SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                  FORM 10-KSB

         [X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                  THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)

                  For the fiscal year ended December 31, 1996

                                       OR

         [   ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                  THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

          For the transition period from _____________ to ____________

Commission File Number:  1-12536

                      PACIFIC ANIMATED IMAGING CORPORATION
             ------------------------------------------------------
             (Exact name of Registrant as specified in its charter)

     Delaware                                                11-2964894
-------------------------------                          --------------------
(State or other jurisdiction of                           (I.R.S. Employer
incorporation or organization)                           Identification  No.)

326 First Street, Suite 100
Annapolis, Maryland                                               21403
------------------------------------                              -----
(Address of principal executive offices)                        (Zip Code)

Registrant's telephone number,
including area code:                                        (410) 263-7761

Securities registered pursuant to Section 12(b) of the Act:  Common Stock,
  $.0001 par value
--------------------------------------------------------------------------------
Securities registered pursuant to Section 12(g) of the Act:  None

                                (Title of Class)

         Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
Registrant  was required to file 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 Regulations S-K (ss.229.405 of this chapter) 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. [X]

         As of March 25, 1997 the  aggregate  market  value of the voting  stock
held by non-affiliates,  approximately  1,589,000 shares of Common Stock, $.0001
par value,  was  approximately  $20,856,000  based on the closing sales price of
$13.125  for one share of Common  Stock on the  Nasdaq  Small Cap Market on such
date. The number of shares  outstanding of the Registrant's  Common Stock, as of
March 25, 1997 was 1,633,839.

         Documents  incorporated  by  reference:  Portions  of the  Registrant's
definitive Proxy Statement regarding its 1997 Annual Meeting of Stockholders are
incorporated by reference in Part III of this Report.


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                                     PART I

Item 1. Description of Business.

General

       The Company is a full service  provider of technology based solutions and
computer  systems  integration  and  support  services,  including  the  sale of
hardware and software  products,  specializing  in the  development  of software
applications  related to work group and work flow computing solutions and custom
interactive  multimedia software.  The Company's systems integration division is
comprised of the business of U.S.  Technologies,  Inc.  ("UST"),  a wholly owned
subsidiary,  which the  Company  acquired in July 1996.  UST is a Lotus  Premium
Business Partner that develops  software  applications used in conjunction with,
and provides  services related to the use of Lotus Notes(R) and Domino(TM),  and
an IBM Industry Remarketer of AS/400(R) and RS/6000(R)  midrange computers.  The
Company's multimedia division develops and markets custom interactive multimedia
software  used to  deliver  electronic  performance  support  systems,  employee
training, sales and marketing presentations,  and corporate communications.  For
the year ended December 31, 1996, approximately 60% of the Company's revenue was
attributable  to six months of  operations of the systems  integration  division
following the acquisition of UST and 40% to the multimedia division.  References
to the "Company" herein refer to Pacific  Animated  Imaging  Corporation and its
subsidiaries.

Systems Integration Services

       As the result of its  acquisition  of UST in July 1996,  the Company is a
full-service  provider of computer  systems  integration  and support  services,
including  the sale of hardware and software  products  and the  development  of
software  applications for and providing services related to work group and work
flow computing solutions.  UST is a Lotus Premium Business Partner that develops
software applications used in conjunction with, and provides services related to
the use of Lotus  Notes(R) and  Domino(TM),  and an IBM Industry  Remarketer  of
AS/400(R) and RS/6000(R) midrange computers.  Approximately 57% of the Company's
revenues  for the year ended  December  31,  1996 was  attributable  to sales of
systems  integration  and  support  services  provided  in  connection  with the
implementation of Lotus Notes(R) and  Domino(TM)-related  products following the
acquisition of UST.  Management believes that UST is one of only approximately a
dozen  companies  that is  both a  Lotus  Premium  Business  Partner  and an IBM
Industry  Remarketer,  and that the combination of  capabilities  resulting from
such  alliances  will  enable the  Company  to  effectively  market its  systems
integration and support services.

       Full-Service  Systems  Integration.  UST is a  full-service  provider  of
computer systems  integration and support services.  Such services include needs
analysis,  network design,  equipment  specification,  project planning with the
customer,   acquisition  and  installation  of  computers  and  other  equipment
(including  configuration of the server, or shared computer,  and workstations),
wiring   installation,   integration  of  network  components,   development  of
customized  systems and software  applications,  data  conversion and migration,
testing,   documentation,    administrative   and   end   user   training,   and
post-installation support services.

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       Lotus  Premium  Business  Partner.  Lotus  Notes(R)  and  Domino(TM)  are
proprietary  groupware  and  messaging  software  products  developed  by  Lotus
Development Corporation that enables users to communicate and collaborate over a
local area  network or  telecommunications  link and access  documents  and data
residing on a shared  computer,  or server.  As of December 31, 1996, there were
approximately 9.5 million users of Lotus Notes(R)/Domino(TM) products worldwide.
In 1996,  UST began  marketing  Domino(TM),  Lotus and IBM's next  generation of
groupware  products,  and has  successfully  implemented  this  state-of-the-art
technology for several customers.

       As a Lotus  Premium  Business  Partner,  UST  develops a wide  variety of
custom   software   applications    expanding   the   applicability   of   Lotus
Notes(R)/Domino(TM)  to a particular  customer's  needs.  Such applications have
included numerous project,  time, sales, and database  management  applications.
For example,  UST recently has developed a sales force  automation  system for a
publisher and distributor of secondary  education products and a quality control
application  for an  international  manufacturer  of  consumer  goods.  UST also
provides  a  full   complement   of  services   related  to  the  use  of  Lotus
Notes(R)/Domino(TM),   including  the  integration,   design,   development  and
installation of computer systems,  intranet and Internet services, and education
and support services.

       UST has been a Lotus Premium Business Partner since December 1994. Of the
more than 12,000 Lotus Business Partners worldwide,  less than 10% have achieved
premium  status.  Such status has been conferred  upon UST by Lotus  Development
Corporation,   based  upon  UST's  deployment,   or  implementation,   of  Lotus
Notes(R)/Domino(TM)  software and related services,  and the number of qualified
Lotus  Notes(R)/Domino(TM)  software  developers  and  instructors  the  Company
employs.  As a result of UST's  premium  status,  UST receives  leads from Lotus
Development  Corporation  and IBM for companies  located in the same  geographic
area  as  UST   that   desire   products   and   services   related   to   Lotus
Notes(R)/Domino(TM).  Management  estimates  that such  referrals  accounted for
approximately  39% of the  Company's  revenues  for the year ended  December 31,
1996.

       UST's  status as a Premium  Business  Partner  is  reviewed  on an annual
basis,  and is subject to  termination by Lotus  Development  Corporation at any
time. UST has been able to satisfy the  requirements for maintaining such status
for the last two years and management  believes that the Company's  relationship
with Lotus Development  Corporation is good. Although UST intends to continue to
satisfy such requirements,  there can be no assurance that it will be able to do
so. Termination of UST's status as a Lotus Premium Business Partner could have a
material adverse effect on UST's and the Company's results of operations.

       IBM Industry  Remarketer.  In November  1996,  UST became an IBM Industry
Remarketer  for  the  AS/400(R)  and  RS/6000(R)  midrange  computers.  Midrange
computers generally are the most powerful computers frequently used by mid-sized
companies  (companies  with  annual  sales of $25 to $250  million).  Management
believes that approximately 40,000 AS/400(R)'s and 50,000 RS/6000(R)'s were sold
worldwide during 1996.

       During the fourth  quarter of 1996,  UST entered into an  agreement  with
Support Net, Inc., IBM's largest Managing Industry Remarketer,  that enables UST
to sell the AS/400(R) and

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RS/6000(R) midrange computers on a non-exclusive basis to end users of those
computers  located in the United States.  UST often sells such computers
together with a variety of value-added services which may include Lotus
Notes(R)/Domino(TM) products and services. Because of the existence of the
agreement,  Support Net and IBM may refer companies  located in the Southeastern
United  States  to  UST  to  obtain  their  AS/400(R)  and  RS/6000(R)  midrange
computers.  Due to the timing of the  agreements  with IBM and Support  Net, one
sale for approximately $80,000 was made during the year ended December 31, 1996.

       Support Net may terminate the agreement  with UST for any reason on three
months' notice, and may terminate it for cause at any time.  Management believes
that in order to remain in good  standing  with  Support  Net, UST must order an
average of at least $250,000 of computers annually. Although management believes
that UST's  relationship with Support Net is good and that UST's computer orders
will meet Support Net's expectations, there can be no assurance that Support Net
will not  terminate the  agreement.  Termination  of the agreement  could have a
material adverse effect on UST's and the Company's results of operations.

       For the year ended December 31, 1996,  approximately 13% of the Company's
revenue was attributable to the sale of miscellaneous hardware by UST other than
AS/400(R) and RS/6000(R) midrange computers following the acquisition of UST.

       LAUNCH for Lotus Notes(R) on AS/400(R). UST recently released a companion
product for Lotus Notes(R) marketed under the name LAUNCH for Notes. LAUNCH is a
combination of powerful,  user-friendly  software and  customized  services that
enables  AS/400(R)  systems  professionals  to rapidly develop and install Lotus
Notes(R)/Domino(TM)  applications  for their  businesses.  The list price of the
LAUNCH  package is $24,995,  and it consists of three  components:  utilities to
enable  users to move  data  to/from  a  non-Notes(TM)  based  system  to/from a
Notes(TM) based system, applications templates, and customized services.

       The  utilities  include four  software  products  developed by others for
which   UST  has   acquired   exclusive   marketing   rights:   infoENABLER(TM),
infoCOORDINATOR(TM),  infoDISTRIBUTOR(TM), and infoCOURIER(TM).  infoENABLER(TM)
provides automatic mapping of host system database  specifications  into a Lotus
Notes(R)  form;   infoCOORDINATOR(TM)   allows  the  exchange  of  data  between
Notes(TM)-based    and     non-Notes(TM)-based     host    systems    databases;
infoDISTRIBUTOR(TM) pulls database reports into Notes(TM) where users easily can
run key word  searches  to locate  important  information;  and  infoCOURIER(TM)
provides intelligent search tools that search Notes(TM) and other databases,  as
well as the Internet.  The application  templates consists of five popular Lotus
Notes(R)/Domino(TM)  application  modules developed by other companies for which
UST has  acquired  nonexclusive  marketing  rights,  which  may be used  without
modification  or tailored  for  specific  business  needs.  The LAUNCH  services
include one week of customized education and training.

       Development  and  Services.  At the  outset of each  systems  integration
project,  UST  provides  each of its  customers  with a  statement  of work that
details the products and services that UST will provide, sets forth a good faith
estimate  of the  amount  UST will  charge,  and  provides  a work  and  payment
schedule.  The payment  schedule  varies from customer to customer,  but usually

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includes some form of up-front  payment and either weekly or monthly payments or
payments  based upon the  completion  of phases of the  project.  UST  generally
charges an  aggregate of $10,000 to $250,000  for systems  integration  services
(including the purchase of hardware) and the amount of time required to complete
such  services  ranges from  several days to a year.  Post-installation  support
services are billed separately, usually on an hourly basis.

       Each customer is required to provide UST with a purchase order reflecting
the estimated  charges and payment  schedule set forth in the statement of work,
and invoices  periodically  are submitted by UST against the purchase order. Any
changes to the  project  that will result in charges  that  exceed the  purchase
order amount are submitted to the customer for approval prior to  implementation
and documented by modifying the purchase  order.  To date,  the amount  actually
charged with respect to projects  undertaken  by UST  generally  has been within
five  percent  of the  amount  estimated.  UST  generally  has  not  experienced
difficulty  completing  projects  according  to the  schedules  set forth in its
statements of work.

       Because of the  extensive  testing  and  evaluation  procedures  that are
undertaken  in  conjunction  with its  customers  with respect to the  Company's
systems  integration  services,  the Company  does not provide  warranties  with
respect to such  services.  Lotus  Development  Corporation  and IBM, as well as
other  equipment  manufacturers,  provide the Company's  customers  with limited
warranties on their products.

Custom Multimedia Software

       The Company's multimedia division develops and markets custom interactive
multimedia  software used to deliver  electronic  performance  support  systems,
employee   training,   sales  and   marketing   presentations,   and   corporate
communications.  Its  software  products  utilize  state-of-the-art  interactive
computer animation, full-motion video and audio communications,  color graphics,
and  text  and  hypertext  to  provide  vivid  and  effective   instruction  and
information.  The Company's products are available for use on multiple platforms
including Windows,  Macintosh,  DOS and other proprietary  operating systems and
can be delivered  using various mediums  including  CD-Rom and via intranets and
the Internet.

       Electronic  Performance  Support  Systems  ("EPSS").  The Company's  EPSS
software   enables   users  to  perform   better  at  their  jobs  by  providing
computer-based support that is integrated into a workstation or work environment
and  acts  as a  combination  coach/trainer/job  aid/reference.  EPSS  increases
employee  productivity  by providing  needed  information  and training when and
where it is  needed - and in an amount  and  format  that is more  useful to the
user.

       Employee  Training.  The  Company's  training  software   (computer-based
training,  or "CBT")  provides an  interactive  learning  experience to instruct
employees  to use complex  equipment  or to  understand  complicated  industrial
processes by simulating  operation and  production  procedures.  These  products
typically replace or supplement  technical  manuals and operating  documentation
and provide interactive  self-paced  training.  They often incorporate  cut-away
views of  equipment  that  would be  difficult  or  impossible  to  display in a
real-world  setting

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and enable users to learn complex  processes by viewing them in real or lapsed
time or in slow motion.  Management  believes that CBT enables users to master
skills and retain  information more effectively that traditional instructor-led
training.  Recent  technological  developments  and  advances in computer
network technology enable the Company to deliver CBT via the World Wide Web,
which is known as Web-based training.

       Sales and Marketing.  The Company's sales and marketing  software enables
manufacturers  and  distributors  to  demonstrate  their  products to  potential
customers  at  trade  shows or in  kiosks.  This  software  enhances  sales  and
marketing presentations by encouraging customer participation through the use of
interactive  product  demonstrations.  In  addition,  the Company has  developed
software   enabling   distributors  to  better  understand  the  markets  for  a
manufacturer's products.

       Corporate  Communications.  The Company  also markets  custom  multimedia
software  and services  for  internal  and  external  corporate  communications.
Internal  corporate  communications  products  developed by the Company  include
software used to disseminate  corporate  policies and procedures and information
about products and services in a comprehensive and  cost-effective  manner.  The
Company also develops  software that delivers lively and compelling  messages to
large  groups of  employees  in  disparate  locations.  The  Company's  external
corporate  communications  business,  marketed  under the name  NetCommerce(TM),
primarily  involves the development and upgrade of Internet World Wide Web sites
for its customers.  These services include  designing  innovative  marketing and
advertising  tools and digital  catalogs,  efficient  inventory  databases,  and
secure payment  processing  procedures  for web sites.  The Company also designs
interactive sites that provide customers with demographic,  tracking,  and other
information regarding web site visitors.

       Turn-key  Services and Generic  Software.  The Company recently has begun
providing   turn-key   multimedia  manual  services,   known  as  TechShelf(TM).
TechShelf(TM)  services convert  customers  manuals,  reference guides, or other
technical materials into interactive multimedia software,  including full-motion
video,  audio,  animation  and  interaction,  at a  relatively  low cost using a
browser shell developed by the Company.

       The Company may develop other generic and off-the-shelf  products derived
from its custom  software  when it is believed  that there is a market and it is
technologically  feasible.  The  Company  has  discontinued  efforts  to  market
off-the-shelf  software  developed by others,  except for those products sold by
UST as described under "Systems Integration Services."

       Development  and  Services.  Custom  multimedia  services  include  needs
analysis, design specification and product development. Needs analysis typically
takes from three to ten days and the charges for such services range from $5,000
to $15,000.  The design phase lasts from four to six weeks,  and the charges for
such  services  range from  $20,000 to  $40,000.  The time  required to complete
product  development can range anywhere from one month to several years, and the
charges for such services range from $10,000 to $1 million.

       At the outset of each project, the Company provides each of its customers
with a  statement  of work that  details  the  services  that the  Company  will
provide, sets forth the amount that the

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Company will charge, and provides a work and payment schedule.  Any changes to
the project that will result in additional charges are  submitted  to the
customer  for  approval  prior to  providing  the services.  The payment
schedule  varies from customer to customer,  but usually includes  some form of
up-front  payment and  progress  payments  based upon the completion of phases
of the project.  To date,  the Company has not  experienced any  significant
difficulties  in delivering  its custom  software  products to customers in
accordance with schedules.

       The Company's  contracts with respect to its custom  multimedia  software
products include an express warranty which usually terminates upon acceptance of
the software by the customer.  However,  the Company  generally will service the
software to ensure that it performs as set forth in the statements of work for a
one-year  period.  Because of the extensive  testing and  evaluation  procedures
performed  in  conjunction  with the  customer  that are  undertaken  during the
development  process, to date, servicing cost after customer acceptance has been
insignificant.  Post-development  support  services are available and are billed
separately, usually on an hourly basis.

Customers and Backlog

       Systems  integration  services customers are generally mid-size and large
companies  that have or require at least 50 individual  computers to be attached
to a network. These customers represent a wide variety of industries and service
organizations.  While  a  substantial  percentage  of  the  systems  integration
revenues  historically  has been generated by customers  located within Florida,
where UST is located,  management anticipates that this percentage will decrease
in the future as the Company  markets  UST's  products and services to customers
located outside of the state, including to the Company's multimedia customers.

       The  Company's  custom  multimedia  customers   traditionally  have  been
comprised  primarily  of large  manufacturers  who must train  employees  to use
complex equipment or understand complicated industrial processes. Such customers
have  represented  a  broad  range  of  industries,  including  the  automotive,
packaging, electronics,  pharmaceutical, beverage bottling, and fitness and food
manufacturing  industries, as well as government agencies located throughout the
United States.

       During fiscal 1996, one customer,  Data Systems International,  accounted
for  approximately  10% of the  Company's  revenue.  During  fiscal 1995,  three
customers,  Bell & Howell, TRW, Inc. ("TRW"),  and Mack Trucks,  Inc., accounted
for approximately  17%, 17%, and 13%,  respectively,  of the Company's  revenue.
During  fiscal  1994,  three  customers,  Dowbrands,  Heath  Company,  and  Mead
Packaging (a division of Mead  Corporation),  accounted for  approximately  23%,
11%, and 10%, respectively, of the Company's revenue.

       The Company had a subcontract with the Data Technologies  Division of TRW
to provide training services to TRW in support of its contract with the State of
California for the development and  implementation  of a management  information
system for the state's  correctional  facilities.  Through 1996, the Company had
completed  the  design  phase  and had  begun the  development  of the  training
program.  However,  effective  February 21, 1997,  TRW's prime

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contract with the State of California was terminated.  Accordingly, no more work
will be performed by the Company with respect to this subcontract. During the
years 1996 and 1995, the Company had  recognized  revenue of  approximately
$134,000  and  $118,000, respectively, under the subcontract.

       As of  December  31,  1996,  the  backlog of custom  multimedia  software
products and systems integration services (i.e., the difference between the fees
payable to the Company set forth in  existing  contracts  and the amount of such
fees that had been recognized as revenue on the Company's financial  statements)
was approximately $400,000, which is expected to be recognized during 1997.

Research and Development

       For the years ended  December 31, 1996 and 1995,  costs  associated  with
research and development activities totaled approximately $252,000 and $258,000,
respectively.  Historically,  research and development  activities  included the
development  of a library  of  reusable  codes,  utilities,  and tools  that the
Company can utilize in the early stages of  development  of many of its software
applications  and  custom  multimedia  products.  Costs  during  the year  ended
December 31, 1996 also  included  approximately  $13,000  incurred in connection
with the development of UST's product, LAUNCH for Notes on AS/400.

       The  Company  believes  that  costs for  research  and  development  will
continue in the future at consistent  levels since the Company plans to continue
to improve its  reusable  codes,  utilities,  and tools,  as well as develop new
reusable applications,  codes, utilities, and tools, and continue development of
products similar to LAUNCH for Notes.

Marketing

       The Company  markets  products  through the use of a direct  sales force,
participation in trade shows, trade journal advertising, direct mail advertising
and telemarketing. The Company employs approximately 9 salespeople who receive a
combination  of salary and  commission.  In addition,  as described  above under
"Systems  Integration  Services," UST is a Lotus Premium Business Partner and an
IBM Industry  Remarketer and receives leads from Lotus Development  Corporation,
IBM and Support Net. The Company's  strategy includes  cross-marketing  its wide
range  of  products  and  services  and  may  enter  into  additional   referral
relationships.  The Company  believes  that it has good  relationships  with its
existing  customer  base and  expects  that  these  contacts  will  enable it to
successfully pursue this strategy.

Competition

       The markets for all of the  Company's  products  and  services are highly
competitive.  The Company's  systems  integration  business  competes with Lotus
Development  Corporation,  IBM,  other Lotus  Notes  Business  Partners  and IBM
Industry  Remarketers,  companies that manufacture and market midrange computers
that compete with the AS/400(R) and  RS/6000(R)  and their  remarketing  agents,
companies that manufacture software that competes with Lotus

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Notes(R)/Domino(TM) and their business partners, and numerous other providers of
systems integration and consulting services.

       The Company's custom multimedia software business competes with companies
that produce  interactive  training software and other third-party  suppliers of
training and marketing  materials,  as well as internal training  departments of
potential  customers.  The Company expects additional  competition from existing
software  companies and book publishers  seeking to broaden their product lines,
and  the  continued   improvement  in  computer  programming  tools  may  enable
businesses to develop their own software internally.

       Many  of  the   Company's   current  and   potential   competitors   have
substantially  greater  financial,   technical,   sales,  marketing,  and  other
resources,  as well as greater name recognition,  than the Company.  The Company
believes that its wide range of software development and systems integration and
support  capabilities  will  enable it to compete  successfully,  and intends to
focus on the provision of high-performance  value-added  integrated products and
services designed to be marketed on the basis of quality as well as price.

Intellectual Property

       Most of the Company's  contracts  state that its software is  proprietary
and that  title to and  ownership  of its  software  generally  reside  with the
Company.  The Company  grants  nonexclusive  licenses to customers  for software
developed  by the Company for such  customers.  Like many  software  firms,  the
Company  has no  patents.  The  Company  attempts  to protect  its rights with a
combination  of  copyright,  trade  secret laws,  and  employee and  third-party
nondisclosure  agreements.  Despite  these  precautions,  it may be possible for
unauthorized third parties to copy certain portions of the Company's products or
obtain and use  information  that the Company  regards as  proprietary,  such as
source codes or programming techniques.

       As the number of  software  products  increases  and their  functionality
further overlaps,  the Company believes that software programs will increasingly
become the subject of infringement claims.  Although the Company's products have
never been the subject of an infringement  claim, there can be no assurance that
third  parties will not assert  infringement  claims  against the Company in the
future or that any such  assertion  may not  require  the  Company to enter into
royalty arrangements or result in costly litigation.

       The Company has applied to register the following trademarks: LAUNCH(TM),
infoENABLER(TM),  infoCOORDINATOR(TM),   infoDISTRIBUTOR(TM),   infoCOURIER(TM),
TechShelf(TM), and Net Commerce(TM).

Product Liability Insurance

       The Company does not  currently  carry  product  liability  insurance and
there can be no assurance that such coverage,  if obtainable,  would be adequate
in terms and scope to protect the Company  against  material  adverse effects in
the event of a successful product liability claim.  Although the Company has not
been  subject to any product  liability  claims,  such claims could

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arise in the future.  There  can be no  assurance  that the  Company  would
have  sufficient resources to satisfy any liability  resulting from these claims
or would be able to have its customers indemnify the Company against such
claims.

Employees

       As of February 28, 1997,  the Company had 44  full-time  employees,  9 of
whom were in administration,  12 of whom were in sales and marketing,  and 23 of
whom held professional  technical  positions.  As of such date, the Company also
had two  part-time  employees  in sales  and  marketing.  None of the  Company's
employees are represented by unions.  Management believes the Company's employee
relations are good.

Item 2.  Description of  Property.

       The Company  leases  office space in Annapolis and  Rockville,  Maryland;
Tampa, Orlando, and Ft. Lauderdale, Florida; and Atlanta, GA. The leases require
the Company to pay monthly rent of approximately $2,800, $3,500, $3,500, $2,700,
$1,500, and $2,800,  respectively,  and expire at various times through 2000. In
addition, the Company leases office space in Redmond,  Washington, for a monthly
rent of approximately  $9,500, which is subleased to an unaffiliated third party
through  the  end of  the  Company's  lease  term  in  January  1998  due to the
consolidation of the multimedia  division.  Management believes that its current
office   facilities  are  adequate  and  suitable  for  the  Company's   current
operations.

Item 3.  Legal Proceedings.

       The Company is not subject any legal  proceedings  other than claims that
arise in the ordinary course of its business.

Item 4.  Submission of Matters to a Vote of Security Holders.

       None.

                                       10

<PAGE>

                                    PART II

Item 5.  Market for Registrant's Common Stock and Related Stockholder Matters

       Since  November 11, 1993,  the Company's  Common Stock has been listed on
the NASDAQ  Small Cap Market  under the  symbol  "PAID" and on the Boston  Stock
Exchange  under the symbol  "PAD."  Prior to November 11,  1993,  the  Company's
Common Stock traded in the  over-the-counter  market and was quoted in the "Pink
Sheets."

       The following  table shows the high and low sale prices for the Company's
Common Stock, for the periods indicated,  based upon information supplied to the
Company from NASDAQ.

                  Year                   High              Low
                  ----                   ----              ---
                  1996
                  1st Quarter            $10.875           $8.875
                  2nd Quarter            $13.75            $9.625
                  3rd Quarter            $13.375           $10.625
                  4th Quarter            $15.00            $12.25

                  1995
                  1st Quarter            $10.9375          $7.00
                  2nd Quarter            $12.25            $7.00
                  3rd Quarter            $13.125           $8.96875
                  4th Quarter            $10.50            $5.75

       The above  prices have been  adjusted for the 1:3.5  reverse  stock split
which was effective December 8, 1995.

       The closing bid price for the  Company's  Common Stock on March 25, 1997,
was $13.125.

       The Company had approximately 173 holders of record of Common Stock as of
March 25, 1997. Management believes that the number of beneficial holders of the
Company's Common Stock as of March 25, 1997, was approximately 3,800.

       No cash  dividends  have been paid by the Company on its Common Stock and
no such payment is anticipated in the foreseeable future.

                                       11

<PAGE>


Item 6.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations.

Fiscal 1996 Compared to Fiscal 1995

       The Company's  revenue is comprised of service fees,  product sales,  and
royalties.  Service fees are for systems  integration  services provided by UST,
the  Company's  subsidiary  acquired in July 1996,  and for the  development  of
custom multimedia software. Product sales are for software and hardware products
primarily sold by UST. Royalties are paid to the Company by customers who resell
copies of software developed by the Company for such customers.

       Total  revenues for the year ended  December 31, 1996 were  $1,588,094 as
compared to $708,652 for the same period of 1995,  an increase of  approximately
$879,000.  This  increase was  primarily  attributable  to the  inclusion of six
months of UST revenues of  approximately  $960,000  following its acquisition by
the Company in July 1996,  offset by a decrease in sales of the Company's custom
software products of approximately  $81,000. The net loss and net loss per share
were $3,823,621 and $2.58 per share,  respectively,  for the year ended December
31,  1996 as  compared  to a net loss and net loss per share of  $1,949,415  and
$3.52 per share, respectively, for the prior year.

       During the year ended  December 31, 1996,  revenue from services fees for
systems integration and software  development services provided by UST following
its  acquisition by the Company in July 1996 was $603,366,  as compared to $0 in
the prior year.

       During the year ended December 31, 1996,  revenue from custom  multimedia
software development services was $552,397 as compared to $633,092 for the prior
year, a decrease of approximately $81,000 or 13%. The decrease was primarily due
to the number and size of new  contracts  the  Company was able to secure and to
ongoing delays in certain  contracts with customers,  particularly the Company's
subcontract with TRW. During the first quarter of 1997, the Company was notified
that TRW's  contract with the State of California was  terminated;  accordingly,
the  Company's  subcontract  with TRW was  terminated.  The  Company  recognized
approximately  $134,000 in revenue from this contract during 1996 as compared to
approximately $118,000 during 1995.

       During the year ended  December 31, 1996,  revenue from sales of products
was  $372,256,  as  compared  to  $21,739  in the prior  year,  an  increase  of
approximately $350,000. Approximately $357,000 of the revenue for the year ended
December  31,  1996,  represents  six months of sales of computer  hardware  and
software  products by UST. UST sells computer  hardware and software products as
part of their systems integration services. The remaining $15,000 in revenue for
the year  ended  December  31,  1996 and all of the  revenue  for the year ended
December 31, 1995 represents sales of two consumer  off-the-shelf products which
the Company  began  marketing  during the last quarter of 1995 when it initiated
test market mailing programs for certain products.  Both mailings  generated low
response rates; accordingly, the Company does not plan to perform any additional
mailings for these products.

                                       12

<PAGE>


       The Company has entered into agreements  that allow certain  customers to
resell  copies of the  Company's  software  products  in  exchange  for  royalty
payments.  Royalties  were  $60,075  during the year ended  December 31, 1996 as
compared to $53,821 for the prior year, an increase of  approximately  $6,000 or
12%. The Company  generally expects royalty revenue to decrease due to the aging
shelf life of  products  for which the  Company  currently  receives  royalties.
However,  the Company continually  explores additional marketing and development
partners to increase revenues generated from royalty arrangements.

       During the year ended December 31, 1996,  total  operating  expenses were
$5,419,016  as  compared  to  $2,697,069  in the  prior  year,  an  increase  of
approximately $2.7 million. The acquisitions of Forsight,  Inc. ("Forsight") and
UST in February 1996 and July 1996,  respectively,  primarily  accounted for the
increase.  The  increase  includes  the  write-off  of  purchased  research  and
development  in  connection  with the  acquisition  of Forsight,  which  totaled
approximately  $289,000,  and the write-off of goodwill in  connection  with the
acquisition of UST, which totaled approximately $578,000.

       For the years ended  December 31, 1996 and 1995, the cost of service fees
for custom  multimedia  software  exceeded custom  multimedia  software revenue,
resulting  in  negative  gross  margins  of   approximately   (42%)  and  (14%),
respectively.  The negative  gross margin for 1996 is primarily due to the lower
than  anticipated  level of sales of the Company's  custom  multimedia  software
services,  particularly for sales expected in connection with the acquisition of
Forsight.

       Cost of service  fees for systems  integration  services  provided by UST
following its acquisition by the Company was approximately $603,000 for the year
ended December 31, 1996, resulting in an approximate break-even gross margin for
1996. The  break-even  gross margin for the 1996 period was primarily due to the
lower than  anticipated  level of sales of UST's  services,  as well as employee
turnover as a result of the merger.

       Cost of product sales was $223,498 for the year ended  December 31, 1996,
as compared to $11,253 in the prior year.  Approximately $219,000 of these costs
for the year  ended  December  31,  1996 was  from the sale of  products  by UST
following  its  acquisition  by the  Company and  resulted in a gross  margin of
approximately  40%,  an  unusually  high  margin due to a  one-time  transaction
recognized during 1996.  Approximately  $5,000 of these costs for the year ended
December  31,  1996  and all of the  costs  for the  prior  year  are the  costs
associated with the consumer off-the-shelf marketing initiative discussed above.

       During  the year  ended  December  31,  1996,  research  and  development
expenses were $251,778 as compared to $257,979 for the prior year.  Research and
development  expenses  were  consistent  with  the  prior  year  as the  Company
continued to improve on existing tools as needed and develop  modified  versions
of  traditional  custom  software  products  to be  sold  to a  broad  range  of
commercial customers.

       During  the  year  ended   December  31,  1996,   selling,   general  and
administrative  expenses were  $2,691,483 as compared to $1,707,521 in the prior
year, an increase of approximately

                                       13

<PAGE>

$984,000, or 58%.  Approximately $922,000 of the  increase is due to the
acquisitions  of Forsight  and UST.  The  remaining increase is due to the
Company's increased sales and marketing efforts.

       During the year ended  December  31, 1996,  total other income  (expense)
decreased by approximately $32,000 from the same period of the prior year due to
losses  recognized  during 1996 related to the  consolidation  of the multimedia
division, the write off of certain obsolete inventory and computer equipment, as
well as interest expense on UST's line-of-credit and bank note.

Fiscal 1995 Compared to Fiscal 1994

       Total  revenues  for the year ended  December  31, 1995 were  $708,652 as
compared to $844,395 for the prior year, a decrease of  approximately  16%. This
decrease  was  attributable  to a  decrease  in  sales of the  Company's  custom
software  products of  approximately  $49,000,  a decrease  in product  sales of
approximately  $53,000,  and a  decrease  in royalty  revenue  of  approximately
$33,000.  The net loss and net loss per  share  were  $1,949,415  and  $3.52 per
share,  respectively,  for the year ended December 31, 1995 as compared to a net
loss and net loss per share of $2,406,099 and $4.62 per share, respectively, for
the prior year.

       For the year ended December 31, 1995, custom multimedia  software revenue
was  $633,092  as  compared  to  $682,591  for the prior  year,  a  decrease  of
approximately  $49,000 or 7%. The decrease was  primarily  due to the number and
size of new  contracts  the Company was able to secure and to ongoing  delays in
certain  contracts with customers,  particularly the Company's  subcontract with
TRW.

       For the year ended  December  31, 1995,  revenue  from product  sales was
$21,739 which represented the sales of consumer  off-the-shelf  products,  which
the Company  began  marketing  during the last quarter of 1995 when it initiated
test market mailing  programs for certain  products.  Prior to 1995, the Company
also  derived  revenues  from the sale of  hardware  and  software  utilized  in
teaching and instructional  skills.  The sale of these products was discontinued
effective June 30, 1994;  accordingly,  there was no revenue from sales of these
products for the year ended  December  31,  1995,  as compared to $74,985 in the
prior year.

       The Company has entered into agreements  that allow certain  customers to
resell  copies of the  Company's  software  products  in  exchange  for  royalty
payments.  Royalties  were $53,821  during the year ended  December 31, 1995, as
compared to $86,819 in the prior year.  The decrease in 1995 royalty  revenue is
primarily  due to the  aging  shelf  life of  products  for  which  the  Company
currently receives royalties.

       For the year ended  December  31, 1995,  total  operating  expenses  were
$2,697,069  as  compared  to  $3,339,095  in  the  prior  year,  a  decrease  of
approximately  $640,000 or 19%. The  decrease was due to lower costs  associated
with custom software development of approximately  $290,000,  the elimination of
costs of  approximately  $51,000 related to the sale of  instructional  products
(offset by costs of approximately  $11,000  associated with the sale of consumer
off-the-shelf  products), and a reduction in selling, general and administrative
expenses of $314,000.

                                       14

<PAGE>

       For the  years  ended  December  31,  1995 and  1994,  the cost of custom
software  production  exceeded  custom software  revenue,  resulting in negative
gross margins of approximately  (14%) and (48%),  respectively.  The decrease in
the cost of custom software production and the improved gross margins during the
1995 period reflects the downsizing of the Company's  development staff, as well
as the implementation of improved project management and tracking techniques.

       Selling,  general and administrative  expenses decreased primarily due to
actions  taken during 1995 to  restructure  the  Company's  sales and  marketing
activities.  Actions  included  concentrating  the  Company's  sales  efforts on
selected industries in which it has had previous success,  including  automotive
and packaging;  converting  certain  full-time sales people to independent sales
representatives;  substituting commission-based compensation for fixed salaries;
and eliminating certain advertising, travel and related expenses.

       For the year ended  December  31,  1995,  total  other  income  (expense)
decreased approximately $50,000 from the prior year, primarily due to a decrease
in funds available for investment.

Cash Flow, Liquidity and Capital Resources

       The Report of Independent  Accountants on the 1996 consolidated financial
statements of the Company  includes an  explanatory  paragraph  stating that the
recurring  losses  from  operations  and  the  existing  cash  resources  may be
insufficient  to  fund  planned  operations  and  that  these  conditions  raise
substantial  doubt about the Company's  ability to continue as a going  concern.
The Company  incurred a net loss of $3,823,621  for the year ended  December 31,
1996, and as of December 31, 1996 had an accumulated deficit of $10,665,959.  As
discussed in Note 1 to the Notes to the  Consolidated  Financial  Statements and
under  Strategy to Achieve  Profitable  Operations  below,  the Company plans to
implement certain actions to address the losses and liquidity matters.  However,
there can be no assurance that such actions will generate  sufficient  cash flow
to ensure the continued existence of the Company;  or that additional  financing
will be  available  from any  sources at terms and  conditions  suitable  to the
Company.

       For  the  year  ended  December  31,  1996,  the  Company  used  cash  of
approximately  $2.8  million  in  operations,  primarily  due to the net loss of
approximately  $3.8  million,  net of  amortization  and  depreciation  and  the
write-offs of purchased research and development and goodwill in connection with
the acquisitions of Forsight and UST, which totaled  approximately $1.1 million.
Net cash of  approximately  $634,000 was used for investing  activities  for the
purchase of U.S. government  securities,  equipment,  and Forsight.  Net cash of
approximately  $200,000  was  provided by the  exercise of 28,571  common  stock
options,  offset  by  approximately  $43,000  used to  make  payments  on  UST's
obligations to a bank.

       For  the  year  ended  December  31,  1995,  the  Company  used  cash  of
approximately $1.8 million in operating activities. In addition to the net loss,
the Company experienced  increases in accounts receivables and other assets. Net
cash  of  approximately  $1.7  million  was  provided  by  investing

                                       15

<PAGE>

activities primarily from proceeds  received at maturity of liquid  investment
securities. Net cash of approximately $3.8 million was provided from financing
activities as a result of net  proceeds  received  from the December  1995
public  offering of 920,000 shares of the Company's  Common Stock.  Working
capital at December 31, 1995 was approximately $4.1 million.

       For  the  year  ended  December  31,  1994,  the  Company  used  cash  of
approximately $2.2 million in operating activities. In addition to the net loss,
the Company experienced  increases in receivables and prepaid expenses and other
current  assets.  Net cash of  approximately  $2.1 million was used in investing
activities to purchase liquid investment securities and property and equipment.

       Working capital of approximately  $684,000 at December 31, 1996, together
with funds to be generated from  investment  income and future sales of services
and products are expected to provide  sufficient  liquidity to meet  anticipated
cash needs on a short-term basis. In addition, during the first quarter of 1997,
the Company received net proceeds of approximately $900,000 from the exercise of
underwriter  warrants and stock  options.  As of December  31, 1996,  backlog of
custom multimedia software and systems integration services totals approximately
$400,000,  all of  which  is  expected  to be  earned  during  1997.  Management
recognizes  that the Company may require  additional  financing  until such time
that  service  fees and  product  sales are of  sufficient  volume  to  generate
positive  cash flows from  operations.  Although the Company may seek  financing
from  placements of equity or debt  securities,  there can be no assurances that
such  financing  will be  available,  or if  available,  will be under terms and
conditions suitable to the Company.

Strategy to Achieve Profitable Operations

       The Company's  strategy to increase  revenue is to utilize its wide range
of computer systems  integration,  support  services,  and software  development
capabilities  to  provide   high-performance   value-added  integrated  computer
services to mid- to large-sized service  organizations,  manufacturers and other
companies located in the United States.  Custom multimedia software and software
applications developed for use in conjunction with Lotus Notes(R)/Domino(TM) are
expected to be important  components of the services  provided by the Company to
such customers. Management believes that the Company's ability to provide all of
the services  required in connection  with design,  installation  and support of
computer  systems  will  enhance  its ability to  effectively  market its custom
software  development  services,  including Intranet and Internet  services,  to
customers  that prefer to purchase an  integrated  set of products  and services
from a single  vendor,  and that the  Company's  expertise  in  developing  such
software  will in turn  enhance  the  Company's  ability to market its  computer
systems integration and support services. In addition, the Company believes that
it  can  increase  revenue  by  using  its  proprietary  products  and  software
development  skills to produce generic versions of its custom software  products
for sale to companies that do not require or cannot afford  complete  customized
services. In addition,  the Company intends to increase revenues by establishing
ongoing  arrangements  with  larger  companies  that  need to  integrate  custom
multimedia software with work group computing systems.

       During 1996, the Company  consummated two acquisitions in order to expand
its areas of expertise and broaden its base of customers  for custom  multimedia
software development

                                       16

<PAGE>

services.  As a result of these acquisitions,  the Company develops    software
applications    used   in    conjunction    with   Lotus Notes(R)/Domino(R),
markets IBM midrange computers and systems  integration and support  services,
and provides  interactive  multimedia  software  development services  for
corporate   communications  using  state-of-the-art   technology, including
web-site  development and other intranet and Internet  services.  The Company
believes that marketing  custom  multimedia  services to this broadened customer
base and marketing its acquired  expertise to the multimedia  customers will
facilitate the growth of its business. In addition,  the Company intends to
pursue the  acquisition  of companies in the computer  systems  integration  and
related businesses, as well as other acquisitions, strategic alliances and joint
ventures that can provide the Company with additional complementary capabilities
or further  broaden its base of  customers  requiring  the products and services
currently  provided.  Management  believes that in the future, the percentage of
the Company's  revenues  attributable  to the  development of custom  multimedia
software will decrease and the  percentage  attributable  to the sale of systems
integration and related support services,  including the sale of hardware,  will
increase as a result of this strategy.

       To better control costs, the Company is implementing plans to consolidate
the  multimedia  related  operations  into one  location  by  consolidating  the
Redmond, WA and the Rockville,  MD office into the Annapolis,  MD location.  The
consolidation  of the Redmond  office was completed by December 31, 1996 and the
consolidation  of the Rockville  office is expected to be completed by April 30,
1997.

       Management  believes that its strategy for increasing  revenues  combined
with  the  impact  of its cost  control  measures  will  enhance  the  Company's
probability  of  achieving  profitable   operations  during  1997.  However,  no
assurance can be given that these measures, even if successful,  will ensure the
continued  existence  of the  Company.  Management's  estimates  are based  upon
information currently available and may not necessarily prove accurate.

"Safe Harbor"  Statement under the Private  Securities  Litigation Reform Act of
1995: The statements  contained in this document and other  statements which are
not  historical  facts are forward  looking  statements  that involve  risks and
uncertainties, including, the success of newly implemented sales strategies; the
continued  existence of agreements with product providers;  market acceptance of
the Company's  products and services;  the ability to obtain a larger number and
size of contracts;  the timing of contract awards; work performance and customer
response;  the  impact  of  competitive  products  and  pricing;   technological
developments  by the  Company's  competitors  or  difficulties  in the Company's
research and development  efforts;  and other risks as detailed in the Company's
Securities and Exchange Commission filings.

Item 7.  Financial Statements

         The  information  required by Item 7 appears at page F-1 which  appears
after this page.

Item 8.  Changes In and Disagreements with Accountants on Accounting and
         Financial Disclosure.
         None.

                                       17

<PAGE>

             PACIFIC ANIMATED IMAGING CORPORATION AND SUBSIDIARIES

                               TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                                                        Page No.
                                                                                        -------
<S> <C>
Report of Coopers & Lybrand L.L.P, Independent Accountants, on the
         December 31, 1996 and 1995 Consolidated Financial Statements                       F-2

Consolidated Balance Sheets, December 31, 1996 and 1995                                     F-3

Consolidated Statements of Operations for the years
         ended December 31, 1996, 1995, and 1994                                            F-4

Consolidated Statements of Stockholders' Equity for the years
         ended December 31, 1996, 1995, and 1994                                            F-5

Consolidated Statements of Cash Flows for the years
         ended December 31, 1996, 1995, and 1994                                            F-6

Notes to Consolidated Financial Statements                                             F-7 - F-16
</TABLE>

                                      F-1

<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and Stockholders
Pacific Animated Imaging Corporation

We have audited the accompanying consolidated balance sheets of Pacific Animated
Imaging  Corporation and its subsidiaries  (the Company) as of December 31, 1996
and 1995 and the consolidated  statements of operations,  stockholders'  equity,
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 audits 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 consolidated financial position of the Company as of
December 31, 1996 and 1995 and the consolidated  results of their operations and
their 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 suffered recurring losses from operations,
had an accumulated  deficit of $10,665,959,  and its existing cash resources are
insufficient to fund planned  operations.  These  conditions  raise  substantial
doubt about the Company's  ability to continue as a going concern.  Management's
plans to address  these  matters  are also  described  in Note 1. The  financial
statements do not include any adjustments  that might result from the outcome of
this uncertainty.



                                                     COOPERS & LYBRAND L.L.P


McLean, Virginia
March 28, 1997

                                      F-2

<PAGE>

             PACIFIC ANIMATED IMAGING CORPORATION AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                                            December 31,     December 31,
                                                                                               1996             1995
                                                                                         --------------    --------------
<S> <C>
                                     ASSETS
         Current assets
               Cash and cash equivalents                                                 $     939,281     $   4,177,534
               Investment in U.S. government securities                                        474,144              --
               Accounts receivable, net                                                        411,220           260,655
               Interest receivable                                                              19,814             3,939
               Inventory                                                                        18,838              --
               Prepaid expenses and other current assets                                       150,819            82,719
                                                                                         --------------    --------------
                  Total current assets                                                       2,014,116         4,524,847
                                                                                         --------------    --------------

         Property and equipment, at cost
               Computers, furniture and equipment                                              990,105           500,162
               Less accumulated depreciation                                                   490,193           218,593
                                                                                         --------------    --------------
                  Net property and equipment                                                   499,912           281,569
                                                                                         --------------    --------------

         Other assets                                                                           55,681            62,708
                                                                                         --------------    --------------

                                                                                         $   2,569,709     $   4,869,124
                                                                                         ==============    ==============

                      LIABILITIES AND STOCKHOLDERS' EQUITY
         Current liabilities
               Accounts payable and accrued liabilities                                  $     796,729     $     274,313
               Deferred revenue                                                                 66,088            76,201
               Customer deposit                                                                 50,000            50,000
               Line of credit                                                                  320,833              --
               Other current liabilities                                                        96,063             7,781
                                                                                         --------------    --------------
                  Total current liabilities                                                  1,329,713           408,295

         Note payable to bank                                                                   18,253              --
         Deferred rent and other                                                               149,125            22,399
                                                                                         --------------    --------------

                  Total liabilities                                                          1,497,091           430,694
                                                                                         --------------    --------------

         Commitments and contingencies

         Stockholders' equity
               Common stock, $.0001 par value.  Authorized 5,000,000 shares;
                  issued and outstanding 1,518,880 and 1,441,024 shares
                  as of December 31, 1996 and 1995.                                                152               144
               Additional paid-in capital                                                   11,893,549        11,280,624
               Accumulated deficit                                                         (10,665,959)       (6,842,338)
               Deferred compensation                                                          (155,124)             --
                                                                                         --------------    --------------
                  Total stockholders' equity                                                 1,072,618         4,438,430
                                                                                         --------------    --------------

                                                                                         $   2,569,709     $   4,869,124
                                                                                         ==============    ==============
</TABLE>

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

                                      F-3

<PAGE>
             PACIFIC ANIMATED IMAGING CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                    Year ended December 31,
                                                                ------------------------------------------------------------
                                                                        1996                 1995                 1994
                                                                ------------------    -----------------    -----------------
<S> <C>
       Revenue

            Service fees                                        $       1,155,763     $        633,092     $        682,591
            Product sales                                                 372,256               21,739               74,985
            Royalties                                                      60,075               53,821               86,819

                                                                ------------------    -----------------    -----------------
                    Total revenue                                       1,588,094              708,652              844,395
                                                                ------------------    -----------------    -----------------

       Expenses

            Cost of service fees                                        1,385,131              720,316            1,010,295
            Cost of product sales                                         223,498               11,253               50,966
            Research and development                                      251,778              257,979              256,552
            Selling, general and administrative                         2,691,483            1,707,521            2,021,282
            Write-off of purchased research and development               289,330                   --                   --
            Write-off of goodwill related to purchase of
                U.S. Technologies, Inc.                                   577,796                   --                   --

                                                                ------------------    -----------------    -----------------
                    Total operating expenses                            5,419,016            2,697,069            3,339,095

                                                                ------------------    -----------------    -----------------
       Loss from operations                                            (3,830,922)          (1,988,417)          (2,494,700)

       Other income, net                                                    7,301               39,002               88,601

                                                                ==================    =================    =================
       Net loss                                                 $      (3,823,621)    $     (1,949,415)    $     (2,406,099)
                                                                ==================    =================    =================

       Average number of common shares outstanding                      1,483,831              553,687              520,739
                                                                ==================    =================    =================

       Net loss per common share                                $           (2.58)    $          (3.52)    $          (4.62)
                                                                ==================    =================    =================
</TABLE>

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

                                      F-4

<PAGE>

             PACIFIC ANIMATED IMAGING CORPORATION AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>

                                                   Common Stock        Additional
                                              ----------------------     Paid-in        Accumulated     Deferred
                                                Shares        Amount     Capital          Deficit      Compensation      Total
                                              -----------     ------   ------------    -------------   ------------   ------------
<S> <C>
Balance, December 31, 1993                       520,739      $  52    $ 7,551,490     $ (2,486,824)    $      --     $ 5,064,718

   Net loss                                           --         --             --       (2,406,099)           --      (2,406,099)

                                              -----------     ------   ------------    -------------    ----------    ------------
Balance, December 31, 1994                       520,739         52      7,551,490       (4,892,923)           --       2,658,619

   Exercise of incentive stock options               285         --          2,250               --                         2,250
   Net proceeds from public offering of
     shares of common stock, $5.25 per share,
     net of offering costs of $1,103,104         920,000         92      3,726,884               --                     3,726,976
   Net loss                                           --         --             --       (1,949,415)                   (1,949,415)

                                              -----------     ------   ------------    -------------    ----------    ------------
Balance, December 31, 1995                     1,441,024        144     11,280,624       (6,842,338)           --       4,438,430

   Exercise of  stock options                     32,856          3        238,424               --            --         238,427
   Stock issued for services                      25,000          3        193,904               --      (155,124)         38,783
   Stock issued in connection with
     Forsight acquisition                         20,000          2        159,373               --            --         159,375
   Adjustment to 1995 offering costs                  --         --         21,224               --            --          21,224
   Net loss                                           --         --             --       (3,823,621)           --      (3,823,621)

                                              ===========     ======   ============    =============    ==========    ============
Balance, December 31, 1996                     1,518,880      $ 152    $11,893,549     $(10,665,959)    $(155,124)    $ 1,072,618
                                              ===========     ======   ============    =============    ==========    ============
</TABLE>

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

                                      F-5

<PAGE>

             PACIFIC ANIMATED IMAGING CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                                             Year ended December 31,
                                                                                      1996            1995           1994
                                                                                  ------------    -------------   -------------
<S> <C>
     Cash flows from operating activities
        Net loss                                                                  $(3,823,621)    $ (1,949,415)   $ (2,406,099)
        Adjustments to reconcile net loss to net cash used in
               operating activities, net of effects from purchases
               of Forsight, Inc. and U.S. Technologies, Inc.
            Depreciation and amortization                                             269,741          146,867         104,352
            Provision for bad debt expense                                             28,981            6,000           6,118
            Amortization of deferred compensation                                      38,783               --              --
            Loss on disposal of assets                                                 22,634           21,022          26,713
            Write-off of purchased research and development                           289,330               --              --
            Write-off of goodwill                                                     577,796
            Increase (decrease) in cash from changes in assets and liabilities
               Accounts receivable                                                    (15,244)        (143,449)         (1,520)
               Interest receivable                                                    (15,875)          34,376         (38,315)
               Inventory                                                               41,091               --              --
               Prepaid expenses and other current assets                              (68,100)          68,586         (67,693)
               Other assets                                                            25,276          (48,102)         33,042
               Accounts payable and accrued liabilities                                (1,146)          17,322          97,294
               Other liabilities                                                     (130,659)          62,100          40,655

                                                                                  ------------    -------------   -------------
        Net cash used in operating activities                                      (2,761,013)      (1,784,693)     (2,205,453)
                                                                                  ------------    -------------   -------------

     Cash flows from investing activities
        Purchase of U.S. government securities                                       (474,144)              --      (2,695,959)
        Proceeds from maturity of U.S. government securities                               --        1,698,319         997,640
        Capital expenditures                                                         (134,033)         (46,462)       (383,066)
        Proceeds from sales of property and equipment                                  11,200           14,038              --
        Payment for purchase of Forsight, Inc., net of cash acquired                  (46,424)              --              --
        Cash acquired from purchase of U.S. Technologies, Inc.                          9,549               --              --

                                                                                  ------------    -------------   -------------
        Net cash provided by (used in) investing activities                          (633,852)       1,665,895      (2,081,385)
                                                                                  ------------    -------------   -------------

     Cash flows from financing activities
        Net proceeds from sale of common stock                                             --        3,726,976              --
        Financing costs included in liabilities as of December 31, 1995                    --           61,345              --
        Proceeds from exercise of options                                             199,997            2,250              --
        Payments on line of credit                                                    (26,886)              --              --
        Payments on note payable to a bank                                            (16,499)              --              --

                                                                                  ------------    -------------   -------------
        Net cash provided by financing activities                                     156,612        3,790,571              --
                                                                                  ------------    -------------   -------------

     Net (decrease) increase in cash and cash equivalents                          (3,238,253)       3,671,773      (4,286,838)

     Cash and cash equivalents, beginning of year                                   4,177,534          505,761       4,792,599

                                                                                  ------------    -------------   -------------
     Cash and cash equivalents, end of year                                       $   939,281     $  4,177,534    $    505,761
                                                                                  ============    =============   =============

     Supplemental disclosures of cash paid:
        Interest                                                                  $    22,701     $         --    $         --
        Income taxes                                                                       --               --              --

     Supplemental schedule of noncash investing and financing activities:
        Stock issued as payment for unearned professional fees                    $   193,907     $         --    $         --
        Stock options exercised in lieu of payment for professional fees               38,430               --              --
        Stock issued in connection with acquisition of Forsight                       159,375               --              --
        Adjustment to 1995 offering costs                                              21,224               --              --
</TABLE>

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

                                      F-6

<PAGE>

             PACIFIC ANIMATED IMAGING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   ----------



1.     THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

       Description of Business.  Pacific  Animated  Imaging  Corporation and its
subsidiaries  (the  "Company") are  full-service  providers of technology  based
software  solutions  and computer  systems  integration  (including  the sale of
hardware  and  software  products)  and  support  services  specializing  in the
development  of  software  applications  related  to work  group  and work  flow
computing  solutions,  and the  development  of  custom  interactive  multimedia
software for use in the areas of process enhancement,  technical  documentation,
training,  and  performance  support for a variety of commercial  and industrial
end-users.

       Going  Concern.  The Company's  financial  statements  for the year ended
December 31, 1996 have been prepared on a going concern basis which contemplates
the  realization of assets and the settlement of liabilities  and commitments in
the normal course of business. The Company incurred a net loss of $3,823,621 for
the year ended December 31, 1996, and as of December 31, 1996 had an accumulated
deficit of  $10,665,959.  Management  recognizes  that in order to  develop  and
market its services and products effectively, the Company may require additional
financing  until such time that service fees and product sales are of sufficient
volume to generate positive cash flows from operations. Although the Company may
seek financing from  placements of its equity  securities or placements of debt,
there  can be no  assurances  that  such  financing  will be  available  or,  if
available,  will  be  under  terms  and  conditions  suitable  to  the  Company.
Management's  plans to address  the losses and  liquidity  matters  include  (i)
consolidating  the  multimedia  related  operations  into one  location and (ii)
increasing  sales by leveraging  the expanded  capabilities  and customer  lists
obtained in connection with the  acquisitions  made during 1996 by marketing the
full  services of the Company to the  customers  of the acquired  companies.  In
addition,  one of the  Company's  subsidiaries  was  approved  during the fourth
quarter as an IBM Industry  Remarketer for both the AS/400 and RS/6000  midrange
computer  platforms.  It is Management's belief that by selling the IBM midrange
products,  the Company will be able to sell additional  services to customers by
providing  customers  with the ability to purchase an integrated set of products
and services from a single  vendor.  However,  no  assurances  can be given that
these measures,  even if successful,  will ensure the continued existence of the
Company.  The Company's financial statements do not include any adjustments that
might result from the outcome of this uncertainty.

       Principles  of  Consolidation.  The  consolidated  financial  statements
include  the  accounts  of Pacific Animated  Imaging  Corporation  ("PAI") and
its wholly owned  subsidiaries,  JMC Company,  Inc.  ("JMC"),  and U.S.
Technologies,  Inc.  ("UST").  All significant  intercompany  transactions  have
been eliminated in  consolidation. PAI, JMC, and UST are hereinafter referred to
as the "Company".

       Revenue  Recognition.  Revenues from hardware and software  product sales
are recognized on delivery.  Revenues from consulting and training  services are
recognized  as  services  are  performed.  Revenues  from the  Company's  custom
multimedia  software  products are recognized using the percentage of completion
method due to the significant customization involved in their development.  Cost
estimates are reviewed  periodically  as work  progresses,  and  adjustments  to
revenue are  reflected in the period in which  revisions to such  estimates  are
deemed necessary. Revenues from royalties are recognized in the period for which
the royalties are earned. Software products generally are delivered without post
sale vendor  obligations  and without a significant  obligation to the customer.
Deferred revenue  represents  amounts advanced by customers and is recognized as
revenue upon delivery of the products or services and is adjusted on a quarterly
basis to reflect the status of projects.

                                      F-7

<PAGE>


             PACIFIC ANIMATED IMAGING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   ----------

       Use of Estimates.  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.

       Cash and Cash  Equivalents.  The  Company  considers  all  highly  liquid
investments  with  an  original  maturity  of  three  months  or less to be cash
equivalents.

       Investments in U.S. Government  Securities.  The Company anticipates that
any investments in U.S. Government  securities,  composed of U.S. Treasury Bills
and Notes,  would be available for sale in response to the  Company's  liquidity
needs, if necessary. Accordingly, these securities are principally considered as
available-for-sale as defined by Statement of Financial Accounting Standards No.
115,  "Accounting for Certain  Investments in Debt and Equity  Securities" (SFAS
115). As of December 31, 1996, amortized cost approximated market, therefore, no
adjustment  was made to  stockholders'  equity.  Interest  income is  accrued as
earned.

       Inventory.  Inventory consists primarily of miscellaneous computer
components and is stated at the lower of cost, determined by the first-in,
first-out (FIFO) method, or market.

       Property  and  Equipment.  Property  and  equipment  are  stated at cost.
Depreciation  is computed  using the  straight-line  method  over the  estimated
useful lives of the related assets,  which are principally three to seven years.
Amortization  of  leasehold  improvements  is computed  using the  straight-line
method over the shorter of the estimated  useful life of the improvements or the
remaining  lease term.  When assets are  retired or  disposed,  the cost and the
related  accumulated  depreciation  are  removed  from  the  accounts,  and  any
resulting gain or loss is recognized in operations for the period.

       Per Share Data. Loss per share is computed on the weighted average number
of shares of common  stock and dilutive  common  equivalent  shares  outstanding
during  the  period.  In  loss  periods,   dilutive  common  equivalent  shares,
consisting of stock  options and  warrants,  are excluded as the effect would be
anti-dilutive.

       New  Accounting  Standard.  In February  1997,  the Financial  Accounting
Standards  Board issued  Statements of Financial  Accounting  Standards No. 128,
"Earnings   Per  Share"   ("SFAS  128"),   which   specifies  the   computation,
presentation,  and disclosure  requirements for earnings per share.  SFAS 128 is
effective for financial  statements  for periods ending after December 15, 1997.
The  Company  believes  that the  adoption  of SFAS 128 will not have a material
effect on the financial statements.

       Research  and  Development   Expenses  and  Software  Development  Costs.
Statement of Financial  Accounting Standards No. 86, "Accounting for the Cost of
Computer Software to be Sold,  Leased or Otherwise  Marketed" (SFAS 86) requires
the  capitalization  of certain software  development  costs once  technological
feasibility  is  established,   which  the  Company  generally  defines  as  the
completion  of a working  model.  Capitalization  ceases when the  products  are
available for general  release to customers,  at which time  amortization of the
capitalized  costs begins on a  straight-line  basis over the estimated  product
life, or on the ratio of current revenues to total projected  product  revenues,
whichever  is  greater.  To date,  software  development  costs  qualifying  for
capitalization  have  been  insignificant.  Accordingly,  the  Company  has  not
capitalized  any  software  development  costs with  respect  to its  continuing
operations.  In addition,  research and  development  costs  including  software
development costs prior to technological  feasibility are expensed in the period
in which they are incurred.

                                      F-8

<PAGE>


             PACIFIC ANIMATED IMAGING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   ----------


       Concentration of Credit Risk. The Company had approximately  $750,000 and
$4,077,000  on deposit in money  market  funds with  strong  credit  ratings and
checking  accounts  at  various  commercial  banking  institutions  in excess of
insured amounts at December 31, 1996 and 1995, respectively. The Company has not
experienced losses on these investments.

       The Company provides hardware and software  products,  develops software,
and performs  services for its customers  located  throughout the United States.
The customer  base of one of the  Company's  subsidiaries,  which  accounted for
approximately  60%  of  the  Company's  1996  revenues,   is  located  primarily
throughout Florida. The Company provides credit in the normal course of business
and, to date, has not experienced significant losses related to receivables from
individual  customers  or  groups  of  customers  in a  particular  industry  or
geographic  area.  In  addition,  for  certain  hardware  orders  and for custom
multimedia  software  development  projects,  the Company  requires  advances or
deposits of at least  one-third of the price of the custom  software or hardware
products with  additional  amounts due at certain  milestones  during the custom
software development process or delivery of the hardware products.  Due to these
factors  management  believes no additional  credit risk beyond amounts provided
for in the  doubtful  account  allowance is inherent in the  Company's  accounts
receivable.

       For the year ended December 31, 1996, one customer, a systems integrator,
accounted  for 10% of the  Company's  revenue.  For the year ended  December 31,
1995, three customers,  an automobile parts  distribution  company, a government
contractor,  and  a  truck  manufacturer,  accounted  for  17%,  17%,  and  13%,
respectively,  of the Company's  revenue.  For the year ended December 31, 1994,
three customers,  a household products  manufacturer,  an electronics  education
firm, and a packaging company, accounted for 23%, 11%, and 10%, respectively, of
the  Company's  revenue.  At December  31,  1996,  two  customers,  a government
contractor  and a department  store,  accounted for  approximately  14% and 18%,
respectively,  of accounts  receivable.  At December 31,1995,  two customers,  a
truck manufacturer and a government contractor,  accounted for approximately 24%
and 45%, respectively, of accounts receivable.

       Recoverability   of  Long-Lived   Assets.   The  Company   evaluates  the
recoverability  of the carrying  value of property and equipment and  intangible
assets in accordance  with the  provisions of Statement of Accounting  Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of".
The Company considers  historical  performance and anticipated future results in
its  evaluation  of  potential  impairment.   Accordingly,  when  indicators  of
impairment are present, the Company evaluates the carrying value of these assets
in  relation  to the  operating  performance  of the  business  and  future  and
undiscounted  cash  flows  expected  to  result  from the use of  these  assets.
Impairment  losses are recognized when the sum of expected future cash flows are
less than the  assets'  carrying  value.  On  December  31,  1996,  the  Company
recognized an impairment loss of approximately $578,000 related to the write-off
of goodwill that resulted from the purchase of U.S. Technologies, Inc. (see Note
2). Factors leading to the impairment  were a combination of historical  losses,
anticipated future losses, and inadequate cash flows.

       Reverse Stock Split. On November 10, 1995, the Board of Directors, acting
on shareholder  approval,  authorized a one-for-three and one half reverse stock
split to be  effective  December  8,  1995.  All share,  per  share,  conversion
amounts,  and  exercise  prices  relating to common  stock,  warrants  and stock
options  included in the  accompanying  financial  statements and footnotes have
been restated to reflect the one-for-three and one half reverse stock split.

       Income  Taxes.   Deferred   income  taxes  are  recognized  for  the  tax
consequences in future years of differences  between the tax bases of assets and
liabilities  and their  financial  reporting  amounts  at each year end based on
enacted tax laws and statutory tax rates  applicable to the periods in which the
differences  are expected to affect  taxable  income.  Valuation  allowances are
established  when necessary to reduce deferred tax assets to the amount expected
to be  realized.  Income tax  expense is the tax  payable for the period and the
change during the period in deferred tax assets and liabilities.

                                      F-9

<PAGE>

             PACIFIC ANIMATED IMAGING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   ----------

       Fair Value of Financial  Instruments.  During 1995,  the Company  adopted
Statement of Financial  Accounting  Standards No. 107, "Disclosure of Fair Value
of  Financial  Instruments"  ("SFAS  107").  The Company  believes  that for all
financial instruments,  as defined by SFAS 107, the carrying amount, as reported
in the balance sheet approximates fair value.

       Reclassifications.  Certain  prior year amounts have been  reclassified
to  correspond  to the current year presentation.


2.     ACQUISITIONS

       During 1996, the Company  acquired the entities  described  below,  which
were  accounted  for by the  purchase  method  of  accounting.  The  results  of
operations of the acquired companies are included in the Company's  statement of
income for the period in which they were owned by the Company.

       Acquisition of Forsight, Inc.

       Effective  February 2, 1996, the Company acquired  substantially  all the
assets of Forsight, Inc. ("Forsight"), a closely held corporation engaged in the
business  of  developing  and  selling  interactive  multimedia  software to the
business  communications and the consumer publishing market for a total purchase
price of approximately  $375,000,  plus direct expenses of the acquisition which
totaled   approximately   $23,000.  The  Company  acquired  cash,  fixtures  and
equipment,  accounts receivable,  intellectual property, and other miscellaneous
assets for the  assumption  of certain  liabilities  of Forsight,  which totaled
approximately  $200,000,  and 20,000  unregistered shares of common stock of the
Company.  Other terms of the acquisition  included the employment by the Company
of  certain  of  Forsight's  key  employees,  who will  continue  as part of the
Company's  senior  management  team; and the acquisition of all of the shares of
Series A Convertible  Preferred  Stock of Forsight  from Circa  Pharmaceuticals,
Inc. in an amount equal to thirty  percent of the net income each year for three
years of Forsight's  operations  up to a maximum  value of $600,000,  payable in
unregistered  shares of common  stock of the Company.  The Series A  Convertible
Preferred  Stock of Forsight was  canceled  after the  acquisition.  The Company
allocated  approximately  $109,000 to identifiable tangible assets and wrote-off
approximately  $289,000 as in process  research and  development  on the date of
acquisition.  The acquisition did not meet  materiality  thresholds for separate
pro forma disclosure.

       Acquisition of U.S. Technologies, Inc.

       Effective July 19, 1996, U.S. Technologies Inc. Acquisition  Corporation,
a  wholly  owned   subsidiary  of  the  Company,   merged  with  and  into  U.S.
Technologies,  Inc.  ("UST"),  with UST being the  surviving  corporation.  As a
result of the merger, the Company owns 100% of UST. Consideration at the time of
purchase amounted to approximately $642,000 which represents the excess of UST's
liabilities over its assets as of the date of the merger.  On December 31, 1996,
the Company  wrote-off  approximately  $578,000,  which represented the purchase
consideration  of  approximately  $642,000,  net  of  approximately  $64,000  of
accumulated amortization, as an impairment loss (see Note 1).

       In addition,  under the terms of the merger, the former 100% owner of UST
has the ability to earn up to 31,068  shares of common stock in the Company (the
market  value of which  was  $400,000  as of the date of the  merger),  provided
certain  financial  milestones are met by UST. The value of the shares of common
stock will be  accounted  for as  compensation  at the time of  issuance.  As of
December 31, 1996,  the Company has not issued any shares of common stock to the
former 100% owner of UST. In addition,  the Company made a commitment to provide
working capital to UST. Through  December 31, 1996,  working capital provided to
UST totaled approximately $722,000.

                                      F-10

<PAGE>

             PACIFIC ANIMATED IMAGING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   ----------

       If the  acquisition  of UST had  occurred on January 1, 1995,  management
estimates that on an unaudited pro forma  consolidated  basis,  revenues,  total
operating  expenses,  net loss, and net loss per common share would have been as
follows:
                                            1996                  1995
                                            ----                  ----
       Revenues                          $2,918,235            $5,361,617
       Total operating expenses          $6,945,473            $7,731,445
       Net loss                         ($4,036,851)          ($2,421,090)
       Net loss per common share           ($2.72)               ($4.37)

       These  estimates  were  based  on  assumptions   that  management   deems
appropriate,  but the results are not necessarily indicative of those that might
have occurred had the acquisition taken place on January 1, 1995.

3.     ACCOUNTS RECEIVABLE

       Accounts  receivable  as of  December  31,  1996 and 1995  consist of the
following:

                                                           December 31,
                                                       1996           1995
                                                       ----           ----
       Accounts receivable                           $ 451,421      $ 266,674
       Less: Allowance for doubtful accounts            40,201          6,019
                                                     ---------      ---------
                                                     $ 411,220      $ 260,655
                                                     =========      =========


4.     ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

       Accounts payable and accrued liabilities as of December 31, 1996 and 1995
consist of the following:

                                                         December 31,
                                                     1996            1995
                                                     ----            ----
       Accounts payable                            $  398,273      $ 101,822
       Payroll and related expenses                   171,262         67,407
       Other                                          227,194        105,084
                                                   ----------     ----------
                                                   $  796,729      $ 274,313
                                                   ==========      =========

5.        LINE OF CREDIT

       As of December 31, 1996, the Company's  subsidiary,  UST, had $320,833 of
short-term  debt  outstanding  under a line of credit with a bank.  This line of
credit  is  collateralized  by  accounts  receivable  as  well  as the  personal
guarantee of the former sole  stockholder  of UST. In July 1996,  in  connection
with the acquisition of UST, this line of credit was  renegotiated  and required
twelve  monthly  principal  payments,  which are  guaranteed by the Company,  of
$5,833 plus interest  through July,  1997.  Interest is at the bank's prime rate
plus 2%. The remaining unpaid principal balance is due and payable on August 18,
1997;  accordingly,  as of  December  31,  1996,  the  outstanding  balance  was
classified as a current obligation.

                                      F-11

<PAGE>

             PACIFIC ANIMATED IMAGING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   ----------

6.        NOTE PAYABLE TO BANK

       As of December  31,  1996,  the  Company's  subsidiary,  UST,  had a note
payable to a bank, as follows:

                                                                    December 31,
                                                                       1996
                                                                       ----
         Note payable to bank in monthly payments of
                  $3,222, including interest at 9.75% through
                  June 1998; collateralized by equipment,
                  inventory, and accounts receivable                   $53,242
         Less current portion, included in other current liabilities   (34,989)
                                                                       -------
         Note payable to bank, less current portion                    $18,253
                                                                       =======


7.     COMMON STOCK

       In connection with the Company's public offering of 920,000 shares of its
common stock in December 1995, a warrant to purchase 80,000 shares of its common
stock was issued to the underwriter. The warrant is exercisable at the option of
the  holder,  in  whole or in part,  at a price of $7.09  per  share at any time
during the period  December 15, 1996 through  December 15, 2000.  These warrants
were exercised in February,  1997 for which the Company received net proceeds of
approximately $540,000.

       In connection with the Company's public offering of 171,428 shares of its
common stock in November 1993, a warrant to purchase 17,142 shares of its common
stock was issued to the underwriter. The warrant is exercisable at the option of
the  holder,  in whole or in part,  at a price of  $39.20  per share at any time
during the period November 10, 1994 through November 9, 1998.

8.     STOCK OPTION PLANS

       Incentive Stock Option Plans

       In 1992, the shareholders  approved the Company's  Incentive Stock Option
Plan ("ISO Plan No. 1") for its  employees  to  purchase up to a total of 39,222
registered  shares of the Company's  common  stock.  In 1994,  the  shareholders
approved the Company's  Incentive Stock Option Plan No. 2 ("ISO Plan No. 2") for
its  employees  to  purchase  up to a total of 28,571  registered  shares of the
Company's  common stock. For both Incentive Stock Option Plans, the option price
per share may not be less than the fair market value of the stock on the date of
the grant,  the terms of the options  are ten years from the date of grant,  and
options  vest  over a  five-year  period  beginning  on the  date of  grant.  If
immediately  before a grant an employee owns more than 10% of the total combined
voting  stock of the Company,  the exercise  price shall be at least 110% of the
fair market  value of the stock on the date of the grant and the options  expire
five years from the date of grant.

                                      F-12

<PAGE>


             PACIFIC ANIMATED IMAGING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   ----------

       A summary of option activity under ISO Plans No. 1 and No. 2 is as
follows:

                                                    Number     Weighted Average
                                                  of Options     Option Prices
                                                  ----------   ----------------
Options outstanding at December 31, 1993            24,568
     Granted                                        25,710
     Exercised                                        --
     Expired                                       (27,996)
                                                   --------
Options outstanding at December 31, 1994            22,282          $ 8.10
     Granted                                        41,138          $11.375
     Exercised                                        (285)         $ 7.875
     Expired                                        (7,999)         $ 8.34
                                                    -------
Options outstanding at December 31, 1995            55,136          $ 10.57
     Granted                                        37,711          $ 10.50
     Exercised                                        --              --
     Expired                                       (45,708)         $ 10.75
                                                   --------
Options outstanding at December 31, 1996            47,139          $ 10.00
                                                    ======

       Nonqualified Stock Option Plans

       In 1992,  the  shareholders  approved the  Company's  Nonqualified  Stock
Option Plan ("Nonqualified Plan") for its directors to purchase up to a total of
8,571 registered  shares of the Company's  common stock.  Effective in 1994, the
Company  adopted  Nonqualified  Stock Option Plan No. 2, under which the Company
authorized  the issuance of options to  consultants  for the purchase of up to a
total of 71,428  registered  shares of its common stock.  Effective in 1995, the
Company  adopted  Nonqualified  Stock Option Plan No. 3, under which the Company
authorized  the issuance of options to  consultants  for the purchase of up to a
total of 13,571  shares of its common  stock.  Effective  in 1996,  the  Company
adopted  Nonqualified Stock Option Plans No. 4, 5, and 6 under which the Company
authorized the issuance of options to employees and consultants for the purchase
of up to a total of 32,500,  100,000, and 150,000 shares,  respectively,  of its
common  stock.  The option price per share under these plans may be greater than
or less than the fair market  value of the stock on the date of the grant.  Both
the option  price and the terms of the  options are  determined  by the Board of
Directors  or a committee  of the Board as of the date of the grant.  Generally,
the terms of the options are ten years from the date of grant,  and options vest
100% on the date of grant. A summary of option  activity under the  Nonqualified
Plans is as follows:

                                                    Number    Weighted Average
                                                  of Options    Option Prices
                                                  ----------  ----------------
Options outstanding at December 31, 1993             8,571
     Granted                                        37,142
     Exercised                                        --
     Expired                                        (8,571)
                                                    -------
Options outstanding at December 31, 1994            37,142         $7.20
     Granted                                        46,426         $8.88
     Exercised                                        --            --
     Expired                                          --            --
                                                   -------
Options outstanding at December 31, 1995             83,568        $8.14
     Granted                                        182,500        $10.67
     Exercised                                      (32,856)       $7.26
     Expired                                        (28,500)       $5.25
                                                   --------
Options outstanding at December 31, 1996            204,712        $11.04
                                                    =======

                                      F-13

<PAGE>

             PACIFIC ANIMATED IMAGING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   ----------

       As of  December  31,  1996,  there was an  aggregate  of 158,871  options
available  for future grant under the  Incentive  Stock Option and  Nonqualified
Stock Option  Plans.  As of December  31, 1996 and 1995,  there were 230,020 and
102,476 options, respectively,  exercisable under the Incentive Stock Option and
Nonqualified  Stock Option Plans at weighted  average  exercise prices of $10.79
and $8.40,  respectively.  The weighted  average  fair value of options  granted
during  the  years  ended  December  31,  1996  and 1995 was  $5.44  and  $6.95,
respectively.   As  of  December  31,  1996,  the  weighted  average   remaining
contractual  life of  options  outstanding  was 9 years and the range of options
prices was $7.88 - $11.75.

       Performance Based Stock Plans

       During 1994, the Company adopted the  Performance  Stock Plan under which
certain officers and key employees of the Company may be granted awards of up to
an  aggregate  of 85,714  Performance  Shares  upon the  attainment  of  certain
performance  objectives.  Each awarded  Performance  Share is convertible to one
share of the Company's common stock at the earlier of December 31, 1997,  death,
total  disability,  termination of the plan, or other event as determined by the
Executive Compensation and Stock Option Committee of the Board of Directors.  As
of December  31,  1996,  no  Performance  Shares had been  awarded and there are
12,857 shares available for award.

       In  connection  with the  acquisition  of UST, the Company  established a
Phantom Stock Plan (the "Plan") for UST's key  employees.  Pursuant to the Plan,
UST's  key  employees  have  the  ability  to earn up to  46,602  shares  of the
Company's common stock, the market value of which was $600,000 as of the date of
the merger.  The ability to earn these shares is subject to UST meeting  certain
financial milestones. As of December 31, 1996, no shares had been awarded.

       Pro Forma Information in Accordance with SFAS 123

       The Company applies Accounting  Principles Board Opinion No. 25 (APB 25),
"Accounting  for Stock  Issued to  Employees",  and related  interpretations  in
accounting for its equity participation programs.  Accordingly,  no compensation
cost has been recognized for its incentive and  nonqualified  stock option plans
related to stock options  granted to employees.  Had  compensation  cost for the
Company's  incentive stock option plans been determined  based on the fair value
at the grant dates for awards  under those plans  consistent  with the method of
accounting  under  Statements  of  Financial   Accounting   Standards  No.  123,
"Accounting for Stock-based  Compensation"  ("SFAS 123"), the Company's net loss
and net loss per share would have been the amounts indicated below:

                                                         1996          1995
                                                         ----          ----
       Net loss                     As reported       $3,823,621    $1,949,415
                                    Pro forma         $4,861,148    $2,360,051

       Net loss per common share    As reported          $2.58         $3.52
                                    Pro forma            $3.28         $4.26

       The fair value of each option is  estimated  on the date of grant using a
type of Black-Scholes  option-pricing  model with the following weighted average
assumptions  used for option grants during the years ended December 31, 1996 and
1995, respectively:  dividend yield of 0%, expected volatility of 66%, risk-free
interest rate of 6.28% and 6.1%, and expected terms of 3.9 years.

                                      F-14

<PAGE>


             PACIFIC ANIMATED IMAGING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   ----------


9.     INCOME TAXES

       The tax effects of the primary  temporary  differences and  carryforwards
which give rise to net  deferred  tax assets are as follows as of  December  31,
1996 and 1995:

                                                           December 31,
                                                       1996             1995
                                                       ----             ----

           Net operating loss carryforwards       $ 3,574,000       $ 2,315,000
           Other                                      273,000            28,000
                                                  -----------       -----------
                                                    3,847,000         2,343,000
           Valuation allowance                     (3,847,000)       (2,343,000)
                                                  -----------       -----------
                                                        --               --
                                                  ===========       ===========

       Realization  of  deferred  tax  assets  at the  balance  sheet  date  are
dependent  on  the  Company's   ability  to  generate   future  taxable  income.
Accordingly,  management  has provided a full  valuation  allowance  against the
Company's deferred tax assets as of December 31, 1996 and 1995.

       The change in the  deferred  tax asset  valuation  allowance is primarily
attributable to the increase in net operating loss carryforwards. As of December
31, 1996,  net operating loss  carryforwards  total  approximately  $9.3 million
which expire at various times  through  2011. As a result of certain  changes in
ownership, the use of these carryforwards to offset future taxable income may be
limited.


10.    RELATED PARTY TRANSACTIONS

       Prior to the acquisition,  UST's sole stockholder advanced amounts to UST
to fund working capital needs. The amounts due are non-interest  bearing and are
to be repaid  upon  availability  of funds and after all amounts due to the bank
are repaid in full by UST.  Accordingly,  these loans are  considered  long-term
obligations. The amount due as of December 31, 1996 was $120,579.


11.    LEASES

       The Company leases office space,  automobiles and certain equipment under
separate  noncancelable  operating  leases which expire at various dates through
2000. The agreements  generally require that the Company pay applicable utility,
property taxes, maintenance, and insurance costs. Certain excess office space is
subleased to a third party.  The future annual minimum rental  payments,  net of
sublease income,  under these leases at December 31, 1996 are as follows:  1997,
$190,292;  1998, $103,015;  1999, $69,604;  2000, $23,654;  and thereafter,  $0.
Rental  expense for the years ended  December  31,  1996,  1995,  and 1994,  was
approximately $297,000, $170,000, and $152,000, respectively.


12.    RETIREMENT AND OTHER BENEFIT PLANS

       Effective January 1, 1994, the Company established a defined contribution
retirement  plan  covering  eligible  full-time  employees.   Under  this  plan,
participants can contribute up to the lesser of 15% of their compensation or the
maximum allowable by IRS regulations, currently $9,500. Employees may direct the
investment of their contributions among several mutual fund options. The Company
may make  discretionary  contributions out of current or accumulated net profit.
Expense for the years ended  December  31, 1996 and 1995  totaled  approximately
$1,250 and $1,200, respectively.

                                      F-15

<PAGE>

             PACIFIC ANIMATED IMAGING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   ----------

       During 1994, the Company  entered into split dollar  agreements  with two
officers  whereby the Company pays the  premiums on split dollar life  insurance
policies held by these  individuals.  Under the  agreements,  the Company has an
interest in the policy equal to the cumulative value of all premiums paid by the
Company and will be reimbursed for these premiums upon death, termination of the
agreement, or termination of employment.  However, since it is possible that the
Company at its discretion may waive this  requirement,  no asset for the premium
has  been  recorded.   The  Company  paid  approximately  $15,000  and  $22,500,
respectively,  in  premiums  for the years  ended  December  31,  1996 and 1995.
Effective June 14, 1995, this plan was terminated with respect to one officer in
connection with his resignation from the Company.


13.    COMMITMENTS

       The Company  has  entered  into an  employment  agreement  with a certain
officer of the Company. This agreement,  which is automatically renewable at the
Company's option, expires in 1998 and requires payments of $100,000 and $66,667,
respectively, in 1997 and 1998, respectively.

       In connection  with the  acquisition of UST, the former 100% owner of UST
entered into an employment  agreement  with the Company for a three year period,
automatically  renewable for one year periods  following the termination date at
the option of either  party.  This  agreement  requires  payments  of  $100,000,
$100,000, and $50,000, in 1997, 1998, and 1999, respectively.

       In connection with the development of certain software products,  UST has
entered  into  royalty  agreements  with  developers  that  require  UST  to pay
approximately one-third of gross revenue from sales of the products. Amounts are
payable once a certain amount advanced to the developer has been  recovered.  As
of December 31, 1996, no amounts have been accrued or paid to developers.

14.      SUBSEQUENT EVENTS

       On January 30, 1997, the Board  of  Directors  of  the  Company  voted  a
three-for-two split of the Company's common stock.  The split is contingent upon
shareholder  approval  of  a  proposal  to  amend  the  Company's Certificate of
Incorporation. Neither the par value of the stock nor  the  number of authorized
shares will be affected by the split. The result of the shareholder vote will be
announced at the annual meeting of shareholders, scheduled to be held on May 22,
1997. Had the additional shares resulting from the  proposed  stock  split  been
outstanding  throughout  all  of  1996, 1995, and 1994, net loss per share would
have  been  as  follows:  1996,  $1.72;  1995, $2.35; and 1994, $3.08. Financial
information contained elsewhere in this report has not  been adjusted to reflect
the impact of the proposed common stock split.

       The Company had a subcontract with the Data Technologies Division of TRW,
Inc. ("TRW") to provide training services to TRW in support of its contract with
the State of California for the development and  implementation  of a management
information system for the state's  correctional  facilities.  Through 1996, the
Company had  completed  the design  phase and had begun the  development  of the
training  program.  However,  effective  February 21, 1997, TRW's prime contract
with the State of California was terminated.  Accordingly,  no more work will be
performed by the Company with respect to this subcontract. During the years 1996
and 1995,  the Company had  recognized  revenue of  approximately  $134,000  and
$118,000, respectively.

       On March 20,  1997,  the  Company  entered  into a  financial  consulting
agreement  ("consulting  agreement") with First Cambridge Securities Corporation
("First Cambridge"). First Cambridge is required to review materials provided by
the Company and advise the  Company.  First  Cambridge is required to provide at
least 50 hours of  service  per  month  on a yearly  average.  The  terms of the
agreement  include that First Cambridge will receive 100,000 stock options at an
exercise  price of $2.00 per share.  First  Cambridge  vests  immediately in the
100,000  options  and  will  have an  exercise  period  of six (6)  months.  The
consulting  agreement is for the five year period January 1, 1998 - December 31,
2002.  Accordingly,  the Company will be recognizing an expense of approximately
$1.3 million,  using the  straight-line  method over the term of the  consulting
agreement, or approximately $22,000 per month, beginning January 1, 1998.

                                      F-16

<PAGE>

                                    PART III

Item 9.  Directors and Executive Officers of the Registrant; Compliance With
         Section 16(a) of the Exchange Act.

         The  following  table sets forth  certain  information  concerning  the
directors and executive officers of the Company as of March 7, 1997.

Name                   Age    Position

John J. Cadigan        66     Chairman of the Board, President, Chief Executive
                              Officer, Secretary, and Treasurer of the Company

Suzanne C. Brown       31     Chief Financial and Accounting Officer of the
                              Company

A. David Rossin        65     Director

Joseph Amato           64     Director

Frederick D. Pettit    61     Director


         John J. Cadigan has been Chairman, Chief Executive Officer,  Secretary,
Treasurer,  and a director of the Company since  February,  1991. He assumed the
position of President in July 1995.  Prior to joining the Company,  Mr.  Cadigan
served as  Chairman of PAI from its  inception  in 1989 until it was merged into
the Company in February, 1991.

         Suzanne C. Brown,  C.P.A.  has been with the Company since February,
1994. In January 1996, Ms. Brown was promoted to Chief Financial  Officer.  From
August,  1988 to February,  1994, Ms. Brown was with KPMG Peat Marwick, an
international accounting firm.

         Dr. A. David Rossin has been a director of the Company since  February,
1991. He has been employed  since August 1987 as President  of Rossin and
Associates,  a California  consulting  firm which  specializes  in nuclear
energy matters.  Dr. Rossin served as Assistant Secretary of the U.S. Energy
Department from 1986 to 1987.

         Joseph Amato has been a director of the Company since  December,  1993.
Mr.  Amato  retired  during  1996 from TRW  Inc.'s  Systems  Integration  Group,
headquartered  in Fairfax,  Virginia,  where he served as Director of  Strategic
Planning  since  October,  1990.  From March to October,  1990,  Mr. Amato was a
self-employed consultant for the Government and private industry.

         Frederick D. Pettit has been a director of the Company  since July
1995.  Mr. Pettit  currently  serves as Chairman and CEO of Consultant Pettit
Associates,  a private  international  investment banking firm of which he is
the sole  shareholder,  since  August,  1994.  Mr.  Pettit was

                                       18

<PAGE>

Chairman,  CEO, and COO of EEONYX  Corporation  from September, 1991 to May,
1992.  From September, 1989, to September, 1991, Mr. Pettit was employed by
Chemical Bank.

Board of Directors

                  The Company's  Certificate of Incorporation  and Bylaws divide
the Company's  directors into three classes  designated as Class I, Class II and
Class  III,  that serve  staggered  three-year  terms that  expire at the annual
meeting of the  Stockholders in the final year of the term. Each class consists,
as nearly as may be  possible,  of  one-third  of the total  number of directors
constituting  the entire Board of Directors.  Directors serve for their term and
until their  successors  are duly elected,  or until their earlier  resignation,
removal from office,  or death. The remaining  directors may fill any vacancy in
the Board of Directors for an unexpired term.

         There are  presently  four  directors  serving on the  Board.  A. David
Rossin has been  designated  as a Class I director and his term expires in 1999.
Joseph Amato has been  designated as a Class II director and his term expires in
1997. On March 14, 1997, Mr. Amato  tendered his  resignation to be effective at
the next annual meeting.  The Board will not have a nominee in time for the 1997
annual meeting but does intend to fill the vacancy once a qualified candidate is
found. John J. Cadigan and Frederick D. Pettit have been designated as Class III
directors and their terms expire in 1998.

         The Company has two standing committees, the Executive Compensation and
Stock Option  Committee and the Audit  Committee.  Mr. Amato, Mr. Rossin and Mr.
Pettit are the  members  of both the  Executive  and Stock  Option and the Audit
Committees.  The Executive Compensation and Stock Option Committee has the power
and  authority  to  designate,  recommend  and/or  review  compensation  of  the
Company's executive officers and other employees,  including salaries,  bonuses,
fringe  benefits and the grant of stock  options.  The Audit  Committee  has the
power and authority to recommend  the  engagement  of  independent  accountants,
review  external  and  internal   auditing   procedures  and  policies,   review
compensation paid to auditors and make recommendations  and/or implement changes
with respect to the foregoing.

         Officers are elected by the Board of Directors at the annual meeting of
directors  following  the annual  shareholders  meeting  and serve  until  their
successors  are  duly  elected,  subject  to  earlier  removal  by the  Board of
Directors.

                                       19

<PAGE>


Item 10.  Executive Compensation

         This information will be contained in the definitive proxy statement of
the Company  for the 1997  Annual  Meeting of  Stockholders  under the  captions
"Directors'  Compensation",  "Executive Compensation",  "Employment Agreements",
and "Executive and Other Employee  Benefit Plans" and is incorporated  herein by
reference.

Item 11.  Security Ownership of Certain Beneficial Owners and Management

         This information will be contained in the definitive proxy statement of
the  Company  for the 1997  Annual  Meeting of  Stockholders  under the  caption
"Security  Ownership  of  Certain  Beneficial  Owners  and  Management"  and  is
incorporated herein by reference.

Item 12.  Certain Relationships and Related Transactions

         This information will be contained in the definitive proxy statement of
the  Company  for the 1997  Annual  Meeting of  Stockholders  under the  caption
"Transactions  Involving  Directors and Officers" and is incorporated  herein by
reference.

                                       20

<PAGE>


                                    PART IV

Item 13.  Exhibits and Reports on Form 8-K.

(a)(1)(2)    Financial Statements
       A list of the Financial  Statements filed as a part of this Report is set
forth  in  Item 7 and  appears  at  Page  F-1 of  this  Report;  which  list  is
incorporated herein by reference.

<TABLE>
<CAPTION>
(a)(3)  Exhibits
        --------
<S> <C>
       1(A)       Stock Purchase Agreement with Forsight, Inc. (8)
       1(B)       Asset Purchase Agreement with Forsight, Inc. (8)
       2          Plan of Merger between U.S. Technologies, Inc. Acquisition Corporation and U.S. Technologies, Inc (9)
       2(A)       Articles of Merger of U.S. Technologies, Inc and U.S. Technologies, Inc. Acquisition Corporation (9)
       3          Certificate of Incorporation and Amendment thereto (1)
       3(B)       By-Laws (1)
       3(C)       Form of Amendments to Certificate of Incorporation and Bylaws
                  dated October 20,  1995 (5)
       10         Form of Indemnification Agreement executed in favor of each
                  officer and director of the Company (1)
       10(A)      Form of Indemnification Agreement Amendment executed in favor
                  of certain officers and directors of the Company (8)
       10(B)      Form of Indemnification  Agreement executed in favor of each
                  officer and  director of the Company (8)
       10(C)      Teaming Agreement between command Support Division, Systems
                  Integration Group, TRW, Inc. and the Registrant (1)
       10(G)      Employment Agreement (9/23/94) - William H. Kauffman (3)
       10(H)      Employment Agreement with John J. Cadigan dated September 1, 1995 (5)
       10(J)      Consulting Agreement (6/15/95) - Larry Crawford (5)
       10(K)      Assignment of Consulting Agreement (8/10/95) - Larry Crawford (5)
       10(N)      Consulting Agreement with Robert Neff dated July 7, 1994 (6)
       10(O)      Master Development Agreement and related documents between
                  Mack Trucks, Inc. and the Company dated June 26, 1995 (6)
       10(Q)      Form of Underwriter's Consulting Contract (7)
       10(U)      Employment Agreement (7/15/96) - Peter S. Steele (11)
       10(V)      Loan Renewal and Modification Agreement (11)
       21         Subsidiaries of Registrant (2)
       23         Consent of Coopers & Lybrand L.L.P. (11)
       99         Incentive Stock Option Plan No. 1 (4)
       99(A)      Nonqualified Stock Option Plan No. 1(4)
       99(B)      Incentive Stock Option Plan No. 2 (5)
       99(D)      Phantom Stock Performance Stock Plan (3)
       99(E)      Nonqualified Stock Option Plan No. 2 (5)
       99(F)      Nonqualified Stock Option Plan No. 3 (5)
       99(H)      Split Dollar Plan Agreement (11/21/94) - John J. Cadigan (3)
       99(I)      Nonqualified Stock Option Plan No. 4 (8)
       99(J)      Nonqualified Stock Option Plan No. 5 (11)
       99(K)      Nonqualified Stock Option Plan No. 6 (11)
       99(L)      Nonqualified Stock Option Plan No. 7 (10)
</TABLE>
-------------------
(1)    Incorporated by reference to Form S-1 Registration Statement, File No.
       33-68826 Exhibits 2, 3, 3(A), 3(B), 10, 10(A), 10(B), 10(C), 10(D),
       10(E), 10(G), 10(H), and 10(J), respectively.
(2)    JMC Company, Inc. and Forsight, Inc., are wholly owned subsidiaries of
       the Company incorporated under the laws of the State of Maryland.  U.S.
       Technologies, Inc. is a wholly owned subsidiary incorporated under the
       laws of the State of Florida.
(3)    Incorporated by reference to December 31, 1994 Form 10-K.
(4)    Incorporated by reference to Form S-8 Registration Statement, File No.
       33-53536.
(5)    Incorporated by reference to Original Form SB-2, File No. 33-97776.
(6)    Incorporated by reference to Amendment No. 1 to Form SB-2, File No.
       33-97776.
(7)    Incorporated by reference to Form SB-2 Registration Statement, File No.
       33-97776, Exhibit 1(C).
(8)    Incorporated by reference to December 31, 1995 Form 10-K.
(9)    Incorporated by reference to Form 8-K, dated July 19, 1996.
(10)   Incorporated by reference to Form S-8 Registration Statement, File No.
       333-23777.
(11)   Filed herewith.

(b)    Reports on Form 8-K
       -------------------
       The following report on Form 8-K was filed during the three months ended
December 31, 1996:  November 14, 1996 - Amendment No. 1 to the Form 8-K filed on
August 2, 1996,  Acquisition  or  Disposition of Assets - U.S. Technologies,
Inc. Merger.

                                       21

<PAGE>


                                   SIGNATURES


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

PACIFIC ANIMATED IMAGING CORPORATION


BY:   /s/  Suzanne C. Brown                              Dated:  March 31, 1997
     ----------------------
     Suzanne C. Brown, Chief Financial Officer

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  Report has been  signed  below by the  following  persons on behalf of the
Registrant and in the capacities and on the dates indicated:

Signature                                Title                    Date
---------                                -----                    ----

/s/ John J. Cadigan                 Chairman of the Board,      March 31, 1997
-------------------                 President, Chief Executive
John J. Cadigan                     Officer, Secretary and
                                    Treasurer


/s/ Dr. A. David Rossin             Director                    March 31, 1997
-----------------------
Dr. A. David Rossin



/s/ Frederick Pettit                Director                    March 31, 1997
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Frederick Pettit