UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-KSB

          ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 2005

                        Commission File Number 000-26598

                            PAPERCLIP SOFTWARE, INC.
             (Name of small business issuer in its charter)

                                    Delaware
              (State or other jurisdiction of incorporation or organization)

                                   22-3137907
                      (I.R.S. Employer Identification No.)

                                 1 University Plaza
                        Hackensack , New Jersey        07601
               (Address of principal executive offices)   (Zip Code)

                              (201)  525-1221
                      (Issuer's  telephone number)

Securities registered pursuant to Section 12 (b) of the Act:

Title of each class: None             Name of exchange on which registered: N/A

Securities registered pursuant to Section 12 (g) of the Act:

                  Common Stock, Par Value $.01
                     (Title of each Class)


Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes  X      No













<PAGE>

     Check if there is no disclosure  of  delinquent  filers in response to Item
405 of  Regulation  S-B  contained  in  this  form,  and no  disclosure  will be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any  amendment to this Form 10-KSB.  [X ]

     Indicate  by check mark  whether  the  registrant  is a shell  company  (as
defined in Rule 12b-2 of the Exchange Act). Yes ___ No X

     The  issuer's  revenue  for the fiscal  year ended  December  31,  2005 was
$1,739,394. As of March 16, 2006, the aggregate market value of the voting stock
held by  non-affiliates  of the  registrant  was $315,766  (based on the closing
price of the OTC Bulletin Board on March 16, 2006). As of March 16, 2006,  there
were 8,196,521 shares of the registrant's common stock outstanding.

Documents Incorporated by Reference: None. Transitional Small
Business  Disclosure  Format  (check  one):  Yes  ___ No X



     Certain information included in this Annual Report may be deemed to include
forward-looking  statements  within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended,  that involve risk and uncertainty,  such as information relating to
the  acceptance  and sale of the Company's  products,  the Company's  ability to
successfully  market  and  distribute  its  products,   product  development  or
enhancements,  the Company's  ability to generate  sufficient cash flow from the
sale of its  products to meet the  Company's  cash  requirements  and to pay its
liabilities  when due, the Company's  ability to raise additional  capital,  the
Company's ability to protect its proprietary  property and the Company's ability
to attract and retain key employees. In addition, certain statements may involve
risk and  uncertainty if they are preceded by,  followed by, or that include the
words "intends," "estimates,"  "believes," "expects,"  "anticipates,"  "should,"
"could," or similar expressions, and other statements contained herein regarding
matters that are not historical facts.

Although we believe that our expectations  are based on reasonable  assumptions,
we can give no  assurance  that our  expectations  will be  achieved.  We do not
undertake   any   obligation   to  release   publicly  any   revisions  to  such
forward-looking  statements to reflect  events or  circumstances  after the date
hereof or to reflect the occurrence of unanticipated events.

















<PAGE>
                                     PART I
Item 1.  Description of Business.

INTRODUCTION

     PaperClip Software, Inc. formerly known as PaperClip Imaging Software, Inc.
(the  "Company"  or  "PaperClip"),  a  Delaware  corporation,  is engaged in the
development and  distribution of computer  software for document  management and
transport  of  electronic  document  packages  across the public  Internet  or a
private intranet with interoperability,  security and tracking capabilities. The
Company is the successor by merger, in March 1992, to the original company which
had been incorporated in New Jersey in October 1991.

About the Company

     The  Company's  systems  allow users of  personal  computers  and  personal
computer networks to scan, file,  retrieve,  display,  print and route documents
and other software  objects (such as word  processing  files,  spreadsheets  and
electronic mail), while continuing to use their existing  application  software.
The Company's systems can be integrated with many personal computer applications
with little or no programming  and can file and retrieve  documents  without the
time consuming step of manually labeling or indexing each document,  or manually
searching for documents.

     The  Company  developed  and  markets  a line  of  software  consisting  of
Professional,  Workgroup and Enterprise  Editions (the  "Systems").  The Company
also markets  PaperClip COLD,  which captures batch file  information  before it
goes to paper and allows expeditious access,  retrieval,  and
printing of COLD  documents.  "COLD"  refers to  Computer  Output to Laser Disk,
which relates to documents  that are archived in large volumes of formatted data
streams  directly to optical  media.  Instead of printing large paper reports or
producing microfilm or microfiche, data is stored on optical disks.

     The Company developed its WebServer(TM)  Product, which is an add-on to the
Systems. This product provides full security for documents stored on a PaperClip
System,  enables  users to make the  documents  available  to anyone  with a Web
Browser and makes a user's document repository  accessible via the Internet or a
private intranet. In November 1995, PaperClip acquired,  from Cheyenne Software,
Inc.  ("Cheyenne"),  the NOSS (Network Optical Storage System) product line. The
Company  offers NOSS as part of its systems . The Company has developed the next
generation of the NOSS product, which has been deployed on the Microsoft Windows
NT server  platform.  The Company  markets the Systems and  associated  products
domestically (i) through a mass  distributor,  Z Source,  which sells to a value
added reseller  ("VAR")  channel that  currently  consists of  approximately  20
resellers and (ii) directly  through such VARs. The Company markets its products
internationally through approximately 3 VARs.


                                          -1-

<PAGE>
Industry Background

     Many  businesses  must  manage,  exchange  and  process  large  amounts  of
information in their day to day activities.  Traditional data processing systems
have  automated the creation and  processing  of data and text,  but they do not
provide a means for storing and  retrieving  documents  that must be retained in
their original form and used in conjunction with the data.

     The greatest difficulty in dealing with paper documents is filing,  storing
and  retrieving  them  conveniently  and  cost-effectively.  In  the  course  of
performing  these  tasks  manually,  critical  documents  can  be  inadvertently
misfiled,  physically  damaged,  or lost. Manual handling is inefficient because
documents  can only be used by one  person  at a time and are also  inaccessible
during the time required to transport  them within the  organization.  Moreover,
significant time and resources are often spent storing and locating documents in
large filing  systems.  With the public  acceptance of document  management and,
more  importantly,  the imaged  document  as an  original  document,  exchanging
electronic documents is a marketing opportunity.

     The procedural steps involved in processing  incoming documents may include
sorting  documents as they are  received,  indexing  them for future  reference,
routing  them from one  employee to the next,  entering  information  from these
documents into computer systems,  collecting different documents for appropriate
action,  creating  letters  and forms of  response  and  queuing  documents  for
subsequent  filing. In order to improve the efficiency of the flow of documents,
manage  information,  and improve office  productivity and response times,  many
companies may seek to automate  their paper and electronic  document  management
procedures.

     Technological  developments in recent years have made possible the low cost
capture,  storage,  retrieval  and  processing  of paper  documents as digitized
images. In particular, the application of optical disk technology, which permits
digitized  document  images to be stored with  densities many times greater than
magnetic storage media,  has enabled the development of cost effective  computer
systems for document management.

     The Systems have been designed to provide  users of personal  computers and
personal computer networks the ability to exchange,  file,  retrieve and process
large  volumes  of  documents  quickly,  efficiently  and  at a  low  cost.  The
enhancements  developed  for the  Systems  have been  designed to allow users to
quickly implement workflow technology in their existing environments without the
need for costly  programming.  The  Company's  Internet  products give users the
added flexibility of exchanging, accessing and managing stored documents via the
Internet.

     The Company  derives all of its revenues  from the licensing or sale of the
Systems and associated  products and services.  The Company's principal products
are the Professional, Workgroup and Enterprise Editions, as well as the Internet
Express and  eXpressLink  products.

                                          -2-



<PAGE>
     The Company has begun  marketing a new  document  management  and work flow
product  which  has  been  customized  for the  mortgage  broker  industry.  The
Company's  sales from this  product were  approximately  $125,000 and $25,000 in
2005 and 2004, respectively.  The product is available in either a client server
model and  installed  at the  customer  site,  or in an ASP model and  hosted by
PaperClip.  ASP refers to a model where PaperClip hosts the clients  information
on PaperClip's computers.  The client server product is named Mortgage Assistant
(MA) and the hosted product is named Virtual Loan Folder.  The Company  believes
that this  product  may  represent  a promising  opportunity  for its  business,
although  there are  competitors  in this business and there can be no assurance
that the Company can generate meaningful revenues from this product.

     The Company has also begun marketing its  PaperClip32  product in ASP model
hosted by PaperClip. PaperClip32 is the name for PaperClip's document management
software.  To date interest in this service has been shown by the life insurance
industry.  The Company  believes  that this  product  may  represent a promising
opportunity  for its business  although there is at least one competitor in this
business and there can be no assurance that the Company can generate  meaningful
revenues from this product.

     PaperClip leveraged its workflow  application in 2005 by adding support for
forms  recognition and processing  data in the ACORD 103 EDI format (XML).  This
technology  development  resulted in two new service offerings,  ImageIn and IGO
Service.  ImageIn provides the ability to correctly  identify  incoming document
types  eliminating the need for manual  identification.  IGO Service provides an
"In Good Order" value to the  recipient,  which means all data and documents are
analyzed to ensure all the recipients required documents have been submitted and
are available before releasing the package to Internet eXpress for delivery.

    There can be no assurance  that the  Company's  products will achieve
broader market  acceptance  or result in significant revenue  to the  Company.

The Systems

     The  Systems  allow  users of  personal  computers  and  personal  computer
networks to scan, file, retrieve,  display,  print and route documents and other
software  objects  (collectively  "Documents"),  such as word processing  files,
spreadsheets  and  electronic  mail.  The  Systems can be  integrated  with many
personal  computer  applications  with little or no programming and can file and
retrieve  Documents  without the time  consuming  step of  manually  labeling or
indexing each Document. The Systems range from single user, stand-alone products
to enterprise-wide document management solutions.

     Electronic  "file  folders" of Documents can be accessed at any time by the
user  with  only one key  stroke  combination.  Minimal  training  is  required.
Moreover,  all Documents  previously  attached to an electronic  file folder are
accessible as soon as each of the Systems is activated.  If a Document is not so
attached, it can be located by searching a Document list or by entering exact or
partial  identifying  information  into  the  folder's  index  fields.  Multiple
Documents can be viewed simultaneously in any of the Systems.

                                          -3-


<PAGE>
     Images displayed through any of the Systems are facsimiles of the Documents
that have been scanned,  and the Systems allow Documents to be scrolled  through
(i.e.,  moved on a display  screen to search for a particular  line or section),
enlarged,  reduced,  and rotated.  The Systems also allow stored Documents to be
reproduced  through a locally  connected laser printer,  or through shared laser
print servers on a network.

Professional Edition

     The Professional  Edition allows users to create "folders" of Documents and
attach or "clip" them to their  existing  application  software.  The additional
features available include the ability to scan, index, retrieve, display, print,
fax, import and export  Documents.  Storage of Documents is on multiple forms of
media and, in addition,  enables the user to store  Documents on a large variety
of optical  disk and  "jukebox"  storage  devices.  A "jukebox"  is a mechanical
device which allows for  multiple  optical disk  platters or tapes to be managed
and accessed by software. This allows the storage of millions of Documents while
maintaining  a high level of  performance.  The  Professional  Edition  works in
conjunction  with SQL database  products from  Microsoft  and Sybase.

Workgroup Edition

      Workgroup   Edition  provides  users  with  all  of  the  features  of
Professional  Edition,  and allows users to perform all of the  functions at the
same  time,  as well as to route  Documents  and  folders  to  other  users on a
network.

Enterprise Edition

     Enterprise  Edition provides all the features of the Workgroup  Edition and
provides for Wide Area Network operation using a client/server architecture. The
significant  difference  provided  to users by the  Enterprise  Edition  are the
improved  performance  in  networks  with more than 20 users and the  ability to
manage a greater number of folders and documents. To operate Enterprise Edition,
the user is  required  to obtain a  license,  which is  readily  available  from
various third parties,  for the desired SQL server.  The  Enterprise  Edition is
suited to large departmental and enterprise installations. The Company presently
offers its  Enterprise  Edition to work in  conjunction  with SQL  Servers  from
Microsoft, Sybase and Oracle.

Capture Product Line - DECS

     DECS (Document EDI Capture Suite) is a set of  applications  with which end
users and business  applications  will  collect  electronic  documents  and / or
Electronic Data Interchange  (EDI) into an Electronic  Document Exchange ("EDX")
V2.0 Package for  transmission  to an IDM solution or EDI  application  or both.
DECS provides the tools for collecting scanned images,  documents printed to the
DECS Print  Driver,  file import,  keyed and file captured EDI. This data can be
transformed, packaged and transported to the recipient for further processing as
an EDX V2.0 Package.  DECS is a remote electronic  document EDX packaging system
that provides scanning, printing, filing and Electronic Data Interchange ("EDI")
capture  producing  capabilities,  and creates EDX Packages for Internet Express
("IE"), eXpressLink ("XL"), the Systems and/or any EDX compliant solution.
                                          -4-



<PAGE>
The Cold Product

     PaperClip  COLD captures  formatted  print data  streams.  Once the data is
captured by the PaperClip COLD Extract Engine, it is automatically imported into
the user's  PaperClip  System and made available to the users by viewing through
the PaperClip  system.  Users can access folders  containing COLD data by simply
pressing a designated key from the applications that they choose.  They can also
access  folders  of  diverse  information  through  PaperClip's  intuitive  file
cabinet/folder  interface.  PaperClip  COLD can  print to any  standard  Windows
printers or fax and can display documents on conventional  80-column monitors in
132  column  format.  To further  facilitate  the  retrieval  and review of COLD
documents,  PaperClip  COLD supports full text  searching of COLD  documents and
forms  overlay,  and can add colored lines to the display to simulate  green bar
paper viewing.

The Noss Product Line

     NOSS is the  subsystem  for optical  storage and jukebox  management.  When
combined  with the  Workgroup and  Enterprise  Editions,  it provides a powerful
system that manages a range of mass storage devices. The acquisition of the NOSS
product  line (a  portion of which is subject  to an  exclusive,  royalty  free,
perpetual  license from  Cheyenne)  allows  PaperClip to fully take advantage of
NOSS's high-end  functionality  to further  develop  powerful  document  imaging
solutions for client/server network environments.

Internet Product Line - Webserver

     WebServer(TM)  is an add-on  to the  Systems.  The  product  provides  full
security for  documents  stored on a PaperClip  System and enables users to make
documents  available  to anyone  with a Web Browser  and to make  available  the
user's  document  repository  to  both  Internet  and  private  intranet  users.
WebServer  allows  users  across the World Wide Web to  retrieve  documents  and
conduct simple workflow tasks from their thin client browser.

Internet Express

     Internet  Express  (IE) is an  extranet  designed  to  exchange  electronic
documents as an Application  Service Provider  ("ASP").  The Company will derive
revenue  based on the  movement  of EDX  packages  across the  Internet.  IE has
expanded to four delivery options, IE Client,  Secure Email, Secure Hosting, and
Secure Fax. Service traffic for the year increased by 50% compared to 2004.

Clipit Toolkit

     ClipIt is designed to facilitate  the  integration  of legacy  applications
with  other  applications.  ClipIt's  greatest  demand  is found in the new thin
client services.  By integrating ClipIt within thin client  applications,  users
simply hit a "Hot Key" to quickly view  important  records and documents  across
the Web.  ClipIt is a Tool-kit  designed to leverage  PaperClip's  award winning
Visual  Context  Processor   (Clipping)   technology   allowing  developers  and
integrators  the ability to program  ClipIt within their  application  or script
within browsers.
                                          -5-


<PAGE>
PaperClip BarCode
     PaperClip  developed  and  released a BarCode  recognition  solution  where
bar-coded documents are automatically received and filed. The solutions includes
the ability to create  bar-coded  cover  sheets and a server  engine  capable of
reading the same.  Documents can be scanned or faxed directly to the recognition
engine.

Expresslink Communications

     PaperClip's  eXpressLink  (XL) is an electronic  document  package exchange
solution  designed to interconnect  dissimilar  Electronic  Document  Management
solutions  whereby  they can  exchange  documents  similar  to  electronic  data
interchange (EDI). Designed to transport electronic document packages across the
corporate  Intranet  or  Internet  providing   interoperability,   security  and
tracking. Utilizing the public standard Electronic Document eXchange version 2.0
for packaging electronic documents, any EDX V2.0 compliant system can connect to
the XL Server seamlessly with no programming.  A company can now connect company
workflow and  integrate  dissimilar  document  management  solutions to business
partners and branch offices attached to the corporate  Intranet or Internet.  XL
significantly reduces document processing costs.  Standards driven, XL cuts cost
and reduces time to process.

     eXpressLink   is   designed   to  exchange   electronic   documents   among
organizations  that are members of the same private  intranet and connect to IE.
The Company  provides XL as a product,  not a service.  This product expands the
user's  communications  options while  maintaining  a consistent  interface to a
user's document management solution.

Mortgage Assistant

     Mortgage  Assistant (MA) is PaperClip's  workflow  application  designed to
manage  users,  stages,  products,   documents,  alerts  and  reports.  Mortgage
Assistant manages document requirements and performs workflow features including
rendezvous,   sign-offs,   process  reports,   notification  alerts,   data-feed
integration  and  process  audits.  Mortgage  Assistant  is an add-on  module to
PaperClip32.



                                                     -6-


<page>
Objectives, Internal Sales Force And Risks

     Management's  marketing  objectives for the Systems and the Company's other
products are as follows:  (i) develop  strategic  relationships  with  prominent
software  organizations;  (ii)  introduce  the Systems and the  Company's  other
products to customers through VARs, original equipment  manufacturers  ("OEMs"),
distributors  and  other   distribution   networks;   (iii)  create  brand  name
recognition of its products by advertising  in appropriate  trade  magazines and
publications,  and by attending  and  participating  in  exhibitions,  shows and
seminars,  engaging  in  public  relations  campaigns,  and  conducting  its own
seminars and direct mail  campaigns;  and (iv) support the sales  efforts of its
resellers through sales tools and training.

     Training  and  technical  support of VARs is a component  of the  Company's
efforts with respect to its Workgroup and Enterprise Editions. Consequently, the
Company  provides  technical  support along with on-going  communication  to its
VARs.

     The  Company  has a sales  force of three  persons.  The  Company  conducts
selling  efforts  directly to the mortgage  broker  industry and life  insurance
brokers.  The Company has one sales  person  focusing on each of those  markets.
While the Company  attempts to encourage VARs,  distributors and other resellers
to focus on the Company's products,  management is aware that VARs, distributors
and other  resellers also represent  other lines of products,  some of which may
be, or are, competitive with those of the Company.  Accordingly, the VARs, OEMs,
distributors  and other resellers may choose to give higher priority to products
of other publishers, which would decrease potential sales by the Company.

Value Added Reseller Network
     To date, revenue sources are approximately evenly divided between VAR sales
and internal services. The Company currently has approximately 23 VARs, of which
approximately 20 VARs are in the United States and approximately 3 are abroad.

Business Services
     The Company's Business Services Department sells directly to major accounts
that want to work on a direct  basis with the  Company.  It also offers users of
its products and VARs, post-contract support, consulting services and assistance
in  the  form  of  training,  product  education  and  technical  support,  when
requested. The Business Services Department currently consists of 1 employee.

Customers And Sales
     The Company had net sales of  $1,739,394  in 2005 and  $1,420,637  in 2004.
ImageTek, a VAR, Bisys and NISC accounted for 9%, 10%, and 9%, respectively,  of
the Company's  sales in 2005.  Lumtron,  an OEM, and ImageTek,  a VAR, Bisys and
NISC accounted for 10%, 11%,11%, and 10%,  respectively,  of the Company's sales
in 2004.  In 2004,  the  Company  commenced  a lawsuit  against  Lumtron  in the
Superior  Court of the State of New Jersey for  payment of  delinquent  accounts
receivable approximating $ 93,000. The Company has set up what it believes is an
adequate  bad debt  reserve to cover this  dispute.  An  arbitration  proceeding
relating to this dispute is currently  scheduled for July 2006.  Three customers
(ImageTek,  Summit  and  Valmark)  represented  47% of  accounts  receivable  at
December  31,  2005.  Three  customers   (Companion,   ImageTek,   and  Lumtron)
represented 58% of accounts receivable at December 31, 2004.
                                            -7-

<page>
Customer Support And Service
     The Company presently  provides  telephone support to its VARs and OEMs and
customers  it deals with  directly.  The majority of the  Company's  service and
support activities involve responses to customer inquiries  regarding use of the
Workgroup, Enterprise and Professional Editions, which are provided by telephone
support directly from the Company's technical support center.

Product Development
     At present,  the Company's  systems are being developed by a combination of
in house staff and, when  necessary,  outside  consultants.  PaperClip  expended
approximately  $503,000  and $ 421,800 on research and  development  in 2005 and
2004, respectively.

     Existing and future competing products that may be offered at lower prices,
or that may have superior technological and performance  characteristics,  could
adversely  affect  sales of the Systems  and/or  other  products  offered by the
Company. Management expects that growing demand for efficient and cost-effective
solutions  for  document  management  and  imaging  will  continue  to drive the
developments  of new  technologies  that  may be  more  sophisticated  than  the
Company's products and that the Company's ability to continue to compete depends
upon its ability to continue to enhance  successfully its existing  products and
to develop  new  products  that meet the  changing  needs of  end-users.  If the
Company is unable to  successfully  enhance its existing  products or to develop
new products,  it may have a material adverse effect on the Company's operations
and profitability.

Production

     The Company has produced a set of master CD's and  documentation for all of
its products.  Depending on the product,  the Company will either  duplicate the
CD's and ship the Systems from its  headquarters  or provide the customer with a
download of the file.  The Company has also engaged  various  sources to produce
and assemble the product and documentation  (including packaging for the Systems
on terms management believes are commercially reasonable).

Product Protection
     The  Company  relies  on a  combination  of  copyright,  trade  secret  and
trademark laws and license  agreements to protect its proprietary  rights in its
technology.  The  Company  was  issued a  Certificate  of  Registration  for the
Trademark  Paperclip  on November  20,  2001.  Although to the best of Company's
knowledge no other person or entity owns any U.S.  registered  trademark for the
mark  "PaperClip" in connection  with software or imaging  products,  there is a
registration  filed  by a  third  party  for  "Technology  As  Easy  To Use As A
PaperClip"(tm) for consulting on computer hardware,  software and systems in the
fields of sales automation,  order  processing,  voicemail,  paging,  dictation,
transcription  and   telecommunications   and  off-site  employee  programs  and
businesses.  While the  Company  does not  believe  there is any  likelihood  of
confusion  raised by the use of such mark, if such confusion  were alleged,  the
Company would rely on its prior common law rights. If any claim is asserted, the
Company  may be forced to expend  significant  effort,  time and funds to defend
against it. If the Company is not successful in defending  against such a claim,
the Company would be required to adopt a different name and would incur costs as
a result thereof.
                                          -8-

<page>
     The Company owns registrations for the trademark PAPERCLIP IMAGING SOFTWARE
& DESIGN in Canada,  but does not now own  registrations  or pending
applications for trademark  registration in other countries in which the Systems
and the Company's other products are sold.

     The  Company   distributes  its  products  under  signed  software  license
agreements,  which  grant  customers  perpetual  licenses  to use,  rather  than
ownership of, the Company's products and which contain  restrictions on copying,
disclosure, reverse engineering and transferability.  The source code for all of
the  Company's  products is protected  as a trade  secret and as an  unpublished
copyrighted  work.  In  addition,  the Company has  entered  into  nondisclosure
agreements with its employees. There can be no assurance that the steps taken by
the  Company in this  regard  will be  adequate  to deter  misappropriations  or
independent third-party development of its technology.

     The  Company  has no patents on its  proprietary  software  technology  and
existing copyright laws afford only limited practical  protection.  In addition,
the laws of some  foreign  countries  do not protect the  Company's  proprietary
rights in its products and technology to the same extent as U.S. laws.

     Although management  believes that the Company's  products,  trademarks and
other  proprietary  rights do not infringe on any existing  proprietary right of
others,   there  can  be  no  assurance  that  third  parties  will  not  assert
infringement claims in the future.

Components Provided By Others

     The Systems require licenses,  which the Company has obtained, from, Merant
AccuSoft  Corporation,  and  Snowbound  Software and may require  licenses  from
Pegasus Imaging Corporation and Sybase Inc.






                                          -9-




<PAGE>
Competition

     The document  management  software market is intensely  competitive.  Buyer
preferences  can  shift  quickly,   and  rapid  changes  in  technology  provide
opportunities  for new entrants into the market.  Management is not aware of any
product  line which  offers all of the  features  and  functions of the Systems.
However, a number of software companies offer products which compete with one or
more of the functions of the Systems.

     There are numerous companies that sell either stand-alone,  network and Web
based  systems with which the Company  competes.  Competition  for the Company's
products  include,  among  others,  Hyland  Software,   Optika  Imaging  Systems
Incorporated,  OTG (a  division of EMC) and  LaserFiche  Document  Imaging.  The
Company  also  competes  with more  expensive  turnkey  solutions  such as those
produced  by  FileNet  Corp.  Many of these  companies  have  greater  financial
strength  and  resources  than the Company,  and there can be no assurance  that
these competitors will not modify their existing  systems,  develop new products
or systems or acquire other  competitors  of the Company to better  compete with
the Systems. In addition,  there can be no assurance that new companies will not
introduce new systems with better features and functions than the Systems. There
are a few competitors in the electronic  document exchange market. This is a new
extension  of the  Internet  services  collectively  known  as the  Business  to
Business  Electronic  Commerce  (B2B/ec).  Current  competition  is  focused  on
electronic  mail (Email) based exchange  solutions,  which is different from the
methodology  the  Company  has  adopted.  In the life  insurance  industry,  one
competitor has emerged  utilizing a central  repository  for document  exchange.
Intellisys  and  Hooper  Holmes  each  provides a central  repository  and sells
retrieval and  communications  with  selected  carriers as their  service.  Each
contracts  with the smaller  brokers where  outsourcing to the broker makes more
sense.  PaperClip's document management customers are the larger volume brokers.
Intellisys is an Internet  Express  customer.  In the mortgage broker  industry,
PaperClip  competes  with a  number  of  companies,  such as  Virpak,  Advectis,
SwiftView  Inc.  and Del Mar.  In addition to  computer  software  for  document
management and imaging,  there is also a diverse range of  alternative  types of
tools and methods for storing and  retrieving  documents,  including  microfilm,
microfiche  and computer  output  microfilm and microfiche  machines.  Moreover,
management  expects that the growing  demand for  efficient  and  cost-effective
solutions for document  management  and computer  imaging will continue to drive
the  development  of  new  technologies  that  may  be  more  sophisticated  and
cost-effective  than the Systems.  Many existing and potential  competitors have
considerably greater financial, technological, marketing and personnel resources
than the Company.

     Management  believes that the principal  competitive  factors in the market
for the Company's products include product performance,  technology,  quality of
customer support, availability of training and consulting services, price, sales
and marketing strength,  corporate reputation and ongoing responsiveness to user
needs.

                                          -10-





<PAGE>
Employees

     As of March 21, 2006, the Company's full-time staff of sixteen (compared to
seventeen a year ago) employees  includes seven employees engaged in development
and systems  testing,  three  engaged in sales,  two in training  and  technical
support,  one in Business  Services  and three  engaged in  administration.  The
Company has no collective bargaining agreements,  and no employee is represented
by a labor union.  The Company has never had a work  stoppage and  considers its
relationship  with its  employees  to be  satisfactory.  The Company  intends to
utilize consultants to supplement its systems  development,  sales and marketing
efforts, when necessary.

     The Company's success depends to a significant  extent upon a number of key
management  and technical  employees.  The loss of services of one or several of
these key  employees  could  have a  material  adverse  effect  on the  Company.
Management  believes that the future  success of the Company will also depend in
large  part upon the  Company's  ability to attract  and retain  highly  skilled
technical, managerial and marketing personnel. Competition for such personnel in
the software industry is intense.

Capital Raising Initiatives

     On October 29, 2004, the Company engaged Sloan Securities  Corp.  (together
with its affiliates,  "Sloan") to provide financial advisory services, which may
include  assistance in seeking to raise additional  capital.  In connection with
such  engagement,  the  Company  issued  two-year  warrants to Sloan to purchase
500,000  shares of the Company's  Common Stock at an exercise  price of $.10 per
share.  The Warrants vested as to 425,000 shares on the date of issuance of such
warrants and as to the remaining  75,000 shares at such time that a financing is
consummated in which at least  1,400,000  shares of common stock or common stock
equivalents are issued to investors introduced to the Company by Sloan.

     On March 30,  2005 and April 8, 2005,  the  Company  received  funds from a
group of  accredited  investors  in the net  amounts of  $100,000  and  $57,500,
respectively,  in anticipation of the execution of definitive documentation with
such  investors.  Documents  had been  fully  negotiated  in  anticipation  of a
financing  for gross  proceeds of between  $500,000  and  $1,200,000.  While the
Company  executed  certain  documents  prior to its  receipt of the  funds,  the
documents were to be held in escrow pending a final  transaction and the Company
never received countersigned  agreements from the investors.  Under the terms of
the negotiated  transaction,  the invested funds were to be in the form of a two
year loan, secured by a lien on the Company's assets,  with interest at the rate
of 12% per annum prepaid for the entire period,  and financing fees due to Sloan
in an aggregate  amount equal to 13% of the gross proceeds  raised.  Warrants to
purchase  200,000  shares  and  50,000  shares  were  also to be  issued  to the
investors and Sloan, respectively,  for each $100,000 of the financing. One half
of such warrants were to be exercisable  at $0.20 per share,  and the other half
of such  warrants  were to be  exercisable  at  $0.25  per  share.  In a  letter
agreement dated March 31, 2005,  Sloan and the investors  agreed that they would
not enforce their registration rights related to shares of common stock issuable
upon  exercise of the  warrants  until such time as the Company has  received an
aggregate  of $500,000 of gross  proceeds  through  the  issuance of notes.  The
Company has  recorded a $250,000  loan  payable on its December 31, 2005 balance

                                        -11-

<page>
sheet based on its  understanding  of the intent of the  parties  that such
$157,500 aggregate amount represents net proceeds to the Company,  after prepaid
interest  and  financing  costs,  of a  $250,000  loan  to the  Company  by such
investors.  The Company  has also  reserved  625,000  shares for  issuance  upon
exercise of the warrants that were to be issued in connection  with the $250,000
financing.  The Company has been unable to obtain  executed  documents  from the
investors or Sloan or  definitive  confirmation  of their intent  regarding  the
funds.  Accordingly,  there can be no assurance that the investors will not seek
to treat the funding as an incomplete investment and demand return of the funds.
The Company has accounted for the loan as short-term indebtedness.


ITEM 2.  Description of Property.

     The  Company's  principal  administrative,  sales  and  marketing,  product
development and support facilities are located in  Hackensack, New Jersey,
and  comprise  approximately  2,100  square  feet.  The Company  occupies  these
premises  pursuant to a lease,  the term of which  expires on February 28, 2011.
The fixed  rent is  approximately  $4,000  per month  plus  utilities,  plus its
proportionate share of any increase in operating costs.












                                          -12-






<PAGE>

ITEM 3.  Legal Proceedings.

     In 2004,  the  Company  commenced  a lawsuit  against  Lumtron,  one of the
largest  customers  of the Company,  in the  Superior  Court of the State of New
Jersey for payment of delinquent accounts receivable  approximating $93,000. The
Company has set up what it believes  is an  adequate  bad debt  reserve to cover
this dispute.  An arbitration  proceeding  relating to this dispute is currently
scheduled for July 2006.

     Except as set  forth  above,  the  Company  is not a party to any  material
pending legal proceedings.


ITEM 4.  Submission Of Matters To A Vote Of Security Holders.

     No matters were  submitted to a vote of security  holders during 2005.



                                     PART II

     ITEM 5. Market For Common Equity and  Related Stockholder  Matters.

                    Common
                     Stock
2005              High      Low
First             0.14     0.04
Second            0.07     0.05
Third             0.08     0.04
Fourth            0.06     0.03


2004              High     Low
First             0.10     0.04
Second            0.18     0.09
Third             0.12     0.06
Fourth            0.14     0.07

     The above  prices  per share  were the bid prices  during  such  periods as
reported by Bloomberg News Service for OTC market  quotations.  Such  quotations
reflect  interdealer prices without retail mark-up,  mark-down or commission and
may not necessarily represent actual transactions.

     The Company's securities are presently traded on the OTC Bulletin Board. As
of December  31,  2005,  there were  approximately  160 holders of record of the
Company's  shares of Common Stock. The Company has not paid cash dividends since
its  organization and does not anticipate the declaration or the payment of cash
dividends  in the  foreseeable  future.  In  addition,  the  Company's  Series A
Preferred Stock  Certificate of Designation  restricts the declaration,  payment
and  setting  aside of any  dividends  without the consent of the holders of the
Requisite  Percentage  (as  defined in such  Certificate)  of Series A Preferred
Stock.


                                           -13-



<PAGE>
ITEM 6.  Management's Discussion and Analysis or Plan of Operation.

RESULTS OF OPERATIONS

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

     Net sales  increased by $318,757 or 22.4% to $1,739,394  for the year ended
December 31, 2005 from  $1,420,637  for the year ended  December  31, 2004.  The
increase  was due to an  increase in  revenues  from annual  support and upgrade
assurances and an increase in sales of the Company's products.

     Research and development  expenses increased by $81,182 or 19% to $ 502,979
for the year ended  December 31, 2005 from $421,797 for the year ended  December
     31,  2004.  The  increase  was due to an increase  in  salaries  related to
research and development.

     Selling expenses  increased by $43,447 or 6% to $796,039 for the year ended
December  31, 2005 from  $752,592  for the year ended  December  31,  2004.  The
increases  resulted from an increase in sales  salaries,  partially  offset by a
decrease in travel expenses.

     General and administrative expenses increased by $75,374 or 14% to $600,839
for the year ended  December 31, 2005 from $525,465 for the year ended  December
31, 2004.  The increase was due to an increase in  professional  fees and moving
expense to relocate the Company's offices.


     Other income (expense) decreased by $44,331 to $(23,064) for the year ended
December  31, 2005 from income of $21,267 for the year ended  December 31, 2004.
The decrease was primarily due to an increase in interest expense resulting from
loans payable to a group of investors.

                                        -14-


<PAGE>
     There was no  current  provision  for  income  taxes in 2005 or 2004 as the
Company had losses in both years and the Company has  provided a full  valuation
allowance for net deferred tax assets.

     Net loss decreased by $74,423 to $(183,527) for the year ended December 31,
2005 from  $(257,950)  for the year ended  December 31,  2004.  The decrease was
primarily  due to an  increase  in sales,  offset  by an  increase  in  salaries
professional fees, and an increase in other expenses.


LIQUIDITY AND CAPITAL RESOURCES
     For the year ended  December 31, 2005, the Company's net loss was $183,527.
For the year ended December 31, 2004, the Company's operations resulted in a net
loss of  $(257,950).  The Company  reported an operating  loss of  approximately
$160,463  during fiscal year 2005. As of December 31, 2005 and 2004, the Company
had an accumulated  deficit of $20,946,008 and  $20,762,481,  respectively.  Net
cash (used for) provided by operating  activities was $(130,028) and $46,990 for
the years ended  December 31, 2005 and December  31, 2004,  respectively.  As of
December 31, 2005, the Company had a working capital deficit of $(601,781), with
$626,388 in current assets and $1,228,169 in current liabilities. As of December
31, 2004, the Company had a working capital deficit of $(454,674), with $535,562
in current assets and $990,236 in current liabilities.


                                       -15-


<PAGE>
     Presently, the Company funds working capital from revenues it receives from
the sale of its  products.  Over the preceding  five fiscal  years,  the Company
received  an  aggregate  of  approximately  $1,500,000  from the sale of its tax
losses,  but does not anticipate any additional  proceeds from such sales in the
future.  As  of  December  31,  2005,  the  Company  had  aggregate  liabilities
approximately  $2.1  million.  Such  amount of  aggregate  liabilities  includes
approximately  (i) $400,000 in annual support  contracts,  which are recorded as
deferred revenue, a non-cash item, for accounting purposes and reclassified,  on
a pro rata basis to sales as such  contracts  expire and income is earned,  (ii)
$435,000 in accounts payable and accrued  expenses,  and (iii) $380,000 in notes
and loans  payable of which  $130,000  was issued more than six years ago.  Such
liabilities also include accrued  compensation-related  party,  which relates to
deferred compensation of approximately  $868,000 payable to Mr. Weiss. Mr. Weiss
has entered into a written  agreement with the Company in which he agreed not to
demand payment of his deferred compensation until subsequent to April 1, 2007.

     At December  31,  2005,  the Company had net Federal  operating  loss carry
forwards ("NOL") of approximately  $20,000,000 for financial reporting purposes,
which are due to expire from 2007 through 2025.  Due to losses  sustained by the
Company for both financial and tax reporting through 2005, management was unable
to  determine  that  realization  of the tax asset  related  to the NOL was more
likely than not and,  thus,  has provided a valuation  allowance  of  $6,197,500
against the  potential tax deferred tax asset of  $6,197,500.  The Company's NOL
that  would be  available  to offset  future  income  may be  subject  to annual
limitations.  However,  due to a  provision  under  the laws of the State of New
Jersey,  the  Company  realized  $623,135,  $ 351,335,  $223,000,  $191,000  and
     $127,000 in 1999, 2000, 2001, 2002 and 2003, respectively, from the sale of
its New Jersey net operating losses and research tax credits. As noted above, no
additional proceeds are anticipated from such sales in the future.

     For  2006,  the  Company   anticipates  that  it  will  need  approximately
$1,800,000 in order to fund its operations.  The Company's  management  believes
that the Company will be able to meet its anticipated cash requirements  through
the end of 2006  through a  combination  of cash from the sale of its  products,
cost reduction initiatives to be implemented as necessary (which initiatives the
Company expects would be primarily  related to the Company's sales and marketing
activities), and cash on hand.

     The  Company's  ability  to fund  its  operations  is  subject  to  broader
acceptance  of its product  lines,  its ability to continue to realize  revenues
from its largest  customers,  product  performance,  competitive  forces,  sales
efforts of resellers,  the absence of  unanticipated  expenses and other factors
identified  herein.  There can be no assurance  that the Company  will  generate
enough  cash  from  the  sale of its  products,  or  that  the  Company  will be
successful  in  implementing   any  cost  reduction   initiatives  that  may  be
undertaken, to meet its anticipated cash requirements for the next 12 months. If
the Company does not generate enough cash to meet its  requirements for the next
12 months,  the Company will not have sufficient  working capital to satisfy its
liabilities,   develop  new  products  or  implement  its  marketing  and  sales
initiatives,  which may  result in a loss of sales  and  would  have a  material
adverse effect on the Company.


                                      -16-

<PAGE>
     See  "Business-Capital  Raising  Initiatives"  for a description of certain
capital  raised by the Company  during  2005.  As  described  in greater  detail
therein,  on March 30, 2005 and April 8, 2005, the Company received funds from a
group of  accredited  investors  in the net  amounts of  $100,000  and  $57,500,
respectively,  in connection  with an investment in the Company in the aggregate
principal  amount of $250,000.  Under the terms of the  negotiated  transaction,
definitive documentation for which was never received, the amount invested would
have been treated as a loan becoming due in 2007 on the second  anniversaries of
such dates and secured by a lien on the  Company's  assets.  If the Company does
not repay this amount in 2007 and if the  investors  were  determined to have an
enforceable loan and an enforceable  security  interest in the Company's assets,
the investors could  foreclose upon the Company's  assets and apply the proceeds
from  the  sale  of such  assets  to the  repayment  of such  amount.  Any  such
foreclosure or other  disposition of the Company's  assets would have a material
adverse effect on the Company.

Statement Regarding Critical Accounting Policies

     The financial  statements  of the Company are prepared in  accordance  with
accounting  principles  generally  accepted in the United States of America that
require  the Company to make  estimates  and  assumptions.  The  Securities  and
Exchange   Commission  ("SEC")  has  recently  issued  disclosure  guidance  for
"critical accounting  policies." The SEC defines critical accounting policies as
those that require  application of management's  most  difficult,  subjective or
complex  judgments  that are  inherently  uncertain and may change in subsequent
periods.

     The  preparation  of financial  statements  in conformity  with  accounting
principles   generally  accepted  in  the  United  States  of  America  requires
management to make estimates and assumptions that affect the reported amounts of
assets and  liabilities  and disclosure of contingent  assets and liabilities at
the date of the financial  statements  and the reported  amounts of revenues and
expenses  during the reporting  period.  Actual  results could differ from those
estimates.   Notwithstanding  the  foregoing,  the  Company  believes  that  the
Company's  operations  are of such a nature that  management  is not required to
make  estimates  and  assumptions  about  highly  uncertain  matters  such  that
differences in such estimates would have a material  impact on the  presentation
of the Company's financial  statements.  Accordingly,  the Company believes that
none of its  significant  accounting  policies  (see  Note 2 in the Notes to the
Financial   Statements)   require  additional   disclosure  as  being  "critical
accounting policies."
                                          -17-

<page>

ITEM 7.  Financial Statements.

        The Financial Statements can be found following Part III of this Report.





ITEM 8.  Changes In And Disagreements With Accountants On Accounting And
         Financial Disclosure.

           None

ITEM 8A    CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures

     The Chief Executive  Officer/Principal Financial Officer of the Company has
concluded, based on his evaluation as of the end of the fiscal period covered by
this Report, that the Company's disclosure controls and procedures are effective
to ensure  that  information  required  to be  disclosed  by the  Company in the
reports filed or submitted by it under the  Securities  Exchange Act of 1934, as
amended (the "Exchange  Act"), is recorded,  processed,  summarized and reported
within the time  periods  specified  in the SEC's  rules and forms,  and include
controls  and  procedures  designed  to ensure that  information  required to be
disclosed by the Company in such reports is accumulated and  communicated to the
Company's management,  including the Chief Executive Officer/Principal Financial
Officer, as appropriate to allow timely decisions regarding required disclosure.

Internal Control over Financial Reporting.

     During the year ended  December 31,  2005,  there has been no change in the
Company's  internal  control  over  financial   reporting  that  has  materially
affected,  or is reasonably likely to materially  affect, the Company's internal
control over financial reporting.




ITEM 8B.  OTHER INFORMATION

None.












                                          -18-
<PAGE>


                                                       PART III

ITEM 9.  Directors and Executive Officers of the Registrant

Executive Officers and Directors

     The directors and executive officers of the Company are
as follows:
Name                       Age          Position

William Weiss              62           Chief Executive Officer; Treasurer;
                                        Director

D. Michael Bridges         51           President, Director

Michael Suleski            45           Vice President, Engineering; Secretary;
                                        Director


     WILLIAM WEISS, a founder of the Company,  has been Chief Executive  Officer
and a director of the Company since its formation in October 1991.  From January
1980 until  March 31, 2003 Mr.  Weiss had also been an  executive  officer  and
President of Medical Registry Services,  Inc., a computer software company which
sells and services a computerized system for cancer record keeping in hospitals.
Mr. Weiss  devotes  approximately  40 hours per week to the  Company.  Mr. Weiss
received a B.S. from the Wharton School of the University of Pennsylvania  and a
J.D. from New York Law School.

     D. MICHAEL BRIDGES,  President,  rejoined the Company in March,  2000 after
providing  consulting services to the Company from August 1998 to March 2000. He
has been a director of the Company since March 2000.  Mr.  Bridges served as the
Company's Vice President of Marketing & Sales and Director of Corporate Services
from  February  1995 to August  1998.  Mr.  Bridges  received a B.S.  from Rowan
University and served as a Captain in the United States Marine Corps.

     MICHAEL  SULESKI,  a  founder  of the  Company,  has been  Vice  President,
Engineering  of the Company since August 1992,  and its Director of Research and
Development  from its  inception in October  1991 to August 1992.  He has been a
director of the Company since May 1995,  and Secretary of the Company since July
1995. He received a B.S. and a M.S. degree from Fairleigh  Dickenson  University
College of Science and Engineering.


                                -19-






<PAGE>
     The  Company's  directors  were  elected  at the  last  annual  meeting  of
stockholders  and hold office until the next annual meeting of the  stockholders
or until their successors are elected and qualified. Directors are not currently
compensated or reimbursed for expenses incurred by them in connection with their
services as directors, except for travel to Board of Directors meetings.

     The Company does not have any independent  directors and therefore does not
have an audit committee. The full Board of Directors is performing the functions
of the audit  committee.

     There are no family relationships among any of the directors or officers.

     The  Company's  officers are chosen by the Board of Directors  and serve at
the pleasure of the Board. The loss of the services of any one of William Weiss,
D. Michael  Bridges or Michael  Suleski could have a material  adverse effect on
the Company.

Board of Advisors

     In January  2004,  the  Company  formed an  Advisory  Board  consisting  of
distinguished  professionals  and  entrepreneurs  who will provide  guidance and
advice to the Company and serve as a sounding board for the management team. The
Advisory Board members will share experiences with colleagues and voice opinions
on the  technologies  transforming  electronic  document  management and its end
communications.  The  Company  believes  that the input of its Board of Advisors
will   influence  the   development   of  new  products  and  improve   existing
technologies.  During 2004,  the Company  revamped its Advisory Board to reflect
the  direction  that the Company was taking in focusing on the mortgage and life
insurance industries.  To that end the Company replaced the three members of the
advisory  board with two  others.  See "2004 Stock  Incentive  Plan" below for a
description  of stock options  available for issuance to members of the Advisory
Board. The current Advisory Board members are as follows:

     A.W. Pickel,  III, CMC, president of Leader Mortgage Company, is the former
president of the  National  Association  of Mortgage  Brokers.  Leader  Mortgage
Company  ("Leader"),  is based in Lenexa,  Kansas,  with a branch  office in St.
Louis,  Missouri.  Leader has been in  business  since  1992,  primarily  in the
Midwest.  A.W. Pickel, III as a mortgage  brokerage,  founded Leader.  Over time
Leader has grown and evolved  into a regional  mortgage  banker.  Leader  offers
in-house processing, underwriting and closing. Leader is a full service mortgage
lender, approved to provide conventional as well as government loans.

     Mr.  Nachmany  is the  Chief  Operating  Officer  of  International  Object
Technology (IOT). Prior to joining  International Object Technology Mr. Nachmany
was the President and CEO of bCompliant, Inc., a company he established in order
to conduct the collection,  review,  validation,  and approval of electronic and
paper  transaction  documents  for the  mortgage  industry in an  efficient  and
convenient fashion regardless of the number of participants and their geographic
dispersion.  From 1990 to 1997, Mr.  Nachmany was the President and CEO of Image
Integration  Corp.  From  1985-1990,  Mr.  Nachmany  acted  as the CEO of  Image
Communication  Systems,  a company which was responsible for the development and
support of a joint venture between  McDonnell  Douglas  Computer Systems Company
and the Bell & Howell Company,  in the Computer Aided Retrieval (CAR) market for
the banking industry.
                                        -20-

<PAGE>

Limitation of Liability and Indemnification Matters

    Insofar as indemnification for liabilities arising under the Securities Act
of 1933,  as  amended,  may be  permitted  to  directors,  officers,  or persons
controlling the Company  pursuant to the foregoing  provisions,  the Company has
been informed 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.

Audit Committee Financial Expert

     The Board of Directors has  determined  that William  Weiss,  the Company's
Chief  Executive  Officer,  is the Board's "audit  committee  financial  expert"
within the meaning of Item  401(e)(2)  of  Regulation  S-B. The Company does not
have any independent  directors and therefore does not have an audit  committee.
The full Board of Directors is performing the functions of the audit committee.

Compliance with Section 16
     Section 16(a) of the Exchange Act requires certain  persons,  including the
Company's directors and executive  officers,  and beneficial owners of more than
10% of the Company's equity securities,  to file reports with the Securities and
Exchange Commission  regarding  beneficial ownership of equity securities of the
Company.  Based on material provided to the Company by such directors,  officers
and beneficial owners of more than 10% of the Company's equity  securities,  the
Company  believes that during the fiscal year ended December 31, 2005, there was
compliance  with all such  filing  requirements.

Code of Ethics
     The Company has adopted a code of ethics (the  "Code")  that applies to our
directors,  officers and employees.  The Code is designed to deter wrongdoing on
the part of such  persons  and to  promote:  (1)  honest  and  ethical  business
conduct,  including  the ethical  handling of actual or  apparent  conflicts  of
interest  between  personal  and  provisional  relationships,  (2)  full,  fair,
accurate,  timely and understandable disclosure in reports and documents that we
file with, or submit to the SEC and in other public  communications  made by us,
(3) compliance with applicable governmental laws, rules and regulations, (4) the
prompt internal  reporting of violations of the Code to an appropriate person or
persons  identified  in the Code,  and (5)  accountability  for adherence to the
Code. The Code is designed to foster the highest standards of ethics and conduct
in all of  our  business  relationships.  The  Code  will  be  available  on the
Company's  website,  www.paperclip.com,  and copies will be mailed upon  written
request to Secretary,  1 University Plaza, Hackensack, NJ 07601 or by
calling (201)  525-1221.  The Company  intends to disclose any  amendments to or
waivers of the Code on behalf of its Chief  Executive  Officer,  Chief Financial
Officer,  and persons performing similar functions on the Company's website,  at
www.paperclip.com,  promptly  following the date of such amendment or waiver. To
date, there are no such amendments.
                                     -21-

<PAGE>
ITEM 10.  Executive Compensation.

     The Summary  Compensation  Table below sets forth  compensation paid by the
Company for the last three fiscal years ended December 31, 2005 for all services
in all  capacities  for its Chief  Executive  Officer and each of its  principal
executive  officers whose total annual salary and bonus exceeded  $100,000.  The
Board determines the compensation of the Company's executive  officers,  none of
whom received increases in their salaries, or a bonus, in 2005.
<TABLE>
<CAPTION>

                                      Summary Compensation Table
--------------------------------------------------------------------------------
                                           Annual Compensation
                                         Long Term Compensation
-------------------------------------------------------------------------------------------------------------------------
                                                                                    Securities
                                                  Other           Restricted       Underlying    LTIP
Name and Other                         Bonus      Annual            Stock         Options/SARs (#)Payouts    All
 Position         Year    Salary ($)    ($)    Compensation       Awards ($)                        ($)
Compensation
--------------------------------------------------------------------------------------------------------------------------
<S>               <C>       <C>      <C>         <C>               <C>              <C>             <C>        <C>
William Weiss     2005      120,000   0           0                 0                0               N/A        N/A
                  2004      120,000   0           0                 0                0               N/A        N/A
CEO (1)(2)        2003      120,000   0           0                 0                0               N/A        N/A
--------------------------------------------------------------------------------------------------------------------------
Michael Suleski   2005      105,000   0           0                 0                0               N/A        N/A
                  2004      105,000   0           0                 0                0               N/A        N/A
Vice President    2003      105,000   0           0                 0                0               N/A        N/A
Engineering (1)
--------------------------------------------------------------------------------------------------------------------------
D Michael Bridges 2005      107,800   0           0                 0                0               N/A        N/A
                  2004      107,800   0           0                 0                0               N/A        N/A
President         2003      107,800   0           0                 0                0               N/A        N/A
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
     (1) The Company presently has no employment  contract with William Weiss or
Michael  Suleski.
     (2)As of December 31, 2005, approximately $868,000 is owed to William Weiss
for past salaries accrued but not paid.
                                           -22-


<PAGE>
Option/SAR Grants

     During  the fiscal  year ended  December  31,  2005,  there were no options
granted to either the Company's Chief Executive  Officer or any of its principal
officers.

     The table below indicates that no options/SARs were exercised during fiscal
year 2005 by the  Company's  Chief  Executive  Officer and each of its principal
executive officers and shows the value of their unexercised options/SARs.

               AGGREGATED  OPTION/SAR  EXERCISES IN FISCAL YEAR 2005
                  AND OPTION/SAR VALUES AT DECEMBER 31, 2005

<TABLE>
<CAPTION>
                                                                                              Value of Unexercised
                                                                      Number of Securities      In-the-Money
                                                                      Underlying                Options/
                                                                      Unexercised Options/SARs  SARs at
                                                                      at FY-end                 FY-End
                          Shares Acquired On         Value            Exercisable/              Exercisable/
    Name                      Exercise (#)         Realized ($)       Unexercisable (#) (1)     Unexercisable($)
----------------------- ---------------------- ---------------------- ------------------------------------------------
<S>                               <C>                 <C>                <C>                        <C>

William Weiss                     0                   0                  770,921/0                  0/0
D. Michael Bridges                0                   0                  405,000/0                  0/0
Michael Suleski                   0                   0                  744,921/0                  0/0

</TABLE>


     (1) The Company does not have a stock appreciation  rights ("SAR") plan and
does not have any SARs outstanding.

     The Company  presently  has no employment  contracts  with William Weiss or
Michael Suleski. The Company does not have any pension, profit sharing, or bonus
plan,  other than a 2004 Stock Incentive Plan for consultants and members of the
Board of Advisors, which is described below.









                                          -23-




<PAGE>

     The Company entered into an Employment Agreement with David Michael Bridges
effective as of January 1, 2000 (the  "Employment  Agreement").  The  Employment
Agreement provides that Mr. Bridges will serve as the Company's President and as
a member of the Company's Board of Directors, subject to stockholder vote, for a
term of three  years,  subject  to  automatic  one  year  extensions  and  early
termination,  at an initial base salary of $107,800. The  Employment  Agreement
provides  that Mr.  Bridges  shall not  compete  with the Company in the product
lines under  development  by the Company or use or disclose any trade secrets of
the  Company  during the term of the  Employment  Agreement.  In  addition,  the
Employment  Agreement  provides that Mr. Bridges shall not solicit  employees of
the Company or induce any employee to terminate his or her relationship with the
Company  during the term and for a period of 24 months after  termination of the
Employment Agreement unless the Company terminates Mr. Bridges without cause (as
defined in the  Employment  Agreement),  the  Company  fails to satisfy  certain
conditions or if William Weiss or Michael  Suleski shall leave the employment of
the Company other than by reason of death or disability.  Mr. Bridges may not be
terminated  prior to the end of the term  except  with cause (as  defined in the
Employment  Agreement) and Mr.  Bridges may terminate the  Employment  Agreement
prior to the end of the term by  giving  the  Company  at least 90 days  written
notice. In the event that there is a transfer of control, defined as 50%, of the
Company within 6 months of the termination of Mr. Bridges,  Mr. Bridges shall be
entitled to his base salary,  vacation and other  benefits for the  remainder of
the  term  of the  Employment  Agreement  and any  difference  in  value  of the
Company's  capital stock owned by Mr. Bridges at the time of his termination and
the value of such stock after  transfer of control as valued in accordance  with
the terms of the Employment  Agreement.  The Employment  Agreement also provided
for the grant of options to  purchase  400,000  shares of the  Company's  common
stock.  Mr.  Bridges is also entitled to  indemnification  to the fullest extent
permitted  under New Jersey law. In the event that Mr.  Bridges'  employment  is
terminated  without  cause prior to the end of the term or any  extension of the
term or because of a disability (as defined in the Employment Agreement),  he is
entitled  to receive his base salary for 6 months,  at his then  current  annual
rate paid in a lump sum within 10 days of termination, plus a payment for unused
vacation.   The  Employment   Agreement  also  provides  that  Mr.  Bridges  may
independently  develop  intellectual  property  outside of his regular  hours of
employment  with the Company and maintain  full  ownership of such  intellectual
property but provides for the  Company's  use of certain  intellectual  property
owned by Mr. Bridges.  The Employment Agreement restricts Mr. Bridges from using
certain  intellectual  property  owned by him to compete with the Company during
the term of the Employment Agreement.

                                       -24-






<PAGE>

2004 Stock Incentive Plan

     In February  2004,  the Board of Directors  of the Company  adopted a stock
incentive plan (the "2004 Stock Incentive  Plan").  Only consultants and members
of the Board of Advisors  are  eligible to  participate  in this plan.  The 2004
Stock  Incentive  Plan provides  that the  aggregate  number of shares of common
stock for which options may be granted  thereunder is 600,000  shares.  The 2004
Stock  Incentive Plan provides that it shall be administered by a committee (the
"Committee")  consisting  of either the full Board of  Directors  or a committee
consisting of at least two directors.

     The Committee has the full power and  authority,  subject to the provisions
of the 2004 Stock Incentive Plan, to designate  participants,  grant options and
determine the terms of all options.  The terms of specific options granted under
the 2004 Stock Incentive Plan are determined by the Committee.  The term of each
option is also  determined by the  Committee,  but no option may be  exercisable
after ten years have elapsed from the date upon which the option is granted.  As
of December 31, 2005,  100,000  options under the 2004 Stock Incentive Plan were
outstanding.

1993 Stock Option Plan

     In March 1993,  the Company  adopted its 1993 Stock  Option Plan (the "1993
Stock Plan") covering 68,912 shares of Common Stock, pursuant to which employees
(other than  directors) of the Company were  eligible to receive stock  options.
The 1993 Stock Plan expired on February 1, 2003, and all the outstanding options
expired in 2005.

1995 Stock Option Plan

     In May 1995,  the  Company  adopted a stock  option  plan (the "1995  Stock
Plan"),  pursuant to which officers,  directors and employees of the Company and
certain  other  persons  conferring  benefit upon the Company  were  eligible to
receive stock  options.  The 1995 Stock Plan  terminated  on March 1, 2005.  All
options thereunder outstanding at the time of such termination shall continue in
full force and effect according to the terms of the option agreements  governing
such options.  As of December 31, 2005,  options to acquire  3,969,222 shares of
Common Stock had been granted under the 1995 Stock Plan.  At such date,  892,872
options had expired,  95,508  options had been  exercised and 2,980,842  options
were outstanding.

Long-Term Incentive Plan

     The  Company  did not grant  any  awards to  executive  officers  under any
long-term incentive plan during fiscal year 2005.
                                            -25-

<PAGE>
Compensation of Directors

     Directors are not currently compensated or reimbursed for expenses incurred
by them in connection  with their  services as  directors,  except for travel to
Board of Directors meetings.

ITEM 11.  Security Ownership of Certain Beneficial Owners and Management And
          Related Stockholder Matters.

     The following  table sets forth, as of March 21, 2006, the number of shares
of  Common  Stock  and  Series  A  Preferred  Stock  beneficially  owned by each
director,  by the directors and executive officers of the Company as a group and
by each  holder  of at least  five  percent  of  Common  Stock  or the  Series A
Preferred  Stock,  as the case may be,  known to the Company and the  respective
percentage  ownership  of the  outstanding  Common  Stock and Series A Preferred
Stock held by each such holder and group:
<TABLE>
<CAPTION>

                                               Common  shares            Series  Preferred A shares
                                    ----------------------------------  --------------------------
Name and Address                            Number         Percentage     Number         Percentage
of Beneficial Owner                       of Shares (1)     of Class    of Shares         of Class
----------------------------------      ----------------  ------------  ----------------  ----------
<S>                                       <C>                <C>        <C>              <C>

William Weiss   (2)                       3,569,643(3)        31.04%     2,533,869          69.4%
PaperClip Software, Inc.
1 University Plaza
Hackensack , New Jersey 07601
Michael Suleski (2)                         780,936(4)         8.73%
PaperClip Software, Inc.
1 University Plaza
Hackensack , New Jersey 07601
D. Michael Bridges                          556,500(5)         6.38%       150,000           4.1%
PaperClip Software, Inc.
1 University Plaza
Hackensack , New Jersey 07601

A11 Officers and Directors
as a group (3 persons)                     4,911,079           38.35%    2,683,869          73.5%
</TABLE>
     (1) Unless otherwise indicated below, all shares are owned beneficially and
of record.
     (2) William Weiss and Michael Suleski are founders of the Company.
     (3) Includes (a) 770,921  shares of Common Stock issuable upon the exercise
of options  currently  exercisable  under the 1995 Stock  Option  Plan,  and (b)
2,533,869 shares of Common  Stock  issuable  upon the  conversion  of 2,533,869
shares of Series A Preferred Stock.
     (4) Includes  744,921  shares of Common Stock issuable upon the exercise of
options currently exercisable under the 1995 Stock Option Plan.
     (5) Includes  405,000 shares of Common Stock issuable upon the exercise of
options  currently  exercisable  under the 1995 Stock Option  Plan,  and 150,000
shares of Common Stock  issuable upon the conversion of 150,000 shares of Series
A Preferred Stock.

                                          -26-

<PAGE>


                        EQUITY COMPENSATION PLAN INFORMATION

     The following table provides  information,  as of December 31, 2005,  about
the Company's 1995 Stock Option Plan and 2004 Stock Incentive Plan, the material
features  of  which  are  described  in this  report  under  "Item  10-Executive
Compensation." Although the 1995 Stock Option Plan expired on March 1, 2005, the
options  with  unexercised  terms  remain  outstanding  under  such plan and are
included in the table below.

All  outstanding  awards  relate to the Company's common stock.

<TABLE>
<CAPTION>
                                Number of securities                                       Number of securities
remaining
                                  to be issued upon                   Weighted-average     available for future
issuance
                                      exercise of                     exercise price of    under equity compensation
plans
                                outstanding options,                 outstanding options,  (excluding securities
                                warrants and rights                   warrants and rights  reflected in column (a))
                                       (a)                                  (b)                   (c)
-------------------     ----------------------------------- ------------------------------ ----------------------------
<S>                              <C>                                         <C>                    <C>
Equity compensation                 2,980,842(1)                                .31                    0(2)
plans approved by
security holders


Equity compensation
plans not approved by
security holders                      100,000 (3)                                                500,000(4)

-------------------       -----------------------------------     ----------------------- -----------------------------

     Total                          3,080,842                                                    500,000
===================       ===================================     ======================= =============================
</TABLE>


     (1) Represents  2,980,842 shares of Common Stock issuable upon the exercise
of outstanding  options  previously granted under the 1995 Stock Option Plan

     (2) The 1995 Stock Option Plan expired on March 1, 2005.

     (3) Represents 100,000 shares of Common Stock issuable upon the exercise
of outstanding  options  granted under the 2004 Stock Incentive Plan.

     (4) Represents 500,000 shares of Common Stock available for future issuance
under the 2004 Stock Incentive Plan.
                                         -27-




<PAGE>

ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     Mr.  Weiss  receives  compensation  of $10,000 per month as part of an oral
employment  arrangement.  However,  in lieu of  receiving  current  compensation
payments,  Mr.  Weiss has agreed to the deferred  payment of such  compensation.
During 2002 and for the first three months  ended March 31, 2003,  Mr. Weiss has
assigned  payment of the  compensation to another company he is affiliated with.
At December 31, 2005, the Company had accrued $867,749 in deferred  compensation
to Mr. Weiss,  or his affiliated  company which is recorded as long term accrued
compensation-  related party on the balance sheet.  Mr. Weiss has entered into a
written  agreement  with the Company in which he agreed not to demand payment of
his deferred compensation until subsequent to April 1, 2007.

Item 13.  Exhibits .


                                          -28-





<PAGE>
(a)       Exhibits:

3.1      Certificate of Incorporation of Registrant, as amended.(1)
3.1(a)   Certificate of Amendment to Certificate of Incorporation.(3)
3.1(b)   Series A Preferred Stock Certificate of Designations.(3)
3.2      By-Laws of Registrant, as amended. (1)
3.3      Registrant's Authorization to do Business in New Jersey. (1)
3.5      Form of Common Stock Certificate. (1)
10.2     1995 Stock Option Plan, as amended (2)
10.3     2004 Stock Incentive Plan (5)
10.4     Form of End User License. (1)
10.5    (a)  Reschedule  Agreement  with NCC Export  Systems 1995 LTD ("NCC"),
        dated as of October 21, 1996  (incorporated  by reference from Exhibit
        10 of the Registrant's  Form 10-QSB for the quarter ended September 30,
        1996), (b) Receipt of full payment and  termination  of the  Reschedule
        Agreement  from NCC, dated January 29 , 1997.(2)
10.6    License  Agreement with Cheyenne  Software,  Inc.,  dated November 10,
        1995  (incorporated  by reference from Exhibit 10.12(c) of the
        Registrant's Form 10-KSB for the fiscal year ended December 31, 1995)
10.11   Employment  Agreement  dated as of January 1, 2000  between  Paperclip
        Software,  Inc.  and D.  Michael Bridges. (3)
10.13   Agreement, dated December 31, 2005 , by and between PaperClip Software,
        Inc. and William Weiss

14.   Code of Ethics (5)

23.1    Consent of Sobel & Co., LLC
31.1    Certification Pursuant to Rule 13a-14(a) Promulgated under the
        Securities Exchange Act of 1934.
32.1    Certification  pursuant  to 18  U.S.C.  Section  1350,  as  adopted
        pursuant  to  Section  906  of  the Sarbanes-Oxley Act of 2002.

                                          -29-



<PAGE>
(1)      Incorporated by reference from the Registrant's  Registration Statement
         on Form SB-2 (File No. 33-92768NY).
(2)      Incorporated  by reference  from the  Registrant's  Form 10-KSB for the
         fiscal year ended December 31, 1997 (File No. 000-26598).
(3)      Incorporated by reference from the Registrant's Form 10-KSB for the
         Fiscal year December 31, 2000 (File No. 000-26598)
(4)      Incorporated by reference from the Registrant's Form 10-KSB for the
           Fiscal year December 31, 2002 (File No. 000-26598)
(5)      Incorporated by reference from the Registrant's Form 10-KSB for the
           Fiscal year December 31, 2004 (File No. 000-26598)

                                         -30-

<PAGE>
ITEM 14.        PRINCIPAL ACCOUNTANT FEES AND SERVICES
     Sobel & Co., LLC ("Sobel") was the Company's  principal  accountant for the
fiscal years ended December 31, 2005 and 2004.

     The  following  is a summary of the fees billed to the Company by Sobel for
professional  services rendered for the fiscal years ended December 31, 2005 and
December 31, 2004:
<TABLE>
<CAPTION>
                                  Percentage of                        Percentage of
                                    2005 Fees                            2004 Fees
Fee Category          Fiscal 2005  Approved by the  Fiscal 2004 Fees   Approved by the
                          Fees        Board                                 Board
-------------        ------------ ----------------  ----------------   ---------------
<S>                   <C>            <C>              <C>                    <C>
Audit Fees              $30,734         100%             $27,600               100%
Audit-Related Fees        5,780                             -
Tax Fees                    -                               -
All Other Fees              -                               -
                      ---------                         ---------
Total Fees              $36,514                          $27,600
                      =========                         =========
</TABLE>
     Audit Fees. Consists of fees billed for professional  services rendered for
the audit of the Company's annual financial statements and review of the interim
financial  statements included in the Company's quarterly reports on Form 10-QSB
and related services.

     Audit-Related  Fees.  Consists  of fees  billed for  assurance  and related
services that are reasonably  related to the  performance of the audit or review
of the Company's financial statements and are not reported under "Audit Fees."

     The audit-related  fees of $5,780 relate to professional  services rendered
in  conjunction  with  research,  assistance  and  discussions  in assisting the
Company preparing responses to SEC letters.

     Tax  Fees.  Consists  of fees  billed  for  professional  services  for tax
compliance, tax advice and tax planning.

     All Other  Fees.  Consists  of fees for  services  other than the  services
reported above.

     The Company does not have any independent  directors and therefore does not
have an audit committee. The full Board of Directors is performing the functions
of the audit  committee.  The Board of Director's  policy is to pre-approve  all
audit and permissible  non-audit services provided by the independent  auditors.
These services may include audit services,  audit-related services, tax services
and other services.  Pre-approval  is generally  provided for up to one year and
any  pre-approval  is  detailed  as to the  particular  service or  category  of
services and is generally subject to a specific budget. The independent auditors
and  management  are required to  periodically  report to the Board of Directors
regarding  the  extent of  services  provided  by the  independent  auditors  in
accordance with this  pre-approval,  and the fees for the services  performed to
date.  The Board of  Directors  may also  pre-approve  particular  services on a
case-by-case  basis.  As illustrated in the table set forth above,  the Board of
Directors  pre-approved each audit and non-audit service rendered to the Company
by its  independent  Auditors and no services were approved using the de minimus
exception afforded by Rule 2-01(c)(7)(i)(C) of Regulation S-X.
                                     -31-


<PAGE>

                                   SIGNATURES

     Pursuant to the  requirements of Section 13 or 15 (d) of the Securities and
Exchange Act of 1934,  the Registrant has caused this Report to be signed on its
behalf by the undersigned, hereunto duly authorized.
                                  PAPERCLIP SOFTWARE, INC.


                                  By: /s/ William Weiss
                                  William Weiss, Chief Executive Officer


                                  Date: March 30, 2006


     Pursuant to the  requirements  of the  Exchange  Act,  this Report has been
signed below by the  following  persons on behalf of the  Registrant  and in the
capacities and on the date indicated.
Signature                 Title                           Date

/s/ William Weiss
William Weiss             Director and Chief Executive    March 30, 2006
                          Officer (Principal Executive,
                          Financial and Accounting Officer)

/s/ D. Michael Bridges    Director, President             March 30, 2006
D. Michael Bridges

/s/ Michael Suleski
Michael Suleski           Director, Vice President,       March 30, 2006
                          Engineering and Secretary
















                                       -32-






<PAGE>










                             PAPERCLIP SOFTWARE, INC.

                             FINANCIAL STATEMENTS

                            DECEMBER 31, 2005 AND 2004








































<PAGE>
PAPERCLIP SOFTWARE, INC.

DECEMBER 31, 2005 AND 2004


TABLE OF CONTENTS


                                                             Page

Report of Independent Registered Public Accounting Firm         1


Financial Statements:

    Balance Sheet at December 31, 2005                          2


    Statements of Operations For The Years Ended
       December 31, 2005 And 2004                               3


    Statements of Changes in Stockholders' Deficiency
       For The Years Ended December 31, 2005 And 2004           4

     Statements of Cash Flows For The Years Ended
       December 31, 2005 And 2004                               5


Notes to Financial Statements                                   6









<PAGE>

Report of Independent Registered Public Accounting Firm




To the Board of Directors
PaperClip Software, Inc.

     We have audited the accompanying balance sheet of PaperClip Software,  Inc.
(a Delaware  corporation)  (the  "Company")  as of  December  31, 2005 , and the
related statements of operations,  change in stockholders' deficiency,  and cash
flows for each of the years ended  December 31, 2005 and 2004.  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 in  accordance  with the  standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain  reasonable  assurance about whether the
financial  statements  are free of  material  misstatement.  The  Company is not
required  to have,  nor were we engaged  to  perform,  an audit of its  internal
control over financial reporting.  Our audit included  consideration of internal
control over financial  reporting as a basis for designing audit procedures that
are appropriate in the  circumstances,  but not for the purpose of expressing an
opinion on the  effectiveness  of the Company's  internal control over financial
reporting.  Accordingly,  we express  no such  opinion.  An audit also  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,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

     In our opinion,  the financial statements referred to above present fairly,
in all material respects, the financial position of PaperClip Software,  Inc. as
of December 31, 2005, and the results of its  operations and its cash flows for
the years  ended  December  31, 2005 and 2004,  in  conformity  with  accounting
principles generally accepted in the United States of America.

     The accompanying  financial statements have been prepared assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  Note 3 to the
financial  statements,  the  Company  has a  significant  loss from  operations;
current  liabilities  exceed current  assets by  approximately  $202,000  (after
adjusting for  approximately  $400,000 of deferred  revenues,  a non-cash item);
deficiencies in working capital and net worth.  These factors raise  substantial
doubt about the Company's  ability to continue as a going concern.  Management's
plans  regarding  those  matters are also  described in Note 3. These  financial
statements do not include any adjustments  that might result from the outcome of
this uncertainty.

                                                   /s/ Sobel & Co., LLC
                                                   Certified Public Accountants
March 13, 2006
Livingston, New Jersey



<PAGE>


PAPERCLIP SOFTWARE, INC.
BALANCE SHEET
<TABLE>
<CAPTION>


                                                                                  DECEMBER 31,
                                                                                      2005
                                                                                 ---------------
<S>                                                                             <C>
ASSETS
  CURRENT ASSETS:
    Cash and cash equivalents                                                   $        384,539
    Accounts receivable (net of
      allowance for doubtful accounts
      of $89,000)                                                                        200,053
    Other current assets                                                                  41,796
                                                                                  ---------------
      Total Current Assets                                                               626,388
                                                                                  ---------------
  EQUIPMENT, FURNITURE AND FIXTURES:
    Computer and office equipment                                                         42,932
    Furniture and fixtures                                                                 6,056
                                                                                  ---------------
                                                                                          48,988
    Less- Accumulated depreciation                                                        14,008
                                                                                  ---------------
      Equipment, Furniture, and Fixtures, Net                                             34,980
                                                                                  ---------------

  OTHER ASSETS                                                                            22,006
  DEFERRED FINANCING COSTS, NET                                                           35,314
                                                                                  ---------------
Total assets                                                                    $        718,688
                                                                                  ===============

LIABILITIES AND STOCKHOLDERS' DEFICIENCY
  CURRENT LIABILITIES:
    Accounts payable and accrued expenses                                       $        435,278
    Taxes payable                                                                         13,500
    Deferred revenue                                                                     399,700
    Notes payable                                                                        129,691
    Loans payable                                                                        250,000
                                                                                  ---------------
      Total Current Liabilities                                                        1,228,169
                                                                                  ---------------

    Accrued compensation- related party                                                  867,749
                                                                                  ---------------
COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' DEFICIENCY:
Convertible Series A, preferred stock, authorized
  10,000,000 shares;  $.01 par value; 3,649,543 shares
  issued and outstanding                                                                  36,495
Common stock, authorized 30,000,000
  shares; $.01 par value; issued and
  outstanding 8,196,521 shares                                                            81,965
Additional paid-in capital                                                            19,450,318
Accumulated deficit                                                                  (20,946,008)
                                                                                  ---------------
  Total Stockholders' Deficiency                                                      (1,377,230)
                                                                                  ---------------
Total liabilities and
  stockholders' deficiency                                                      $        718,688
                                                                                  ===============
</TABLE>
     See report of independent  registered  public  accounting firm and notes to
financial statements
                                -2-
<PAGE>
PAPERCLIP SOFTWARE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>

                                                                   YEAR ENDED DECEMBER 31,
                                                                       2005                 2004
                                                                 -----------      ---------------
<S>                                                             <C>             <C>

NET SALES                                                      $  1,739,394     $      1,420,637
                                                                 -----------      ---------------

OPERATING EXPENSES:
Research and development expenses                                   502,979              421,797
Selling expenses                                                    796,039              752,592
General and administrative expenses                                 600,839              525,465
                                                                 -----------      ---------------
     Total operating expenses                                     1,899,857            1,699,854
                                                                 -----------      ---------------


LOSS FROM OPERATIONS                                               (160,463)            (279,217)
                                                                 -----------      ---------------

OTHER INCOME (EXPENSE):
Extinguishment of accounts payable                                   35,090               36,127
Interest expense                                                    (59,186)             (15,600)
Interest income                                                       1,032                  740
                                                                 -----------      ---------------
      Total other (expense) income, net                             (23,064)              21,267
                                                                 -----------      ---------------

NET LOSS  BEFORE PROVISION FOR INCOME TAXES                    $   (183,527)    $       (257,950)

Provision for income taxes                                                0                    0
                                                                 -----------      ---------------

NET LOSS                                                       $   (183,527)    $       (257,950)
                                                                 ===========      ===============

BASIC AND FULLY DILUTED
   LOSS PER COMMON SHARE                                       $      (0.02)    $          (0.03)
                                                                 ===========      ===============


WEIGHTED AVERAGE NUMBER COMMON
SHARES OUTSTANDING                                                8,196,521            8,196,521
                                                                 ===========      ===============

</TABLE>
     See report of independent  registered  public  accounting firm and notes to
financial statements
                                                             -3-

<PAGE>
PAPERCLIP SOFTWARE, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
<TABLE>
<CAPTION>

                                    Preferred Stock    Common Stock
                                                                          Additional  Accumulated  Stockholders
                                    Number of  Par valuNumber of  Par valuPaid-In     Deficit      Deficiency
                                    Shares             Shares             Capital
                                    -----------------------------------------------------------------------------
<C>                                 <S>       <S>      <S>       <S>      <S>         <S>          <S>
BALANCE, December 31, 2003          3,649,543  $36,495 8,196,521  $81,965 $19,426,318 ($20,504,531)    ($959,753)

Deferred financing costs                                                       24,000                     24,000
NET LOSS, 2004                                                                            (257,950)     (257,950)
                                    -----------------------------------------------------------------------------
BALANCE, December 31, 2004          3,649,543  $36,495 8,196,521   81,965  19,450,318  (20,762,481)   (1,193,703)

NET LOSS, 2005                                                                            (183,527)     (183,527)
                                    -----------------------------------------------------------------------------

BALANCE, December 31, 2005          3,649,543  $36,495 8,196,521  $81,965 $19,450,318 ($20,946,008)  ($1,377,230)
                                    =============================================================================
</TABLE>
     See report of independent  registered  public  accounting firm and notes to
financial statements

                                                       -4-





<PAGE>
PAPERCLIP SOFTWARE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                 YEAR ENDED DECEMBER 31,
                                                                       2005                 2004
                                                                 -----------      ---------------
<S>                                                               <C>             <C>
OPERATING ACTIVITIES:
Net loss                                                       $   (183,527)    $       (257,950)
Adjustments to reconcile net income to
net cash provided by (used for) operating activities-
Depreciation                                                         10,066                7,843
Extinguishment of accounts payable                                  (35,090)             (36,127)
Accrued interest on convertible note                                 15,500               15,600
Increase in accrued compensation to related party                    64,038               93,592
Amortization of prepaid interest & deferred financing costs          43,686                  -
Tax deferred asset                                                    -                   11,600
Change in operating assets and liabilities:
  Accounts receivable                                               (39,422)             107,018
  Other current assets                                               (4,296)                 -
  Other assets                                                       (8,506)                 -
  Accounts payable and accrued expenses                              26,223               (9,836)
  Taxes payable                                                       -                  (27,000)
  Deferred revenue                                                  (18,700)             142,250
                                                                 -----------      ---------------
Net cash  (used for) provided by operating activities              (130,028)              46,990
                                                                 -----------      ---------------
INVESTING ACTIVITIES -- Purchases of
  equipment, furniture and fixtures                                 (17,864)             (25,067)
                                                                 -----------      ---------------
FINANCING ACTIVITIES:
  Net proceeds from loans payable                                   157,500                  -
                                                                 -----------      ---------------
Net cash provided by financing activities                           157,500                  -
                                                                 -----------      ---------------

Net  increase in cash and cash equivalents                            9,608               21,923

CASH AND CASH EQUIVALENTS
Beginning of year                                                   374,931              353,008
                                                                 -----------      ---------------
End of year                                                    $    384,539     $        374,931
                                                                 ===========      ===============


</TABLE>


See report of independent  registered  public  accounting firm and notes to
financial statements
                                         -5-






<page>
PAPERCLIP SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004

NOTE 1  -  ORGANIZATION:
     PaperClip  Software,  Inc.  (formerly known as PaperClip  Imaging Software,
Inc.),located in Hackensack, NJ, (the "Company"), a Delaware corporation,
incorporated in October,  1991,is engaged in the development and distribution of
computer software for document  management and transport of electronic  document
packages across the public Internet or a private Intranet with interoperability,
security  and  tracking  capabilities.  The  Company's  systems  allow  users of
personal computer  networks to scan, file,  retrieve,  display,  print and route
documents  and  other  software   objects  (such  as  word   processing   files,
spreadsheets  and  electronic  mail),  while  continuing  to use their  existing
application software.  The systems can be integrated with many personal computer
applications  with little or no programming and can file and retrieve  documents
without the time consuming step of manually labeling or indexing each document.

     The  Company  sells its  products  worldwide  to twenty  three  Value Added
Resellers ("VAR's") and original equipment  manufacturers  ("OEM's") of personal
computers and personal computer networks utilized on a corporate level.

NOTE 2  -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Basis of Accounting:

     The Company's policy is to prepare its financial  statements on the accrual
basis of accounting.

Revenue Recognition:
     The  Company  generates  revenues  from  licensing  the  rights  to use its
software  products  directly  to  distributors,  resellers,  original  equipment
manufacturers, and end users. The Company's delivery and payment arrangements do
not include extended payment terms and are generally net 30 days.

     Revenues  from  licenses are  recognized  upon  shipment of the software if
there are no significant  post delivery  obligations,  if collection is probable
and if payment  is due  within one year.  The  Company  provides  post  contract
services,  which  includes  telephone  support,  software  version  upgrades and
consulting and training  services related to installation and  implementation of
the  Company's  products at no  additional  charge for periods not exceeding one
year. The estimated cost of providing such support is not significant.  Revenues
from consulting services are recognized as services are performed.

     In addition to the  above-referenced  post contract services provided at no
additional  charge, the Company offers additional  contractual  support services
that are billed  separately.  Revenues paid by the customer prior to performance
of such  contractual  support services are deferred and recognized over the term
of the contract service agreement,  usually one year. The underlying calculation
for deferred  services are generally not complex  (i.e.,  deferred  revenues are
generally  recognized as income over the course of the applicable  contract on a
formulaic basis).

                                        -6-


<PAGE>
Reclassification:

     Certain  reclassifications  have been made to the 2004 financial statements
to conform to the 2005 financial statement presentation.

Use of Estimates:
     The  preparation  of financial  statements  in conformity  with  accounting
principles  generally  accepted  in  the  United  States  of  America,  requires
management to make estimates and assumptions that affect the reported amounts of
assets and  liabilities  and disclosure of contingent  assets and liabilities at
the date of the financial  statements  and the reported  amounts of revenues and
expenses  during the reporting  period.  Actual  results could differ from those
estimates.

     Significant  estimates  have  been made by  management  in the areas of the
allowance for bad Debts (See Note 9)and the  recognition/realization of deferred
revenues. Actual results could differ materially from these estimates, making it
reasonably  possible  that a change in these  estimates  could occur in the near
term.

Advertising:
     Advertising  costs are expensed as incurred,  and amounted to approximately
$17,000 in 2005 and $32,000 in 2004.

Cash and Cash Equivalents:
     Cash and cash  equivalents  consist  primarily  of cash at banks and highly
liquid investments with original maturities of three months or less.

Accounts Receivable:

     The Company  carries its accounts  receivable at cost less an allowance for
doubtful  accounts.  On a periodic  basis,  the Company  evaluates  its accounts
receivable and adjusts the allowance for doubtful  accounts,  based on a history
of past write-offs and collections  and current credit  conditions.  At December
31, 2005 and 2004, the Company  believes the allowance for doubtful  accounts is
adequate.

Equipment, Furniture and Fixtures:
     Equipment,  furniture  and  fixtures are stated at cost,  less  accumulated
depreciation.  Depreciation  expense is computed using the straight-line  method
over the  estimated  useful  lives of the assets  which range from five to seven
years.

Accounting for Stock-Based Compensation:
     The Company has elected to follow  Accounting  Principles Board Opinion No.
25,"Accounting for Stock Issued to Employees"(APB25).  If the option price under
the Stock  Option  plans  equals or exceeds the fair market  value of the common
shares on the date of the grant,  no compensation  cost is recognized  under the
provisions  of APB 25 for stock  options.  If the option  price  under the Stock
Option  Plans is less than the fair market value of the common stock on the date
of grant, compensation cost is recognized for the difference.
                                     -7-

<PAGE>
     The Company  adopted  only the  disclosure  part of  Statement of Financial
Accounting  Standards No. 123,  "Accounting for Stock-Based  Compensation" (SFAS
123 as amended by SFAS 123R). The adoption of this  pronouncement  had no impact
on the Company's financial condition or results of operations for 2005 and 2004,
however, additional disclosures have been included in the financial statements.

Deferred Financing Costs:
     Expenditures  incurred in conjunction with debt or equity capital issuances
are deferred as other assets. Such costs will be offset against equity proceeds,
amortized  over the life of the debt,  or  expensed  if the  transaction  is not
completed.

Deferred Rent:
     The Company  recognizes rent expense on a straight line basis for financial
reporting  purposes.  The difference  between cash payments and expenses will be
included in deferred rent. Deferred rent will commence January 1, 2006.

Federal Income Taxes:
     The Company has adopted Statement of Financial  Accounting  Standards Board
No. 109,  "Accounting  for Income  Taxes"  (SFAS 109),  which  provides  for the
recognition of deferred tax assets,  net of an applicable  valuation  allowance,
related to net operating loss carryforwards and certain temporary differences.

Income (Loss) Per Common Share:
     Income per common  share-basic is computed based upon the weighted  average
number of common shares and common share equivalents  outstanding,  if dilutive.
2005 and 2004 fully  diluted loss per share does not reflect the  conversion  of
Series A Preferred  Stock or common  stock  equivalents  as the result  would be
anti-dilutive.

Research and Development Costs:

     The costs  incurred in  establishing  the  technological  feasibility  of a
computer  software product that is to be sold,  leased or otherwise  marketed by
the Company is accounted for as Research & Development costs and expensed in the
period incurred. The amount charged against income was $502,979 and $421,797 for
the years ended December 31, 2005 and 2004, respectively.

                                       -8-

<PAGE>

Recent Accounting Pronouncements:

     The Financial  Accounting  Standards  Board ("FASB") has issued several new
standards  during 2005 and 2004. In December  2004, the FASB issued SFAS 123(R),
"Share-Based  Payment,"  which  revises SFAS 123,  "Accounting  for  Stock-Based
Compensation,"  and supersedes APB Opinion No. 25,  "Accounting for Stock Issued
to  Employees."  SFAS 123(R)  requires  fair value  recognition  of stock option
grants in the income  statement  as an expense  and is  effective  for the first
interim  reporting period beginning after December 15, 2005. This  pronouncement
may have a material impact on the Company's operating results. The Company is in
the process of  evaluating  the impact of this  pronouncement  on its  financial
statements.

NOTE 3-GOING CONCERN:

     The  accompanying  financial  statements  have been  prepared  assuming the
Company is a going concern,  which  assumption  contemplates  the realization of
assets and  satisfaction  of liabilities  in the normal course of business.  The
Company has suffered a loss from operations,  current liabilities exceed current
assets by approximately  $202,000 (after adjusting for approximately $400,000 of
deferred revenues,  a non-cash item), and the Company lacks sufficient liquidity
to continue its operations. Management's 2006 forecast indicates positive trends
for sales, but it may not result in an increase in operating income, net income,
and positive cash flows.

     These  factors  raise substantial  doubt  about the  Company's  ability to
continue  as a going  concern.  The  financial  statements  do not  include  any
adjustments  related to the  recoverability and classification of recorded asset
amounts or the amount of liabilities  that might be necessary should the Company
be unable to continue in existence.

     Continuation  of the Company as a going concern is dependent upon achieving
profitable  operations .  Management's  plans to achieve  profitability  include
developing new products,  obtaining new customers,  increasing sales to existing
customers and  implementing  certain cost  reduction  initiatives  as necessary.
There can be no assurance  that the Company will  generate  enough cash from the
sale of its products,  or that cost reduction  initiatives will be successful to
meet anticipated cash requirements.

                                                     -9-

<page>
NOTE 4  -  INCOME TAXES:
     For tax return  purposes,  the Company has the following net operating loss
carry forwards as of December 31, 2005 and 2004 for Federal purposes:

             Federal
     Net Operating Loss    Year Incurred      Expiration Date

        $1,474,595       December 31, 1992      December 31, 2007
        $2,790,034       December 31, 1993      December 31, 2008
        $2,880,756       December 31, 1994      December 31, 2009
        $3,648,749       December 31, 1995      December 31, 2010
        $4,660,613       December 31, 1996      December 31, 2011
        $2,707,112       December 31, 1997      December 31, 2017
        $  880,373       December 31, 1998      December 31, 2018
        $   35,944       December 31, 1999      December 31, 2019
        $  633,601       December 31, 2000      December 31, 2020
        $   43,371       December 31, 2001      December 31, 2021
        $  161,000       December 31, 2004      December 31, 2024
        $  183,000       December 31, 2005      December 31, 2025
     The  Company  also  has tax  credits  related  to  research  activities  of
approximately $400,000 for Federal purposes at December 31, 2005.

     As stated in Note 13, the State of New Jersey has  allowed in recent  years
the sale of state net operating losses and research tax credits. The Company has
sold all of its net operating losses and research tax credits  available through
2003. The Company has a state net operating loss  carryforward for 2004 and 2005
approximately $200,000, which will expire through 2012.

     The Company's total deferred tax  liabilities,  deferred tax assets,  which
are comprised  principally of net operating loss carry  forwards,  and valuation
allowance consists of the following at December 31:
                                         2005                 2004
                                   --------------------------------------
Total deferred tax liabilities     $      -              $     -
Total deferred tax assets             6,197,500             6,140,000
Total valuation allowance             6,197,500             6,140,000
                                   -------------------------------------
Current deferred tax asset        $       -              $      -
                                  ======================================
 A reconciliation of the statutory tax rates are as follows:
                                          Year Ended December 31,
                                         2005                 2004
                                   --------------------------------------
Statutory rate                           (34%)                (34%)
State income tax                          (6%)                 (6%)
                                   --------------      ---------------
                                         (40%)                (40%)
Current year valuation allowance          40%                 40%
                                   --------------      ---------------
Benefit for income tax                     0%                   0%
                                   --------------      ---------------

                                              -10-

<PAGE>
Note 5- INVESTMENT BANKING AGREEMENT AND LOAN PAYABLE:

     On October 29, 2004,  the Company  signed an investment  banking  agreement
with Sloan  Securities  Corp.  ("Sloan") to raise  capital for the  Company.  In
connection with such engagement,  the Company issued two-year  warrants to Sloan
to purchase 500,000 shares of the Company's Common Stock at an exercise price of
$.10 per share. The Warrants vested as to 425,000 shares on the date of issuance
and as to the  remaining  75,000  shares  at  such  time  that  a  financing  is
consummated in which at least  1,400,000  shares of common stock or common stock
equivalents  are issued to  investors  introduced  to the Company by Sloan.  The
Company recorded the 425,000 warrants on the balance sheet as deferred financing
costs at a value of $24,000.

     On March 31, 2005 and April 8, 2005 the Company received funds from a group
of accredited investors in the amounts of $100,000 and $57,500, respectively, in
anticipation  of the execution of definite  documentation  with such  investors.
Documents  had been fully  negotiated in  anticipation  of a financing for gross
proceeds of between $500,000 and $1,200,000.  While the Company executed certain
documents  prior to its receipt of the funds,  the documents  were to be held in
escrow pending a final transaction and the Company never received  countersigned
agreements  from the investors.  Under the terms of the negotiated  transaction,
the invested funds were to be in the form of a two year loan,  secured by a lien
on the Company's assets,  with interest at the rate of 12% per annum prepaid for
the entire period,  and financing fees to Sloan in the aggregate amount equal to
13% of the gross proceeds raised. Warrants to purchase 200,000 shares and 50,000
shares were also to be issued to the investors and Sloan, respectively, for each
$100,000 of the  financing.  One half of such warrants were to be exercisable at
$0.20 per share,  and the other half of such warrants were to be  exercisable at
$0.25 per share.  In a letter  agreement  dated  March 31,  2005,  Sloan and the
investors agreed that they would not enforce their  registration  rights related
to shares of common stock issuable upon exercise of the warrants until such time
as the Company has received an aggregate of $500,000 of gross  proceeds  through
the issuance of notes.  The Company has recorded a $250,000  loan payable on its
December 31, 2005 balance sheet based on its  understanding of the intent of the
parties  that such  $157,000  aggregate  amount  represents  net proceeds to the
Company,  after prepaid  interest and financing costs, of a $250,000 loan to the
Company,  by such  investors.  The Company has also reserved  625,000 shares for
issuance upon exercise of the warrants that were to be issued in connection with
the $250,000 financing. The Company has been unable to obtain executed documents
from the investors or Sloan or definite  confirmation of their intent  regarding
the funds.  Accordingly,  there can be no assurance  that the investors will not
seek to treat the funding as an incomplete  investment  and demand return of the
funds. The Company has accounted for the loan as short-term indebtedness.

NOTE 6  - CONVERTIBLE DEBT:
Notes payable, convertible into common stock at $.30
per share,  12% interest,  matured  December 31, 1999,
and as of December 31, 2005, the notes remain in default.        $129,691
                                                                ============

                                                     -11-

<page>

Note 7  -  EXTINGUISHMENT OF ACCOUNTS PAYABLE:

     During the years ended  December 31, 2005 and 2004,  the Company wrote down
its  accounts  payable by $35,090 and $36,127,  respectively,  relating to debts
which were incurred over six years ago, for which the statute of limitations has
expired and the vendors can no longer institute a claim against the Company. The
write down was included in the statement of operations as an  extinguishment  of
accounts payable.

NOTE 8  -  PREFERRED STOCK:

     The  Company  has ten  million  shares of  preferred  stock  $.01 par Value
authorized.  The Company has designated Series A Preferred Stock, with 3,649,543
shares issued on November 2, 2000, 3,649,543 shares issued and outstanding as of
December 31, 2005.  Each share of Series A Preferred  Stock is convertible  into
one share of common stock subject to  adjustment  and  anti-dilution  protection
upon certain events.

NOTE 9  -  COMMITMENTS AND CONTINGENCIES:

     In 2004, the Company commenced a lawsuit against a customer in the Superior
Court of the State of New Jersey for payment of delinquent  accounts  receivable
approximating  $50,000.  The  Company has set up what it believes is an adequate
bad debt reserve to cover this dispute.

NOTE 10  -  LEASES:

     The Company leases its office space under a non-cancelable operating lease.
which expires in 2011.  Rent expense was  approximately  $56,000 and $51,000 for
the years ended December 31, 2005 and 2004, respectively.

     Future minimum  rental payments  required under this lease are as follows:

               Year Ended December 31,
2006     $40,275
2007     $48,778
2008     $49,315
2009     $49,852
2010     $50,389
2011     $ 8,413

NOTE 11  -  EMPLOYMENT AGREEMENT:

     The Company has an employment agreement with Michael Bridges, the Company's
President who is also a member of the Board of  Directors,  subject to automatic
one-year  extensions and early  terminations  at a base salary of $107,800.  The
agreement  also provides for options to purchase  400,000 shares of common stock
at $0.25 per share with immediate vesting, which was subsequently granted at the
fair market value of the Company's  stock at the time of issuance which was $.25
per share. In addition, the agreement has specific clauses including not limited
to covenants not to compete with the Company's  product  line,  solicitation  of
employees of the Company upon termination and a severance  package if there is a
transfer of control.
                                            -12-

<PAGE>
NOTE 12  -  CONCENTRATION OF RISK:

     The Company  maintains its cash balances and certificates of deposit at one
financial  institution.  This  account is insured by the FDIC  (Federal  Deposit
Insurance  Corporation) up to $100,000. The Company routinely maintains balances
in excess of $100,000 in the ordinary course of business.


NOTE 13  -  MAJOR CUSTOMERS:

     The Company  sells its products  primarily  through mass  distributors  and
approximately  23 independent  VARS. The VARS sell and install these products at
end user sites.

     Sales to three major  customers  for the year ended  December 31, 2005 were
approximately 28%. Sales to four major customers for the year ended December 31,
2004 was approximately 42%.

     Four and three  customers  make up 47% and 58% of  accounts  receivable  at
December 31, 2005 and 2004, respectively.


NOTE 14  -  STOCK OPTIONS:

1993 Stock Option Plan

     The Company  adopted a stock  option plan (the "1993 Stock  Option  Plan"),
effective  March 8,  1993,  pursuant  to which  employees  of the  Company  were
eligible to receive incentive stock options.  The 1993 Stock Option Plan expired
on February 1, 2003, and all  outstanding  options  thereunder  expired in 2005.
Stock  option  transactions  for the 1993 Stock  Option Plan are  summarized  as
follows:

                                         Year Ended December 31,
                                            Exercise             Exercise
                                    2005     Price      2004     Price
                                 ---------------------------------------
Outstanding, beginning of year      20,183   $2.60      20,183    $2.60
Granted                               -        -          -         -
Exercised                             -        -          -         -
Cancelled, settled or expired       20,183   $2.60        -         -
                                 ---------------------------------------
Outstanding, end of year               -       -        20,183    $2.60
                                 =======================================

1995 Stock Option Plan -

     In May 1995,  the  Company  adopted a stock  option  plan (the "1995  Stock
Option  Plan"),  pursuant to which  officers,  directors  and  employees  of the
Company and certain  other  persons  conferring  benefit  upon the Company  were
eligible to receive stock  options.  The 1995 Stock Option Plan expired on March
1, 2005.  All options  thereunder  outstanding  at the time of such  termination
shall  continue  in full force and effect  according  to the terms of the option
agreements governing such options.
                                                     -13-

<page>
     Stock option  transactions for the 1995 Stock Option Plan are summarized as
follows:

                                   Year Ended December 31,
                                         Exercise             Exercise
                                2005      Price        2004    Price
                           ----------------------------------------------
Outstanding, beginning of
year                         3,183,842  $.06-2.50    3,133,842  $.06-2.50
Granted                          -          -          150,000  $.05-$.07
Exercised                        -          -             -         -
Cancelled or expired          (203,000) $.05-2.50     (100,000)    $.25
                           ----------------------------------------------
Outstanding, end of year     2,980,842  $.05-2.50    3,183,842  $.06-2.50
                           ==============================================

     In February  2004,  the Board of Directors  of the Company  adopted a stock
incentive plan(the "2004 Stock Incentive Plan"). Only consultants and members of
the Board of Advisors are eligible to  participate  in this plan. The 2004 Stock
Incentive Plan provides that the aggregate  number of shares of common stock for
which options may be granted  thereunder is 600,000  shares.  In 2004, the Board
awarded  options for an aggregate of 525,000  shares to the members of the Board
of Advisors under the 2004 Stock  Incentive Plan at an exercise price of $.07 to
$.10 per share, the market price of the Common Stock on the date of grant.  Such
options are not included in the tables above.

     Stock  option  transactions  for the 2004 Stock  Incentive  Option Plan are
summarized as follows:

                                   Year Ended December 31,
                                         Exercise             Exercise
                                2005      Price        2004    Price
                           ----------------------------------------------
Outstanding, beginning of
year                           175,000  $.07-$.10
Granted                          -                     525,000  $.07-$.10
Exercised                        -          -             -         -
Cancelled,repurchased
or expired                     (75,000) $.07-$.10     (350,000)    $.07
                           ----------------------------------------------
Outstanding, end of year       100,000    $.07         175,000  $.07-$.10
                           ==============================================

SFAS 123 disclosure:
     During the year ended December 31, 2004, the Board of Directors  authorized
the issuance of options to purchase  675,000 shares at an average exercise price
of $.06 per share.  The Board did not  authorize  the granting of any options in
2005.  The fair value of each option  grant was  estimated  on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants:  expected  volatility of 175% and 190% for 2005 and
2004,  respectively;  risk-free  interest rate of 4.5% and 4% for 2005 and 2004,
respectively; and expected lives of 10 years.

                                    -14-

<page>
     Had  compensation  cost for the Company's stock option plan been recognized
based on the fair  value  at the  grant  date  for  awards  consistent  with the
provisions  of SFAS No.  123, as amended by SFAS No.  123R,  the  Company's  net
income and income per share for the year ended  December 31, 2005 and 2004 would
have been as follows:
                                                    2005            2004
                                                 ---------       -----------
Net loss as reported                            $(183,527)        $(257,950)
Required adjustment to loss                        (6,300)          (10,500)
                                                 ---------       -----------
Net loss pro forma                              $(189,827)        $(268,450)
                                                 =========       ===========
                                             Basic         Fully diluted
Loss per common share - as reported 2005      $(.02)         $(.02)
                                           ==========      =========
Loss per common share - pro forma   2005      $(.02)         $(.02)
                                           ==========      =========
Loss per common share - as reported 2004      $(.03)         $(.03)
                                           ==========      =========
Loss per common share - pro forma   2004      $(.03)         $(.03)
                                           ==========      =========


NOTE 15  -  RELATED PARTY TRANSACTIONS:

     Mr. William Weiss, ("Weiss"),  Chief Executive Officer and Treasurer of the
Company,  receives  compensation  of  $10,000  per  month  as  part  of an  oral
employment arrangement.  In lieu of receiving current compensation payments, Mr.
Weiss has agreed to the deferred payment of such  compensation.  During 2002 and
for the first three months ended March 31, 2003, Mr. Weiss has assigned  payment
of the  compensation to another  company he is affiliated  with. At December 31,
2005, the Company has accrued  $867,749 in deferred  compensation  to Mr. Weiss,
which is recorded as accrued  compensation - related party on the balance sheet.
Mr.  Weiss has  entered  into a written  agreement  with the Company in which he
agreed not to demand payment of his deferred  compensation  until  subsequent to
April 1, 2007.

                                      -15-



<PAGE>
NOTE 16  -  ROYALTIES:

     During  2005 and 2004,  the  Company  had  licensing  agreements  with five
vendors to distribute various software products.  The agreements require royalty
payments to vendors  based on sales  volume.  At December 31, 2005,  all amounts
outstanding  in  regards  to  these   agreements   have  been  included  in  the
accompanying  financial  statements.  For the years ended  December 31, 2005 and
2004,  the Company paid  royalties of $8,535 and  $11,752,  respectively.  As of
December 31, 2005, the Company's  accrued  royalties of  approximately  $49,000,
which is included as accrued expenses on the balance sheet.

NOTE 17  -  EXPORT SALES:

     Export sales were  approximately  1% and 2% of the Company's net sales for
the years ended December 2005 and 2004, respectively. The foreign countries that
the  Company  primarily  deals with are Italy, Nigeria  and  various  other
countries.

NOTE 18  -  SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:

                                             2005           2004
                                   ------------------------------------
Cash paid for interest                   $    -           $    -
                                   ====================================
Cash paid for state income taxes         $    -           $    -
                                   ====================================
Non cash financing activity-
   Prepaid interest and
   deferred costs                         $92,500          $    -
                                   ====================================

Non cash issuance of warrants
for services                              $   -           $24,000
                                   ====================================

Note 19 - Fair Value of Financial Instruments:

     SFAS No.107"  Disclosure  About the Fair Value of  Financial  Instruments",
requires disclosure of fair value information about financial  instruments.  The
carrying  amounts reported in the balance sheet for cash,  accounts  receivable,
accounts  payable and accrued  expenses  approximate fair value because of their
short term  nature.  The  carrying  amounts of notes  payable and long term debt
approximates  fair value because those  financial  instruments  bear interest at
rates that  approximate  current market rates for loans with similar  maturities
and credit  quality.  None of these  financial  instruments are held for trading
purposes.



                                         -16-


<PAGE>
Exhibit 10.12
          Agreement, dated December 31, 2005, by and between
             PaperClip Software, Inc. and William Weiss


                               WILLIAM WEISS

                                                           December 31, 2005
PaperClip Software, Inc.
1 University Plaza
Hackensack , New Jersey 07601

     Reference is hereby made to the  $867,749 in "accrued  compensation-related
party"  recorded on the balance  sheet  appearing  in the Annual  Report on Form
10-KSB of PaperClip  Software,  Inc. for the year ended December 31, 2005.  Such
payables relate to deferred  compensation for services  previously  performed by
William  Weiss  ("Weiss")  as an  officer  of the  Company  pursuant  to an oral
employment  arrangement and are payable to Weiss and/or his affiliated  company.
Weiss hereby agrees that neither Weiss nor such affiliated  company shall demand
payment of such payables prior to April 1, 2007.



                                                     Sincerely,

                                                     /s/ William Weiss
                                                     William Weiss








<page>

Exhibit 23.1


                 CONSENT OF INDEPENDENT REGISITERED PUBLIC ACCOUNTING FIRM

     We consent to the incorporation by reference in the Registration  Statement
on Form S-8  (Registration  No.  333-04245)  of our report dated March 13, 2006,
with respect to the financial statements of PaperClip Software, Inc. included in
the Annual Report on Form 10-KSB of PaperClip Software,  Inc. for the year ended
December 31, 2005.

                                          /s/ Sobel & Co., LLC
                                          Certified Public Accountants
March 13, 2006
Livingston, New Jersey




































<PAGE>
Exhibit 31.1                CERTIFICATION
I, William Weiss, certify that:
     1. I have reviewed this annual report on Form 10-KSB of PaperClip Software,
Inc.;
     2. Based on my knowledge, this report does not contain any untrue statement
of a  material  fact or omit to  state a  material  fact  necessary  to make the
statements made, in light of the circumstances  under which such statements were
made, not misleading with respect to the period covered by this report;
     3. Based on my knowledge,  the financial  statements,  and other  financial
information included in this report, fairly present in all material respects the
financial condition,  results of operations and cash flows of the small business
issuer as of, and for, the periods presented in this report;
     4. The  small  business  issuer's  other  certifying  officer(s)  and I are
responsible for establishing and maintaining  disclosure controls and procedures
(as  defined  in  Exchange  Act Rules  13a-15(e)  and  15d-15(e))  for the small
business issuer and have:
     (a)  Designed  such  disclosure  controls  and  procedures,  or caused such
disclosure  controls and  procedures to be designed  under our  supervision,  to
ensure  that  material  information  relating  to  the  small  business  issuer,
including its  consolidated  subsidiaries,  is made known to us by others within
those  entities,  particularly  during the period in which this  report is being
prepared;
(b) [Reserved];
     (c) Evaluated the effectiveness of the small business  issuer's  disclosure
controls and procedures and presented in this report our  conclusions  about the
effectiveness  of the disclosure  controls and procedures,  as of the end of the
period covered by this report based on such evaluation; and
     (d)  Disclosed  in this  report any change in the small  business  issuer's
internal  control  over  financial  reporting  that  occurred  during  the small
business issuer's most recent fiscal quarter (the small business issuer's fourth
fiscal quarter in the case of an annual report) that has materially affected, or
is reasonably likely to materially  affect, the small business issuer's internal
control over financial reporting; and
     5. The small  business  issuer's  other  certifying  officer(s)  and I have
disclosed,  based  on our  most  recent  evaluation  of  internal  control  over
financial  reporting,  to the small  business  issuer's  auditors  and the audit
committee  of the  small  business  issuer's  board  of  directors  (or  persons
performing the equivalent functions):
     (a) All significant  deficiencies and material  weaknesses in the design or
operation of internal  control over  financial  reporting  which are  reasonably
likely to  adversely  affect  the small  business  issuer's  ability  to record,
process, summarize and report financial information; and
     (b) Any fraud,  whether or not material,  that involves management or other
employees who have a significant  role in the small business  issuer's  internal
control over financial reporting.

Date:    March 30, 2006                  By: /s/ William Weiss
                                         William Weiss
                                         Chief Executive Officer
                                         Principal Financial Officer


<page>

Exhibit 32.1

CERTIFICATION OF
CHIEF EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER OF
PAPERCLIP SOFTWARE, INC.

(Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code)

     The  undersigned,  William  Weiss,  Chief  Executive  Officer and Principal
Financial Officer of PaperClip Software, Inc. (the "Company"), certifies that:

  -  the Annual Report on Form 10-KSB of the Company for the year ended December
31, 2004 fully complies with the  requirements  of Section 13(a) or 15(d) of the
Securities  Exchange Act of 1934;

  - and the  information  contained in the Annual  Report on Form 10-KSB of the
Company for the year ended  December 31, 2005 fairly  presents,  in all material
respects, the financial condition and results of operations of the Company.


March 30, 2006                                           By: /s/ William Weiss