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

[X]      Quarterly Report Pursuant to Section 13 or 15(d) of the securities
         Exchange Act of 1934

                For the quarterly period ended DECEMBER 31, 2003

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

                      For the transition period from: _____ to _____

                         Commission File Number 0-15949

                   INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
              (Exact name of Small business issuer in its charter)


<TABLE>
<CAPTION>
<S>                                                                  <C>
                         CALIFORNIA                                             94-2862863
(State or other jurisdiction of incorporation or organization)      (I.R.S. Employer Identification No.)

       100 ROWLAND WAY, SUITE 300, NOVATO, CALIFORNIA                             94945
          (Address of principal executive offices)                              (Zip code)

                       (415) 878-4000
                 Issuer's telephone number
</TABLE>


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

As of FEBRUARY 6, 2004, 23,447,368 Shares of Issuer's common stock, no par
value, were outstanding.

Transitional Small Business Disclosure Format:                YES /_/   NO /X/

<PAGE>


                   INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
                                AND SUBSIDIARIES

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
<S>                                                                                                   <C>
PART I - FINANCIAL INFORMATION                                                                         3

         ITEM1- CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                            3
                  CONDENSED CONSOLIDATED BALANCE SHEETS                                                3
                  CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)      4
                  CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY                            5
                  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                                      6
                  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                 7
         ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS              14
         ITEM 3- CONTROLS AND PROCEDURES                                                              26


PART II - OTHER INFORMATION                                                                           26

         ITEM 1- LEGAL PROCEEDINGS                                                                    26
         ITEM 2- CHANGES IN SECURITIES                                                                26
         ITEM 3- DEFAULTS UPON SENIOR SECURITIES                                                      26
         ITEM 4- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  26
         ITEM 5- OTHER INFORMATION                                                                    27
         ITEM 6- EXHIBITS AND REPORTS ON FORM 8-K                                                     27


SIGNATURES                                                                                            29

INDEX TO EXHIBITS:                                                                                    30
</TABLE>

                                       2
<PAGE>

                         PART I - FINANCIAL INFORMATION

ITEM1- CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
                                                                 (UNAUDITED)
                                                              -----------------    -------------
                                                              DECEMBER 31, 2003    JUNE 30, 2003
                                                              -----------------    -------------
<S>                                                           <C>                  <C>
ASSETS
 Current assets:
    Cash and cash equivalents                                      $  5,249         $ 10,399
    Investment in marketable securities                                 197               --
    Receivables,  less allowances for doubtful  accounts,
    discounts and returns of $630 and $445                            1,123              734
    Receivables, other (related to discontinued operations)           1,000               --
    Inventories                                                         512              268
    Other current assets                                                484              240
                                                                   --------         --------
    TOTAL CURRENT ASSETS                                              8,565           11,641

 FIXED ASSETS, NET                                                      271               85

 Intangible assets
    Capitalized software, net                                           778               87
    Domain names, net                                                 1,419                4
    Distribution rights, net                                             --               36
    Capitalized customer lists                                          128               --
    Goodwill                                                            608              179
                                                                   --------         --------
    TOTAL INTANGIBLE ASSETS                                           2,933              306

Other assets
    Note receivable from related party                                  350               --
    Investment in securities                                          1,138              998
    Assets related to discontinued operations                         1,300            1,300
                                                                   --------         --------
    TOTAL OTHER ASSETS                                                2,788            2,298

                                                                   ========         ========
           TOTAL ASSETS                                            $ 14,557         $ 14,330
                                                                   ========         ========

LIABILITIES AND SHAREHOLDERS' EQUITY

 Current liabilities:
    Short-term debt                                                     786              304
    Trade accounts payable                                              871              564
    Income tax payable                                                   --              271
    Accrued and other liabilities                                       610            1,541
    Deferred revenue                                                    241              305
                                                                   --------         --------
    TOTAL CURRENT LIABILITIES                                         2,508            2,985

 Liabilities related to discontinued operations                          84               84
 Long-term debt and other obligations                                   181               --
                                                                   --------         --------
 TOTAL LIABILITIES                                                    2,773            3,069

Shareholders' equity:
   Common stock, no par value; 300,000,000 authorized;
   Issued and outstanding 23,347,368 and 22,818,232 shares           36,099           35,546
   Accumulated deficit                                              (24,221)         (24,223)
   Accumulated other comprehensive loss                                 (94)             (62)
                                                                   --------         --------
      TOTAL SHAREHOLDERS' EQUITY                                     11,784           11,261
                                                                   --------         --------
                                                                   ========         ========
           TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY              $ 14,557         $ 14,330
                                                                   ========         ========
</TABLE>

            See Notes to Condensed Consolidated Financial Statements


                                       3
<PAGE>

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

<TABLE>
<CAPTION>
                                                                          THREE MONTHS ENDED                 SIX MONTHS ENDED
                                                                             DECEMBER 31,                       DECEMBER 31,
                                                                         2003             2002             2003             2002
                                                                       --------         --------         --------         --------
<S>                                                                    <C>              <C>              <C>              <C>
 Net revenues                                                          $  2,674         $  2,466         $  4,455         $  4,543
 Product costs                                                              793            1,075            1,371            1,582
                                                                       --------         --------         --------         --------
  GROSS MARGIN                                                            1,881            1,391            3,084            2,961

 Costs and expenses:
    Sales and marketing                                                   1,065              836            1,803            1,604
    General and administrative                                              991              499            1,675            1,442
    Research and development                                                531              445            1,007              822
                                                                       --------         --------         --------         --------
  TOTAL OPERATING EXPENSES                                                2,587            1,780            4,485            3,868
                                                                       --------         --------         --------         --------
 OPERATING LOSS                                                            (706)            (389)          (1,401)            (907)
                                                                       --------         --------         --------         --------

 Other income and (expense):
    Interest and other, net                                                  60             (127)             140             (182)
    Unrealized gain on marketable securities                                 47               --              177               --
    Gain on liquidation of foreign subsidiaries                              --               --               --               42
    Gain (loss) on extinguishment of debt                                    (5)             257               76              435
                                                                       --------         --------         --------         --------
LOSS BEFORE INCOME TAX                                                     (604)            (259)          (1,008)            (612)

 Income tax benefit                                                           6               --               10               --
                                                                       --------         --------         --------         --------
LOSS FROM CONTINUING OPERATIONS                                            (598)            (259)            (998)            (612)

Gain from the sale of discontinued operations                             1,000               --            1,000               --
Income from discontinued operations, net of income tax                       --              208               --              425
                                                                       --------         --------         --------         --------
 NET INCOME (LOSS)                                                     $    402         ($    51)        $      2         ($   187)
                                                                       ========         ========         ========         ========

Other comprehensive income (loss), net of tax:
    Foreign currency translation, net of tax                                (28)              (6)             (32)              (2)
                                                                       --------         --------         --------         --------
    OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX                      $    374         ($    57)        ($    30)        ($   189)
                                                                       ========         ========         ========         ========

BASIC EARNINGS (LOSS) PER SHARE
         Loss per share from continuing operations                     ($  0.02)        ($  0.01)        ($  0.04)        ($  0.03)
         Gain from the sale of discontinued operations                 $   0.04               --         $   0.04               --
         Income from discontinued operations, net of income tax              --         $   0.01               --         $   0.02
         Earnings  (loss) per share                                    $   0.02         $   0.00         $   0.00         ($  0.01)
DILUTED EARNINGS (LOSS) PER SHARE
         Loss per share from continuing operations                     ($  0.02)        ($  0.01)        ($  0.04)        ($  0.03)
         Gain from the sale of discontinued operations                 $   0.04               --         $   0.04               --
         Income from discontinued operations, net of income tax              --         $   0.01               --         $   0.02
         Earnings (loss) per share                                     $   0.02         $   0.00         $   0.00         ($  0.01)

Shares used in computing basic earnings (loss) per share                 23,268           22,792           23,223           22,792
information

Shares used in computing diluted earnings (loss) per share               23,268           22,792           23,223           22,792
information
</TABLE>

            See Notes to Condensed Consolidated Financial Statements

                                       4
<PAGE>

           INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES
            CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                       Six Months ended December 31, 2003
                                 (In thousands)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                          COMMON STOCK                                ACCUMULATED
                                                                                                         OTHER
                                                                                     ACCUMULATED      COMPREHENSIVE
                                                       SHARES       AMOUNT             DEFICIT             LOSS           TOTAL
                                                 --------------------------------------------------------------------------------
<S>                                                   <C>          <C>               <C>              <C>              <C>
BALANCE AT JUNE 30, 2003                               22,818       $35,546            ($24,223)           ($62)         $11,261
                                                 ================================================================================
Issuance of common stock related to:
    Warrants exercised                                    305            65                                                   65
    Stock options exercised                               124            71                                                   71
    Acquisitions                                          100            92                                                   92

Issuance of warrants related to:
    Consulting services rendered                                        248                                                  248
    Acquisitions                                                         59                                                   59

Issuance of stock options related to:
    Consulting services rendered                                          7                                                    7

Variable accounting adjustment related to stock                          11                                                   11
options previously issued

Net income                                                                                     2                               2

Comprehensive loss                                                                                          (32)            (32)
                                                 --------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2003                           23,347       $36,099            ($24,221)           ($94)         $11,784
                                                 ================================================================================
</TABLE>

            See Notes to Condensed Consolidated Financial Statements

                                       5
<PAGE>

           INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                     SIX MONTHS ENDED DECEMBER 31,
                                                                     -----------------------------
                                                                         2003             2002
                                                                       --------         --------
<S>                                                                    <C>              <C>
Cash flows from operating activities:

NET CASH USED BY OPERATING ACTIVITIES                                  ($ 2,507)        ($   694)
                                                                       --------         --------

Cash flows from investing activities:
   Acquisition of product lines                                          (1,525)              --
   Acquisition of business                                                 (257)              --
   Loan to related party                                                   (350)              --
   Investment in marketable securities                                     (160)              --
   Purchase of equipment and furniture                                     (174)             (11)
   Purchase of software                                                     (13)             (14)
   Cash used by discontinued operations in investing activities              --             (154)
                                                                       --------         --------
NET CASH USED BY INVESTING ACTIVITIES                                    (2,479)            (179)
                                                                       --------         --------

Cash flows from financing activities:
   Settlement of note payable (Imageline)                                  (160)              --
   Note borrowings                                                           --              321
   Note repayments                                                         (109)            (558)
   Warrants exercised                                                        65               --
   Options exercised                                                         71               --
   Proceeds from issuance of common stock                                    --                1
   Repayment of capital lease obligations                                    --              (76)
   Cash used by discontinued operations in financing activities              --              (95)
                                                                       --------         --------
NET CASH USED BY FINANCING ACTIVITIES                                      (133)            (407)
                                                                       --------         --------

Effect of exchange rate change on cash and cash equivalents                 (31)              (2)
Net decrease in cash and cash equivalents                                (5,150)          (1,282)
Cash and cash equivalents at beginning of period                         10,399            2,455
                                                                       --------         --------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD                         $  5,249         $  1,173
                                                                       --------         --------
</TABLE>

            See Notes to Condensed Consolidated Financial Statements

                                       6
<PAGE>

           INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


      1. BASIS OF PRESENTATION

The interim condensed consolidated financial statements have been prepared from
the records of International Microcomputer Software, Inc. and Subsidiaries
("IMSI") without audit. All significant inter-company balances and transactions
have been eliminated in consolidation. In the opinion of management, all
adjustments, which consist of only normal recurring adjustments, to present
fairly the financial position at December 31, 2003 and the results of operations
and cash flows for the three and six months ended December 31, 2003 and 2002,
have been made. The interim condensed consolidated financial statements should
be read in conjunction with the consolidated financial statements and notes
thereto contained in our Annual Report on Form 10-KSB for the fiscal year ended
June 30, 2003. The results of operations for the three and six months ended
December 31, 2003 are not necessarily indicative of the results to be expected
for any other interim period or for the full year.

      2. DISCONTINUED OPERATIONS

As previously disclosed in our annual report on Form 10-KSB for the fiscal year
ended June 30, 2003, we sold ArtToday, Inc ("ArtToday"), our wholly-owned
subsidiary based in Arizona, to Jupitermedia Corporation ("Jupiter") in June
2003. Under Generally Accepted Accounting Principles ("GAAP") in the United
States, ArtToday's operating results for the three and six months ended December
31, 2002, have been accounted for as discontinued operations.

Reclassifications have been made to the amounts reported in fiscal 2003 to
conform to the current year presentation. The amounts reported for fiscal 2003
present the results of operations for ArtToday as discontinued operations due to
the sale of ArtToday on June 30, 2003.

During the quarter ended December 31, 2003, we recorded a gain of $1.0 Million
from the sale of discontinued operations representing the successful achievement
of the first earnout from the sale of ArtToday. This earnout was contingent on
ArtToday reaching certain revenue milestones. We have received confirmation from
Jupiter that the full amount of the $1.0 Million earnout was earned and will be
paid per the stock purchase agreement by February 14, 2004.

      3. RECLASSIFICATIONS

Effective for the quarter ended December 31, 2003, we revised our accounting
treatment with regard to fees paid to our third party E-commerce solution
provider, whereby we now record them as sales and marketing expenses as compared
to our prior treatment of them as an offset to revenue. The effect of this
reclassification, as of December 31, 2003, was to increase revenues and sales
and marketing expense by $138,000 and $187,000 for the three and six months
ended December 31, 2003. In order to conform our prior year's results to this
revised presentation for the three and six months ended December 31, 2002, we
have increased revenues and sales and marketing expense by $77,000 and $155,000,
respectively.

      4. PRODUCT LINE AND OTHER ACQUISITIONS

PLANWORKS

On November 17, 2003, we acquired Planworks L.L.C. ("Planworks"), a leading
online provider of house plans. Planworks operates the houseplanguys.com website
that contains an extensive library of over 11,000 unique house plans and has
more than 25,000 members. We also acquired ten other domain names which will be
used to assist individuals and designers looking for house plans and related
products, further strengthening the IMSI network of online design and content
commerce sites. The total consideration for the acquisition included the
following:

      o     Cash: $275,000 of which $260,000 was paid upon closing with the
            remaining $15,000 balance to be held in an escrow account for a
            period of eight months.

      o     85,000 restricted shares of IMSI common stock priced as of the
            acquisition date or $1.16 per share.


                                       7
<PAGE>

CADSYMBOL ACQUISITION

On November 6, 2003, we entered into an asset purchase agreement with Assisto
GmbH ("Assisto"), a German company, whereby we acquired title and interest in
certain tangible and intangible assets of Assisto. The assets included certain
CAD symbol content, custom developed software and all related assets including
inventory, web sites and domain names.

The total purchase price of approximately $372,000 will be paid according to the
following schedule:

      o     Approximately $172,000 at closing;

      o     Approximately $200,000 to be held in escrow and released over the
            next fifteen months.

In addition, we granted to Ane Gyldholm and Michael Heckmann, principals of
Assisto, warrants to each purchase twenty thousand (20,000) shares of IMSI's
common stock at any time within the three year period following the closing at
an exercise price of $1.21, which was the price of IMSI's common stock on the
closing date.

CADSYMBOLS ACQUISITION

On October 27, 2003, we entered into an asset license and purchase agreement
with Cardiff Consultants, Limited, a New York corporation ("Cardiff"), whereby
we acquired from Cardiff the exclusive, non-transferable right to use the
cadsymbols.com and cadsymbols.net domain names and trademarks until December 31,
2006, when Cardiff is to assign the domain names and trademark to us subject to
our payment of all amounts due Cardiff. The total consideration for the
acquisition ($845,000) is comprised of the following:

      o     Three Hundred Thirty-Five Thousand Dollars ($335,000) upon the
            execution of the agreement;

      o     Two Hundred Fifty-Five Thousand Dollars ($255,000) in two payments
            to be paid over the next nine months

      o     Royalty payments to Cardiff equal to two percent (2.0%) of the net
            revenues, subject to certain minimums for the next three years based
            on sales generated by the websites.

In addition, we granted to Cardiff a warrant to purchase twenty-five thousand
(25,000) shares of IMSI's common stock at any time within the three-year period
following the execution of the agreement at $1.14 per share.

Upon the execution of the agreement, Cardiff deposited in an escrow account the
assignment agreement of each domain name, and the assignment agreement of the
trademark. The escrow agreement calls for release of the assignment documents to
us on September 30, 2006 subject to the cumulative payment to Cardiff of all
amounts due.

CADKEY ACQUISITION TERMINATION

As previously disclosed, on August 22, 2003, we entered into an agreement with
CADKEY Corporation ("CADKEY") a Massachusetts corporation to purchase
substantially all of its assets. The proposed purchase price was $2,500,000 and
the assumption of CADKEY customer obligations. The acquisition was conditioned
upon court approval pursuant to Section 363 of the U.S. Bankruptcy Code after
CADKEY filed a voluntary petition under Chapter 11 of the Bankruptcy Code on
August 22, 2003 in the U.S. Bankruptcy Court in Worcester, Massachusetts.

On October 27, 2003, we terminated our bid to acquire substantially all of the
assets of CADKEY through an auction sale. As a result of the termination, we
received a break up fee of $45,000 which was recorded as a reduction of legal
expense and were reimbursed for $225,000 of professional fees advanced to CADKEY
in addition to the $250,000 that was initially held in escrow. These amounts
were initially recorded as short-term assets in the "Other current assets"
account.


                                       8
<PAGE>

CADALOG

On September 12, 2003, we acquired from CADalog, Inc, CADalog.com, a network of
websites that offers one of the largest mechanical parts symbols libraries
on-line and allows members access to over 8 million 2D and 3D hardware component
symbols. The acquisition also included the purchase of CADalog, Inc.'s
Partsxl.com, Partswork.com and 3DModelsharing.com websites. This acquisition
gives us the opportunity to sell additional CAD content and software plug-ins.
The total consideration for the acquisition was $295,000. A payment of $250,000
was made on September 19, 2003 and the remaining $45,000 will be held in an
escrow account with $15,000 to be released to the seller ninety days after the
closing date, and the remaining $30,000 to be released after a period of twelve
months. The escrow balance of $45,000 was fully funded on October 8, 2003.

DESIGNCAD

On July 28, 2003, we entered into an agreement to purchase the tangible and
intangible assets of Upperspace Corporation ("Upperspace"), an Oklahoma
corporation, constituting its DesignCAD line of products, several learning aids,
and various smaller design programs.

The purchase price included the following consideration:

      o     $700,000 cash (of which $100,000 is being held in an escrow account
            for a period of twelve months)

      o     $300,000, 5% simple interest, promissory note payable 12 months from
            the date of closing

      o     An earn-out based on net revenue that could result in an additional
            $300,000 during the next three fiscal years

      o     A license pursuant to which Upperspace shall act for a period as the
            exclusive distributor of the purchased products to retail outlets,
            and a non-exclusive reseller of the product through direct sales
            channels such as the internet, email, telephone and fax.


                                       9
<PAGE>


The table below documents the components of consideration paid for each
acquisition completed in the three and six months ended December 31, 2003
detailed above and the allocation of that consideration to the tangible and
intangible assets acquired.

<TABLE>
<CAPTION>
---------------------------------------------------------- --------------- ------------------ --------------------- ---------------
                                            PLANWORKS        CADSYMBOL          CADSYMBOLS            CADALOG           DESIGN CAD
---------------------------------------------------------- --------------- ------------------ --------------------- ---------------
     DATE TRANSACTION CLOSED:            NOVEMBER 17, 2003 NOVEMBER 6, 2003   OCTOBER 27, 2003   SEPTEMBER 12, 2003   JULY 28, 2003
---------------------------------------------------------- --------------- ------------------ --------------------- ---------------
<S>                                      <C>               <C>                <C>                <C>                  <C>
 CONSIDERATION
---------------------------------------------------------- --------------- ------------------ --------------------- ---------------
       Cash                                   $       260      $      171         $      335           $       250        $    600
---------------------------------------------------------- --------------- ------------------ --------------------- ---------------
       Less: Cash on hand                            (16)               -                  -                     -               -
---------------------------------------------------------- --------------- ------------------ --------------------- ---------------
       Escrow                                           -             170                  -                    45             100
---------------------------------------------------------- --------------- ------------------ --------------------- ---------------
       Stock                                           77               -                  -                     -               -
---------------------------------------------------------- --------------- ------------------ --------------------- ---------------
       Warrants                                         -              30                 18                     -               -
---------------------------------------------------------- --------------- ------------------ --------------------- ---------------
       Notes payable                                   14               -                474                     -             300
---------------------------------------------------------- --------------- ------------------ --------------------- ---------------
       Liabilities assumed                             23               -                  -                     -               -
---------------------------------------------------------- --------------- ------------------ --------------------- ---------------
       Transaction fees                                20               1                  3                     -               -
---------------------------------------------------------- --------------- ------------------ --------------------- ---------------
    TOTAL CONSIDERATION                       $       378      $      372         $      830           $       295       $   1,000
---------------------------------------------------------- --------------- ------------------ --------------------- ---------------

---------------------------------------------------------- --------------- ------------------ --------------------- ---------------
 ASSET ALLOCATION
---------------------------------------------------------- --------------- ------------------ --------------------- ---------------
    Tangible Assets
---------------------------------------------------------- --------------- ------------------ --------------------- ---------------
       Inventory                                        -               -                  -                     -              91
---------------------------------------------------------- --------------- ------------------ --------------------- ---------------
       Marketing materials                              -               -                  -                     -               2
---------------------------------------------------------- --------------- ------------------ --------------------- ---------------
       Prepaid expenses                                 1               -                  -                     -               -
---------------------------------------------------------- --------------- ------------------ --------------------- ---------------
       Computer hardware                                -              12                  -                     7              12
---------------------------------------------------------- --------------- ------------------ --------------------- ---------------
       Computer software                                -               -                  -                     -               9
---------------------------------------------------------- --------------- ------------------ --------------------- ---------------
    TOTAL TANGIBLE ASSETS                      $        1      $       12          $       -           $         7        $    114
---------------------------------------------------------- --------------- ------------------ --------------------- ---------------
    Intangible Assets
---------------------------------------------------------- --------------- ------------------ --------------------- ---------------
       Capitalized software / content                   -             180                  -                   268             323
---------------------------------------------------------- --------------- ------------------ --------------------- ---------------
       Websites and associated
         domain names                                 315             180                830                    20              50
---------------------------------------------------------- --------------- ------------------ --------------------- ---------------
       Customer list                                   33               -                  -                     -             113
---------------------------------------------------------- --------------- ------------------ --------------------- ---------------
       Goodwill                                        29               -                  -                     -             400
---------------------------------------------------------- --------------- ------------------ --------------------- ---------------
    TOTAL INTANGIBLE ASSETS                   $       377      $      360         $      830           $       288        $    886
---------------------------------------------------------- --------------- ------------------ --------------------- ---------------
---------------------------------------------------------- --------------- ------------------ --------------------- ---------------
    TOTAL ASSETS ALLOCATED                    $       378      $      372         $      830           $       295       $   1,000
---------------------------------------------------------- --------------- ------------------ --------------------- ---------------
</TABLE>


                                       10
<PAGE>

      5. NOTE PAYABLE TO IMAGELINE

On July 7, 2003, we repaid the note payable to Imageline in the amount of
$160,000 representing the final payment in connection with our mutual settlement
as previously disclosed in our annual report on Form 10-KSB for the fiscal year
ended June 30, 2003.

      6. NOTE RECEIVABLE FROM RELATED PARTY - DCDC 15% NOTE

On September 18, 2003, we entered into a 15% one-year note with Digital Creative
Development Corporation ("DCDC") whereby we extended a loan to DCDC in the
amount of $350,000. The note is due, with interest, on September 18, 2004. The
note is secured by 400,000 shares of IMSI's stock held by DCDC. The agreement
also calls for DCDC not to sell any other IMSI common stock which it holds, with
the exception of private sales of IMSI common stock, prior to February 15, 2004.

Concurrent with this note, DCDC repaid the entire principal portion of a $50,000
note, made in favor of IMSI on February 25, 2003. That note, due on February 25,
2004, was unsecured and carried a 4% interest rate. This note had been
previously recorded as a fully reserved receivable as it was unsecured. The
reversal of the reserve upon the repayment of this note was consequently
accounted for as other income during the quarter ended September 30, 2003. The
interest payable, amounting to $1,162, is still outstanding as of the filing and
is due and payable on February 18, 2004.

      7. SEGMENT INFORMATION

We have three 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 segment comprises the
revenues and expenses related to Keynomics, our business applications subsidiary
which provides ergonomic and keyboard training for worker-enhanced safety,
productivity and ergonomic compliance improvements through its proprietary
software system, "The KeySoft Performance System".

The following table details segment information (in thousands). The foreign
segment refers to the operations of our German and Australian wholly owned
subsidiaries, IMSI GmbH and IMSI Australia PTY Ltd.

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
            QUARTER ENDED DECEMBER 31, 2003            KEYNOMICS     NORTH AMERICA     OTHER FOREIGN   ELIMINATIONS      TOTAL
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>           <C>               <C>             <C>             <C>
Net Revenues                                             $319              2,225               130              --        2,674
Operating income (loss)                                  (58)              (672)                24              --        (706)
Identifiable assets                                       223             15,575               374         (1,615)       14,557
--------------------------------------------------------------------------------------------------------------------------------
         QUARTER ENDED DECEMBER 31, 2002
--------------------------------------------------------------------------------------------------------------------------------
Net Revenues                                             $447            $1, 902              $117             $--       $2,466
Operating income (loss)                                    58              (400)              (47)              --        (389)
Identifiable assets                                       627              2,972               308              --        3,907
--------------------------------------------------------------------------------------------------------------------------------
         SIX MONTHS ENDED DECEMBER 31, 2003
--------------------------------------------------------------------------------------------------------------------------------
Net Revenues                                             $478             $3,685              $292             $--       $4,455
Operating income (loss)                                 (201)            (1,216)                16                      (1,401)
Identifiable assets                                       223             15,575               374         (1,615)       14,557
--------------------------------------------------------------------------------------------------------------------------------
         SIX MONTHS ENDED DECEMBER 31, 2002
--------------------------------------------------------------------------------------------------------------------------------
Net Revenues                                             $624             $3,641              $278             $--       $4,543
Operating loss                                            (8)              (870)              (29)              --        (907)
Identifiable assets                                       627              2,972               308              --        3,907
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       11
<PAGE>

      8. EARNINGS (LOSS) PER SHARE

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

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

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
                                                                          THREE MONTHS ENDED             SIX MONTHS ENDED
                                                                    --------------------------------------------------------------
                                                                        DECEMBER 31,   DECEMBER 31,   DECEMBER 31,    DECEMBER 31,
                                                                            2003           2002           2003            2002
                                                                    --------------------------------------------------------------
         NUMERATOR:
<S>                                                                     <C>            <C>            <C>             <C>
Net income (loss)                                                              $402          ($51)             $2          ($187)

Numerator for basic earnings (loss) per share - income (loss)                  $402          ($51)             $2          ($187)
available to common stockholders

Numerator for diluted earnings (loss) per share - income (loss)                $402          ($51)             $2          ($187)
available to common stockholders after assumed conversions

         DENOMINATOR:

Denominator for basic earnings (loss) per share - weighted average       23,268,099     22,792,261     23,223,488      22,792,391
shares outstanding

Effect of dilutive securities using the treasury stock method as
at December 31, 2003:
7,343,244 Warrants Outstanding                                                   --             --             --              --
2,058,644 Stock Options Outstanding                                              --             --             --              --

Effect of dilutive securities using the treasury stock method as
at December 31, 2002:
5,366,577 Warrants Outstanding                                                   --             --             --              --
2,204,638 Stock Options Outstanding                                              --             --             --              --

Dilutive potential common shares                                                                --             --              --

Denominator for diluted earnings (loss) per share -  adjusted            23,268,099     22,792,261     23,223,488      22,792,391
weighted average shares and assumed conversion

BASIC EARNINGS (LOSS) PER SHARE                                               $0.02        ($0.00)          $0.00         ($0.01)
DILUTED EARNINGS (LOSS) PER SHARE                                             $0.02        ($0.00)          $0.00         ($0.01)
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


      9. STOCK-BASED AWARDS

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

We account for stock-based compensation plans in accordance with Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," under which no compensation cost is recognized in the financial
statements for employee stock warrants and options when grants are made at an
exercise price equal to the fair market value of the Company's stock. We have
adopted the disclosure only provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation".


                                       12
<PAGE>

Under variable plan accounting, we recognize a charge equal to the per share
change in the share value until the underlying options expire or are exercised.
During the three and six months ended December 31, 2003 we recognized charges of
($2,069) and $12,735 respectively related to variable awards. This compares to
charges of $0 and ($5,947), respectively for the three and six months ended
December 31, 2002.

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

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)                         THREE MONTHS ENDED DECEMBER 31,      SIX MONTHS ENDED DECEMBER 31,
----------------------------------------                         -------------------------------      -----------------------------
                                                                     2003              2002              2003             2002
                                                                     ----              ----              ----             ----
<S>                                                                 <C>              <C>                  <C>          <C>
  NET INCOME (LOSS), AS REPORTED                                      $402             ($51)                $2           ($187)
    Intrinsic compensation charge recorded under APB 25                247             (387)               254              95
    Pro Forma compensation charge under SAS 123                       (614)            (316)              (866)           (925)
------------------------------------------------------------------------------------------------------------------------------------
  PRO FORMA NET INCOME (LOSS)                                           35             (754)              (610)         (1,017)
  Pro Forma net income (loss) per share:
         Basic--as reported                                          $0.02           ($0.00)             $0.00          ($0.01)
         Basic--pro forma                                            $0.00           ($0.03)            ($0.03)         ($0.04)

         Diluted--as reported                                        $0.02           ($0.00)             $0.00          ($0.01)
         Diluted--pro forma                                          $0.00           ($0.03)            ($0.03)         ($0.04)
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

The fair value of each option granted was estimated on the date of the grant
using the Black-Scholes option-pricing model using the following weighted
average assumptions:


-------------------------------------------------------------------------
                                            QUARTER ENDED DECEMBER 31,
                                            --------------------------
                                              2003              2002
                                              ----              ----
Risk-free interest rates                  2.36% - 4.18%            1.21%
Expected dividend yields                             --               --
Expected volatility                             101.11%          126.08%
Expected option life (in years)                  3 - 10           5 - 10
-------------------------------------------------------------------------

The weighted average fair value per option as of the grant date for grants made
for both the three and six months ended December 31, 2003 was $0.85. This
compares to $0.56 and $0.70, respectively for the three and six months ended
December 31, 2002.

      10. NEW ACCOUNTING STANDARDS

ACCOUNTING FOR REVENUE ARRANGEMENTS WITH MULTIPLE DELIVERABLES In November 2002,
the EITF reached a consensus on Issue No. 00-21, Revenue Arrangements with
Multiple Deliverables. Issue 00-21 provides guidance on how to account for
arrangements that involve the delivery or performance of multiple products,
services and/or rights to use assets. The provisions of Issue 00-21 will apply
to revenue arrangements entered into in fiscal periods beginning after June 15,
2003. The adoption of Issue 00-21 did not have a material effect on our
consolidated financial position, results of operations or cash flows.


AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES On
April 30, 2003, the FASB issued Statement No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. Statement 149 is intended to
result in more consistent reporting of contracts as either freestanding
derivative instruments subject to Statement 133 in its entirety, or as hybrid
instruments with debt host contracts and embedded derivative features. In
addition, Statement 149 clarifies the definition of a derivative by providing
guidance on the meaning of initial net investments related to derivatives.
Statement 149 is effective for contracts entered into or modified after June 30,
2003. At December 31, 2003, we do not hold any derivative instruments. The
adoption of Statement 149 did not have an effect on our consolidated financial
position, results of operations or cash flows.


                                       13
<PAGE>

FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY On May
15, 2003, the FASB issued Statement No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. Statement 150
establishes standards for classifying and measuring as liabilities certain
financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. Statement 150 represents a
significant change in practice in the accounting for a number of financial
instruments, including mandatory redeemable equity instruments and certain
equity derivatives that frequently are used in connection with share repurchase
programs. Statement 150 is effective for all financial instruments created or
modified after May 31, 2003, and to other instruments as of July 1, 2003. We
adopted Statement 150 on July 1, 2003 and the effect of adopting this statement
did not have an impact on our financial position, results of operations or cash
flows.

      11. GOODWILL

Total goodwill at December 31, 2003 related to the acquisitions of Keynomics,
DesignCAD and Planworks was $608,000. In accordance with SFAS No. 142, Goodwill
and Intangible Assets, we will assess the underlying goodwill for impairment
annually or more frequently if circumstances indicate impairment.

      12. SUBSEQUENT EVENTS (PROPOSED ACQUISITION OF ALADDIN SYSTEMS, INC.)

On January 21, 2004, we announced that we entered into a definitive agreement
with Aladdin Systems Holdings, Inc. to acquire its wholly owned subsidiary,
Aladdin Systems, Inc. ("Aladdin"), a developer and publisher of utility software
solutions in the areas of information access, removal, recovery, security and
distribution of information and data for the Windows(R), Linux(R) and
Macintosh(R) platforms.

The proposed consideration, which was based upon an in-depth analysis of
Aladdin's current and projected business results, comparable companies and
similar transactions, is a combination of cash, stock and a convertible note
with a aggregate value of approximately $8 million plus an earn-out that could
result in an additional $2 million in payments during the next three years.

We will rely on our available cash balance upon closing to fund the initial cash
payment component of this transaction.

The transaction is expected to close in March 2004 and is subject to customary
closing conditions.

ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

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 or Plan of Operations in our Fiscal 2003 Form 10-KSB.
This quarterly report on Form 10-QSB, and in particular this "Management's
Discussion and Analysis or Plan of Operations," may contain forward-looking
statements regarding future events or our future performance. These future
events and future performance involve certain risks and uncertainties including
those discussed in the "Other Factors That May Affect Future Operating Results"
section of this Form 10-QSB, as well as in our Fiscal 2003 Form 10-KSB, 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.

CRITICAL ACCOUNTING POLICIES

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


                                       14
<PAGE>

REVENUE RECOGNITION

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

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

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

o     For software delivered via the Internet, revenue is recorded when the
      customer downloads the software.

o     Revenue from post contract customer support (PCS) is recognized ratably
      over the contract period.

o     Training fees are recognized when the service is performed.

o     Subscription revenue is recognized ratably over the contract period.

o     Revenue from hybrid products is allocated to the underlying components
      based on the ratio of the value of each component to the total price and
      each portion is recognized accordingly.

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

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

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

o     Revenue from Original Equipment Manufacturer (OEM) contracts is recognized
      upon completion of our contractual obligations.


RESERVE FOR RETURNS, PRICE DISCOUNTS AND REBATES

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

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

INVENTORIES

Inventories are valued at the lower of cost or market and are accounted for on
the first-in, first-out basis. Management performs periodic assessments to
determine the existence of obsolete, slow moving and non-salable inventories,
and records necessary provisions to reduce such inventories to net realizable
value. As of December 31, 2003, distributors held approximately $61,000 of our
inventory under consignment arrangements.

IMPAIRMENT

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


                                       15
<PAGE>

In accordance with SFAS No. 142, Goodwill and Intangible Assets, we will assess
the underlying goodwill for impairment annually or more frequently if
circumstances indicate impairment.

RECENT EVENTS

PLANWORKS

On November 17, 2003, we acquired Planworks, a leading online provider of house
plans. Planworks operates the houseplanguys.com website that contains an
extensive library of over 11,000 unique house plans and has more than 25,000
members. We also acquired ten other domain names which will be used to assist
individuals and designers looking for house plans and related products, further
strengthening the IMSI network of online design and content commerce sites. The
total consideration for the acquisition included the following:

            o     Cash: $275,000 of which $260,000 was paid upon closing with
                  the remaining $15,000 balance to be held into an escrow
                  account for a period of eight moths.

            o     85,000 restricted shares of IMSI common stock which were
                  priced as of the acquisition date or $1.16 per share.

CADSYMBOL ACQUISITION

On November 6, 2003, we entered into an asset purchase agreement with Assisto,
whereby we acquired title and interest in certain tangible and intangible assets
of Assisto. The assets included certain CAD symbol content, custom developed
software and all related assets including inventory, web sites and domain names.

The total purchase price of approximately $372,000 will be paid according to the
following schedule:

      o     Approximately $172,000 at closing;

      o     Approximately $200,000 to be held in escrow and released over the
            next fifteen months.

In addition, we granted to Ane Gyldholm and Michael Heckmann, principals of
Assisto, warrants to each purchase twenty thousand (20,000) shares of IMSI's
common stock at any time within the three year period following the closing at
an exercise price of $1.21, which was the price of IMSI's common stock on the
closing date.

CADSYMBOLS ACQUISITION

On October 27, 2003, we entered into an asset license and purchase agreement
with Cardiff, whereby we acquired from Cardiff the exclusive, non-transferable
right to use the cadsymbols.com and cadsymbols.net domain names and trademarks
until December 31, 2006, when Cardiff is to assign the domain names and
trademark to us subject to our payment of all amounts due Cardiff. The total
consideration for the acquisition ($845,000) is comprised of the following:

      o     Three Hundred Thirty-Five Thousand Dollars ($335,000) upon the
            execution of the agreement;

      o     Two Hundred Fifty-Five Thousand Dollars ($255,000) in two payments
            to be paid over the next nine months

      o     Royalty payments to Cardiff equal to two percent (2.0%) of the net
            revenues, subject to certain minimums for the next three years based
            on sales generated by the websites.

In addition, we granted to Cardiff a warrant to purchase twenty-five thousand
(25,000) shares of IMSI's common stock at any time within the three year period
following the execution of the agreement at $1.14 per share.


                                       16
<PAGE>

Upon the execution of the agreement, Cardiff deposited in an escrow account the
assignment agreement of each domain name, and the assignment agreement of the
trademark. The escrow agreement calls for release of the assignment documents to
us on September 30, 2006 subject to the cumulative payment to Cardiff of all
amounts due.

CADKEY ACQUISITION TERMINATION

As previously disclosed, on August 22, 2003, we entered into an agreement with
CADKEY to purchase substantially all of its assets. The proposed purchase price
was $2,500,000 and the assumption of CADKEY customer obligations. The
acquisition was conditioned upon court approval pursuant to Section 363 of the
U.S. Bankruptcy Code after CADKEY filed a voluntary petition under Chapter 11 of
the Bankruptcy Code on August 22, 2003 in the U.S. Bankruptcy Court in
Worcester, Massachusetts.

On October 27, 2003, we terminated our bid to acquire substantially all of the
assets of CADKEY through an auction sale. As a result of the termination, we
received a break up fee of $45,000 which was recorded as a reduction of legal
expense and were reimbursed for $225,000 of professional fees advanced to CADKEY
in addition to the $250,000 that was initially held in escrow. These amounts
were initially recorded as short-term assets in the "Other current assets"
account.

CADALOG

On September 12, 2003, we acquired from CADalog, Inc, CADalog.com, a network of
websites that offers one of the largest mechanical parts symbols libraries
on-line and allows members access to over 8 million 2D and 3D hardware component
symbols. The acquisition also included the purchase of CADalog, Inc.'s
Partsxl.com, Partswork.com and 3DModelsharing.com websites. This acquisition
gives us the opportunity to sell additional CAD content and software plug-ins.
The total consideration for the acquisition was $295,000. A payment of $250,000
was made on September 19, 2003 and the remaining $45,000 will be held in an
escrow account with $15,000 to be released to the seller ninety days after the
closing date, and the remaining $30,000 to be released after a period of twelve
months. The escrow balance of $45,000 was fully funded on October 8, 2003.

DESIGNCAD

On July 28, 2003, we entered into an agreement to purchase the tangible and
intangible assets of Upperspace corporation, constituting its DesignCAD line of
products, several learning aids, and various smaller design programs.

The purchase price included the following consideration:

      o     $700,000 cash (of which $100,000 is being held in an escrow account
            for a period of twelve months)

      o     $300,000, 5% simple interest, promissory note payable 12 months from
            the date of closing

      o     An earn-out based on net revenue that could result in an additional
            $300,000 during the next three fiscal years

      o     A license pursuant to which Upperspace shall act for a period as the
            exclusive distributor of the purchased products to retail outlets,
            and a non-exclusive reseller of the product through direct sales
            channels such as the internet, email, telephone and fax.


                                       17
<PAGE>


The table below documents the components of consideration paid for each
acquisition completed in the three and six months ended December 31, 2003
detailed above and the allocation of that consideration to the tangible and
intangible assets acquired.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                      PLANWORKS         CADSYMBOL      CADSYMBOLS      CADALOG           DESIGN CAD      TOTAL
------------------------------------------------------------------------------------------------------------------------------------
                                      NOVEMBER           NOVEMBER      OCTOBER         SEPTEMBER          JULY
     DATE TRANSACTION CLOSED:         17, 2003           6, 2003       27, 2003        12, 2003          28, 2003
------------------------------------------------------------------------------------------------------------------------------------
<S>                                   <C>                <C>           <C>             <C>               <C>           <C>
 CONSIDERATION
------------------------------------------------------------------------------------------------------------------------------------
            Cash                      $    260           $    171      $    335        $    250          $    600      $  1,616
------------------------------------------------------------------------------------------------------------------------------------
            Less: Cash on hand             (16)                --            --              --                --           (16)
------------------------------------------------------------------------------------------------------------------------------------
            Escrow                          --                170            --              45               100           315
------------------------------------------------------------------------------------------------------------------------------------
            Stock                           77                 --            --              --                --            77
------------------------------------------------------------------------------------------------------------------------------------
            Warrants                        --                 30            18              --                --            48
------------------------------------------------------------------------------------------------------------------------------------
            Notes payable                   14                 --           474              --               300           788
------------------------------------------------------------------------------------------------------------------------------------
            Liabilities assumed             23                 --            --              --                --            23
------------------------------------------------------------------------------------------------------------------------------------
            Transaction fees                20                  1             3              --                --            24
------------------------------------------------------------------------------------------------------------------------------------
       TOTAL CONSIDERATION            $    378           $    372      $    830        $    295          $  1,000      $  2,875
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
 ASSET ALLOCATION
------------------------------------------------------------------------------------------------------------------------------------
       Tangible Assets
------------------------------------------------------------------------------------------------------------------------------------
            Inventory                       --                 --            --              --                91            91
------------------------------------------------------------------------------------------------------------------------------------
            Marketing materials             --                 --            --              --                 2             2
------------------------------------------------------------------------------------------------------------------------------------
            Prepaid expenses                 1                 --            --              --                --             1
------------------------------------------------------------------------------------------------------------------------------------
            Computer hardware               --                 12            --               7                12            31
------------------------------------------------------------------------------------------------------------------------------------
            Computer software               --                 --            --              --                 9             9
------------------------------------------------------------------------------------------------------------------------------------
       TOTAL TANGIBLE ASSETS          $      1           $     12      $     --        $      7          $    114      $    134
------------------------------------------------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------------------------------------------------
       INTANGIBLE ASSETS
------------------------------------------------------------------------------------------------------------------------------------
            Capitalized software /
             content                        --                180            --             268               323           771
------------------------------------------------------------------------------------------------------------------------------------
            Websites and associated
              domain names                 315                180           830              20                50         1,395
------------------------------------------------------------------------------------------------------------------------------------
            Customer list                   33                 --            --              --               113           146
------------------------------------------------------------------------------------------------------------------------------------
            Goodwill                        29                 --            --              --               400           429
------------------------------------------------------------------------------------------------------------------------------------
       TOTAL INTANGIBLE ASSETS        $    377           $    360      $    830        $    288          $    886      $  2,741
------------------------------------------------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------------------------------------------------
       TOTAL ASSETS ALLOCATED         $    378           $    372      $    830        $    295          $  1,000      $  2,875
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       18
<PAGE>


RESULTS OF OPERATIONS

The following table sets forth our results of operations for the three months
ended December 31, 2003 and 2002 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.

On June 30, 2003, we sold ArtToday, our wholly owned subsidiary based in Arizona
to Jupiter. Under Generally Accepted Accounting Principles in the United States,
ArtToday's operating results for all periods presented have been accounted for
as discontinued operations.


                                       19
<PAGE>



<TABLE>
<CAPTION>
                                                       THREE MONTHS ENDED DECEMBER 31,
                                                 -------------------------------------------   ---------------------
                                                                                                   $ CHANGE FROM
                                                                                                   PREVIOUS YEAR
                                                         2003                    2002
                                                 -------------------     -------------------
                                                             AS % OF                 AS % OF   $ INCREASE /
                                                    $         SALES         $         SALES     (DECREASE)      %
                                                 -------     -------     -------     -------   -----------   -------
<S>                                              <C>             <C>     <C>             <C>     <C>               <C>
Net revenues                                     $ 2,674         100%    $ 2,466         100%    $   208           8%
Product cost                                         793          30%      1,075          44%        282          26%
--------------------------------------------     -------     -------     -------     -------     -------     -------
         GROSS MARGIN                              1,881          70%      1,391          56%        490          35%

Operating expenses
 Sales & marketing                                 1,065          40%        836          34%        229          27%
 General & administrative                            991          37%        499          20%        492          99%
 Research & development                              531          20%        445          18%         86          19%
--------------------------------------------     -------     -------     -------     -------     -------     -------
         TOTAL OPERATING EXPENSES                  2,587          97%      1,780          72%        807          45%
--------------------------------------------     -------     -------     -------     -------     -------     -------
         OPERATING LOSS                             (706)        -26%       (389)        -16%       (317)         81%
--------------------------------------------     -------     -------     -------     -------     -------     -------
Other Income (expenses)
 Interest and other, net                              60           2%       (127)         -5%        187        -147%
 Unrealized gain on marketable securities             47           2%         --          --          47         100%
 Gain on liquidation of foreign subsidiaries          --          --          --          --          --          --
 Gain on extinguishment of debt                       (5)         --         257          10%       (262)       -102%
--------------------------------------------     -------     -------     -------     -------     -------     -------
         TOTAL OTHER INCOME (EXPENSES)               102           4%        130           5%        (28)        -22%
--------------------------------------------     -------     -------     -------     -------     -------     -------
 LOSS BEFORE INCOME TAX                             (604)        -23%       (259)        -11%       (345)        133%
--------------------------------------------     -------     -------     -------     -------     -------     -------
 Income tax benefit                                    6          --          --          --           6         100%
--------------------------------------------     -------     -------     -------     -------     -------     -------
 LOSS  FROM CONTINUING OPERATIONS                   (598)        -22%       (259)        -11%       (339)        131%
--------------------------------------------     -------     -------     -------     -------     -------     -------
Gain from the sale of discontinued operations      1,000          37%         --          --       1,000         100%
Income from discontinued operations, net of
  income tax                                          --          --         208           8%       (208)       -100%
--------------------------------------------     -------     -------     -------     -------     -------     -------
NET INCOME (LOSS)                                $   402          15%    $   (51)         -2%    $   453        -888%
--------------------------------------------     =======     =======     =======     =======     =======     =======
</TABLE>


<TABLE>
<CAPTION>
                                                        SIX MONTHS ENDED DECEMBER 31,
                                                 -------------------------------------------   ---------------------
                                                                                                   $ CHANGE FROM
                                                                                                   PREVIOUS YEAR
                                                         2003                    2002
                                                 -------------------     -------------------
                                                             AS % OF                 AS % OF   $ INCREASE /
                                                    $         SALES         $         SALES     (DECREASE)      %
                                                 -------     -------     -------     -------   -----------   -------
<S>                                              <C>             <C>     <C>             <C>     <C>           <C>
Net revenues                                     $ 4,455         100%    $ 4,543         100%    $   (88)         -2%
Product cost                                       1,371          31%      1,582          35%       (211)        -13%
-------------------------------------------      -------     -------     -------     -------     -------     -------
         GROSS MARGIN                              3,084          69%      2,961          65%        123           4%

Operating expenses
 Sales & marketing                                 1,803          40%      1,604          35%        199          12%
 General & administrative                          1,675          38%      1,442          32%        233          16%
 Research & development                            1,007          23%        822          18%        185          23%
-------------------------------------------      -------     -------     -------     -------     -------     -------
         TOTAL OPERATING EXPENSES                  4,485         101%      3,868          85%        617          16%
-------------------------------------------      -------     -------     -------     -------     -------     -------
         OPERATING LOSS                           (1,401)        -31%       (907)        -20%       (494)         54%
-------------------------------------------      -------     -------     -------     -------     -------     -------
Other Income (expenses)
 Interest and other, net                             140           3%       (182)         -4%        322        -177%
 Unrealized gain on marketable securities            177           4%         --          --         177         100%
 Gain on liquidation of foreign subsidiaries          --          --          42           1%        (42)       -100%
 Gain on extinguishment of debt                       76           2%        435          10%       (359)        -83%
-------------------------------------------      -------     -------     -------     -------     -------     -------
         TOTAL OTHER INCOME (EXPENSES)               393           9%        295           6%         98          33%
-------------------------------------------      -------     -------     -------     -------     -------     -------
 LOSS BEFORE INCOME TAX                           (1,008)        -23%       (612)        -13%       (396)         65%
-------------------------------------------      -------     -------     -------     -------     -------     -------
 Income tax benefit                                   10          --          --          --          10         100%
-------------------------------------------      -------     -------     -------     -------     -------     -------
 LOSS FROM CONTINUING OPERATIONS                    (998)        -22%       (612)        -13%       (386)         63%
-------------------------------------------      -------     -------     -------     -------     -------     -------
Gain from the sale of discontinued operations      1,000          22%         --          --       1,000         100%
Income from discontinued operations, net of
  income tax                                          --          --         425           9%       (425)       -100%
-------------------------------------------      -------     -------     -------     -------     -------     -------
NET INCOME (LOSS)                                $     2          --     $  (187)         -4%    $   189        -101%
-------------------------------------------      =======     =======     =======     =======     =======     =======
</TABLE>


                                       20
<PAGE>


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 six months ended December 31,
2003 and 2002 are summarized in the following table (in thousands except for
percentage amounts):


<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
                                                       THREE MONTHS ENDED DECEMBER 31,
                             ----------------------------------------------------------------
                                   2003                    2002
                             -----------------      -----------------
                                $          %           $          %       $ CHANGE    % CHANGE
---------------------------- ------     ------      ------     ------      ------      ------
<S>                          <C>        <C>         <C>        <C>         <C>         <C>
 Precision Design            $1,349         50%     $  745         30%     $  604          81%

 Business Applications
 and Other                    1,325         50%      1,721         70%       (396)       -23%
---------------------------- ------     ------      ------     ------      ------      ------

 NET REVENUES                $2,674        100%     $2,466        100%     $  208           8%
---------------------------- ------     ------      ------     ------      ------      ------
</TABLE>

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
                                                             SIX MONTHS ENDED DECEMBER 31,
                               -------------------------------------------------------------------
                                      2003                  2002
                               -----------------      -----------------
                                  $         %            $          %       $ CHANGE      % CHANGE
----------------------------   ------     ------      ------     ------      ------      ---------
<S>                            <C>        <C>         <C>        <C>         <C>         <C>
 Precision Design              $2,050         46%     $1,752         39%     $  298       17%

 Business Applications
 and Other                      2,405         54%      2,791         61%       (386)     -14%
----------------------------   ------     ------      ------     ------      ------      ------

 NET REVENUES                  $4,455        100%     $4,543        100%     $  (88)     -2%
----------------------------   ------     ------      ------     ------      ------      ------
</TABLE>


Sales of our flagship product, TurboCAD(R), increased in the three and six
months ended December 31, 2003 as compared to the same reporting periods in the
previous fiscal year, resulting in an overall increase in revenues in the
precision design category. The introduction of the "DesignCAD" line of products
during the first quarter of fiscal 2004 and the additional revenues we earned
from the acquisition of Planworks in the second quarter of fiscal 2004 accounted
for the increase in sales of the precision design products as compared to the
same period from the previous fiscal year. Revenues from Planworks amounted to
$111,000 during the quarter ended December 31, 2003.

Overall revenues in the "Business Applications and Other" segment decreased
during the three and six months ended December 31, 2003 as compared to the same
periods of the previous fiscal year. Revenues from Keynomics, our productivity
software subsidiary are included in this category and amounted to $318,000 and
$478,000 during the three and six months ended December 31, 2003, respectively
as compared to $447,000 and $625,000, respectively in the comparable periods
from the previous fiscal year. The decline in sales of our historically strong
selling products in this category like MasterClips and OrgPlus was the primary
reason for the overall decrease in the "Business Applications and Other" segment
despite the introduction of new titles during the first half of the fiscal year
(PhotoObject) in addition to the release of newer version of our existing
products (EasyLanguage and Net Accelerator).

Internationally, we distribute our products through our wholly owned German and
Australian subsidiary and republishing partners in Europe and Asia. The increase
in international sales during the three and six months ended December 31, 2003
is primarily due to our reentry into the European market by re-activating our
German subsidiary during the previous fiscal year which allowed us to sell
directly into the European Union. Total net sales from our German subsidiary
accounted for $77,000 and $260,000, respectively during the three and six months
ended December 31, 2003. The following table details the revenue breakdown
between the domestic and international markets for the periods indicated.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
                                         THREE MONTHS ENDED DECEMBER 31,
                         ------------------------------------------------------------
                               2003                 2002
                         -----------------    -----------------
                            $        %          $        %        $ CHANGE   % CHANGE
                         ------   ------      ------   ------      ------     ------
<S>                      <C>      <C>         <C>      <C>        <C>        <C>
   Domestic sales        $2,296       86%     $2,186       88%     $  110          5%
   International sales      378       14%        280       12%         98         35%
                         ------   ------      ------   ------      ------     ------
 NET REVENUES            $2,674      100%     $2,466      100%     $  208          8%
------------------------ ------   ------      ------   ------      ------     ------
</TABLE>
<TABLE>
<CAPTION>
------------------------   ------------------------------------------------------------------
                                                        SIX MONTHS ENDED DECEMBER 31,
                           ------------------------------------------------------------------
                                 2003                      2002
                           -----------------      -----------------      ------      ------
                              $         %           $           %       $ CHANGE    % CHANGE
                           ------     ------      ------     ------      ------      ------
<S>                        <C>        <C>         <C>        <C>        <C>         <C>
   Domestic sales          $3,669         82%     $3,949         87%     ($ 280)         -7%
   International sales        786         18%        594         13%        192          32%
                           ------     ------      ------     ------      ------      ------
 NET REVENUES              $4,455        100%     $4,543        100%     $   88           2%
------------------------   ------     ------      ------     ------      ------      ------
</TABLE>


We are currently serving the domestic and international retail markets using
direct sales methods and republishing agreements. Low barriers to entry, intense
price competition, and business consolidations continue to characterize the
consumer software industry. Each 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.


                                       21
<PAGE>

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

RESERVE FOR RETURNS, PRICE DISCOUNTS AND REBATES

During the second quarter of fiscal 2004 we provided $181,000 for returns and
received actual returns of approximately $112,000. The return reserve balance as
of December 31, 2003 of $583,000 is consistent with the level of our estimate of
excess inventory in the channel.

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 for the three and six
months ended December 31, 2003 as compared to the same periods from the previous
fiscal year was primarily attributable to decreased amortization expenses and to
a change in product mix toward the lower cost / higher margin precision design
products.

GROSS MARGIN

Gross margin improved to 70% from 56% and to 69% from 65% during the three and
six months ended December 31, 2003, respectively. This increase in gross margin
is attributable to;

      o     A shift in our product mix towards the "precision design" segment
            from the "business application and other" segment as we increased
            our direct marketing emphasis. This is demonstrated by the re-launch
            of our revenue generating websites in September 2003, newly acquired
            products including DesignCAD, and the launch of new high margin
            services.

      o     A reduction in amortization expenses for software products as a
            result of the products being fully amortized.

Given the uncertain product lifecycle for some of our historically high margin
products and depending on the success of newer versions launches, we may see our
gross margin decline in future reporting periods.

SALES AND MARKETING

Our sales and marketing expenses consist primarily of salaries and benefits of
sales and marketing personnel, commissions, advertising, printing and direct
mail expenses. The increase in sales and marketing expenses during the three and
six months ended December 31, 2003 was mainly attributable to the following:

      o     Increased direct mail expenses relative to our growing efforts to
            focus on direct targeting of our customers via marketing campaigns.

      o     Increased commissions paid to outside service providers that help us
            with their sales forces and E-commerce systems.

      o     The revision of our accounting treatment with regard to fees paid to
            our third party E-commerce solution provider, whereby we now record
            the fees as sales and marketing expenses. The effect of this
            reclassification was to increase sales and marketing expense by
            $61,000 and $32,000 for the three and six months ended December 31,
            2003 as compared to the previous year.

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, fees to our professional
advisors, rent and other general operating costs.


                                       22
<PAGE>

The increase in general and administrative expenses during the quarter ended
December 31, 2003 as compared to the same quarter from the previous year was
primarily due to amortization expense of $237,000 from the issuance of warrants
to outside consultants mainly providing services in the area of investor
relations. The comparable period from the previous fiscal year also included the
reversal of the intrinsic value of warrants issued to Mr. Martin Wade III, our
CEO, as part of his initial employment agreement. During the second quarter of
fiscal 2003, we amended Mr. Wade's employment agreement whereby IMSI and Mr.
Wade agreed to the full and complete cancellation of all outstanding warrants
granted to Mr. Wade. Consequently, we reversed, during the six months ended
December 31, 2003, $432,000 of already incurred amortization expense of the
intrinsic value of warrants issued to Mr. Wade but were unvested.

Excluding the effect of the two transactions above, general and administrative
expenses would have declined by approximately $195,000 during the quarter ended
December 31, 2003 as compared to the same period from the previous fiscal year.
We also experienced a substantial decline in legal fees as a result of the
settlement of all outstanding legal actions from previous periods which
accounted for the majority of the decrease in the general and administrative
expenses.

RESEARCH AND DEVELOPMENT

Our research and development expenses consist primarily of salaries and benefits
for research and development employees and payments to independent contractors.
The increase in research and development expenses in the three months ended
December 31, 2003 as compared to the same period from the previous fiscal year
resulted mainly from increased personnel costs.

We continue to maintain a consistent investment in existing and new products.
The constant ratio of research and development expenses as a percentage of sales
reflects our commitment to investing in and developing our core products as well
as maintaining strong relationships with our third party 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-month period ended December 31, 2003 and 2002:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
                                               THREE MONTHS ENDED DECEMBER 31,
                                   ------------------------------------------------------------
                                     2003             2002          $ CHANGE FROM PREVIOUS YEAR
                                   ------------- --------------- ------------------------------
INTEREST & OTHER EXPENSE, NET
<S>                                       <C>           <C>                <C>            <C>
   Interest expense                       $   0         $ (129)            $   129        100%

   Interest income                           19               2                 17       1141%

   Foreign exchange gain (loss)              41               -                 41        100%

   Other income                               -               -                  -          0%
------------------------------------------------ --------------- ------------------ -----------
TOTAL                                      $ 60         $ (127)             $  187        147%
------------------------------------------------ --------------- ------------------ -----------
</TABLE>

<TABLE>
<CAPTION>
---------------------------------- -------------------------------------------------------------
                                                  SIX MONTHS ENDED DECEMBER 31,
                                   -------------------------------------------------------------
                                        2003             2002        $ CHANGE FROM PREVIOUS YEAR
                                   ---------------- --------------- ----------------------------
INTEREST & OTHER EXPENSE, NET
<S>                                        <C>             <C>              <C>             <C>
   Interest expense                         $   (3)        $ (176)          $   173         98%

   Interest income                              45              8                37        477%

   Foreign exchange gain (loss)                 48            (14)               62        434%

   Other income                                 50               -               50        100%
---------------------------------- ---------------- --------------- ---------------- -----------
TOTAL                                        $ 140         $ (182)           $  322        177%
---------------------------------- ---------------- --------------- ---------------- -----------
</TABLE>


UNREALIZED GAIN ON MARKETABLE SECURITIES

We recorded a $47,000 and a $177,000 gain on marketable securities during the
three and six months ended December 31, 2003, respectively as we marked to
market value our equity portfolio. The following table summarizes the net gain
on marketable securities:

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------ --------------------------------------
          DESCRIPTION                           QUARTER ENDED DECEMBER 31, 2003               SIX MONTHS ENDED DECEMBER 31, 2003
          -----------                           -------------------------------               ----------------------------------
<S>                                             <C>                                           <C>
Gain (loss) on Jupitermedia common stock                             ($2,500)                                          $140,000
Gain on professionally managed portfolio                               49,050                                            36,845
------------------------------------------------------------------------------ -------------------------------------------------
TOTAL                                                                 $46,550                                          $176,845
------------------------------------------------------------------------------ -------------------------------------------------
</TABLE>



                                       23
<PAGE>


GAIN ON EXTINGUISHMENT OF DEBT

During the six months ended December 31, 2003, we recognized a gain of $76,000
from the extinguishment of debt primarily relating to the settlement of
liabilities related to assets under a capital lease.

During the six months ended December 31, 2002, we recognized a gain of $435,000
from the extinguishment of debt representing the difference between the carrying
balances and the settlement amounts payable to a variety of unsecured creditors,
of which $84,000 was attributable to the extinguishment of debt owed to Baystar
Capital.

PROVISION FOR INCOME TAXES

In the three months ended December 31, 2003, we recorded a tax benefit of $6,000
related to the refund of our estimated state income tax paid in prior fiscal
years.

We have not recorded a tax benefit for domestic tax losses because of the
uncertainty of realization. We adhere to Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes," which requires an asset and
liability approach to financial accounting and reporting for income taxes.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized.

GAIN FROM THE SALE OF DISCONTINUED OPERATIONS

During the quarter ended December 31, 2003, we recorded a gain of $1.0 Million
from the sale of discontinued operations representing the successful achievement
of the first earnout from the sale of ArtToday. This earnout was contingent on
ArtToday reaching certain revenue milestones. We have received confirmation from
Jupitermedia that the full amount of the $1.0 Million earnout was earned and
will be paid per the stock purchase agreement by February 14, 2004.

INCOME FROM DISCONTINUED OPERATIONS

In June 2003, we sold ArtToday, our wholly owned subsidiary based in Arizona, to
Jupitermedia. Under Generally Accepted Accounting Principles ("GAAP") in the
United States, ArtToday's operating results for the three and six months ended
December 31, 2002, totaling $208,000 and $425,000, respectively, have been
accounted for as discontinued operations.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2003, we had $5,249,000 in cash and cash equivalents. This
represents a $1,480,000 decline from the $6,729,000 balance at September 30,
2003 and a $5,150,000 decline from the $10,399,000 balance at June 30, 2003.
Working capital at December 31, 2003 was $6,057,000. This represents a decline
of $994,000 over the working capital at September 30, 2003 and a decline of
$2,599,000 over the working capital at June 30, 2003 of $8,656,000.

Our operating activities used net cash of $2,507,000 during the six months ended
December 31, 2003. This compares to net cash used from operations of $694,000
during the six months ended December 31, 2002. Our increased operating loss,
combined with payments we made relating to accrued taxes and other accrued
expenses and the increase in our receivables and inventories contributed to the
increased usage of cash in the six months ended December 31, 2003 as compared to
the same period from the previous fiscal year. Receivables and inventories
increased during the six months ended December 31, 2003 primarily due to a
change in the method of distribution for some of our products, including
TurboCAD(R), from licensing arrangements to selling directly to resellers and
distributors.

Our investing activities consumed net cash of $2,479,000 during the six months
ended December 31, 2003, as compared to net cash used of $179,000 during the
comparable period from the previous fiscal year. The cash was mainly used to
acquire Planworks and several new product lines. The following table details the
cash outlays for the acquisitions we made during the six months ended December
31, 2003.


                                       24
<PAGE>

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------- ----------------------------------
                                                                ACQUIRED IN                     CASH SPENT (IN $000)
WEBSITES, CONTENT AND NEW PRODUCT LINES:
<S>                                                        <C>                                   <C>
   CADsymbols                                              2nd quarter of Fiscal 2004                    $         (365)
   CADsymbol                                               2nd quarter of Fiscal 2004                              (171)
   DesignCAD                                               1st quarter of Fiscal 2004                              (700)
   Cadalog                                                 1st quarter of Fiscal 2004                              (295)
    Other                                                  2nd quarter of Fiscal 2004                               (35)

BUSINESS
   Planworks                                               2nd quarter of Fiscal 2004                              (260)
-----------------------------------------------------                                   ---------------------------------
TOTAL                                                                                                    $       (1,826)
-------------------------------------------------------------------------------------- ----------------------------------
</TABLE>

These acquisitions are consistent with our strategy to grow our software
business with a focus on products and services that complement our direct
marketing and online distribution strengths. We expect to continue to identify
and acquire products and launch services that satisfy real customer needs and
have the combination of high growth potential and positive EBITDA. These
acquisitions, including the proposed Aladdin Systems, Inc. acquisition, will be
funded thru a combination of cash on hand, debt and the issuance of our common
stock. The divestiture of ArtToday provided us with sufficient liquidity to
continue to strengthen our product portfolio and distribution channels.

Our investing activities also included investment in marketable securities in
the amount of $160,000 during the quarter ended September 30, 2003.

Also, during the first quarter of fiscal 2004, we entered into a 15% one-year
note with DCDC whereby we extended a loan to them in the amount of $350,000. The
note is due, with interest, on September 18, 2004. The note is secured by
400,000 shares of IMSI's stock held by DCDC. The agreement also calls for DCDC
not to sell any other IMSI common stock that it holds, with the exception of
private sales of IMSI common stock, prior to February 15, 2004.

Our financing activities consumed net cash of $133,000 during the six months
ended December 31, 2003. This compares to $407,000 of net cash used by financing
activities during the comparable periods from the previous fiscal year. As
previously disclosed, we paid $160,000 to Imageline on July 7, 2003, which
represents the final payment in connection with our mutual settlement of
previous infringement claims. This payment accounted for most of the cash used
in our financing activities during the six months ended December 31, 2003 and
was in part offset by cash received from the exercise of warrants and options in
the amounts of $65,000 and $71,000, respectively.

Historically, we have financed our working capital and capital expenditure
requirements primarily from retained earnings, short-term and long-term notes
and bank borrowings, capitalized leases and sales of common stock. The sale of
ArtToday to Jupitermedia in June 2003 provided us with additional sources of
funds to support future growth. We may also seek additional equity and/or debt
financing to sustain our growth strategy. However, we believe that we have
sufficient funds to support our operations at least for the next twelve months,
based on our current cash position and equity sources. If we are successful in
continuing to improve our financial performance, we believe that we will be able
to obtain any additional financing required on competitive terms. In addition,
we will continue to seek opportunities and discussions with third parties
concerning the sale or license of certain product lines and/or the sale or
license of a portion of our assets.

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

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


                                       25
<PAGE>



OTHER FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

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

      o     Market acceptance of our products or those of our competitors

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

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

      o     Intense price competition and numerous end-user rebates

      o     Projected and actual changes in platforms and technologies

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

      o     Extent of third party royalty payments

      o     Rate of growth of the consumer software and Internet markets

      o     Timing of orders or order cancellation from major customers

      o     Changes or disruptions in the consumer software distribution
            channels

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

      o     Achievement of future earn-outs related to the sale of ArtToday,
            Inc.


ITEM 3- CONTROLS AND PROCEDURES

(a) Under the supervision and with the participation of IMSI's management,
including IMSI's principal executive officer and principal financial officer, we
conducted an evaluation of our disclosure controls and procedures, as such term
is defined under Rule 13a-14(c) promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), within 90 days of the filing date of this
report. Based on their evaluation, our principal executive officer and principal
financial officer concluded that our disclosure controls and procedures are
effective.

(b) We have evaluated our accounting procedures and control processes related to
material transactions to ensure they are recorded timely and accurately in the
financial statements. There have been no significant changes in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the evaluation referenced in paragraph (a) above.


                           PART II - OTHER INFORMATION

ITEM 1- LEGAL PROCEEDINGS

Not Applicable

ITEM 2- CHANGES IN SECURITIES

Not Applicable

ITEM 3- DEFAULTS UPON SENIOR SECURITIES

Not Applicable

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

On February 10, 2004, we filed with the Securities and Exchange Commission a
Proxy Statement on Schedule 14-A pursuant to section 14(A) of the Securities
Exchange Act Of 1934 in connection with the solicitation of proxies by the board
of directors of IMSI for use at the annual meeting of shareholders to be held on
March 17, 2004.


                                       26
<PAGE>

The annual meeting of the shareholders of IMSI will be held for the following
purposes:

      o     To elect seven directors for a term of one year.

      o     To approve the 2004 Incentive Stock Option Plan.

      o     To authorize the issuance of options aggregating up to 49.0% of the
            outstanding capitalization.

      o     To ratify the appointment of Grant Thornton LLP as IMSI's
            independent auditors for the fiscal year ending June 30, 2004.

      o     To consider and act on such other business as may properly come
            before the meeting or any adjournment or adjournments thereof.

The Board of Directors has nominated the following persons for election:


<TABLE>
<CAPTION>
---------------------------------- ----------------- ---------------------------------------- ---------------------
      NAME                         AGE                                OCCUPATION                 DIRECTOR SINCE
---------------------------------- ----------------- ---------------------------------------- ---------------------
<S>                                <C>               <C>                                      <C>
Bruce Galloway                     45                Chairman of the Board of Directors       2001
---------------------------------- ----------------- ---------------------------------------- ---------------------
Martin Wade, III                   54                Chief Executive Officer                  2001
---------------------------------- ----------------- ---------------------------------------- ---------------------
Evan Binn                          64                Director                                 2001
---------------------------------- ----------------- ---------------------------------------- ---------------------
Donald Perlyn                      60                Director                                 2001
---------------------------------- ----------------- ---------------------------------------- ---------------------
Robert Mayer                       49                Executive Vice President                 2000
---------------------------------- ----------------- ---------------------------------------- ---------------------
Robert S. Falcone                  57                Director                                 2002
---------------------------------- ----------------- ---------------------------------------- ---------------------
Richard J. Berman                  61                Director                                 2002
---------------------------------- ----------------- ---------------------------------------- ---------------------
</TABLE>


ITEM 5- OTHER INFORMATION

Not Applicable

ITEM 6- EXHIBITS AND REPORTS ON FORM 8-K

EXHIBITS AND FINANCIAL STATEMENTS:

The following documents are filed as a part of this Report:

      FINANCIAL STATEMENTS

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

         Consolidated Balance Sheet at December 31, 2003 and June 30, 2003

         Consolidated Statements of Operations for the interim periods ended
         December 31, 2003 and 2002

         Consolidated Statements of Shareholders' Equity for the interim period
         ended December 31, 2003

         Consolidated Statements of Cash Flows for the interim periods ended
         December 31, 2003 and 2002

         Notes to Consolidated Financial Statements

      EXHIBITS

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

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

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

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

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



                                       27
<PAGE>



(b)   REPORTS ON FORM 8-K

      o     On November 17, 2003 we filed a Form 8-K to announce our financial
            results for the fiscal quarter ended September 30, 2003.




                                       28
<PAGE>


                                   SIGNATURES


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


INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.


DATE: FEBRUARY 11, 2003


BY: /S/ MARTIN WADE, III
Martin Wade, III
Director & Chief Executive Officer


BY:  /S/ WILLIAM J. BUSH
William J. Bush
Chief Financial Officer (Principal Accounting Officer)



                                       29
<PAGE>



                               INDEX TO EXHIBITS:


<TABLE>
<CAPTION>
NUMBER      EXHIBIT TITLE                                                              PAGE
------      -------------                                                              ----
<S>       <C>                                                                          <C>
31.1       Certification of Chief Executive Officer Pursuant to Section 302 of the
           Sarbanes-Oxley Act of 2002                                                   31

31.2       Certification of Chief Financial Officer Pursuant to Section 302 of the
           Sarbanes-Oxley Act of 2002                                                   32

32.1       Certification of Chief Executive Officer Pursuant to Section 906 of the
           Sarbanes-Oxley Act of 2002                                                   33

32.2       Certification of Chief Financial Officer Pursuant to Section 906 of the
           Sarbanes-Oxley Act of 2002                                                   34
</TABLE>


                                       30