##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549FORM 10-QSB

|       |  |                                                                                        
|------ |  | ---------------------------------------------------------------------------------------
|(XBOX) |  | Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

For the quarter ended                 March 31, 2002

|      |  |                                                                                         
|----- |  | ----------------------------------------------------------------------------------------
|(BOX) |  | 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 registrant as specified in its charter)

|                                                                    |  |                                     
|------------------------------------------------------------------- |  | ------------------------------------
|California                                                          |  | 94-2862863                          
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|(State or other jurisdiction of
incorporation or organization)      |  | (I.R.S. Employer
identification No.)
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    |  |                                     
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|75 Rowland Way, Novato, CA
(Address of principal executive offices) |  | 94945
(Zip code)                    

(415) 878-4000
(Registrants telephone number including area code)

Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.

YES  (XBOX)    NO  (BOX)

As of May 10, 2002, 21,592,827 shares of Registrants common stock, no par
value, were outstanding.





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TABLE OF CONTENTS



|                               |                                                                                               |                                                      |  |  |  |  |  | 
|------------------------------ | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION
|                               | Item 1. Condensed Consolidated Financial Statements                                          
|                               |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                               |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                               |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                               |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                               | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|PART II  OTHER INFORMATION   
|                               | Item 1. Legal Proceedings                                                                    
|                               | Item 2. Changes in Securities and Use of Proceeds                                            
|                               | Item 3. Defaults upon Senior Securities                                                      
|                               | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                               | Item 5. Other Information                                                                    
|                               | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                    
|Exhibit Index                 
|Exhibit 10.1                  
|Exhibit 10.2                  



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##### Table of Contents



INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES

INDEX

|                                                                                              |  |  |    |  | 
|--------------------------------------------------------------------------------------------- |  |  | -- |  | 
|PART I  FINANCIAL INFORMATION                                                                |  |  | 3  | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              |  |  |    |  | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Item 1. Condensed Consolidated Financial Statements                                           |  |  | 3  | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|CONDENSED CONSOLIDATED BALANCE SHEETS                                                         |  |  | 3  | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS                                               |  |  | 4  | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                                               |  |  | 5  | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                          |  |  | 6  | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              |  |  |    |  | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations |  |  | 13 | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              |  |  |    |  | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|PART II  OTHER INFORMATION                                                                   |  |  | 28 | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              |  |  |    |  | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Item 1. Legal Proceedings                                                                     |  |  | 28 | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Item 2. Changes in Securities and Use of Proceeds                                             |  |  | 28 | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Item 3. Defaults upon Senior Securities                                                       |  |  | 29 | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Item 4. Submission of Matters to a Vote of Security Holders                                   |  |  | 29 | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Item 5. Other Information                                                                     |  |  | 29 | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Item 6. Exhibits and Reports on Form 8-K                                                      |  |  | 29 | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              |  |  |    |  | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|SIGNATURES                                                                                    |  |  | 30 | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              |  |  |    |  | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|EXHIBIT INDEX                                                                                 |  |  | 31 | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              |  |  |    |  | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Exhibit 10.1                                                                                  |  |  | 32 | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|EXECUTIVE EMPLOYMENT AGREEMENT                                                                |  |  | 32 | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Exhibit 10.2                                                                                  |  |  | 39 | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|AMENDMENT TO RESTRUCTURE AGREEMENT                                                            |  |  | 39 | 

2



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##### Table of Contents






PART I  FINANCIAL INFORMATION




Item 1. Condensed Consolidated Financial Statements




INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)

|                                                                                                           |  |                |         |               |  |   |         |  
|---------------------------------------------------------------------------------------------------------- |  | -------------- | ------- | ------------- |  | - | ------- | -
|                                                                                                           |  | (Unaudited)    |         | (Restated)   
|                                                                                                           |  |                |         |              
|                                                                                                           |  | March 31, 2002 |         | June 30, 2001
|                                                                                                           |  |                |         |              
|ASSETS                                                                                                     |  |                |         |               |  |   |         |  
|                                                                                                          
|                                                                                                          
|                                                                                                          
|                                                                                                          
|Current assets:                                                                                            |  |                |         |               |  |   |         |  
|                                                                                                          
|                                                                                                          
|                                                                                                          
|                                                                                                          
|Cash and cash equivalents:                                                                                 |  | $              | 2,352   |               |  | $ | 1,268   |  
|                                                                                                          
|                                                                                                          
|                                                                                                          
|                                                                                                          
|Receivables, less allowances for doubtful
Accounts, discounts and returns of $193 and $182                 |  |                | 999     |               |  |   | 1,256   |  
|                                                                                                          
|                                                                                                          
|                                                                                                          
|                                                                                                          
|Inventories                                                                                                |  |                | 376     |               |  |   | 176     |  
|                                                                                                          
|                                                                                                          
|                                                                                                          
|                                                                                                          
|Prepaid royalties and licenses                                                                             |  |                | 28      |               |  |   | 229     |  
|                                                                                                          
|                                                                                                          
|                                                                                                          
|                                                                                                          
|Other current assets                                                                                       |  |                | 374     |               |  |   | 382     |  
|                                                                                                           |  |                |         |               |  |   |         |  
|Total current assets                                                                                       |  |                | 4,129   |               |  |   | 3,311   |  
|                                                                                                          
|                                                                                                          
|                                                                                                          
|                                                                                                          
|Fixed assets, net                                                                                          |  |                | 429     |               |  |   | 600     |  
|                                                                                                          
|                                                                                                          
|                                                                                                          
|                                                                                                          
|Capitalized software development costs, net                                                                |  |                | 909     |               |  |   | 1,351   |  
|                                                                                                          
|                                                                                                          
|                                                                                                          
|                                                                                                          
|Other assets, net                                                                                          |  |                | 1,045   |               |  |   | 1,229   |  
|                                                                                                           |  |                |         |               |  |   |         |  
|Total assets                                                                                               |  | $              | 6,512   |               |  | $ | 6,491   |  
|                                                                                                           |  |                |         |               |  |   |         |  
|LIABILITIES AND SHAREHOLDERS DEFICIT                                                                      |  |                |         |               |  |   |         |  
|                                                                                                          
|                                                                                                          
|                                                                                                          
|                                                                                                          
|Current liabilities:                                                                                       |  |                |         |               |  |   |         |  
|                                                                                                          
|                                                                                                          
|                                                                                                          
|                                                                                                          
|Current portion long-term debt                                                                             |  | $              | 2,271   |               |  | $ | 11,927  |  
|                                                                                                          
|                                                                                                          
|                                                                                                          
|                                                                                                          
|Trade accounts payable                                                                                     |  |                | 2,163   |               |  |   | 2,658   |  
|                                                                                                          
|                                                                                                          
|                                                                                                          
|                                                                                                          
|Accrued interest and penalties payable                                                                     |  |                | 52      |               |  |   | 2,293   |  
|                                                                                                          
|                                                                                                          
|                                                                                                          
|                                                                                                          
|Accrued and other liabilities                                                                              |  |                | 2,773   |               |  |   | 2,741   |  
|                                                                                                          
|                                                                                                          
|                                                                                                          
|                                                                                                          
|Accrued arbitration award-current                                                                          |  |                | 179     |               |  |   | 131     |  
|                                                                                                          
|                                                                                                          
|                                                                                                          
|                                                                                                          
|Deferred revenue                                                                                           |  |                | 1,337   |               |  |   | 1,378   |  
|                                                                                                           |  |                |         |               |  |   |         |  
|Total current liabilities                                                                                  |  |                | 8,775   |               |  |   | 21,128  |  
|                                                                                                          
|                                                                                                          
|                                                                                                          
|                                                                                                          
|Accrued arbitration award                                                                                  |  |                | 625     |               |  |   | 702     |  
|                                                                                                          
|                                                                                                          
|                                                                                                          
|                                                                                                          
|Long term debt and other obligations                                                                       |  |                | 440     |               |  |   | 231     |  
|                                                                                                           |  |                |         |               |  |   |         |  
|Total liabilities                                                                                          |  |                | 9,840   |               |  |   | 22,061  |  
|                                                                                                          
|                                                                                                          
|                                                                                                          
|                                                                                                          
|Shareholders deficit:                                                                                     |  |                |         |               |  |   |         |  
|                                                                                                          
|                                                                                                          
|                                                                                                          
|                                                                                                          
|Common stock, no par value; 300,000,000 authorized;
Issued and outstanding 21,402,827 and 9,695,740 shares |  |                | 33,877  |               |  |   | 29,089  |  
|                                                                                                          
|                                                                                                          
|                                                                                                          
|                                                                                                          
|Accumulated deficit                                                                                        |  |                | (37,207 | )             |  |   | (44,666 | )
|                                                                                                          
|                                                                                                          
|                                                                                                          
|                                                                                                          
|Accumulated other comprehensive income (loss)                                                              |  |                | 2       |               |  |   | 7       |  
|                                                                                                           |  |                |         |               |  |   |         |  
|Total shareholders deficit                                                                                |  |                | (3,328  | )             |  |   | (15,570 | )
|                                                                                                           |  |                |         |               |  |   |         |  
|Total liabilities and shareholders deficit                                                                |  | $              | 6,512   |               |  | $ | 6,491   |  
|                                                                                                           |  |                |         |               |  |   |         |  

See Notes to Condensed Consolidated Financial Statements

3



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##### Table of Contents






INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)

|                                                                                               |                                                                                   |   |                              |      |                             |   |       |       |            |   |        |       |   |   |        |       |  
|---------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------- | - | ---------------------------- | ---- | --------------------------- | - | ----- | ----- | ---------- | - | ------ | ----- | - | - | ------ | ----- | -
|                                                                                               |                                                                                   |   | (Unaudited)                  |      | (Unaudited)                
|                                                                                               |                                                                                   |   | Three Months Ended March 31, |      | Nine Months Ended March 31,
|                                                                                               |                                                                                   |   |                              |      |                            
|                                                                                               |                                                                                   |   | 2002                         |      | 2001                        |   | 2002  |       | 2001      
|                                                                                               |                                                                                   |   |                              |      | (restated)                  |   |       |       | (restated)
|                                                                                               |                                                                                   |   |                              |      |                             |   |       |       |           
|Net revenues                                                                                   |                                                                                   | $ | 3,661                        |      |                             | $ | 3,314 |       |            | $ | 9,981  |       |   | $ | 9,944  |      
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Product costs                                                                                  |                                                                                   |   | 692                          |      |                             |   | 727   |       |            |   | 2,213  |       |   |   | 2,536  |      
|                                                                                               |                                                                                   |   |                              |      |                             |   |       |       |            |   |        |       |   |   |        |      
|Gross margin                                                                                   |                                                                                   |   | 2,969                        |      |                             |   | 2,587 |       |            |   | 7,768  |       |   |   | 7,408  |      
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Costs and expenses:                                                                            |                                                                                   |   |                              |      |                             |   |       |       |            |   |        |       |   |   |        |      
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Sales and marketing                                                                            |                                                                                   |   | 846                          |      |                             |   | 989   |       |            |   | 2,356  |       |   |   | 2,560  |      
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|General and administrative                                                                     |                                                                                   |   | 1,114                        |      |                             |   | 1,228 |       |            |   | 3,617  |       |   |   | 3,461  |      
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Research and development                                                                       |                                                                                   |   | 535                          |      |                             |   | 690   |       |            |   | 1,743  |       |   |   | 2,111  |      
|                                                                                               |                                                                                   |   |                              |      |                             |   |       |       |            |   |        |       |   |   |        |      
|Total operating expenses                                                                       |                                                                                   |   | 2,495                        |      |                             |   | 2,907 |       |            |   | 7,716  |       |   |   | 8,132  |      
|                                                                                               |                                                                                   |   |                              |      |                             |   |       |       |            |   |        |       |   |   |        |      
|Operating income (loss)                                                                        |                                                                                   |   | 474                          |      |                             |   | (320  | )     |            |   | 52     |       |   |   | (724   | )    
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Gain on product line sale                                                                      |                                                                                   |   |                             |      |                             |   |      |       |            |   | 20     |       |   |   | 285    |      
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Interest and other, net                                                                        |                                                                                   |   | 101                          |      |                             |   | (576  | )     |            |   | (389   | )     |   |   | (1,665 | )    
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Gain (loss) on disposition of fixed assets                                                     |                                                                                   |   | 5                            |      |                             |   | (6    | )     |            |   | 10     |       |   |   | (9     | )    
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Distribution to affiliated company                                                             |                                                                                   |   |                             |      |                             |   |      |       |            |   | (200   | )     |   |   |       |      
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Settlement of fee agreement                                                                    |                                                                                   |   |                             |      |                             |   |      |       |            |   |       |       |   |   | (187   | )    
|                                                                                               |                                                                                   |   |                              |      |                             |   |       |       |            |   |        |       |   |   |        |      
|Income (Loss) before income tax, extraordinary item and
cumulative effect of accounting change |                                                                                   |   | 580                          |      |                             |   | (902  | )     |            |   | (507   | )     |   |   | (2,300 | )    
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Income tax provision (benefit)                                                                 |                                                                                   |   | 1                            |      |                             |   | (14   | )     |            |   | 3      |       |   |   | (21    | )    
|                                                                                               |                                                                                   |   |                              |      |                             |   |       |       |            |   |        |       |   |   |        |      
|Income (Loss) before extraordinary item and cumulative effect of
accounting change             |                                                                                   |   | 579                          |      |                             |   | (888  | )     |            |   | (510   | )     |   |   | (2,279 | )    
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Extraordinary item  gain on forgiveness of debt                                               |                                                                                   |   |                             |      |                             |   |      |       |            |   | 7,970  |       |   |   |       |      
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Cumulative effect of change in accounting principle                                            |                                                                                   |   |                             |      |                             |   |      |       |            |   |       |       |   |   | (285   | )    
|                                                                                               |                                                                                   |   |                              |      |                             |   |       |       |            |   |        |       |   |   |        |      
|Net income (loss)                                                                              |                                                                                   | $ | 579                          |      |                             | $ | (888  | )     |            | $ | 7,460  |       |   | $ | (2,564 | )    
|                                                                                               |                                                                                   |   |                              |      |                             |   |       |       |            |   |        |       |   |   |        |      
|Basic earnings (loss) per share                                                                |                                                                                   |   |                              |      |                             |   |       |       |            |   |        |       |   |   |        |      
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Basic earnings (loss) per share before extraordinary
item and accounting change   |   | $                            | 0.04 |                             |   | $     | (0.09 | )          |   | $      | (0.04 | ) |   | $      | (0.23 | )
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Basic earnings (loss) per share _ extraordinary item                              |   |                              |      |                             |   |       |       |            |   | $      | 0.71  |   |   |        |       |  
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Basic earnings (loss) per share _ Change in
accounting principle                  |   |                              |      |                             |   |       |       |            |   |        |       |   |   | $      | (0.03 | )
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Basic earnings (loss) per share _ Net                                             |   | $                            | 0.04 |                             |   | $     | (0.09 | )          |   | $      | 0.67  |   |   | $      | (0.26 | )
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Diluted earnings (loss) per share                                                              |                                                                                   |   |                              |      |                             |   |       |       |            |   |        |       |   |   |        |      
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Diluted earnings (loss) per share before
extraordinary item and accounting change |   | $                            | 0.04 |                             |   | $     | (0.09 | )          |   | $      | (0.04 | ) |   | $      | (0.23 | )
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Diluted earnings (loss) per share _ extraordinary item                            |   |                              |      |                             |   |       |       |            |   | $      | 0.71  |   |   |        |       |  
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Diluted earnings (loss) per share _ Change in
accounting principle                |   |                              |      |                             |   |       |       |            |   |        |       |   |   | $      | (0.03 | )
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Diluted earnings (loss) per share _ Net                                           |   | $                            | 0.04 |                             |   | $     | (0.09 | )          |   | $      | 0.67  |   |   | $      | (0.26 | )
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Shares used in computing basic earnings (loss) per share                                       |                                                                                   |   | 14,082                       |      |                             |   | 9,694 |       |            |   | 11,180 |       |   |   | 9,680  |      
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Shares used in computing diluted earnings (loss) per share                                     |                                                                                   |   | 15,490                       |      |                             |   | 9,694 |       |            |   | 11,180 |       |   |   | 9,680  |      

See Notes to Condensed Consolidated Financial Statements

4



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##### Table of Contents






INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

|                                                            |  |                             |        |                 |  |   |       |  
|----------------------------------------------------------- |  | --------------------------- | ------ | --------------- |  | - | ----- | -
|                                                            |  | (Unaudited)                
|                                                            |  | Nine Months Ended March 31,
|                                                            |  |                            
|                                                            |  | 2002                        |        | 2001 (restated)
|                                                            |  |                             |        |                
|Cash flows from operating activities:                       |  |                             |        |                 |  |   |       |  
|                                                           
|                                                           
|                                                           
|                                                           
|Net cash provided by operating activities                   |  | $                           | 1,520  |                 |  | $ | 263   |  
|                                                            |  |                             |        |                 |  |   |       |  
|Cash flows from investing activities:                       |  |                             |        |                 |  |   |       |  
|                                                           
|                                                           
|                                                           
|                                                           
|Proceeds from product line and domain name sales            |  |                             | 20     |                 |  |   | 285   |  
|                                                           
|                                                           
|                                                           
|                                                           
|Purchase of equipment and furniture                         |  |                             | (76    | )               |  |   | (371  | )
|                                                           
|                                                           
|                                                           
|                                                           
|Software development costs                                  |  |                             | (22    | )               |  |   | (40   | )
|                                                           
|                                                           
|                                                           
|                                                           
|Acquisition of subsidiary from affiliated company           |  |                             | (50    | )               |  |   |      |  
|                                                           
|                                                           
|                                                           
|                                                           
|Additions to other assets                                   |  |                             | (304   | )               |  |   | (6    | )
|                                                            |  |                             |        |                 |  |   |       |  
|Net cash used by investing activities                       |  |                             | (432   | )               |  |   | (132  | )
|                                                            |  |                             |        |                 |  |   |       |  
|Cash flows from financing activities:                       |  |                             |        |                 |  |   |       |  
|                                                           
|                                                           
|                                                           
|                                                           
|Increase in notes payable                                   |  |                             | 708    |                 |  |   | 90    |  
|                                                           
|                                                           
|                                                           
|                                                           
|Repayment of loans                                          |  |                             | (1,358 | )               |  |   | (20   | )
|                                                           
|                                                           
|                                                           
|                                                           
|Repayment of capital lease obligations                      |  |                             | (219   | )               |  |   | (149  | )
|                                                           
|                                                           
|                                                           
|                                                           
|Capital contributions                                       |  |                             | 116    |                 |  |   |      |  
|                                                           
|                                                           
|                                                           
|                                                           
|Proceeds from issuance of common stock                      |  |                             | 754    |                 |  |   | 11    |  
|                                                            |  |                             |        |                 |  |   |       |  
|Net cash used by financing activities                       |  |                             | 1      |                 |  |   | (68   | )
|                                                            |  |                             |        |                 |  |   |       |  
|Effect of exchange rate change on cash and cash equivalents |  |                             | (5     | )               |  |   | 13    |  
|                                                           
|                                                           
|                                                           
|                                                           
|Net increase (decrease) in cash and cash equivalents        |  |                             | 1,084  |                 |  |   | 76    |  
|                                                           
|                                                           
|                                                           
|                                                           
|Cash and cash equivalents at beginning of period            |  |                             | 1,268  |                 |  |   | 1,775 |  
|                                                            |  |                             |        |                 |  |   |       |  
|Cash and cash equivalents at end of the period              |  | $                           | 2,352  |                 |  | $ | 1,851 |  
|                                                            |  |                             |        |                 |  |   |       |  

See Notes to Condensed Consolidated Financial Statements

5



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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. In the opinion of management, all adjustments, which
consist only of normal recurring adjustments, necessary to present fairly the
financial position at March 31, 2002 and the results of operations and cash
flows as of and for the three and nine months ended March 31, 2002 and 2001
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-K for the fiscal year ended
June 30, 2001. The results of operations for the three and nine months ended
March 31, 2002 are not necessarily indicative of the results to be expected for
any other interim period or for the full year.

On October 1, 2001, we acquired from Digital Creative Development Corporation
(DCDC) 100% of the outstanding shares of Keynomics, Inc. a productivity
software company. The acquisition has been treated as a transfer between
entities under common control. We have restated the financial statements for
all prior periods to reflect the acquisition as of the beginning of the periods
presented. The following tables summarize the effect of the acquisition of
Keynomics on IMSIs Balance Sheet, Statement of Operations, and Statement of
Cash Flows:

|                                            |  |               |         |           |  |             |      |       |  |  |         |  
|------------------------------------------- |  | ------------- | ------- | --------- |  | ----------- | ---- | ----- |  |  | ------- | -
|                                            |  | June 30, 2001
|                                            |  | Before        |         |           |  |             |      | After
|BALANCE SHEET (in thousands)                |  | Acquisition   |         | Keynomics |  | Acquisition
|ASSETS                                      |  |               |         |           |  |             |      |       |  |  |         |  
|                                           
|                                           
|                                           
|                                           
|Current assets                              |  |               | 2,875   |           |  |             | 436  |       |  |  | 3,311   |  
|                                           
|                                           
|                                           
|                                           
|Long term assets                            |  |               | 3,113   |           |  |             | 67   |       |  |  | 3,180   |  
|                                           
|                                           
|                                           
|                                           
|Total assets                                |  |               | 5,988   |           |  |             | 503  |       |  |  | 6,491   |  
|                                           
|                                           
|                                           
|                                           
|LIABILITIES AND SHAREHOLDERS DEFICIT       |  |               |         |           |  |             |      |       |  |  |         |  
|                                           
|                                           
|                                           
|                                           
|Current Liabilities                         |  |               | 20,354  |           |  |             | 774  |       |  |  | 21,128  |  
|                                           
|                                           
|                                           
|                                           
|Long term liabilities                       |  |               | 880     |           |  |             | 53   |       |  |  | 933     |  
|                                           
|                                           
|                                           
|                                           
|Total liabilities                           |  |               | 21,234  |           |  |             | 827  |       |  |  | 22,061  |  
|                                           
|                                           
|                                           
|                                           
|Total shareholders deficit                 |  |               | (15,246 | )         |  |             | (324 | )     |  |  | (15,570 | )
|                                           
|                                           
|                                           
|                                           
|Total liabilities and shareholders deficit |  |               | 5,988   |           |  |             | 503  |       |  |  | 6,491   |  

6



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|                                        |  |                                   |       |           |  |             |      |       |  |   |       |  
|--------------------------------------- |  | --------------------------------- | ----- | --------- |  | ----------- | ---- | ----- |  | - | ----- | -
|                                        |  | Three months ended March 31, 2001
|                                        |  | Before                            |       |           |  |             |      | After
|STATEMENTS OF OPERATIONS (in thousands) |  | Acquisition                       |       | Keynomics |  | Acquisition
|Net revenues                            |  | $                                 | 3,107 |           |  | $           | 207  |       |  | $ | 3,314 |  
|                                       
|                                       
|                                       
|                                       
|Product costs                           |  |                                   | 720   |           |  |             | 7    |       |  |   | 727   |  
|                                       
|                                       
|                                       
|                                       
|Gross margin                            |  |                                   | 2,387 |           |  |             | 200  |       |  |   | 2,587 |  
|                                       
|                                       
|                                       
|                                       
|Total operating expenses                |  |                                   | 2,513 |           |  |             | 394  |       |  |   | 2,907 |  
|                                       
|                                       
|                                       
|                                       
|Operating loss                          |  |                                   | (126  | )         |  |             | (194 | )     |  |   | (320  | )
|                                       
|                                       
|                                       
|                                       
|Other Income (Expense)                  |  |                                   | (578  | )         |  |             | (4   | )     |  |   | (582  | )
|                                       
|                                       
|                                       
|                                       
|Loss before income tax                  |  |                                   | (704  | )         |  |             | (198 | )     |  |   | (902  | )
|                                       
|                                       
|                                       
|                                       
|Income tax benefit                      |  |                                   | (14   | )         |  |             |     |       |  |   | (14   | )
|                                       
|                                       
|                                       
|                                       
|Net loss                                |  | $                                 | (690  | )         |  | $           | (198 | )     |  | $ | (888  | )

|                                                                |  |                                  |        |           |  |             |       |       |  |   |        |  
|--------------------------------------------------------------- |  | -------------------------------- | ------ | --------- |  | ----------- | ----- | ----- |  | - | ------ | -
|                                                                |  | Nine months ended March 31, 2001
|                                                                |  | Before                           |        |           |  |             |       | After
|STATEMENTS OF OPERATIONS (in thousands)                         |  | Acquisition                      |        | Keynomics |  | Acquisition
|Net revenues                                                    |  | $                                | 9,399  |           |  | $           | 545   |       |  | $ | 9,944  |  
|                                                               
|                                                               
|                                                               
|                                                               
|Product costs                                                   |  |                                  | 2,521  |           |  |             | 15    |       |  |   | 2,536  |  
|                                                               
|                                                               
|                                                               
|                                                               
|Gross margin                                                    |  |                                  | 6,878  |           |  |             | 530   |       |  |   | 7,408  |  
|                                                               
|                                                               
|                                                               
|                                                               
|Total operating expenses                                        |  |                                  | 7,023  |           |  |             | 1,109 |       |  |   | 8,132  |  
|                                                               
|                                                               
|                                                               
|                                                               
|Operating loss                                                  |  |                                  | (145   | )         |  |             | (579  | )     |  |   | (724   | )
|                                                               
|                                                               
|                                                               
|                                                               
|Other Income (Expense)                                          |  |                                  | (1,572 | )         |  |             | (4    | )     |  |   | (1,576 | )
|                                                               
|                                                               
|                                                               
|                                                               
|Loss before income tax                                          |  |                                  | (1,717 | )         |  |             | (583  | )     |  |   | (2,300 | )
|                                                               
|                                                               
|                                                               
|                                                               
|Income tax benefit                                              |  |                                  | (21    | )         |  |             |      |       |  |   | (21    | )
|                                                               
|                                                               
|                                                               
|                                                               
|Loss before cumulative effect of change in accounting principle |  |                                  | (1,696 | )         |  |             | (583  | )     |  |   | (2,279 | )
|                                                               
|                                                               
|                                                               
|                                                               
|Cumulative effect of change in accounting principle             |  |                                  | (285   | )         |  |             |      |       |  |   | (285   | )
|                                                               
|                                                               
|                                                               
|                                                               
|Net loss                                                        |  | $                                | (1,981 | )         |  | $           | (583  | )     |  | $ | (2,564 | )

7



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##### Table of Contents



|                                                            |  |                                  |       |           |  |             |      |       |  |   |       |  
|----------------------------------------------------------- |  | -------------------------------- | ----- | --------- |  | ----------- | ---- | ----- |  | - | ----- | -
|                                                            |  | Nine months ended March 31, 2001
|                                                            |  | Before                           |       |           |  |             |      | After
|STATEMENT OF CASH FLOWS (in thousands)                      |  | Acquisition                      |       | Keynomics |  | Acquisition
|Net cash provided (used) by operating activities            |  | $                                | 561   |           |  | $           | (298 | )     |  | $ | 263   |  
|                                                           
|                                                           
|                                                           
|                                                           
|Net cash provided (used) by investing activities            |  |                                  | (73   | )         |  |             | (59  | )     |  |   | (132  | )
|                                                           
|                                                           
|                                                           
|                                                           
|Net cash provided (used) by financing activities            |  |                                  | (158  | )         |  |             | 90   |       |  |   | (68   | )
|                                                           
|                                                           
|                                                           
|                                                           
|Effect of exchange rate change on cash and cash equivalents |  |                                  | 13    |           |  |             |     |       |  |   | 13    |  
|                                                           
|                                                           
|                                                           
|                                                           
|Net increase (decrease) in cash and cash equivalents        |  |                                  | 343   |           |  |             | (267 | )     |  |   | 76    |  
|                                                           
|                                                           
|                                                           
|                                                           
|Cash and cash equivalents at beginning of period            |  |                                  | 1,477 |           |  |             | 298  |       |  |   | 1,775 |  
|                                                           
|                                                           
|                                                           
|                                                           
|Cash and cash equivalents at end of the period              |  | $                                | 1,820 |           |  |             | 31   |       |  |   | 1,851 |  

2.  Realization of Assets

The financial statements have been prepared on a basis that contemplates our
continuation as a going concern and the realization of assets and liquidation
of liabilities in the ordinary course of business. We have an accumulated
deficit of $37,207,000 and negative working capital of $4,646,000 as of March
31, 2002.

It is possible that we will require additional capital, either through equity
or other financing arrangements. Our large accumulated losses and the negative
amount of shareholders equity as of March 31, 2002 make it difficult for us to
obtain new debt financing or to obtain equity financing at attractive prices.

The financial statements do not include any adjustments relating to the
recoverability or classification of assets or the amounts and classification of
liabilities that might result from the outcome of this uncertainty.

3.  Equity related transactions

The following tables detail the activity regarding our common stock, warrants
and stock options for the nine-month period ended March 31, 2002:

8



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|                                        |                                         |       |                               |            |  |           |            |           |            |           |            |   |           | 
|--------------------------------------- | --------------------------------------- | ----- | ----------------------------- | ---------- |  | --------- | ---------- | --------- | ---------- | --------- | ---------- | - | --------- | 
|                                        |                                         |       |                               |            |  |           |            | Number of |            |           |            |  
|Transaction type                        |                                         | Group |                               | securities |  | Amount   
|                                        |                                         |       |                               |            |  |          
|Shares outstanding as of June 30, 2001  |                                         |       |                               |            |  |           | 9,695,740  |           |            | $         | 29,088,425 |  
|                                       
|                                       
|                                       
|                                       
|                                        | Private placement                       |       | Accredited investors          |            |  | 835,000   |            |           |            | 417,500   |           
|                                       
|                                       
|                                       
|                                       
|                                        | Capital contribution                    |       | Former Keynomics owner        |            |  |          |            |           |            | 116,580   |           
|                                       
|                                       
|                                       
|                                       
|                                        | Debt to equity conversion               |       | Related parties               |            |  | 9,661,764 |            |           |            | 3,555,000 |           
|                                       
|                                       
|                                       
|                                       
|                                        | Options issued for consulting services  |       | Consultants                   |            |  |          |            |           |            | 41,956    |           
|                                       
|                                       
|                                       
|                                       
|                                        | Warrants issued for consulting services |       | Consultants                   |            |  |          |            |           |            | 269,272   |           
|                                       
|                                       
|                                       
|                                       
|                                        | Options exercised                       |       | Employees and consultants     |            |  | 82,000    |            |           |            | 16,794    |           
|                                       
|                                       
|                                       
|                                       
|                                        | Warrants exercised                      |       | Executives & advisers to IMSI |            |  | 1,282,500 |            |           |            | 318,750   |           
|                                       
|                                       
|                                       
|                                       
|                                        | Settlement shares and warrants          |       | Vendors                       |            |  | 45,823    |            |           |            | 88,388    |           
|                                       
|                                       
|                                       
|                                       
|                                        | Retirement into treasury                |       | Broderbund settlement         |            |  | (200,000  | )          |           |            | (52,000   | )         
|                                       
|                                       
|                                       
|                                       
|                                        | Variable accounting charge              |       | Re-priced stock options       |            |  |          |            |           |            | 16,131    |           
|                                        |                                         |       |                               |            |  |           |            |           |            |           |            |  
|                                        |                                         | Total |                               |            |  |           |            |           | 11,707,087 |           |            | $ | 4,788,371 | 
|                                        |                                         |       |                               |            |  |           |            |           |            |           |            |  
|Shares outstanding as of March 31, 2002 |                                         |       |                               |            |  |           | 21,402,827 |           |            | $         | 33,876,796 |  
|                                        |                                         |       |                               |            |  |           |            |           |            |           |            |  

|                              |           |  |           |           |          |  |           |            |  
|----------------------------- | --------- |  | --------- | --------- | -------- |  | --------- | ---------- | -
|                              |           |  | Options   |           | Warrants
|Outstanding at June 30, 2001  |           |  | 1,976,164 |           |          |  | 729,291   |           
|                             
|                             
|                             
|                             
|                              | Granted   |  |           | 1,056,000 |          |  |           | 2,092,500  |  
|                             
|                             
|                             
|                             
|                              | Exercised |  |           | (82,000   | )        |  |           | (1,282,500 | )
|                             
|                             
|                             
|                             
|                              | Cancelled |  |           | (899,927  | )        |  |           |           |  
|                              |           |  |           |           |          |  |           |           
|Outstanding at March 31, 2002 |           |  | 2,050,237 |           |          |  | 1,539,291 |           
|                              |           |  |           |           |          |  |           |           

4.  Segment Information

We have four reportable operating segments based on the sales market. Two of
these are geographic segments and generate revenues and incur expenses related
to the sale of our PC productivity software. The third and forth segments
comprise the revenues and expenses related to ArtToday.com, our graphic design
Internet subsidiary and to Keynomics, our newly acquired business applications
subsidiary. The following table details segment information (in thousands):

9



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##### Table of Contents



|                                            |  |              |       |           |  |               |      |               |  |              |       |       |  |   |     |   |  |  |        |   |  |   |       |  
|------------------------------------------- |  | ------------ | ----- | --------- |  | ------------- | ---- | ------------- |  | ------------ | ----- | ----- |  | - | --- | - |  |  | ------ | - |  | - | ----- | -
|                                            |  | ArtToday.com |       | Keynomics |  | North America |      | Other Foreign |  | Eliminations |       | Total
|                                            |  |              |       |           |  |               |      |               |  |              |       |      
|Quarter Ended March 31, 2002                |  |              |       |           |  |               |      |               |  |              |       |       |  |   |     |   |  |  |        |   |  |   |       |  
|                                           
|                                           
|                                           
|                                           
|Net Revenues-external                       |  | $            | 1,082 |           |  | $             | 239  |               |  | $            | 2,219 |       |  | $ | 121 |   |  |  |       |   |  | $ | 3,661 |  
|                                           
|                                           
|                                           
|                                           
|Operating income (loss)                     |  |              | 402   |           |  |               | (84  | )             |  |              | 157   |       |  |   | (1  | ) |  |  |       |   |  |   | 474   |  
|                                           
|                                           
|                                           
|                                           
|Identifiable assets                         |  |              | 1,989 |           |  |               | 81   |               |  |              | 4,690 |       |  |   | (97 | ) |  |  | (151   | ) |  |   | 6,512 |  
|                                           
|                                           
|                                           
|                                           
|Quarter Ended March 31, 2001
(restated)     |  |              |       |           |  |               |      |               |  |              |       |       |  |   |     |   |  |  |        |   |  |   |       |  
|                                           
|                                           
|                                           
|                                           
|Net Revenues-external                       |  | $            | 778   |           |  | $             | 207  |               |  | $            | 2,269 |       |  | $ | 60  |   |  |  |       |   |  | $ | 3,314 |  
|                                           
|                                           
|                                           
|                                           
|Operating income (loss)                     |  |              | (28   | )         |  |               | (195 | )             |  |              | (57   | )     |  |   | (40 | ) |  |  |       |   |  |   | (320  | )
|                                           
|                                           
|                                           
|                                           
|Identifiable assets                         |  |              | 2,324 |           |  |               | 346  |               |  |              | 6,453 |       |  |   | 205 |   |  |  | (1,587 | ) |  |   | 7,741 |  
|                                           
|                                           
|                                           
|                                           
|Nine months Ended March 31, 2002            |  |              |       |           |  |               |      |               |  |              |       |       |  |   |     |   |  |  |        |   |  |   |       |  
|                                           
|                                           
|                                           
|                                           
|Net Revenues-external                       |  | $            | 3,013 |           |  | $             | 916  |               |  | $            | 5,650 |       |  | $ | 402 |   |  |  |       |   |  | $ | 9,981 |  
|                                           
|                                           
|                                           
|                                           
|Operating income (loss)                     |  |              | 1,008 |           |  |               | (81  | )             |  |              | (906  | )     |  |   | 31  |   |  |  |       |   |  |   | 52    |  
|                                           
|                                           
|                                           
|                                           
|Identifiable assets                         |  |              | 1,989 |           |  |               | 81   |               |  |              | 4,690 |       |  |   | (97 | ) |  |  | (151   | ) |  |   | 6,512 |  
|                                           
|                                           
|                                           
|                                           
|Nine months Ended March 31, 2001
(restated) |  |              |       |           |  |               |      |               |  |              |       |       |  |   |     |   |  |  |        |   |  |   |       |  
|                                           
|                                           
|                                           
|                                           
|Net Revenues-external                       |  | $            | 2,309 |           |  | $             | 545  |               |  | $            | 6,845 |       |  | $ | 245 |   |  |  |       |   |  | $ | 9,944 |  
|                                           
|                                           
|                                           
|                                           
|Operating income (loss)                     |  |              | 101   |           |  |               | (579 | )             |  |              | (231  | )     |  |   | (15 | ) |  |  |       |   |  |   | (724  | )
|                                           
|                                           
|                                           
|                                           
|Identifiable assets                         |  |              | 2,324 |           |  |               | 346  |               |  |              | 6,453 |       |  |   | 205 |   |  |  | (1,587 | ) |  |   | 7,741 |  

5.  Earnings (Loss) Per Share

Earnings (loss) per share are computed by dividing net earnings (loss) by the
weighted average number of common shares outstanding for the period. The
following table summarizes the weighted average shares outstanding:

|                                            |  |                             |            |                            |  |      |            |      |  |  |            |   |  |  |            |  
|------------------------------------------- |  | --------------------------- | ---------- | -------------------------- |  | ---- | ---------- | ---- |  |  | ---------- | - |  |  | ---------- | -
|                                            |  | Three Months Ended March 31 |            | Nine Months Ended March 31
|                                            |  |                             |            |                           
|                                            |  | 2002                        |            | 2001                       |  | 2002 |            | 2001
|                                            |  |                             |            |                            |  |      |            |     
|Weighted Average Shares Outstanding         |  |                             | 14,081,521 |                            |  |      | 9,693,892  |      |  |  | 11,179,696 |   |  |  | 9,680,040  |  
|                                           
|                                           
|                                           
|                                           
|Total Stock Options Outstanding             |  |                             | 2,050,237  |                            |  |      | 2,142,855  |      |  |  | 2,050,237  |   |  |  | 2,142,855  |  
|                                           
|                                           
|                                           
|                                           
|Less: Non Dilutive Stock Options            |  |                             | (1,633,111 | )                          |  |      | (2,142,855 | )    |  |  | (2,050,237 | ) |  |  | (2,142,855 | )
|                                           
|                                           
|                                           
|                                           
|Total Warrants Outstanding                  |  |                             | 1,539,291  |                            |  |      | 664,291    |      |  |  | 1,539,291  |   |  |  | 664,291    |  
|                                           
|                                           
|                                           
|                                           
|Less: Non Dilutive Warrants                 |  |                             | (547,639   | )                          |  |      | (664,291   | )    |  |  | (1,539,291 | ) |  |  | (664,291   | )
|                                            |  |                             |            |                            |  |      |            |      |  |  |            |   |  |  |            |  
|Diluted Weighted Average Shares
Outstanding |  |                             | 15,490,299 |                            |  |      | 9,693,892  |      |  |  | 11,179,696 |   |  |  | 9,680,040  |  

10



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6.  Comprehensive Income (Loss)

Comprehensive income (loss) includes changes in the balance of items that are
reported directly in a separate component of shareholders deficit on the
condensed consolidated balance sheets. The reconciliation of net income (loss)
to comprehensive income (loss) is as follows.

|                                         |  |                              |     |                             |  |      |      |            |  |   |       |   |  |   |        |  
|---------------------------------------- |  | ---------------------------- | --- | --------------------------- |  | ---- | ---- | ---------- |  | - | ----- | - |  | - | ------ | -
|                                         |  | Three Months Ended March 31, |     | Nine Months Ended March 31,
|                                         |  |                              |     |                            
|                                         |  | 2002                         |     | 2001                        |  | 2002 |      | 2001      
|                                         |  |                              |     | (restated)                  |  |      |      | (restated)
|                                         |  |                              |     |                             |  |      |      |           
|Net Income (Loss)                        |  | $                            | 579 |                             |  | $    | (888 | )          |  | $ | 7,460 |   |  | $ | (2,564 | )
|                                        
|                                        
|                                        
|                                        
|Foreign currency translation
adjustments |  |                              | 6   |                             |  |      | 10   |            |  |   | (5    | ) |  |   | 13     |  
|                                        
|                                        
|                                        
|                                        
|Total comprehensive income (loss)        |  | $                            | 585 |                             |  | $    | (878 | )          |  | $ | 7,455 |   |  | $ | (2,551 | )

7.  New Accounting Standards

In June 2001, the Financial Accounting Standards Board adopted SFAS No. 142
Goodwill And Intangible Assets. SFAS No. 142 addresses the methods used to
amortize intangible assets and to assess impairment of those assets, including
goodwill resulting from business combinations accounted for under the purchase
method. SFAS No. 142 is effective for fiscal years beginning after December
15, 2001, except for the non-amortization provisions of the statement, which
are effective for business combinations completed after June 30, 2001.
Included in our assets at March 31, 2002, is goodwill with a net carrying value
of $112,000 related to the acquisition of ArtToday.com. OrgPlus goodwill,
which was included in this category prior to September 30, 2001, was
transferred to capitalized distribution rights in conjunction with the
settlement of our software license and distribution agreement with Broderbund
and concurrent software assignment, license and distribution agreements with
Human Concepts.

Upon adoption of SFAS No. 142, we will no longer amortize goodwill related to
ArtToday.com, decreasing amortization expense by approximately $81,000 in
fiscal 2003. We are required to assess this goodwill for impairment in the
year of adoption. We do not expect the adoption of SFAS No. 142 to have a
material effect on our financial condition or results of operation.

In 2001, the FASB issued SFAS 143, Accounting for Asset Retirement Obligations.
SFAS 143 applies to all entities that have legal obligations associated with
the retirement of a tangible long-lived asset. SFAS 143 requires that a
liability for an asset retirement obligation be recognized if the obligation
meets the definition of a liability in FASB Concepts Statement 6, Elements of
Financial Statements, and if the amount of the liability can be reasonably
estimated. When a retirement obligation is initially recognized, the asset
retirement cost is capitalized by increasing the carrying amount of the related
long-lived asset by an amount equal to the liability. The initial recording of
the obligation should be at fair market value. SFAS 143 is effective for
fiscal years beginning after June 15, 2002, but earlier application is
encouraged The Company does not expect this statement to have a material
effect on its financial statements.

In 2001, the FASB issued SFAS 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS 144 supersedes SFAS 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of, as well as
the provisions of APB Opinion 30, Reporting the Results of Operations 
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, that
address the disposal of a business. SFAS 144

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also amends ARB 51, Consolidated Financial Statements, to eliminate the
exception to consolidate a subsidiary for which control is likely to be
temporary. SFAS 144 carries over the recognition and measurement provisions of
SFAS 121, but differs from SFAS 121 in that it provides guidance for estimating
future cash flows to test recoverability. SFAS 144 also includes criteria that
have to be met for an entity to classify a long-lived asset or asset group as
held for sale, and extends the presentation of discontinued operations
permitted by Opinion 30 to include disposals of a component of an entity. SFAS
144 is effective for fiscal years beginning after December 15, 2001, except for
the disposal provisions, which are immediately effective. We do not expect the
adoption of SFAS No. 144 to have a material effect on our financial condition
or results of operation.

8.  Extraordinary Items

We did not record any extraordinary items during the quarter ended March 31,
2002.

During the fiscal quarter ended December 31, 2001, we recognized $2,243,000
gain from forgiveness of debt. $2,062,000 was related to the forgiveness of a
portion of the principal and accrued interest on the promissory note payable to
Silicon Valley Bank, one of our senior secured creditors. $140,000 was related
to the forgiveness of amounts payable to Light Work Design and $40,500 was
related to the forgiveness of amounts payable to Microsoft. Light Work Design
and Microsoft are two unsecured creditors that were owed royalties.

In the quarter ended September 30, 2001, we recorded an extraordinary gain of
$5,727,000 related to the forgiveness of debt to BayStar Capital and DelRay
Technologies. BayStar Capital agreed to settle for 10% of the principal and
accrued interest and penalties outstanding. According to the agreement,
payments are to be made in four quarterly installments of $177,534 beginning
September 30, 2002, with interest accruing at the rate of 8% per annum from
August 31, 2001 to the date of the first installment. Thereafter, the interest
rate is 12% per annum until the note is paid in full on or before June 30,
2003. DelRay Technologies agreed to a one-time payment of $20,000 as
settlement in full of its outstanding claim.

These combined transactions resulted into an aggregate forgiveness of debt gain
of $7,970,000 for the nine-month period ended March 31, 2002.

The tax expense on the extraordinary gain on forgiveness of debt is
approximately $3,183,000 as calculated at our marginal tax rate of 39.94%. This
expense will be entirely offset by the net operating loss carryforward.

9.  Executive Employment Agreement

As of April 27, 2002 we entered into a three-year executive employment
agreement commencing January 1, 2002, with Martin Wade which outlined the terms
of Mr. Wades employment by us as Chief Executive Officer of IMSI. As
compensation for his services, Mr. Wade is to receive the following: warrants
totaling 1,250,000 at an exercise price of $0.35, vesting on March 1, 2003
and expiring five years after the grant date; an additional 2 million warrants
upon the sale, merger, or acquisition of at least fifty one percent of the
Companys common stock by a single corporate entity at an exercise price
representing the average closing price of the Companys stock over the twelve
months preceding the execution of a definitive agreement for such sale, merger,
or acquisition; an initial bonus of $25,000; an annual bonus for fiscal 2002 of
$25,000 if the Company meets its annual plan; two subsequent annual bonuses of
$50,000 each if the Company meets its annual plans for fiscal years 2003 and
2004; and the right to participate in the Companys benefit plans.

12



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10.  Merger Termination

On August 31, 2001 IMSI and DCDC entered into an Agreement and Plan of Merger
and Reorganization (Merger Agreement) pursuant to which DCDC was to merge
with and into DCDC Merge, Inc. (Merger Sub), a California corporation and a
wholly owned subsidiary of IMSI, and Merger Sub was to continue as the
surviving corporation. Simultaneously and pursuant to the Merger Agreement,
DCDC agreed to purchase for $2,500,000 all rights as lender and holder under a
promissory note between Union Bank of California and IMSI in the original
principal amount of $3,580,000.

On March 1, 2002, we entered into a Mutual Termination Agreement and Release
with DCDC whereby the Merger Agreement was terminated and each company was
released from all duties, rights, claims, obligations and liabilities arising
from, in connection with, or relating to, the Merger Agreement.

Furthermore the two companies agreed to enter into an agreement entitled
Promissory Note Conversion and General Release pursuant to which DCDC agreed to
cancel the entire outstanding principal amount of $3,580,000 and all interest
due on the promissory note that DCDC had acquired in return for 9,000,000
shares of common stock of IMSI and cash in the amount of $250,000 to be paid in
monthly installments over 15 months as follows:



| |  |  | $10,000 per month for the first five installments starting March 1, 2002
| | - |  | ------------------------------------------------------------------------
|
| |  |  | $20,000 per month for ten months thereafter                             

11.  Subsequent Events: Silicon Valley note restructure

On October 9, 2001 we signed an agreement with Silicon Valley Bank for a
settlement of its existing secured note, which had a balance (including
penalties and interest) of approximately $3.2 million. The settlement provided
for a new secured promissory note for $1.2 million with 12 monthly payments of
$100,000 plus interest at 12% interest per annum beginning October 20, 2001. We
had made the first five payments as of March 31, 2002.

On April 3, 2002, we amended this agreement whereby we offered to Silicon
Valley Bank and Silicon Valley Bank accepted an early payment of the $700,000
balance of the note at a $100,000 discount. The payment of the $600,000 was
made on April 5, 2002, on which date Silicon Valley Bank declared all our
obligations to them under the revised promissory note, the related ArtToday
Security Agreement and the related Pledge Agreement to have been satisfied and
therefore released its interest in the collateral securing the note and the
note itself.

In the next fiscal quarter, we will recognize an additional gain from
forgiveness of debt of $100,000 arising from this transaction as an
extraordinary item.




Item 2.  Managements Discussion and Analysis of Financial Condition and Results of Operations

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 2001 Form 10-K and previously filed fiscal 2002 Forms 10-QSB. 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

13



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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
2001 Form 10-K, as filed with the Securities and Exchange Commission (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.

Recent Events

Fiscal Quarter ended March 31, 2002.



| |                   
| | ------------------
| | Merger Termination

On August 31, 2001 IMSI and DCDC entered into an Agreement and Plan of Merger
and Reorganization (Merger Agreement) pursuant to which DCDC was to merge
with and into DCDC Merge, Inc. (Merger Sub), a California corporation and a
wholly owned subsidiary of IMSI, and Merger Sub was to continue as the
surviving corporation. Simultaneously and pursuant to the Merger Agreement,
DCDC agreed to purchase for $2,500,000 all rights as lender and holder under a
promissory note between Union Bank of California and IMSI in the original
principal amount of $3,580,000.

On March 1, 2002, we entered into a Mutual Termination Agreement and Release
with DCDC whereby the Merger Agreement was terminated and each company was
released from all duties, rights, claims, obligations and liabilities arising
from, in connection with, or relating to, the Merger Agreement.

Furthermore the two companies agreed to enter into an agreement entitled
Promissory Note Conversion and General Release pursuant to which DCDC agreed to
cancel the entire outstanding principal amount of $3,580,000 and all interest
due on the promissory note that DCDC had acquired in return for 9,000,000
shares of common stock of IMSI and cash in the amount of $250,000 to be paid in
monthly installments over 15 months as follows:



| |  |  | $10,000 per month for the first five installments starting March 1, 2002
| | - |  | ------------------------------------------------------------------------
|
| |  |  | $20,000 per month for ten months thereafter                             



| |                                                   
| | --------------------------------------------------
| | Private Placement of Shares and Warrants Exercised

During the fiscal quarter ended March 31, 2002, we were successful in raising
additional working capital through a private offering of IMSI shares. We
offered shares of common stock at $.50 per share to certain investors in a
private placement offering to qualified private investors. The money received
in the offering, together with additional funds received pursuant to certain
warrant exercises (as described below), contributed significantly to our
ability to pay off early and at a $100,000 discount the remaining $700,000
principal balance of the Silicon Valley Bank note. This repayment occurred on
April 5, 2002.

As of March 31, 2002, we had received formal commitment from investors to
purchase 1,005,000 shares of IMSIs capital stock at an aggregate purchase
price of $502,500. We received funds totaling $417,500 from the subscribers as
of the end of the quarter. Subsequently and as of the date of this filing, all
committed funds have been received and deposited and all shares have been
issued. None of the participants in this private placement, except Mr. John
Wade who is our CEOs brother and Mr. Matthew

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Rexon who is our chairmans
cousin, were deemed to be an affiliate or a related party as defined in the
Glossary to Statement of Financial Standards No.57, Related Party Disclosures.

The shares related to the offering have not been registered under the
Securities Act of 1933 nor have they been registered under the securities laws
of any state. The offer and sale of the shares was exempt from registration
under section 4(2) of the Securities Act of 1933, and Rule 506 of Regulation D
thereunder and exempt from the qualification requirements of state securities
laws under the respective rules and regulations of the states in which the
shares were being offered and sold.

Also, during the fiscal quarter ended March 31, 2002, certain officers and
advisors to the company exercised previously issued warrants in the aggregate
number of 1,282,500 at exercise prices ranging from $.20 to $.30 (averaging
$.25). The proceeds to the company from this warrant exercise totaled $318,750.



| |                                
| | -------------------------------
| | Silicon Valley note restructure

On October 9, 2001, we signed an agreement with Silicon Valley Bank for a
settlement of its existing secured note, which had a balance (including
penalties and interest) of approximately $3.2 million. The settlement provided
for a new secured promissory note for $1.2 million with 12 monthly payments of
$100,000 plus interest at 12% interest per annum beginning October 20, 2001. We
had made the first five payments as of March 31, 2002.

On April 3, 2002, we amended this agreement whereby we offered to Silicon
Valley Bank and Silicon Valley Bank accepted an early payment of the $700,000
balance of the note at a $100,000 discount. The payment of the $600,000 was
made on April 5, 2002, on which date Silicon Valley Bank declared all our
obligations to them under the revised promissory note, the related ArtToday
Security Agreement and the related Pledge Agreement to have been satisfied and
therefore released its interest in the collateral securing the note and the
note itself.

In the next fiscal quarter, we will recognize an additional gain from
forgiveness of debt of $100,000 arising from this transaction as an
extraordinary item.

Fiscal Quarters ended December 31, 2001



| |                      
| | ---------------------
| | Keynomics acquisition

On November 29, 2001, we entered into a stock purchase agreement with DCDC to
acquire all issued and outstanding shares of capital stock of Keynomics, a
California corporation focused on productivity enhancement software and wholly
owned and controlled by DCDC. Incorporated in April 2000, Keynomics provides
ergonomic and keyboard training for Fortune 1000 companies for worker-related
safety, productivity and ergonomic compliance improvements. Keynomics currently
offers The KeySoft Performance System in its server and ASP versions as its
core products. The companys mission is to reduce the costs and risks
associated with the use of computer keyboards by workers in companies and
provide significant long-term savings through ergonomic and productivity
training and awareness.

The transaction was accounted for as a transfer between entities under common
control. The total aggregate purchase price of Keynomics was $200,000 payable
in installments to DCDC. As of March 31, 2002, $125,000 had been paid. The
stock purchase agreement also calls for potential payments in the future to
DCDC depending on Keynomics performance. These amounts, payable 60 days after
the end of the next three fiscal years, consist of 50% of Keynomics net
operating income, if any, in excess of:

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| |  |  | $500,000 in the fiscal year ending June 30, 2003  
| | - |  | --------------------------------------------------
|
| |  |  | $1,000,000 in the fiscal year ending June 30, 2004
|
| |  |  | $1,500,000 in the fiscal year ending June 30, 2005

Furthermore, potential payments may be due DCDC if we sell substantially
all of the capital stock or substantially all of the assets of Keynomics within
six months following the closing of the transaction. Such payments would
consist of fifty percent of any amount paid for Keynomics in excess of $1.2
million.

As of the date of the purchase, Keynomics had $245,000 of promissory notes
outstanding. Subsequent to the execution of the stock purchase agreement,
holders of an aggregate $225,000 of the outstanding notes agreed to convert
them into 661,765 shares of IMSIs capital stock at $0.34 per share. Gordon
Landies, our president, and Paul Jakab, our Chief Operating Officer, received
192,079 and 10,232 shares of IMSIs capital stock, respectively, in exchange
for their outstanding promissory notes from Keynomics. Joe Abrams, an IMSI
related party and ,at the date of the transaction, owner of shares of IMSIs
capital stock in excess of 5% of the total outstanding also received 287,389
shares in exchange of his outstanding promissory note to Keynomics.



| |                   
| | ------------------
| | Debt Restructuring

Along with the termination of the merger agreement with DCDC and the
restructure of the Silicon Valley Bank note, we restructured our remaining
outstanding debt as follows:



| |  |  | On July 27, 2001, and as subsequently amended on September 24, 2001
and October 5, 2001, IMSI and Imageline, Inc agreed on the settlement
of a) an arbitration award issued in January 2000 in favor of
Imageline; and b) a variety of on going issues between the parties
involving the intellectual property rights of Imageline. The agreement,
effective September 30, 2001, calls for us to provide Imageline a
variety of considerations including the following:
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | o |  | The dismissal of any further appeal of the award (which
dismissal occurred on October 11, 2001).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | o |  | Cash installments over a 12-year period, starting
October 2001. These payments are to be made as follows: twelve
monthly payments of $11,500 beginning on October 5, 2001; four
equal quarterly payments of $78,750 beginning on September 30,
2002 and, 132 monthly payments of $6,500 thereafter. These
payments had a net present value at June 30, 2001 of
approximately $833,000 assuming a 12% discount rate.                                                                                                                                                                                                                                                                                    
|
| | o |  | Certain rights to royalties, licenses, and inventories
pertaining to our MasterClips line of products.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | o |  | A percentage of any net recovery we obtain from an
indemnification claim we have against a third party associated
with the original circumstances leading to the arbitration award.
On March 28, 2002 we received a payment in the amount of $300,000
as settlement of all and any claims we had regarding the adverse
arbitration award arising from the ImageLine dispute. On April
26, 2002 we made a payment to ImageLine in the amount of $30,000
representing an advance on its share of the net recovery from the
indemnification claims. The remaining balance will be paid as
soon as information regarding related legal fees necessary to
compute the net recovery amount becomes available.



| |  |  | On July 30, 2001 we entered into an agreement with Baystar Capital
wherein Baystar agreed to accept $626,000 as settlement of all
obligations due totaling $6,260,000. According to the
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

16



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| |   |  | agreement,
payments are to be made in four quarterly payments beginning September
30, 2002. Interest is to accrue at 8% per annum from August 31, 2001
until the September 2002 payment, and at 12% per annum thereafter until
the claim is paid in full on or before June 30, 2003.                                                                                                                                       
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | We negotiated an agreement with most of our remaining unsecured
creditors, which provides for the discounting to 10% of all outstanding
amounts owed to them (plus the payment of interest from February 1,
2000 at the rate of 8% per annum). These payments are to be made in
quarterly installments beginning August 15, 2002. These unsecured
creditors comprise approximately $3,800,000 of debt on our balance
sheet.

We believe that the reduction in our liabilities under planned and completed
settlements will assist us to become profitable in the future and help provide
a remedy to our working capital needs. In addition, we will continue to engage
in discussions with third parties concerning the sale or license of non-core
product lines; the sale or license of part of our assets; and raising
additional capital investment through the issuance of stock and short or long
term debt financing.

Results of Operations

The following tables set forth our results of operations for the three and
nine-month periods ended March 31, 2002 and 2001 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



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|                        |                                                      |                          |       |                                |       |                 |       |      |      |          |     |          |      |          |      |        |       |      |       |       |       |   |       |       |       |  
|----------------------- | ---------------------------------------------------- | ------------------------ | ----- | ------------------------------ | ----- | --------------- | ----- | ---- | ---- | -------- | --- | -------- | ---- | -------- | ---- | ------ | ----- | ---- | ----- | ----- | ----- | - | ----- | ----- | ----- | -
|                        |                                                      |                          |       | Fiscal quarter ended March 31,
|                        |                                                      |                          |       |                               
|                        |                                                      |                          |       | 2002                           |       | 2001 (restated)
|                        |                                                      |                          |       |                                |       |                
|                        |                                                      |                          |       |                                |       |                 |       |      |      |          |     | $ Change |      | % Change |      |        |       |      |       |       |       |  
|                        |                                                      |                          |       |                                |       |                 |       |      |      |          |     | from     |      | from     |      |        |       |      |       |       |       |  
|                        |                                                      |                          |       |                                |       |                 |       | As % |      | previous |     | previous |      |          |      |        |       | As %
|                        |                                                      |                          |       | $                              |       | of sales        |       | year |      | year     |     | $        |      | of sales
|                        |                                                      |                          |       |                                |       |                 |       |      |      |          |     |          |      |         
|Net Revenues            |                                                      | $                        | 3,661 |                                |       |                 | 100.0 | %    |      | $        | 347 |          |      |          | 10.5 | %      |       | $    | 3,314 |       |       |   | 100.0 | %    
|                       
|                       
|                       
|                       
|Product Cost            |                                                      |                          | 692   |                                |       |                 | 18.9  | %    |      |          | (35 | )        |      |          | -4.8 | %      |       |      | 727   |       |       |   | 21.9  | %    
|                       
|                       
|                       
|                       
|                        |                                                      | Gross Margin             |       |                                | 2,969 |                 |       |      | 81.1 | %        |     |          | 382  |          |      |        | 14.8  | %    |       |       | 2,587 |   |       |       | 78.1  | %
|                       
|                       
|                       
|                       
|Operating Expenses      |                                                      |                          |       |                                |       |                 |       |      |      |          |     |          |      |          |      |        |       |      |       |       |       |   |       |      
|                       
|                       
|                       
|                       
|                        | Sales & Marketing                                    |                          |       | 846                            |       |                 |       | 23.1 | %    |          |     | (143     | )    |          |      | -14.5  | %     |      |       | 989   |       |   |       | 29.8  | %    
|                       
|                       
|                       
|                       
|                        | General & Administrative                             |                          |       | 1,114                          |       |                 |       | 30.4 | %    |          |     | (114     | )    |          |      | -9.3   | %     |      |       | 1,228 |       |   |       | 37.1  | %    
|                       
|                       
|                       
|                       
|                        | Research & Development                               |                          |       | 535                            |       |                 |       | 14.6 | %    |          |     | (155     | )    |          |      | -22.5  | %     |      |       | 690   |       |   |       | 20.8  | %    
|                       
|                       
|                       
|                       
|                        |                                                      | Total Operating Expenses |       |                                | 2,495 |                 |       |      | 68.2 | %        |     |          | (412 | )        |      |        | -14.2 | %    |       |       | 2,907 |   |       |       | 87.7  | %
|                       
|                       
|                       
|                       
|                        |                                                      | Operating Income         |       |                                | 474   |                 |       |      | 12.9 | %        |     |          | 794  |          |      |        | 248.1 | %    |       |       | (320  | ) |       |       | -9.7  | %
|                       
|                       
|                       
|                       
|Other Income (Expenses) |                                                      |                          |       |                                |       |                 |       |      |      |          |     |          |      |          |      |        |       |      |       |       |       |   |       |      
|                       
|                       
|                       
|                       
|                        | Interest (expense)                                   |                          |       | (75                            | )     |                 |       | -2.0 | %    |          |     | 501      |      |          |      | 87.0   | %     |      |       | (576  | )     |   |       | -17.4 | %    
|                       
|                       
|                       
|                       
|                        | Interest income                                      |                          |       | 3                              |       |                 |       | 0.1  | %    |          |     | 3        |      |          |      | 100    | %     |      |       |       |       |   |       | 0.0   | %    
|                       
|                       
|                       
|                       
|                        | Foreign exchange gain (loss)                         |                          |       | 14                             |       |                 |       | 0.4  | %    |          |     | 14       |      |          |      | 100    | %     |      |       |       |       |   |       | 0.0   | %    
|                       
|                       
|                       
|                       
|                        | Other Income (Expenses)                              |                          |       | 159                            |       |                 |       | 4.3  | %    |          |     | 159      |      |          |      | 100    | %     |      |       |       |       |   |       | 0.0   | %    
|                       
|                       
|                       
|                       
|                        | Distribution to affiliated company                   |                          |       |                               |       |                 |       | 0.0  | %    |          |     |         |      |          |      |        |       |      |       |       |       |   |       | 0.0   | %    
|                       
|                       
|                       
|                       
|                        | Gain (loss) on disposal of fixed assets              |                          |       | 5                              |       |                 |       | 0.1  | %    |          |     | 11       |      |          |      | 183.3  | %     |      |       | (6    | )     |   |       | -0.2  | %    
|                       
|                       
|                       
|                       
|                        | Gain on sales of product line                        |                          |       |                                |       |                 |       | 0.0  | %    |          |     |          |      |          |      |        |       |      |       |       |       |   |       | 0.0   | %    
|                       
|                       
|                       
|                       
|                        | Settlement costs                                     |                          |       |                                |       |                 |       | 0.0  | %    |          |     |          |      |          |      |        |       |      |       |       |       |   |       | 0.0   | %    
|                       
|                       
|                       
|                       
|                        |                                                      | Total other expenses     |       |                                | 106   |                 |       |      | 2.9  | %        |     |          | 688  |          |      |        | 118.2 | %    |       |       | (582  | ) |       |       | -17.6 | %
|                       
|                       
|                       
|                       
|                        | Income (loss) before tax and extraordinary items     |                          |       | 580                            |       |                 |       | 15.8 | %    |          |     | 1,482    |      |          |      | 164.3  | %     |      |       | (902  | )     |   |       | -27.2 | %    
|                       
|                       
|                       
|                       
|                        | Income tax expense (benefit)                         |                          |       | 1                              |       |                 |       | 0.0  | %    |          |     | 15       |      |          |      | -107.1 | %     |      |       | (14   | )     |   |       | -0.4  | %    
|                       
|                       
|                       
|                       
|                        | Loss before extraordinary items                      |                          |       | 579                            |       |                 |       | 15.8 | %    |          |     | 1,467    |      |          |      | 165.2  | %     |      |       | (888  | )     |   |       | -26.8 | %    
|                       
|                       
|                       
|                       
|                        | Cumulative effect of change in accounting principles |                          |       |                                |       |                 |       | 0.0  | %    |          |     |          |      |          |      |        |       |      |       |       |       |   |       | 0.0   | %    
|                       
|                       
|                       
|                       
|                        | Gain from forgiveness of debt                        |                          |       |                                |       |                 |       | 0.0  | %    |          |     |          |      |          |      |        |       |      |       |       |       |   |       | 0.0   | %    
|                       
|                       
|                       
|                       
|                        | Net income (loss)                                    |                          | $     | 579                            |       |                 |       | 15.8 | %    |          | $   | 1,467    |      |          |      | 165.2  | %     |      | $     | (888  | )     |   |       | -26.8 | %    

18



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##### Table of Contents



|                        |                                                      |                          |       |                             |       |                 |       |      |      |          |      |          |       |          |       |       |       |      |       |        |        |   |       |       |       |  
|----------------------- | ---------------------------------------------------- | ------------------------ | ----- | --------------------------- | ----- | --------------- | ----- | ---- | ---- | -------- | ---- | -------- | ----- | -------- | ----- | ----- | ----- | ---- | ----- | ------ | ------ | - | ----- | ----- | ----- | -
|                        |                                                      |                          |       | Nine months ended March 31,
|                        |                                                      |                          |       |                            
|                        |                                                      |                          |       | 2002                        |       | 2001 (restated)
|                        |                                                      |                          |       |                             |       |                
|                        |                                                      |                          |       |                             |       |                 |       |      |      |          |      | $ Change |       | % Change |       |       |       |      |       |        |        |  
|                        |                                                      |                          |       |                             |       |                 |       |      |      |          |      | from     |       | from     |       |       |       |      |       |        |        |  
|                        |                                                      |                          |       |                             |       |                 |       | As % |      | previous |      | previous |       |          |       |       |       | As %
|                        |                                                      |                          |       | $                           |       | of sales        |       | year |      | year     |      | $        |       | of sales
|                        |                                                      |                          |       |                             |       |                 |       |      |      |          |      |          |       |         
|Net Revenues            |                                                      | $                        | 9,981 |                             |       |                 | 100.0 | %    |      | $        | 37   |          |       |          | 0.4   | %     |       | $    | 9,944 |        |        |   | 100.0 | %    
|                       
|                       
|                       
|                       
|Product Cost            |                                                      |                          | 2,213 |                             |       |                 | 22.2  | %    |      |          | (323 | )        |       |          | -12.7 | %     |       |      | 2,536 |        |        |   | 25.5  | %    
|                       
|                       
|                       
|                       
|                        |                                                      | Gross Margin             |       |                             | 7,768 |                 |       |      | 77.8 | %        |      |          | 360   |          |       |       | 4.9   | %    |       |        | 7,408  |   |       |       | 74.5  | %
|                       
|                       
|                       
|                       
|Operating Expenses      |                                                      |                          |       |                             |       |                 |       |      |      |          |      |          |       |          |       |       |       |      |       |        |        |   |       |      
|                       
|                       
|                       
|                       
|                        | Sales & Marketing                                    |                          |       | 2,356                       |       |                 |       | 23.6 | %    |          |      | (204     | )     |          |       | -8.0  | %     |      |       | 2,560  |        |   |       | 25.7  | %    
|                       
|                       
|                       
|                       
|                        | General & Administrative                             |                          |       | 3,617                       |       |                 |       | 36.2 | %    |          |      | 156      |       |          |       | 4.5   | %     |      |       | 3,461  |        |   |       | 34.8  | %    
|                       
|                       
|                       
|                       
|                        | Research & Development                               |                          |       | 1,743                       |       |                 |       | 17.5 | %    |          |      | (368     | )     |          |       | -17.4 | %     |      |       | 2,111  |        |   |       | 21.2  | %    
|                       
|                       
|                       
|                       
|                        |                                                      | Total Operating Expenses |       |                             | 7,716 |                 |       |      | 77.3 | %        |      |          | (416  | )        |       |       | -5.1  | %    |       |        | 8,132  |   |       |       | 81.8  | %
|                       
|                       
|                       
|                       
|                        |                                                      | Operating Income         |       |                             | 52    |                 |       |      | 0.5  | %        |      |          | 776   |          |       |       | 107.2 | %    |       |        | (724   | ) |       |       | -7.3  | %
|                       
|                       
|                       
|                       
|Other Income (Expenses) |                                                      |                          |       |                             |       |                 |       |      |      |          |      |          |       |          |       |       |       |      |       |        |        |   |       |      
|                       
|                       
|                       
|                       
|                        | Interest (expense)                                   |                          |       | (552                        | )     |                 |       | -5.5 | %    |          |      | 1,113    |       |          |       | 66.8  | %     |      |       | (1,665 | )      |   |       | -16.7 | %    
|                       
|                       
|                       
|                       
|                        | Interest income                                      |                          |       | 9                           |       |                 |       | 0.1  | %    |          |      | 9        |       |          |       | 100   | %     |      |       |        |        |   |       | 0.0   | %    
|                       
|                       
|                       
|                       
|                        | Foreign exchange gain (loss)                         |                          |       | 15                          |       |                 |       | 0.2  | %    |          |      | 15       |       |          |       | 100   | %     |      |       |        |        |   |       | 0.0   | %    
|                       
|                       
|                       
|                       
|                        | Other Income (Expenses)                              |                          |       | 139                         |       |                 |       | 1.4  | %    |          |      | 139      |       |          |       | 100   | %     |      |       |        |        |   |       | 0.0   | %    
|                       
|                       
|                       
|                       
|                        | Distribution to affiliated company                   |                          |       | (200                        | )     |                 |       | -2.0 | %    |          |      | (200     | )     |          |       | 100   | %     |      |       |        |        |   |       | 0.0   | %    
|                       
|                       
|                       
|                       
|                        | Gain (loss) on disposal of fixed assets              |                          |       | 10                          |       |                 |       | 0.1  | %    |          |      | 19       |       |          |       | 211.1 | %     |      |       | (9     | )      |   |       | -0.1  | %    
|                       
|                       
|                       
|                       
|                        | Gain on sales of product line                        |                          |       | 20                          |       |                 |       | 0.2  | %    |          |      | (265     | )     |          |       | -93.0 | %     |      |       | 285    |        |   |       | 2.9   | %    
|                       
|                       
|                       
|                       
|                        | Settlement costs                                     |                          |       |                            |       |                 |       |      |      |          |      | 187      |       |          |       | 100.0 | %     |      |       | (187   | )      |   |       | -1.9  | %    
|                       
|                       
|                       
|                       
|                        |                                                      | Total other expenses     |       |                             | (559  | )               |       |      | -5.6 | %        |      |          | 1,017 |          |       |       | 64.5  | %    |       |        | (1,576 | ) |       |       | -15.8 | %
|                       
|                       
|                       
|                       
|                        | Income (loss) before tax and extraordinary items     |                          |       | (507                        | )     |                 |       | -5.1 | %    |          |      | 1,793    |       |          |       | 78.0  | %     |      |       | (2,300 | )      |   |       | -23.1 | %    
|                       
|                       
|                       
|                       
|                        | Income tax expense (benefit)                         |                          |       | 3                           |       |                 |       | 0.0  | %    |          |      | 24       |       |          |       | 114.3 | %     |      |       | (21    | )      |   |       | -0.2  | %    
|                       
|                       
|                       
|                       
|                        | Loss before extraordinary items                      |                          |       | (510                        | )     |                 |       | -5.1 | %    |          |      | 1,769    |       |          |       | 77.6  | %     |      |       | (2,279 | )      |   |       | -22.9 | %    
|                       
|                       
|                       
|                       
|                        | Cumulative effect of change in accounting principles |                          |       |                            |       |                 |       | 0.0  | %    |          |      | 285      |       |          |       | 100.0 | %     |      |       | (285   | )      |   |       | -2.9  | %    
|                       
|                       
|                       
|                       
|                        | Gain from forgiveness of debt                        |                          |       | 7,970                       |       |                 |       | 79.9 | %    |          |      | 7,970    |       |          |       | 100   | %     |      |       |       |        |   |       | 0.0   | %    
|                       
|                       
|                       
|                       
|                        | Net income (loss)                                    |                          | $     | 7,460                       |       |                 |       | 74.7 | %    |          | $    | 10,024   |       |          |       | 391.0 | %     |      | $     | (2,564 | )      |   |       | -25.8 | %    

19



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##### Table of Contents



Net Revenues

Net revenues of each of our principal product categories in dollars and as a
percentage of total net revenues for the three and nine-month periods ended
March 31, 2002 and 2001 are summarized in the following table (in thousands
except for percentage amounts):

|                                                   |  |                              |       |                             |  |         |     |      |  |      |       |         |  |   |     |   |  |   |     |   |  |   |     |   |  |   |       |   |  |  |     |   |  |   |       |   |  |  |     |   |  |   |      |   |  |     |    |  
|-------------------------------------------------- |  | ---------------------------- | ----- | --------------------------- |  | ------- | --- | ---- |  | ---- | ----- | ------- |  | - | --- | - |  | - | --- | - |  | - | --- | - |  | - | ----- | - |  |  | --- | - |  | - | ----- | - |  |  | --- | - |  | - | ---- | - |  | --- | -- | -
|                                                   |  | Three Months Ended March 31, |       | Nine Months Ended March 31,
|                                                   |  |                              |       |                            
|                                                   |  | 2002                         |       | 2001                        |  | Changes |     | 2002 |  | 2001 |       | Changes
|                                                   |  |                              |       |                             |  |         |     |      |  |      |       |        
|                                                   |  | $                            |       | %                           |  | $       |     | %    |  | $    |       | %       |  | $ |     | % |  | $ |     | % |  | $ |     | %
|                                                   |  |                              |       |                             |  |         |     |      |  |      |       |         |  |   |     |   |  |   |     |   |  |   |     |  
|Visual Design                                      |  | $                            | 1,427 |                             |  |         | 39  | %    |  | $    | 1,306 |         |  |   | 39  | % |  | $ | 121 |   |  |   | 9   | % |  | $ | 3,362 |   |  |  | 34  | % |  | $ | 3,594 |   |  |  | 36  | % |  | $ | (232 | ) |  |     | -6 | %
|                                                  
|                                                  
|                                                  
|                                                  
|Graphic Design                                     |  | $                            | 1,340 |                             |  |         | 37  | %    |  |      | 1,208 |         |  |   | 36  | % |  |   | 132 |   |  |   | 11  | % |  |   | 3,767 |   |  |  | 38  | % |  |   | 4,073 |   |  |  | 41  | % |  |   | (306 | ) |  | -8  | % 
|                                                  
|                                                  
|                                                  
|                                                  
|Business Application & Other                       |  | $                            | 937   |                             |  |         | 26  | %    |  |      | 848   |         |  |   | 26  | % |  |   | 89  |   |  |   | 10  | % |  |   | 2,911 |   |  |  | 29  | % |  |   | 2,659 |   |  |  | 27  | % |  |   | 252  |   |  |     | 9  | %
|                                                  
|                                                  
|                                                  
|                                                  
|Provision for returns and
rebates not yet received |  |                              | (43   | )                           |  |         | -1  | %    |  |      | (48   | )       |  |   | -1  | % |  |   | 5   |   |  |   | -11 | % |  | $ | (59   | ) |  |  | -1  | % |  |   | (382  | ) |  |  | -4  | % |  |   | 323  |   |  | -85 | % 
|                                                   |  |                              |       |                             |  |         |     |      |  |      |       |         |  |   |     |   |  |   |     |   |  |   |     |   |  |   |       |   |  |  |     |   |  |   |       |   |  |  |     |   |  |   |      |   |  |     |    |  
|Net Revenues                                       |  | $                            | 3,661 |                             |  |         | 100 | %    |  | $    | 3,314 |         |  |   | 100 | % |  | $ | 347 |   |  |   | 10  | % |  | $ | 9,981 |   |  |  | 100 | % |  | $ | 9,944 |   |  |  | 100 | % |  | $ | 37   |   |  |     | 0  | %
|                                                   |  |                              |       |                             |  |         |     |      |  |      |       |         |  |   |     |   |  |   |     |   |  |   |     |   |  |   |       |   |  |  |     |   |  |   |       |   |  |  |     |   |  |   |      |   |  |     |    |  

The sales figures provided in this table have been restated to include
Keynomics sales into the business application and other category.

For the fiscal quarter ended March 31, 2002, sales of FloorPlan and TurboCAD
increased as compared to the same reporting period in the previous fiscal year.
This increase is the result of more focused direct marketing campaigns targeted
toward the end users of these products. Sales of IMSIs flagship product,
TurboCAD, decreased in the nine-month period ended March 31, 2002 as compared
to the same reporting period in the previous fiscal year, resulting in an
overall decrease in revenues in the visual design category. The intense
competition that characterized the computer-aided design market and the delays
in introducing the new version 8.0 of TurboCAD negatively impacted sales of the
visual design category in the nine-month period ended March 31, 2002.

In the three and nine month periods ended March 31, 2002, revenues in the
graphic design category consisted mostly of subscription revenues for graphic
content from our wholly owned subsidiary ArtToday.com. When compared to the
same periods in the previous fiscal year, ArtToday.coms sales increased in the
quarter ended March 31, 2002 from $778,000 to $1,082,000 and from $2,310,000 to
$3,012,000 for the nine-months ended March 31, 2002. This increase is the
result of more paid subscribers as a result of a wider range of subscription
choices. Because ArtToday.coms revenues are based on subscriptions, these
amounts are initially deferred and then amortized over the subscription
periods, which extend up to twelve months. As of March 31, 2002, approximately
$1,044,000 of revenue related to ArtToday.com remained deferred. The following
table details the amortization schedule of these deferred revenues for the
upcoming year:

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##### Table of Contents



|                           |  |                                                 |           | 
|-------------------------- |  | ----------------------------------------------- | --------- | 
|                           |  | ArtToday.com Deferred revenues to be recognized
|4th Quarter of Fiscal 2002 |  | $                                               | 543,000   | 
|                          
|                          
|                          
|                          
|1st Quarter of Fiscal 2003 |  | $                                               | 296,000   | 
|                          
|                          
|                          
|                          
|2nd Quarter of Fiscal 2003 |  | $                                               | 162,000   | 
|                          
|                          
|                          
|                          
|3rd Quarter of Fiscal 2003 |  | $                                               | 43,000    | 
|                          
|                          
|                          
|                          
|Total                      |  | $                                               | 1,044,000 | 

The decrease in overall revenues in the graphic design category for the
nine-month period ended March 31, 2002 is attributable to the steep decline in
the revenues from our historically most important revenue producing product
line within this category, MasterClips, and to the decline in sales of our
Hijaak product line. The significant decrease in Masterclips revenues was the
result of decreased sales from our republisher Vivendi who acquired the rights
to the product during the previous fiscal year. The republishing agreement with
Vivendi expired according to its own terms and we subsequently released new
versions of Masterclips in December 2001.

We intend to continue publishing new versions of Masterclips in the future.
Future sales of Masterclips along with the increasing trend of ArtToday.com
sales should contribute to higher revenues in the graphic design category in
future reporting periods. The 40% increase in ArtTodays revenues in the
quarter ended March 31, 2002 as compared to the same quarter from the previous
fiscal year more than offset the decreases in the revenues from MasterClips and
Hijaak resulting in an overall increase in the revenues derived from the
graphic design category.

During the quarter ended December 31, 2001, we acquired Keynomics, a company
focused on productivity enhancement software. Sales of Keynomics products
contributed $239,000 and $916,000 to the business application and other
category during the fiscal quarter and the nine-month periods ended March 31,
2002 respectively as compared to $207,000 and $545,000 for the same reporting
periods in fiscal 2001.

Prior to September 30, 2000, our focus had been primarily on our Internet
business and our graphic and visual design products. Because we did not spend
as much on marketing non-core products as during previous periods, sales of
Flow!, FormTool, Maplinx, MasterPublisher, OrgPlus, People Scheduler, Web
Business Builder and TurboProject all declined up to March 2001. These factors
combined to bring revenues from the business application and other category to
an all time low. During the nine month period ended March 31, 2002, however,
demand for some of our non-core products in this category such as Flow!,
FormTool, OrgPlus and Graphics converter increased. This increased demand
along with the $371,000 increase in Keynomics revenues replaced lost revenues
from the sale of Update Now, a Y2K related product that was popular during
fiscal 2001, and therefore maintain revenues from the business application and
other category at the same level as in the previous fiscal year.

Net revenues from domestic sales increased by $419,000 or 14%to $3,377,000 and
were 92% of total net revenues for the three-month period ended March 31, 2002.
This compares to net revenues from domestic sales of $2,958,000, or 89% of
total net revenues, for the comparable period in the previous fiscal year. For
the nine month period ended March 31, 2002, net revenues from domestic sales
decreased slightly to $9,030,000 and were 90% of total net revenues. This
compares to $9,048,000 or 91% of total net revenues, for the comparable period
in the previous fiscal year.

Net revenues from international sales decreased by $72,000 or 20%, and were
$284,000 or 8% of net revenues for the three-month period ended March 31, 2002.
This compares to $356,000 or 11% of net revenues for the three months ended
March 31, 2001. For the nine month period ended March 31, 2002,

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##### Table of Contents



net revenues from international sales increased by $55,000 or 6% to $951,000
and were 10% of total net revenues. This compares to $896,000 or 9% of total
net revenues, for the comparable period in the previous fiscal year.

We are currently serving the domestic and international retail markets using
direct sales methods and republishing agreements. In addition, we are
increasing our presence in the retail market through selected distribution
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.

Product Costs

Our product costs include the costs of CD-ROM duplication, printing of
manuals, packaging and fulfillment, freight-in, freight out, license fees,
royalties that we pay to third parties based on sales of published software,
and amortization of capitalized software acquisition and development costs.
Costs associated with the return of products, such as refurbishment and the
write down in value of returned goods are also included in product costs. The
decrease in product costs in absolute dollars and as a percentage of net
revenues in the three and nine-month periods ended March 31, 2002 as compared
to the same periods from the previous fiscal year was primarily attributable to
lower amortization costs.

We amortize capitalized software development costs and license fees on a
product-by-product basis. The amortization for each product is the greater of
the amount computed using (a) the ratio of current gross revenues to the total
of current and anticipated future gross revenues for the product or (b) the
economic life of the product. During the first nine months of fiscal 2002, we
capitalized new software development costs in the amount of $22,000 related to
purchases made by ArtToday and Keynomics. Amortization of such costs was
$533,000, and $1,006,000 in the nine-month periods ended March 31, 2002 and
March 31, 2001, respectively.

Sales and Marketing

Our sales and marketing expenses consist primarily of sales and marketing
personnel salaries and benefits, commissions, advertising, printing and direct
mail expenses. Decreased commissions paid to our sales force along with
reduced advertising expenses were the primary reasons for the overall decrease
in sales and marketing expenses in the three and nine months ended March 31,
2002. The steady ratio of sales and marketing expenses as a percentage of net
revenues over the three and nine-month periods ended March 31, 2002 reflects
our commitment to our core products and ArtTodays online products.

General and Administrative

Our general and administrative expenses consist primarily of salaries and
benefits for employees in the legal, finance, accounting, human resources,
information systems and operations departments and fees to our professional
advisors. The decrease in general and administrative expenses in the quarter
ended March 31, 2002 as compared to the same period from the previous year
reflects our commitment to control overhead expenses throughout the Company.
For the nine-month period ended March 31, 2002, a one time charge of $211,000
relating to issuance of warrants to outside consultants, totaling 785,000
warrants with an average exercise price of $0.27 and terms of three to ten
years, combined with the severance cost of $60,000 payable to one of our former
executives were the primary causes of the increase in general and
administrative expense.

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##### Table of Contents



Research and Development

Our research and development expenses consist primarily of salaries and
benefits for research and development employees and payments to independent
contractors. Research and development costs decreased in the three and
nine-month periods ended March 31, 2002 as compared to the same reporting
periods in the previous fiscal year. This decrease is mainly due to lower
payroll charges and outside consulting fees relating to the Design.Net
division, which was spun off effective October 1, 2001, and to the decrease in
the number of products under development. Despite this decrease in research and
development expenses, we are still committed to sustaining our investment in
developing our core products by maintaining strong relationships with our
development team in Russia.

Interest and Other, Net

Interest and other expenses, net, include interest and penalties 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-month periods ended March 31, 2002 and
2001:

|                        |       |                              |   |                                |     |                 |   |      |      |  
|----------------------- | ----- | ---------------------------- | - | ------------------------------ | --- | --------------- | - | ---- | ---- | -
|                        |       |                              |   | Fiscal quarter ended March 31,
|                        |       |                              |   |                               
|                        |       |                              |   | 2002                           |     | 2001 (restated)
|                        |       |                              |   |                                |     |                
|                        |       |                              |   | $                              |     | $              
|                        |       |                              |   |                                |     |                
|Interest and other, net |       |                              |   |                                |     |                 |   |     
|                       
|                       
|                       
|                       
|                        |       | Interest expense             |   | $                              | (75 | )               |   | $    | (410 | )
|                       
|                       
|                       
|                       
|                        |       | Interest income              |   |                                | 3   |                 |   |      | 6    |  
|                       
|                       
|                       
|                       
|                        |       | Foreign exchange gain (loss) |   |                                | 14  |                 |   |      | (37  | )
|                       
|                       
|                       
|                       
|                        |       | Penalties                    |   |                                |    |                 |   |      | (135 | )
|                       
|                       
|                       
|                       
|                        |       | Other income                 |   |                                | 159 |                 |   |      |     |  
|                        |       |                              |   |                                |     |                 |   |      |      |  
|                        | Total |                              | $ | 101                            |     |                 | $ | (576 | )   
|                        |       |                              |   |                                |     |                 |   |      |      |  

|                        |                                     |   |                             |      |                 |   |        |        |  
|----------------------- | ----------------------------------- | - | --------------------------- | ---- | --------------- | - | ------ | ------ | -
|                        |                                     |   | Nine months ended March 31,
|                        |                                     |   |                            
|                        |                                     |   | 2002                        |      | 2001 (restated)
|                        |                                     |   |                             |      |                
|                        |                                     |   | $                           |      | $              
|                        |                                     |   |                             |      |                
|Interest and other, net |                                     |   |                             |      |                 |   |        |       
|                       
|                       
|                       
|                       
|                        | Interest expense                    |   | $                           | (397 | )               |   | $      | (1,218 | )
|                       
|                       
|                       
|                       
|                        | Interest related to warrants issued |   |                             | (65  | )               |   |        |       |  
|                       
|                       
|                       
|                       
|                        | Interest income                     |   |                             | 9    |                 |   |        | 19     |  
|                       
|                       
|                       
|                       
|                        | Foreign exchange gain (loss)        |   |                             | 15   |                 |   |        | (61    | )
|                       
|                       
|                       
|                       
|                        | Penalties                           |   |                             | (90  | )               |   |        | (405   | )
|                       
|                       
|                       
|                       
|                        | Other income                        |   |                             | 139  |                 |   |        |       |  
|                        |                                     |   |                             |      |                 |   |        |        |  
|Total                   |                                     | $ | (389                        | )    |                 | $ | (1,665 | )     
|                        |                                     |   |                             |      |                 |   |        |        |  

Interest and other expense, net, decreased substantially in the three and
nine-month periods ended March 31, 2002, as compared to the same reporting
period in fiscal 2001. This decrease is mainly the result of our debt
restructuring and the plan of merger we signed with DCDC on August 31, 2001.
We did not accrue penalties on the Baystar note after August 2001, and interest
expenses of 8% per annum on the new negotiated balance of the Baystar note is
substantially reduced as compared to the same period from the previous year. We
saved on the interest previously paid to Union Bank of California since the
note

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was acquired by DCDC. The original merger agreement provided that the note
not bear interest except in
the event of the termination of the plan of merger. The plan of merger was
terminated and the two companies entered into an agreement entitled Promissory
Note Conversion and General Release, pursuant to which DCDC converted the
entire outstanding principal amount of $3,580,000 and all interest due under
the promissory note it had acquired into 9,000,000 shares of common stock of
IMSI and cash in the amount of $250,000 to be paid in monthly installments over
15 months.

In the fiscal quarter ended March 31, 2002, Interest and other expense, net,
included $159,000 of other income representing the net recovery amount of
$164,000 we obtained from indemnification claims we had against third parties
associated with the original circumstances leading to the adverse Imageline
arbitration award offset by a $5,000 expense related to ArtToday.

Gain on sales of product line

During the second quarter of fiscal 2002 we sold the rights to the Visual Cadd
software product to TriTools Partners, a California company, for $20,000. The
entire amount of the sale was recorded as a gain since the product had a zero
book value at the time of the transaction. This was the only transaction
involving a gain or loss on sales of product lines during the nine-month period
ended March 31, 2002.

During the nine-month period ended March 31, 2001, we collected the remaining
$200,000 pertaining to the sale of the Easy Language line of product and
recognized that amount as a one-time gain on product line sale. During the same
period, ArtToday.com sold the domain name Caboodles for $85,000 and recorded
a one-time gain for the same amount.

Extraordinary item  gain on forgiveness of debt

We did not record any gain from forgiveness of debt during the quarter ended
March 31, 2002. On April 3, 2002, we offered to Silicon Valley Bank and Silicon
Valley Bank accepted an early payment of the $700,000 balance of their note at
a $100,000 discount. The payment of $600,000 was made on April 5, 2002. In the
next fiscal quarter, we will recognize an additional gain from forgiveness of
debt of $100,000 arising from this transaction as an extraordinary item.

During the fiscal quarter ended December 31, 2001, we recognized a $2,243,000
gain from forgiveness of debt. $2,062,000 was related to the forgiveness of a
portion of the principal and accrued interest on the Silicon Valley Bank note.
$140,000 was related to the forgiveness of amounts payable to Light Work Design
and $40,500 was related to the forgiveness of amounts payable to Microsoft.
Light Work Design and Microsoft are two unsecured creditors that were owed
royalties.

In the quarter ended September 30, 2001, we recorded an extraordinary gain of
$5,727,000 related to the forgiveness of debt to BayStar Capital and DelRay
Technologies. BayStar Capital agreed to settle for 10% of the principal and
accrued interest and penalties outstanding. According to the original
agreement, payments are to be made in four quarterly installments beginning
September 30, 2002, with interest accruing at the rate of 8% per annum from
August 31, 2001 to the date of the first installment. Thereafter, the interest
rate is 12% per annum until the note is paid in full on or before June 30,
2003. DelRay Technologies agreed to a one-time payment of $20,000 as
settlement in full of its outstanding claim.

These combined transactions resulted into an aggregate forgiveness of debt gain
of $7,970,000 for the nine-month period ended March 31, 2002.

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The tax expense on the extraordinary gain on forgiveness of debt is
approximately $3,183,000 as calculated at our marginal tax rate of 39.94%. This
expense will be entirely offset by the net operating loss carryforward.

Settlement costs

We recorded a charge of $187,000 during the fiscal quarter ended September 30,
2000 relating to the issuance of 185,005 shares of common stock in July 2000 as
a settlement of the ArtToday.com Fee Agreement. We had no similar transactions
during the current fiscal year.

Provision for Income Taxes

We did not record a tax benefit in the nine months ending March 31, 2002 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.

Liquidity and Capital Resources

As of March 31, 2002, we had $2,352,000 in cash and cash equivalents. This
represents a $1,084,000 increase from the $1,268,000 balance at June 30, 2001.
Working capital at March 31, 2002 was a negative $4,646,000. This represents an
improvement of $13,171,000 over the negative working capital at June 30, 2001
of $17,817,000. The improvement in working capital over the past nine-month
period is mainly the result of the decline in current liabilities following the
restructuring of our debt combined with an increase in cash of $1,084,000.

The increase in cash and cash equivalents during the quarter and the
nine-months ended March 31, 2002 resulted primarily from our improved
operations and from the cash we raised through the private placement and the
warrant exercises, in part offset by our debt payouts. During the quarter ended
March 31, 2002 we raised cash through a combination of a private placement and
the exercise of warrants by certain executives and senior advisers to the
company. Part of the proceeds were subsequently used to pay off the Silicon
Valley Bank note at a discount in the beginning of the fourth quarter of fiscal
year 2002.

Our operating activities generated cash of $1,077,000 and $1,520,000 during the
three and nine-month period ended March 31, 2002. The loss from continuing
operations before extraordinary items was $510,000 for the nine months ended
March 31, 2002. The main items that helped reconcile this loss to the net cash
provided by operating activities during the nine-month period ended March 31,
2002 included depreciation and amortization expenses of $1,034,000, increases
of accrued interest expenses of $277,000 and a non cash charge of $310,000
related to warrants issued to outside consultants and other third parties.
During the nine-months ended March 31, 2002, our net receivables decreased by
$260,000 as we improved our collection cycle. Part of the cash collected was
used to build inventories in order to satisfy the increased demand of our
products. During the quarter ended March 31, 2002 we recovered $300,000 related
to indemnification claims we have against third parties associated with the
original circumstances leading to the arbitration award. The recovered amount
was subsequently offset by expenses totaling $136,000 representing fees
related to this matter.

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Our investing activities during the nine months ended March 31, 2002 consumed
$432,000 in cash used mainly in acquiring new domain names necessary to
increase traffic to ArtTodays websites, in acquiring new equipment for
ArtToday and in acquiring Keynomics during the previous quarter.

Our financing activities did not consume or generate significant cash during
the nine-month period ended March 31, 2002. During this period, we decreased
our obligation to Union Bank by $350,000 bringing the balance of all amounts
due to the bank to $3,580,000. Subsequent to these payments and pursuant to our
original merger agreement with DCDC, DCDC acquired the Union Banks note in
August 2001 and later converted the note into shares of IMSIs common stock.
Also during the same period of fiscal 2002, we made payments relating to
capital lease obligations of $219,000 and we repaid $500,000 to Silicon Valley
Bank pursuant to the new $1.2 million secured promissory note. Subsequently,
and during the fourth quarter of fiscal 2002, we paid the remaining balance of
the Silicon Valley Bank at a $100,000 discount. We were able to do so after we
raised funds in excess of $800,000 through a private placement and the exercise
of warrants by certain executives and senior advisers to the company.

If we fail to raise additional capital, the negative working capital position
could have a material adverse effect on our liquidity in the future. The
financial statements have been prepared on a basis that contemplates our
continuation as a going concern and the realization of our assets and
liquidation of our liabilities in the ordinary course of business. We have an
accumulated deficit of $37 million and negative working capital of $4.6 million
at March 31, 2002. We also lack sustained profitability across all business
segments during our recent history. All these issues raise substantial doubt
about our ability to be a going concern for a reasonable period of time and the
auditors report on our financial statements filed within our fiscal 2001 Form
10-K reflects such doubt. The financial statements do not include any
adjustments relating to the recoverability or classification of assets or the
amounts and classification of liabilities that might result from the outcome of
this uncertainty. Our continued existence is dependent on our ability to
complete the repayment of debt and obtain additional financing sufficient to
allow us to meet our obligations as they become due and to achieve and maintain
profitable operations.

Historically, we financed our working capital and capital expenditure
requirements primarily from retained earnings, short-term and long-term bank
borrowings, capitalized leases and sales of common stock. We will require
additional working capital to meet our ongoing operating expenses, to develop
new products, and to properly conduct business activities. We believe that the
reduction in our liabilities under planned and completed settlements will allow
us to continue as a going concern, remain profitable in the future, and remedy
our working capital needs. In addition, we will continue to evaluate raising
additional capital investment through the issuance of stock and short or long
term debt financing.

The forecasted 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. The factors described in Risk Factors, as filed in our
fiscal 2001 Form 10-K, will affect future capital requirements and the adequacy
of available funds. We can provide no assurance that needed financing will be
available. Furthermore, any additional equity financing, if available, may be
dilutive to shareholders, and debt financing, if available, may involve
restrictive covenants. Failure to raise capital when needed will have a
material adverse effect on our business, operating results, financial condition
and ability to continue as a going concern.

We had no material commitments for future capital expenditures or material
long-term debt at March 31, 2002 except as previously disclosed under the
heading Debt restructuring regarding long term obligations to Imageline,
Baystar Capital and other unsecured creditors.

Other Factors that May Affect Future Operating Results

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Other factors that may cause fluctuations of, or a decline in, operating
results in the future include the market factors and competitive factors
described in our Fiscal 2001 Form 10-K, under Future
Performance and Additional Risk Factors. 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 cancellations from major customers                                         
|
| |  |  | Changes or disruptions in the consumer software distribution channels                                
|
| |  |  | Failure of Keynomics to become profitable on a sustained basis                                       
|
| |  |  | Economic conditions, both generally and within the software or Internet industries                   

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PART II  OTHER INFORMATION




Item 1.  Legal Proceedings

Not Applicable




Item 2.  Changes in Securities and Use of Proceeds

On March 1, 2002, we mutually agreed with DCDC to terminate our planned merger
and released each other from all duties, rights, claims, obligations and
liabilities arising from, in connection with, or relating to, the Merger
Agreement signed on August 31, 2001. We also agreed to enter into an agreement
entitled Promissory Note Conversion and General Release pursuant to which DCDC
agreed to convert the entire outstanding principal amount and all interest due
under the Union Bank note into 9,000,000 shares of common stock of IMSI and
cash in the amount of $250,000 to be paid in monthly installments over 15
months.

In addition, we raised capital through a private offering of IMSI shares during
the fiscal quarter ended March 31, 2002. We offered shares of common stock at
$.50 per share in a private placement offering to certain qualified accredited
investors. The money received in the offering, together with additional funds
received pursuant to certain warrant exercises (as described below),
contributed significantly to our ability to pay off early and at a $100,000
discount the remaining $700,000 principal balance of the Silicon Valley Bank
note. This repayment occurred on April 5, 2002.

As of March 31, 2002, we received formal commitment from investors to purchase
1,005,000 shares of IMSIs capital stock at an aggregate purchase price of
$502,500. We received funds totaling $417,500 from the subscribers as of the
end of the quarter. Subsequently and as of the date of this filing all
committed funds have been received and deposited and all shares have been
issued. None of the participants in this private placement, except for Mr.
John Wade who is our CEOs brother and Mr. Matthew Rexon who is our chairmans
cousin are affiliates or a related parties.

The shares related to the offering have not been registered under the
Securities Act of 1933 nor have they been registered under the securities laws
of any state. The offer and sale of the shares are exempt from registration
under section 4(2) of the Securities Act of 1933, and Rule 506 of Regulation D
thereunder and exempt from securities qualification and related requirements
under the respective rules and regulations of the states in which the shares
were being offered and sold. All the investors represented to IMSI that they
are accredited investors under Rule 501 of Regulation D.

Also, during the fiscal quarter ended March 31, 2002, certain officers and
advisors to the company exercised previously issued warrants in the aggregate
number of 1,282,500 at exercise prices ranging from $.20 to $.30 (averaging
$.25). The proceeds to the company from these warrant exercises totaled
$318,750.

These transactions resulted in the issuance of 11,117,500 shares of common
stock that significantly diluted the 10,212,327 shares of IMSIs capital stock
issued and outstanding as of December 31, 2001.
The following table details the activity regarding common stock for the quarter
ended March 31, 2002.

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|                                           |                                        |       |                               |            |  |           |            |           |            |           |            |  |           | 
|------------------------------------------ | -------------------------------------- | ----- | ----------------------------- | ---------- |  | --------- | ---------- | --------- | ---------- | --------- | ---------- |  | --------- | 
|                                           |                                        |       |                               |            |  |           |            | Number of |            |           |            | 
|Transaction type                           |                                        | Group |                               | securities |  | Amount   
|                                           |                                        |       |                               |            |  |          
|Shares outstanding as of December 31, 2001 |                                        |       |                               |            |  |           | 10,212,327 |           |            | $         | 29,737,465 | 
|                                          
|                                          
|                                          
|                                          
|                                           | Private placement                      |       | Accredited investors          |            |  | 835,000   |            |           |            | 417,500   |           
|                                          
|                                          
|                                          
|                                          
|                                           | Debt to equity conversion              |       | Related parties               |            |  | 9,000,000 |            |           |            | 3,330,000 |           
|                                          
|                                          
|                                          
|                                          
|                                           | Options issued for consulting services |       | Consultants                   |            |  |           |            |           |            | 41,956    |           
|                                          
|                                          
|                                          
|                                          
|                                           | Options exercised                      |       | Employees and consultants     |            |  | 73,000    |            |           |            | 14,994    |           
|                                          
|                                          
|                                          
|                                          
|                                           | Warrants exercised                     |       | Executives & advisers to IMSI |            |  | 1,282,500 |            |           |            | 318,750   |           
|                                          
|                                          
|                                          
|                                          
|                                           | Variable accounting charge             |       | Re-priced stock options       |            |  |           |            |           |            | 16,131    |           
|                                           |                                        |       |                               |            |  |           |            |           |            |           |            | 
|                                           |                                        | Total |                               |            |  |           |            |           | 11,190,500 |           |            |  | 4,139,331 | 
|                                           |                                        |       |                               |            |  |           |            |           |            |           |            | 
|Shares outstanding as of March 31, 2002    |                                        |       |                               |            |  |           | 21,402,827 |           |            | $         | 33,876,796 | 
|                                           |                                        |       |                               |            |  |           |            |           |            |           |            | 




Item 3.  Defaults upon Senior Securities

Not Applicable




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

Not Applicable




Item 5.  Other Information

Not Applicable




Item 6.  Exhibits and Reports on Form 8-K



| | (a) |  | See Exhibits       
| | --- |  | -------------------
|
| | (b) |  | Reports on Form 8-K

One report on Form 8-K was filed during the third quarter of fiscal year 2002,
on March 13, 2002, to discuss the mutual termination of the plan of merger with
DCDC and the resignation of four directors as well as the addition of two new
directors to our Board.

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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.

Date:May 20, 2002, INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.

By: /s/ Martin Wade, III
Martin Wade, III
Director , Chief Executive Officer & Chief Financial Officer

By: /s/ Gordon Landies
Gordon Landies
President

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INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
2001 Form 10-QSB QUARTERLY Report




Exhibit Index

|        |  |                                                          |  |      |    | 
|------- |  | -------------------------------------------------------- |  | ---- | -- | 
|Exhibit |  |                                                          |  |      |    | 
|Number  |  | EXHIBIT TITLE                                            |  | Page
|        |  |                                                          |  |     
|10.1    |  | Executive Employment Agreement_ Martin Wade              |  |      | 29 | 
|       
|       
|       
|       
|        |  |                                                          |  |      |    | 
|       
|       
|       
|       
|10.2    |  | Amendment To Restructure Agreement _ Silicon Valley Bank |  |      | 38 | 

31