**UNITED      STATES**

**SECURITIES      AND EXCHANGE COMMISSION**

**FORM      10-QSB**

**December      31, 2005**

**INTERNATIONAL      MICROCOMPUTER SOFTWARE, INC**
**.**

| **CALIFORNIA**                                                                | **94-2862863**                                      |
|-------------------------------------------------------------------------------|-----------------------------------------------------|
| (State                or other jurisdiction of incorporation or organization) | (I.R.S.                Employer Identification No.) |
|                                                                          |                                                |
| **100                ROWLAND WAY, NOVATO, CALIFORNIA**                        | **94945**                                           |
| (Address                of principal executive offices)                       | (Zip                code)                           |
|                                                                          |                                                |
| **(415)                878-4000**                                             |                                                |
| Issuer's                telephone number                                      |                                                |

** **
** **

----

**INTERNATIONAL      MICROCOMPUTER SOFTWARE, INC.**

**AND      SUBSIDIARIES**

**Table      of Contents**

| **PART                  I - FINANCIAL INFORMATION**                                                                                               | **3**  |
|---------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                              |   |
| ITEM                  1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                                                             | 3      |
| CONDENSED                  CONSOLIDATED BALANCE SHEETS                                                                                            | 3      |
| CONDENSED                  CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME                  / (LOSS)                               | 4      |
| CONDENSED                  CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY                                                                        | 5      |
| CONDENSED                  CONSOLIDATED STATEMENTS OF CASH FLOWS                                                                                  | 6      |
| NOTES                  TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                                                             | 7      |
| ITEM                  2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION                  AND                  RESULTS OF OPERATIONS | 17     |
| ITEM                  3 - CONTROLS AND PROCEDURES                                                                                                 | 34     |
|                                                                                                                                              |   |
|                                                                                                                                              |   |
| **PART                  II - OTHER INFORMATION**                                                                                                  | **35** |
|                                                                                                                                              |   |
| ITEM                  1 - LEGAL PROCEEDINGS                                                                                                       | 35     |
| ITEM                  2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                                             | 35     |
| ITEM                  3 - DEFAULTS UPON SENIOR SECURITIES                                                                                         | 35     |
| ITEM                  4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                                     | 35     |
| ITEM                  5 - OTHER INFORMATION                                                                                                       | 36     |
| ITEM                  6 - EXHIBITS                                                                                                                | 36     |
|                                                                                                                                              |   |
|                                                                                                                                              |   |
| **SIGNATURES**                                                                                                                                    | **37** |
|                                                                                                                                              |   |
|                                                                                                                                              |   |
|                                                                                                                                              |   |
| **INDEX                  TO EXHIBITS:**                                                                                                           | **38** |
|                                                                                                                                              |   |

----

**PART      I - FINANCIAL INFORMATION**

**Item1-      Condensed Consolidated Financial Statements**

**INTERNATIONAL      MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES**

**CONDENSED      CONSOLIDATED BALANCE SHEETS**

|                                                                                                                                                                                                                                                                         |   | **December                  31, 2005** |        | **June                  30, 2005** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------|-------------|------------------------------------|--------|
| **Unaudited**                                                                                                                                                                                                                                                                |   |                              |        |                               |   |
| ASSETS                                                                                                                                                                                                                                                                  |   |                                   |        |                               |   |   |   |
| Current                  assets:                                                                                                                                                                                                                                             |   |                                   |        |                               |   |  |   |
| Cash                  and cash equivalents                                                                                                                                                                                                                                   |   |                                   | $9,849      |                               |   | $4,347 |   |
| Trading                  securities                                                                                                                                                                                                                                          |   |                                   | -           |                               |   | 714 |   |
| Receivables,                  less allowances for doubtful accounts, discounts and returns of                  $551 as of                  December                  31, 2005 and $626 as of June 30, 2005.                                                                  |   |                                   | 1,384       |                               |   | 773 |   |
| Inventories,                  net                                                                                                                                                                                                                                            |   |                                   | 873         |                               |   | 758 |   |
| Receivables,                  other (related to discontinued operations)                                                                                                                                                                                                     |   |                                   | -           |                               |   | 2,000 |   |
| Receivables,                  other                                                                                                                                                                                                                                          |   |                                   | -           |                               |   | 30 |   |
| Other                  current assets                                                                                                                                                                                                                                        |   |                                   | 1,278       |                               |   | 530 |   |
| Assets                  related to discontinued operations                                                                                                                                                                                                                   |   |                                   | -           |                               |   | 12,231 |   |
| **Total                  current assets**                                                                                                                                                                                                                                    |   |                                   | **13,384**  |                               |   | **21,383** |   |
|                                                                                                                                                                                                                                                                         |   |                                   |        |                               |   |  |   |
| **Fixed                  assets, net**                                                                                                                                                                                                                                       |   |                                   | **340**     |                               |   | **377** |   |
|                                                                                                                                                                                                                                                                         |   |                                   |        |                               |   |  |   |
| Intangible                  assets                                                                                                                                                                                                                                           |   |                                   |        |                               |   |  |   |
| Capitalized                  software, net                                                                                                                                                                                                                                   |   |                                   | 322         |                               |   | 494 |   |
| Domain                  names and brands, net                                                                                                                                                                                                                                |   |                                   | 1,960       |                               |   | 1,574 |   |
| Distribution                  rights and proprietary plans, net                                                                                                                                                                                                              |   |                                   | 773         |                               |   | 170 |   |
| Capitalized                  customer lists, agreements and relationships, net                                                                                                                                                                                               |   |                                   | 1,327       |                               |   | 326 |   |
| Goodwill                                                                                                                                                                                                                                                                     |   |                                   | 3,678       |                               |   | 2,090 |   |
| Trademarks,                  net                                                                                                                                                                                                                                             |   |                                   | 19          |                               |   | 1 |   |
| **Total                  intangible assets**                                                                                                                                                                                                                                 |   |                                   | **8,079**   |                               |   | **4,655** |   |
|                                                                                                                                                                                                                                                                         |   |                                   |        |                               |   |   |   |
| **Total                  assets**                                                                                                                                                                                                                                            |   |                                   | **$21,803** |                               |   | **$26,415** |   |
|                                                                                                                                                                                                                                                                         |   |                                   |        |                               |   |  |   |
| **LIABILITIES                  AND SHAREHOLDERS' EQUITY**                                                                                                                                                                                                                    |   |                                   |        |                               |   |  |   |
| Current                  liabilities:                                                                                                                                                                                                                                        |   |                                   |        |                               |   |  |   |
| Short-term                  debt                                                                                                                                                                                                                                             |   |                                   | 873         |                               |   | 2,764 |   |
| Trade                  accounts payable                                                                                                                                                                                                                                      |   |                                   | 1,364       |                               |   | 2,245 |   |
| Accrued                  and other liabilities                                                                                                                                                                                                                               |   |                                   | 1,577       |                               |   | 1,871 |   |
| Deferred                  revenues                                                                                                                                                                                                                                           |   |                                   | 45          |                               |   | 38 |   |
| Liabilities                  related to discontinued operations                                                                                                                                                                                                              |   |                                   | -           |                               |   | 1,037 |   |
|                                                                                                                                                                                                                                                                         |   |                                   |        |                               |   |   |   |
| **Total                  current liabilities**                                                                                                                                                                                                                               |   |                                   | **3,859**   |                               |   | **7,955** |   |
|                                                                                                                                                                                                                                                                         |   |                                   |        |                               |   |  |   |
| Long-term                  debt and other obligations                                                                                                                                                                                                                        |   |                                   | 173         |                               |   | 230 |   |
|                                                                                                                                                                                                                                                                         |   |                                   |        |                               |   |   |   |
| **Total                  liabilities**                                                                                                                                                                                                                                       |   |                                   | **4,032**   |                               |   | **8,185** |   |
|                                                                                                                                                                                                                                                                         |   |                                   |        |                               |   |  |   |
| Shareholders'                  equity                                                                                                                                                                                                                                        |   |                                   |        |                               |   |  |   |
| Common                  stock, no par value; 300,000,000 authorized; 29,845,877 issued                  and                  outstandingas                  of December 31, 2005 and 28,796,886 issued and outstanding as of                  June 30,                  2005 |   |                                   | 44,843      |                               |   | 43,663 |   |
| Accumulated                  deficit                                                                                                                                                                                                                                         |   |                                   | (27,161     | )                                  |   | (25,331 | ) |
| Accumulated                  other comprehensive income (loss)                                                                                                                                                                                                               |   |                                   | 89          |                               |   | (102 | ) |
| **Total                  shareholders' equity**                                                                                                                                                                                                                              |   |                                   | **17,771**  |                               |   | **18,230** |   |
|                                                                                                                                                                                                                                                                         |   |                                   |        |                               |   |   |   |
| **Total                  liabilities and shareholders' equity**                                                                                                                                                                                                              |   |                                   | **$21,803** |                               |   | **$26,415** |   |

----

**INTERNATIONAL      MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES**

**CONDENSED      CONSOLIDATED STATEMENTS OF OPERATIONS**
**      and COMPREHENSIVE INCOME / (LOSS**
**)**

**(Unaudited)**

|                                                                                                                       |   | **Three                  months ended December 31,** |       | **Six                  months ended December 31,** |   |
|----------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------|------------|----------------------------------------------------|--------|
|                                                                                                                       |   | **2005**                                             |       | **2004**                                           |   | **2005** |   | **2004** |   |
| Net                  revenues                                                                                              |   |                                                 | $3,719     |                                               |   | $3,478 |   |   | $7,684 |   |   | $6,613 |   |
| Product                  costs                                                                                             |   |                                                 | 1,328      |                                               |   | 1,122 |   |   | 2,783 |   |   | 2,143 |   |
| **Gross                  margin**                                                                                          |   |                                                 | **2,391**  |                                               |   | **2,356** |   |   | **4,901** |   |   | **4,470** |   |
|                                                                                                                       |   |                                                 |       |                                               |   |   |   |   |   |   |   |  |   |
| **Costs                  and expenses**                                                                                    |   |                                                 |       |                                               |   |   |   |   |   |   |   |  |   |
| Sales                  and marketing                                                                                       |   |                                                 | 1,658      |                                               |   | 1,538 |   |   | 3,189 |   |   | 2,888 |   |
| General                  and administrative                                                                                |   |                                                 | 1,329      |                                               |   | 982 |   |   | 2,754 |   |   | 1,841 |   |
| Research                  and development                                                                                  |   |                                                 | 553        |                                               |   | 368 |   |   | 988 |   |   | 837 |   |
| **Total                  operating expenses**                                                                              |   |                                                 | **3,540**  |                                               |   | **2,888** |   |   | **6,931** |   |   | **5,566** |   |
|                                                                                                                       |   |                                                 |       |                                               |   |   |   |   |   |   |   |   |   |
| **Operating                  loss**                                                                                        |   |                                                 | **(1,149** | **)**                                              |   | **(532** | **)** |   | **(2,030** | **)** |   | **(1,096** | **)** |
|                                                                                                                       |   |                                                 |       |                                               |   |   |   |   |   |   |   |  |   |
| **Other                  income (expense)**                                                                                |   |                                                 |       |                                               |   |   |   |   |   |   |   |  |   |
| Interest                  and other, net                                                                                   |   |                                                 | 17         |                                               |   | 33 |   |   | (52 | ) |   | 39 |   |
| Realized                  / unrealized gain on securities                                                                  |   |                                                 | 923        |                                               |   | 471 |   |   | 765 |   |   | 422 |   |
| **Loss                  before income tax**                                                                                |   |                                                 | **(209**   | **)**                                              |   | **(28** | **)** |   | **(1,317** | **)** |   | **(635** | **)** |
|                                                                                                                       |   |                                                 |       |                                               |   |   |   |   |   |   |   |  |   |
| Income                  tax provision                                                                                      |   |                                                 | (39        | )                                                  |   | (2 | ) |   | (39 | ) |   | (8 | ) |
|                                                                                                                       |   |                                                 |       |                                               |   |   |   |   |   |   |   |   |   |
| **Loss                  from continuing operations**                                                                       |   |                                                 | **(248**   | **)**                                              |   | **(30** | **)** |   | **(1,356** | **)** |   | **(643** | **)** |
|                                                                                                                       |   |                                                 |       |                                               |   |   |   |   |   |   |   |  |   |
| Income                  from discontinued operations, net of income tax                                                    |   |                                                 | -          |                                               |   | 159 |   |   | - |   |   | 444 |   |
| Gain                  (loss) from the sale of discontinued operations, net of income                  tax                  |   |                                                 | 369        |                                               |   | - |   |   | (474 | ) |   | 53 |   |
|                                                                                                                       |   |                                                 |       |                                               |   |   |   |   |   |   |   |   |   |
| **Net                  income (loss)**                                                                                     |   |                                                 | **$121**   |                                               |   | **$129** |   |   | **($1,830** | **)** |   | **($146** | **)** |
|                                                                                                                       |   |                                                 |       |                                               |   |   |   |   |   |   |   |  |   |
| Other                  comprehensive income (loss)                                                                         |   |                                                 |       |                                               |   |   |   |   |   |   |   |  |   |
| Unrealized                  loss on restricted securities                                                                  |   |                                                 | (478       | )                                                  |   | - |   |   | - |   |   | - |   |
| Foreign                  currency translation adjustments                                                                  |   |                                                 | 2          |                                               |   | (24 | ) |   | 191 |   |   | (34 | ) |
| **Comprehensive                  income (loss)**                                                                           |   |                                                 | **($355**  | **)**                                              |   | **$105** |   |   | **($1,639** | **)** |   | **($180** | **)** |
|                                                                                                                       |   |                                                 |       |                                               |   |   |   |   |   |   |   |  |   |
| **Basic                  earnings (loss) per share:**                                                                      |   |                                                 |       |                                               |   |   |   |   |   |   |   |  |   |
| Loss                  from continuing operations                                                                           |   |                                                 | ($0.01     | )                                                  |   | $0.00 |   |   | ($0.05 | ) |   | ($0.02 | ) |
| Income                  from discontinued operations, net of income                  tax                                   |   |                                                 | $0.00      |                                               |   | $0.01 |   |   | $0.00 |   |   | $0.02 |   |
| Gain                  (loss) from the sale of discontinued operations,                  net of income                  tax |   |                                                 | $0.01      |                                               |   | $0.00 |   |   | ($0.02 | ) |   | $0.00 |   |
| Net                  income (loss)                                                                                         |   |                                                 | $0.00      |                                               |   | $0.00 |   |   | ($0.06 | ) |   | ($0.01 | ) |
| **Diluted                  earnings (loss) per share:**                                                                    |   |                                                 |       |                                               |   |   |   |   |   |   |   |  |   |
| Loss                  from continuing operations                                                                           |   |                                                 | ($0.01     | )                                                  |   | $0.00 |   |   | ($0.05 | ) |   | ($0.02 | ) |
| Income                  from discontinued operations, net of income                  tax                                   |   |                                                 | $0.00      |                                               |   | $0.01 |   |   | $0.00 |   |   | $0.02 |   |
| Gain                  (loss) from the sale of discontinued operations,                  net of income                  tax |   |                                                 | $0.01      |                                               |   | $0.00 |   |   | ($0.02 | ) |   | $0.00 |   |
| Net                  income (loss)                                                                                         |   |                                                 | $0.00      |                                               |   | $0.00 |   |   | ($0.06 | ) |   | ($0.01 | ) |
|                                                                                                                       |   |                                                 |       |                                               |   |   |   |   |   |   |   |  |   |
| Shares                  used in computing basic earnings (loss) per share                                                  |   |                                                 | 29,821     |                                               |   | 27,196 |   |   | 29,755 |   |   | 27,605 |   |
| Shares                  used in computing diluted earnings (loss) per share                                                |   |                                                 | 31,831     |                                               |   | 29,885 |   |   | 29,755 |   |   | 27,605 |   |

----

**INTERNATIONAL      MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES**

**CONDENSED      CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY**

**(Unaudited)**

|                                                     |   | **Common                  Stock** |           |       |   |                                     |   |                                                               |         |
|----------------------------------------------------------|--------|-----------------------------------|----------------|------------|--------|------------------------------------------|--------|--------------------------------------------------------------------|--------------|
|                                                     |   | **Shares**                        |           | **Amount** |   | **Accumulated                  deficit** |   | **Accumulated                  other comprehensive income (loss)** |         | **Total** |   |
|                                                     |   |                              |           |       |   |                                     |   |                                                               |         |   |   |   |   |   |   |   |
| **Balance                  at July 1, 2005**             |   |                              | **28,796,886** |       |   | **$43,663**                              |   |                                                               | **($25,331** | **)** |   | **($102** | **)** |   | **$18,230** |   |
|                                                     |   |                              |           |       |   |                                     |   |                                                               |         |   |   |   |   |   |  |   |
| Issuance                  of common stock related to:    |   |                              |           |       |   |                                     |   |                                                               |         |   |   |   |   |   |  |   |
| Stock                  options exercised                 |   |                              | 85,291         |       |   | 73                                       |   |                                                               |         |   |   |   |   |   | 73 |   |
| Warrants                  exercised                      |   |                              | 117,117        |       |   | -                                        |   |                                                               |         |   |   |   |   |   | - |   |
| Acquisitions                                             |   |                              | 826,583        |       |   | 1,021                                    |   |                                                               |         |   |   |   |   |   | 1,021 |   |
| Finder's                  fee related to acquisition     |   |                              | 20,000         |       |   | 25                                       |   |                                                               |         |   |   |   |   |   | 25 |   |
|                                                     |   |                              |           |       |   |                                     |   |                                                               |         |   |   |   |   |   |  |   |
| Issuance                  of stock options related to:   |   |                              |           |       |   |                                     |   |                                                               |         |   |   |   |   |   |  |   |
| Consulting                  services rendered            |   |                              |           |       |   | 21                                       |   |                                                               |         |   |   |   |   |   | 21 |   |
|                                                     |   |                              |           |       |   |                                     |   |                                                               |         |   |   |   |   |   |  |   |
| Issuance                  of warrants related to:        |   |                              |           |       |   |                                     |   |                                                               |         |   |   |   |   |   |  |   |
| Acquisitions                                             |   |                              |           |       |   | 6                                        |   |                                                               |         |   |   |   |   |   | 6 |   |
| Procurement                  of short-term debt          |   |                              |           |       |   | 68                                       |   |                                                               |         |   |   |   |   |   | 68 |   |
|                                                     |   |                              |           |       |   |                                     |   |                                                               |         |   |   |   |   |   |  |   |
| Accrual                  of stock buy-back               |   |                              |           |       |   | (30                                      | )      |                                                               |         |   |   |   |   |   | (30 | ) |
|                                                     |   |                              |           |       |   |                                     |   |                                                               |         |   |   |   |   |   |  |   |
| Issuance                  of stock options               |   |                              |           |       |   | 2                                        |   |                                                               |         |   |   |   |   |   | 2 |   |
|                                                     |   |                              |           |       |   |                                     |   |                                                               |         |   |   |   |   |   |  |   |
| Variable                  accounting adjustment          |   |                              |           |       |   | (6                                       | )      |                                                               |         |   |   |   |   |   | (6 | ) |
|                                                     |   |                              |           |       |   |                                     |   |                                                               |         |   |   |   |   |   |  |   |
| Net                  loss                                |   |                              |           |       |   |                                     |   |                                                               | (1,830       | ) |   |   |   |   | (1,830 | ) |
|                                                     |   |                              |           |       |   |                                     |   |                                                               |         |   |   |   |   |   |  |   |
| Foreign                  currency translation adjustment |   |                              |           |       |   |                                     |   |                                                               |         |   |   | 191 |   |   | 191 |   |
| **Balance                  at December 31, 2005**        |   |                              | **29,845,877** |       |   | **$44,843**                              |   |                                                               | **($27,161** | **)** |   | **$89** |   |   | **$17,771** |   |

----

**INTERNATIONAL      MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES**

**CONDENSED      CONSOLIDATED STATEMENTS OF CASH FLOWS**

|                                                                              |   | **Six                  months ended December 31,** |       |
|-----------------------------------------------------------------------------------|--------|----------------------------------------------------|------------|
|                                                                              |   | **2005**                                           |       | **2004** |   |
| **Cash                  flows from operating activities:**                        |   |                                               |       |   |   |  |   |
| **Net                  cash provided by (used in) operating activities**          |   |                                               | **($753**  | **)** |   | **$248** |   |
| **Cash                  flows from investing activities:**                        |   |                                               |       |   |   |  |   |
| Proceeds                  from sale of discontinued operations                    |   |                                               | 9,466      |   |   | 650 |   |
| Proceeds                  from sale of product line                               |   |                                               | -          |   |   | 258 |   |
| Acquisition                  of subsidiaries                                      |   |                                               | (1,807     | ) |   | (1,356 | ) |
| Acquisition                  of software development, domain names and trademarks |   |                                               | -          |   |   | (600 | ) |
| Purchases                  of equipment and software                              |   |                                               | (29        | ) |   | (163 | ) |
| Transfer                  cash to escrow for Jupitermedia                         |   |                                               | -          |   |   | (499 | ) |
| Proceeds                  from the sale of marketable securities                  |   |                                               | 1,524      |   |   | 1,780 |   |
| Other                                                                             |   |                                               | (8         | ) |   | 25 |   |
| Cash                  provided by discontinued operations in investing activities |   |                                               | -          |   |   | 464 |   |
| **Net                  cash provided by investing activities**                    |   |                                               | **9,146**  |   |   | **559** |   |
| **Cash                  flows from financing activities:**                        |   |                                               |       |   |   |  |   |
| Proceeds                  from borrowings                                         |   |                                               | 850        |   |   | 400 |   |
| Repayments                  of notes                                              |   |                                               | (3,802     | ) |   | (1,730 | ) |
| Proceeds                  from warrants and options exercised                     |   |                                               | 73         |   |   | 137 |   |
| Cash                  provided by discontinued operations in financing activities |   |                                               | -          |   |   | 12 |   |
| **Net                  cash used in financing activities**                        |   |                                               | **(2,879** | **)** |   | **(1,181** | **)** |
| **Effect                  of exchange rate change on cash and cash equivalents**  |   |                                               | (12        | ) |   | (34 | ) |
| **Net                  increase (decrease) in cash and cash equivalents**         |   |                                               | 5,502      |   |   | (408 | ) |
| **Cash                  and cash equivalents at beginning of period**             |   |                                               | 4,347      |   |   | 3,212 |   |
| **Cash                  and cash equivalents at end of the period**               |   |                                               | **$9,849** |   |   | **$2,804** |   |

|                                                                                        |   | **Six                  months ended December 31,**  |
|---------------------------------------------------------------------------------------------|--------|----------------------------------------------------------|
|                                                                                        |   |                                                     | **2005** |   |   | **2004** |   |
| **SUPPLEMENTAL                  DISCLOSURE OF CASH FLOW INFORMATION**                       |
| Interest                  paid                                                              |   |                                                     | 128 |   |   | 125 |   |
|                                                                                        |   |                                                     |   |   |   |  |   |
| **SUPPLEMENTAL                  DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES** |
| Capital                  stock issued in conjunction with acquisitions                      |   |                                                     | 1,046 |   |   | 1,602 |   |
| Warrants                  issued in conjunction with acquisitions                           |   |                                                     | 6 |   |   | - |   |
| Notes                  payable incurred in conjunction with acquisitions                    |   |                                                     | 1,000 |   |   | 505 |   |
| Warrants                  issued in conjunction with short-term debt                        |   |                                                     | 68 |   |   | - |   |

----

**INTERNATIONAL      MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES**

**NOTES      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

| **1.** | **Basis                of Presentation** |
|--------|------------------------------------------|

| **2.** | **Use                of Estimates** |
|--------|-------------------------------------|

| **3.** | **Reclassifications** |
|--------|-----------------------|

| **4.** | **Discontinued                Operations** |
|--------|--------------------------------------------|

**Gain      (loss) from the sale of discontinued operations, net of income      tax**
** **

**Three      and six months ended December 31, 2005: Sale of Allume**

----

**Six      months ended December 31, 2004: Sale of Keynomics**

**Income      from discontinued operations, net of income tax**

| **5.** | **Acquisition                of Weinmaster Homes,                Ltd.** |
|--------|-------------------------------------------------------------------------|

| **Description**                                                          | **Amount**                 |
|--------------------------------------------------------------------------|----------------------------|
|                                                                     |                       |
| Fair                  value of 826,583 shares of our common stock   | $                  1.0     |
| Cash                                                                     | 2.0                        |
| Promissory                  note                                         | 1.0                        |
| Costs                  incurred to consummate the acquisition            | 0.2                        |
| **Total**                                                                | **$                  4.2** |

----

| **Description**                                      | **Amounts                  (unaudited)** |
|------------------------------------------------------|------------------------------------------|
|                                                 |                                     |
| Cash                  acquired                       | $0.3                                     |
| Other                  tangible assets acquired      | 0.1                                      |
| Amortizable                  intangible assets:      |                                     |
| Domain                  names                        | 0.6                                      |
| Designer                  agreements / relationships | 0.8                                      |
| Broker                  agreements / relationships   | 0.3                                      |
| Proprietary                  plans                   | 0.6                                      |
| Customer                  lists                      | 0.1                                      |
| Goodwill                                             | 1.5                                      |
| Liabilities                  assumed                 | (0.1)                                    |
| **Total**                                            | **$4.2**                                 |

| **Description**                                      | **Estimated                  remaining life (years)** |
|------------------------------------------------------|-------------------------------------------------------|
|                                                 |                                                  |
| Tangible                  assets:                    |                                                  |
| Office                  equipment                    | 3                  -                  5               |
| Computer                  equipment                  | 3                                                     |
| Amortizable                  intangible assets:      |                                                  |
| Domain                  names                        | 5                                                     |
| Designer                  agreements / relationships | 5                                                     |
| Broker                  agreements / relationships   | 5                                                     |
| Proprietary                  plans                   | 15                                                    |
| Customer                  lists                      | 3                                                     |

| **6.** | **Plan                of merger with                AccessMedia** |
|--------|-------------------------------------------------------------------|

----

| **7.** | **Fair                Value of Financial                Instruments** |
|--------|-----------------------------------------------------------------------|

| **8.** | **Intangible                Assets** |
|--------|--------------------------------------|

**Software      Development Costs and License Fees**

*Accounting      for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed.      *

**Other      Intangible Assets**

----

**Impairment      of Long Lived Assets **

**Goodwill**

*Goodwill      and Intangible Assets,*

| **9.** | **Debt** |
|--------|----------|

|                                                        |   | **As                  of December 31, 2005** |
|-------------------------------------------------------------|--------|----------------------------------------------|
| **Short-term**                                              |   |                                         |
| Acquisition                  related obligations Weinmaster |   | $                  750                       |
| Cardiff                  Consultants, Ltd.                  |   | 120                                          |
| Other                  obligations                          |   | 3                                            |
| **Subtotal                  short-term**                    |   | **873**                                      |
|                                                        |   |                                         |
| **Long-term**                                               |   |                                         |
| Acquisition                  related obligations            |   |                                         |
| ULTRYX                                                      |   | 168                                          |
| Other                  obligations                          |   | 5                                            |
| **Subtotal                  long-term**                     |   | **173**                                      |
|                                                        |   |                                         |
| **Grand                  total**                            |   | **$1,046**                                   |

| **10.** | **Gain                / (loss) on Marketable                Securities** |
|---------|--------------------------------------------------------------------------|

----

|                                                 |   |                                                                                                                                     |   |                                                                                                                |                                                                                   |      |                                                                 |   |     |
|------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------|-----------|----------------------------------------------------------------------|--------|----------|
|                                                 |   | **Gain                  (loss) on marketable securities for the three months ended December                  31,                  2005** |
|                                                 |   | **Realized**                                                                                                                             |   | **Unrealized**                                                                                                      |                                                                                   | **Total** |
| **Description**                                      |   |                                                                                                                                     |   | Reversal                  of unrealized gain                  / (loss) recognized in                  prior periods | Unrealized                  gain / (loss) for the three months ended December 31, 2005 |      | Sub                  total Unrealized                  gain / (loss) |   |     |
|                                                 |   |                                                                                                                                     |   |                                                                                                                |                                                                                   |      |                                                                 |   |     |
|                                                 |   |                                                                                                                                     |   |                                                                                                                |                                                                                   |      |                                                                 |   |     |
| Smith                  Micro common stock            |   | $923                                                                                                                                     |   | -                                                                                                                   | -                                                                                      |      | -                                                                    |   | $923     |
| **Total**                                            |   | **$923**                                                                                                                                 |   | **-**                                                                                                               | **-**                                                                                  |      | **-**                                                                |   | **$923** |
|                                                 |   |                                                                                                                                     |   |                                                                                                                |                                                                                   |      |                                                                 |   |     |
|                                                 |   | **Gain                  (loss) on marketable securities for the three months ended December                  31,                  2004** |
|                                                 |   | **Realized**                                                                                                                             |   | **Unrealized**                                                                                                      |                                                                                   | **Total** |
| **Description**                                      |   |                                                                                                                                     |   | Reversal                  of unrealized gain                  / (loss) recognized in                  prior periods | Unrealized                  gain / (loss) for the three months ended December 31, 2004 |      | Sub                  total Unrealized                  gain / (loss) |   |     |
|                                                 |   |                                                                                                                                     |   |                                                                                                                |                                                                                   |      |                                                                 |   |     |
| Jupitermedia                  common stock           |   | $1,050                                                                                                                                   |   | ($1,050)                                                                                                            | $-                                                                                     |      | ($1,050)                                                             |   | $-       |
| Other                  stock in investment portfolio |   | 111                                                                                                                                      |   | 9                                                                                                                   | 351                                                                                    |      | 360                                                                  |   | 471      |
| **Total**                                            |   | **$1,161**                                                                                                                               |   | **($1,041)**                                                                                                        | **$351**                                                                               |      | **($690)**                                                           |   | **$471** |

|                                                 |   |                                                                                                                                   |   |                                                                                                                |                                                                                 |      |                                                                 |   |     |
|------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------|-----------|----------------------------------------------------------------------|--------|----------|
|                                                 |   | **Gain                  (loss) on marketable securities for the six months ended December                  31,                  2005** |
|                                                 |   | **Realized**                                                                                                                           |   | **Unrealized**                                                                                                      |                                                                                 | **Total** |
| **Description**                                      |   |                                                                                                                                   |   | Reversal                  of unrealized gain                  / (loss) recognized in                  prior periods | Unrealized                  gain / (loss) for the six months ended December 31, 2005 |      | Sub                  total Unrealized                  gain / (loss) |   |     |
|                                                 |   |                                                                                                                                   |   |                                                                                                                |                                                                                 |      |                                                                 |   |     |
| Smith                  Micro common stock            |   | $923                                                                                                                                   |   |                                                                                                                |                                                                                 |      |                                                                 |   | $923     |
| Other                  stock in investment portfolio |   | ($234)                                                                                                                                 |   | $90                                                                                                                 | ($14)                                                                                |      | $76                                                                  |   | ($158)   |
| **Total**                                            |   | **$689**                                                                                                                               |   | **$90**                                                                                                             | **($14)**                                                                            |      | **$76**                                                              |   | **$765** |
|                                                 |   |                                                                                                                                   |   |                                                                                                                |                                                                                 |      |                                                                 |   |     |
|                                                 |   | **Gain                  (loss) on marketable securities for the six months ended December                  31,                  2004** |
|                                                 |   | **Realized**                                                                                                                           |   | **Unrealized**                                                                                                      |                                                                                 | **Total** |
| **Description**                                      |   |                                                                                                                                   |   | Reversal                  of unrealized gain                  / (loss) recognized in                  prior periods | Unrealized                  gain / (loss) for the six months ended December 31, 2004 |      | Sub                  total Unrealized                  gain / (loss) |   |     |
|                                                 |   |                                                                                                                                   |   |                                                                                                                |                                                                                 |      |                                                                 |   |     |
| Jupitermedia                  common stock           |   | $2,094                                                                                                                                 |   | ($2,097)                                                                                                            | $163                                                                                 |      | ($1,934)                                                             |   | $160     |
| Other                  stock in investment portfolio |   | 64                                                                                                                                     |   | 92                                                                                                                  | 106                                                                                  |      | 198                                                                  |   | 262      |
| **Total**                                            |   | **$2,158**                                                                                                                             |   | **($2,005)**                                                                                                        | **$269**                                                                             |      | **($1,736)**                                                         |   | **$422** |

----

| **11.** | **Marketable                Securities Activity** |
|---------|---------------------------------------------------|

|                                                                          | **Six                Months Ended December 31** |
|-------------------------------------------------------------------------------|-------------------------------------------------|
|                                                                          | **2005**                                        |   | **2004** |
|                                                                          |                                            |   |   |
| **Beginning                balance of marketable securities July 1**          | $714                                            |   | $2,151 |
|                                                                          |                                            |   |   |
| Net                cash transferred in (out) of marketable securities account | (2,755)                                         |   | 16 |
| Securities                received from sale of subsidiary                    | 1,832                                           |   | - |
| Purchases                of marketable securities                             | -                                               |   | (2,435) |
| Realized                gain                                                  | 780                                             |   | 2,162 |
| Unrealized                loss                                                | (15)                                            |   | (1,765) |
| Borrowings                from (repayment of) margin account                  | (558)                                           |   | 2,435 |
| Interest                and dividends earned                                  | 2                                               |   | - |
| Margin                interest paid                                           | -                                               |   | (16) |
| Wire                fees                                                      | -                                               |   |   |
| Net                change in marketable securities                            | (714)                                           |   | 397 |
|                                                                          |                                            |   |   |
| **Ending                balance of marketable securities December 31**        | $0                                              |   | $2,548 |

| **12.** | **Segment                Information** |
|---------|----------------------------------------|

|                            |   | **Three                  months ended December 31, 2005** |                               | **Three                  months ended December 31, 2004** |
|---------------------------------|--------|-----------------------------------------------------------|------------------------------------|-----------------------------------------------------------|
|                            |   | **Software****Segment**                                   | **Internet****Content****Segment** | **Total**                                                 |   | **Software****Segment** | **Internet****Content****Segment** | **Total** |
|                            |   |                                                      |                               |                                                      |   |   |   |   |
| Net                  revenues   |   | $2,203                                                    | $1,516                             | **$3,719**                                                |   | $2,580 | $898 | **$3,478** |
| Gross                  margin   |   | 1,423                                                     | 968                                | **2,391**                                                 |   | 1,873 | 483 | **2,356** |
| Operating                  loss |   | (946)                                                     | (203)                              | **(1,149)**                                               |   | (363) | (169) | **(532)** |
| Total                  assets   |   | 9,557                                                     | 12,246                             | **21,803**                                                |   | 23,627 | 3,460 | **27,087** |
|                            |   | **Six                  months ended December 31 2005**    |                               | **Six                  months ended December 31 2004**    |
|                            |   | **Software****Segment**                                   | **Internet****Content****Segment** | **Total**                                                 |   | **Software****Segment** | **Internet****Content****Segment** | **Total** |
|                            |   |                                                      |                               |                                                      |   |   |   |   |
| Net                  revenues   |   | $4,451                                                    | $3,233                             | **$7,684**                                                |   | $5,109 | $1,504 | **$6,613** |
| Gross                  margin   |   | 2,891                                                     | 2,010                              | **4,901**                                                 |   | 3,664 | 806 | **4,470** |
| Operating                  loss |   | (1,430)                                                   | (600)                              | **(2,030)**                                               |   | (819) | (277) | **(1,096)** |
| Total                  assets   |   | 9,557                                                     | 12,246                             | **21,803**                                                |   | 23,627 | 3,460 | **27,087** |

----

|                          |   | **Three                  months ended December 31, 2005** |              | **Three                  months ended December 31, 2004** |
|-------------------------------|--------|-----------------------------------------------------------|-------------------|-----------------------------------------------------------|
|                          |   | **Domestic**                                              | **International** | **Total**                                                 |   | **Domestic** | **International** | **Total** |
|                          |   |                                                      |              |                                                      |   |   |   |   |
| Net                  revenues |   | $2,742                                                    | $977              | **$3,719**                                                |   | $2,816 | $662 | **$3,478** |
| Total                  assets |   | 16,518                                                    | 5,285             | **21,803**                                                |   | 26,420 | 667 | **27,087** |
|                          |   | **Six                  months ended December 31, 2005**   |              | **Six                  months ended December 31, 2004**   |
|                          |   | **Domestic**                                              | **International** | **Total**                                                 |   | **Domestic** | **International** | **Total** |
|                          |   |                                                      |              |                                                      |   |   |   |   |
| Net                  revenues |   | $5,579                                                    | $2,105            | **$7,684**                                                |   | $5,445 | $1,168 | **$6,613** |
| Total                  assets |   | 16,518                                                    | 5,285             | **21,803**                                                |   | 26,420 | 667 | **27,087** |

| **13.** | **Earnings                per Share - Potentially Dilutive                Securities** |
|---------|----------------------------------------------------------------------------------------|

|                                                                                    |   | **Three                  months ended December 31,** |
|-----------------------------------------------------------------------------------------|--------|------------------------------------------------------|
|                                                                                    |   | **2005**                                             |   | **2004** |
|                                                                                    |   |                                                 |   |   |
| **Basic                  weighte****d                  average shares ou****tstanding** |   | **29,821**                                           |   | **27,917** |
|                                                                                    |   |                                                 |   |   |
| Total                  stock options outstanding                                        |   | 4,565                                                |   | 3,248 |
| Less:                  anti dilutive stock options                                      |   | (4,189)                                              |   | (2,766) |
|                                                                                    |   |                                                 |   |   |
| Total                  warrants outstanding                                             |   | 6,324                                                |   | 6,633 |
| Less:                  anti dilutive warrants                                           |   | (4,690)                                              |   | (5,147) |
|                                                                                    |   |                                                 |   |   |
| **Diluted                  weighted average shares outstanding**                        |   | **31,831**                                           |   | **29,885** |

|                                                             |   | **Six                  months ended December 31,** |
|------------------------------------------------------------------|--------|----------------------------------------------------|
|                                                             |   | **2005**                                           |   | **2004** |
|                                                             |   |                                               |   |   |
| **Basic                  weighted average shares outstanding**   |   | **29,755**                                         |   | **27,605** |
|                                                             |   |                                               |   |   |
| Total                  stock options outstanding                 |   | 4,565                                              |   | 3,248 |
| Less:                  anti dilutive stock options due to loss   |   | (4,565)                                            |   | (3,248) |
|                                                             |   |                                               |   |   |
| Total                  warrants outstanding                      |   | 6,324                                              |   | 6,633 |
| Less:                  anti dilutive warrants due to loss        |   | (6,324)                                            |   | (6,633) |
|                                                             |   |                                               |   |   |
| **Diluted                  weighted average shares outstanding** |   | **29,755**                                         |   | **27,605** |

----

| **14.** | **Stock                Based Awards** |
|---------|---------------------------------------|

*Accounting      for Stock-Based Compensation-Transition and Disclosure, an Amendment of FASB      Statement No. 123,*
*Accounting      for Stock-Based Compensation*

*Accounting      for Stock Issued to Employees*

|                                                                      |             | **Three                  months ended December 31,** |
|---------------------------------------------------------------------------|------------------|------------------------------------------------------|
|                                                                      |             | **2005**                                             |   | **2004** |
|                                                                      |             |                                                 |   |   |
| **Net                  income, as reported**                              | **  ** | **$121**                                             |   | **$129** |
| Intrinsic                  compensation charge recorded under APB 25      |             | 18                                                   |   | 7 |
| Pro                  forma compensation charge under SFAS 123, net of tax |             | (83)                                                 |   | (205) |
| **Pro                  forma net income (loss)**                          | **  ** | **$56**                                              |   | **($69)** |
|                                                                      |             |                                                 |   |   |
| Earnings                  (loss) per share:                               |        |                                                 |   |   |
| Basic—as                  reported                                  |        | ($0.00)                                              |   | $0.00 |
| Basic—pro                  forma                                    |        | ($0.00)                                              |   | $0.00 |
|                                                                      |             |                                                 |   |   |
| Diluted—as                  reported                                |        | ($0.00)                                              |   | $0.00 |
| Diluted—pro                  forma                                  |        | ($0.00)                                              |   | $0.00 |

|                                                                      |             | **Six                  months ended December 31,** |
|---------------------------------------------------------------------------|------------------|----------------------------------------------------|
|                                                                      |             | **2005**                                           |   | **2004** |
|                                                                      |             |                                               |   |   |
| **Net                  loss, as reported**                                | **  ** | **($1,830)**                                       |   | **($146)** |
| Intrinsic                  compensation charge recorded under APB 25      |             | 18                                                 |   | 15 |
| Pro                  forma compensation charge under SFAS 123, net of tax |             | (159)                                              |   | (417) |
| **Pro                  forma net loss**                                   | **  ** | **($1,971)**                                       |   | **($548)** |
|                                                                      |             |                                               |   |   |
| Loss                  per share:                                          |        |                                               |   |   |
| Basic—as                  reported                                  |        | ($0.07)                                            |   | ($0.01) |
| Basic—pro                  forma                                    |        | ($0.07)                                            |   | ($0.02) |
|                                                                      |             |                                               |   |   |
| Diluted—as                  reported                                |        | ($0.07)                                            |   | ($0.01) |
| Diluted—pro                  forma                                  |        | ($0.07)                                            |   | ($0.02) |

----

|                                             |                     | **Three                  months ended December 31,** |
|--------------------------------------------------|--------------------------|------------------------------------------------------|
|                                             |                     | **2005**                                             |   | **2004** |
| Risk-free                  interest rates        |      | 4.3%                                                 |   | 4.2% |
| Expected                  dividend yields        |      | -                                                    |   | - |
| Expected                  volatility             |      | 72%                                                  |   | 62% |
| Expected                  option life (in years) |      | 10                                                   |   | 10 |

|                                             |                     | **Three                  months ended September 30,** |
|--------------------------------------------------|--------------------------|-------------------------------------------------------|
|                                             |                     | **2005**                                              |   | **2004** |
| Risk-free                  interest rates        |      | 4.2%                                                  |   | 4.1% |
| Expected                  dividend yields        |      | -                                                     |   | - |
| Expected                  volatility             |      | 75%                                                   |   | 55% |
| Expected                  option life (in years) |      | 10                                                    |   | 10 |

----

**Item      2- Management's Discussion and Analysis of Financial Condition and Results      of      Operations**

**Overview**

| • | Overview; |
|---------|-----------|

| • | Significant                Trends and Developments in Our                Business; |
|---------|------------------------------------------------------------------------------------|

| • | How                We Generate Revenue; |
|---------|-----------------------------------------|

| • | Recent                Events; |
|---------|-------------------------------|

| • | Forward                Looking Statements; |
|---------|--------------------------------------------|

| • | Results                of Operations; |
|---------|---------------------------------------|

| • | Liquidity                and Capital Resources; |
|---------|-------------------------------------------------|

| • | Critical                Accounting Policies; and |
|---------|--------------------------------------------------|

| • | Factors                That May Impact Future Operating Results. |
|---------|------------------------------------------------------------------|

**Significant      Trends and Developments in Our Business **

**How      We Generate Revenue**

----

| **Business                  Segment**                                     | **Product                  Family**        | **Product                  Group**         | **Selected                  Product Brand** |
|---------------------------------------------------------------------------|--------------------------------------------|--------------------------------------------|---------------------------------------------|
|                                                                      |                                       |                                       |                                        |
| **Software**                                                              | Precision                  Design Software | Professional                  CADSolutions | *TurboCAD                  Professional*    |
| *TurboCADCAM*                                                             |
| *CADsymbols*                                                              |
| Consumer                  CADSolutions                                    | *TurboCAD                  Deluxe*         |
| *DesignCAD*                                                               |
| *Instant                  Series*                                         |
| *FloorPlan*                                                               |
| Business                  Applications andOther                  Software | Business                  Solutions        | *FlowCharts                  & More*   |
| *FormTool*                                                                |
| *QuickStart*                                                              |
| *TurboProject*                                                            |
| Graphics                  Solutions                                       | *Animations                  & More*   |
| *ClipArt                  & More*                                     |
| *HiJaak*                                                                  |
| Consumer                  Solutions                                       | *EazyLanguage*                             |
| *Legacy                  Family Tree*                                     |
| *TurboTyping*                                                             |
|                                                                      |                                       |                                       |                                        |
| **Internet                  Content**                                     | Home                  Design               | Houseplans                                 | *Houseplans.com*                            |
| *Houseplanguys.com*                                                       |
| *Homeplanfinder.com*                                                      |
| *Globalhouseplans.com*                                                    |

***Direct      Marketing:***
** **

***Retail      / Distribution:***
** **

***Republishing      / Original Equipment Manufacturers (“OEM”):***
** **

----

**Recent      Events**

**The      Weinmaster Homes, Ltd. (“WHL”) Acquisition**

**The      Sale of Allume**

**Plan      of Merger with AccessMedia**

**Forward        Looking Statements**

----

**Results      of Operations**

**(**
**)**

|                                                                              |   | **Three                  months ended December 31,** |
|-----------------------------------------------------------------------------------|--------|------------------------------------------------------|
|                                                                              |   |                                                 |   |   |   |   |   | **$                  Change from****previous                  year** |
|                                                                              |   | **2005**                                             |   | **2004** |   |
|                                                                              |   | **$**                                                | **As****%                  of****sales** |   | **$** | **As****%                  of****sales** |   |  **Variance** | **%** |
|                                                                              |   |                                                 |   |   |   |   |   |   |   |
| Net                  revenues                                                     |   | $3,719                                               | 100% |   | $3,478 | 100% |   | $241 | 7% |
| Product                  cost                                                     |   | 1,328                                                | 36% |   | 1,122 | 32% |   | 206 | 18% |
| **Gross                  margin**                                                 |   | **2,391**                                            | **64%** |   | **2,356** | **68%** |   | **35** | **1%** |
|                                                                              |   |                                                 |   |   |   |   |   |   |   |
| Operating                  expenses                                               |   |                                                 |   |   |   |   |   |   |   |
| Sales                  and marketing                                              |   | 1,658                                                | 45% |   | 1,538 | 44% |   | 120 | 8% |
| General                  and administrative                                       |   | 1,329                                                | 36% |   | 982 | 28% |   | 347 | 35% |
| Research                  and development                                         |   | 553                                                  | 15% |   | 368 | 11% |   | 185 | 50% |
| **Total                  operating expenses**                                     |   | **3,540**                                            | **95%** |   | **2,888** | **83%** |   | **652** | **23%** |
|                                                                              |   |                                                 |   |   |   |   |   |   |   |
| **Operating                  loss**                                               |   | **(1,149)**                                          | **-31%** |   | **(532)** | **-15%** |   | **(617)** | **116%** |
|                                                                              |   |                                                 |   |   |   |   |   |   |   |
| Other                  income (expenses)                                          |   |                                                 |   |   |   |   |   |   |   |
| Interest                  expense                                                 |   | (21)                                                 | -1% |   | (55) | -2% |   | 34 | -62% |
| Interest                  income                                                  |   | 57                                                   | 2% |   | 10 | 0% |   | 47 | N/A |
| Gain                  (loss) on sale of product line                              |   | (1)                                                  | 0% |   | 33 | 1% |   | (34) |  -103% |
| Realized                  gain (loss) - securities                                |   | 923                                                  | 25% |   | 1,161 | 33% |   | (238) | -20% |
| Unrealized                  loss- securities                                      |   | -                                                    | 0% |   | (690) | -19% |   | 690 | 100% |
| Foreign                  exchange gain (loss)                                     |   | (18)                                                 | 0% |   | 45 | 1% |   | (63) | -140% |
| **Total                  other income**                                           |   | **940**                                              | **25%** |   | **504** | **15%** |   | **436** | **86%** |
|                                                                              |   |                                                 |   |   |   |   |   |   |   |
| **Income                  (loss) before income tax**                              |   | **(209)**                                            | **-6%** |   | **(28)** | **-1%** |   | **(181)** | **N/A** |
|                                                                              |   |                                                 |   |   |   |   |   |   |   |
| Income                  tax provision                                             |   | (39)                                                 | -1% |   | (2) | 0% |   | (37) | N/A |
|                                                                              |   |                                                 |   |   |   |   |   |   |   |
| **Loss                  from continuing operations**                              |   | **(248)**                                            | **-7%** |   | **(30)** | **-1%** |   | **(218)** | **N/A** |
|                                                                              |   |                                                 |   |   |   |   |   |   |   |
| Income                  from discontinued operations, net of income tax           |   | -                                                    | 0% |   | 159 | 5% |   | (159) | -100% |
| Gain                  from the sale of discontinued operations, net of income tax |   | 369                                                  | 10% |   | - | 0% |   | 369 | N/A |
|                                                                              |   |                                                 |   |   |   |   |   |   |   |
| **Net                  income**                                                   |   | **$121**                                             | **3%** |   | **$129** | **4%** |   | **($8)** | **-6%** |

----

**(**
**)**

|                                                                                                      |   | **Six                  months ended December 31,** |
|-----------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------|
|                                                                                                      |   |                                               |   |   |   |   |   | **$                  Change from****previous                  year** |
|                                                                                                      |   | **2005**                                           |   | **2004** |   |
|                                                                                                      |   | **$**                                              | **As****%                  of****sales** |   | **$** | **As****%                  of****sales** |   |  **Variance** | **%** |
|                                                                                                      |   |                                               |   |   |   |   |   |   |   |
| Net                  revenues                                                                             |   | $7,684                                             | 100% |   | $6,613 | 100% |   | $1,071 | 16% |
| Product                  cost                                                                             |   | 2,783                                              | 36% |   | 2,143 | 32% |   | 640 | 30% |
| **Gross                  margin**                                                                         |   | **4,901**                                          | **64%** |   | **4,470** | **68%** |   | **431** | **10%** |
|                                                                                                      |   |                                               |   |   |   |   |   |   |   |
| Operating                  expenses                                                                       |   |                                               |   |   |   |   |   |   |   |
| Sales                  and marketing                                                                      |   | 3,189                                              | 42% |   | 2,888 | 44% |   | 301 | 10% |
| General                  and administrative                                                               |   | 2,754                                              | 36% |   | 1,841 | 28% |   | 913 | 50% |
| Research                  and development                                                                 |   | 988                                                | 13% |   | 837 | 13% |   | 151 | 18% |
| **Total                  operating expenses**                                                             |   | **6,931**                                          | **90%** |   | **5,566** | **84%** |   | **1,365** | **25%** |
|                                                                                                      |   |                                               |   |   |   |   |   |   |   |
| **Operating                  loss**                                                                       |   | **(2,030)**                                        | **-26%** |   | **(1,096)** | **-17%** |   | **(934)** | **85%** |
|                                                                                                      |   |                                               |   |   |   |   |   |   |   |
| Other                  income (expenses)                                                                  |   |                                               |   |   |   |   |   |   |   |
| Interest                  expense                                                                         |   | (144)                                              | -2% |   | (125) | -2% |   | (19) | 15% |
| Interest                  income                                                                          |   | 105                                                | 1% |   | 69 | 1% |   | 36 |  52% |
| Gain                  (loss) on sale of product line                                                      |   | (1)                                                | 0% |   | 33 | 0% |   | (34) |  -103% |
| Realized                  gain- securities                                                                |   | 689                                                | 9% |   | 2,140 | 32% |   | (1,451) | -68% |
| Unrealized                  gain (loss) - securities                                                      |   | 76                                                 | 1% |   | (1,718) | -26% |   | 1,794 | 104% |
| Foreign                  exchange gain (loss)                                                             |   | (12)                                               | 0% |   | 62 | 1% |   | (74) | -119% |
| **Total                  other income**                                                                   |   | **713**                                            | **9%** |   | **461** | **7%** |   | **252** | **55%** |
|                                                                                                      |   |                                               |   |   |   |   |   |   |   |
| **Loss                  before income tax**                                                               |   | **(1,317)**                                        | **-17%** |   | **(635)** | **-10%** |   | **(682)** | **107%** |
|                                                                                                      |   |                                               |   |   |   |   |   |   |   |
| Income                  tax provision                                                                     |   | (39)                                               | -1% |   | (8) | 0% |   | (31) | 388% |
|                                                                                                      |   |                                               |   |   |   |   |   |   |   |
| **Loss                  from continuing operations**                                                      |   | **(1,356)**                                        | **-18%** |   | **(643)** | **-10%** |   | **(713)** | **111%** |
|                                                                                                      |   |                                               |   |   |   |   |   |   |   |
| Income                  from discontinued operations, net of income tax                                   |   | -                                                  | 0% |   | 444 | 7% |   | (444) | -100% |
| Gain                  (loss) from the sale of discontinued operations, net of income                  tax |   | (474)                                              | -6% |   | 53 | 1% |   | (527) | N/A |
|                                                                                                      |   |                                               |   |   |   |   |   |   |   |
| **Net                  Loss**                                                                             |   | **($1,830)**                                       | **-24%** |   | **($146)** | **-2%** |   | **($1,684)** | **N/A** |

----

**Net      Revenues**

|                                    |   | **Three                  months ended December 31, 2005** |                               |   | **Six                  months ended December 31, 2005** |
|-----------------------------------------|--------|-----------------------------------------------------------|------------------------------------|--------|---------------------------------------------------------|
|                                    |   | **Software****Segment**                                   | **Internet****Content****Segment** |   | **Total**                                               |   |   | **Software****Segment** | **Internet****Content****S****egment** |   | **Total** |
|                                    |   |                                                      |                               |   |                                                    |   |   |   |   |   |   |
| Net                  revenues           |   | $2,203                                                    | $1,516                             |   | **$3,719**                                              |   |   | $4,451 | $3,233 |   | **$7,684** |
|                                    |   |                                                      |                               |   |                                                    |   |   |   |   |   |   |
| Channel                  revenues       |   |                                                      |                               |   |                                                    |   |   |   |   |   |   |
| Direct                  marketing       |   | $920                                                      | $1,516                             |   | **$2,436**                                              |   |   | $1,912 | $3,233 |   | **$5,145** |
| Retail                  / distribution  |   | 951                                                       | -                                  |   | **951**                                                 |   |   | 1,873 | - |   | **1,873** |
| Republishing                  / OEM     |   | 332                                                       | -                                  |   | **332**                                                 |   |   | 666 | - |   | **666** |
| **Total**                               |   | **$2,203**                                                | **$1,516**                         |   | **$3,719**                                              |   |   | **$4,451** | **$3,233** |   | **$7,684** |
|                                    |   |                                                      |                               |   |                                                    |   |   |   |   |   |   |
| Domestic                  revenues      |   | $1,654                                                    | $1,088                             |   | **$2,742**                                              |   |   | $3,374 | $2,205 |   | **$5,579** |
| International                  revenues |   | 549                                                       | 428                                |   | **977**                                                 |   |   | 1,077 | 1,028 |   | **2,105** |
| **Total**                               |   | **$2,203**                                                | **$1,516**                         |   | **$3,719**                                              |   |   | **$4,451** | **$3,233** |   | **$7,684** |
|                                    |   |                                                      |                               |   |                                                    |   |   |   |   |   |   |
|                                    |   |                                                      |                               |   |                                                    |   |   |   |   |   |   |
|                                    |   | **Three                  months ended December 31, 2004** |                               |   | **Six                  months ended December 31, 2004** |
|                                    |   | **Software****Segment**                                   | **Internet****Content****Segment** |   | **Sub****Total**                                        |   |   | **Software****Segment** | **Internet****Content****Segment** |   | **Sub****Total** |
|                                    |   |                                                      |                               |   |                                                    |   |   |   |   |   |   |
| Net                  revenues           |   | $2,580                                                    | $898                               |   | **$3,478**                                              |   |   | $5,109 | $1,504 |   | **$6,613** |
|                                    |   |                                                      |                               |   |                                                    |   |   |   |   |   |   |
| Channel                  revenues       |   |                                                      |                               |   |                                                    |   |   |   |   |   |   |
| Direct                  marketing       |   | $1,294                                                    | $898                               |   | **$2,192**                                              |   |   | $2,439 | $1,504 |   | **$3,943** |
| Retail                  / distribution  |   | 791                                                       | -                                  |   | **791**                                                 |   |   | 1,700 | - |   | **1,700** |
| Republishing                  / OEM     |   | 495                                                       | -                                  |   | **495**                                                 |   |   | 970 | - |   | **970** |
| **Total**                               |   | **$2,580**                                                | **$898**                           |   | **$3,478**                                              |   |   | **$5,109** | **$1,504** |   | **$6,613** |
|                                    |   |                                                      |                               |   |                                                    |   |   |   |   |   |   |
| Domestic                  revenues      |   | $1,918                                                    | $898                               |   | **$2,816**                                              |   |   | $3,941 | $1,504 |   | **$5,445** |
| International                  revenues |   | 662                                                       | -                                  |   | **662**                                                 |   |   | 1,168 | - |   | **1,168** |
| **Total**                               |   | **$2,580**                                                | **$898**                           |   | **$3,478**                                              |   |   | **$5,109** | **$1,504** |   | **$6,613** |

**Revenues      by Business Segment**

**Internet      Content Segment: **

----

**Software      Segment:**

**Precision      design software product family:**

**Business      applications and other software product family:**

**Revenues      by Distribution Channel**

----

**Domestic      and International Revenues**

**Product      Costs**
**      and Gross Margin**

----

**Sales      and Marketing**

**General      and Administrative**

**Research      and Development**

----

**Interest      and Other, Net**

|                                               |   |  **Three                  months ended December 31,** |           |  **Six                  months ended December 31,** |
|----------------------------------------------------|--------|------------------------------------------------------------|----------------|----------------------------------------------------------|
|                                               |   |  **2005**                                             |  **2004** |                                                     | **$                  Change from****previous                  year** |   |  **2005** |  **2004** |   | **$                  Change from****previous                  year** |
|                                               |   | **$**                                                      | **$**          |                                                     | **Variance** | **%** |   | **$** | **$** |   |  **Variance** | **%** |
|                                               |   |                                                       |           |                                                     |   |   |   |   |   |   |   |   |
| Interest                  and other, net           |   |                                                       |           |                                                     |   |   |   |   |   |   |   |   |
| Interest                  expense                  |   | ($21)                                                      | ($55)          |                                                     | $34 | -62% |   | ($144) |  ($125) |  |  ($19) | 15% |
| Interest                  income                   |   | 57                                                         | 10             |                                                     | 47 | 470% |   | 105 |  69 |  |  36 | 52% |
| Gain                  on sale of product line      |   | (1)                                                        | 33             |                                                     | (34) | -103% |   | (1) |  33 |  |  (34) | -103% |
| Foreign                  exchange gain             |   | (18)                                                       | 45             |                                                     | (63) | -140% |   | (12) | 62 |  |  (74) | -119% |
| **Total                  interest and other, net** |   | **$17**                                                    | **$33**        |                                                     | **($16)** | **-48%** |   | **($52)** | ** $39** |  |  **($91)** | **-233%** |

**Gain      / (Loss) on Marketable Securities**

|                                                 |   | **Gain                  (loss) on marketable securities for the three months ended December                  31,                  2005** |
|------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------|
|                                                 |   | **Realized**                                                                                                                             |   | **Unrealized** |   | **Total** |
| **Description**                                      |   |                                                                                                                                     |   | Reversal                  of unrealized gain                  / (loss) recognized in                  prior periods | Unrealized                  gain / (loss) for the three months ended December 31, 2005 |   | Sub                  total Unrealized                  gain / (loss) |   |   |
|                                                 |   |                                                                                                                                     |   |   |   |   |   |   |   |
|                                                 |   |                                                                                                                                     |   |   |   |   |   |   |   |
| Smith                  Micro common stock            |   | $923                                                                                                                                     |   | - | - |   | - |   | $923 |
| **Total**                                            |   | **$923**                                                                                                                                 |   | **-** | **-** |   | **-** |   | **$923** |
|                                                 |   |                                                                                                                                     |   |   |   |   |   |   |   |
|                                                 |   | **Gain                  (loss) on marketable securities for the three months ended December                  31,                  2004** |
|                                                 |   | **Realized**                                                                                                                             |   | **Unrealized** |   | **Total** |
| **Description**                                      |   |                                                                                                                                     |   | Reversal                  of unrealized gain                  / (loss) recognized in                  prior periods | Unrealized                  gain / (loss) for the three months ended December 31, 2004 |   | Sub                  total Unrealized                  gain / (loss) |   |   |
|                                                 |   |                                                                                                                                     |   |   |   |   |   |   |   |
| Jupitermedia                  common stock           |   | $1,050                                                                                                                                   |   | ($1,050) | $- |   | ($1,050) |   | $- |
| Other                  stock in investment portfolio |   | 111                                                                                                                                      |   | 9 | 351 |   | 360 |   | 471 |
| **Total**                                            |   | **$1,161**                                                                                                                               |   | **($1,041)** | **$351** |   | **($690)** |   | **$471** |

----

|                                                 |   | **Gain                  (loss) on marketable securities for the six months ended December                  31,                  2005** |
|------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------|
|                                                 |   | **Realized**                                                                                                                           |   | **Unrealized** |   | **Total** |
| **Description**                                      |   |                                                                                                                                   |   | Reversal                  of unrealized gain                  / (loss) recognized in                  prior periods | Unrealized                  gain / (loss) for the six months ended December 31, 2005 |   | Sub                  total Unrealized                  gain / (loss) |   |   |
|                                                 |   |                                                                                                                                   |   |   |   |   |   |   |   |
| Smith                  Micro common stock            |   | $923                                                                                                                                   |   |   |   |   |   |   | $923 |
| Other                  stock in investment portfolio |   | ($234)                                                                                                                                 |   | $90 | ($14) |   | $76 |   | ($158) |
| **Total**                                            |   | **$689**                                                                                                                               |   | **$90** | **($14)** |   | **$76** |   | **$765** |
|                                                 |   |                                                                                                                                   |   |   |   |   |   |   |   |
|                                                 |   | **Gain                  (loss) on marketable securities for the six months ended December                  31,                  2004** |
|                                                 |   | **Realized**                                                                                                                           |   | **Unrealized** |   | **Total** |
| **Description**                                      |   |                                                                                                                                   |   | Reversal                  of unrealized gain                  / (loss) recognized in                  prior periods | Unrealized                  gain / (loss) for the six months ended December 31, 2004 |   | Sub                  total Unrealized                  gain / (loss) |   |   |
|                                                 |   |                                                                                                                                   |   |   |   |   |   |   |   |
| Jupitermedia                  common stock           |   | $2,094                                                                                                                                 |   | ($2,097) | $163 |   | ($1,934) |   | $160 |
| Other                  stock in investment portfolio |   | 64                                                                                                                                     |   | 92 | 106 |   | 198 |   | 262 |
| **Total**                                            |   | **$2,158**                                                                                                                             |   | **($2,005)** | **$269** |   | **($1,736)** |   | **$422** |

**Provision      for State and Federal Income Taxes**
** **

*Accounting      for Income Taxes*

----

**Gain      (loss) from Discontinued Operations **

**Three      and six months ended December 31, 2005: Sale of Allume**

**Six      months ended December 31, 2004: Sale of Keynomics**

**Income      from discontinued operations, net of income tax**

**Liquidity      and Capital Resources**
** **

----

----

**Critical      Accounting Policies**

**Revenue      Recognition **

*Software      Revenue Recognition*
*Modification      of SOP 97-2, With Respect to Certain Transactions*

|   | · | Revenue                from packaged product sales to resellers and end users is recorded                at the                time of the sale net of estimated returns. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Revenue                from sales to distributors is recognized when the product sells through                to                retailers or end users. Sales to distributors permit limited rights                of                return according to the terms of the                contract. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | For                software and content delivered via the Internet, revenue is recorded                when                the customer downloads the software, activates the subscription account                or                is shipped the content. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Revenue                from post contract customer support (“PCS”) is recognized ratably over the                contract period. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Subscription                revenue is recognized ratably over the contract period. |
|--------|--------|-------------------------------------------------------------------------------------|

|   | · | We                use the residual method to recognize revenue when a license agreement                includes one or more elements to be delivered at a future                date.   If there is an undelivered element under the license                arrangement, we defer revenue based on vendor-specific objective                evidence                (“VSOE”) of the fair value of the undelivered element, as determined by                the price charged when the element is sold separately. If VSOE of                fair                value does not exist for all undelivered elements, we defer all revenue                until sufficient evidence exists or all elements have been                delivered. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Non-refundable                advanced payments received under license agreements with no defined                terms                are recognized as revenue when the customer accepts the delivered                software. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Revenue                from software licensed to developers, including amounts in excess                of                non-refundable advanced payments, is recorded as the developers ship                products containing the licensed software. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Revenue                from minimum guaranteed royalties in republishing agreements is recognized                ratably over the term of the agreement. Royalties in excess of the                guaranteed minimums are recognized when collected. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Revenue                from original equipment manufacturer (“OEM”) contracts is recognized upon                completion of our contractual                obligations. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Reserve      for returns, price discounts and rebates **

**Inventories      **

----

**Software      Development Costs and License Fees**

*Accounting      for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed.      *

**Impairment**

*Accounting      for the Impairment or Disposal of Long-Lived Assets*

*Goodwill      and Intangible Assets, *

**Factors      That May Impact Future Operating Results**

**OUR      OPERATING RESULTS MAY FLUCTUATE IN FUTURE PERIODS, WHICH MAY ADVERSELY AFFECT      OUR STOCK PRICE **

|   | · | Fluctuations                in demand for our products and services, especially with respect                to                software and Internet businesses |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Our                ability to maintain appropriate inventory levels and purchase commitments |
|--------|--------|----------------------------------------------------------------------------------------------|

|   | · | Price                and product competition in the software and Internet house plans                businesses |
|--------|--------|-----------------------------------------------------------------------------------------------------------------|

|   | · | Overall                movement toward industry consolidation |
|--------|--------|---------------------------------------------------------------|

|   | · | Variations                in sales channels, product costs, or mix of products sold |
|--------|--------|-------------------------------------------------------------------------------------|

|   | · | The                timing, size, and mix of orders from customers |
|--------|--------|-------------------------------------------------------------------|

|   | · | Fluctuations                in our gross margins |
|--------|--------|--------------------------------------------------|

|   | · | Our                ability to achieve targeted cost reductions |
|--------|--------|----------------------------------------------------------------|

|   | · | Actual                events, circumstances, outcomes, and amounts differing from judgments,                assumptions, and estimates used in determining the values of certain                assets (including the amounts of related valuation allowances),                liabilities, and other items reflected in our condensed consolidated                financial statements |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | · | How                well we execute on our strategy and operating plans |
|--------|--------|------------------------------------------------------------------------|

|   | · | Changes                in accounting rules, such as recording expenses for employee stock                option                grants and changes in tax accounting principles |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Compliance                expense including the costs of procedures required for Sarbanes-Oxley                Section 404 reporting and the costs of procedure remediation, if                any |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Merger                and acquisition activity |
|--------|--------|------------------------------------------------|

**OUR      OPERATING RESULTS MAY BE ADVERSELY AFFECTED BY UNFAVORABLE ECONOMIC AND MARKET      CONDITIONS **

**OUR      REVENUE FOR A PARTICULAR PERIOD IS DIFFICULT TO PREDICT, AND A SHORTFALL IN      REVENUE MAY HARM OUR OPERATING RESULTS **

**WE      EXPECT GROSS MARGIN TO VARY OVER TIME, AND OUR RECENT LEVEL OF PRODUCT GROSS      MARGIN MAY NOT BE SUSTAINABLE **

|   | · | Changes                in customer, geographic, or product                mix |
|--------|--------|-------------------------------------------------------------------------------|

|   | · | Introduction                of new products |
|--------|--------|---------------------------------------------|

|   | · | Sales                discounts and other promotional factors in retail channels |
|--------|--------|---------------------------------------------------------------------------------|

|   | · | Increases                in material or labor input costs |
|--------|--------|-----------------------------------------------------------|

|   | · | Obsolescence                charges |
|--------|--------|-------------------------------------|

|   | · | Changes                in shipment volume |
|--------|--------|-------------------------------------------|

|   | · | Inventory                costs resulting from forecasting variances |
|--------|--------|---------------------------------------------------------------------|

|   | · | Increased                price competition |
|--------|--------|--------------------------------------------|

|   | · | Changes                in distribution channels |
|--------|--------|-------------------------------------------------|

|   | · | How                well we execute on our strategy and operating                plans |
|--------|--------|---------------------------------------------------------------------------------------|

|   | · | Inability                to achieve targeted cost reductions |
|--------|--------|--------------------------------------------------------------|

**DISRUPTION      OF OR CHANGES IN OUR DISTRIBUTION MODEL COULD HARM OUR SALES AND MARGINS**

----

**OUR      BUSINESS SUBSTANTIALLY DEPENDS UPON THE CONTINUED GROWTH OF THE INTERNET AND      INTERNET-BASED SYSTEMS **

**CHANGES      IN INDUSTRY STRUCTURE AND MARKET CONDITIONS COULD LEAD TO CHARGES RELATED TO      DISCONTINUANCES OF CERTAIN OF OUR PRODUCTS OR BUSINESSES AND ASSET IMPAIRMENTS      **

**WE      HAVE MADE AND EXPECT TO CONTINUE TO MAKE ACQUISITIONS THAT COULD DISRUPT OUR      OPERATIONS AND HARM OUR OPERATING RESULTS **

|   | · | Difficulties                in integrating the operations, technologies, products, and personnel                of                the acquired companies |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Diversion                of management’s attention from normal daily operations of the business |
|--------|--------|-------------------------------------------------------------------------------------------------------|

|   | · | Potential                difficulties in completing projects associated with in-process research                and development |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------|

|   | · | Difficulties                in entering markets in which we have no or limited direct prior experience                and where competitors in such markets have stronger market positions |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Initial                dependence on unfamiliar supply chains or relatively small supply                partners |
|--------|--------|------------------------------------------------------------------------------------------------------------------|

|   | · | Insufficient                revenue to offset increased expenses associated with acquisitions |
|--------|--------|-----------------------------------------------------------------------------------------------|

|   | · | The                potential loss of key employees of the acquired                companies |
|--------|--------|---------------------------------------------------------------------------------------------|

|   | · | Issue                common stock that would dilute our current shareholders’ percentage                ownership |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------|

|   | · | Assume                liabilities |
|--------|--------|-----------------------------------|

|   | · | Record                goodwill and non-amortizable intangible assets that will be subject                to                impairment testing on a regular basis and potential periodic impairment                charges |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Incur                amortization expenses related to certain intangible assets |
|--------|--------|---------------------------------------------------------------------------------|

|   | · | Incur                large and immediate write-offs and restructuring and other related                expenses |
|--------|--------|-----------------------------------------------------------------------------------------------------------------|

|   | · | Become                subject to intellectual property or other litigation |
|--------|--------|----------------------------------------------------------------------------|

----

**OUR      OPERATING RESULTS AND FUTURE PROSPECTS COULD BE MATERIALLY HARMED BY      UNCERTAINTIES OR REGULATION OF THE INTERNET **

**FAILURE      TO RETAIN AND RECRUIT KEY PERSONNEL WOULD HARM OUR ABILITY TO MEET KEY      OBJECTIVES **

**ADVERSE      RESOLUTION OF LITIGATION MAY HARM OUR OPERATING RESULTS OR FINANCIAL CONDITION      **

**OUR      BUSINESS AND OPERATIONS ARE ESPECIALLY SUBJECT TO THE RISKS OF EARTHQUAKES,      FLOODS, AND OTHER NATURAL CATASTROPHIC EVENTS **

**OUR      STOCK PRICE MAY BE VOLATILE **

**Item      3- Controls and Procedures**

----

**PART      II - OTHER INFORMATION**

**Item      1- Legal Proceedings**

**Item      2- **
**Unregistered      Sales of Equity Securities and Use of Proceeds**

| **Date****Securities****Issued**                     | **Securities****Title**                                     | **Issued                  to**             | **Number                  of****Securities****Issued** | **Consideration****(1)** | **Footnotes** |
|------------------------------------------------------|-------------------------------------------------------------|--------------------------------------------|--------------------------------------------------------|--------------------------|---------------|
| **Common                  Stock Issuances**          |                                                        |                                       |                                                   |                     |
|                                                 |                                                        |                                       |                                                   |                     |          |
| Oct                  7, 2005                         | Common                  Stock                               | George                  Riddick            | 117,117                                                |                     | **(2)**       |
|                                                 | **Total                  unregistered common stock issued** | **117,117**                                |                                                   |                     |
|                                                 |                                                        |                                       |                                                   |                     |
| **Derivative                  Securities Issuances** |                                                        |                                       |                                                   |                     |
| Oct                  28, 2005                        | Warrant                                                     | Bruce                  Weinmaster          | 20,000                                                 |                     | **(3)**       |
|                                                 |                                                        | **Total                  warrants issued** | **20,000**                                             |                     |          |

| (1) | Consideration                received in cash except where                noted. |
|-----|----------------------------------------------------------------------------------|

| (2) | Stock                issued pursuant to a cashless warrant                exercise. |
|-----|-------------------------------------------------------------------------------------|

| (3) | Warrant                issued pursuant to an acquisition. |
|-----|-----------------------------------------------------------|

**Item      3- Defaults upon Senior Securities**

**Item      4- Submission of Matters to a Vote of Security Holders**

----

**Item      5- Other Information**

**Item      6- Exhibits**

**Financial      Statements**

**Exhibits      **

| **Number** | **Exhibit                Title**                                                                                                                                                                                                                                                     | **Note** | **Page**                   |
|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------|----------------------------|
|       |                                                                                                                                                                                                                                                                                 |     |                       |
| **2.1**    | Agreement                and Plan of Merger dated as of August 8, 2005, by and among International                Microcomputer Software, Inc., ACCM Acquisition Corp., AccessMedia                Networks, Inc., and the stockholders of AccessMedia Networks,                Inc. | **(1)**  |                       |
| **2.2**    | Joint                Operating Agreement dated as of August 8, 2005, between International                Microcomputer Software, Inc. and AccessMedia Networks,                Inc.                                                                                                 | **(1)**  |                       |
| **2.3**    | Stock                Purchase Agreement between International Microcomputer Software,                Inc. (the                Seller) and Smith Micro Software, Inc.                                                                                                                 | **(2)**  |                       |
| **2.4**    | Weinmaster                Homes, Ltd. Stock Purchase Agreement, dated July 1, 2005, between                Weinmaster Homes, Ltd., Bruce Weinmaster & Janice Weinmaster and                International Microcomputer Software, Inc                                             | **(3)**  |                       |
| **3.01**   | Amended                and Restated Articles of Incorporation                                                                                                                                                                                                                        | **(4)**  |                       |
| **3.02**   | Amended                and Restated Bylaws                                                                                                                                                                                                                                           | **(5)**  |                       |
| **31.1**   | Certification                of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley                Act of 2002                                                                                                                                                     |     | **Page                39** |
| **31.2**   | Certification                of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley                Act of 2002                                                                                                                                                     |     | **Page                40** |
| **32.1**   | Certification                of Chief Executive Officer & Chief Financial Officer Pursuant to                Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                       |     | **Page                41** |

| **Notes** |                                                                                                                                                               |
|-----------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **(1)**   | Incorporated                by reference to exhibits to the Company's Current report on Form                8-K filed                on August 9, 2005             |
| **(2)**   | Incorporated                by reference to exhibits to the Company's Current report on Form                8-K filed                on July 7, 2005               |
| **(3)**   | Incorporated                by reference to exhibits to the Company's Current report on Form                8-K filed                on July 7, 2005               |
| **(4)**   | Incorporated                by reference to exhibits to the Company's registration statement                on Form                S-3 filed on September 22, 1993 |
| **(5)**   | Incorporated                by reference to exhibits to the Company's Current report on Form                8-K filed                on January 18, 2005           |

----

**SIGNATURES**

**INTERNATIONAL      MICROCOMPUTER SOFTWARE, INC.**

**Date:      February 14, 2006**

**By:      /s/ Martin Wade, III**

**By:      /s/ Robert O’Callahan**

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**INDEX      TO EXHIBITS:**

| **Number** | **Exhibit                Title**                                                                                                                               | **Note** | **Page**                   |
|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|----------|----------------------------|
|       |                                                                                                                                                           |     |                       |
| **31.1**   | Certification                of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley                Act of 2002                               |     | **Page                39** |
| **31.2**   | Certification                of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley                Act of 2002                               |     | **Page                40** |
| **32.1**   | Certification                of Chief Executive Officer & Chief Financial Officer Pursuant to                Section 906 of the Sarbanes-Oxley Act of 2002 |     | **Page                41** |