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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                  FORM 10-KSB

        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                  For the fiscal year ended December 31, 1996
                                            -----------------


                            PaperClip Software, Inc.
             ------------------------------------------------------         
             (Exact name of registrant as specified in its charter)

Delaware                                              22-3137907
(State or other jurisdiction of          (I.R.S. Employer Identification No.)
incorporation or organization


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

(201) 487-3503  (Registrant's telephone number, including area code)

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


         Title of each class           Name of exchange on which registered
         None


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



Common Stock, Par Value $.01; Class A Purchase Warrants
-------------------------------------------------------------------------
                                (Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or



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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 ____

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not 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.

As of March 31, 1997, the aggregate market value of the voting stock held by
non-affiliates of the registrant (based on the OTC Bulletin Board closing bid
price on March 31, 1997) was $1,980,052. As of March 31, 1997, there were
8,055,521 shares of the registrant's common stock outstanding.

Documents Incorporated by Reference: None.
























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                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS.


                                    GLOSSARY

API (APPLICATION PROGRAM INTERFACE) - A language and message format used by an
application program to communicate with another program that provides services
for it.

APPLICATION SOFTWARE - A category of software designed for specific functions
to be used by end users, e.g., spreadsheets and word processing software.

CLIENT/SERVER ARCHITECTURE - An architecture of computer hardware and software
configurations in which the APPLICATION SOFTWARE is designed to partition
functionality between the server and the client in order to optimize
performance.

COLD (COMPUTER OUTPUT TO LASER DISC) - Archiving large volumes of formatted
print data streams directly to optical media. Instead of printing large paper
reports or producing microfilm or microfiche, data is stored on optical disks.

DLL (DYNAMIC LINK LIBRARY) - A set of program routines that can be called at
runtime as needed. A dynamic link is the communications mechanism that lets one
program launch and execute another on the fly. It lets feature-laden software
run in minimal amounts of memory by building functions as separate routines
that are called into memory when required.

DOS (DISK OPERATING SYSTEM) - A category of software designed to be used to
control and manage the internal operations of a computer.

EDITION - One of the SYSTEMS.

GRAPHICAL USER INTERFACE (GUI) - A feature of a software program that uses
graphical or iconical labels and instructions to enable a user to interact with
a computer in a manner which is more intuitive than with character - based
interfaces.

GROUPWARE - A category of software that allows multiple users to work on a
project simultaneously.

INTERNET - An open global network of interconnected commercial, education and
governmental computer networks which utilize a common communications protocol,
TCP/IP.

INTRANET -An organization's network of interconnected computers which utilize a
common communications protocol, TCP/IP.


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JUKEBOX STORAGE DEVICE - A mechanical device which allows for multiple optical
disk platters or tapes to be managed and accessed by APPLICATION SOFTWARE.

LOCAL AREA NETWORK (LAN) - A network that is located in a small geographic
area, such as an office, a building, a complex of buildings, or a campus, and
whose communication technology provides a large communication capacity, low -
cost medium to which many personal computers can be connected.

MASS DISTRIBUTOR - A seller of software and hardware products and components to
VARs and retail outlets.

MICROCOMPUTER - A personal computer.

ODBC (OPEN DATABASE CONNECTIVITY) - A database programming interface from
Microsoft that provides a common language for Windows applications to access
databases.

OEM - Original equipment manufacturer of hardware or software products.

OPERATING SYSTEMS - A set of computer programs and software routines that
control the execution of computer programs.

ROUTE - An electronic method of moving documents or information on a LAN.

SCAN - To convert text and pictures printed on paper to a digital format using
a scanner.

SOFTWARE LICENSE - Rights granted to operate a computer program, subject to
certain limitations and conditions, without conferring ownership rights.

SQL (Standard Query Language) - A database query language which is used to
query and manipulate data in a relational database management system.

STORAGE MEDIA - The physical medium onto which the computer information is
recorded. Storage Media can be hard disk, optical disk or tape.

SYSTEMS - The Company's line of software products for the Windows environments,
consisting of Personal, Professional, Network and SQL (Enterprise) Editions.

TCP/IP (TRANSMISSION CONTROL PROTOCOL/INTERNET PROTOCOL) - A
compilation of network- and transport-level protocols that allow computers with
different architectures and operating system software to communicate with other
computers on the Internet.



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VAR (Value Added Reseller) - A computer hardware and/or software reseller that
employs third party technology in conjunction with its own expertise and
services in providing solutions to end users. WEB BROWSER - A program used to
navigate and view documents on the Worldwide Web of the Internet.

WINDOWS, WINDOWS 95 and WINDOWS NT - A personal computer environment
manufactured by Microsoft, emphasizing a GRAPHICAL USER INTERFACE.

WORKFLOW - A category of software that allows the user to define rules to
automate and manage work processes in a business environment.





























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Introduction

         PaperClipSoftware, Inc. formerly known as PaperClip Imaging Software,
Inc. (the "Company" or "PaperClip"), a Delaware corporation (which is the
successor by merger, in March 1992, to the original company which had been
incorporated in New Jersey in October 1991), is engaged in the development and
distribution of computer software for document management and imaging systems.

Recent Developments

         The Company consummated its initial public offering in September of
1995, with a business plan to create an Internet suite of products and to move
PaperClip's flagship document management and imaging product line into a
Windows NT/95 32 bit platform. The Company spent approximately $3 million on
the development of the above mentioned products. With the completion of
WebClip, one of the scheduled Internet products, the Company launched an
ambitious public relations and advertising campaign to create market awareness
of the WebClip product. As of the date hereof, the Company has not realized the
volume of sales that it had hoped to achieve with the WebClip product.

         In connection with obligations owed by the Company to a software
developer, during October 1996 the Company entered into an agreement which
provided for the rescheduling of payments owed by the Company to the developer.
The Company paid $150,000 upon signing such agreement and agreed to pay an
additional amount aggregating approximately $200,000 (the "Remaining Amount")
in three monthly installments commencing January 1, 1997. On January 29, 1997
the Company paid the Remaining Amount from the proceeds of the Access Loan (as
defined below).

         In December 1996, the Company borrowed an aggregate amount of
$129,690.74 from nine of its stockholders. The loan was evidenced by
Convertible Promissory Notes ("Notes") issued to each of the nine stockholders
for their respective loan amounts. The Notes: (i) have a three (3) year
maturity, (ii) have a 12% interest rate, and (iii) are convertible into common
stock of the Company at a rate of $0.30 per share.

         Throughout 1996, the Company incurred losses and has been seeking
sources of additional financing. In July 1996, the underwriter of the Company's
initial public offering and principal market maker for its Common Stock, A.R.
Baron & Co, Inc. ("A.R. Baron"), filed for bankruptcy. For the past several
months, management has been engaged in discussions with a number of investment
banks, corporate buyout firms and potential merger and joint venture partners
regarding various financial and strategic alternatives for the Company. The
Company has been unable to identify any additional source for a public or
private financing.

         After evaluating several potential opportunities for a sale of the
Company or its assets, the Company entered into a non-binding Letter of Intent
dated January 2, 1997 (the "Letter of


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Intent") with Access Solutions International, Inc. ("Access" or "Access 
Solutions"), providing for the parties to use their best efforts to negotiate 
a transaction involving the purchase by Access Solutions of substantially all 
of the assets of the Company and for Access Solutions to assume specified 
liabilities of the Company. The purchase price would be paid by delivery to the 
Company of approximately 1,544,000 shares of Access Solutions' common stock plus
an equivalent number of Access Solutions' Class B Warrants. The shares and 
warrants of Access to be received in the transaction would be subject to a lock 
up which will limit sales prior to October 1998. Pursuant to the Letter of 
Intent, Access Solutions provided a one year bridge loan, of $300,000 (the 
"Access Loan"), at an interest rate of 12% per annum, to the Company for use 
as operating capital. In consideration of such loan, the Company issued a 
convertible note to Access Solutions, convertible into common stock of the 
Company at a conversion price of twenty-five cents ($0.25) per share. The 
parties are negotiating a definitive purchase agreement (the "Definitive 
Agreement with Access") with respect to the asset sale transaction, and if the 
final details can be agreed upon, the transaction is expected to close on or 
about July 15, 1997. The companies have begun working together in developing a 
joint business plan and integrating their sales/marketing and product 
development areas. It is anticipated that the parties will enter into a 
Management Agreement simultaneously with the execution of the Definitive 
Agreement with Access, pursuant to which Access Solutions will assume the 
management and control of the day-to-day operations of the Company. Pursuant 
to the Management Agreement, if executed, Access will advance funds to 
PaperClip, in accordance with an agreed upon budget, pending the 
closing. It is currently anticipated that, following the closing of 
the Definitive Agreement with Access, the Company will dissolve and 
distribute the Access shares and warrants to its shareholders, after 
making provisions for its liabilities, if any, and subject to a holdback
for the benefit of warrant holders. There can be no assurance that the Company
will be successful in completing the above-described sale of assets to Access
Solutions. The Company has not identified any alternative sources of liquidity
and has no commitment with regard to obtaining any further funds which would be
required to sustain the Company's operations if the agreement with Access is
not signed or cannot be closed.

         On March 11, 1997, the Company was informed by Nasdaq that its
securities have been deleted from The Nasdaq SmallCap Market due to the
Company's failure to comply with minimum asset and capital surplus requirements
established by Nasdaq. The Company's securities are now quoted on the OTC
Bulletin Board.

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 systems can be integrated with many personal computer applications with
little or no programming and can file and retrieve documents without the time


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consuming step of manually labeling or indexing each document, or manually
searching for documents.

         PaperClip has developed and markets a line of software consisting of
Personal (which is no longer distributed) , Professional, Network and SQL
(Enterprise) Editions (the "Systems"). In late 1991, the Company completed and
commenced marketing its first system, a five-user DOS Network System.
Thereafter, the Company completed the Windows Personal Edition in February
1993, followed by the Windows Network Edition, which was completed in October
1993, the Windows SQL (Enterprise) Edition, which was completed in October
1994, and the Windows Professional Edition, which was completed in January
1995. In 1996, the Company developed its Workflow module which allows the
automation of work processes associated with PaperClip documents, folders,
pages and batches as well as interaction with external data. The Company also
completed two upgrades to its Windows Network Edition and is currently
marketing Version 4.1 of the Windows Network Edition. The Company enhanced its
SQL (Enterprise Edition) by completing its certification with Microsoft and
Oracle SQL Database Servers. The Company also markets PaperClip COLD, which
captures batch file information before it goes to paper and allows expeditious
access, retrieval, full text searching and printing of COLD documents.

         The Company is currently engaged in the Alpha (initial) testing of
PaperClip 32, a Windows 95/NT version of the PaperClip Windows Network Edition.
The PaperClip 32 Edition utilizes many of the enhancements that Microsoft has
built into its Windows 95 operating system. In October 1996, due to its lack of
operating funds, the Company suspended its development of the PaperClip
Workflow 32 bit Edition for Windows 95/NT, which is an add-on to PaperClip 32
that would allow the automation of work processes associated with PaperClip
documents, folders, pages and batches, as well as interaction with external
data. Although a completed version of Workflow 32 was developed for the Company
by DCL, it has never been fully tested by the Company. Although no
determination has yet been made, it is anticipated that testing will begin upon
the execution of the Definitive Agreement with Access.

         The Company has completed WebClip(TM) an Internet-related product
which is a Web Browser add-on, designed to work with popular Windows 95 Web
Browsers from Netscape and Microsoft. WebClip allows users to organize Web
contents of interest in a hierarchical storage system using the Microsoft
Windows 95 Explorer interface. It also provides intelligent storage and the
ability to refresh locally stored Web pages and embedded objects (graphics,
sound, etc.) and any other objects downloaded from Web sites, while optimizing
on-line retrieval and down-load time. The Company began marketing WebClip in
August 1996. Despite an ambitious public relations and advertising campaign,
the Company has not realized the volume of sales it had hoped to achieve with
the WebClip product. A more enhanced version called WebClip Summarizer was
entering final development at year-end. The WebClip Summarizer enhances WebClip
by adding automatic abstracting and keywording to Web content.

         The Company has completed development of, but has not yet tested, its
WebServer, which (like Workflow 32) is an add-on to the PaperClip 32 bit
Systems. Due to its lack of operating


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funds, in October 1996, the Company suspended its plans to test WebServer. This
new product has been designed to provide full security for documents stored on
a PaperClip System, to enable users to make the documents available to anyone
with a Web Browser and to make accessible the user's document repository to
both Internet and Intranet users. Although no determination has yet
been made, it is anticipated that testing will begin upon the execution of
the Definitive Agreement with Access.

         In November 1995, PaperClip acquired, from Cheyenne Software, Inc.
("Cheyenne"), the NOSS (Network Optical Storage System) product line, which
PaperClip had previously incorporated into the Systems pursuant to a license
agreement. The Company is now also offering NOSS separately.

         The Company markets the Systems and associated products domestically
(i) through mass distributors, including Tech Data Corporation and Law Cypress
Distributing Company, who sell to a value added reseller ("VAR") channel that
currently consists of approximately 150 resellers and (ii) through such VARs.
The Company markets its products internationally through approximately 25 VARs
and through distributors.

INDUSTRY BACKGROUND

         Many businesses must manage 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.

         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


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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 computer networks the ability to 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 should give users the added
flexibility of accessing and managing stored documents via the Internet.

THE PRODUCTS

         The Company derives all of its revenues from the licensing or sale of
the Systems and associated products and services.

         The Company is working on the development of Windows 95/NT versions of
the Systems and on the development of its WebClip Internet product and further
enhancements of, and additions to, its existing products. The Company's ability
to continue to compete will be dependent upon its ability to execute the
Definitive Agreement with Access or to obtain alternative sources of funding.
Even if funding is secured, there can be no assurance that the products and
enhancements currently being tested, developed or explored by PaperClip will be
completed or introduced within the anticipated timeframes, that they will
perform as anticipated, achieve market acceptance or result in revenue to the
Company. The inability to further enhance successfully its existing products or
to develop new products may have a material adverse effect on the Company's
operations and profitability.

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 ("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.



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         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.

         The Company is offering the Systems only in Windows Editions. The
Company introduced the 4.1 Editions of the Systems in 1996, and expects to
introduce PaperClip 32 Editions in the third quarter of 1997. The 4.2 Editions,
which were designed for a 16-bit platform and were scheduled to be introduced
during the second quarter of 1997, have been cancelled by the Company because
of its strategy to focus on products such as PaperClip 32, which are designed
for 32-bit platforms using Windows 95/NT.

         Personal Edition

         During 1996, the Company ceased selling the Personal Edition since the
market for this product has not grown as the Company had expected.

         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" (see "Glossary") storage
devices. This allows the storage of thousands of Documents while maintaining a
high level of performance. The user also has the ability to convert scanned
Documents by optical character recognition to a variety of word processing
formats, and to store such Documents. The DocumentLink(TM) feature allows the
user to find both the folder and the scanned image of such a Document from
within a word processing program.

         Network Edition

         The Network Edition provides users with all of the features of the
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 the
network. It also supports a shared network fax capability, allowing the user to
send faxes from, and store faxes in, folders.

         SQL Edition

         The SQL Edition provides all the features of the Network Edition and
provides for Wide Area Network operation using a client/server architecture.
The significant differences provided to users by the SQL Edition are the
increased integrity of the database (i.e., if there is a hardware or


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software failure which corrupts the database, this Edition will facilitate the
recovery of such records as they existed prior to their corruption) and the
improved performance in networks with more than 20 users. To operate the SQL
Edition, the user is required to obtain a license, which is readily available
from various third parties, for the desired SQL server. The SQL Edition is
suited to large departmental and enterprise installations because of its
inherent security, transaction logging capability and database integrity. The
Company presently offers its SQL Edition to work in conjunction with SQL
Servers from Microsoft, Oracle and Centura.

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 through a
familiar interface. 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 Network and SQL 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. PaperClip is also making NOSS available as a separate product for
VARs, integrators, and distributors to develop applications based on network
optical storage.

PaperClip WorkFlow

         PaperClip WorkFlow is an automated rule based workflow module that
allows the automation of work processes associated with PaperClip documents,
folders, pages and batches, as well as interaction with external data. Workflow
is an add-on to the Company's SQL Edition. PaperClip WorkFlow was developed for
PaperClip by DCL International, Ltd., a company located in the State of Israel
("DCL"). Using an object oriented graphical interface, expressions, rules and
associated processes can be easily defined and maintained using a drag and drop
interface, without programming. The graphical process map is automatically
created by PaperClip


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WorkFlow, without the need to draw flow-charts. It allows those personnel
closest to the work process to define the rules for their stage of the process.
Consistent with the Company's intuitive document and image management software,
users can quickly implement workflow solutions without the need for costly
programming.

Internet Product Line  - WebClip

         The Company also completed WebClip, which is an Internet-related
product. WebClip is a Web Browser add-on designed to work with popular Windows
95 Web Browsers from Netscape and Microsoft. WebClip allows users to organize
Web contents of interest in a hierarchical storage system using the Microsoft
Windows '95 Explorer interface. It provides intelligent storage and the ability
to refresh locally stored Web pages and embedded objects (graphics, sound,
etc.) and any other objects downloaded from Web sites, while optimizing on-line
retrieval and down-load time. The Company began marketing WebClip in August
1996. The WebClip product, despite a strong public relations and advertising
effort by the Company, has not realized the volume of sales that the Company
had hoped that it would.

Products Under Development

         PaperClip 32

         The Company is engaged in Alpha testing the PaperClip 32 Edition and
expects to Beta test it (have its VARS test the product) in the second quarter
of 1997. While management believes that the PaperClip 32 Edition will work
properly, there can be no assurance that they will function effectively in the
hands of end-users. The Company is currently engaged in testing of PaperClip
32.

         Internet Product Line - WebServer

         The Company has completed development of, but has not yet tested, its
WebServer(TM), which is an add-on to the PaperClip 32 Systems. The new product
is being designed to provide full security for documents stored on a PaperClip
System, to enable users to make the documents available to anyone with a Web
Browser and to make available the user's PaperClip document repository to both
Internet and Intranet users. The Company has anticipated that the introduction
of the WebServer would coincide with a second release of its Windows 95
products, but, because of the Company's lack of operating funds, testing of
WebServer was suspended. There can be no assurance it will be resumed.






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MARKETING

Objectives, Internal Sales Force and Risks

         Management's marketing objectives for the Systems have been, and, 
subject to availability of funds, will continue to be to: (i) develop strategic
relationships with prominent computer hardware and software organizations; (ii)
introduce the Systems to customers through value added resellers ("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.

         Marketing assistance, training and technical support of VARs is a
critical component of the Company's efforts with respect to its Network and SQL
Editions. Consequently, the Company is expending approximately $25,000 per
month to maintain a group of seven (7) marketing, training, and technical
support employees dedicated to providing on-going communication with, and
support to, its VARs. Marketing assistance includes hot line access, mailings
of product and technical updates, joint cooperative marketing, site visits and
seminars.

         In June 1996, the Company hired David Valentino, as Vice President of
Sales and Marketing.

         The Company has a field sales force of four (4) persons.

         While management will attempt 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.

Distribution; Retail Sales and Licensing

         The Company also utilizes distribution agreements, sales through
retail stores (and various Websites), and licensing agreements in order to
market its products.

         The Company is party to several distribution agreements for its
products, most of which are terminable on 60 days' notice. The cancellation of
certain of these agreements could have a material adverse effect on the
Company.

         The Company is selling its WebClip Product through retail stores such
as Software City,


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Micro Center, Media Play, Nebraska Furniture Mart and J&R World, through its
own Website and through the Websites of other companies, for which it receives
a portion of the sales revenue. Other companies' Websites where WebClip is
being sold are Saturn Solutions, Inc., Maagnum Showcase LLC, Westgroup
Management Resources, IDT Internet Services ("IDT") and International Software
Network Inc.

         The Company has also entered into licensing agreements with various
licensees who will bundle WebClip as part of their products, and which will pay
to the Company its proportional share of the revenue derived from such bundled
products.

Strategic Alliances; OEM and Third Party Relationships

         Management believes that strategic alliances with OEMs and other third
party relationships can provide three important benefits to the Company: (i) a
revenue stream through sales of bundled products; (ii) a means to seed the
market; and (iii) a means to broaden PaperClip's name recognition. During 1996
the Company was unable to expand on its non-contractual joint marketing
relationships that it had with a number of hardware and software manufacturers.
At the present time management is not pursuing opportunities in this area.

         On June 1, 1995, the Company entered into a six month agreement with
Fujitsu Europe Limited ("Fujitsu UK"). Commencing in February 1996, Fujitsu UK
began bundling the Personal Edition with Fujitsu UK's MO City/DynaMo external
3.5" Magneto Optical Disc Drive product line. The Company will be paid
(pound)15 (approximately $24) for each bundled product. During 1996 the Company
realized $20,000 from this agreement. To reach all of Fujitsu UK's market, the
Personal Edition would have had to be translated into German, French and
certain other languages, a task which management believes can be accomplished
as needed. Thus far no translations have been required in connection with this
Agreement.

Value Added Reseller Network

         To date, the most significant portion of the Company's sales have been
made through VARs. The Company currently has approximately 175 VARs, of which
approximately 150 VARs are in the United States and approximately 25 are
abroad.

Business Services

         In the fourth quarter of 1995, the Company launched its Business
Services Department. The 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 two (2)
employees.



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CUSTOMERS AND SALES

         The Company had net sales of $1,059,924 in 1994, $1,489,139 in 1995
and $1,968,750 for 1996. Law Cypress accounted for 15% of the Company's sales
in 1996. The Company had no other customers in 1996 who accounted for more than
10% of its sales. Four (4) major customers (of which two (2) are VARs and two
(2) are distributors) accounted for 56% of sales collectively, and sales to two
(2) major customers accounted for 39%, of the Company's sales in 1995 and 1994,
respectively.

         During 1996 the Business Services Department generated important sales
and business opportunities for the Company.

CUSTOMER SUPPORT AND SERVICE; WARRANTIES

         The Company presently provides telephone support to its VARs. The
majority of the Company's service and support activities involve responses to
customer inquiries regarding use of the Network, SQL and Professional Editions,
which are provided by telephone support directly from the Company's technical
support center.

         Beginning in 1997, the Company started to limit offering the
maintenance for its 16 bit product. The Company reduced offering this
maintenance program because it does not want customers who upgrade from the 16
bit product to the 32 bit product to be covered under the maintenance program
(which does not include the 32 bit product).

         The Company warrants all its products to end users for 90 days.
Warranties cover only replacement (or refunding of purchase price) for either
damaged condition or failure to conform to specifications. WebClip requires
some limited telephone support and services to its customers.
 All other products require more extensive telephone support.

PRODUCT DEVELOPMENT

         To date, all of the Systems have been developed by the Company's
staff, which continues to be engaged in the planning, development and testing
of new products and product enhancements. The PaperClip WorkFlow module was
developed by DCL, a company operating in the State of Israel. The Company's
Internet products were developed by NCC Export Systems, Ltd., another Israeli
company.

         PaperClip expended approximately $1,621,800 and $3,066,400 on research
and development in 1995 and 1996, respectively. For a discussion of the
products under development, see "- The Products - Products Under Development."

         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


                                       16

<PAGE>



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. However, unless the Company
has sources of financing available to it (which it currently does not), these
objectives cannot be met. The ability to enhance successfully its existing
products or to develop new products may have a material adverse effect on the
Company's operations and profitability.

PRODUCTION

         The Company has produced a set of master diskettes and documentation
for each System and duplicates the diskettes, and assembles and ships the
Systems at and from its headquarters. The Company has also engaged various
sources to produce and assemble the product and documentation (including
packaging) for the Systems on terms that management believes are commercially
reasonable. The Company's WebClip product is produced in a similar manner and
can be downloaded from various Internet Websites (including the Company's own
Website). Although management believes that it may find other sources to
produce and assemble the product and documentation (including packaging) on
commercially reasonable terms, there can be no assurance that it would be able
to locate such alternative sources. The cancellation of the arrangements with
certain of these sources and the failure to locate an alternative source could
adversely affect the Company's stream of revenues.

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 obtained from the U.S. Patent and Trademark Office a
registered trademark for PAPERCLIP SOFTWARE AND DESIGN in August 1993 and
obtained a registered trademark for PAPERCLIP IMAGING SOFTWARE AND DESIGN in
February 1993. Although no other person or entity owns any U.S. registered
trademark for the mark "PaperClip" in connection with software or imaging
products, there was a prior U.S. registration for use of the "PaperClip" mark
in connection with pre-recorded word processor programs. This latter
registration was automatically canceled on April 2, 1992 by the U.S. Patent and
Trademark Office because of the registrant's failure to file (as required by
statute) an affidavit, during the year commencing with the fifth anniversary of
the registration, stating that the mark was still in use. However, the user of
the canceled registration might, at some future time, assert an infringement
claim in the U.S. based on alleged common law rights. If such a 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.



                                       17

<PAGE>



         PaperClip has also applied for trademark registration of WEBCLIP with
the U.S. Patent and Trademark Office. This application was initially rejected
and PaperClip's intellectual property counsel responded arguing that the mark
was registrable. By letter dated March 7,1997, the Superintendent of Documents
of the United States Patent and Trademark Office informed PaperClip that the
above-mentioned mark will be published in the Office Gazette on April 8, 1997.
If no party opposes the registration application within 30 days of its
publication in the Official Gazette or requests an extension of time to oppose,
the mark shall be registered. There can be no assurance that such registration
will be obtained.

         The Company also has registered trademarks for PAPERCLIP IMAGING
SOFTWARE & DESIGN in the United Kingdom, Germany and Canada, but has not filed
applications for trademark registration in other countries in which the Systems
are sold.

         The Company distributes its products under signed software license
agreements, which grant customers perpetual licenses to, 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
Decomp, among others. Before December 1996, the Professional, Network and SQL
Editions also utilized, under license, the proprietary products of Ligature,
Ltd. As of December 1, 1996, for a number of product-related reasons, the
Company stopped using Ligature's products in its software (although the license
still remains in effect).

         The Company intends to seek to purchase the rights to PaperClip
Workflow module, which DCL developed. There can be no assurance that it will be
successful in this regard. If the negotiations are not completed, then
PaperClip will continue to have the rights to sell the Workflow module
worldwide, but would not own the source code.


                                       18

<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 or network
systems with which the Company competes. Competition for the Company's products
include, among others, KeyFile Corporation, Westbrook Technologies, a division
of Intelligent Optics Co., Watermark Software, Inc. ("Watermark"), Optika
Imaging Systems Incorporated, LaserData, Inc., Minolta Corporation, Network
Imaging Corporation, Genesys Information Systems Corporation and Hitachi. The
Company also competes with more expensive turnkey solutions such as those
produced by FileNet Corp. ("FileNet"), IBM Corporation ("IBM"), Wang
Laboratories, Inc. ("Wang") and ViewStar Corporation. Many of these companies
have greater financial strength and technical resources than the Company, and
there can be no assurance that these competitors will not modify their existing
systems or acquire other competitors of the Company to better compete with the
Systems. Nor can there by any assurance that new companies will not introduce
new systems with better features and functions than the Systems. In 1995,
FileNet acquired Watermark. FileNet is one of the leading large system
competitors and Watermark is one of the Company's leading direct competitors.
Combined, the two companies are able to offer a more complete range of workflow
and document imaging solutions than the Company. The WebClip product competes
with the products of a number of companies, some of which have much greater
resources than the Company. Competitors for the Company's Internet products
include, among others, DocuMagix, First Floor Inc., Traveling Software, Inc.,
The ForeFront Group, Inc., and FreeLoader, Inc.

         On April 13, 1995, Microsoft, Inc. ("Microsoft"), one of the largest
computer software companies in the world, announced the settlement of a lawsuit
with Wang. Under the terms of the settlement agreement, portions of Wang's
imaging software will be incorporated as a standard feature in future versions
of Microsoft Windows 95 and Windows NT operating systems. Management cannot
predict the effects of such settlement on the Company's business and prospects.
To date Microsoft has not entered into the document management and imaging
market. Microsoft's entry into the document management and imaging market may
have a material adverse effect on the prospects of the Company.

         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


                                       19

<PAGE>



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.

EMPLOYEES

         As a result of limited resources, the Company reduced its full-time
staff from 43 in 1996 to 31 in 1997. At present, the Company's full-time staff
includes eleven (11) engaged in development and systems testing, twelve (12)
engaged in sales, marketing and technical support, two (2) in Business Services
and five (5) 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'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.


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 9,900 square feet. The Company occupies these premises
pursuant to a sublease, the term of which expires on January 30, 1998. The
fixed rental is approximately $7,500 per month plus escalation's for taxes and
operating expenses over a 1995 base year. The Company is purchasing, on an
installment basis, the furniture of the sublessor at a rate of approximately
$4,500 per month through January 30, 1998.

         In addition, the Company leases a small sales office in California at
a cost of $2,253 per month.


ITEM 3.  LEGAL PROCEEDINGS.



                                       20

<PAGE>



         The Company is not a party to any material pending legal proceedings.


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

         The Company held its 1996 Annual Meeting of Stockholders on October
29, 1996, at which the following actions were taken unanimously: (i) election
of directors, (ii) the amendment of Article Fourth of the Company's Certificate
of Incorporation to increase the authorized shares of the Company's common
stock, $.01 par value per share, from 15,000,000 shares to 30,000,000 shares,
(iii) the amendment of Article First of the Company's Certificate of
Incorporation to change the Company's name to "PaperClip Software, Inc." and
(iv) amendment of Company's 1995 Stock Option Plan.































                                       21

<PAGE>




                                    PART II


ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

         On May 31, 1996 the Company effected a two-for-one split of its Common
Stock. On June 12, 1996, the Company effected a two-for-one split of its Class
A Warrants. All share amounts and per-share amounts in this Report on Form
10-KSB reflect both of these splits.

         The Company's Common Stock and the Class A Warrants were, until March
11, 1997, traded on the Automated Quotation System of the National Association
of Securities Dealers, Inc. ("NASDAQ") under the symbols "PCLP" and "PCLPW,"
respectively. The following table sets forth the high and low sale prices for
the Common Stock and Class A Warrants as reported by NASDAQ.

<TABLE>
<CAPTION>

                                    Common Stock              Class A  Warrants

                                    High             Low               High             Low
1995 Quarter
------------
<S>                                 <C>            <C>               <C>             <C> 
THIRD (commencing                   8 1/4            7                 2 3/4            1 3/8
September 27, 1995)

FOURTH                              8 1/4            1 3/4             2 5/8            1/2

1996 Quarter
------------
FIRST                               11 3/8           4                 6 1/8            1

SECOND (reflects 2-1                5 7/8            1 1/2             3 1/4*           5/8*
stock split May 31)                                            *(reflects 2-1 warrant split
                                                                            June 12)
THIRD                               2 11/16          1 19/32           1 7/16           1/2

FOURTH                              1 3/4            10/32             1                5/32


1997 Quarter
------------
FIRST (through                      3/4              9/32              7/32             1/8
March 31)

</TABLE>

         On March 11, 1997, the Company was informed by NASDAQ that its
securities have been deleted from the Nasdaq SmallCap Market due to the
Company's failure to comply with minimum


                                       22

<PAGE>



asset and capital surplus requirements established by NASDAQ. The
Company's securities are now quoted on the OTC Bulletin Board.

         On March 31, 1997, there were approximately 1000 holders of record of
the Company's shares of Common Stock.

         On March 31, 1997, the closing bid and asked prices of the Common
Stock were 9/32 and 11/32, respectively, and the closing bid and asked prices
of the Class A Warrants were 1/16 and 1/8 respectively, as reported on the OTC
Bulletin Board.

         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.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
         RESULTS OF OPERATIONS.

Results of Operations

Year ended December 31, 1996 Compared with Year Ended December 31, 1995

         Net sales in the year ended December 31, 1996 increased by 32.2% over
the year ended December 31, 1995 (from $1,489,139 to $1,968,750) due to the
greater acceptance of the new Windows Network Edition and SQL Editions, the
introduction of "View Only" licenses, a maintenance program which guaranteed
updated versions to end users, the introduction of a COLD product and sales
from the recently acquired NOSS product line. None of such increases was a
result of increases in prices.

         Salaries and related benefits increased in such period by 7.7% (from
$1,292,654 to $1,391,725 due to the addition of administrative personnel.
Research and development expenses increased by 87.8% (from $1,621,849 to
$3,066,395) due to increased internal staffing to complete Versions 4.0 and 4.1
of the document and imaging management products, continued development of
PaperClip 32, a Windows '95 32-bit version of the Company's document and
imaging and management products, increased purchases of computer software,
supplies and support for the increased staff and utilization of external
consultants to complete the development of WebClip (an Internet browser add-on
product) and development of an Internet Web server product to be used with the
Company's Windows '95 32-bit document and imaging management products, and
continued development of a Windows '95 32-bit Workflow product.

         Selling expenses increased by 53.9% (from $940,624 to $1,447,593) due
to increased personnel, development of product literature, the hiring of a
Public Relations firm and the launching of an advertising campaign for the
introduction of the WebClip product. General and administrative expenses
increased by 6.9% (from $846,817 to $905,137).



                                       23

<PAGE>



         The loss from operations for the year ended December 31, 1996
increased by 50.7% over the year ended December 31, 1995 (from $3,212,805 to
$4,842,100 primarily due to the increase in research and development, and
selling expenses. These increases were partially offset by an increase in
sales.

         Interest expense and financing costs decreased to $5,561 in 1996 from
$1,073,800 in 1995, primarily due to the financing costs incurred in connection
with the April 1995 Bridge Financing and the Public Offering completed in
September 1995. As a consequence of the increased loss from operations and
interest expense and financing costs, the Company's net loss was ($4,751,841)
or ($.63) per share, in 1996, as compared to ($4,236,970), or ($.88) per share,
in 1995. The decrease in the loss per share was due the higher amount of
weighted average shares outstanding in 1996.

Year ended December 31, 1995 Compared with Year Ended December 31, 1994

         Net sales in the year ended December 31, 1995 increased by 40.5% over
the year ended December 31, 1994 (from $1,059,924 to $1,489,139) due to the
greater acceptability of the Windows Network and SQL Editions, the introduction
of a Maintenance Program which guaranteed to the end users updated versions,
the introduction of a COLD product (computer output to laser disk), the SyQuest
OEM agreement, and the initiation of a Business Services Department. None of
such increase was a result of increases in prices.

         Salaries and related benefits increased in such period by 11.0% (from
$1,164,430 to $1,292,654 ) due to the addition of administrative personnel.
Research and development expenses increased by 39.0% (from $1,166,769 to
$1,621,849 ) due to increased internal staffing to complete the 3.2 Editions of
the Systems and initiate the 4.0 and Windows 95 (5.0) Editions and utilization
of external consultants to continue the development of the WorkFlow product and
to begin the development of Internet products.

         Selling expenses increased by 26.1% (from $745,958 to $940,624) due to
increased royalties and commissions on higher sales, development of product
literature, and increased expenses incurred to visit and support the VAR
network. General and administrative expenses decreased by 2.1% (from $864,863
to $846,817).

         The loss from operations for the year ended December 31, 1995
increased by 11.5% over the year ended December 31, 1994 (from $2,882,096 to
$3,212,805) primarily due increases in salaries and related benefits resulting
from the increase in the number of employees, research and development expenses
and selling expenses.

         Interest expense and financing costs increased from $9,500 in 1994 to
$1,073,800 in 1995 primarily due to the financing costs incurred in connection
with the April 1995 Bridge Financing described in "Liquidity and Capital
Resources", below. As a consequence of the increased loss from operations and
interest expense and financing costs, the Company's net loss was


                                       24

<PAGE>



($4,236,970), or ($ .88) per share, in 1995, as compared $2,887,622, or $ .85
per share, in 1994.

Liquidity and Capital Resources

         For the years ended December 31, 1994, 1995 and 1996, the Company
incurred net losses of $2,887,622, $4,236,970 and $4,751,841, respectively. As
of December 31, 1996, the Company had an accumulated deficit of $16,798,006,
and it continues to incur operating losses. As of December 31, 1995, the
Company had a positive working capital of $3,256,657. As of December 31, 1996
the Company had a working capital deficit of $700,859. For the years ended
December 31, 1994, 1995 and 1996, the Company's negative cash flows from
operations were $2,051,062 ,$4,087,608 and 3,990,242 respectively. As a result
of these factors, the report of the independent public accounts contains
explanatory language as to the Company's ability to continue as a going
concern.

         Prior to January 1, 1994, the Company was considered to be a
development stage company. The Company required the proceeds of the Offering or
alternative funds to conduct its proposed activities. Prior to completion of
the Offering, the Company funded its operations through five (5) private
placements and three (3) Regulation S offerings that were completed between
June 1992 and December 1994, in which it raised an aggregate of approximately
$7,200,000, net of issuance costs, and through the Bridge Financing, described
below.

         In the Bridge Financing, the Company issued Bridge Notes in the
aggregate principal amount of $2,365,000 and Bridge Warrants to acquire an
aggregate of 430,000 shares of Common Stock. The Bridge Notes bore interest at
the rate of 9% per annum and were repaid from the proceeds of the Company's
Offering. The Bridge Warrants are exercisable for five (5) years after their
issuance date at an exercise price of $2.25 per share. The shares issuable upon
the exercise of the Bridge Warrants were registered pursuant to the
registration statement relating to the Offering, and holders of Bridge Warrants
are entitled to certain demand and "piggyback" registration rights with respect
to the underlying shares of Common Stock.

         On September 27, 1995, the Company completed the Offering, pursuant to
which it issued 1,799,750 shares of Common Stock and 1,799,750 Class A
Warrants, at prices of $5.00 per share of Common Stock and $.10 per Class A
Warrant. Each Class A Warrant entitles the registered holder thereof to
purchase one share of Common Stock at a price of $6.25, subject to adjustment,
at any time from the date of issuance of the Class A Warrant until the close of
business on August 9, 2000, unless previously redeemed. The Class A Warrants
are subject to redemption by the Company at $.10 per Class A Warrant on 30
days' prior written notice provided that either: (i) the last sales price (or
highest closing bid price) of the Common Stock as reported by NASDAQ (or on
such exchange on which the Common Stock is then traded) exceeds $9.00 per share
for 20 consecutive business days ending within 15 days prior to the date of the
notice of redemption, or (ii) the Company shall have obtained written consent
from Baron, the underwriter of the Offering, to redeem the Class A Warrants.
The Class A Warrants may not be redeemed in the absence of an effective
registration statement covering the Common Stock issuable upon exercise of the


                                       25

<PAGE>



Class A Warrants.

         The Offering resulted in net proceeds (after payment of underwriting
discounts and commissions and other expenses of the Offering) of approximately
$7,907,000. However, because approximately $1,397,000 of the principal amount
of the Bridge Notes were applied by the holders thereof to the purchase of
securities in the Offering, the net cash proceeds to the Company of the
Offering were approximately $6,510,000. Approximately $1,222,000 of the net
cash proceeds were used to repay the balance of the principal amount of the
Bridge Notes ($969,000), the interest on all the Bridge Notes ($102,000) and
certain other debt (including a $150,000 8% note payable to counsel to the
Company, two partners of which were directors of the Company from June 1992
through April 1995.) The balance of the net cash proceeds were allocated to
marketing, research and development, capital equipment and working capital.

         At December 31, 1996, the Company had net Federal operating loss carry
forwards ("NOL") for financial reporting purposes. Due to losses sustained by
the Company for both financial and tax reporting through 1995, 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 full valuation allowance. As a
result of the Offering, the Company's NOL that would be available to offset
future income may be subject to annual limitations. See Note 2 of the Notes to
the Financial Statements, in Item 7.

         The Company consummated its initial public offering in September of
1995, with a business plan to create an Internet suite of products and to move
PaperClip's flagship document management and imaging product line into a
Windows NT/95 32 bit platform. The Company spent approximately $3 million on
the development of the above mentioned products. With the completion of
WebClip, one of the scheduled Internet products, the Company launched an
ambitious public relations and advertising campaign to create market awareness
of the WebClip product. As of the date hereof, the Company has not realized the
volume of sales that it had hoped to achieve with the WebClip product.

         In connection with obligations owed by the Company to a software
developer, during October 1996 the Company entered into an agreement which
provided for the rescheduling of payments owed by the Company to the developer.
The Company paid $150,000 upon signing such agreement and agreed to pay an
additional amount aggregating approximately $200,000 (the "Remaining Amount")
in three monthly installments commencing January 1, 1997. On January 29, 1997
the Company paid the Remaining Amount from the proceeds of the Access Loan (as
defined below).

         In December 1996, the Company borrowed an aggregate amount of
$129,690.74 from nine of its stockholders. The loan was evidenced by
Convertible Promissory Notes ("Notes") issued to each of the nine stockholders
for their respective loan amounts. The Notes: (i) have a three (3) year
maturity, (ii) bear interest at a rate of 12% per annum, and (iii) are
convertible into common stock of the Company at a rate of $0.30 per share.


                                       26

<PAGE>



         Throughout 1996, the Company incurred losses and has been seeking
sources of additional financing. In July 1996, the underwriter of the Company's
initial public offering and principal market maker for its Common Stock, A.R.
Baron & Co., Inc., filed for bankruptcy. For the past several months,
management has been engaged in discussions with a number of investment banks,
corporate buyout firms and potential merger and joint venture partners
regarding various financial and strategic alternatives for the Company. The
Company has been unable to identify any additional source for a public or
private financing.

         After evaluating several potential opportunities for a sale of the
Company or its assets, the Company entered into a non-binding Letter of Intent
dated January 2, 1997 with Access Solutions, providing for the parties to use 
their best efforts to negotiate a transaction involving the purchase by Access 
Solutions of substantially all of the assets of the Company and for Access 
Solutions to assume specified liabilities of the Company. See "DESCRIPTION OF 
BUSINESS" - "Recent Developments". There can be no assurance that the Company 
will be successful in completing the sale of assets to Access Solutions. The 
Company has no other sources of liquidity and has no commitments with regard 
to obtaining any further funds which would be required to sustain the 
Company's operations. In the event the transaction is consummated, it is 
currently anticipated that the Company will dissolve and distribute the Access 
shares and warrants it receives as consideration in the transaction to its
shareholders, after making provisions for its liabilities, if any, and subject
to a holdback for the benefit of warrant holders.

See the Financial Statements and the accompanying Notes, set forth in Item 7.


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.

         Not Applicable.








                                       27

<PAGE>



                                    PART III


The information required by Items 9, 10, 11 and 12 will be filed as part of the
Company's definitive proxy statement (or as an amendment to this Form 10-KSB)
filed with the Commission not later 120 days after the end of the fiscal year.


ITEM 13.          EXHIBITS AND REPORTS ON FORM 8-K.

<TABLE>
<CAPTION>

(a) Exhibits
                                                                      
<S>               <C>                                                                      
3.1               Certificate of Incorporation of Registrant, as amended.
3.2               By-Laws of Registrant, as amended. (1)
3.3               Registrant's Authorization to do Business in New Jersey. (1)
3.4               Registrant's Authorization to do Business in California. (1)
3.5               Form of Common Stock Certificate. (1)
4.2               Class A Warrant Agreement (including form of Class A Warrant) among the
                  Registrant, A.R. Baron & Co., Inc. ("Baron") and American Stock Transfer &
                  Trust Company.(1)
4.3               Stock Purchase Option, dated September 27, 1995, granted to Baron.(1) 
4.4               Warrant Purchase Option, dated September 27, 1995, granted to Baron.(1) 
4.5               Form of Investor Purchaser Agreement, dated as of April 5, 1995, by and
                  between the Registrant and the Investors identified in the Schedule of Investors
                  attached thereto, and amendment thereto, dated March 29, 1995. (1)
4.6               Form of Bridge Note issued on April 5, 1995, to each Investor identified on the
                  Schedule of Investors included with Exhibit 4.5. (1)
4.7               Form of Bridge Warrant dated April 5, 1995, given to each Investor identified on
                  the Schedule of Investors included with Exhibit 4.5. (1)
10.1              Employment Agreement, dated as of May 1, 1995, between the Registrant and
                  William Weiss. (1)
10.2              Employment Agreement, dated as of May 1, 1995, between the Registrant and
                  Sol Rosenberg. (1)
10.3              Employment Agreement, dated as of May 1, 1995, between the Registrant and
                  Helaine Fischer. (1)
10.4              Employment Agreement, dated as of December 1, 1992, between the Registrant
                  and Michael Suleski. (1)
10.5              Employment Agreement, dated as of June 17, 1996, between the Registrant and
                  David Valentino
10.6              1993 Stock Option Plan. (1)
10.7              1995 Stock Option Plan, as amended
10.8              Development License Agreement with Decomp, dated May 25, 1993. (1)
10.9              License Agreement with Decomp, dated June 3, 1993. (1)


                                       28

<PAGE>



10.10             License Agreement with Ligature, Ltd., dated August 18, 1994. (1)
10.11             License Agreement with Pixel Translations, Inc., dated May 16, 1995. (1)
10.12             Distributor Agreement with Law Cypress Distributing Company. dated as of
                  March 18,1993 (incorporated by reference from Exhibit 10.16
                  of the Registrant's Form 10-KSB for the fiscal year ended
                  December 31, 1995).
10.13             Distribution Agreement with Tech Data Corporation, dated June 16, 1993. (1)
10.14             Form of End User License. (1)
10.15             Corporate License Agreement with Tenaga Nasional Berhard, dated January
                  1995. (1)
10.16             Development Agreement with DCL Systems International, Ltd., dated June 1,
                  1994. (1)
10.17             Sublease by and between the Registrant and Ram Mobile Data U.S.A. Limited
                  Partnership, dated as of April 20,1995, for the Registrant's headquarters. (1)
10.18             Software Bundle Agreement with Fujitsu U.K. Limited, dated as of June l, 1995.  (1)
10.19             Lease by and between the Registrant and Lillipont Investment Co. dba Dupont Palm Court,
                  executed April 24, 1996, for Registrant's California Sales Office.
10.20             Merger and Acquisition Agreement between the Registrant and Baron, dated
                  September  27, 1995.  (1)
10.21             Consulting Agreement with Stephen Kornfeld, dated as of January 1, 1996
                  (incorporated by reference from Exhibit 10.27 of the Registrant's Form
                  10-KSB for the fiscal year ended December 31, 1995).
10.22             (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.
10.23             Software License Agreement with InText Systems, dated as of June 30,
                  1996.
10.24             Distributor License  Agreement with Pesaniaga SDN BHD,
                  dated as of November 10, 1994.
10.25             Distributor License Agreement with Digital Document Systems, dated
                  July 1, 1996.
10.26             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).
10.27             (a) Letter of Intent with Access Solutions International, Inc. ("Access
                  Solutions"), dated January 2, 1997.
                  (b) Letter Agreement with Access Solutions, amending the Letter of Intent,

                                       29

<PAGE>



                  dated January 31, 1997.
                  (c) Letter Agreement with Access Solutions, amending the Letter of Intent,
                  dated February 28, 1997.
                  (d) Letter Agreement with Access Solutions, amending the Letter of Intent,
                  dated March 31, 1997.
                  (e) Convertible Promissory note issued by the Registrant to Access
                  Solutions, dated January 29, 1997.
                  (f) Security Agreement with Access Solutions, dated January 29, 1997.
                  Registration Rights Agreement with Access Solutions, dated January
                  29, 1997.

   21.1           List of subsidiaries of Registrant. (1)
                  ----------------------------
                  (1)      Incorporated by reference from the Registrant's Registration Statement on
                           Form SB-2 (File No. 33-92768NY).
</TABLE>

(b)      Reports on Form 8-K.

         The Company filed three (3) reports on Form 8-K during the period
covered by this report. Each report on Form 8-K was filed with respect to Item
5. The date of such reports on Form 8-K were December 12, 1996 and  January 2,
1997.























                                       30



<PAGE>


                           PAPERCLIP SOFTWARE, INC.
                           ------------------------

                  (FORMERLY PAPERCLIP IMAGING SOFTWARE, INC.)

                         INDEX TO FINANCIAL STATEMENTS
     


REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS                                    F-2


BALANCE SHEETS AS OF DECEMBER 31, 1996 AND 1995                             F-3


STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
   DECEMBER 31, 1996, 1995 AND 1994                                         F-4


STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FOR
   THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994                         F-5


STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996,
   1995 AND 1994                                                            F-6


NOTES TO FINANCIAL STATEMENTS                                               F-8




                                      F-1


<PAGE>


                             ARTHUR ANDERSEN LLP






                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To the Board of Directors of

PaperClip Software, Inc.:


We have audited the accompanying balance sheets of PaperClip Software, Inc.
(formerly PaperClip Imaging Software, Inc.) (a Delaware corporation) as of
December 31, 1996 and 1995, and the related statements of operations,
stockholders' equity (deficit) and cash flows for each of the three years in
the period ended December 31, 1996. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes 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, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has negative cash flow from operations, has
incurred losses from inception and has negative working capital. These factors
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans with respect to future operations are also
described in Note 1. The financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts
and classification of liabilities that might result should the Company be
unable to continue as a going concern.



                                              /s/ Arthur Andersen LLP

Roseland, New Jersey
February 20, 1997

                                      F-2



<PAGE>



                           PAPERCLIP SOFTWARE, INC.

                  (FORMERLY PAPERCLIP IMAGING SOFTWARE, INC.)

                 BALANCE SHEETS -- DECEMBER 31, 1996 AND 1995

<TABLE>
<CAPTION>
                        ASSETS                                      1996               1995
                        ------                                  ------------    ------------
<S>                                                            <C>              <C>         
CASH AND CASH EQUIVALENTS (Note 1)                              $    220,573    $  3,661,009


ACCOUNTS RECEIVABLE (net of allowance for doubtful accounts
of $30,000 and $40,000 in 1996 and 1995, respectively)               275,527         267,024


PREPAID EXPENSES AND OTHER CURRENT ASSETS                             33,855           2,767
                                                                ------------    ------------

        Total current assets                                         529,955       3,930,800
                                                                ------------    ------------

EQUIPMENT, FURNITURE AND FIXTURES (Note 2):
  Computer and office equipment                                      669,889         549,569
  Furniture and fixtures                                             204,858         201,474
                                                                ------------    ------------
                                                                     874,747         751,043
  Less- Accumulated depreciation                                    (451,902)       (263,352)
                                                                ------------    ------------
                                                                     422,845         487,691
                                                                ------------    ------------
  OTHER ASSETS                                                        53,282          48,466
                                                                ------------    ------------
        Total assets                                            $  1,006,082    $  4,466,957
                                                                ============    ============


         LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
         ----------------------------------------------

ACCOUNTS PAYABLE AND ACCRUED EXPENSES (Note 4)                  $  1,125,306    $    565,936


DEFERRED REVENUE (Note 2)                                             56,066          58,400


CURRENT PORTION OF CAPITALIZED LEASES (Note 4)                        49,442          49,807
                                                                ------------    ------------
        Total current liabilities                                  1,230,814         674,143
                                                                ------------    ------------

NOTES PAYABLE (Note 3)                                               129,691               0
                                                                ------------    ------------

CAPITAL LEASE, net of current portion (Note 4)                         3,966          49,442
                                                                ------------    ------------

COMMITMENTS AND CONTINGENCIES (Note 4)

STOCKHOLDERS' EQUITY (DEFICIT) (Note 5):
  Common stock, authorized 30,000,000 shares; $.01 par value;
    issued and outstanding 7,722,188 and 3,599,750 shares in
    1996 and 1995, respectively                                       77,222          35,998
  Additional paid-in capital                                      16,362,395      15,753,539
  Accumulated deficit                                            (16,798,006)    (12,046,165)
                                                                ------------    ------------
        Total stockholders' equity (deficit)                        (358,389)      3,743,372
                                                                ------------    ------------
        Total liabilities and stockholders' equity (deficit)    $  1,006,082    $  4,466,957
                                                                ============    ============
</TABLE>

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

                                      F-3

<PAGE>
                           PAPERCLIP SOFTWARE, INC. 
                 (FORMERLY PAPERCLIP IMAGING SOFTWARE, INC.) 
                           STATEMENTS OF OPERATIONS 
             FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 

<TABLE>
<CAPTION>
                                                      1996            1995            1994 
                                                --------------  --------------  -------------- 
<S>                                             <C>             <C>             <C>
NET SALES (Notes 2 and 6)                         $ 1,968,750     $ 1,489,139     $ 1,059,924 
                                                --------------  --------------  -------------- 
OPERATING EXPENSES: 
 Salaries and related benefits                      1,391,725       1,292,654       1,164,430 
 Research and development expenses 
  (Note 2)                                          3,066,395       1,621,849       1,166,769 
 Selling expenses                                   1,447,593         940,624         745,958 
 General and administrative expenses                  905,137         846,817         864,863 
                                                --------------  --------------  -------------- 
   Total operating expenses                         6,810,850       4,701,944       3,942,020 
                                                --------------  --------------  -------------- 
   Loss from operations                            (4,842,100)     (3,212,805)     (2,882,096) 
                                                --------------  --------------  -------------- 
OTHER INCOME (EXPENSE): 
 Interest income                                       95,820          49,635           3,974 
 Interest expense and financing costs (Note 3)         (5,561)     (1,073,800)         (9,500) 
                                                --------------  --------------  -------------- 
                                                       90,259      (1,024,165)         (5,526) 
                                                --------------  --------------  -------------- 
   Net loss                                      ($ 4,751,841)   ($ 4,236,970)   ($ 2,887,622) 
                                                ==============  ==============  ============== 
NET LOSS PER COMMON SHARE (Note 2)               ($       .63)   ($       .88)   ($       .85) 
                                                ==============  ==============  ============== 
WEIGHTED AVERAGE NUMBER COMMON 
 SHARES OUTSTANDING (Note 2)                        7,576,260       4,792,932       3,392,434 
                                                ==============  ==============  ============== 
</TABLE>

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

                                F-4           
<PAGE>
                           PAPERCLIP SOFTWARE, INC. 
                 (FORMERLY PAPERCLIP IMAGING SOFTWARE, INC.) 
                 STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) 
             FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 

<TABLE>
<CAPTION>
                                               COMMON STOCK 
                                         ----------------------    ADDITIONAL 
                                            NUMBER        PAR        PAID-IN      SUBSCRIPTIONS       ACCUMULATED 
                                           OF SHARES     VALUE       CAPITAL       RECEIVABLE           DEFICIT 
                                         -----------  ---------  -------------  ---------------  ------------------- 
<S>                                      <C>          <C>        <C>            <C>              <C>                   
BALANCE, December 31, 1993                 1,286,604    $12,866    $ 5,078,339      $       0       ($  4,921,573) 
 Issuance of stock for cash in 
  private placement                          364,951      3,649      1,596,717              0                   0 
 Issuance of stock in lieu of cash 
  compensation                                17,526        175         90,825              0                   0 
 Issuance of stock in payment 
  of loans                                    81,662        817        294,183              0                   0 
 Issuance of stock for subscription 
  receivable, net                             30,768        308         99,692       (100,000)                  0 
 Conversion of note payable to 
  equity in January, 1995                          0          0         60,000              0                   0 
 Net loss for 1994                                 0          0              0              0          (2,887,622) 
                                         -----------  ---------  -------------  ---------------  ------------------- 
BALANCE, December 31, 1994                 1,781,511     17,815      7,219,756       (100,000)         (7,809,195) 
 Issuance of stock for note converted 
  to equity in 1994                           18,489        185           (185)             0                   0 
 Payment of stock subscription 
  receivable                                       0          0              0        100,000                   0 
 Issuance of stock and warrants 
  for cash in public offering              1,525,931     15,260      6,495,129              0                   0 
 Issuance of stock and warrants 
  for Bridge Note conversion in 
  public offering                            273,819      2,738      1,393,739              0                   0 
 Issuance of Bridge Warrants                       0          0        645,000              0                   0 
 Sale of underwriter of purchase 
  options                                          0          0            100              0                   0 
 Net loss for 1995                                 0          0              0              0          (4,236,970) 
                                         -----------  ---------  -------------  ---------------  ------------------- 
BALANCE, December 31, 1995                 3,599,750     35,998     15,753,539              0         (12,046,165) 
 Exercise of Bridge Warrants                 247,090      2,471        553,566              0                   0 
 2 for 1 stock split                       3,846,840     38,468        (38,468)             0                   0 
 Exercise of stock options                    28,508        285         33,338              0                   0 
 Net loss for 1996                                 0          0              0              0          (4,751,841) 
 Options granted at less than 
  fair value                                       0          0         60,420              0                   0 
                                         -----------  ---------  -------------  ---------------  ------------------- 
BALANCE, December 31, 1996                 7,722,188    $77,222    $16,362,395      $       0       ($ 16,798,006) 
                                         ===========  =========  =============  ===============  =================== 
</TABLE>

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

                                F-5           
<PAGE>
                           PAPERCLIP SOFTWARE, INC. 
     (FORMERLY PAPERCLIP IMAGING SOFTWARE, INC.) STATEMENTS OF CASH FLOWS 
             FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 

<TABLE>
<CAPTION>
                                                            1996            1995            1994 
                                                      --------------  --------------  -------------- 
<S>                                                   <C>             <C>             <C>
CAH FLOWS FROM OPERATING ACTIVITIES: 
 Net loss                                              ($ 4,751,841)   ($ 4,236,970)   ($ 2,887,622) 
 Adjustments to reconcile net loss to net cash used 
  in operating activities-- 
  Depreciation and amortization                             188,550         108,999          72,651 
  Expense recognized for options granted at less 
   than fair market value                                    60,420               0               0 
  Stock issued in lieu of cash compensation                       0               0          91,000 
  Issuance of Bridge Warrants                                     0         645,000               0 
  (Increase) decrease in accounts receivable, net            (8,503)       (142,214)         28,345 
  (Increase) decrease in prepaid expenses and other 
   current assets                                           (31,088)         (2,767)         14,500 
  (Increase) decrease in other assets                        (4,816)        (44,000)         15,074 
  Increase (decrease) in accounts payable and 
   accrued expenses                                         559,370        (474,056)        614,990 
  (Decrease) increase in deferred revenue                    (2,334)         58,400               0 
                                                      --------------  --------------  -------------- 
     Net cash used in operating activities               (3,990,242)     (4,087,608)     (2,051,062) 
                                                      --------------  --------------  -------------- 
CASH FLOWS FROM INVESTING ACTIVITIES-- 
 Purchases of equipment, furniture and fixtures            (123,704)       (203,849)        (62,693) 
                                                      --------------  --------------  -------------- 
CASH FLOWS FROM FINANCING ACTIVITIES: 
 Proceeds from issuance of stock and warrants for 
  cash in initial public offering, net of costs                   0       6,510,389               0 
 Proceeds from issuance of bridge notes                   2,365,000               0 
 Proceeds from sale of purchase warrants                          0             100               0 
 Repayment of bridge financing                                    0        (968,523)              0 
 Proceeds from borrowings from stockholders                       0               0         450,000 
 Proceeds from issuance of stock for cash                         0               0       1,600,365 
 Proceeds from exercise of bridge warrants                  556,037               0               0 
 Proceeds from exercise of stock options                     33,623               0               0 
 Proceeds from notes payable                                129,691               0          60,000 
 Proceeds from common stock subscriptions receivable              0         100,000               0 
 Payments on capitalized leases                             (45,841)        (33,859)              0 
 Payments of notes payable to stockholder                         0        (155,000)              0 
                                                      --------------  --------------  -------------- 
   Net cash provided by financing activities                673,510       7,818,107       2,110,365 
                                                      --------------  --------------  -------------- 
   Net (decrease) increase in cash                       (3,440,436)      3,526,650          (3,390) 
CASH AND CASH EQUIVALENTS, beginning of year              3,661,009         134,359         137,749 
                                                      --------------  --------------  -------------- 
CASH AND CASH EQUIVALENTS, end of year                  $   220,573     $ 3,661,009     $   134,359 
                                                      ==============  ==============  ============== 
</TABLE>

                                F-6           
<PAGE>
<TABLE>
<CAPTION>
                                                    1996       1995         1994 
                                                 --------  -----------  ---------- 
<S>                                              <C>       <C>          <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW 
 INFORMATION: 
Cash paid for interest                             $5,561   $  123,350    $      0 
                                                 ========  ===========  ========== 
SUPPLEMENTAL SCHEDULE OF NONCASH 
 FINANCING ACTIVITIES: 
  Common stock (81,661 shares in 1994) issued 
   to satisfy loans payable to stockholders 
   and in conversion of notes payable              $    0   $        0    $295,000 
  Assets acquired under capital lease 
   obligations                                          0      133,108           0 
  Issuance of stock in exchange of Bridge Notes         0    1,396,477           0 
                                                 ========  ===========  ========== 
</TABLE>

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

                                F-7           



<PAGE>




                           PAPERCLIP SOFTWARE, INC.

                  (FORMERLY PAPERCLIP IMAGING SOFTWARE, INC.)


                         NOTES TO FINANCIAL STATEMENTS



(1)    ORGANIZATION:

       PaperClip Software, Inc. (formerly PaperClip Imaging Software, Inc.)
       (the "Company"), a Delaware corporation, is engaged in the development
       and distribution of off-the-shelf computer software for document
       management and imaging systems. 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.

       During 1995, the Company completed an initial public offering (the IPO)
       of 1,799,750 shares of its common stock, and 1,799,750 redeemable Class
       A purchase warrants. The common stock and Class A warrants were
       purchased in pairs at $5.10 per pair but were separately transferable
       immediately after completion of the IPO.

       The Company's financial statements have been presented on the basis
       that is a going concern, which contemplates the realization of assets
       and the satisfaction of liabilities in the normal course of business.

       The Company is subject to the risks and difficulties encountered by any
       new business, including competition from existing companies offering
       the same or similar services, lack of financial resources and minimal
       previous record of operations, earnings or revenues. The Company has
       incurred losses from inception, has negative cash flows from operating
       activities and has signed a letter of intent for the potential sale of
       its assets (see Note 9). These factors raise substantial doubt about
       the ability of the Company to continue as a going concern. The
       financial statements do not include any adjustments relating to the
       recoverability and classification of recorded asset amounts or the
       amounts and classification of liabilities or any other adjustments that
       might result should the Company be unable to continue as a going
       concern.

(2)    SUMMARY OF SIGNIFICANT
       ACCOUNTING POLICIES:

       Use of Estimates in the
       Preparation of Financial Statements-

         The preparation of financial statements in conformity with generally
         accepted accounting principles requires management to make estimates
         and assumptions that affect the reported amounts of assets 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.


                                     F-8


<PAGE>





       Revenue Recognition-

         The Company generates revenues from licensing the rights to use its
         software products directly to distributors, resellers, original
         equipment manufacturers (OEM's), and end users.

         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. Under the license,
         the Company provides telephone support 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.

         Commencing in 1995, the Company offered post contract services, which
         included software version upgrades only, and consulting and training
         services related to installation and implementation of the Company's
         product. Total revenues from post contract services were not
         significant for 1996 and 1995. Revenues paid by the customer prior to
         performance of post contract services are deferred and recognized
         over the term of the post contract service agreement, usually one
         year. Deferred revenue included in the balance sheet at December 31,
         1996 and 1995 was $56,066 and $58,400, respectively.

       Cash and Cash Equivalents-

         Cash and cash equivalents consist primarily of cash at banks and
         investments with maturities of three months or less.

       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
         (five to seven years).

       Software Development Costs-

         Statement of Financial Accounting Standards No. 86 requires
         capitalization of software development cost from the time of
         establishment of technological feasibility for the computer software
         product until the time when the product is available for general
         release to customers. Management of the Company has determined that
         technological feasibility and availability for release are virtually
         simultaneous and, therefore, no development costs have been
         capitalized in the accompanying financial statements.

       Long-Lived Assets-

         During 1995, the Company adopted the provisions of Statement of
         Financial Accounting Standards No. 121, "Accounting for the
         Impairment of Long-Lived Assets" ("SFAS 121"). SFAS 121 requires,
         among other things, that an entity review its long-lived assets and
         certain related intangibles for impairment whenever changes in
         circumstances indicate that the carrying amount of an asset may not
         be fully recoverable. As a result of its review, the Company does not
         believe that any impairment currently exists related to its
         long-lived assets.


                                     F-9



<PAGE>





       Accounting for Stock-Based Compensation-

       The Company has adopted Statement of Financial Accounting Standards No.
       123, "Accounting for Stock-Based Compensation" (SFAS 123). The adoption
       of this pronouncement had no impact on the Company's financial
       condition or results of operations, however, additional disclosures
       have been included in the financial statements (see Note 7).

       Federal Income Taxes-

         The Financial Accounting Standards Board issued Statement 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.

         At December 31, 1996, the Company had net Federal operating loss
         carryforwards (NOL) of approximately $16,182,000 which expire at
         various dates through 2011. Due to losses sustained by the Company,
         management was unable to determine that realization of the deferred
         tax asset was more likely than not and, thus, has provided a full
         valuation allowance. As a result of a change in control resulting
         from the Company's IPO (see Note 5) or which may result upon the sale
         of the Company, the Company's NOL that would be available to offset
         future taxable income may be subject to annual limitations.

       Net Loss Per Common Share-

         Net loss per common share is computed based upon the weighted average
         number of common shares and common share equivalents outstanding if
         dilutive during each year. Shares issuable upon exercise of warrants
         related to the April 5, 1995 Bridge Financing have been included in
         the computation of net loss per share for all periods prior to the
         IPO (see Note 3). All per share amounts have been retroactively
         adjusted for the two-for-one common stock split on May 31, 1996. On
         June 12, 1996, there was a two-for-one split of the Company's
         warrants.

         In March 1997, the Financial Accounting Standards Board issued
         Statement of Financial Accounting Standards No. 128, "Earnings per
         Share" which makes certain changes to the manner in which earnings
         per share is reported. The Company is required to adopt this standard
         for the year ended December 31, 1997. The adoption of this standard
         will require restatement of prior years' earnings per share if the
         impact is material.

(3)      DEBT:

       On April 5, 1995, the Company consummated a bridge financing in which
       the Company issued notes (the Bridge Notes) in the aggregate principal
       amount of $2,365,000 and 430,000 warrants (the Bridge Warrants) to
       acquire an aggregate of 430,000 shares of common stock at an exercise
       price equal to the IPO price for the common stock less $2.75. The
       Bridge Warrants are exercisable for five years from the date of
       issuance. In connection with the IPO, $1,396,477 of the Bridge Notes
       were converted for 273,819 shares of common stock and related warrants
       (see Note 5). The balance of the principal amount of the Bridge Notes
       and related interest were repaid with proceeds from the IPO. During
       1996, 247,090 Bridge Warrants were exercised. At December 31, 1996,
       182,910 (365,820 post split - see Note 2) Bridge Warrants were
       outstanding. The $645,000 difference between the exercise price of the
       Bridge Warrants and the $3.75 estimated fair value of the common stock
       at the date of the bridge financing has been charged to interest
       expense and a credit to be paid in capital in 1995.

                                     F-10


<PAGE>




       The Bridge Notes bore interest at the rate of 9% per annum, and
       additional costs associated with their issuance of $307,450 are
       reflected in interest expense and financing costs in the 1995 statement
       of operations.

       During 1996, the Company issued $129,691 of Convertible Notes (the
       Notes) to certain shareholders of the Company. The Notes bear interest
       at 12% per annum and are convertible into common stock at a rate of
       $.30 per share. The Notes mature in December, 1999. The Notes become
       due upon the occurrence of certain events of default, as defined.

(4)    COMMITMENTS AND CONTINGENCIES:

       William Weiss, Chief Executive Officer and Sol Rosenberg, President
       have each entered into an employment agreement with the Company for a
       term ending December 31, 1998. In accordance with their respective
       contracts, each of Messrs. Weiss and Rosenberg is entitled to $120,000
       per annum. Messrs. Weiss and Rosenberg's annual compensation will be
       increased to $150,000 per annum after the end of the first fiscal year
       in which the Company is profitable. In addition, Mr. Rosenberg's
       contract provides for a severance payment not to exceed $120,000 and
       requires the Company to purchase and maintain disability insurance for
       his benefit.

       The Company leases its office spaces under a noncancellable operating
       lease. Future minimum rental payments required under this lease are
       $119,000, $36,000 and $15,000 for 1997, 1998 and 1999, respectively. In
       addition, the Company leases office furniture under a capital lease
       agreement requiring principal payments of $49,000 and $4,000 in 1997
       and 1998, respectively. Rent expense was approximately $119,000,
       $120,000 and $122,000 for the years ended December 31, 1996, 1995 and
       1994, respectively.

       In the last quarter of 1995, the Company purchased from Cheyenne, for
       $100,000, the NOSS product line, which the Company had previously been
       licensing from Cheyenne. Cheyenne also granted to the Company a
       nonexclusive, perpetual, irrevocable, nontransferable, worldwide,
       royalty free license with respect to certain other software the Company
       had previously been licensing from Cheyenne. Prior to the purchase, the
       Company had paid Cheyenne in excess of $300,000 in royalties. In
       January, 1996, the parties further agreed that Cheyenne will forward to
       the Company all orders received by Cheyenne for the NOSS products and
       will be paid a commission of 15% with respect to each such order.

(5)    STOCKHOLDERS' EQUITY (DEFICIT):

       On February 17, 1994, the Company issued 264,367 shares of common stock
       to qualified investors at $5.19 per share. Net cash proceeds from the
       offering were $1,178,640. As part of the offering, 32,934 shares were
       issued to existing stockholders in repayment of loans of $80,000 and in
       lieu of cash compensation of $91,000.

       During 1994, the Company obtained an advance of $60,000 for working
       capital purposes from First Albany Corporation. In January, 1995, the
       Company issued 18,489 shares to First Albany at $3.25 per share in
       settlement of the above advance.


                                     F-11


<PAGE>








       In addition, the Company issued 30,768 shares of common stock prior to
       December 31, 1994, the payment of which was received in 1995.

       On December 30, 1994, the Company issued 133,518 shares of common stock
       to qualified investors at $3.25 per share. Net cash proceeds from the
       offering were $421,725. As part of the offering, 66,254 shares at $3.25
       per share were issued to existing stockholders in repayment of loans of
       $215,000.

       In September, 1995, the Company completed an initial public offering
       (the IPO) of 1,799,750 shares of its common stock, and 1,799,750
       redeemable Class A purchase warrants (Class A warrants) including
       shares issued on conversion of Bridge Warrants (see Note 3). The common
       stock and Class A warrants were purchased in pairs at $5.10 per pair
       but were separately transferable immediately after completion of the
       IPO. Cash proceeds from the IPO were $6,510,389, net of expenses of
       $1,271,859.

       The Company granted to the underwriter of the IPO a five year option to
       purchase up to ten percent (10%) of: (i) the number of shares of common
       stock sold in the IPO (the Stock Purchase Option), at a price of $6.75
       per share; and (ii) the number of Class A Warrants sold in the IPO (the
       Warrant Purchase Option), at a price of $0.135 per Class A Warrant. The
       Stock Purchase Option and the Warrant Purchase Option are collectively
       referred to as the "Purchase Options." The Purchase Options may be
       separately and independently exercised.

(6)    MAJOR CUSTOMERS:

       The Company sells its products primarily through mass distributors and
       approximately 200 independent Value Added Resellers ("VARS"). The VARS
       sell and install these products at end user sites. Sales to one major
       customer for the year ended December 31, 1996 was approximately 15%.
       Sales to four major customers for the year ended December 1995 were
       approximately 10%, 11%, 15% and 20% . Sales to two major customers for
       the year ended December 31, 1994 were 25% and 14%.

(7)    STOCK OPTION PLAN:

       1993 Stock Option Plan-

         The Company adopted a stock option plan (the "1993 Stock Option
         Plan"), effective March 8, 1993, covering 58,126 shares of the
         Company's common stock, pursuant to which employees of the Company
         are eligible to receive incentive stock options. The 1993 Stock
         Option Plan, which expires in 2003, is administered by the Board of
         Directors. The selection of participants, allotment of shares,
         determination of price and other conditions of purchase of options is
         determined by the Board of Directors. Incentive stock options granted
         under the Plan are exercisable for a period of up to ten years from
         the date of the grant. The options vest as follows: 25% in year 1,
         30% in year 2, and 45% in year 3.


                                     F-12


<PAGE>







     Stock option transactions for the 1993 Stock Option Plan are summarized
as follows-


                                             Year Ended December 31
                                ------------------------------------------
                                           Exercise               Exercise     
                                   1996      Price      1995       Price       
                                --------   --------   -------    ---------    
Outstanding, beginning of year   58,126      $2.60    58,126       $2.60     
Granted                               0       0.00         0        0.00      
Exercised                             0       0.00         0        0.00      
Canceled or expired             (24,939)      2.60         0        0.00
                                --------   --------   -------    ---------    
Outstanding, end of year         33,187      $2.60    58,126       $2.60
                                ========   ========   =======    ========= 

       As of December 31, 1996, all of the options outstanding under the 1993
       Stock Option Plan were exercisable at $2.60 per share.

       1995 Stock Option Plan-

         In May, 1995 the Company adopted a stock option plan (the "1995 Stock
         Option Plan") covering 1,000,000 shares of common stock, pursuant to
         which officers, directors and employees of the Company and certain
         other persons conferring benefit upon the Company will be eligible to
         receive stock options. The 1995 Stock Option Plan, which expires on
         March 1, 2005, is administered by the Board of Directors. The
         selection of participants, allotment of shares, determination of
         price, vesting and other conditions of purchase of options is
         determined by the Board of Directors. Stock options granted under the
         Plan are exercisable for a period of up to 10 years from the date of
         grant.

         Stock option transactions for the 1995 Stock Option Plan are 
         summarized as follows-

                                             Year Ended December 31
                                ------------------------------------------
                                            Exercise               Exercise    
                                   1996       Price      1995       Price      
                                --------    --------   -------    ---------   
Outstanding, beginning of year   140,200  $1.13-$2.50        0     $0        
Granted                          370,342  $.05-$2.50   140,200     $1.13-2.50
Exercised                        (28,508) $1.13-$2.55        0     $0        
Canceled or expired              (14,600) $1.13              0     $0
                                --------    --------   -------    ---------   
Outstanding, end of year         467,434  $.05-$2.50   140,200     $1.13-$2.50


       During 1996, 50,000 options were granted to three employees at less
       than fair market value. The difference of $60,420 between the exercise
       price and the fair market value of the Company's stock on the grant
       date has been charged to operations with a corresponding credit to
       additional paid in capital. Certain of the options vest as follows: 33%
       in 1995, 66% in 1996 and 100% in 1997. As of December 31, 1996, 200,519
       options were exercisable at prices ranging from $.05 to $2.50 per
       share.


                                     F-13

<PAGE>





       Effective January 1, 1996, the Company adopted the provisions of SFAS
       123, "Accounting for Stock-Based Compensation." As permitted by the
       statement, the Company has chosen to continue to account for
       stock-based compensation using the intrinsic value method. Had the fair
       value method of accounting been applied to the Company's stock option
       plans, which requires recognition of compensation cost ratably over the
       vesting period of the underlying equity instruments, the net loss would
       have been increased by approximately $88,000 with a $.01 per share
       effect in 1996 and approximately $32,000 with $.01 per share effect in
       1995. This pro forma impact only takes into account options granted
       since January 1, 1995 and is likely to increase in future years as
       additional options are granted and amortized ratably over the vesting
       period. The average fair value of options granted during 1996 and 1995
       was $1.33 and $1.13, respectively.

       The fair value was estimated using the Black-Scholes option-pricing
       model based on the weighted average market price at grant date of $1.89
       in 1996 and $1.87 in 1995 and the following weighted average
       assumptions; risk-free interest rate of 7.5% in 1996 and 1995,
       volatility of 75% for 1996 and 1995, and dividend yield of 0% for 1996
       and 1995.

(8)    EXPORT SALES:

       Export sales were approximately 18.6%, 21.3% and 16.5% of the Company's
       net sales for the years ended December 1996, 1995 and 1994,
       respectively.

(9)    SUBSEQUENT EVENT:

       On January 2, 1997, the Company signed a letter of intent with Access
       Solutions International Inc. (Access) for the sale of the Company's
       assets and assumption of certain liabilities by Access for
       approximately $5.8 million. The purchase price would be paid by the
       issuance of approximately 1,544,000 shares of Access' common stock plus
       an equivalent number of Access Class B Warrants. Each warrant would
       entitle the holder to purchase one share of Access common stock at an
       exercise price of $6.00 per share. The parties are currently
       negotiating a definitive purchase agreement. In addition, on January
       29, 1997, Access advanced $300,000 to the Company and the Company
       signed a convertible promissory note maturing on January 27, 1998. The
       promissory note bears interest at 12% and is convertible into common
       stock of the Company at $.25 per share at the option of Access.


                                     F-14


<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, thereunto duly authorized.


PAPERCLIP SOFTWARE, INC.
------------------------


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


Date:     April 14, 1997


         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.

<TABLE>
<CAPTION>

Signature                                 Title                                    Date
---------                                 -----                                    ----
<S>                          <C>                                               <C>


/s/ William Weiss
-----------------------
William Weiss                  Director, Chief Executive Officer                 April 14, 1997
                                         (Principal Executive Financial and
                                         and Accounting Officer)




/s/ Sol Rosenberg
-----------------------
Sol Rosenberg                   President, Director                              April 14, 1997



/s/ Michael Suleski
-----------------------
Michael Suleski                 Director, Vice President, Secretary              April 14, 1997

</TABLE>


                                       31


<PAGE>



                                 EXHIBIT INDEX

<TABLE>
<CAPTION>

<S>               <C>                                                                      
3.1               Certificate of Incorporation of Registrant, as amended.
3.2               By-Laws of Registrant, as amended. (1)
3.3               Registrant's Authorization to do Business in New Jersey. (1)
3.4               Registrant's Authorization to do Business in California. (1)
3.5               Form of Common Stock Certificate. (1)
4.2               Class A Warrant Agreement (including form of Class A Warrant) among the
                  Registrant, A.R. Baron & Co., Inc. ("Baron") and American Stock Transfer &
                  Trust Company.(1)
4.3               Stock Purchase Option, dated September 27, 1995, granted to Baron.(1) 
4.4               Warrant Purchase Option, dated September 27, 1995, granted to Baron.(1) 
4.5               Form of Investor Purchaser Agreement, dated as of April 5, 1995, by and
                  between the Registrant and the Investors identified in the Schedule of Investors
                  attached thereto, and amendment thereto, dated March 29, 1995. (1)
4.6               Form of Bridge Note issued on April 5, 1995, to each Investor identified on the
                  Schedule of Investors included with Exhibit 4.5. (1)
4.7               Form of Bridge Warrant dated April 5, 1995, given to each Investor identified on
                  the Schedule of Investors included with Exhibit 4.5. (1)
10.1              Employment Agreement, dated as of May 1, 1995, between the Registrant and
                  William Weiss. (1)
10.2              Employment Agreement, dated as of May 1, 1995, between the Registrant and
                  Sol Rosenberg. (1)
10.3              Employment Agreement, dated as of May 1, 1995, between the Registrant and
                  Helaine Fischer. (1)
10.4              Employment Agreement, dated as of December 1, 1992, between the Registrant
                  and Michael Suleski. (1)
10.5              Employment Agreement, dated as of June 17, 1996, between the Registrant and
                  David Valentino
10.6              1993 Stock Option Plan. (1)
10.7              1995 Stock Option Plan, as amended
10.8              Development License Agreement with Decomp, dated May 25, 1993. (1)
10.9              License Agreement with Decomp, dated June 3, 1993. (1)
10.10             License Agreement with Ligature, Ltd., dated August 18, 1994. (1)
10.11             License Agreement with Pixel Translations, Inc., dated May 16, 1995. (1)
10.12             Distributor Agreement with Law Cypress Distributing Company. dated as of
                  March 18,1993 (incorporated by reference from Exhibit 10.16
                  of the Registrant's Form 10-KSB for the fiscal year ended
                  December 31, 1995).
10.13             Distribution Agreement with Tech Data Corporation, dated June 16, 1993. (1)





                                       32

<PAGE>



10.14             Form of End User License. (1)
10.15             Corporate License Agreement with Tenaga Nasional Berhard, dated January
                  1995. (1)
10.16             Development Agreement with DCL Systems International, Ltd., dated June 1,
                  1994. (1)
10.17             Sublease by and between the Registrant and Ram Mobile Data U.S.A. Limited
                  Partnership, dated as of April 20,1995, for the Registrant's headquarters. (1)
10.18             Software Bundle Agreement with Fujitsu U.K. Limited, dated as of June l, 1995.  (1)
10.19             Lease by and between the Registrant and Lillipont Investment Co. dba Dupont Palm Court,
                  executed April 24, 1996, for Registrant's California Sales Office.
10.20             Merger and Acquisition Agreement between the Registrant and Baron, dated
                  September  27, 1995.  (1)
10.21             Consulting Agreement with Stephen Kornfeld, dated as of January 1, 1996
                  (incorporated by reference from Exhibit 10.27 of the Registrant's Form
                  10-KSB for the fiscal year ended December 31, 1995).
10.22             (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.
10.23             Software License Agreement with InText Systems, dated as of June 30,
                  1996.
10.24             Distributor License  Agreement with Pesaniaga SDN BHD,
                  dated as of November 10, 1994.
10.25             Distributor License Agreement with Digital Document Systems, dated
                  July 1, 1996.
10.26             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).
10.27             (a) Letter of Intent with Access Solutions International, Inc. ("Access
                  Solutions"), dated January 2, 1997.
                  (b) Letter Agreement with Access Solutions, amending the Letter of Intent,
                  dated January 31, 1997.
                  (c) Letter Agreement with Access Solutions, amending the Letter of Intent,
                  dated February 28, 1997.
                  (d) Letter Agreement with Access Solutions, amending the Letter of Intent,





                                       33

<PAGE>


                  dated March 31, 1997.
                  (e) Convertible Promissory note issued by the Registrant to Access
                  Solutions, dated January 29, 1997.
                  (f) Security Agreement with Access Solutions, dated January 29, 1997.
                  Registration Rights Agreement with Access Solutions, dated January
                  29, 1997.

21.1              List of subsidiaries of Registrant. (1)
                  ----------------------------
                  (1)      Incorporated by reference from the Registrant's Registration Statement on
                           Form SB-2 (File No. 33-92768NY).


</TABLE>





























                                       34