<PAGE>
 
                   U. S. 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
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
For the transition period from __________ to _________.
                        COMMISSION FILE NUMBER 0-12471

                            IMAGEMATRIX CORPORATION
            (Exact name of registrant as specified in its charter)

     COLORADO                                                84-1313108
(State of incorporation)                    (I.R.S. Employer Identification No.)

     400 S. COLORADO BLVD., SUITE 500, DENVER, COLORADO           80222
          (Address of principal executive offices)             (Zip Code)

                                (303) 399-3700
                          (Issuers telephone number)

        SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
                              TITLE OF EACH CLASS
                                     None
                   NAME OF EACH EXCHANGE ON WHICH REGISTERED
                                     None

        SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
                          Common Stock (no par value)
                               (Title of class)

     Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.

                       Yes [X]                   No [_]

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

     Issuer's revenues for most recent fiscal year  $3,119,000

     The aggregate market value of the voting stock held by non-affiliates
computed by reference to the average bid and asked prices of such stock at March
20, 1997 was $4,143,000. The number of shares outstanding at March 20, 1997 was
4,922,834.

DOCUMENTS INCORPORATED BY REFERENCE

     Registrant's Proxy Statement to be filed is incorporated by reference into
Part III of this report.
 
     Transitional Small Business Disclosure Format:
                       Yes [_]                   No [X]

<PAGE>
 
                                    PART I

ITEM 1.  DESCRIPTION OF BUSINESS

GENERAL DEVELOPMENT OF BUSINESS

ImageMatrix Corporation (the Company), was incorporated in July 1995.  The
Company designs, markets and installs document imaging and work flow systems
which improve productivity and customer service for health maintenance
organizations (HMOs), health insurance companies, third-party administrators
(TPAs), workers compensation organizations, dental providers and preferred
provider organizations (PPOs).  These organizations are collectively known as
Managed Care Organizations (MCOs). The Company's imaging systems integrate the
Company's proprietary software as well as components manufactured by third party
imaging software, hardware and peripheral vendors. The Company has developed a
suite of software products including, CaptureMatrix /(TM)/, ClaimMatrix /(TM)/
and ServiceMatrix /(TM)/. CaptureMatrix /(TM)/ is a document capture, storage
and retrieval system. ClaimMatrix /(TM)/ performs imaging-based workflow claims
processing. ServiceMatrix /(TM)/ is planned to be released in June 1997 and will
enable customer service departments to resolve customer inquiries in a rapid,
cost-efficient manner. Installation of the first ClaimMatrix/(TM)/ system was
successfully completed in October 1996. The second ClaimMatrix/(TM)/ system
entered the installation stage in December 1996 and that installation is
expected to be complete in second quarter 1997.

PRODUCTS AND SERVICES

CaptureMatrix /(TM)/ CaptureMatrix/(TM)/ converts paper-based claims and their
--------------------
accompanying documents into digital images.  It streamlines and automates data
entry tasks and reduces the cost of claims data entry by means of zone-based
indexing, OCR, and intelligent document management. The price range for
CaptureMatrix/(TM)/ is typically in the $100,000 to $350,000 range.  Software
features include:

        .  Database lookups - CaptureMatrix/(TM)/ can integrate with any
           database system to perform real-time data verification
        .  Batch processing - documents are processed in batches, streamlining
           the capture and indexing process in the system
        .  Zone-based indexing - the product automatically zooms in and
           highlights zones on the document for quick location of the data to be
           keyed
        .  Host file extraction - the product can output a file for direct
           upload to a host, speeding the data interface process
 
ClaimMatrix /(TM)/ ClaimMatrix/(TM)/ is specifically designed to automate the
------------------
processing of claims, enrollment forms, EDI claims and phone inquiries.
ClaimMatrix/(TM)/ provides MCOs with a turnkey software system which automates
the processing, case management and payment of paper claims (converted by the
system to digital form) and EDI claims. The system is designed to interface with
the client's host system, accessing data and processing claims within the scope
of the client's overall information system infrastructure. Rules-based routing
allows claims processing departments to methodically and efficiently process
claims. The benefit for most organizations is an expected payback on investment
ranging from 12 to 24 months. The price range for ClaimMatrix/(TM)/ is, on
average, approximately $450,000. However, differences in the size of the
installation can cause the price to vary from $250,000 to over $4,000,000.
Software features include:

        .  Automatic processing of claims documents on-line
        .  Automated routing based on document types, exception codes, or other
           data
        .  Access to document archives for searching and reviewing other claims
           and member-related documents
        .  Rapid access to claims information
        .  Prioritization and escalation of claims (to ensure rapid turnaround
           time)
        .  Integration with the host adjudication system

ServiceMatrix /(TM)/ (planned release in June 1997). ServiceMatrix /(TM)/ will
--------------------
enable customer service departments to resolve customer inquiries in a rapid,
cost-efficient manner. The product offers a variety of features to improve

                                       2
<PAGE>
 
both administrative productivity and customer service representative's overall
work performance. However, differences in the size of the installation can cause
the price to vary from $150,000 to $450,000. Software features include:

        .  Call tracking for members, providers, internal employees, etc.
        .  Electronic routing of information
        .  Assignment of deadlines, to ensure prompt service
        .  Tracking of all contacts and answers to their questions
        .  Access to documents, whether archived or still in process
        .  Viewing the managed care workflow to answer questions regarding
           status

Professional Services. In order to ensure customer satisfaction, the Company
provides system design, installation, integration and other post-installation
services to end-users directly for CaptureMatrix /(TM)/ and ClaimMatrix/(TM)/
products. In addition, the Company provides training to end-users on the
features and functions of these products.

Installation and Integration Services.  The Company provides system analysis
recommendations, project management, site preparation, customization, systems
integration and installation services for its customers.  The Company believes
that the quality of its installation and integration services is crucial to its
success and that it has a competitive advantage due to its expertise in this
area.  In 1997, the Company anticipates signing one or more agreements with
third party systems integrators to install the Company's systems.  The Company
believes it can accelerate the number of additional clients by using integration
partners to install its systems.

Post-Installation Services.  The Company's post-installation services include
routine software and hardware maintenance, user assistance and a software
product upgrade release program.  These services are provided under the terms of
the Company's renewable maintenance agreements, fees for which are generally
based upon a percentage of the originally installed systems cost.

DISTRIBUTION

The Company currently markets its products and services directly through its own
sales organization.  The Company has sales offices in Denver, Colorado;
Bellevue, Washington; Atlanta, Georgia; Birmingham, Alabama; Minneapolis,
Minnesota; Shelton, Connecticut; Raleigh, North Carolina; St. Louis, Missouri;
San Antonio, Texas; and San Francisco, California.  The Company supports its
products through advertising, focused marketing, publishing articles and
technical papers on the products and by participating in MCO trade shows.

For direct and indirect sales, the Company's sales efforts focus on MCOs which
have (i) adequate capital resources to purchase the products, (ii) an
information system infrastructure in place to allow the integration of imaged
documents into the workflow of the organization and (iii) adequate size to
leverage the productivity benefits of the system.

The Company directs its sales and marketing efforts at the thousands of MCOs
that could benefit from the productivity impacts of the Company's products.  The
Company's sales force practices a solution selling focus with a cost
justification basis, generally demonstrating a 12 to 24 month payback period
relative to the system cost.  The Company believes that the key value of its
system lies in (i) productivity enhancements through reduced payroll and
operating costs and higher output within current staffing levels and (ii)
enhanced customer service capabilities.

The Company has begun marketing its products through referral and finder's fee
relationships with large HCIS accounting, plan administration and general
information system (IS) vendors in the managed care segment of the market.  In
February 1997, the Company signed a Market Development and Reciprocal Referral
Agreement with Health Systems Design Corporation (HSDC).  This agreement
provides for the mutual referral of the Company's and HSDC's clients.

In 1996, the Company spent approximately $1,650,000 and plans to spend
approximately $3,100,000 in 1997 on sales and marketing efforts.

                                       3
<PAGE>
 
COMPETITION

The Company is in a competitive industry that may be affected by rapid changes
in technology and spending patterns in the business and institutional client
sectors.  Most of the Company's competitors have greater financial and
technological resources and have more established sales and marketing
organizations than the Company.

Competitors include: (i) MACESS Corporation, (ii) regional imaging integrators,
(iii) imaging software companies which sell imaging systems either partially or
exclusively on a direct basis such as FileNet, Optika, ViewStar, International
Business Machines (IBM) and Eastman Kodak Corporation, (iv) business solutions
consultants with a national presence such as Andersen Consulting, Electronic
Data Systems (EDS), Perot Systems and TRW and (v) numerous small imaging
integrators.

The Company believes that the principal competitive factors in its market are
system features and reliability, the referent installed base of customers,
price, sales and marketing efforts, and the reputation for customer service.

SUPPLIERS

The Company must be approved as an authorized dealer by many of the vendors of
the components that the Company utilizes in its business.  In the case of
MicroSoft(R), Oracle(R), FileNet(R) and KOFAX(R), the Company's vendor
authorizations are an important requirement to the current operations and future
strategies.  Dealer agreements typically provide that a dealer may be terminated
with cause upon as little as 30 days notice.  The Company's current dealer
agreements  generally last one year.  Vendors have regularly renewed the
Company's dealer agreements; however no assurance can be given that such
renewals will continue. While management does not believe that such an
occurrence is likely, the loss of vendor authorizations from any of the above
four vendors could have a material adverse effect on the Company's business.

The Company also purchases imaging system components including hardware and
peripheral devices from other vendors and suppliers.  The Company does not have
any long-term agreements or commitments with the vendors or suppliers of such
components, but believes that competitive sources of supply are available for
such components.

DEPENDENCE UPON MAJOR CUSTOMERS

For the year ended December 31, 1996, two customers (Standard Insurance Company
and Health Partners of Philadelphia) accounted for approximately 34% of total
revenue.  Accounts receivable from these customers totaled approximately
$200,000 at December 31, 1996.  Based upon the nature of the Company's business
(sales of business solutions) and review of historical data, the Company
believes it is likely that the revenues earned from these customers in 1996 will
be replaced and exceeded by revenue from different customers in 1997.

For the year ended December 31, 1995, one customer (First Trust Corporation)
accounted for approximately 51% of total revenue and a another customer (FHP
International) accounted for approximately 17% of total revenue.  At December
31, 1995, approximately $497,000 of the Company's accounts receivable balance
was attributable to its two largest customers.

INTELLECTUAL PROPERTY

The Company regards its CaptureMatrix /(TM)/, ClaimMatrix /(TM)/ and
ServiceMatrix /(TM)/ software as proprietary and relies primarily on a
combination of copyrights, employee confidentiality and invention assignment
agreements and distribution and software license agreements to safeguard its
software products. The Company has received federal copyright registration for
ClaimMatrix /(TM)/ and has filed for copyright protection for CaptureMatrix
/(TM)/ and ServiceMatrix /(TM)/. The Company has not applied for patents for its
software, but the Company may from time to time investigate the appropriateness
of patent applications for its technology or certain aspects of its technology.

The Company does not have any federally registered service marks or trademarks.
The Company has filed applications for federal service marks for the marks
ImageMatrix/(TM)/, CaptureMatrix /(TM)/, ClaimMatrix/(TM)/ and 

                                       4
<PAGE>
 
ServiceMatrix /(TM)/ and in the future may file federal applications for such
other marks as the Company may originate related to further product and service
developments. There is no assurance that registered service marks will be
granted, or that if granted, will provide protection from conflicting uses or
claims of prior use, infringement upon or confusion with another trademark.

IMPACT OF GOVERNMENT APPROVAL AND REGULATIONS

Government approval is not required for any aspect of the Company's products or
services.  In addition, management believes that the Company's business is
unaffected by any existing or probable governmental regulations.

RESEARCH AND DEVELOPMENT

The Company's research and development efforts are focused primarily on ongoing
improvements in existing software products and additional functional modules,
such as ServiceMatrix /(TM)/, appropriate for the MCO industry. Disclosure of
the planned software modules is not made for competitive reasons.

The Company's research and development efforts can be influenced significantly
by customer requirements. New features may be customized initially for delivery
to a single customer and then incorporated into future versions of the products.
For the year ended December 31, 1996, the Company spent approximately $703,000
on research and development of which approximately $416,000 was capitalized. No
expenditures related to direct research and development were incurred during
1995. Estimated 1997 expenditures for research and development are $650,000.

EMPLOYEES

At March 28, 1997, the Company had 39 full time employees.  Thirty of the
Company employees are located in Denver, Colorado.  The employees are not
represented by a labor union or subject to a collective bargaining agreement.
The Company has never experienced a work stoppage and employee relations are
considered to be excellent.

ITEM 2.  DESCRIPTION OF PROPERTY

The Company leases office space for its corporate headquarters at 400 South 
Colorado Blvd., Suite 500, Denver, Colorado 80222. The Company believes that its
facilities are suitable and adequate for its current operations.  The Company 
houses its management, administrative, sales, system design and installation,
software design and programming, training and service support and maintenance at
its headquarters. The Company also leases sales offices in Bellevue, Washington;
Portland, Oregon; Minneapolis, Minnesota; Atlanta, Georgia; Birmingham,
Alabama; Shelton, Connecticut; Raleigh, North Carolina; San Antonio, Texas; and
San Francisco, California.

ITEM 3.  LEGAL PROCEEDINGS

At April 14, 1997, to the Company's knowledge, there are no material legal
proceedings pending against the Company.

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

No matters were submitted to a vote of security holders during the fourth
quarter ended December 31, 1996.

                                       5
<PAGE>
 
                                    PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's Common Stock began trading on The Nasdaq SmallCap Market tier of
the Nasdaq Stock Market under the symbol IMCX on June 4, 1996 (date of initial
public offering).  The following table sets forth the range of high and low
closing bid prices of the Company's Common Stock as reported by Nasdaq since
June 1996.

       Market Price                      1996
       ------------                      ----
                                    High       Low
                                   ------     ------
       First Quarter*              N/A        N/A
       Second Quarter*             $6 1/8     $4 1/2
       Third Quarter               $4 1/2     $3 1/4
       Fourth Quarter              $4 1/8     $2 3/4
*  Stock began trading on June 4, 1996.


The foregoing quotations represent quotations between dealers without adjustment
for retail markups, markdowns or commissions and may not represent actual
transactions.

At April 9, 1997, the Company had approximately 1,000 shareholders of record.
During 1996, no dividends were paid by the Company. At this time, the Company
does not anticipate the payment of dividends to its common shareholders in the
foreseeable future.

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

OVERVIEW

ImageMatrix Corporation (the Company), was incorporated in July 1995.  The
Company designs, sells and installs document imaging and work flow systems which
improve productivity and customer service for health maintenance organizations
(HMOs), health insurance companies, third-party administrators (TPAs), workers
compensation organizations, dental providers and preferred provider
organizations. These organizations are collectively known as Managed Care
Organizations (MCOs). The Company's imaging systems integrate the Company's
proprietary software as well as components manufactured by third party imaging
software, hardware and peripheral vendors. The Company has developed a suite of
software products including, CaptureMatrix /(TM)/, ClaimMatrix /(TM)/ and
ServiceMatrix /(TM)/. CaptureMatrix /(TM)/ is a document capture, storage and
retrieval system. ClaimMatrix /(TM)/ performs imaging-based workflow claims
processing. ServiceMatrix /(TM)/ will be released in June 1997 and will
enable customer service departments to resolve customer inquiries in a rapid,
cost-efficient manner. Installation of the first ClaimMatrix/(TM)/ system was
successfully completed in October 1996. The second ClaimMatrix /(TM)/ system
entered the installation stage in December 1996 and that installation will be
complete in second quarter 1997.

In August 1995 the Company acquired the imaging business of ENTEX Information
Services, Inc. of Colorado, Inc. (ENTEX).  The imaging business had been
acquired by ENTEX from Documatrix Corporation, a company controlled by the
Company's president, on February 15, 1995.  As Documatrix and the Company had no
operations from February 16, 1995 through August 30, 1995, pro forma results of
operations incorporating the financial statements of Documatrix Corporation and
the imaging division of ENTEX as predecessor companies are being compared to the
actual results of operations for the twelve-month period ended December 31,
1996.

In June 1996, the Company raised $6,247,000, net of offering costs, from its
initial public offering of 1,400,000 shares of Common Stock (the IPO).

                                       6
<PAGE>
 
RESULTS OF OPERATIONS

TWELVE MONTHS ENDED DECEMBER 31, 1996 COMPARED TO PRO FORMA TWELVE MONTHS ENDED
DECEMBER 31, 1995 (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                                          ------------------------
                                                                         PRO FORMA
                                                            1996             1995
                                                          --------         -------
REVENUE:
<S>                                                       <C>              <C>
  System sales                                            $ 2,704          $ 4,584
  Service contracts and other                                 415              231
                                                          -------          -------
                                                            3,119            4,815
COSTS OF REVENUES:
  Cost of revenues - systems                                2,195            3,041
  Cost of revenues - service contracts                        
   and other                                                  281              105
                                                          -------          -------
                                                            2,476            3,146
                                                          -------          -------
 
GROSS PROFIT                                                  643            1,669
 
Selling, general and administrative                         
 expenses                                                   4,191            1,264
                                                          -------          -------
 
OPERATING INCOME (LOSS)                                    (3,548)             405
Other income (expense):
  Interest expense                                           (110)            (269)
  Other expense                                                (5)               -
                                                          -------          -------
 
NET INCOME (LOSS)                                         $(3,663)         $   136
                                                          =======          =======
 
PER SHARE DATA:
Net income (loss)                                          $(0.87)           $0.04
                                                          =======          =======
 
Weighted Average Shares Outstanding                         4,189            3,575
                                                          =======          =======
</TABLE>

REVENUES

Revenues totaled $3,119,000 for the year ended December 31, 1996 as compared to
$4,815,000 for the year ended December 31, 1995, a decrease of 35.2%.
Contributing largely to the decrease is the change in focus from providing
system integration services related to software and hardware products
manufactured by third parties to sales of the Company's products, including
installation and configuration services.  Beginning in 1996, the primary focus
of the Company's sales and marketing efforts is sales of its software into the
MCO market.

Revenues from system sales decreased 41.0% to $2,704,000 for 1996 from the
$4,584,000 reported for 1995.  The decrease in system sales is primarily due to
the fact that the Company did not have comparable large ongoing general systems
integration contracts during 1996.  During 1995, a single integration contract
provided $2,829,000 of revenue compared to $247,000 in 1996.  As a result of the
1996 strategy, revenues from the sale of ClaimMatrix /(TM)/ systems for
applications within the MCO industry totaled $1,384,000 for 1996.  Revenue for
1996 included $1,065,000 (34.1% of total revenue) from two major customers, both
of whom are in the MCO industry.

Revenues from service contracts and other increased 79.7% to $415,000 in 1996
from $231,000 in 1995. The increase in service contract revenue from 1995 to
1996 is due to the increased number and average contract price of service
contracts during 1996.  The majority of the contracts are derived from the 1995
integration customers.

                                       7
<PAGE>
 
COST OF REVENUES AND RESULTING GROSS MARGIN RESULTS

Cost of revenues declined 21.3% to $2,476,000 in 1996 from $3,146,000 in 1995.
Cost of system revenues totaled $2,195,000 and $3,041,000 in 1996 and 1995,
respectively, representing a decrease of 27.8%.  The decrease in total cost of
revenues and cost of system revenues is related to lower sales volume in 1996
than 1995.

Cost of service contracts and other rose to $281,000 in 1996 from $105,000 1995.
This increase in costs is related to the increased number of service contracts.

Gross profit was $643,000 (20.6% of revenue) in 1996 and $1,669,000 (34.7% of
revenue) in 1995, representing a decrease of 61.5%.  Gross profit from system
sales totaled $509,000 (18.8% of revenue) and $1,543,000 (33.7% of revenue) in
1996 and 1995, respectively.  The decrease is the result of the lower sales
experienced during 1996.

Gross profit from service contracts and other totaled $134,000 and $126,000 in
1996 and 1995, respectively.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administration expenses increased 231.6% to $4,191,000 for
1996, compared to $1,264,000 for 1995. The increase in 1996 compared to 1995 is
related to an increase in the number of personnel engaged in sales, marketing
and administrative activities, together with higher expenditures for marketing
and sales efforts.  Also included in selling, general and administrative
expenses for 1996 is $495,000 related to the utilization of the professional
services staff in sales, product development and training efforts.  The total
for 1996 is exclusive of $416,000 in software development costs capitalized
during the period.

INTEREST EXPENSE - NET

Interest expense - net decreased to $110,000 for 1996, compared to $269,000 for
1995.  In 1995, the debt was outstanding for the entire year.  In 1996, the
Company incurred interest expense on its outstanding debt until June at which
time the debt was retired.

NET INCOME (LOSS)

The Company reported a net loss of $3,663,000 or $0.87 per share for 1996 as
compared to net income of $136,000 for 1995 or $0.04 per share. The loss in 1996
is due to lower revenue and higher expense levels, as noted above.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities was $2,934,000 in 1996 while net cash
provided by operating activities in 1995 was $224,000.  In 1996, net cash used
in operating activities consisted primarily of the net loss for the period
offset by depreciation and amortization expense and a decrease in accounts
receivable balances and an increase in accounts payable and accrued expenses.

Net cash used in investing activities was $928,000 and $517,000 in the 1996 and
1995, respectively.  In the year ended December 31, 1996, net cash used in
investing activities consisted primarily of purchases of computer equipment and
furniture related to the increase in the number of employees of the Company and
the leasing of additional office space and costs incurred to develop software.

Net cash provided by financing activities was $3,636,000 and $838,000 in 1996
and 1995, respectively.  In June 1996, the Company raised $6,247,000, net of
offering costs, from an IPO.  The Company has repaid all of its long-term debt
obligations with the proceeds of this offering, including $1,484,000 owed to
ENTEX Information Services of Colorado, Inc., and $1,160,000 owed to Bank One,
Colorado, N.A. The Company used the remaining proceeds to fund the development
of its products and to increase its sales and marketing efforts, as well as to
finance general working capital needs.

                                       8
<PAGE>
 
The Company has access to a $2,000,000 line of credit.  The terms and conditions
of this line allow the Company to borrow up to 80% of approved accounts
receivable balances.  At December 31, 1996, no debt was outstanding under this
line.

The sales cycle of the Company's systems is running longer than originally
anticipated.  Management had originally anticipated that the average sales cycle
for the Company's software would take from two to four months.  Based on recent
experience, management now anticipates that the sales cycle will typically take
between six and twelve months.  The results of that change have slowed the
market development and the anticipated increase in revenues from the Company's
software and caused a greater use of capital resources than anticipated.  As a
result of these conditions, the Company completed the following transactions:

1)  In January 1997, the Company sold 247,000 shares of Common Stock at a price
     of $1.96 per share.  Net proceeds to the Company relating to this
     transaction totaled $465,000.

2)  On April 14, 1997, the Company entered into an agreement to sell 3,300,000 
     shares of non-voting, Series A Preferred Stock (Preferred Stock) for gross
     proceeds of $3,300,000. In connection with the sale, the Company agreed to
     pay commissions of $330,000 and issue warrants to purchase 1,550,000 shares
     of Common Stock to certain placement agents. Of the 1,550,000 warrants,
     1,050,000 are exercisable at $2.25 per share and 500,000 are exercisable at
     $3.00 per share. All such warrants may be exercised for a period of three
     years from the date of grant. The Preferred Stock yields a 7% dividend,
     which the Company can elect to pay in cash or Common Stock. The Preferred
     Stock can be converted into Common Stock at the lesser of $2.25 per share
     or 75% of the average closing price for the previous eight trading days
     prior to conversion. Through April 14, 1997 the Company has received
     $200,000 of the proceeds and anticipates receiving the remainder by April
     18, 1997.

The Company's strategy is to invest heavily in its research and development and
sales and marketing efforts in order to establish market leadership.  This
strategy has led to losses in 1996 and the Company expects this strategy will
lead to losses for much of 1997. Additionally, should revenues increase
significantly in 1997, capital will be required to finance the growth of working
capital and fixed capital investments in addition to financing any operating
losses. The Company believes the above mentioned financing activities, including
its $2,000,000 line of credit, the sale of 247,000 shares of Common Stock in
January 1997, the sale of the 3,300,000 shares of Series A Preferred Stock in
April 1997 and its cash generated from operations will be sufficient to finance
its capital needs for the next twelve months. The Company's long term capital
requirements will depend on many factors, including, but not limited to, product
revenues from operations, working capital requirements, research and development
expenses and capital expenditures. The Company's market development efforts are
still relatively young and changes in the anticipated business development of
the Company which extend the Company's time to achieve profitability could cause
the Company to issue additional debt, equity or a combination of both. There can
be no assurance that additional financing will be available, or, if available,
the terms of such financing will be favorable to the Company or its shareholders
without substantial dilution of their ownership rights. If adequate funds are
not available, or are not available on terms acceptable to the Company, the
Company may be required to curtail its operations significantly, forego market
opportunities, or obtain funds through arrangements with strategic partners or
others that may require the Company to relinquish material rights to certain of
its technologies or potential markets.

"SAFE HARBOR" STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

The statements contained in this report which are not historical facts are
forward-looking statements that are subject to risks and uncertainties that
could cause actual results to differ materially from those set forth in or
implied by forward-looking statements, including, but not limited to, the risk
that the market for imaging-based claims processing may not develop as expected,
the recent introduction of the Company's products which is based on client/
server technology, the degree of success of the Company's market initiatives,
expansion of sales in the industries to which the Company provides systems, the
success of the Company in forecasting demand for its software, the success of
the Company in increasing its software system sales as a percentage of overall
revenues to increase gross profit margins and decrease general, administration
and sales costs as a percentage of overall gross profit, the risk that the long
length of the Company's sales cycle could delay revenues, and those risks and
uncertainties discussed more completely in the Company's Form SB-2 registration
statement.

                                       9
<PAGE>
 
                         REPORT OF INDEPENDENT AUDITORS

Board of Directors and Stockholders
ImageMatrix Corporation

We have audited the accompanying consolidated balance sheet of ImageMatrix
Corporation as of December 31, 1996, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the two years in
the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ImageMatrix
Corporation at December 31, 1996, and the consolidated results of its operations
and its cash flows for each of the two years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.

As discussed in Note 1 to the financial statements, the Company's losses from
operations raise substantial doubt about its ability to continue as a going
concern.  Management's plan as to these matters are described in Note 1.  The
1996 financial statements do not include any adjustments that might result from
the outcome of this uncertainty.

                                     Ernst & Young LLP

Denver, Colorado
February 18, 1997 except for Note 8,
as to which the date is April 14, 1997

                                       10
<PAGE>
 
 
ITEM 7.  FINANCIAL STATEMENTS
 
                            IMAGEMATRIX CORPORATION
                     CONSOLIDATED STATEMENT OF OPERATIONS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

 
                                                       YEAR ENDED DECEMBER 31,
                                                       -----------------------
                                                           1996      1995
                                                         --------   -------
REVENUE:
  System sales                                            $ 2,704   $ 1,851
  Service contracts and other                                 415       117
                                                          -------   -------
                                                            3,119     1,968
COSTS OF REVENUES:
  Cost of revenues - systems                                2,195     1,203
  Cost of revenues - service contracts                        
   and other                                                  281        59
                                                          -------   -------
                                                            2,476     1,262
                                                          -------   -------
 
Gross profit                                                  643       706
 
Selling, general and administrative                         
 expenses                                                   4,191       722
                                                          -------   -------
 
OPERATING LOSS                                             (3,548)      (16)
Other expense:
  Interest expense                                           (110)     (171)
  Other expense                                                (5)        -
  Net realized gain on sale of net                              
   assets                                                       -       347
                                                          -------   -------
 
Income (loss) before income taxes                          (3,663)      160
Provision for income taxes                                      -       (24)
                                                          -------   -------
NET INCOME (LOSS)                                         $(3,663)  $   136
                                                          =======   =======
 
PER SHARE DATA:
Net income (loss)                                         $ (0.87)  $  0.04
                                                          =======   =======
 
Common shares used in computing net                         
 income (loss) per share                                    4,189     3,575
                                                          =======   =======



See notes to consolidated financial statements.

                                       11
<PAGE>
 
<TABLE>
<CAPTION>
 
                                               IMAGEMATRIX CORPORATION
                                              CONSOLIDATED BALANCE SHEET
                                          (IN THOUSANDS, EXCEPT SHARE DATA)
 
                                                                                       DECEMBER 31,
ASSETS                                                                                    1996
                                                                                   -------------------
Current assets
<S>                                                                                <C>
  Cash and cash equivalents                                                                   $    324
  Accounts receivable, less allowance for doubtful accounts of $7                                  323
  Unbilled revenues                                                                                302
  Inventory                                                                                        125
  Prepaid expenses and other current assets                                                        127
                                                                                   -------------------
    Total current assets                                                                         1,201
 
Property and equipment, at cost
  Computer equipment                                                                               624
  Office furniture and leasehold improvements                                                       85
                                                                                  --------------------
                                                                                                   709
Less:  accumulated depreciation                                                                   (168)
                                                                                  --------------------
                                                                                                   541
Software development costs, net of accumulated amortization of $132                                284
Other assets, net of accumulated amortization of $55                                                56
                                                                                  --------------------
TOTAL ASSETS                                                                                  $  2,082
                                                                                  ====================
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
  Accounts payable                                                                            $    490
  Deferred revenue                                                                                  20
  Accrued payroll-related expenses                                                                 193
                                                                                  --------------------
    Total current liabilities                                                                      703
Stockholders' equity
  Preferred stock, no par value, 5,000,000 shares authorized, no shares issued
    or outstanding                                                                                   -
  Common stock, no par value, 20,000,000 shares authorized, 4,665,897 shares
    issued and outstanding                                                                       5,139
  Deferred compensation, net of accumulated amortization of $50                                    (50)
  Accumulated retained deficit                                                                  (3,710)
                                                                                  --------------------
    Total stockholders' equity                                                                   1,379
                                                                                  --------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                                    $  2,082
                                                                                  ====================
</TABLE> 

See notes to consolidated financial statements.

                                       12
<PAGE>
 
                            IMAGEMATRIX CORPORATION
                     CONSOLIDATED STATEMENT OF CASH FLOWS
                                (IN THOUSANDS)
<TABLE> 
<CAPTION> 
 
                                                                                              YEAR ENDED DECEMBER 31,
                                                                                              -----------------------
                                                                                                1996            1995
                                                                                              --------        --------
<S>                                                                                           <C>             <C>
OPERATING ACTIVITIES
Net income (loss)                                                                             $(3,663)        $   136
Adjustments to reconcile income (loss) to net cash provided by
  (used in) operating activities:
  Depreciation and amortization                                                                   377              29
  Net realized gain on sale of net assets                                                           -            (347)
  Changes in operating assets and liabilities, net of effect from
    business combination and disposition:
      Accounts receivable                                                                         429             541
      Unbilled revenue                                                                           (302)              -
      Inventory                                                                                    91            (238)
      Prepaid expenses and other current assets                                                   (83)            (41)
      Accounts payable, accrued liabilities and deferred income                                   137             254
      Other assets                                                                                 80            (110)
                                                                                              --------        --------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES                                               (2,934)            224
 
INVESTING ACTIVITIES
Proceeds from sale to ENTEX Information Services, Inc.                                              -             118
Purchase of net assets of ENTEX Information Services, Inc.
   plus expenses totaling $66                                                                       -            (787)
Purchases of computer equipment and furniture                                                    (512)           (140)
Software development costs                                                                       (416)              -
Proceeds from disposal of discontinued operations                                                   -             292
                                                                                              --------        --------
NET CASH USED BY INVESTING ACTIVITIES                                                            (928)           (517)
 
FINANCING ACTIVITIES
Issuance of common stock, net of offering costs of $1,802                                       6,280           1,201
Decrease in note payable to bank                                                               (1,160)           (280)
Decrease in note payable to ENTEX Information Services, Inc.                                   (1,484)              -
Decrease in amount due to principal stockholder                                                     -             (83)
                                                                                              --------        --------
NET CASH PROVIDED BY FINANCING ACTIVITIES                                                       3,636             838
 
Net increase in cash and cash equivalents                                                        (226)            545
Cash and cash equivalents at beginning of period                                                  550               5
                                                                                              --------        --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                    $   324         $   550
                                                                                              ========        ========
 
Supplemental schedule of additional cash flow information
  and non-cash activities:
     Cash paid for interest during the period                                                 $   152         $   191
     Assumption of debt by primary stockholder                                                      -              60
     Income taxes paid                                                                             18               -
</TABLE> 
See notes to consolidated financial statements.

                                       13
<PAGE>
 
                            IMAGEMATRIX CORPORATION
                CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                               ($ IN THOUSANDS)
<TABLE> 
<CAPTION> 
                                                                    
                                                                 
                                           COMMON STOCK                                        TOTAL    
                                    ------------------------     DEFERRED     ACCUMULATED   SHAREHOLDERS' 
                                         SHARES      AMOUNT    COMPENSATION     DEFICIT        EQUITY
                                    --------------   -------   ------------   -----------   -------------
<S>                                 <C>              <C>       <C>            <C>           <C> 
    DOCUMATRIX CORPORATION                                                                      
BALANCE, DECEMBER 31, 1994                       -   $   318              -   $    (3,003)  $      (2,685)
  Net income to July 25, 1995                    -         -              -           183             183
                                    --------------   -------   ------------   -----------   -------------
BALANCE, JULY 25, 1995                           -       318              -        (2,820)         (2,502)
                                                                                            
    IMAGEMATRIX CORPORATION                                                                     
  Reclassification of equity                                                                
    accounts on July 25, 1995                    -      (318)             -           318               -
  Assumption of liabilities in                                                              
    excess of assets acquired at                                                            
    July 25, 1995 in exchange for                                                           
    common stock (Note 1)                2,180,246    (2,502)             -         2,502               -
  Issuance of common stock to                                                               
    founders for cash (Note 4)             266,771        63              -             -              63
  Issuance of common stock to                                                               
    accredited investors for cash                                                           
    (Note 4)                               818,176     1,138              -             -           1,138
  Assumption of debt by                                                                     
    primary stockholder (Note 6)                 -        60              -             -              60
  Deferred compensation related                                                             
    to sale of common stock                      -       100           (100)            -               -
  Net loss                                       -         -              -           (47)            (47)
                                    --------------   -------   ------------   -----------   -------------
BALANCE, DECEMBER 31, 1995               3,265,193    (1,141)          (100)          (47)         (1,288)
                                                                                            
  Issuance of common stock, net of                                                          
    offering costs of $1,802             1,400,000     6,247              -             -           6,247
  Exercise of stock options                 27,125        70              -             -              70
  Deferred compensation                          -         -             50             -              50
  Stock recission (Note 4)                 (26,421)      (37)             -             -             (37)
  Net loss                                       -         -              -        (3,663)         (3,663)
                                    --------------   -------   ------------   -----------   -------------
BALANCE, DECEMBER 31, 1996               4,665,897   $ 5,139          $ (50)  $    (3,710)  $       1,379
                                    ==============   =======   ============   ===========   =============
 
</TABLE>


See notes to consolidated financial statements.

                                       14
<PAGE>
 
NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

ImageMatrix Corporation (the Company) designs, sells and installs document
imaging and work flow systems that improve productivity and customer service for
managed care organizations (MCOs).  The Company's imaging systems integrate the
Company's proprietary software as well as components manufactured by third party
imaging software, hardware and peripheral vendors.

The Company's customer base is nationwide and is serviced from offices in
Denver, Colorado; Bellevue, Washington; Atlanta, Georgia; Birmingham, Alabama;
Minneapolis, Minnesota; Shelton, Connecticut; Raleigh, North Carolina; St.
Louis, Missouri; San Antonio, Texas; and San Francisco, California.

Basis of Presentation

The Company, previously known as Documatrix Acquisition Corporation, was
incorporated in July 1995.  In July 1995, the Company acquired all of the
authorized, issued and outstanding shares of Documatrix Corporation
(Documatrix), a private company wholly owned by Gerald E. Henderson (President
and Chief Executive Officer of the Company), in exchange for approximately
2,180,000 shares of the Company's Common Stock.  As Mr. Henderson owned all of
the shares of Documatrix at the acquisition date, this transaction was recorded
as a combination of entities under common control and the assets and liabilities
of Documatrix were recorded at Documatrix's historical cost.  The operations of
Documatrix have been included as a predecessor company in these financial
statements and are shown as if the Company owned Documatrix for all periods
presented.

On February 15, 1995, Documatrix sold substantially all of its assets and
liabilities to ENTEX Information Services of Colorado, Inc. (ENTEX), formerly
known as Random Access, Inc.  ENTEX assumed Documatrix's net liabilities except
for a $1,500,000 note payable to Bank One, Colorado N.A., which was retained by
Documatrix and was subsequently included in the net liabilities of Documatrix
acquired by the Company in July 1995.  This note was paid in full in June 1996.
The net liabilities assumed by ENTEX totaled approximately $1,459,000 and
consisted primarily of accounts payable, a bank operating line of credit, and
deferred revenue and was offset primarily by inventories and accounts
receivable.  ENTEX paid $51,000 in cash to Documatrix, agreed to make payments
to Documatrix pursuant to an earnout agreement based upon the operating results
of the imaging division, and agreed to make monthly payments of approximately
$7,700 to Documatrix until the earlier of August 31, 1996 or the point in time
that ENTEX had paid Documatrix $1,149,000 pursuant to the earnout agreement.
The sum of such monthly payments totaled approximately $67,000.  Documatrix did
not have any significant operating activities after the sale to ENTEX.

On August 30, 1995, the Company repurchased the assets and liabilities of the
imaging division of ENTEX, which were comprised primarily of the assets and
liabilities, which had been previously sold in February 1995 by Documatrix to
ENTEX.  The Company acquired these assets and liabilities in exchange for
$721,000 in cash and a note payable of approximately $1,484,000.  This note was
paid in full in June 1996.  The Company also issued warrants to ENTEX as part of
the overall consideration (see Note 4).  This transaction was accounted for
under the purchase method of accounting and the excess of the purchase price
over the fair value of the net assets acquired was applied to reduce the gain on
the sale of the assets in February 1995.  The gain on the sale of assets
exceeded the excess of the purchase price over the fair value of the net assets
acquired by approximately $347,000.

The following represents the summarized results of operations for Documatrix for
the period from January 1, 1995 to July 24, 1995 and the summarized consolidated
results of operations for the Company for the period from July 25, 1995 to
December 31, 1995. The consolidated statement of operations for the year ended
December 31, 1995 is comprised of both of these components.

                                       15
<PAGE>
 
<TABLE>
<CAPTION>
                           JANUARY 1, 1995    JULY 25, 1995 TO       YEAR ENDED
                          TO JULY 24, 1995   DECEMBER 31, 1995   DECEMBER 31, 1995
                        ----------------------------------------------------------
<S>                       <C>                <C>                 <C>
REVENUE                               $ 61             $ 1,907             $ 1,968
COST OF REVENUE                        (66)             (1,196)             (1,262)
                                      ----             -------             -------
GROSS PROFIT                            (5)                711                 706
OTHER INCOME (EXPENSE)                 188                (758)               (570)
                                      ----             -------             -------
NET INCOME (LOSS)                     $183             $  (47)             $   136
                                      ====             =======             =======
</TABLE>

The following represents the pro forma results of operations as if the transfer
of the net liabilities to ENTEX from Documatrix and the subsequent acquisition
of the assets and liabilities from ENTEX by the Company had never occurred (in
thousands, except per share data):

<TABLE>
<CAPTION>
 
                                  YEAR ENDED
                               DECEMBER 31, 1995
                               -----------------
<S>                            <C>
Revenue                                   $4,815
Net income                                $  136
Net income per common share               $ 0.04
</TABLE>

Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary Documatrix.  All material intercompany
balances and transactions have been eliminated in consolidation.

Cash and cash equivalents
The Company defines cash equivalents as highly liquid investments with original
maturities of 90 days or less.  The carrying value of the Company's cash
equivalents approximates their fair market value.

Inventory
Inventory consists primarily of purchased hardware and software and is stated at
the lower of cost or market with cost determined on a first-in, first-out (FIFO)
basis.

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 assets, which range
from three to six years.

Revenue Recognition
Revenues from contracts for system sales that extend over a period time and are
performed on a fixed-price basis are recognized by applying the percentage of
completion method.  The Company's basis for measuring the percent of completion
is the ratio of costs incurred to total estimated costs.  Revenues from the sale
of software licenses and hardware products are recognized at the time of
shipment unless significant future obligations exist.  Revenues from maintenance
and support contracts are recognized ratably over the terms of the related
contracts.

Software Development Costs
Software development costs are expensed until technological feasibility has been
established.  Costs incurred from that time until the product is available for
general release to customers are capitalized.  Costs of enhancing existing
products are capitalized, while costs associated with routine maintenance of
existing products are charged to expense as incurred.  Amortization of computer
software development costs begins when the product is available for use by
customers.  Amortization is recorded using the greater of: (1) the amount
computed using the ratio of current product revenue to the total of current and
anticipated revenue or (2) the amount determined using the straight-line method
over three years.  Amortization of computer software development costs is
included in cost of system sales in the accompanying consolidated statement of
operations.  For the year ended December 31, 1996, amortization of capitalized
software costs was approximately $132,000.

                                       16
<PAGE>
 
Significant Customers and Concentration of Credit Risk
During 1996, the Company had two significant customers that accounted for
approximately 34% of total revenue.  For the year ended December 31, 1995, the
Company had one principal customer (different from the two in 1996) that
accounted for approximately 51% of revenue and another principal customer that
accounted for 17% of revenue.  Accounts receivable from the principal customers
were approximately $200,000 at December 31, 1996.  In order to reduce credit
risk, the Company generally does not require collateral but does require
substantial down payments and progress payments during the course of a system
installation.

Advertising Costs
The Company expenses advertising costs as incurred.  Advertising expense for the
years ended December 31, 1996 and 1995 was approximately $158,000 and $23,000,
respectively.

Research and Development Expenses
Research and development expenses are charged to operations when incurred except
for those costs incurred after technological feasibility is established which
are capitalized as software development costs.  Research and development expense
for the years ended December 31, 1996 was $703,000, exclusive of $416,000 which
was capitalized.  Minimal research and development costs were incurred during
1995.

Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes.  Actual results could differ from those estimates.

Earnings per Share
The earnings per share calculation for the year ended December 31, 1996, is
based upon the weighted average number of common shares outstanding during the
period from June 4, 1996 through December 31, 1996 (post initial public
offering).  Prior to that time, the calculation was based upon shares
outstanding as described below.

The earnings per share calculation for the year ended December 31, 1995 and for
the period January 1, 1996 through June 4, 1996, has been calculated in
accordance with Securities and Exchange Commission Staff Accounting Bulletins
and Staff Policy whereby all common and common equivalent shares issued during
the 12-month period prior to an initial public offering at prices below the
public offering price are presumed to have been issued in contemplation of the
public offering, even if antidilutive, and have been included in the calculation
as if these common and common equivalent shares were outstanding for all periods
presented (using the treasury stock method).

Liquidity and Capital Resources
The sales cycle of the Company's systems is running longer than originally
anticipated.  Management had originally anticipated that the average sales cycle
for the Company's software would take from two to four months.  Based on recent
experience, management now anticipates that the sales cycle will typically take
between six and twelve months.  The results of that change have slowed the
market development and the anticipated increase in revenues from the Company's
software and caused a greater use of capital resources than anticipated.  As a
result of these conditions, the Company completed the transactions described in
Note 8.

The Company's strategy is to invest heavily in its research and development and
sales and marketing efforts in order to establish market leadership. This
strategy has led to losses in 1996 and the Company expects this strategy will
lead to losses for much of 1997. Additionally, should revenues not increase
significantly in 1997, capital will be required to finance the growth of working
capital and fixed capital investments in addition to financing any operating
losses. The Company believes the above mentioned financing activities, including
its $2,000,000 line of credit (whereby the Company is allowed to borrow up to
80% of approved accounts receivable balances), the sale of 247,000 shares of
common stock, the sale of 3,300,000 shares of non-voting, Series A Preferred
Stock (See Note 8) and increases in operating cash flow resulting from increased
sales levels, will be sufficient to finance its capital needs for the next
twelve months. The Company's long term capital requirements will depend on many
factors, including, but not limited to, product revenues from operations,
working capital requirements, research and development expenses and

                                       17
<PAGE>
 
capital expenditures. The Company's market development efforts are still
relatively young and changes in the anticipated business development of the
Company which extend the Company's time to achieve profitability could cause the
Company to issue additional debt, equity or a combination of both. There can be
no assurance that additional financing will be available, or, if available, the
terms of such financing will be favorable to the Company or its shareholders
without substantial dilution of their ownership rights. If adequate funds are
not available, or are not available on terms acceptable to the Company, the
Company may be required to curtail its operations significantly, forego market
opportunities, or obtain funds through arrangements with strategic partners or
others that may require the Company to relinquish material rights to certain of
its technologies or potential markets.

NOTE 2.  OPERATING LEASES

The Company has leases for office equipment and space that expire in various
years, some of which contain renewal options.  Future minimum lease payments
required as of December 31, 1996 under non-cancelable operating leases with
terms exceeding one year, are as follows:
<TABLE>
<CAPTION>
 
<S>         <C>
1997        $305,000
1998         201,000
1999          86,000
            --------
 
   Total    $592,000
            ========
</TABLE>

Total minimum payments have not been reduced by minimum sublease rentals of
$78,000 due in the future under non-cancelable subleases.

Operating lease rentals for office facilities and equipment amounted to
approximately $234,000 in 1996 and $60,000 in 1995.

NOTE 3.  INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.  As of December 31, 1996,
the Company's net deferred tax asset has been fully reserved with a valuation
allowance.  Significant components of the Company's deferred tax assets and
liabilities (in thousands) are as follows:
<TABLE>
<CAPTION>
 
                                          DECEMBER 31,
                                              1996
                                        --------------
Deferred tax assets:
<S>                                       <C>
  Net operating loss (NOL) carryforwards       $ 1,736
  AMT credit carryforwards                          18
  Tax-basis goodwill                               425
  Other                                             20
                                               -------
      Total deferred tax assets                  2,199
  Deferred tax liabilities:
  Fixed asset differences                            3
  Deferred compensation                             21
  Capitalized software                             106
                                               -------
      Total deferred tax liabilities               130
Net deferred tax asset                           2,069
Valuation allowance                             (2,069)
                                               -------
Net deferred taxes                             $     -
                                               =======
</TABLE>

The following table reconciles the amount which would be provided by applying
the 34% federal statutory rate to income before income tax expense to federal
income taxes actually provided (in thousands):

                                       18
<PAGE>
 
<TABLE>
<CAPTION>
 
                                             DECEMBER 31
                                          -----------------
                                            1996      1995
                                          ---------  ------
<S>                                       <C>        <C>
Income taxes at federal statutory rate     $(1,245)  $  54
Benefit of tax losses not recognized         1,245       -
Benefit due to utilization of regular      
 tax NOLs                                        -     (54)
AMT arising from NOL carryforward         
 limitation                                      -      24
                                           -------   -----
Total income tax expense                   $     -   $  24
                                           =======   ===== 
</TABLE>
At December 31, 1996, the Company has NOLs of approximately $4,693,000 for
income tax purposes of which $671,000 expire in 2009 and $4,022,000 which expire
in 2011.  The use of the NOLs is limited to future taxable earnings of the
Company.

In 1996, cumulative purchases and transfers of the Company's Common Stock caused
an ownership change under Internal Revenue Code Section 382 which could result
in a limitation of the Company's ability to utilize net operating losses up to
that date.  At this time, it cannot be determined whether this limitation will
affect the Company's future tax liability.

NOTE 4.  STOCKHOLDERS' EQUITY

Preferred Stock
Pursuant to the Company's Articles of Incorporation, the Company's Board of
Directors may issue up to 5,000,000 shares of Preferred Stock.  The Company's
Board of Directors has the authority to fix the rights, powers, preferences and
privileges, and the qualifications, limitations or restrictions thereof, of any
series of Preferred Stock, including but not limited to dividend rights,
dividend rates, conversion rights, voting rights, and liquidation preferences.
The Company's Board of Directors has not yet established any rights, powers,
preferences or privileges for the Preferred Stock. See Note 8 for a related
subsquent event.

Common Stock
In July 1995, the Company sold 266,771 share of its Common Stock for
approximately $69,000 exclusive of offering costs of approximately $6,000.

In August 1995, the Company sold 818,176 shares of its Common Stock for
approximately $1,161,000, exclusive of offering costs of approximately $23,000.

On March 4, 1996, the Company's shareholders approved a split of the Common
Stock on a 0.775-for-1 basis. All share and per share data have been
retroactively restated to reflect the stock split.

In June 1996, the Company raised $6,247,000, net of offering costs, from its
initial public offering of 1,400,000 shares of Common Stock.

Warrants
The Company has authorized the issuance of 1,610,000 warrants to purchase an
aggregate of 805,000 shares of Common Stock and has reserved 805,000 shares of
Common Stock for issuance upon exercise of the Warrants.  Of the 1,610,000
warrants 1,400,000 were sold in conjunction with the initial public offering.
Two Warrants entitle the registered holder to purchase one share of Common Stock
at an exercise price of $7.65 per share at any time during a 23-month period
beginning July 4, 1997.  The Warrants may be exercised only in quantities to
purchase full shares of Common Stock.  Beginning July 4, 1997, the Warrants are
redeemable by the Company on 30 days prior written notice at a redemption price
of $0.25 per Warrant, provided the average closing bid price of the Company's
Common Stock in the Nasdaq Small Cap Market for any 10 consecutive trading days
ending with five days of the notice of redemption exceeds $8.80 per share
(subject to adjustment by the Company in the event of any reverse stock split or
similar events.)  All Warrants not exercised prior to the redemption date must
be redeemed if any are redeemed.  In addition, the underwriter of the initial
public offering can purchase 210,000 shares at an average price of $9.57.  These
warrants are exercisable for a 48 month period commencing July 4, 1997.

                                       19
<PAGE>
 
In conjunction with the purchase of the assets and liabilities from ENTEX, the
Company issued a warrant to ENTEX to purchase approximately 64,000 shares of the
Company's Common Stock.  The exercise price of the shares underlying the warrant
is $5.75.  The warrant will automatically terminate on August 29, 2000.

Stock Recission
Effective May 16, 1996, the sale of 26,421 shares of the Company's Common Stock
which occurred in August 1995 was rescinded.  This recission was the result of
provisions of the Corporate Financing Rule of the National Association of
Securities Dealers, Inc. related to underwriter compensation in connection with
the Company's initial public offering.

Deferred Compensation
Deferred compensation represents the amount recorded as compensation resulting
from the agreement between the Company's primary shareholder and CEO and another
officer of the Company.  Pursuant to this agreement, the Company's CEO sold
shares to the other officer at a price that was in the aggregate $100,000 below
the deemed fair market value of the shares sold.  The Company recorded deferred
compensation and a credit to Common Stock of $100,000 at December 31, 1995.  The
amortization expense recorded during the year ended December 31, 1996 totaled
$50,000.  The net deferred compensation included in stockholders' equity at
December 31, 1996, is $50,000.  Pursuant to the vesting provisions of the
restricted stock agreement, the amortization period is two years and will be
complete at December 31, 1997.

NOTE 5.  STOCK OPTIONS

On July 24, 1995, the Company adopted the Founders and Consultant Stock Option
Plan (1995 Plan) for employees, directors and consultants of the Company.  The
1995 Plan provides for the issuance of incentive and non-statutory stock options
of up to 852,500 shares of the Company's Common Stock.  Options issued under the
1995 Plan are exercisable under conditions as determined by the Company's Board
of Directors, with the term of each option being a maximum of ten years from the
date of grant.

On November 2, 1995, the Company adopted the 1996 Stock Option Plan (1996 Plan)
for employees, directors and consultants of the Company.  The 1996 Plan provides
for the issuance of incentive and non-statutory stock options of up to 387,500
shares of the Company's Common Stock.  Options issued under the 1996 Plan are
exercisable under conditions determined by the Company's Board of Directors,
with the terms of each option being a maximum of ten years from the date of
grant.

On November 2, 1995, the Company also adopted the Stock Option Plan, for Non-
Employee Directors (Non-Employee Plan).  Each member of the Company's Board of
Directors who is not otherwise an employee of the Company is eligible to
participate in this plan.  All options granted under this plan are non-statutory
and expire no later than ten years from the date of grant.  The Non-Employee
Plan provides for the issuance of up to 58,125 shares of the Company's Common
Stock.  Each of the three Non-Employee Directors received 7,750 options on the
date of adoption of this plan and each Non-Employee Director is eligible to
receive an additional 5,812 shares annually.  The options vest 40%, 30% and 30%
at the first, second and third annual meeting after the date of grant,
respectively.

The Company has elected to follow Accounting Principles Board Opinion No. 25
Accounting for Stock Issued to Employees (APB 25) and related interpretations in
accounting for its stock options because, as discussed below, the alternative
fair value accounting provided for under Financial Accounting Standards Board
No. 123 "Accounting for Stock-based Compensation" (SFAS 123) requires use of
option valuation models that were not developed for use in valuing stock
options. Under APB 25, because the exercise price of the Company's stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.

                                       20
<PAGE>
 
Pro forma information regarding net income and earnings per share is required by
SFAS 123, which also requires that the information be determined as if the
Company has accounted for its stock options granted subsequent to December 31,
1994 under the fair value method of that Statement.  The fair value for these
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions for 1996 and 1995:  risk-
free interest rates ranging from 6.0% to 7.0% in 1996 and ranging from 5.7% to
6.3% in 1995, a dividend yield of 0%, volatility factor of the expected market
price of the Company's Common Stock of 0.438 in both 1996 and 0 in 1995 and an
average expected life of the options of 5 years.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable.  In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility.  Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its employee stock options.

A summary of the Company's stock option activity and related information for the
year ended December 31 follows:
<TABLE>
<CAPTION>
 
                                                  1996                          1995
                                                  Weighted Average              Weighted Average
                                       Options     Exercise Price    Options     Exercise Price
                                    ------------------------------------------------------------
<S>                                   <C>         <C>               <C>         <C>
Outstanding at beginning of year       1,119,784             $3.32           -             $   -
Granted                                  331,425              3.84   1,119,784              3.32
Exercised                                 27,125              2.58           -                 -
Forfeited                                 85,250              2.58           -                 -
                                    ------------                  ------------
 
Outstanding at end of year             1,338,834              3.51   1,119,784              3.32
                                    ============                  ============
 
Exercisable at end of year               824,580              3.67     362,989              4.85
                                    ============                  ============
 
Weighted average fair value
of options granted during the year         $1.77                    $     0.55
</TABLE>
Exercise prices for options outstanding as of December 31, 1996 ranged from
$2.58 to $7.19.  The weighted average remaining contractual life of those
options is nine years.

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options vesting period.  If the Company had
elected to recognize compensation cost based on the fair value of the stock
options at grant date as allowed by the SFAS 123 compensation expense of
$465,000 and $1,099,000 would have been recorded for 1996 and 1995,
respectively.  The Company's pro forma information for the years ending December
31 follows:
<TABLE>
<CAPTION>
 
                                      1996          1995
                                  -------------  -----------
<S>                               <C>            <C>
Net income (loss):
  As reported                      $(3,663,000)   $ 136,000
  Pro forma                        $(4,128,000)   $(963,000)
Earnings (loss) per share:
  As reported                      $     (0.87)   $    0.04
  Pro forma earnings per share     $     (0.99)   $   (0.27)
 
</TABLE>

                                       21
<PAGE>
 
NOTE 6.  RELATED PARTY TRANSACTIONS

Opus Capital, Inc. (Opus) was paid $10,000 for services rendered during the
initial capitalization efforts for Documatrix in August 1995.  Opus was also
under retainer at a rate of $10,000 per month from September 1, 1995 through
April 30, 1996 for consulting services to the Company's management including
consulting services related to the Company's initial public offering.  The total
amount paid to Opus was classified as an offering cost.  Opus and its affiliates
currently own 249,479 (5.3%) of the total outstanding Common Stock of the
Company.  In addition, Opus received stock options to purchase an aggregate of
358,050 shares of the Common Stock (see Note 5).

The Company leases office furniture and equipment from the Companys majority
shareholder and CEO at a cost of approximately $10,000 per year under an
operating lease with a term of three years.  At the end of the term, the Company
may purchase the office furniture and equipment at fair market value.  This
transaction was made at arms length and was based upon an independent valuation.

The Company made no payments to Treuhand, Inc., a corporation wholly owned by a
board member and an officer of the Company, in 1996.  In 1995, Treuhand, Inc.
was paid approximately $33,000 for consulting services related to developing
financing strategies for the Company. The Company's majority shareholder and CEO
also granted this same board member an option to acquire up to 87,746 shares of
his stock in the Company at a price of $1.42 per share. This option expires
September 26, 2000.

The Company's majority shareholder and CEO personally assumed $60,000 of
Documatrix's note payable to the bank during 1995.  In exchange, the Company
recorded an increase in the employee's basis in the Company of $60,000.  No
contingent liability exists on the part of the Company related to this
transaction.

NOTE 7.  COMMITMENTS AND CONTINGENCIES

The Company's majority shareholder and CEO entered into an employment agreement
in 1996 with the Company that provides for a base salary of $180,000 in calendar
year 1997 and additional bonuses based upon the Companys performance.  This
employee is entitled to receive a termination payment equal to 100% of his then
current annual salary plus monthly payments for twelve months totaling his then
current annual salary, if his employment is terminated by the Company, with or
without cause.

The Company has entered into agreements with its primary suppliers to act as an
authorized reseller.  Typically, these agreements extend for one year and are
generally renewable for additional one-year periods unless terminated sooner by
mutual consent of the parties or a breach by one of the parties of the
agreement provisions.  Certain of these agreements include provisions for the
Company to meet specified sales goals.  The loss of such agreements could have a
material adverse effect on the Company's business.  However, although there can
be no assurance of such, management of the Company believes that if one of these
contracts were to be terminated by a supplier, the Company would be able to
obtain similar hardware or software from other suppliers.

NOTE 8.  SUBSEQUENT EVENT

In January 1997, the Company sold 247,000 shares of Common Stock at a price of
$1.96 per share.  Net proceeds to the Company, relating to this transaction
totaled $465,000.

On April 14, 1997, the Company entered into an agreement to sell 3,300,000 
shares of non-voting, Series A Preferred Stock (Preferred Stock) for gross
proceeds of $3,300,000. In connection with the sale, the Company agreed to pay
commissions of $330,000 and issue warrants to purchase 1,550,000 shares of
Common Stock to certain placement agents. Of the 1,550,000 warrants, 1,050,000
are exercisable at $2.25 per share and 500,000 are exercisable at $3.00 per
share. All such warrants may be exercised for a period of three years from the
date of grant. The Preferred Stock yields a 7% dividend, which the Company can
elect to pay in cash or Common Stock. The Preferred Stock can be converted into
Common Stock at the lesser of $2.25 per share or 75% or the average closing
price for the previous eight trading days prior to conversion. Through April 14,
1997 the Company has received $200,000 of the proceeds and anticipates receiving
the remainder by April 18, 1997.
                                       22
<PAGE>
 
ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

There have been no changes in the Company's independent accountants or
disagreements on accounting and financial statement disclosure matters.

                                    PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

The Company's definitive Proxy Statement to be filed pursuant to Schedule 14A
under the Securities Exchange Act of 1934 is incorporated herein by reference.

ITEM 10.  EXECUTIVE COMPENSATION

The Company's definitive Proxy Statement to be filed pursuant to Schedule 14A
under the Securities Exchange Act of 1934 is incorporated herein by reference.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The Company's definitive Proxy Statement to be filed pursuant to Schedule 14A
under the Securities Exchange Act of 1934 is incorporated herein by reference.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Company's definitive Proxy Statement to be filed pursuant to Schedule 14A
under the Securities Exchange Act of 1934 is incorporated herein by reference.

                                       23
<PAGE>
 
                                    PART IV

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a)   EXHIBITS:

   EXHIBIT
   NUMBER            DOCUMENT DESCRIPTION
   ------            --------------------
 
3.1            Amended and Restated Articles of Incorporation. (Incorporated by
               reference from Exhibit 3.1 to the Registrant's Registration
               Statement on Form SB-2 (No. 333-1990)).

3.2            Bylaws of Registrant. (Incorporated by reference from Exhibit 3.2
               to the Registrant's Registration Statement on Form SB-2 (No. 333-
               1990)).

4.1            Form of certificate for shares of Common Stock. (Incorporated by
               reference from Exhibit 4.1 to the Registrant's Registration
               Statement on Form SB-2 (No. 333-1990)).

4.2            Form of Warrant Agreement and Redeemable Warrant. (Incorporated
               by reference from Exhibit 4.2 to the Registrant's Registration
               Statement on Form SB-2 (File No. 333-1990)).

10.1           Employment Agreement dated December 29, 1995 by and between
               ImageMatrix Corporation and Gerald E. Henderson. (Incorporated by
               reference from Exhibit 10.1 to the Registrant's Registration
               Statement on Form SB-2 (File No. 333-1990)).

10.2           Severance Agreement dated December 29, 1995 by and between
               ImageMatrix Corporation and Dennis C. Hefter. (Incorporated by
               reference from Exhibit 10.2 to the Registrant's Registration
               Statement on Form SB-2 (File No. 333-1990)).

10.3           Letter Agreement dated December 21, 1995 by and between
               ImageMatrix Corporation and Blair W. McNea. (Incorporated by
               reference from Exhibit 10.3 to the Registrant's Registration
               Statement on Form SB-2 (File No. 333-1990)).

10.4           ImageMatrix Corporation Founders and Consultants Stock Option
               Plan. (Incorporated by reference from Exhibit 10.4 to the
               Registrant's Registration Statement on Form SB-2 (File No. 333-
               1990)).

10.5           ImageMatrix Corporation 1996 Stock Option Plan. (Incorporated by
               reference from Exhibit 10.5 to the Registrant's Registration
               Statement on Form SB-2 (File No. 333-1990)).

10.6           ImageMatrix Corporation Stock Option Plan for Non-Employee
               Directors.(Incorporated by reference from Exhibit 10.6 to the
               Registrant's Registration Statement on Form SB-2 (File No. 333-
               1990)).

10.7           Asset Purchase Agreement dated August 30, 1995 by and among
               Documatrix Acquisition Corporation, Random Access, Inc. and
               Gerald E. Henderson. (Incorporated by reference from Exhibit
               10.7 to the Registrant's Registration Statement on Form SB-2
               (File No. 333-1990)).

10.8           Authorized Reseller Agreement dated February 21, 1996 by and
               between ImageMatrix Corporation and Optika Imaging Systems, Inc.
               (Incorporated by reference from Exhibit 10.8 to the Registrant's
               Registration Statement on Form SB-2 (File No. 333-1990)).

                                       24
<PAGE>
 
10.9           Reseller Agreement dated January 8, 1996 by and between
               ImageMatrix Corporation and FileNet Corporation. (Incorporated by
               reference from Exhibit 10.9 to the Registrant's Registration
               Statement on Form SB-2 (File No. 333-1990)).

10.10          Asset Purchase Agreement dated February 15, 1995 by and among
               Random Access, Inc., Documatrix Corporation and Gerald E.
               Henderson. (Incorporated by reference from Exhibit 10.10 to the
               Registrant's Registration Statement on Form SB-2 (File No. 333-
               1990)).

10.11          Change in Terms Agreement dated December 27, 1995 by and among
               Bank One Colorado, N.A., Gerald E. Henderson, Carolyn Lee
               Henderson and Documatrix Corporation, as amended by Change in
               Terms Agreement dated February 29, 1996 by and among Bank One
               Colorado, N.A., Gerald E. Henderson, Carolyn Lee Henderson,
               Documatrix Corporation and ImageMatrix Corporation. (Incorporated
               by reference from Exhibit 10.11 to the Registrant's Registration
               Statement on Form SB-2 (File No. 333-1990)).

11             Statement Re Computation of Earnings Per Share.

27             Financial Data Schedule.


(b)  REPORTS ON FORM 8-K.

There were no reports filed on Form 8-K for the quarter ended December 31, 1996.

                                       25
<PAGE>
 
                                   SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                           IMAGEMATRIX CORPORATION

Date: April 14, 1997
                                 By:  /s/ Gerald E. Henderson        
                                      -----------------------------------
                                 Gerald E. Henderson, President and Chief
                                 Executive Officer (Principal Executive Officer)


Date: April 14, 1997             By:  /s/ Blair McNea
                                      -----------------------------------
                                 Blair McNea, Chief Financial Officer
                                 Vice President - Business Development 
                                 Treasurer, Secretary, (Principal Financial and
                                 Accounting Officer)


In accordance with the Exchange Act, this report has been signed below by the 
following persons on behalf of the Registrant and in the capacities and on the 
dates indicated.


Date: April 14, 1997
                                 By:  /s/ Gerald E. Henderson        
                                      -----------------------------------
                                 Gerald E. Henderson, President and Chief
                                 Executive Officer and Director
                                 (Principal Executive Officer)


Date: April 14, 1997             By:  /s/ Blair McNea
                                      -----------------------------------
                                 Blair McNea, Chief Financial Officer
                                 Vice President - Business Development 
                                 Treasurer, Secretary, and Director
                                 (Principal Financial and Accounting Officer)


Date: April 14, 1997             By:  /s/ Robert Beekmann
                                      ----------------------------------- 
                                 Robert Beekman, Director


Date: April 14, 1997             By:
                                      -----------------------------------
                                 David Seigle, Director


Date: April 14, 1997             By:
                                      -----------------------------------
                                 Jaidev Sugavanam, Director

                                       26