SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                  FORM 10-QSB

         [X]      QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                      For the quarter ended March 31, 1997
                                       OR

         [   ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

          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 Identification  No.)
  incorporation or organization)

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

                                 Not applicable
   (Former name, former address and former fiscal year if changed since last
                                    report)

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
                                      ---     ---

 1,733,839 Common Shares, $.0001 par value were issued and outstanding at March
                                   31, 1997.


<PAGE>


                      PACIFIC ANIMATED IMAGING CORPORATION

                               TABLE OF CONTENTS
                                                                    Page No.
                                                                    --------
Part I - Financial Information

Consolidated Balance Sheets, March 31, 1997 (unaudited)
       and December 31, 1996                                           3

Consolidated Statements of Operations for the three
       months ended March 31, 1997 and 1996 (unaudited)                4

Consolidated Statements of Cash Flows for the three
       months ended March 31, 1997 and 1996 (unaudited)                5

Notes to Consolidated Financial Statements (unaudited)                 6

Management's Discussion and Analysis of Financial
       Condition and Results of Operations                             7


Part II - Other Information

Items 1-6                                                             10

Signature                                                             11

                                       2


<PAGE>
             PACIFIC ANIMATED IMAGING CORPORATION AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                                March 31,             December 31,
                                                                                   1997                   1996
                                                                           -------------------    -------------------
                                                                               (Unaudited)
<S> <C>
                                     ASSETS
    Current assets
           Cash and cash equivalents                                       $          960,604     $          939,281
           Investment in U.S. government securities                                   474,144                474,144
           Accounts receivable, net                                                 1,455,178                411,220
           Interest receivable                                                         27,863                 19,814
           Inventory                                                                   52,888                 18,838
           Prepaid expenses and other current assets                                  122,518                150,819
                                                                           -------------------    -------------------
              Total current assets                                                  3,093,195              2,014,116
                                                                           -------------------    -------------------

    Property and equipment, at cost
           Computers, furniture and equipment                                         995,541                990,105
           Less accumulated depreciation                                              537,468                490,193
                                                                           -------------------    -------------------
              Net property and equipment                                              458,073                499,912
                                                                           -------------------    -------------------

    Other assets                                                                    1,204,042                 55,681
                                                                           -------------------    -------------------

                                                                           $        4,755,310     $        2,569,709
                                                                           ===================    ===================

                      LIABILITIES AND STOCKHOLDERS' EQUITY
    Current liabilities
           Accounts payable and accrued liabilities                        $        1,301,217     $          796,729
           Deferred revenue                                                           135,504                 66,088
           Customer deposit                                                            50,000                 50,000
           Line of credit                                                             303,333                320,833
           Other current liabilities                                                   53,865                 96,063
                                                                           -------------------    -------------------
              Total current liabilities                                             1,843,919              1,329,713

    Note payable to bank                                                                9,062                 18,253
    Deferred rent and other                                                           143,982                149,125
                                                                           -------------------    -------------------

              Total liabilities                                                     1,996,963              1,497,091
                                                                           -------------------    -------------------

    Commitments and contingencies

    Stockholders' equity
           Common stock, $.0001 par value.  Authorized 5,000,000
              shares; issued and outstanding 1,733,839 and 1,518,880
              shares as of March 31, 1997 and December 31, 1996                           174                    152
           Additional paid-in capital                                              14,058,571             11,893,549
           Accumulated deficit                                                    (11,154,969)           (10,665,959)
           Deferred compensation                                                     (145,429)              (155,124)
                                                                           -------------------    -------------------
              Total stockholders' equity                                            2,758,347              1,072,618
                                                                           -------------------    -------------------

                                                                           $        4,755,310     $        2,569,709
                                                                           ===================    ===================
</TABLE>

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

                                       3

<PAGE>
             PACIFIC ANIMATED IMAGING CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
               FOR THE THREE MONTHS ENDED MARCH 31, 1997 and 1996
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                           Three months ended
                                                                                 March 31,
                                                                   ---------------------------------------
                                                                          1997                 1996
                                                                   -----------------    ------------------
<S> <C>
      Revenue

           Service fees                                            $        673,379     $         225,624

           Product sales                                                  1,055,003                15,236

           Royalties                                                          9,347                 6,111

                                                                   -----------------    ------------------
                   Total revenue                                          1,737,729               246,971
                                                                   -----------------    ------------------

      Expenses

           Cost of service fees                                             412,423               262,855

           Cost of product sales                                            942,885                 5,553

           Research and development                                          72,444                41,156

           Selling, general and administrative                              814,808               452,525

           Write-off of purchased research and development                       --               289,330

                                                                   -----------------    ------------------
                   Total operating expenses                               2,242,560             1,051,419

                                                                   -----------------    ------------------
      Loss from operations                                                 (504,831)             (804,448)

      Other income, net                                                      15,821                42,245

                                                                   =================    ==================
      Net loss                                                     $       (489,010)    $        (762,203)
                                                                   =================    ==================

      Weighted average number of common shares outstanding                1,584,465             1,453,771
                                                                   =================    ==================

      Net loss per common share                                    $          (0.31)    $           (0.52)
                                                                   =================    ==================
</TABLE>

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

                                       4

<PAGE>
             PACIFIC ANIMATED IMAGING CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
               For the three months ended March 31, 1997 and 1996
                                  (Unaudited)
<TABLE>
<CAPTION>
                                                                                               Three months ended
                                                                                                    March 31,
                                                                                   ------------------------------------------
                                                                                           1997                   1996
                                                                                   -------------------    -------------------
<S> <C>
     Cash flows from operating activities
        Net loss                                                                   $         (489,010)    $         (762,203)
        Adjustments to reconcile net loss to net cash
               used in operating activities, net of effects
               from purchase of Forsight, Inc.
            Depreciation and amortization                                                      59,638                 34,416
            Amortization of deferred compensation                                               9,695                     --
            Loss on disposal of assets                                                             --                     39
            Write-off of purchased research and development                                        --                289,330
            Increase (decrease) in cash from changes in assets and liabilities
               Accounts receivable                                                         (1,043,958)               (40,091)
               Interest receivable                                                             (8,049)               (10,364)
               Inventory                                                                      (34,050)                    --
               Prepaid expenses and other current assets                                       28,301                (42,458)
               Other assets                                                                     1,639                  1,275
               Accounts payable and accrued liabilities                                       504,488                (85,446)
               Other liabilities                                                               61,215               (127,779)

                                                                                   -------------------    -------------------
        Net cash used in operating activities                                                (910,091)              (743,281)
                                                                                   -------------------    -------------------

     Cash flows from investing activities
        Capital expenditures                                                                  (17,799)               (40,824)
        Proceeds from sale of property and equipment                                               --                    200
        Payment for purchase of Forsight, net of cash acquired                                     --                (46,424)

                                                                                   -------------------    -------------------
        Net cash used in investing activities                                                 (17,799)               (87,048)
                                                                                   -------------------    -------------------

     Cash flows from financing activities
        Net proceeds from exercise of options and warrants                                    975,044                     --
        Payments on line of credit                                                            (17,500)                    --
        Payments on note payable to a bank                                                     (8,331)                    --

                                                                                   -------------------    -------------------
        Net cash provided by financing activities                                             949,213                     --
                                                                                   -------------------    -------------------

     Net increase (decrease) in cash and cash equivalents                                      21,323               (830,329)

     Cash and cash equivalents, beginning of period                                           939,281              4,177,534

                                                                                   ===================    ===================
     Cash and cash equivalents, end of period                                      $          960,604     $        3,347,205
                                                                                   ===================    ===================
</TABLE>

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

                                       5


<PAGE>


             PACIFIC ANIMATED IMAGING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

1.       GENERAL

         The  consolidated  financial  statements  of Pacific  Animated  Imaging
Corporation  (the  "Company")  as of and for the three month periods ended March
31, 1997 and 1996 are unaudited; however, in the opinion of management,  include
all adjustments,  consisting of normal recurring  adjustments necessary for fair
presentation of such financial information. These financial statements should be
read in  conjunction  with the audited  financial  statements  and notes thereto
included in the  consolidated  financial  statements for the year ended December
31, 1996 included in the Company's Annual Report on Form 10-KSB previously filed
with the Securities and Exchange Commission.

2.       STOCK SPLIT

         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 and is subject to ratification by the Board of Directors.  Neither
the par value of the stock nor the number of authorized  shares will be affected
by the split.  The  results 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
during the three month periods ended March 31, 1997 and 1996, net loss per share
would have been as follows: 1997, $ 0.21 and 1996, $ 0.35. Financial information
contained  elsewhere in this report has not been  adjusted to reflect the impact
of the proposed common stock split.

3.       NEW ACCOUNTING STANDARD

         In February  1997,  the  Financial  Accounting  Standards  Board issued
Statement of Financial  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.

4.       COMMITMENTS

         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,  perform  financial  consulting  services,  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.  First Cambridge  exercised their options on March 28,
1997.

                                       6

<PAGE>


As of March 31, 1997,  the Company had a deferred  asset  of  approximately $1.1
million.  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 $1.1 million, using the straight-line  method over the term of the
consulting  agreement,  or approximately $22,000 per month, beginning January 1,
1998.


          Management's Discussion and Analysis of Financial Condition
                           and Results of Operations

Results of Operations

       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 three  month  period  ended  March 31, 1997 were
$1,737,729  as compared to $246,971 for the same period of 1996,  an increase of
approximately  $1,491,000.  This  increase  was  primarily  attributable  to the
inclusion of UST revenues of approximately $1,462,000, as well as an increase in
sales of the Company's custom software  products of approximately  $40,000.  The
net loss and net loss per share were $489,010 and $0.31 per share, respectively,
for the three month period  ended March 31, 1997,  as compared to a net loss and
net loss per share of $762,203 and $0.52 per share,  respectively,  for the same
period of the prior year.

       During the three month period ended March 31, 1997, revenue from services
fees for systems integration and software  development  services provided by UST
was $407,490, as compared to $0 in the prior year.

       During the three month period  ended March 31, 1997,  revenue from custom
multimedia  software  development  services was $265,889 as compared to $225,624
for the same period of the prior year, an increase of  approximately  $40,000 or
18%. The increase is due to several contracts which started in the first quarter
of 1997.

       During the three month period ended March 31, 1997, revenue from sales of
products was $1,055,003,  as compared to $15,236 in the same period of the prior
year, an increase of approximately $1,040,000.  All of the revenue from sales of
products  for the three month period  ended March 31, 1997  represents  sales of
computer  hardware and software products by UST. UST sells computer hardware and
software  products  as  part  of  their  systems   integration   services.   The
approximately $15,000 in revenue for the three month period ended March 31, 1996
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.

       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 $9,347  during the three month period ended March 31,
1997,  as compared to $6,111 for the same period of the prior year,  an increase
of approximately $3,000 or 53%. 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.

                                       7

<PAGE>


       During the three month  period  ended  March 31,  1997,  total  operating
expenses  were  $2,242,560  as compared to  $1,051,419 in the same period of the
prior year, an increase of  approximately  $1.2 million.  The operations of UST,
acquired  by the Company in July 1996,  primarily  accounted  for the  increase;
offset by the 1996 write-off of purchased research and development in connection
with the acquisition of Forsight, which totaled approximately $289,000.

       Cost of service fees for systems integration services provided by UST was
approximately  $202,000  for the  three  month  period  ended  March  31,  1997,
resulting in a gross margin of approximately 50%.

       For the three month period ended March 31, 1997, the cost of service fees
for custom  multimedia  software  was  approximately  $211,000,  as  compared to
approximately  $263,000, for the same period of the prior year. The gross margin
for the three  month  period  ended  March 31,  1997 was  approximately  20%, as
compared  to  the  negative  gross  margin  for  the  same  period  of  1996  of
approximately  (14%).  The  improvement  in gross margin is primarily due to the
consolidation  of the  multimedia  related  operations  into one  location.  The
consolidation of the Redmond office was completed by December 31, 1996.

       Cost of product sales was $942,885 for the three month period ended March
31,  1997,  as compared to $5,553 in the prior year.  All of the cost of product
sales for the  three  month  period  ended  March 31,  1997 are from the sale of
products by UST and resulted in a gross margin of approximately  10%. All of the
costs  for  the  prior  year  are  the  costs   associated   with  the  consumer
off-the-shelf marketing initiative discussed above.

       During  the three  month  period  ended  March  31,  1997,  research  and
development  expenses were $72,444 as compared to $41,156 for same period of the
prior year.  Research and development  expenses include  improvement on existing
tools and  development of software  tools to be sold by UST in conjunction  with
their sales of certain IBM mid-range systems.

       During the three month period ended March 31, 1997, selling,  general and
administrative expenses were $814,808 as compared to $452,525 in the same period
of the prior year, an increase of approximately  $362,000,  or 80%. The increase
is primarily due to the addition of the UST operations.

       During the three month period  ended March 31,  1997,  total other income
(expense)  decreased by approximately  $26,000 from the same period of the prior
year due to a decrease in the amount of funds available for investment,  as well
as the addition of interest  expense incurred on UST's  line-of-credit  and bank
note.

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. For
the three month period ended March 31, 1997, the Company  incurred a net loss of
$489,010,  an  improvement  from the net loss of $762,203 for the same period of
the prior year. As discussed  under  Strategy to Achieve  Profitable  Operations
below,  the Company has  implemented  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 three month period ended March 31, 1997, the Company used cash of
approximately  $910,000 in operations.  In addition to the net loss, the Company
experienced  increases  in  accounts  receivable  and  inventory.  Net  cash  of
approximately  $18,000 was used for  investing  activities  for the  purchase of
equipment.  Net cash of  approximately  $950,000 was provided by the exercise of
common

                                       8

<PAGE>

stock  options  and  warrants,  offset  by  approximately $26,000  used  to make
payments on UST's obligations to a bank.

       For the three month period ended March 31, 1996, the Company used cash of
approximately  $743,000 in operations.  In addition to the net loss, the Company
experienced  increases  in accounts  receivable  and  prepaid and other  current
assets and decreases in liabilities.  Net cash of approximately $87,000 was used
for investing activities for the purchase of equipment and Forsight, Inc.

       Working capital of approximately $1.2 million at March 31, 1997, 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.  During the first quarter of 1997, the Company
received net proceeds of approximately $900,000 from the exercise of underwriter
warrants and stock options.  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  services.  As a result of these acquisitions,  the Company
develops    software    applications    used   in    conjunction    with   Lotus
Notes(R)/Domino(TM),  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  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.

                                       9

<PAGE>


       Management  believes that its strategy for increasing  revenues  combined
with the impact of the consolidation of the multimedia  related  operations 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.




                          PART II - OTHER INFORMATION


Item 1.       Legal Proceedings:     None

Item 2.       Changes in Securities:      None

Item 3.       Defaults Upon Senior Securities:     None

Item 4.       Submission of Matters to a Vote of Security Holders:     None

Item 5.       Other Information:     None

Item 6.       Exhibits and Reports on Form 8-K:

              (a)     Exhibits:     None

              (b)  No reports on Form 8-K were required to be filed for the
                      three months ended March 31, 1997


                                       10

<PAGE>


                      PACIFIC ANIMATED IMAGING CORPORATION


                                   SIGNATURE


Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
Registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.


                                      PACIFIC ANIMATED IMAGING CORPORATION
                                              (Registrant)

Dated:  March 15, 1997




                                      BY: /s/ Suzanne C. Brown
                                          ___________________________
                                          Suzanne C. Brown
                                          Chief Financial and Accounting Officer


                                       11