**UNITED
STATES**


**SECURITIES
AND EXCHANGE COMMISSION**


Washington
D.C. 20549





**FORM
10-QSB**




x
    QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d)
      OF THE SECURITIES EXCHANGE ACT OF 1934





For the
quarterly period ended **March
31, 2005**




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





For the
transition period from: _______ to _______





Commission
File Number  0-15949







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


(Exact
name of Small business issuer in its charter)




**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








Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.   YES x NO o








As
of **May 9, 2005, 28,401,103** Shares of
Issuer’s common stock, no par value, were outstanding.





Transitional
Small Business Disclosure Format:   YES o  NO x








**INTERNATIONAL
MICROCOMPUTER SOFTWARE, INC.**


**AND
SUBSIDIARIES**





**Table
of Contents**




**PART
      I - FINANCIAL INFORMATION**
    **3**ITEM1-
      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    3CONDENSED
      CONSOLIDATED BALANCE SHEETS
    3CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME /
      (LOSS)
    4CONDENSED
      CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
    5CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS
    6NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    7ITEM
      2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
      OF OPERATIONS
    15ITEM
      3- CONTROLS AND PROCEDURES
    30**PART
      II - OTHER INFORMATION**
    **30**ITEM
      1- LEGAL PROCEEDINGS
    30ITEM
      2- UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
    PROCEEDS
    30ITEM
      3- DEFAULTS UPON SENIOR SECURITIES
    30ITEM
      4- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    30ITEM
      5- OTHER INFORMATION
    31ITEM
      6- EXHIBITS
    31**SIGNATURES**
    **32****INDEX
      TO EXHIBITS:**
    **33**


-2-


**PART
I - FINANCIAL INFORMATION**




**Item1** **-
Condensed Consolidated Financial Statements**





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


**CONDENSED
CONSOLIDATED BALANCE SHEETS**


(In
thousands, except share amounts)





****
    
    **March
      31, 2005**
    
    **June
      30, 2004******
    
    **Unaudited**
    
    ******ASSETS**
    
    
    
    ******Current
      assets:**
    
    
    
    ****Cash
      and cash equivalents
    
    $
    2,391
    
    $
    3,212Investment
      in marketable securities
    
    
    2,258
    
    
    2,151Receivables,
      less allowances for doubtful accounts, discounts and returns of $1,027 and
      $958
    
    
    3,122
    
    
    2,522Inventories,
      net of reserves for obsolescence of $123 and $123
    
    
    1,140
    
    
    1,122Receivables,
      other (related to discontinued operations)
    
    
    --
    
    
    1,000Note
      receivable from related party
    
    
    --
    
    
    350Other
      current assets
    
    
    637
    
    
    552Assets
      related to discontinued operations
    
    
    499
    
    
    828**Total
      current assets**
    
    
    **10,047**
    
    
    **11,737****Fixed
      assets, net**
    
    
    **601**
    
    
    **637****Intangible
      assets**
    
    
    
    
    
    ****Capitalized
      software, net
    
    
    2,587
    
    
    2,748Domain
      names, net
    
    
    1,845
    
    
    1,566Trademarks
    
    
    710
    
    
    709Distribution
      rights, net
    
    
    518
    
    
    594Capitalized
      customer lists
    
    
    873
    
    
    843Goodwill
    
    
    8,811
    
    
    7,559**Total
      intangible assets**
    
    
    **15,344**
    
    
    **14,019****Other
      assets:**
    
    
    
    
    
    ****Prepaid
      expenses
    
    
    60
    
    
    99Investment
      in securities
    
    
    --
    
    
    1,771**Total
      other assets**
    
    
    **60**
    
    
    **1,870****TOTAL
      ASSETS**
    
    **$**
    **26,052**
    
    **$**
    **28,263****LIABILITIES
      AND SHAREHOLDERS' EQUITY**
    
    
    
    
    
    ******Current
      liabilities:**
    
    
    
    
    
    ****Short
      term debt
    
    $
    1,974
    
    $
    3,557Trade
      accounts payable
    
    
    1,898
    
    
    2,375Accrued
      and other liabilities
    
    
    1,497
    
    
    1,751Liabilities
      related to discontinued operations
    
    
    --
    
    
    397**Total
      current liabilities**
    
    
    **5,369**
    
    
    **8,080**Long-term
      debt and other obligations
    
    
    1,536
    
    
    2,318**Total
      liabilities**
    
    
    **6,905**
    
    
    **10,398****Shareholders'
      equity**
    
    
    
    
    
    ****Common
      stock, no par value; 300,000,000 authorized; 28,296,600 issued andoutstanding
      on March 31, 2005 and 26,261,829 issued and outstanding
      onJune
      30, 2004
    
    
    43,365
    
    
    41,512Accumulated
      deficit
    
    
    (24,109
    )
    
    (23,577
    )Accumulated
      other comprehensive loss
    
    
    (109
    )
    
    (70
    )**Total
      shareholders' equity**
    
    
    **19,147**
    
    
    **17,865****TOTAL
      LIABILITIES AND SHAREHOLDERS' EQUITY**
    
    **$**
    **26,052**
    
    **$**
    **28,263**


See Notes
to Condensed Consolidated Financial Statements


-3-


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


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


(In
thousands, except per share amounts)


(Unaudited)


**Three
      Months Ended**
      **March
      31,**
    
    **Nine
      Months Ended**
      **March
      31,****2005**
    
    **2004**
    
    **2005**
    
    **2004**Net
      revenues
    
    $
    6,340
    
    $
    2,713
    
    $
    18,054
    
    $
    6,690Product
      costs
    
    
    1,713
    
    
    1,038
    
    
    4,833
    
    
    2,401**Gross
      margin**
    
    
    **4,627**
    
    
    **1,675**
    
    
    **13,221**
    
    
    **4,289****Costs
      and expenses**Sales
      and marketing
    
    
    2,430
    
    
    1,299
    
    
    7,259
    
    
    2,784General
      and administrative
    
    
    1,199
    
    
    836
    
    
    3,590
    
    
    2,457Research
      and development
    
    
    1,045
    
    
    576
    
    
    3,078
    
    
    1,436**Total
      operating expenses**
    
    
    **4,674**
    
    
    **2,711**
    
    
    **13,927**
    
    
    **6,677******
    
    
    ****
    
    
    
    
    
    ******Operating
      loss**
    
    
    **(47**
    **)**
    
    **(1,036**
    **)**
    
    **(706**
    **)**
    
    **(2,388**
    **)****Other
      income and (expense)**Interest
      and other, net
    
    
    (60
    )
    
    --
    
    
    (42
    )
    
    141Realized
      / unrealized gain (loss) on marketable securities
    
    
    (277
    )
    
    1,764
    
    
    145
    
    
    1,941Gain
      on sale of product line
    
    
    --
    
    
    58
    
    
    33
    
    
    59Gain
      on extinguishment of debt
    
    
    --
    
    
    --
    
    
    --
    
    
    76**Income
      (loss) before income tax**
    
    
    **(384**
    **)**
    
    **786**
    
    
    **(570**
    **)**
    
    **(171**
    **)**Income
      tax (expense)
    
    
    (2
    )
    
    (34
    )
    
    (10
    )
    
    (24
    )**Income
      (loss) from continuing operations**
    
    
    **(386**
    **)**
    
    **752**
    
    
    **(580**
    **)**
    
    **(195**
    **)**Loss
      from discontinued operations, net of income tax
    
    
    --
    
    
    (204
    )
    
    (5
    )
    
    (255
    )Gain
      from the sale of discontinued operations, net of income
tax
    
    
    --
    
    
    --
    
    
    53
    
    
    1,000**Net
      income (loss)**
    
    **$**
    **(386**
    **)**
    **$**
    **548**
    
    **$**
    **(532**
    **)**
    **$**
    **550****Other
      comprehensive loss**Foreign
      currency translation adjustments
    
    
    (5
    )
    
    (9
    )
    
    (39
    )
    
    (40
    )**Comprehensive
      income (loss)**
    
    **$**
    **(391**
    **)**
    **$**
    **539**
    
    **$**
    **(570**
    **)**
    **$**
    **510********Basic
      income (loss) per share**Income
      (loss) from continuing operations
    
    $
    (0.01
    )
    $
    0.03
    
    $
    (0.02
    )
    $
    (0.01
    )Loss
      from discontinued operations, net of income tax
    
    $
    --
    
    $
    (0.01
    )
    $
    (0.00
    )
    $
    (0.01
    )Gain
      from the sale of discontinued operations, net of income
tax
    
    $
    --
    
    $
    --
    
    $
    0.00
    
    $
    0.04Net
      income (loss)
    
    $
    (0.01
    )
    $
    0.02
    
    $
    (0.02
    )
    $
    0.02**Diluted
      income (loss) per share**Income
      (loss) from continuing operations
    
    $
    (0.01
    )
    $
    0.03
    
    $
    (0.02
    )
    $
    (0.01
    )Loss
      from discontinued operations, net of income tax
    
    $
    --
    
    $
    (0.01
    )
    $
    (0.00
    )
    $
    (0.01
    )Gain
      from the sale of discontinued operations, net of income
tax
    
    $
    --
    
    $
    --
    
    $
    0.00
    
    $
    0.04Net
      income (loss)
    
    $
    (0.01
    )
    $
    0.02
    
    $
    (0.02
    )
    $
    0.02Shares
      used in computing basic earnings (loss) per share
    information
    
    
    28,051
    
    
    23,475
    
    
    27,623
    
    
    23,332Shares
      used in computing diluted earnings (loss) per share
      information
    
    
    28,051
    
    
    27,324
    
    
    27,623
    
    
    23,332


See Notes
to Condensed Consolidated Financial Statements


-4-


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


**CONDENSED** **CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY**


Nine
Months ended March 31, 2005


(In
thousands)


(Unaudited)





**Accumulated**
    
    **Accumulated
      Other Comprehensive****Common
      Stock****Shares**
    
    **Amount**
    
    **Deficit**
    
    **Loss**
    
    **Total****Balance
      at June 30, 2004**
    
    
    **26,262**
    
    **$**
    **41,512**
    
    **$**
    **(23,577**
    **)**
    **$**
    **(70**
    **)**
    **$**
    **17,865**Issuance
      of common stock related to:Warrants
      exercised
    
    
    166
    
    
    37
    
    
    
    
    
    
    
    
    **37**Stock
      options exercised
    
    
    229
    
    
    115
    
    
    
    
    
    
    
    
    **115**Acquisitions
    
    
    1,640
    
    
    1,602
    
    
    
    
    
    
    
    
    **1,602******Issuance
      of warrants related to:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    ****Consulting
      services rendered
    
    
    
    
    
    20
    
    
    
    
    
    
    
    
    **20**Acquisitions
    
    
    
    
    
    8
    
    
    
    
    
    
    
    
    **8******Issuance
      of stock options related to:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    ****Consulting
      services rendered
    
    
    
    
    
    3
    
    
    
    
    
    
    
    
    **3**Acquisitions
    
    
    
    
    
    65
    
    
    
    
    
    
    
    
    **65******Variable
      accounting adjustment related to stock options previously
      issued
    
    
    
    
    
    3
    
    
    
    
    
    
    
    
    **3******Net
      loss
    
    
    
    
    
    
    
    
    (532
    )
    
    
    
    
    **(532**
    **)******Foreign
      currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    (39
    )
    
    **(39**
    **)****Balance
      at March 31, 2005**
    
    
    **28,297**
    
    **$**
    **43,365**
    
    **$**
    **(24,109**
    **)**
    **$**
    **(109**
    **)**
    **$**
    **19,147**


See Notes
to Condensed Consolidated Financial Statements


-5-


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


**CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS**


(In
thousands)


(Unaudited)


****
    
    **Nine
      months ended**
      **March
      31,******
    
    **2005**
    
    **2004****Cash
      flows from operating activities:**
    
    ****
    
    ******Net
      cash generated (used) by operating activities**
    
    **$**
    **237**
    
    **$**
    **(2,450**
    **)****Cash
      flows from investing activities:**Proceeds
      from sale of marketable securities
    
    
    1,780
    
    
    116Cash
      released from escrow
    
    
    608
    
    
    --Proceeds
      from sale of product line
    
    
    258
    
    
    --Related
      party note receivable (DCDC)
    
    
    371
    
    
    (350
    )Acquisition
      of business, net of cash acquired
    
    
    (1,356
    )
    
    (260
    )Cash
      transferred to escrow
    
    
    (499
    )
    
    --Purchase
      of trade names, software and domain names
    
    
    (174
    )
    
    (66
    )Purchase
      of equipment and furniture
    
    
    (171
    )
    
    (340
    )Acquisition
      of product line
    
    
    --
    
    
    (1,815
    )Investment
      in marketable securities
    
    
    --
    
    
    (367
    )Cash
      used by discontinued operations in investing activities
    
    
    --
    
    
    (7
    )**Net
      cash generated (used) by investing activities**
    
    **$**
    **817**
    
    **$**
    **(3,089**
    **)****Cash
      flows from financing activities:**Settlement
      of note payable (Imageline)
    
    
    --
    
    
    (160
    )Proceeds
      from short-term borrowings
    
    
    400
    
    
    350Repayments
      of contractual liabilities
    
    
    (2,388
    )
    
    (249
    )Warrants
      exercised
    
    
    37
    
    
    96Options
      exercised
    
    
    115
    
    
    111Cash
      used by discontinued operations in financing activities
    
    
    --
    
    
    (63
    )**Net
      cash generated (used) by financing activities**
    
    **$**
    **(1,836**
    **)**
    **$**
    **85**Effect
      of exchange rate change on cash and cash equivalents
    
    
    (39
    )
    
    (40
    )**Net
      decrease in cash and cash equivalents**
    
    
    **(821**
    **)**
    
    **(5,494**
    **)**Cash
      and cash equivalents at beginning of period
    
    
    3,212
    
    
    10,399**Cash
      and cash equivalents at end of the period**
    
    **$**
    **2,391**
    
    **$**
    **4,905**


See Notes
to Condensed Consolidated Financial Statements











(In
      thousands)
    
    **Nine
      months ended**
      **March
      31,****2005**
    
    **2004****SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION**Interest
      paid
    
    $
    189
    
    $
    24Income
      tax paid
    
    **$**
    2
    
    **$**
    10**SUPPLEMENTAL
      DISCLOSURE OF NON-CASH FINANCING ACTIVITIES**Notes
      payable incurred in conjunction with acquisitions
    
    $
    480
    
    $
    1,355Capital
      stock issued in conjunction with acquisitions
    
    $
    1,602
    
    $
    92


See Notes
to Condensed Consolidated Financial Statements


-6-


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


**NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**





**1.**
    **Basis
      of Presentation**





The
interim condensed consolidated financial statements have been prepared from the
records of International Microcomputer Software, Inc. and Subsidiaries ("IMSI")
without audit. All significant inter-company balances and transactions have been
eliminated in consolidation. In the opinion of management, all adjustments,
which consist of only normal recurring adjustments, to present fairly the
financial position at March 31, 2005 and the results of operations and cash
flows for the three and nine months ended March
31 , 2005
and 2004, have been made. The interim condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto contained in our Annual Report on Form 10-KSB as
amended for the fiscal year ended June 30, 2004. The results of operations for
the three and nine months ended March
31 , 2005
are not necessarily indicative of the results to be expected for any other
interim period or for the full year.





**2.**
    **Use
      of Estimates**




Our
consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States (“GAAP”). These accounting
principles require us to make certain estimates, judgments and assumptions. We
believe that the estimates, judgments and assumptions upon which we rely are
reasonable based upon information available to us at the time that these
estimates, judgments and assumptions are made. These estimates, judgments and
assumptions can affect the reported amounts of assets and liabilities as of the
date of the financial statements as well as the reported amounts of revenues and
expenses during the periods presented. Our financial statements would be
affected to the extent there are material differences between these estimates
and actual results. In many cases, the accounting treatment of a particular
transaction is specifically dictated by GAAP and does not require management’s
judgment in its application. There are also areas in which management’s judgment
in selecting any available alternative would not produce a materially different
result.




**3.**
    **Discontinued
      Operations**


****


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





The
amounts reported for the three and nine months ended March 31, 2005 and 2004 as
discontinued operations represent the pre-tax results of operations for
Keynomics. This segment had pre-tax net loss of $204,000 for the quarter ended
March 31, 2004 and pre-tax loss of $5,000 and $255,000 for the nine months ended
March 31, 2005 and 2004 respectively. These results were derived from net
revenues of $71,000 for the quarter ended March 31, 2004 and $68,000 and
$549,000 for the nine months ended March 31, 2005 and 2004 respectively.





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





As
previously disclosed in our Annual Report on Form 10-KSB, as amended, for the
fiscal year ended June 30, 2004, we sold the assets and customer related
liabilities of our wholly owned subsidiary Keynomics, Inc. in July 2004. We
evaluated the Keynomics business segment and its long term prospects during the
fourth quarter of fiscal 2004 and with our focus on direct marketing and the
on-line distribution of utilities and precision design content, we determined
that Keynomics no longer represented a strategic fit for our company. The
$53,000 gain from the sale of discontinued operations for the nine months ended
March 31, 2005 relate to the sale of Keynomics during the quarter ended
September 30, 2004 and represent the excess of the total consideration received
over its net carrying value.





During
the quarter ended December 31, 2003, we recorded a gain of $1.0 Million from the
sale of discontinued operations representing the successful achievement of the
first earn-out from the sale of ArtToday to Jupitermedia Corporation in June
2003 (the second earnout payment of $1.0 million was earned in June 2004 but is
not applicable for purposes of this comparative discussion).


-7-





**4.**
    **Acquisition****s**





The table
below details the consideration paid for acquisitions and amendments to prior
acquisitions, completed during the nine month period ended March 31, 2005 and
the allocation of that consideration to the tangible and intangible assets
acquired.





**Table
I-1-4**


**Precision
      Design Solutions Segment**
    
    **Consumer
      and Business Software Solutions Segment******
    
    **Aggregated
      Non Material Transactions**
    
    **Aggregated
      Non Material Transactions**
    
    ********
    
    
    
    
    
    ******Consideration**
    
    
    
    
    
    ****Cash
    
    $
    1,318
    
    $
    50Escrowed
      cash
    
    
    75
    
    
    0Notes
    
    
    275
    
    
    205Common
      stock
    
    
    503
    
    
    65Derivative
      securities
    
    
    0
    
    
    65Less:
      Cash on hand
    
    
    (97
    )
    
    0Legal
      & escrow fees
    
    
    33
    
    
    0
    
    
    ****Broker
      fees (cash & warrants)
    
    
    43
    
    
    0
    
    
    ******Total
      Consideration**
    
    
    **2,150**
    
    
    **385**
    
    
    ******Estimated
      Useful Life****Purchase
      Price Allocation**
    
    
    
    
    
    
    
    
    ********
    
    
    
    
    
    
    
    
    ******Assumed
      liabilities**
    
    
    **(125**
    **)**
    
    **0**
    
    
    ********
    
    
    
    
    
    
    
    
    ******Tangible
      Assets**Inventory
    
    
    1
    
    
    0Prepaid
      expenses
    
    
    12
    
    
    0Accounts
      receivable
    
    
    8
    
    
    0**Total
      Tangible Assets**
    
    
    **21**
    
    
    **0**
    
    
    ********
    
    
    
    
    
    
    
    
    ******Intangible
      Assets****Identifiable
      Assets**Customer
      list
    
    
    220
    
    
    0
    
    
    3
      yearsDomain
      names
    
    
    603
    
    
    0
    
    
    5
      yearsSoftware
      development costs
    
    
    0
    
    
    385
    
    
    5
      years**Total
      Identifiable Assets**
    
    
    **823**
    
    
    **385**
    
    
    ********
    
    
    
    
    
    
    
    
    ******Unidentifiable
      Assets**Goodwill
    
    
    1,431
    
    
    0
    
    
    Indefinite**Total
      Unidentifiable Assets**
    
    
    **1,431**
    
    
    **0**
    
    
    ******Total
      Intangible Assets**
    
    
    **2,254**
    
    
    **385**
    
    
    ********
    
    
    
    
    
    
    
    
    ******Total**
    
    **$**
    **2,150**
    
    **$**
    **385**
    
    
    ****





-8-


**Acquisition
of****Abbisoft House
Plans, Inc.**





As
previously disclosed in our quarterly report on Form 10-QSB for the quarter
ended September 30, 2004, we completed a stock purchase agreement on September
28, 2004 whereby we acquired all the outstanding stock of Abbisoft House Plans,
Inc. (“Abbisoft”), an on-line provider of stock house plans which operates the www.homeplanfinder.com website.
The consideration for the acquisition was paid in a combination of cash
(including cash held in escrow), notes payable (secured by the acquired
business) and 500,000 unregistered IMSI common shares valued at $1.0067 per
share. Subsequent to the third quarter end, we amended the Abbisoft Stock
Purchase Agreement in April 2005 whereby the seller agreed to release the cash
being held in escrow to us in exchange of payment in the amount of $40,000 and
the issuance of 27,273 additional restricted shares of IMSI common
stock.





This
transaction was not deemed to be a material business combination, therefore, no
pro forma results are required under the Statement of Financial Accounting
Standards No. 141. We do not expect the goodwill associated with this
acquisition to be deductible for tax purposes.





**Amendment
to****the
Allume Acquisition**





In
September 2004, IMSI and Monterey Bay Tech, Inc.  (“MBYI”
and formerly known as Aladdin Systems Holdings, Inc. ”) amended the portion of
the purchase agreement which called for earn-outs to be paid based on the
achievement of certain revenue targets. The earn-out payments were converted
from contingent obligations to fixed obligations as follows:




·
    The
      first earn out payment of $666,667 which could have been due on April 19,
      2005 became fully earned as of the amendment date and will be payable on
      June 2, 2005.




·
    The
      second and third earn-out payments were terminated in consideration of the
      issuance of shares of the common stock of IMSI priced as of the closing
      bid price on the date of the amendment.  As a result, during the
      first quarter of Fiscal Year 2005, we issued to MBYI an additional
      1,065,807 shares of our common stock, with a value of $1,033,867, pursuant
      to a transaction exempt from registration under Section 4(2) of the
      Securities Act.




We
consequently amended, as of June 30, 2004, the purchase price of the Allume
acquisition to include the $1.7 million value of the fixed obligations described
above. This additional amount was allocated to goodwill.




As part
of the same agreement, MBYI agreed to modify the date by which we were required
to file a registration statement on Form SB- 2 to register the common stock that
MBYI received from us as part of the original agreement from ninety (90) days
from the Closing Date to September 30, 2004.  Additionally, MBYI agreed to
modify the date by which the registration statement was required to be declared
effective by the SEC from one hundred and eighty (180) days from the Closing
Date to March 31, 2005.  We filed the registration statement with the SEC
on September 29, 2004 and it was declared effective on November 4, 2004,
fulfilling our obligations under this agreement.




In April
2005, and subsequent to quarter end, we further amended the purchase agreement
whereby we agreed to use our best efforts to ensure that the registration
statement referenced above remain effective until June 29, 2005. In exchange,
MBYI agreed to extend the due date of the earn-out described above from June 2,
2005 to August 15, 2005.




**5.**
    **Note
      Receivable from Related Part****y
      - DCDC 15% Note**





On
January 31, 2005, we sold the DCDC promissory note to Mag Multi Corp (“Mag
Multi”), a New York corporation for $343,000, representing the principal balance
and all accrued interest as of the date of the transfer. This amount was
received in its entirety on February 10, 2005. The DCDC note was a 15% one-year
note we received on September 18, 2003 from Digital Creative Development
Corporation upon extending a loan to them in the amount of $350,000. This note
was secured by 400,000 shares of IMSI’s stock held by DCDC and was originally
due on September 18, 2004. The maturity of this note was subsequently extended
to May 31, 2005 in exchange for a full payment of the then accrued interest, a
payment of $25,000 against the principal amount and an increase the collateral
attached to the note.





-9-




**6.**
    **Debt**





The
following table details our outstanding debt as of March 31, 2005:





**Table
I-1-6**


**As
      of**
      **March
      31, 2005****Short-Term**
    
    ****Acquisition
      related notesMonterey
      Bay Tech, Inc.
    
    $
    1,666All
      other acquisition related obligations
    
    
    210***Subtotal***
    
    
    ***1,876***Short
      term financing (secured by selected accounts receivable)
    
    
    88Other
      short term obligations
    
    
    10**Subtotal
      Short Term**
    
    
    **1,974****Long-Term**Acquisition
      related notesMonterey
      Bay Tech, Inc.
    
    
    1,250All
      other acquisition related obligations
    
    
    286**Subtotal
      Long Term**
    
    
    **1,536****Grand
      Total**
    
    **$**
    **3,510**





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





The fair
value of cash and cash equivalents, trade receivables, trade payables and debt
approximates carrying value due to the short maturity of such instruments.





As of
March 31, 2005 we had $2.3 million classified under investments in marketable
securities on our balance sheet representing the market value of our investment
portfolio.





The total
consideration related the sale of ArtToday to Jupitermedia in June 2003 included
250,000 shares of Jupitermedia common stock. The ArtToday purchase agreement
originally called for these shares to be held in escrow until December 30, 2005.
However, a t our
discretion, we had the ability to replace all, or a portion of, the common stock
held in escrow with cash in an amount equal to the closing market value, at June
30, 2003, of the common stock to be replaced.





During
the third quarter of fiscal 2004 and pursuant to an amended escrow agreement,
Jupitermedia agreed to release from the escrow account, without additional cash
consideration, 125,000 of the original 250,000 shares that were tendered as part
of the consideration in the sale of ArtToday.





During
the first quarter of fiscal 2005 and as provided for under the original escrow
agreement, we elected to substitute the remaining 125,000 shares of Jupitermedia
for approximately $500,000 in cash (recorded as Assets from Discontinued
Operations). This amount will be released to us, net of any claims, on December
30, 2005.





After
their release from the escrow account the Jupiter media shares
were deposited
into our marketable securities account and were sold as market conditions
allowed. We did not hold any shares of Jupitermedia common stock as of March 31,
2005.





In
addition to the shares referenced above, the escrow account also included $1.3
million in cash to be released in two equal installments in June 2004 and
December 2004.





The first
payment of $650,000 was released to us on June 30, 2004 of which approximately
$42,000 was paid to the former minority shareholders of ArtToday.




-10-




The
remaining $650,000 escrow balance was released to us on December 30, 2004 in
addition to accrued interest. Approximately $42,000 of the remaining cash in
escrow was due to the former minority shareholders of ArtToday and was paid to
them in January 2005.








**8.**
    **Gain
      / (loss) on Marketable Securities**




The
following table details the net gain on marketable securities that we recognized
during the three and nine months ended March 31, 2005:





**Table
I-1-8**


**Gain
      (loss) on marketable securities for the**
      **three
      months ended March 31, 2005****Realized**
    
    **Unrealized**
    
    **Total****Description**
    
    
    
    Reversal
      of unrealized gain / (loss) recognized in prior periods
    
    Unrealized
      gain / (loss) for the quarter ended March 31, 2005
    
    Sub
      total Unrealized gain / (loss)****
    
    
    
    
    
    
    
    
    
    ****Stock
      in investment portfolio
    
    $
    81
    
    $
    (62
    )
    $
    (296
    )
    **$**
    **(358**
    **)**
    **$**
    **(277**
    **)******
    
    
    ****
  **Gain
      (loss) on marketable securities for the**
      **nine
      months ended March 31, 2005****Realized**
    
    **Unrealized**
    
    **Total****Description**
    
    
    
    Reversal
      of unrealized gain / (loss) recognized in prior periods
    
    Unrealized
      gain / (loss) for the nine months ended March 31, 2005
    
    Sub
      total Unrealized gain / (loss)****
    
    
    
    
    
    
    
    
    
    ****Stock
      in investment portfolio
    
    $
    2,239
    
    $
    (2,067
    )
    $
    (27
    )
    **$**
    **(2,094**
    **)**
    **$**
    **145******
    
    ****





-11-




**9.**
    **Segment
      Information**





We have
two reportable operating segments which serve businesses and individuals in the
design and consumer markets. The segments are classified in accordance to our
product families and generate revenues and incur expenses related to the sale of
our software and services . All
inter-company amounts are eliminated through consolidation. Certain general and
administrative expenses are allocated among our different segments based on each
segment contribution to total revenue.





**Table
I-1-9**


****
    
    **Three
      months ended March 31, 2005**
    
    **Three
      months ended March 31, 2004******
    
    **Precision
      Design Solutions**
    
    **Consumer
      Software Solutions**
    
    **Total**
    
    **Precision
      Design Solutions**
    
    **Consumer
      Software Solutions**
    
    **Total**Net
      revenues
    
    $
    3,213
    
    $
    3,127
    
    **$**
    **6,340**
    
    $
    1,815
    
    $
    898
    
    **$**
    **2,713**Gross
      margin
    
    
    1,947
    
    
    2,680
    
    
    **4,627**
    
    
    1,159
    
    
    516
    
    
    **1,675**Operating
      loss
    
    $
    (26
    )
    $
    (21
    )
    **$**
    **(47**
    **)**
    $
    (673
    )
    $
    (363
    )
    **$**
    **(1,036**
    **)******
    
    
    
    
    
    
    
    
    ****
  ****
    
    **Nine
      months ended March 31, 2005**
    
    **Nine
      months ended March 31, 2004******
    
    **Precision
      Design Solutions**
    
    **Consumer
      Software Solutions**
    
    **Total**
    
    **Precision
      Design Solutions**
    
    **Consumer
      Software Solutions**
    
    **Total**Net
      revenues
    
    $
    7,970
    
    $
    10,084
    
    **$**
    **18,054**
    
    $
    3,847
    
    $
    2,843
    
    **$**
    **6,690**Gross
      margin
    
    
    5,034
    
    
    8,187
    
    
    **13,221**
    
    
    2,457
    
    
    1,832
    
    
    **4,289**Operating
      loss
    
    $
    (270
    )
    $
    (436
    )
    **$**
    **(706**
    **)**
    $
    (1,402
    )
    $
    (986
    )
    **$**
    **(2,388**
    **)**




The
following table details the geographical breakdown in our net revenues (in
thousands). The International
sales refer to
the revenues from our German and Australian wholly owned subsidiaries, IMSI GmbH
and IMSI Australia PTY Ltd, and sales derived from international distribution
and republishing agreement we have in Europe (France, England), Asia (Japan and
China) and Australia.




**Table
I-2-4**


****
    
    **Three
      months ended March 31,******
    
    **2005**
    
    **2004**
    
    **Change******
    
    $
    
    %
    
    $
    
    %
    
    $
    
    %Domestic
      sales
    
    $
    5,612
    
    
    89
    %
    $
    2,374
    
    
    88
    %
    $
    3,238
    
    
    136
    %International
      sales
    
    
    728
    
    
    11
    %
    
    339
    
    
    12
    %
    
    389
    
    
    115
    %**Net
      Revenues**
    
    **$**
    **6,340**
    
    
    **100**
    **%**
    **$**
    **2,713**
    
    
    **100**
    **%**
    **$**
    **3,627**
    
    
    **134**
    **%**
  ****
    
    **Nine
      months ended March 31,******
    
    **2005**
    
    **2004**
    
    **Change******
    
    $
    
    %
    
    $
    
    %
    
    $
    
    %Domestic
      sales
    
    $
    15,664
    
    
    87
    %
    $
    5,648
    
    
    84
    %
    $
    10,016
    
    
    177
    %International
      sales
    
    
    2,390
    
    
    13
    %
    
    1,042
    
    
    16
    %
    
    1,348
    
    
    129
    %**Net
      Revenues**
    
    **$**
    **18,054**
    
    
    **100**
    **%**
    **$**
    **6,690**
    
    
    **100**
    **%**
    **$**
    **11,364**
    
    
    **170**
    **%**





**10.**
    **Earnings****/
      (Loss) per Share**





Basic
earnings/ (loss) per share is computed using the weighted average number of
common shares outstanding during the period. Diluted earnings per share are
computed using the weighted average number of common and potentially dilutive
securities outstanding during the period. Potentially dilutive securities
consist of the incremental common shares issuable upon exercise of stock options
and warrants (using the treasury stock method). Potentially dilutive securities
are excluded from the computation if their effect is anti-dilutive.




-12-




The
following table sets forth the computation of basic and diluted earnings (loss)
per share:





**Table
I-1-10**


****
    
    **Three
      months ended**
    
    **Nine
      months ended******
    
    **March
      31, 2005**
    
    **March
      31, 2004**
    
    **March
      31, 2005**
    
    **March
      31, 2004****Numerator:**Net
      income (loss)
    
    $
    (386
    )
    $
    548
    
    $
    (532
    )
    $
    550Numerator
      for basic earnings (loss) per share - income (loss) available to common
      stockholders
    
    $
    (386
    )
    $
    548
    
    $
    (532
    )
    $
    550Numerator
      for diluted earnings (loss) per share - income (loss) available to common
      stockholders after assumed conversions
    
    $
    (386
    )
    $
    548
    
    $
    (532
    )
    $
    550**Denominator:**Denominator
      for basic loss per share - weighted average shares outstanding
    
    
    28,051,090
    
    
    23,475,424
    
    
    27,622,926
    
    
    23,331,526Effect
      of dilutive securities using the treasury stock method as at March 31,
      2005:Total
      Warrants Outstanding - 6,623,244
    
    
    --
    
    
    --
    
    
    --
    
    
    --Total
      Stock Options Outstanding - 3,761,355
    
    
    --
    
    
    --
    
    
    --
    
    
    --Effect
      of dilutive securities using the treasury stock method as at March 31,
      2004:Total
      Warrants Outstanding - 7,163,244
    
    
    --
    
    
    2,867,241
    
    
    --
    
    
    --Total
      Stock Options Outstanding - 2,101,198
    
    
    --
    
    
    981,647
    
    
    --
    
    
    --Dilutive
      potential common shares
    
    
    --
    
    
    --
    
    
    --
    
    
    --Denominator
      for diluted loss per share - adjusted weighted average shares and assumed
      conversion
    
    
    28,051,090
    
    
    27,324,312
    
    
    27,622,926
    
    
    23,331,526Basic
      loss per share
    
    $
    (0.01
    )
    $
    0.02
    
    $
    (0.02
    )
    $
    0.02Diluted
      loss per share
    
    $
    (0.01
    )
    $
    0.02
    
    $
    (0.02
    )
    $
    0.02





**11.**
    **Stock
      Based Awards**





Statement
of Financial Accounting Standards No. 148, “Accounting for Stock-Based
Compensation-Transition and Disclosure, an Amendment of FASB Statement No. 123,”
amends the disclosure requirements of Statement of Financial Accounting
Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), to
require more prominent disclosures in both annual and interim financial
statements regarding the method of accounting for stock-based employee
compensation and the effect of the method used on reported results.





We
account for stock-based compensation plans in accordance with Accounting
Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to
Employees,” under which no compensation cost is recognized in the financial
statements for employee stock arrangements when grants are made at fair market
value. The Company has adopted the disclosure only provisions of SFAS No. 123,
“Accounting for Stock Based Compensation”.





Beginning
on July 1, 2006, we will adopt the accounting treatment required by FASB
Statement No. 123 (revised 2004) which will require us to measure all employee
stock-based compensation awards using a fair value method and record such
expense in our consolidated financial statements (see the “Recent Accounting
Pronouncements” note).




-13-




Under
variable plan accounting, we recognize a charge equal to the per share change in
the share value until the underlying options expire or are exercised. During the
three months ended March 31, 2005 and 2004, we recognized an expense of $8,188
and an expense of $10,347 respectively related to variable awards. During the
nine months ended March 31, 2005 and 2004, we recognized an expense of $3,224
and an expense of $21,013 respectively related to variable awards.





Had
compensation cost for the stock-based compensation plans been determined based
upon the fair value at grant dates for awards under those plans consistent with
the method prescribed by SFAS 123, net income would have been reduced to the pro
forma amounts indicated below:





**Table
I-1-11**


*(in
      thousands, except per share amounts)*
    
    **Three
      months Ended March 31,**
    
    **Nine
      months Ended March 31,****2005**
    
    **2004**
    
    **2005**
    
    **2004****Net
      income (loss), as reported**
    
    **$**
    **(386**
    **)**
    **$**
    **548**
    
    **$**
    **(532**
    **)**
    **$**
    **550**Intrinsic
      compensation charge recorded under APB 25
    
    
    8
    
    
    11
    
    
    23
    
    
    265Pro
      Forma compensation charge under SFAS 123
    
    
    (90
    )
    
    (404
    )
    
    (507
    )
    
    (1,271
    )**Pro
      Forma net income (loss)**
    
    **$**
    **(468**
    **)**
    **$**
    **155**
    
    **$**
    **(1,016**
    **)**
    **$**
    **(456**
    **)******Pro
      Forma net income (loss) per share:Basic—as
      reported
    
    $
    (0.01
    )
    $
    0.02
    
    $
    (0.02
    )
    $
    0.02Basic—pro
      forma
    
    $
    (0.02
    )
    $
    0.01
    
    $
    (0.04
    )
    $
    (0.02
    )Diluted—as
      reported
    
    $
    (0.01
    )
    $
    0.02
    
    $
    (0.02
    )
    $
    0.02Diluted—pro
      forma
    
    $
    (0.02
    )
    $
    0.01
    
    $
    (0.04
    )
    $
    (0.02
    )





The
weighted average fair values per option as of the grant date for grants made for
both the three and nine months ended March 31, 2005 were $0.85 and $0.74. This
compares to $1.08 and $1.08, respectively for the three and nine months ended
March 31, 2004.





**12.**
    **Goodwill**





In
accordance with SFAS No. 142, *Goodwill
and Intangible Assets* goodwill
is being assessed for impairment annually or more frequently if circumstances
indicate impairment. We have not recognized any impairment charges related to
goodwill during the nine months ended March 31, 2005. Total
goodwill at March 31, 2005 was $8.8million and relates to the acquisitions we
consummated during fiscal 2004 and 2005.





**13.**
    **R****ecent
      Accounting Pronouncements**





***Share-Based
Payment -*** ***revision
of FASB Statement No. 123, Accounting for Stock-Based Compensation -*** In
December 2004, FASB issued Statement of Financial Accounting Standards (SFAS)
No. 123 (Revised 2004), *Share-Based
Payment* . The new
pronouncement replaces the existing requirements under SFAS No.123 and APB 25.
According to SFAS No. 123 (R), all forms of share-based payments to employees,
including employee stock options and employee stock purchase plans, would be
treated the same as any other form of compensation by recognizing the related
cost in the Statement of Operations. This pronouncement eliminates the ability
to account for stock-based compensation transactions using APB No. 25 and
generally would require instead that such transactions be accounted for using a
fair-value based method. FASB concluded that, for small business issuers, SFAS
No. 123 (R) is effective for awards and stock options granted, modified or
settled in cash in annual periods beginning after December 15, 2005. SFAS No.
123 (R) provides transition alternatives for public companies to restate prior
interim periods or prior years. We are in the process of evaluating the impact
of this standard on our statement of operation.





***Exchanges
of Nonmonetary Assets—an amendment of APB Opinion No. 29
-*** ****** In
December 2004, FASB issued SFAS 153, “Exchanges of Nonmonetary Assets—an
amendment to APB Opinion No. 29”. This statement amends APB 29 to eliminate the
exception for nonmonetary exchanges of similar productive assets and replaces it
with a general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. Adoption of this statement is not expected to have a material
impact on our results of operations or financial condition.




-14-




***Inventory
Costs—an amendment of ARB No. 43, Chapter 4 -*** ****** In
November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an amendment of
ARB No. 43, Chapter 4." The standard requires that abnormal amounts of idle
capacity and spoilage costs should be excluded from the cost of inventory and
expensed when incurred. SFAS No. 151 is effective for fiscal years beginning
after June 15, 2005. We do not expect the adoption of this standard to have a
material effect on our financial position or results of operations.




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





**Overview**





IMSI is a
developer and publisher of software in the precision design, utilities and
business applications categories. We offer a wide variety of application
software that we market through an array of distribution methods
including:





·
    Direct
      marketing to consumers and businesses


·
    Retail/
      Distribution agreements


·
    Republishing
      & OEM agreements





We are
committed to being a leading provider of these applications and services to
businesses and consumers.





We
believe that revenues and operating earnings growth can be achieved through
internally developed products and services and through acquisitions. Over the
last year we have completed several acquisitions aimed at growing our revenues
and strengthening our financial results. Management believes that good value
target companies, presenting a strategic fit with our current operations, are
still present in the marketplace and that potential business combinations with
these entities would help us achieve our growth potential in addition to
providing synergies that would improve profitability.


-15-


**How
we generate revenue**




We
develop, publish, market and sell a variety of software titles and services that
are targeted to a wide array of users primarily for individuals and small
businesses. To efficiently serve our customers and maximize our revenue
opportunities, we have aligned our business along two segments as described
below:




**Table
I-2-1**


**Business
      Segment**
    **Product
      Family**
    **Product
      Group**
    **Selected
      Product Brand****Precision
      Design Solutions**
    Precision
      Design Software
    Professional
      CAD Solutions
    *TurboCAD
      Professional**TurboCADCAM**CADsymbol
      CD*Consumer
      CAD Solutions
    *TurboCAD
      Deluxe**DesignCAD**Instant
      Series**FloorPlan*Precision
      Design Services
    Content
    *Houseplans.com**Houseplanguys.com**Homeplanfinder.com**CADsymbols.com***Consumer
      and Business Software Solutions**
    Utilities
    Compression,
      Access and Transmission (CAT)
    *StuffIt
      Deluxe & Standard*Security
      and Internet
    *iClean**Internet
      Cleanup**SpamCatcher**Spring
      Cleaning**DragStrip*Software
      Compilations
    *Ten
      for X**Creative
      Essentials**The
      Big Mix*Business
      Applications and Other
    Business
      Solutions
    *FlowCharts
      & More**FormTool**OrgChart
      Professional**QuickStart**TurboProject*Graphics
      Solutions
    *Animations
      & More**ClipArt
      & More**HiJaak*Consumer
      Solutions
    *Easy
      Language**Legacy
      Family Tree**TurboTyping*





Our
ability to develop and distribute products and services and determine the
optimum distribution channel for their maximum exposure is a competitive
advantage that differentiates us from other players in the
industry.




Depending
on the product and the customer, we deliver our products either through
Electronic Software Downloads (ESD) or as physical products. Our distribution
methods are comprised of the following three major channels:




**·**
    **Direct
      Marketing:**




o
    ***Direct
      to Consumers-***We
      maintain e-commerce websites and employ a sales force internally and
      through strategic partnerships to directly sell products to our customers.
      We conduct direct mail campaigns, both postal and email, for our existing
      and new products in addition to upgrades of existing products, as well as
      third-party offers. These mailings generally offer a specially priced
      product, as well as complementary or enhanced products for a further
      charge.





o
    ***Direct
      to Businesses*****-**We
      sell certain products and site licenses to businesses including large
      Fortune 100 companies. We market to these corporations through a
      combination of telemarketing, direct mail, and e-mailing. We believe that
      certain of our products and services, particularly TurboCAD, StuffIt,
      TurboProject, OrgChart Professional and HiJaak, are well suited for use
      within large corporations.




-16-




·
    **Retail
      / Distribution*****-***We
      are relying on selected distributors and partners to distribute a number
      of our products in the retail software market in order to reach a wider
      range of end users. Intense price competition along with the intermittent
      unfavorable retail conditions, including erosion of margins from
      competitive marketing and high rates of product returns, make this
      distribution channel increasingly
challenging.





·
    **Republishing
      / OEM*****-***We
      have republishing agreements domestically and internationally which
      typically include minimum guaranteed royalty payments.




****


**Forward
Looking Statement**




The
following information should be read in conjunction with the consolidated
financial statements and the notes thereto and in conjunction with Management’s
Discussion and Analysis of Financial Condition and Results of Operations in our
Fiscal 2004 Form 10-KSB, as amended . This
quarterly report on Form 10-QSB, and in particular this “Management’s Discussion
and Analysis of Financial Condition and Results of Operations,” may contain
forward-looking statements regarding future events or our future
performance . These
future events and future performance involve certain risks and uncertainties
including those discussed in the “Other Factors That May Affect Future Operating
Results” section of this Form 10-QSB, as well as in our Fiscal 2004 Form 10-KSB,
as amended, as filed with SEC . Actual
events or our actual future results may differ materially from any
forward-looking statements due to such risks and uncertainties . We assume no
obligation to update these forward-looking statements to reflect actual results
or changes in factors or assumptions affecting such forward-looking
statements . This
analysis is not intended to serve as a basis for projection of future
events .




Our
consolidated financial statements are prepared in accordance with GAAP. These
accounting principles require us to make certain estimates, judgments and
assumptions. We believe that the estimates, judgments and assumptions upon which
we rely are reasonable based upon information available to us at the time that
these estimates, judgments and assumptions are made. These estimates, judgments
and assumptions can affect the reported amounts of assets and liabilities as of
the date of the financial statements as well as the reported amounts of revenues
and expenses during the periods presented. Our financial statements would be
affected to the extent there are material differences between these estimates
and actual results. In many cases, the accounting treatment of a particular
transaction is specifically dictated by GAAP and does not require management’s
judgment in its application. There are also areas in which management’s judgment
in selecting any available alternative would not produce a materially different
result.




**Results
of Operations**





The
following table sets forth our results of operations for the three and nine
months ended March
31 , 2005
and 2004 in absolute dollars and as a percentage of net revenues. It also
details the changes from the prior fiscal year in absolute dollars and in
percentages.







-17-


**Table
I-2-2**


**Three
      months ended March 31,**
    
    **Nine
      months ended March 31,****2005**
    
    **2004**
    
    **Change
      from**
      **previous
      year**
    
    **2005**
    
    **2004**
    
    **Change
      from**
      **previous
      year******
    
    $
    
    As %
      of sales
    
    $
    
    As %
      of sales
    
    $
      Increase / (Decrease)
    
    %
    
    $
    
    As %
      of sales
    
    $
    
    As %
      of sales
    
    $
      Increase / (Decrease)
    
    %Net
      revenues
    
    $
    6,340
    
    
    100
    %
    $
    2,713
    
    
    100
    %
    $
    3,627
    
    
    134
    %
    $
    18,054
    
    
    100
    %
    $
    6,690
    
    
    100
    %
    $
    11,364
    
    
    170
    %Product
      cost
    
    
    1,713
    
    
    27
    %
    
    1,038
    
    
    38
    %
    
    675
    
    
    65
    %
    
    4,833
    
    
    27
    %
    
    2,401
    
    
    36
    %
    
    2,432
    
    
    101
    %**Gross
      margin**
    
    
    **4,627**
    
    
    **73**
    **%**
    
    **1,675**
    
    
    **62**
    **%**
    
    **2,952**
    
    
    **176**
    **%**
    
    **13,221**
    
    
    **73**
    **%**
    
    **4,289**
    
    
    **64**
    **%**
    
    **8,932**
    
    
    **208**
    **%**Operating
      expensesSales
      & marketing
    
    
    2,430
    
    
    38
    %
    
    1,299
    
    
    48
    %
    
    1,131
    
    
    87
    %
    
    7,259
    
    
    40
    %
    
    2,784
    
    
    42
    %
    
    4,475
    
    
    161
    %General
      & administrative
    
    
    1,199
    
    
    19
    %
    
    836
    
    
    31
    %
    
    363
    
    
    43
    %
    
    3,590
    
    
    20
    %
    
    2,457
    
    
    37
    %
    
    1,133
    
    
    46
    %Research
      & development
    
    
    1,045
    
    
    16
    %
    
    576
    
    
    21
    %
    
    469
    
    
    81
    %
    
    3,078
    
    
    17
    %
    
    1,436
    
    
    21
    %
    
    1,642
    
    
    114
    %**Total
      operating expenses**
    
    
    **4,674**
    
    
    **74**
    **%**
    
    **2,711**
    
    
    **100**
    **%**
    
    **1,963**
    
    
    **72**
    **%**
    
    **13,927**
    
    
    **77**
    **%**
    
    **6,677**
    
    
    **100**
    **%**
    
    **7,250**
    
    
    **109**
    **%****Operating
      loss**
    
    
    **(47**
    **)**
    
    **-1**
    **%**
    
    **(1,036**
    **)**
    
    **-38**
    **%**
    
    **989**
    
    
    **-95**
    **%**
    
    **(706**
    **)**
    
    **-4**
    **%**
    
    **(2,388**
    **)**
    
    **-36**
    **%**
    
    **1,682**
    
    
    **-70**
    **%**Other
      Income (expenses)Interest
      and other, net
    
    
    (60
    )
    
    -1
    %
    
    --
    
    
    0
    %
    
    (60
    )
    
    -100
    %
    
    (42
    )
    
    0
    %
    
    141
    
    
    2
    %
    
    (183
    )
    
    -130
    %Realized
      / unrealized gain (loss) on marketable securities
    
    
    (277
    )
    
    -4
    %
    
    1,764
    
    
    65
    %
    
    (2,041
    )
    
    -116
    %
    
    145
    
    
    1
    %
    
    1,941
    
    
    29
    %
    
    (1,796
    )
    
    -93
    %Gain
      on sale of product line
    
    
    --
    
    
    0
    %
    
    58
    
    
    2
    %
    
    (58
    )
    
    -100
    %
    
    33
    
    
    0
    %
    
    59
    
    
    1
    %
    
    (26
    )
    
    -44
    %Gain
      on extinguishment of debt
    
    
    --
    
    
    0
    %
    
    --
    
    
    0
    %
    
    --
    
    
    --
    %
    
    --
    
    
    0
    %
    
    76
    
    
    1
    %
    
    (76
    )
    
    -100
    %**Total
      other income**
    
    
    **(337**
    **)**
    
    **-5**
    **%**
    
    **1,822**
    
    
    **67**
    **%**
    
    **(2,159**
    **)**
    
    **-118**
    **%**
    
    **136**
    
    
    **1**
    **%**
    
    **2,217**
    
    
    **33**
    **%**
    
    **(2,081**
    **)**
    
    **-94**
    **%****Income
      (loss) before income tax**
    
    
    **(384**
    **)**
    
    **-6**
    **%**
    
    **786**
    
    
    **29**
    **%**
    
    **(1,170**
    **)**
    
    **-149**
    **%**
    
    **(570**
    **)**
    
    **-3**
    **%**
    
    **(171**
    **)**
    
    **-3**
    **%**
    
    **(399**
    **)**
    
    **233**
    **%**Income
      tax benefit (expense)
    
    
    (2
    )
    
    0
    %
    
    (34
    )
    
    -1
    %
    
    32
    
    
    -94
    %
    
    (10
    )
    
    0
    %
    
    (24
    )
    
    0
    %
    
    14
    
    
    -58
    %**Income
      (loss) from continuing operations**
    
    
    **(386**
    **)**
    
    **-6**
    **%**
    
    **752**
    
    
    **28**
    **%**
    
    **(1,138**
    **)**
    
    **-151**
    **%**
    
    **(580**
    **)**
    
    **-3**
    **%**
    
    **(195**
    **)**
    
    **-3**
    **%**
    
    **(385**
    **)**
    
    **197**
    **%**Loss
      from discontinued operations, net of income tax
    
    
    --
    
    
    0
    %
    
    (204
    )
    
    -8
    %
    
    204
    
    
    -100
    %
    
    (5
    )
    
    0
    %
    
    (255
    )
    
    -4
    %
    
    250
    
    
    -98
    %Gain
      from the sale of discontinued operations, net of income tax
    
    
    --
    
    
    0
    %
    
    --
    
    
    0
    %
    
    --
    
    
    --
    %
    
    53
    
    
    0
    %
    
    1,000
    
    
    15
    %
    
    (947
    )
    
    -95
    %**Net
      income (loss)**
    
    **$**
    **(386**
    **)**
    
    **-6**
    **%**
    **$**
    **548**
    
    
    **20**
    **%**
    **$**
    **(934**
    **)**
    
    **-170**
    **%**
    **$**
    **(532**
    **)**
    
    **-3**
    **%**
    **$**
    **550**
    
    
    **8**
    **%**
    **$**
    **(1,082**
    **)**
    
    **-197**
    **%**







-18-


**Net
Revenues**




The
following illustrations provide a breakdown of our revenues (based on the
criteria indicated) for the quarters ended March 31, 2005 and 2004.





**Revenue
by Business Segment**





**Graph
I-2-1**









**Revenue
by****Product
Family**




**Graph
I-2-2**










**Revenue
by Distribution Channel**




**Graph
I-2-3**









-19-




**Revenues
by****Business
Segment and Distribution Channel**




**Graph
I-2-4**





-20-




**Revenues
by** **Product
Family and Distribution Channel**




**Graph
I-2-5**








The
acquisitions we completed during fiscal 2004 and 2005 (primarily Allume Systems)
accounted for the majority of the increase in net revenue across our product
segments for the three and nine months ended March
31 , 2005 as
compared the same periods from the previous fiscal year. However, we also were
able to increase revenues in our organic businesses (primarily sales of Design
software) which recorded revenue growth of 22% for the three month ended March
31, 2005 as compared to the prior year. The following table summarizes the
breakdown of our revenues for the periods indicated (all amounts are in
thousands except for percentage amounts):





**Table
I-2-3**


**Three
      months ended March 31,******
    
    **2005**
    
    **2004**
    
    **Change******
    
    $
    
    %
    
    $
    
    %
    
    $
    
    %Consumer
      & Business Software Solutions
    
    $
    3,127
    
    
    49
    %
    $
    898
    
    
    33
    %
    $
    2,229
    
    
    248
    %Precision
      Design Solutions
    
    
    3,213
    
    
    51
    %
    
    1,815
    
    
    67
    %
    
    1,398
    
    
    77
    %**Net
      Revenues**
    
    **$**
    **6,340**
    
    
    **100**
    **%**
    **$**
    **2,713**
    
    
    **100**
    **%**
    **$**
    **3,627**
    
    
    **134**
    **%******
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    ****
  **Nine
      months ended March 31,****2005**
    
    **2004**
    
    **Change**$
    
    %
    
    $
    
    %
    
    $
    
    %Consumer
      & Business Software Solutions
    
    $
    10,084
    
    
    56
    %
    $
    2,843
    
    
    42
    %
    $
    7,241
    
    
    255
    %Precision
      Design Solutions
    
    
    7,970
    
    
    44
    %
    
    3,847
    
    
    58
    %
    
    4,123
    
    
    107
    %**Net
      Revenues**
    
    **$**
    **18,054**
    
    
    **100**
    **%**
    **$**
    **6,690**
    
    
    **100**
    **%**
    **$**
    **11,364**
    
    
    **170**
    **%**






-21-




**C****onsumer
& Business Software Solutions Segment**




The
Consumer & Business software solutions segment is comprised of the utilities
and the business applications and other product families. The acquisition of
Allume Systems during the fourth quarter of fiscal 2004, and therefore the
addition of the Utilities product family to this segment, more than offset the
decline in revenues in the Business Applications and Other product family and
accounted for the substantial increase in revenues of the Consumer &
Business software solutions segment for the three and nine months ended March
31, 2005 as compared to the same periods from the previous fiscal
year.




·
    **Utilities:**With the acquisition of Allume Systems during the last quarter of fiscal
      2004, we added the high margin utility product family to the Consumer
      & Business software solutions segment. Sales of Allume amounted to
      $2.5 million and $7.6 million, respectively, during the three and nine
      months ended March 31, 2005. We did not have similar revenues to report
      for the comparable periods from the previous fiscal year. The additional
      revenues from the utility product family during the three March 31, 2005
      represented 76% of the sales in the Consumer & Business software
      solutions segment and accounted for the majority of the revenues in that
      segment.




·
    **Business
      Applications and Other:**the Business Applications and Other product family accounted for only 24%
      of the total revenues of the Consumer & Business software solutions
      segment for the quarter ended March 31, 2005. Historically, and prior to
      the acquisition of Allume in April 2004, this product family accounted for
      100% of the sales in the Consumer & Business software solutions
      segment. This product family includes third party product brands that we
      license from other software publishers and market to our client base. The
      decline in sales in this product family during the three and nine months
      ended March 31, 2005 as compared to the same periods of the previous
      fiscal year was mainly the result of the decline in the revenues generated
      from the sale of third party products and in particular OrgPlus (a product
      that we licensed until the third quarter of the previous fiscal year). The
      decline in revenues from the sale of Hijaak (an owned product which
      current version is nearing the end of its life cycle) also accounted for
      the decline in revenues of the Business Applications and Other product
      family for the periods ended March 31, 2005 as compared to the previous
      fiscal year.




**Precision
Design Solutions****Segment**




·
    **Precision
      Design Software**:
      Revenues from the software titles that we acquired during fiscal 2004
      (DesignCAD and the Instant Series) grew during the three and nine months
      ended March 31, 2005 as we continued the direct marketing activities of
      the new versions that we released in the beginning of fiscal 2005. This
      product family also saw substantial increase in revenues from the sale of
      FloorPlan and TurboCAD on a year over year basis for the three and nine
      months ended March 31, 2005.




We
released the latest version (V 11.0) of our flagship product, TurboCAD toward
the end of the quarter ended March 31, 2005. This release which included new
features and functionalities had a mild effect on the revenues of the March
quarter. We expect this release to increase revenues in this product family
during the fourth quarter of fiscal 2005 as we benefit from the effect of a full
quarter of targeted direct marketing activities. The previous release (V 10.5)
which occurred during the second quarter of fiscal 2005 accounted for the
majority of the revenue growth in the precision design software product family
for the three and nine months ended March 31, 2005 as compared to the same
period from the previous fiscal year.




Also
during the quarter ended March 31, 2005 we saw an increase in the number of
units sold-through and the total revenue amount for our FloorPlan product as we
engaged into aggressive marketing activities in the Retail/Distribution channel
in order to clear the channel from excess inventory and clear the way to the new
version (V 10.0) due to be released during the fourth quarter of fiscal
2005.




·
    **Precision
      Design Services:**This
      product family is primarily comprised of a network of websites hosting an
      extensive library of over 19,000 unique stock house plans and marketed
      under thewww.houseplans.com,
      www.homeplanfinder.com and www.houseplanguys.com
      websites.
      These websites which are targeted to general contractors, consumers and
      designers offer particularly strong synergies with the precision design
      software product family.




-22-




We have
introduced these products and services upon acquisitions we made during the
second quarter of fiscal 2004 (Houseplans, Inc.) and during the first quarter of
fiscal 2005 (Abbisoft House Plans, Inc.). As with the Consumer & Business
software solutions segment, these acquisitions were consistent with our overall
strategy to improve and diversify our offerings. These acquisitions resulted in
the introduction of this new product family (precision design services) which
began to add to the sales of the precision design segment starting in the second
quarter of fiscal 2004.




Revenues
generated by this product family grew substantially for the three and nine
months ended March 31, 2005 and should continue to grow during the future
reporting periods as we continue to focus on improving the branding and
marketing of these websites. Revenues from the Houseplans network of websites
was $1,480,000 and $2,984,000 during the three and nine months ended March 31,
2005 respectively. This compares to sales of $467,000 and $579,000,
respectively, for the three and nine months ended March 31, 2004.





We market
our products internationally through our wholly owned Australian and German
subsidiaries and through distribution and republishing partners in Europe, Asia
and other regions of the world. Revenues from our Australian subsidiary are
primarily derived from royalty payments after we licensed the distribution
rights of some of our products in Australia to a third party publisher during
fiscal 2003.





During
the quarter ended March 31, 2005, we were able to secure a Canadian licensing
agreement that helped boost our international revenue. Additionally, the
increase in our international revenues during the three and nine months ended
March 31, 2005 as compared to the same periods from the previous fiscal year was
due to the improved performance of our international distribution and
republishing partners in Europe, the additional international business from
Allume’s operations and to the improved results of our German subsidiary as
market conditions and customer acceptance of our new versions of design products
in Europe improved.





Revenues
from our German subsidiary grew to $161,000 and $639,000 for the three and nine
months ended March 31, 2005, respectively, from $104,000 and $354,000,
respectively, in the comparable periods from the previous fiscal year. Revenue
from our Australian subsidiary amounted to approximately $25,000 and $120,000
for the three and nine months ended March 31, 2005, respectively. This compares
to revenues of $27,000 and $69,000 for the comparable periods from the previous
fiscal year.





The
following table details the revenue breakdown between the domestic and
international markets for the periods indicated.





**Table
I-2-4**


**Three
      months ended March 31,****2005**
    
    **2004**
    
    ****$
    
    %
      of total
    
    $
    
    %
      of total
    
    **$
      change**
    
    **%
      change**Domestic
      sales
    
    $
    5,612
    
    
    89
    %
    $
    2,374
    
    
    88
    %
    $
    3,238
    
    
    136
    %International
      sales
    
    
    728
    
    
    11
    %
    
    339
    
    
    12
    %
    
    389
    
    
    115
    %**Total
      Net Sales**
    
    **$**
    **6,340**
    
    
    **100**
    **%**
    **$**
    **2,713**
    
    
    **100**
    **%**
    **$**
    **3,627**
    
    
    **134**
    **%**
  **Nine
      months ended March 31,****2005**
    
    **2004**
    
    ****$
    
    %
      of total
    
    $
    
    %
      of total
    
    **$
      change**
    
    **%
      change**Domestic
      sales
    
    $
    15,664
    
    
    87
    %
    $
    5,648
    
    
    84
    %
    $
    10,016
    
    
    177
    %International
      sales
    
    
    2,390
    
    
    13
    %
    
    1,042
    
    
    16
    %
    
    1,348
    
    
    129
    %**Total
      Net Sales**
    
    **$**
    **18,054**
    
    
    **100**
    **%**
    **$**
    **6,690**
    
    
    **100**
    **%**
    **$**
    **11,364**
    
    
    **170**
    **%**





We are
currently serving the domestic and international retail markets using direct
sales, distribution and republishing channels. Low barriers to entry, intense
price competition, and business consolidations continue to characterize the
consumer software industry. Any one of these factors along with the intermittent
unfavorable retail conditions, including erosion of margins from competitive
marketing and high rates of product returns, may adversely affect our revenues
in the future.




-23-




Our
international revenues may be affected by the risks customarily associated with
international operations, including fluctuations of the U.S. dollar, increases
in duty rates, exchange or price controls, longer collection cycles, government
regulations, political instability and changes in international tax
laws.





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





The
introduction of the high margin utilities product family, upon the acquisition
of Allume during the forth quarter of fiscal 2004, and the improvement in
margins of our historical business accounted for the majority of the improvement
in our consolidated gross margin for the three and nine months ended March 31,
2005 as compared to the same periods from the previous year. Despite the growing
share of the lower margin precision design services category as a percentage of
our total revenues, our consolidated gross margins improved significantly to 73%
from 62% during the third quarter of fiscal 2005 as compared to the same period
from the previous fiscal year and to 73% from 64% for the nine month periods
ended March 31, 2005 and 2004, respectively. These margins may fluctuate during
future reporting periods given the uncertain product lifecycle for some of our
historically high margin products and depending on the success of the release of
newer software versions.





The
significant shift of sales break-down by distribution channel toward the more
profitable direct marketing channel, compounded the positive effect of the
introduction of the utility product family on our over all profit
margin.


More than
sixty-five percent (65%) of our product sales were fulfilled through our direct
marketing channel where the more profitable ESD is the delivery method of
choice.





In
addition to the costs of CD-ROM duplication, printing of manuals, packaging and
fulfillment, and royalties and license fees that we pay to third parties based
on sales of published software and content, our product costs include costs
associated with the return of products, such as refurbishment and the write down
in value of returned goods.





Our
product costs also include the amortization
of capitalized software, a fixed component of our overall product costs. These
amortization expenses amounted to $227,000 and $660,000, respectively, for the
three and nine months ended March 31, 2005 as compared to $96,000 and $212,000,
respectively, for the same periods from the previous fiscal year. The increase
in amortization expense resulted mainly from the acquisitions we completed
during the previous quarters. As we continue to acquire businesses and product
lines, we are likely to increase our basis in certain intangible assets (i.e.
capitalized software development), the amortization of which may negatively
affect our gross margin in the future.





**Sales
and Marketing**





We
continue to successfully integrate the acquisitions we completed during fiscal
2004 and 2005 (i.e. Allume, Houseplans and Abbisoft) and we continue to
implement savings and identify synergies among our business units. These actions
have resulted in the decline in sales and marketing expenses on a sequential
basis for the third quarter of fiscal 2005. Our sales and marketing expenses for
the third quarter of fiscal 2005 included charges relating to the release of the
newer versions of our flagship products TurboCAD and Stuffit. We have yet to
witness the full revenue effect of these expenses as the releases happened later
in the third quarter. On a year over year basis, the additional sales and
marketing expenses related to our acquired businesses accounted for the majority
of the increase in our sales and marketing expenses during the three and nine
months ended March 31, 2005.





Sales and
marketing expenses consist
primarily of salaries and benefits of sales and marketing personnel,
commissions, advertising, printing and direct mail expenses. W e
continue to improve our focus on the direct marketing distribution channel and
the ESD delivery method by improving our internal sales force and partnering
with outside service providers of sales forces and E-commerce systems.
Management believes that these investments in the distribution channels and the
E-commerce platform will generate increased revenues going forward, and are an
indication of our continuing commitment to our core products.





**General
and Administrative**





Consistent
with our focus on returning to sustained profitability and containment of
operating expenses, our general and administrative expenses declined on a
sequential basis for the three months ended March 31, 2005. These expenses
consist primarily of salaries and benefits for employees in the legal, finance,
accounting, human resources, information systems and operations departments,
amortization expenses, fees to our professional advisors, rent and other general
operating costs. Our general and administrative expenses also include
amortization expense mainly related to domain names acquired.




-24-




On a year
over year basis, the increase in our general and administrative expenses during
the three and nine months ended March 31, 2005 was mainly caused by the
additional expenses related to the businesses we acquired during fiscal 2004 and
2005 (i.e. Allume, Houseplans and Abbisoft).





Based on
our eventual implementation or Sarbanes-Oxley Section 404, our general and
administrative costs may increase significantly. Currently, we are scheduled to
implement the provisions of Section 404 for our fiscal year ended June 30,
2007.





**Research
and Development**





Our
continuous and steady investment in research and development is a
reflection on our commitment to improving our existing core products and
developing new titles, features and functionalities . Our
management believes that product innovation and new technology integration is
essential to proactively respond to the ever-evolving customer demands. Our
research and development expenses consist primarily of salaries and benefits for
research and development employees and payments to independent contractors,
mainly our third
party contract development teams in Russia and India with whom we continue to
maintain a strong partnership at competitive costs .





The
increase in r esearch
and development expenses during the three and nine months ended March 31, 2005
as compared to the same periods from the previous fiscal year resulted mainly
from the additional development expenses related to the Allume operations and to
the additional development work invested in the release of the new version of
TurboCAD.





**Interest
and Other, Net**





Interest
and other expenses, net, include interest on debt instruments, foreign currency
transaction gains and losses, and other non-recurring items. The following table
summarizes the components of interest and other, net for the three and nine
months ended March 31, 2005 and 2004:





**Table
I-2-5**


**Three
      months ended March 31,**
    
    **Nine
      months ended March 31,****2005**
    
    **2004**
    
    **Change
      from**
      **previous
      year**
    
    **2005**
    
    **2004**
    
    **Change
      from**
      **previous
      year******
    
    $
    
    $
    
    $
      Increase / (Decrease)
    
    %
    
    $
    
    $
    
    $
      Increase / (Decrease)
    
    %Interest
      & Other, netInterest
      expense
    
    $
    (64
    )
    $
    (23
    )
    $
    (41
    )
    
    178
    %
    $
    (189
    )
    $
    (24
    )
    $
    (165
    )
    
    688
    %Interest
      income
    
    
    22
    
    
    24
    
    
    (2
    )
    
    -8
    %
    
    91
    
    
    69
    
    
    22
    
    
    32
    %Foreign
      exchange gain/(loss)
    
    
    (18
    )
    
    (1
    )
    
    (17
    )
    
    1700
    %
    
    43
    
    
    47
    
    
    (4
    )
    
    -9
    %Other
      income
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    %
    
    13
    
    
    49
    
    
    (36
    )
    
    -73
    %**Total
      Interest & Other, Net**
    
    **$**
    **(60**
    **)**
    **$**
    **--**
    
    **$**
    **(60**
    **)**
    
    **-100**
    **%**
    **$**
    **(42**
    **)**
    **$**
    **141**
    
    **$**
    **(183**
    **)**
    
    **-130**
    **%**





The
increase in interest expense for the three and nine months ended March 31, 2005
was mainly the result of the interest we incurred on the acquisitions-related
notes and interest incurred on our short term financing
activities.


-25-


**Gain
/ (l** **oss)
on marketable securities**





The
following table details the net gain on marketable securities that we recognized
during the three and nine months ended March 31, 2005:





**Table
I-1-8**


**Gain
      (loss) on marketable securities for the three months ended March 31,
      2005****Realized**
    
    **Unrealized**
    
    **Total****Description**
    
    
    
    Reversal
      of unrealized gain / (loss) recognized in prior periods
    
    Unrealized
      gain / (loss) for the quarter ended March 31, 2005
    
    Sub
      total Unrealized gain / (loss)****
    
    
    
    
    
    
    
    
    
    ****Stock
      in investment portfolio
    
    $
    81
    
    $
    (62
    )
    $
    (296
    )
    **$**
    **(358**
    **)**
    **$**
    **(277**
    **)******
    
    
    ****
  **Gain
      (loss) on marketable securities for the nine months ended March 31,
      2005****Realized**
    
    **Unrealized**
    
    **Total****Description**
    
    
    
    Reversal
      of unrealized gain / (loss) recognized in prior periods
    
    Unrealized
      gain / (loss) for the nine months ended March 31, 2005
    
    Sub
      total Unrealized gain / (loss)****
    
    
    
    
    
    
    
    
    
    ****Stock
      in investment portfolio
    
    $
    2,239
    
    $
    (2,067
    )
    $
    (27
    )
    **$**
    **(2,094**
    **)**
    **$**
    **145******
    
    
    ****





**Gain
on sale of product line**





During
the nine months ended March 31, 2005 (in the second quarter of fiscal 2005), we
sold certain domain names and their related interest and contents (Cadalog.com
and 3Dmodelsharing.com) and we recognized gains in the aggregate amount of
$33,000 which represented the excess of the consideration received over the net
book value of the assets sold.





**Gain
on extinguishment of debt**





During
the nine months ended March 31, 2004, we recognized a gain of $76,000 from the
extinguishment of debt primarily relating to the settlement of liabilities
related to assets under a capital lease.





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





During
the three and nine months ended March 31, 2005, we recorded tax expense of
$2,000 and $10,000, respectively, related to state income taxes where we have
operations. This compares to an income tax expense of $34,000 and $24,000,
respectively, for the three and nine months ended March 31, 2004.





We have
not recorded a tax benefit for domestic tax losses because of the uncertainty of
realization. We adhere to Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes," which requires an asset and liability approach to
financial accounting and reporting for income taxes. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Consistent with our past practice, we have recorded a full
valuation allowance at March 31, 2005 as the realizeability of our net operating
loss carry-forwards is not determinable.


-26-


**Income
from Discontinued Operations** **and Gain from Discontinued Operations**




**Income
(loss) from discontinued operations, net of income tax**




The
amounts reported for the three and nine months ended March 31, 2005 and 2004 as
discontinued operations represent the pre-tax results of operations for
Keynomics. This segment had pre-tax net loss of $204,000 for the quarter ended
March 31, 2004 and pre-tax loss of $5,000 and $255,000 for the nine months ended
March 31, 2005 and 2004 respectively. These results were derived from net
revenues of $71,000 for the quarter ended March 31, 2004 and $68,000 and
$549,000 for the nine months ended March 31, 2005 and 2004 respectively.




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




As
previously disclosed in our annual report on Form 10-KSB, as amended, for the
fiscal year ended June 30, 2004, we sold the assets and customer related
liabilities of our wholly owned subsidiary Keynomics, Inc. in July 2004. We
evaluated the Keynomics business segment and its long term prospects during the
fourth quarter of fiscal 2004 and with our focus on direct marketing and the
on-line distribution of utilities and precision design content, we determined
that Keynomics no longer represented a strategic fit for our company. The
$53,000 gain from the sale of discontinued operations for the nine months ended
March 31, 2005 relate to the sale of Keynomics during the quarter ended
September 30, 2004 and represent the excess of the total consideration received
over its net carrying value.





During
the quarter ended December 31, 2003, we recorded a gain of $1.0 Million from the
sale of discontinued operations representing the successful achievement of the
first earn-out from the sale of ArtToday to Jupitermedia Corporation in June
2003 (the second earnout payment of $1.0 million was earned in June 2004 but is
not applicable for purposes of this comparative discussion).





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





As of
March 31, 2005, we had $2,391,000 in cash and cash equivalents. This represents
a $413,000 decline from the $2,804,000 balance as of December 31, 2004 and an
$821,000 decline from the $3,212,000 balance as of June 30, 2004. Working
capital at March 31, 2005 was $4,678,000. This represents an increase of
$1,021,000 over the working capital at June 30, 2004.





Despite a
net loss of $532,000 for the nine month period ended March 31, 2005, our
operating activities provided net cash of $237,000. This compares to net cash
used from operations of $2,450,000 in the nine months ended March 31, 2004 on a
net income of $550, 000 for the same period. Non-cash depreciation and
amortization expenses of $1.4 million during the nine months ended March 31,
2005 (mainly relating to amortization expense incurred as a result of our
acquisition strategy) helped reconcile the net loss to our positive operating
cash flow for the nine months ended March 31, 2005.





During
fiscal 2004, we recorded a gain of $2.0 Million from the sale of discontinued
operations representing the successful achievement of the first and second
earn-outs from the sale of ArtToday. These earn-out payments were contingent on
ArtToday reaching certain revenue milestones. The first installment of $1.0
Million was earned during the second quarter of fiscal 2004 and was paid per the
stock purchase agreement during the third quarter of fiscal 2004 and the second
$1.0 million installment of the earn-outs was earned during the fourth quarter
of fiscal 2004 and was paid during the first quarter of fiscal 2005. This
payment accounted for the majority of the improvement in cash from operating
activities.





Our
investing activities provided net cash of $817,000 during the nine months ended
March 31, 2005, as compared to net cash used of $3,089,000 during the comparable
period from the previous fiscal year. During the nine months ended March 31,
2005, we sold marketable securities (mainly Jupitermedia common stock we
received as part of the sale of ArtToday) and we collected proceeds of
approximately $1.8 million. We also received, during the same period, the
second payment of $650,000 that was held in escrow in
connection to the ArtToday sale to Jupitermedia. In addition, we sold the assets
of our wholly owned subsidiary, Keynomics, in July 2004 and received proceeds
from the sale of approximately $250,000. These cash infusions were mainly used
to finance our acquisition activities. During the nine months ended March 31,
2005, we acquired AbbiSoft, the newest addition to our network of stock house
plans website, and invested in a new technology to be incorporated into our
Stuffit line of product allowing JPEG and image files to be compressed by an
additional 30% on average.




-27-




The
comparable period from the previous fiscal year was also marked by the
consummation of several acquisitions that were consistent with our strategy to
grow our software business with a focus on products and services that complement
our direct marketing and online distribution strengths. These acquisitions
included CADsymbols, CADsymbol, DesignCAD, Homeplans and other smaller product
lines and businesses.





During
the first quarter of fiscal 2004, we extended a $350,000 loan to DCDC as
disclosed in note 5 to our condensed consolidated financial statements. On
January 31, 2005, we sold this DCDC promissory note to Mag Multi Corp, a New
York corporation for $343,000, representing the principal balance and all
accrued interest as of the date of the transfer. This amount was received in its
entirety on February 10, 2005.





Also,
during the nine months ended March 31, 2005 and as part of an amended escrow
agreement with Jupitermedia, we transferred approximately $500,000 in cash to an
escrow account as a substitution of 125,000 shares of Jupitermedia that were
held in the same escrow account. This amount will be released to us, net of any
claims, on December 30, 2005.





Our
financing activities consumed net cash of $1,836,000 for the nine-month period
ended March 31, 2005. This compares to $85,000 of net cash generated by
financing activities during the comparable period from the previous fiscal year.
The cash used by our financing activities for the nine months ended March 31,
2005 was primarily related to payments we made on notes relating to the
acquisitions we consummated during fiscal 2004 and 2005. Our financing
activities from the comparable period of the previous fiscal year included a
$160,000 payout to Imageline in July 2003 representing the final payment in
connection with our mutual settlement of previous infringements claims.





Historically,
we have financed our working capital and capital expenditure requirements
primarily from short-term and long-term notes and bank borrowings, capitalized
leases and sales of common stock. The sale of ArtToday to Jupitermedia in June
2003 provided us with additional sources of funds to support future growth.





To
achieve our growth objectives, we are considering different strategies,
including growth through mergers and/or acquisitions. As a result, we are
evaluating and we will continue to evaluate other companies and businesses for
potential synergies that would add value to our existing operations.





We may
seek, in the future, additional equity and/or debt financing to sustain our
growth strategy. However, we believe that we have sufficient funds to support
our operations at least for the next twelve months, based on our current cash
position and equity sources. We believe that we will be able to obtain any
additional financing required on competitive terms particularly if we are
successful in improving our financial performance. In addition, we will continue
to seek opportunities and discussions with third parties concerning the sale or
license of certain product lines and/or the sale or license of a portion of our
assets.





The
forecast period of time through which our financial resources will be adequate
to support working capital and capital expenditure requirements is a
forward-looking statement that involves risks and uncertainties, and actual
results could vary. Furthermore, any additional equity financing may be dilutive
to shareholders, and debt financing may involve restrictive
covenants.





**Critical
Accounting Policies**





In
accordance with Securities and Exchange Commission guidance, those material
accounting policies that we believe are the most critical to an investor’s
understanding of our financial results and condition have been expanded and are
discussed below. Certain of these policies are particularly important to the
portrayal of our financial position and results of operations and require the
application of significant judgment by our management to determine the
appropriate assumptions to be used in the determination of certain
estimates.





**Revenue
Recognition**




Revenue
is recognized in accordance with American Institute of Certified Public
Accountants Statement of Position (“SOP”) 97-2, *Software
Revenue Recognition* , and SOP
98-9, *Modification
of SOP 97-2, With Respect to Certain Transactions* . Revenue
is recognized when persuasive evidence of an arrangement exists (generally a
purchase order), product or service has been delivered, the fee is fixed and
determinable, and collection of the resulting account is probable.




-28-




·
    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 and 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**




Reserves
for returns, price discounts and rebates are estimated using historical
averages, open return requests, channel inventories, recent product sell-through
activity and market conditions. Our allowances for returns, price discounts and
rebates are based upon management’s best judgment and estimates at the time of
preparing the financial statements. Reserves are subjective estimates of future
activity that are subject to risks and uncertainties, which could cause actual
results to differ materially from estimates.




Our
return policy generally allows our distributors to return purchased products
primarily in exchange for new products or for credit towards future purchases as
part of stock balancing programs. These returns are subject to certain
limitations that may exist in the contract with an individual distributor,
governing, for example, aggregate return amounts, and the age, condition and
packaging of returned product. Under certain circumstances, such as terminations
or when a product is defective, distributors could receive a cash refund if
returns exceed amounts owed.




**Inventories**




Inventories
are valued at the lower of cost or market and are accounted for on the first-in,
first-out basis. Management performs periodic assessments to determine the
existence of obsolete, slow moving and non-salable inventories, and records
necessary provisions to reduce such inventories to net realizable value. As of
March 31, 2005, approximately $209,000 of our inventory was held by certain of
our distributors under consignment arrangements.




**Impairment**




Property,
equipment, intangible and certain other long-lived assets are amortized over
their useful lives. Useful lives are based on management’s estimates of the
period that the assets will generate revenues. Long-lived assets are written
down to fair value whenever events or changes indicate that the carrying amount
of an asset may not be recoverable. Our policy is to review the recoverability
of all long-lived assets at a minimum of once per year and record an impairment
loss when the fair value of the assets does not exceed the carrying amount of
the asset.




In
accordance with SFAS No. 142, *Goodwill
and Intangible Assets,* goodwill
is being assessed for impairment annually or more frequently if circumstances
indicate impairment.




-29-





**Other
Factors that May Affect Future Operating Results**





Factors
that may affect operating results in the future include, but are not limited
to:





·
    Market
      acceptance of our products or those of our
competitors


·
    Timing
      of introductions of new products and new versions of existing
      products


·
    Expenses
      relating to the development and promotion of such new products and new
      version introductions


·
    Intense
      price competition and numerous end-user
rebates


·
    Projected
      and actual changes in platforms and
technologies


·
    Accuracy
      of forecasts of, and fluctuations in, consumer
demand


·
    Extent
      of third party royalty payments


·
    Rate
      of growth of the consumer software and Internet
markets


·
    Timing
      of orders or order cancellation from major
customers


·
    Changes
      or disruptions in the consumer software distribution
    channels


·
    Economic
      conditions, both generally and within the software or Internet
      industries


·
    Our
      ability to successfully integrate the acquisitions that we have completed
      in the last twelve months


·
    The
      successful attainment of the final $2.0m earn-out payment related to the
      sale of the ArtToday business


·
    The
      costs of compliance with Sarbanes-Oxley Section
404.




**Item** **3- Controls and Procedures**





(a) Under
the supervision and with the participation of IMSI’s management, including
IMSI’s principal executive officer and principal financial officer, we conducted
an evaluation of our disclosure controls and procedures (“Disclosure Controls”),
as such term is defined under Rule
13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), as of March 31, 2005, the end of the period covered by this
quarterly report. Based on their evaluation, our principal executive officer and
principal financial officer concluded that our disclosure controls and
procedures are effective.





(b) We
have evaluated our accounting procedures and control processes in place as of
March 31, 2005 r elated to material
transactions to ensure they are recorded timely and accurate ly in the
financial statements. There have been no significant changes in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the
eval uation
referenced in paragraph (a) above.




**PART
II - OTHER INFORMATION**




**Item** **1- Legal Proceedings**





Not
Applicable




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





During
the quarter ended March 31, 2005, two warrant holders exercised warrants to
purchase 50,000 shares of IMSI common stock. The proceeds from this exercise,
totaling $11,250 were used to finance general working capital
needs.




**Item** **3- Defaults upon Senior Securities**





Not
Applicable




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





On
February 3, 2005, we filed with the Securities and Exchange Commission a
Definitive Proxy Statement on Schedule 14-A pursuant to section 14(A) of the
Securities Exchange Act Of 1934 in connection with the solicitation of proxies
by the board of directors of IMSI for use at the annual meeting of the
shareholders.
 
 The
annual meeting of the shareholders of IMSI was held on March 16, 2005 and the
following proposals were approved by the shareholders:
 
 ·
    The
      election of seven directors for a term of one
year: 
 **NAME**
    **AGE**
    **OCCUPATION**
    **DIRECTORSINCE**
    **VOTESCAST
      FOR**
    **VOTESWITHHELD**Bruce
      Galloway
    46
    Chairman
      of the Board of Directors
    2001
    23,258,219
    1,783,503Martin
      Wade, III
    55
    Chief
      Executive Officer
    2001
    24,345,544
    696,178Evan
      Binn
    65
    Director
    2001
    20,439,636
    4,602,086Donald
      Perlyn
    61
    Director
    2001
    23,267,935
    1,773,787Robert
      Mayer
    50
    Executive
      Vice President
    2000
    23,595,713
    1,446,009Robert
      S. Falcone
    58
    Director
    2002
    24,989,645
    52,077Richard
      J. Berman
    62
    Director
    2002
    24,989,645
    52,077
 
 ·
    The
      ratification of the appointment of BURR, PILGER & MAYER LLP as IMSI’s
      independent auditors for the fiscal year ending June 30, 2005. This
      proposal was approved according to the votes as cast
  below: o
    For:
      25,032,295 o
    Against:
      5,038 o
    Abstain:
      4,389 
 ·
    The
      amendment of the 2004 Incentive Stock Option Plan. This proposal was
      approved according to the votes as cast below: o
    For:
      23,093,195 o
    Against:
      1,917,549 o
    Abstain:
      30,978


-30-


**Item** **5- Other Information**





Not
Applicable




**Item** **6- Exhibits**








**Financial
Statements**





The
following consolidated financial statements of International Microcomputer
Software, Inc., and Subsidiaries are incorporated by reference in Part I, Item
1:





Consolidated
Balance Sheet at March 31, 2005 and June 30, 2004


Consolidated
Statements of Operations for the interim periods ended March 31, 2005 and
2004


Consolidated
Statements of Shareholders' Equity for the interim period ended March 31,
2005


Consolidated
Statements of Cash Flows for the interim periods ended March 31, 2005 and
2004


Notes to
Consolidated Financial Statements





**Exhibits**





The
following exhibits are filed as part of, or incorporated by reference into this
Report:





**31.1**  Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002


**31.2**  Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002


**32.1**  Certification
of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002


**32.2**  Certification
of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002


-31-


**SIGNATURES**





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





**INTERNATIONAL
MICROCOMPUTER SOFTWARE, INC.**




**Date:
May 16, 2005**




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


Martin
Wade, III


Director
& Chief
Executive Officer





**By:  
/s/ William J. Bush**


William
J. Bush


Chief
Financial Officer (Principal Accounting Officer)


-32-


**INDEX
TO EXHIBITS:**




**Number**
    
    **Exhibit
      Title**
    
    **Page**31.1
    
    Certification
      of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002
    
    3431.2
    
    Certification
      of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002
    
    3532.1
    
    Certification
      of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002
    
    3632.2
    
    Certification
      of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002
    
    37


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