offered hereby to close out such short
positions. The Selling Stockholders may also enter into option or other
transactions with broker-dealers or other financial institutions which require
the delivery to such broker-dealer or other financial institution of Shares
offered hereby, which Shares such broker-dealer or other financial institution
may resell pursuant to this Prospectus (as supplemented or amended to reflect
such transaction). The Selling Stockholders may also pledge Shares to a
broker-dealer or other financial institution, and, upon a default, such
broker-dealer or other financial institution, may effect sales of the pledged
Shares pursuant to this Prospectus (as supplemented or amended to reflect such
transaction). In addition, any Shares that qualify for sale pursuant to Rule
144 may, at the option of the holder thereof, be sold under Rule 144 rather
than pursuant to this Prospectus.
 
  Any broker-dealer participating in such transactions as agent may receive
commissions from the Selling Stockholder and/or purchasers of the shares
offered hereby (and, if it acts as agent for the purchaser of such shares,
from such purchaser). Usual and customary brokerage fees will be paid by the
Selling Stockholder. Broker-dealers may agree with the Selling Stockholder to
sell a specified number of shares at a stipulated price per share, and, to the
extent such a broker-dealer is unable to do so acting as agent for the Selling
Stockholder, to purchase as principal any unsold shares at the price required
to fulfill the broker-dealer commitment to the Selling Stockholder. Broker-
dealers who acquire shares as principal may thereafter resell such shares from
time to time in transactions (which may involve cross and block transactions
and which may involve sales to and through other broker-dealers, including
transactions of the nature described above) in the over-the-counter market, in
negotiated transactions or otherwise at market prices prevailing at the time
of sale or at negotiated prices, and in connection with such resales may pay
to or receive from the purchasers of such shares commissions computed as
described above.
 
  In order to comply with the securities laws of certain states, if
applicable, the Shares will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
Shares may not be sold unless they have been registered or qualified for sale
in the applicable state or an exemption from the registration or qualification
requirement is available and is complied with.
 
  The Company has advised the Selling Stockholders that the anti-manipulation
rules of Regulation M under the Exchange Act may apply to sales of Shares in
the market and to the activities of the Selling Stockholders and their
affiliates. In addition, the Company will make copies of this Prospectus
available to the Selling Stockholders and has informed them of the need for
delivery of copies of this Prospectus to purchasers at or prior to the time of
any sale of the Shares offered hereby. The Selling Stockholders may indemnify
any broker-dealer that participates in transactions involving the sale of the
shares against certain liabilities, including liabilities arising under the
Securities Act.
 
                                      19

 
  At the time a particular offer of Shares is made, if required, a Prospectus
Supplement will be distributed that will set forth the number of Shares being
offered and the terms of the offering, including the name of any underwriter,
dealer or agent, the purchase price paid by any underwriter, any discount,
commission and other item constituting compensation, any discount, commission
or concession allowed or reallowed or paid to any dealer, and the proposed
selling price to the public.
 
  The sale of Shares by the Selling Stockholders is subject to compliance by
the Selling Stockholders with certain contractual restrictions with the
Company. There can be no assurance that the Selling Stockholders will sell all
or any of the Shares.
 
  The Company has agreed to indemnify the Selling Stockholders and any person
controlling a Selling Stockholder against certain liabilities, including
liabilities under the Securities Act. The Selling Stockholders have agreed to
indemnify the Company and certain related persons against certain liabilities,
including liabilities under the Securities Act.
 
  The Company has agreed with the Selling Stockholders to keep the
Registration Statement of which this Prospectus constitutes a part effective
for up to 180 days following the effective date of this Registration
Statement. The Company intends to de-register any of the Shares not sold by
the Selling Stockholders at the end of such 180 day period.
 
                                 LEGAL MATTERS
 
  Certain legal matters relating to the validity of the securities offered
hereby will be passed upon for the Company by Wilson Sonsini Goodrich &
Rosati, Professional Corporation, Palo Alto, California ("WSGR"). Jeffrey D.
Saper, a member of WSGR, owns 16,000 shares of Common Stock of the Company,
and certain affiliated investment partnerships of WSGR own 9,000 shares of
Common Stock of the Company.
 
                                    EXPERTS
 
  The audited consolidated financial statements and financial statement
schedule as of December 31, 1996 and 1995 and for each of the three years
ended December 31, 1996, 1995 and 1994 incorporated by reference in this
Prospectus have been incorporated by reference in reliance on the report of
Coopers & Lybrand L.L.P., independent accountants, which report is given upon
the authority of said firm as experts in accounting and auditing.
 
                                      20

 
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  NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE BY THIS
PROSPECTUS TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT
CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY, ANY SELLING STOCKHOLDER OR BY ANY OTHER PERSON. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITY OTHER THAN THE SHARES OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SHARES OFFERED HEREBY
TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE OF
OR OFFER TO SELL THE SHARES MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
 
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                               TABLE OF CONTENTS
 


                                                                            PAGE
                                                                            ----
                                                                         
Available Information......................................................  2
Additional Information.....................................................  2
Incorporation of Certain Documents by Reference............................  3
The Company................................................................  4
Recent Developments........................................................  5
Forward-Looking Statements.................................................  8
Risk Factors...............................................................  9
Use of Proceeds............................................................  18
Selling Stockholders.......................................................  18
Plan of Distribution.......................................................  19
Legal Matters..............................................................  20
Experts....................................................................  20

 
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                                516,387 SHARES
 
                                METATOOLS, INC.
 
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                                 COMMON STOCK
 
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                                  PROSPECTUS
 
                                  MAY 5, 1997
 
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