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

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

                  For the quarterly period ended MARCH 31, 2004

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

                      For the transition period from: _____ to _____

                         Commission File Number 0-15949

                   INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.

              (Exact name of small business issuer in its charter)


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


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


                                 (415) 878-4000
                            Issuer's telephone number


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

As of APRIL 29, 2004, 23,727,953 Shares of Issuer's common stock, no par value,
were outstanding.

Transitional Small Business Disclosure Format: YES __ NO X


                                       1

<PAGE>

                   INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
                                AND SUBSIDIARIES

                                TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S>                                                                                                               <C>
PART I - FINANCIAL INFORMATION                                                                                      3
         ITEM 1- CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                                        3
                  CONDENSED CONSOLIDATED BALANCE SHEETS                                                             3
                  CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)                   4
                  CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY                                         5
                  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                                                   6
                  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                              7
         ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF OPERATIONS                16
         ITEM 3- CONTROLS AND PROCEDURES                                                                           25


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                                                                                                         28

INDEX TO EXHIBITS                                                                                                  29
</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)
                                                          --------------
                                                          MARCH 31, 2004    JUNE 30, 2003
                                                          --------------    -------------
<S>                                                       <C>             <C>
ASSETS

 Current assets:
    Cash and cash equivalents                                 $  4,905        $ 10,399
    Investment in marketable securities                          1,752              --
    Receivables, less allowances for doubtful accounts,
    discounts and returns of  $734 and $445                      1,187             734
    Inventories                                                    451             268
    Other current assets                                           624             240
                                                              --------        --------
    TOTAL CURRENT ASSETS                                         8,919          11,641

 FIXED ASSETS, NET                                                 412              85

 Intangible assets
    Capitalized software, net                                      934              87
    Domain names, net                                            1,643               4
    Distribution rights, net                                        --              36
    Capitalized customer lists                                     262              --
    Goodwill                                                       611             179
                                                              --------        --------
    TOTAL INTANGIBLE ASSETS                                      3,450             306

Other assets
    Note receivable from related party                             350              --
    Investment in securities                                     1,436             998
    Assets related to discontinued operations                    1,300           1,300
                                                              --------        --------
    TOTAL OTHER ASSETS                                           3,086           2,298
                                                              ========        ========
           TOTAL ASSETS                                       $ 15,867        $ 14,330
                                                              ========        ========

LIABILITIES AND SHAREHOLDERS' EQUITY

 Current liabilities:
    Short-term debt                                           $    986        $    304
    Trade accounts payable                                       1,051             564
    Income tax payable                                               1             271
    Accrued and other liabilities                                  633           1,541
    Deferred revenue                                               268             305
                                                              --------        --------
    TOTAL CURRENT LIABILITIES                                    2,939           2,985

 Liabilities related to discontinued operations                     84              84
 Long-term debt and other obligations                              471              --
                                                              --------        --------
 TOTAL LIABILITIES                                               3,494           3,069

Shareholders' equity:
   Common stock, no par value; 300,000,000 authorized;
   Issued and outstanding 23,653,835                            36,148          35,546
   and 22,818,232 shares
   Accumulated deficit                                         (23,673)        (24,223)
   Accumulated other comprehensive loss                           (102)            (62)
                                                              --------        --------
      TOTAL SHAREHOLDERS' EQUITY                                12,373          11,261
                                                              --------        --------

                                                              ========        ========
           TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY         $ 15,867        $ 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 MARCH 31,
                                                                                              2004                  2003
                                                                                        -----------------   ----------------------
<S>                                                                                     <C>                      <C>
 Net revenues                                                                                     $2,784                   $2,625
 Product costs                                                                                     1,045                    1,096
                                                                                        -----------------   ----------------------
  GROSS MARGIN                                                                                     1,739                    1,529

 Costs and expenses:
    Sales and marketing                                                                            1,467                      874
    General and administrative                                                                       864                      803
    Research and development                                                                         648                      358
                                                                                        -----------------   ----------------------
  TOTAL OPERATING EXPENSES                                                                         2,979                    2,035
                                                                                        -----------------   ----------------------
 OPERATING LOSS                                                                                  (1,240)                    (506)
                                                                                        -----------------   ----------------------

 Other income and (expense):
    Interest and other, net                                                                           58                    (199)
    Realized gain on marketable securities                                                            76                       --
    Unrealized gain on marketable securities                                                       1,688                       --
    Gain on liquidation of foreign subsidiaries                                                       --                        4
    Gain on extinguishment of debt                                                                    --                      134
                                                                                        -----------------   ----------------------
INCOME (LOSS) BEFORE INCOME TAX                                                                      582                    (567)

 Income tax benefit (provision)                                                                     (34)                       45
                                                                                        -----------------   ----------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS                                                             548                    (522)

Gain from the sale of discontinued operations                                                         --                       --
Income from discontinued operations, net of income tax                                                --                      419
                                                                                        -----------------   ----------------------
 NET INCOME (LOSS)                                                                                  $548                   ($103)
                                                                                        =================   ======================

Other comprehensive loss, net of tax:
    Foreign currency translation, net of tax                                                         (9)                     (10)
                                                                                        -----------------   ----------------------
    OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX                                                   $539                   ($113)
                                                                                        =================   ======================

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

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

Shares used in computing basic earnings (loss) per share information                              23,475                   22,807
Shares used in computing diluted earnings (loss) per share information                            27,324                   22,807
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
                                                                                        NINE MONTHS ENDED MARCH 31,
                                                                                         2004                  2003
                                                                                  -------------------   --------------------
<S>                                                                                    <C>                 <C>
 Net revenues                                                                                 $7,239                 $7,168
 Product costs                                                                                 2,417                  2,678
                                                                                  -------------------   --------------------
  GROSS MARGIN                                                                                 4,822                  4,490

 Costs and expenses:
    Sales and marketing                                                                        3,270                  2,478
    General and administrative                                                                 2,538                  2,185
    Research and development                                                                   1,655                  1,181
                                                                                  -------------------   --------------------
  TOTAL OPERATING EXPENSES                                                                     7,463                  5,844
                                                                                  -------------------   --------------------
 OPERATING LOSS                                                                              (2,641)                (1,354)
                                                                                  -------------------   --------------------

 Other income and (expense):
    Interest and other, net                                                                      198                  (381)
    Realized gain on marketable securities                                                        76                     --
    Unrealized gain on marketable securities                                                   1,865                     --
    Gain on liquidation of foreign subsidiaries                                                   --                     46
    Gain on extinguishment of debt                                                                76                    569
                                                                                  -------------------   --------------------
INCOME (LOSS) BEFORE INCOME TAX                                                                (426)                (1,120)

 Income tax benefit (provision)                                                                 (24)                     45
                                                                                  -------------------   --------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS                                                       (450)                (1,075)

Gain from the sale of discontinued operations                                                  1,000                     --
Income from discontinued operations, net of income tax                                            --                    785
                                                                                  -------------------   --------------------
 NET INCOME (LOSS)                                                                              $550                 ($290)
                                                                                  ===================   ====================

Other comprehensive loss, net of tax:
    Foreign currency translation, net of tax                                                    (40)                   (12)
                                                                                  -------------------   --------------------
    OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX                                               $510                 ($302)
                                                                                  ===================   ====================

BASIC EARNINGS (LOSS) PER SHARE
         Income (loss) per share from continuing operations                                  ($0.02)                ($0.05)
         Gain per share from the sale of discontinued operations                               $0.04                    $--
         Income per share from discontinued operations, net of income tax                        $--                  $0.04
         Earnings  (loss) per share                                                            $0.02                ($0.01)

DILUTED EARNINGS (LOSS) PER SHARE
         Income (loss) per share from continuing operations                                  ($0.02)                ($0.05)
         Gain per share  from the sale of discontinued operations                              $0.04                    $--
         Income per share from discontinued operations, net of income tax                        $--                  $0.04
         Earnings (loss) per share                                                             $0.02                ($0.01)

Shares used in computing basic earnings (loss) per share information                          23,332                 22,800
Shares used in computing diluted earnings (loss) per share information                        23,332                 22,800
----------------------------------------------------------------------------------------------------------------------------
</TABLE>

            See Notes to Condensed Consolidated Financial Statements

                                       4
<PAGE>

           INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES

            CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                        Nine Months ended March 31, 2004

                                 (In thousands)

                                   (Unaudited)

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
                                                                      COMMON STOCK
                                                                SHARES            AMOUNT           ACCUMULATED DEFICIT
                                                           ----------------------------------------------------------------
<S>                                                            <C>               <C>               <C>
BALANCE AT JUNE 30, 2003                                             22,818            $35,546                   ($24,223)
                                                           ================================================================
Issuance of common stock related to:
    Warrants exercised                                                  505                 96
    Stock options exercised                                             276                111
    Acquisitions                                                        100                 92

Issuance of warrants related to:
    Consulting services rendered                                                           255
    Acquisitions                                                                            76

Issuance of stock options related to:
    Consulting services rendered                                                            10

Retirement of common stock                                             (45)               (59)

Variable accounting adjustment related to stock options                                     21
previously issued

Net income                                                                                                             550

Comprehensive loss
                                                           ================================================================
BALANCE AT MARCH 31, 2004                                            23,654            $36,148                   ($23,673)
                                                           ================================================================
</TABLE>

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
                                                              ACCUMULATED OTHER
                                                             COMPREHENSIVE LOSS           TOTAL
                                                           --------------------------------------------
<S>                                                          <C>                    <C>
BALANCE AT JUNE 30, 2003                                                    ($62)              $11,261
                                                           ============================================
Issuance of common stock related to:
    Warrants exercised                                                                              96
    Stock options exercised                                                                        111
    Acquisitions                                                                                    92

Issuance of warrants related to:
    Consulting services rendered                                                                   255
    Acquisitions                                                                                    76

Issuance of stock options related to:
    Consulting services rendered                                                                    10

Retirement of common stock                                                                        (59)

Variable accounting adjustment related to stock options                                             21
previously issued

Net income                                                                                         550

Comprehensive loss                                                           (40)                 (40)
                                                           ============================================
BALANCE AT MARCH 31, 2004                                                  ($102)              $12,373
                                                           ============================================
</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>
                                                                          NINE MONTHS ENDED MARCH 31,
                                                                        ------------------------------
                                                                           2004                2003
                                                                        ----------          ----------
<S>                                                                     <C>                 <C>
Cash flows from operating activities:

NET CASH USED BY OPERATING ACTIVITIES                                   ($   2,450)         ($     395)
                                                                        ----------          ----------

Cash flows from investing activities:
   Acquisition of product lines                                             (1,815)                 --
   Acquisition of business                                                    (260)                 --
   Loan to related party                                                      (350)                 --
   Investment in marketable securities                                        (367)                 --
   Proceeds from sale of marketable securities                                 116                  --
   Purchase of equipment and furniture                                        (347)                (36)
   Purchase of software and domain names                                       (66)                 --
   Cash used by discontinued operations in investing activities                 --                (197)
                                                                        ----------          ----------
NET CASH USED BY INVESTING ACTIVITIES                                       (3,089)               (233)
                                                                        ----------          ----------

Cash flows from financing activities:
   Settlement of note payable (Imageline)                                     (160)                 --
   Note borrowings                                                             350                 684
   Note repayments                                                            (312)             (1,291)
   Warrants exercised                                                           96                   4
   Options exercised                                                           111                  --
   Proceeds from issuance of common stock                                       --                   1
   Repayment of capital lease obligations                                       --                 (19)
   Cash used by discontinued operations in financing activities                 --                (140)
                                                                        ----------          ----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES                                85                (761)
                                                                        ----------          ----------

Effect of exchange rate change on cash and cash equivalents                    (40)                (12)
Net decrease in cash and cash equivalents                                   (5,494)             (1,401)
Cash and cash equivalents at beginning of period                            10,399               2,455
                                                                        ----------          ----------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD                          $    4,905          $    1,054
                                                                        ==========          ==========
</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 March 31, 2004 and the results of  operations
and cash flows for the three and nine months ended March 31, 2004 and 2003, 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 nine months ended March 31,
2004 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 nine months ended March
31, 2003, 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 earn-out from the sale of ArtToday. This earn-out was contingent on
ArtToday  reaching  certain  revenue  milestones.  The full  amount  of the $1.0
million  earn-out was earned during the quarter ended  December 31, 2003 and was
paid per the stock purchase agreement on February 13, 2004.

As part of the sale of ArtToday,  Inc., a portion of the consideration  received
was placed in an escrow  account to offset  potential  indemnity  claims against
ArtToday, Inc. which were unknown at the close of the transaction.  The escrowed
amounts  consisted  of  $1,300,000  in cash and 250,000  shares of  Jupitermedia
Corporation   common  stock.  The  cash  was  recorded  as  "Assets  related  to
discontinued  operations"  and was  subject  to claims  of  $84,000  of  certain
minority  shareholders of ArtToday which was recorded as "Liabilities related to
discontinued  operations".  Net of any  indemnity  claims  the  cash  escrow  is
scheduled  to be released  as follows;  50% at June 30, 2004 and 50% at December
31, 2004. The stock escrow,  which is classified as "Investment in  Securities",
is  scheduled  to be released  net of any claims on December  31,  2005.  At the
Company's option, we are allowed to sell the shares in escrow at any time during
the escrow period but are required to maintain a $1.0 million balance of cash or
securities  in  the  account.  As  part  of an  amended  escrow  agreement  with
Jupitermedia,  125,000 of the shares were  released  from the escrow  account in
February  2003.  Those shares have been  classified as "Investment in Marketable
Securities". At March 31, 2004, we had sold 10,000 of the Jupitermedia shares.


                                       7
<PAGE>


      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 March 31, 2004, was to increase  revenues and sales and
marketing  expense by $92,000 and  $249,000  for the three and nine months ended
March 31,  2004.  In order to conform our prior  year's  results to this revised
presentation  for the three  and nine  months  ended  March  31,  2003,  we have
increased  revenues  and sales and  marketing  expense by $93,000 and  $248,000,
respectively.

      4. PRODUCT LINE AND OTHER ACQUISITIONS

The  table  below  documents  the  components  of  consideration  paid  for each
significant  acquisition  completed  in the nine months ended March 31, 2004 and
the  allocation  of that  consideration  to the tangible and  intangible  assets
acquired.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                               HOUSEEPLANS.COM   PLANWORKS     CADSYMBOL     CADSYMBOLS      CADALOG     DESIGN CAD
                                                 FEBRUARY 23,   NOVEMBER 17,  NOVEMBER 6,    OCTOBER 27,   SEPTEMBER 12,  JULY 28,
           DATE TRANSACTION CLOSED:                 2004           2003          2003           2003           2003         2003
------------------------------------------------------------------------------------------------------------------------------------
<S>                                              <C>            <C>             <C>            <C>            <C>            <C>
 CONSIDERATION
          Cash                                   $  270         $  260          $  171         $  335         $  250         $  600

          Less: Cash on hand                         --            (16)             --             --             --             --

          Cash paid to fund Escrow Account(s)        30             --             170             --             45            100

          Stock                                      --             77              --             --             --             --

          Warrants                                   17             --              30             18             --             --

          Notes payable                             313             14              --            474             --            300

          Liabilities assumed                        --             23              --             --             --             --

          Transaction fees                           20             20               1              3             --             --
------------------------------------------------------------------------------------------------------------------------------------
      TOTAL CONSIDERATION                        $  650         $  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            200             --             180             --            268            323

          Websites and associated domain names      300            315             180            830             20             50

          Customer lists                            150             33              --             --             --            113

          Goodwill                                   --             29              --             --             --            400
      TOTAL INTANGIBLE ASSETS                    $  650         $  377          $  360         $  830         $  288         $  886
------------------------------------------------------------------------------------------------------------------------------------
      TOTAL ASSETS ACQUIRED                      $  650         $  378          $  372         $  830         $  295         $1,000
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       8
<PAGE>


         HOUSEPLANS.COM

On February 23, 2004 we entered, through our wholly owned subsidiary,  Homeplan,
Inc., into an asset purchase and license  agreement with ULTRYX,  Inc ("ULTRYX")
whereby  we  acquired  certain  assets  of  ULTRYX.   The  assets  included  the
homeplans.com  domain name, related web site assets including house plans images
and related  on-line and print content in addition to customers'  profiles.  The
total  consideration  for  the  acquisition  was  $650,000  (including  fees  of
$20,000).  Included in the agreement was a warrant to purchase  twenty  thousand
(20,000) shares of IMSI's common stock at any time within the three-year  period
following the execution of the agreement at $1.24 per share.

         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 are 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 was $378,000.

         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  was
approximately $372,000 including warrants which were granted to Ane Gyldholm and
Michael  Heckmann,  principals  of Assisto,  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  was  $830,000.  As part of the  agreement,  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.

         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.


                                       9
<PAGE>


         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.

In addition to the purchase  price of  $1,000,000,  the  agreement  calls for an
earn-out based on net revenue that could result in an additional  $300,000 to be
paid to Upperspace  during the next three fiscal years and 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.

         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.

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

On September  18, 2003,  we received a 15% one-year  note from 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 called for DCDC not to sell any IMSI common  stock which it held,  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.


                                       10
<PAGE>


6.       DEBT

The following table details our outstanding debt as of March 31, 2004:

<TABLE>
<CAPTION>
                                                                            DEBT AS OF
                                                                          MARCH 31, 2004
------------------------------------------------------------------------------------------
<S>                                                                       <C>
 SHORT-TERM
 Short-term financing (secured by selected accounts receivable)                $322
 CADsymbol Escrow                                                               141
 Acquisition related notes
   DesignCAD Acquisition                                                        300
   CADsymbols.com Acquisition                                                   142
   Planworks Acquisition                                                         14
   Houseplans.com Acquisition                                                    62
   Other                                                                          6
------------------------------------------------------------------------------------------
 SUBTOTAL SHORT-TERM                                                            986

------------------------------------------------------------------------------------------

 LONG-TERM
 Liabilities related to discontinued operations                                  84
 Acquisition related notes
   Houseplans.com Acquisition                                                   281
   CADsymbols.com Acquisition                                                   187
   Other                                                                          3
------------------------------------------------------------------------------------------
 SUBTOTAL LONG TERM                                                             555
------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------
 GRAND TOTAL                                                                 $1,541
------------------------------------------------------------------------------------------
</TABLE>


      7. REALIZED GAIN ON MARKETABLE SECURITIES

During  the  quarter  ended  March 31,  2004,  we  realized  a  $76,000  gain on
marketable securities as we sold 10,000 shares of Jupitermedia common stock that
we received as part of the consideration related to the sale of ArtToday on June
30, 2003.

      8. UNREALIZED GAIN ON MARKETABLE SECURITIES

We recorded a $1.7  million and a $1.9  million  gain on  marketable  securities
during the three and nine months ended March 31, 2004,  respectively  reflecting
the  increase  in market  value of our equity  portfolio.  The  following  table
summarizes the net gain on marketable securities:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
                 DESCRIPTION                  THREE MONTHS ENDED MARCH 31, 2004     NINE MONTHS ENDED MARCH 31, 2004
<S>                                           <C>                                   <C>
Gain on Jupitermedia common stock                 $     1,660,000                         $    1,800,000
Gain on professionally managed portfolio                   27,681                                 64,526
-----------------------------------------------------------------------------------------------------------------------
TOTAL                                             $     1,687,681                         $    1,864,526
-----------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       11
<PAGE>


      9. 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>
--------------------------------------------------------------------------------------------------------------------------
                                               KEYNOMICS       NORTH AMERICA      OTHER FOREIGN     ELIMINATIONS     TOTAL
--------------------------------------------------------------------------------------------------------------------------
         QUARTER ENDED MARCH 31, 2004
--------------------------------------------------------------------------------------------------------------------------
<S>                                            <C>             <C>                <C>              <C>            <C>
Net Revenues                                      $71              $2,582              $131              $--       $2,784
Operating loss                                  (225)               (925)              (90)               --      (1,240)
Identifiable assets                               136              15,591               360            (220)       15,867
--------------------------------------------------------------------------------------------------------------------------
         QUARTER ENDED MARCH 31, 2003
--------------------------------------------------------------------------------------------------------------------------
Net Revenues                                      442                1903               280               --        2,625
Operating loss                                     65               (547)              (24)               --        (506)
Identifiable assets                               232               2,374               350            (490)        2,466
--------------------------------------------------------------------------------------------------------------------------
         NINE MONTHS ENDED MARCH 31, 2004
--------------------------------------------------------------------------------------------------------------------------
Net Revenues                                      549               6,267               423               --        7,239
Operating loss                                  (426)             (2,142)              (73)               --      (2,641)
Identifiable assets                               136              15,591               360            (220)       15,867
--------------------------------------------------------------------------------------------------------------------------
         NINE MONTHS ENDED MARCH 31, 2003
--------------------------------------------------------------------------------------------------------------------------
Net Revenues                                    1,066               5,545               557               --        7,168
Operating loss                                     57             (1,359)              (52)               --      (1,354)
Identifiable assets                              $232              $2,374              $350           ($490)       $2,466
--------------------------------------------------------------------------------------------------------------------------
</TABLE>

      10. 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.


                                       12
<PAGE>


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

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
                                                                   THREE MONTHS ENDED              NINE MONTHS ENDED
                                                             ----------------------------------------------------------------
                                                             MARCH 31, 2004  MARCH 31, 2003  MARCH 31, 2004  MARCH 31, 2003
                                                             ----------------------------------------------------------------
<S>                                                          <C>             <C>             <C>             <C>
         NUMERATOR:

Net income (loss)                                                       $548          ($103)            $550          ($290)

Numerator for basic earnings (loss) per share -
income (loss) available to common stockholders                           548           (103)             550           (290)

Numerator for diluted earnings (loss) per share -
income (loss) available to common stockholders
after assumed conversions                                                548           (103)             550           (290)

         DENOMINATOR:

Denominator for basic earnings (loss) per share
- weighted average shares outstanding                             23,475,424      22,806,882      23,331,526      22,799,624

Effect of dilutive  securities  using the treasury
stock method as at March 31, 2004:

         7,163,244 Warrants Outstanding                                   --              --              --              --
         2,101,198 Stock Options Outstanding                              --              --              --              --

Effect of dilutive  securities  using the treasury
stock method as at March 31, 2003:

         5,254,077 Warrants Outstanding                            2,867,241              --              --              --
         2,223,321 Stock Options Outstanding                         981,647              --              --              --

Dilutive potential common shares                                          --              --              --              --

Denominator for diluted earnings (loss) per share -
adjusted weighted average shares and assumed conversion           27,324,312      22,806,882      23,331,526      22,799,624

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

      11. STOCK-BASED AWARDS

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

We account for  stock-based  compensation  plans in accordance  with  Accounting
Principles  Board  ("APB")  Opinion  No.  25,  "Accounting  for Stock  Issued to
Employees,"  under which no  compensation  cost is  recognized  in the financial
statements  for employee  stock  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".

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 nine months ended March 31, 2004 we  recognized  charges of
$10,000 and $21,000  respectively  related to variable awards.  This compares to
charges of $0 and  ($5,000),  respectively  for the three and nine months  ended
March 31, 2003.

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 MARCH 31,          NINE MONTHS ENDED MARCH 31,
                                                                 2004               2003              2004              2003
<S>                                                           <C>                <C>              <C>               <C>
  NET INCOME (LOSS), AS REPORTED                                 $548             ($103)              $550            ($290)
    Intrinsic compensation charge recorded under APB 25            11                 72               265                75
    Pro Forma compensation charge under SAS 123                 (404)              (467)           (1,271)           (1,395)
-----------------------------------------------------------------------------------------------------------------------------
  PRO FORMA NET INCOME (LOSS)                                    $155             ($498)            ($456)          ($1,610)
  Pro Forma net income (loss) per share:
         Basic--as reported                                      $0.02              $0.00             $0.02           ($0.01)
         Basic--pro forma                                        $0.01            ($0.02)           ($0.02)           ($0.07)
         Diluted--as reported                                    $0.02              $0.00             $0.02           ($0.01)
         Diluted--pro forma                                      $0.01            ($0.02)           ($0.02)           ($0.07)
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       13
<PAGE>


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:

-----------------------------------------------------------------------------
                                               THREE MONTHS ENDED MARCH 31,
                                               ----------------------------

                                                  2004               2003
                                                  ----               ----

Risk-free interest rates                     2.21% - 2.80%             1.17%
Expected dividend yields                                --                --
Expected volatility                                 98.47%            101.1%
Expected option life (in years)                          5                 5
-----------------------------------------------------------------------------

The weighted  average fair value per option as of the grant date for grants made
during  the three and nine  months  ended  March 31,  2004 were $1.08 and $1.08,
respectively.  This compares to $0.43 and $0.63,  respectively for the three and
nine months ended December 31, 2002.

      12. 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 March 31, 2004, 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.


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.

      13. SUBSEQUENT EVENT: ACQUISITION OF ALADDIN SYSTEMS, INC.

On April 19, 2004 (the "Closing  Date"),  we consummated  the acquisition of all
the stock of Aladdin  Systems,  Inc.  ("Aladdin"),  pursuant to a Stock Purchase
Agreement  (the "Stock  Purchase  Agreement"),  dated January 20, 2004,  between
Aladdin Systems Holdings, Inc, the parent company of Aladdin, and IMSI.

Aladdin is 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 and Macintosh(R) platforms.


                                       14
<PAGE>


The consideration  paid in the Acquisition  (which was determined as a result of
arms'-length  negotiations  and  which was based  upon an in depth  analysis  of
Aladdin's  current and  projected  business  activity in addition to  comparable
companies and  transactions)  consists of a combination of cash in the amount of
$1,500,000,  subject  to a 10%  escrow,  2,317,881  unregistered  shares of IMSI
common stock (which are required to be registered  within 90 days of the Closing
Date)  and  two  three-year   convertible  notes  in  the  aggregate  amount  of
$3,000,000.  Additional cash earn-out payments may be earned, up to an aggregate
of  $2,000,000,  based  on net  revenues  derived  from  Aladdin  for the  three
consecutive  twelve month  periods  following  the Closing  Date.  Additionally,
eligible  employees of Aladdin will be given the  opportunity  to convert  their
existing  Aladdin  Systems  Holdings Inc.  stock options into IMSI stock options
priced at market as of the date of the closing.  The newly granted  options will
be subject to vesting as set forth in our 2004 Incentive  Stock Option Plan. The
conversion ratio was calculated using the Black-Scholes valuation methodology.

We relied on our  available  cash  balances to honor the payment  related to the
cash component of this transaction.

We are in the process of obtaining a third party valuation of certain intangible
assets and as a result the  allocation  of the  purchase  price  relating to the
Aladdin  Acquisition  is not available at the time of this filing.  On April 21,
2004,  we filed a current  report on Form 8-K  disclosing  the  details  of this
acquisition.  The audited annual financial statements of Aladdin Systems,  Inc.,
the  unaudited  interim  financial   statements  and  the  pro  forma  financial
statements  required in  accordance  with item 310 (c) and 310 (d) of regulation
S-B and the purchase price allocation will be filed by an amendment to the above
referenced  current report on Form 8-K as soon as practicable but not later than
July 5, 2004.

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

         OVERVIEW

IMSI is a developer and publisher of consumer  software in the precision  design
and  business  applications  and other  categories.  We offer a wide  variety of
application  software that we market through an array of  distribution  channels
including  retail,  direct to consumer and online.  We are  committed to being a
leading  provider  of these  applications  and  services  to the  Architectural,
Engineering and Construction (AEC) and Mechanical market.

We believe that  consistent  growth of both the revenues and operating  earnings
can be achieved through  internally  developed products and services and through
acquisition. Management believes that good value target companies are present in
the marketplace and that business combinations with these entities would help us
achieve  our growth  potential  in addition to  providing  synergies  that would
improve profitability.

         FORWARD LOOKING STATEMENT

The following  information  should be read in conjunction  with the consolidated
financial  statements and the notes thereto and in conjunction with Management's
Discussion  and Analysis 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.

         RESULTS OF OPERATIONS

The following  table sets forth our results of operations for the three and nine
months ended March 31, 2004 and 2003 in thousands of dollars and as a percentage
of net  revenues.  It also  details  the changes  from the prior  fiscal year in
thousands of dollars and in percentages.

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


                                       15
<PAGE>

<TABLE>
<CAPTION>
                                                            THREE MONTHS ENDED MARCH 31,
                                                          ----------------------------------    ---------- -------
                                                                                                   CHANGE FROM
                                                                                                  PREVIOUS YEAR
                                                               2004               2003
                                                          ---------------    ---------------
                                                             $      AS %         $    AS %          $         %
                                                                    OF                 OF       INCREASE/
                                                                   SALES             SALES      (DECREASE)
                                                          -------- ------    ------- -------    ---------- -------
<S>                                                       <C>      <C>       <C>      <C>       <C>        <C>
  Net revenues                                             $2,784   100%     $2,625    100%          $159      6%
  Product costs                                             1,045    38%      1,096     42%          (51)     -5%
--------------------------------------------------        -------- ------    ------- -------    ---------- -------
      GROSS MARGIN                                          1,739    62%      1,529     58%           210     14%

  Operating expenses
    Sales & marketing                                       1,467    53%        874     33%           593     68%
    General & administrative                                  864    31%        803     31%            61      8%
    Research & development                                    648    23%        358     14%           290     81%
--------------------------------------------------        -------- ------    ------- -------    ---------- -------
      TOTAL OPERATING EXPENSES                              2,979   107%      2,035     78%           944     46%
--------------------------------------------------        -------- ------    ------- -------    ---------- -------
      OPERATING LOSS                                      (1,240)   -45%      (506)    -19%         (734)    145%
--------------------------------------------------        -------- ------    ------- -------    ---------- -------
  Other Income (expenses)
    Interest and other, net                                    58     2%      (199)     -8%           257   -129%
    Realized gain on marketable securities                     76     3%          -      0%            76   100%
    Unrealized gain on marketable securities                1,688    61%          -      0%         1,688   100%
    Gain on liquidation of foreign subsidiaries                 -     0%          4      0%           (4)   -100%
    Gain on extinguishment of debt                              -     0%        134      5%         (134)   -100%
--------------------------------------------------        -------- ------    ------- -------    ---------- -------
      TOTAL OTHER INCOME (EXPENSES)                         1,822    66%       (61)     -2%         1,883   3087%
--------------------------------------------------        -------- ------    ------- -------    ---------- -------
    INCOME (LOSS) BEFORE INCOME TAX                           582    21%      (567)    -22%         1,149    203%
--------------------------------------------------        -------- ------    ------- -------    ---------- -------
    Income tax benefit (provision)                           (34)    -1%         45      2%          (79)   -176%
--------------------------------------------------        -------- ------    ------- -------    ---------- -------
    INCOME (LOSS) FROM CONTINUING OPERATIONS                  548    20%      (522)    -20%         1,070   -205%
--------------------------------------------------        -------- ------    ------- -------    ---------- -------
  Gain from the sale of discontinued operations                 -     0%          -      0%             -    --
  Income from discontinued operations, net of
  income tax                                                    -     0%        419     16%         (419)   -100%
--------------------------------------------------        -------- ------    ------- -------    ---------- -------
  NET INCOME (LOSS)                                          $548    20%     ($103)     -4%          $651    632%
==================================================        ======== ======    ======= =======    ========== =======
</TABLE>


<TABLE>
<CAPTION>
                                                              NINE MONTHS ENDED MARCH 31,
                                                           ----------------------------------    ---------- -------
                                                                                                    CHANGE FROM
                                                                                                    PREVIOUS YEAR
                                                                2004               2003
                                                           ---------------    ---------------
                                                              $     AS %         $    AS %            $        %
                                                                     OF                OF         INCREASE/
                                                                    SALES             SALES      (DECREASE)
                                                           -------- ------    ------- -------    ---------- -------
<S>                                                        <C>       <C>      <C>     <C>        <C>        <C>
  Net revenues                                              $7,239   100%     $7,168    100%           $71      1%
  Product costs                                              2,417    33%      2,678     37%         (261)    -10%
--------------------------------------------------         -------- ------    ------- -------    ---------- -------
      GROSS MARGIN                                           4,822    67%      4,490     63%           332      7%

  Operating expenses
    Sales & marketing                                        3,270    45%      2,478     35%           792     32%
    General & administrative                                 2,538    35%      2,185     30%           353     16%
    Research & development                                   1,655    23%      1,181     16%           474     40%
--------------------------------------------------         -------- ------    ------- -------    ---------- -------
      TOTAL OPERATING EXPENSES                               7,463   103%      5,844     82%         1,619     28%
--------------------------------------------------         -------- ------    ------- -------    ---------- -------
      OPERATING LOSS                                       (2,641)   -36%     (1,354)   -19%       (1,287)     95%
--------------------------------------------------         -------- ------    ------- -------    ---------- -------
  Other Income (expenses)
    Interest and other, net                                    198     2%      (381)     -5%           579   -152%
    Realized gain on marketable securities                      76     1%          -      0%            76   100%
    Unrealized gain on marketable securities                 1,865    26%          -      0%         1,865   100%
    Gain on liquidation of foreign subsidiaries                  -     0%         46      1%          (46)   -100%
    Gain on extinguishment of debt                              76     1%        569      8%         (493)    -87%
--------------------------------------------------         -------- ------    ------- -------    ---------- -------
      TOTAL OTHER INCOME (EXPENSES)                          2,215    30%        234      3%         1,981    847%
--------------------------------------------------         -------- ------    ------- -------    ---------- -------
    INCOME (LOSS) BEFORE INCOME TAX                          (426)    -6%     (1,120)   -16%           694    -62%
--------------------------------------------------         -------- ------    ------- -------    ---------- -------
    Income tax benefit (provision)                            (24)     0%         45      1%          (69)   -153%
--------------------------------------------------         -------- ------    ------- -------    ---------- -------
    INCOME (LOSS) FROM CONTINUING OPERATIONS                 (450)    -5%     (1,075)   -15%           625    -58%
--------------------------------------------------         -------- ------    ------- -------    ---------- -------
  Gain from the sale of discontinued operations              1,000    14%          -      0%         1,000   100%
  Income from discontinued operations, net of
  income tax                                                     -     0%        785     11%         (785)   -100%
--------------------------------------------------         -------- ------    ------- -------    ---------- -------
  NET INCOME (LOSS)                                           $550     8%     ($290)     -4%          $840    290%
==================================================         ======== ======    ======= =======    ========== =======
</TABLE>


                                       16
<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 nine months ended March 31,
2004 and 2003 are  summarized  in the following  table (in thousands  except for
percentage amounts):


<TABLE>
<CAPTION>
--------------------------------------------  -----------------------------------------------------------------------------------
                                                                         THREE MONTHS ENDED MARCH 31,
                                              -----------------------------------------------------------------------------------
                                                      2004                     2003
                                              ----------------------  -----------------------
                                                  $           %           $            %          $ CHANGE          % CHANGE
                                              ----------  ----------  -----------  ----------  ---------------  -----------------
<S>                                            <C>        <C>         <C>          <C>          <C>               <C>
 Precision Design                                $1,823         65%       $1,233         47%             $590                48%
 Business Applications and Other                    961         35%        1,392         53%            (431)               -31%
--------------------------------------------  ----------  ----------  -----------  ----------  ---------------  -----------------
 NET REVENUES                                    $2,784        100%       $2,625        100%             $159                 6%
--------------------------------------------  ----------  ----------  -----------  ----------  ---------------  -----------------
</TABLE>

<TABLE>
<CAPTION>
-------------------------------------------- -----------------------------------------------------------------------------------
                                                                        NINE MONTHS ENDED MARCH 31,
                                             -----------------------------------------------------------------------------------
                                                     2004                     2003
                                             ----------------------  -----------------------
                                                 $           %           $            %          $ CHANGE          % CHANGE
                                             ----------  ----------  -----------  ----------  ---------------  -----------------
<S>                                           <C>         <C>         <C>          <C>         <C>              <C>
 Precision Design                               $3,873         54%       $2,985         42%             $888                30%
 Business Applications and Other                 3,366         46%        4,183         58%            (817)               -20%
-------------------------------------------- ----------  ----------  -----------  ----------  ---------------  -----------------
 NET REVENUES                                   $7,239        100%       $7,168        100%              $71                 1%
-------------------------------------------- ----------  ----------  -----------  ----------  ---------------  -----------------
</TABLE>

Concurrent with the introduction our the newest release of our flagship product,
TurboCAD(R)  10.0 in March 2004 and the full quarter  effect of our wholly owned
subsidiary  Homeplan,  Inc,  sales of  precision  design  products  and services
increased  in the three and nine months  ended March 31, 2004 as compared to the
same  reporting   periods  in  the  previous  fiscal  year.   Additionally   the
introduction of the "DesignCAD" and the "Instant Series" line of products during
the first  quarter of fiscal 2004  contributed  to 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 $467,000 and $579,000  during
the quarter  and the nine  months  ended March 31,  2004.  As we  completed  the
acquisition  of  Planworks,  LLC on November 18,  2003,  we did not have similar
revenues to report for the comparable period from the previous fiscal year.

Despite the  introduction of new titles  (PhotoObject)  and the release of newer
version of our existing products (EasyLanguage and Net Accelerator), the decline
in  sales  of  our  historically   strong  selling  products  in  the  "Business
Applications and Other" products like  MasterClips and OrgPlus,  and the decline
in revenues from Keynomics, our productivity software subsidiary,  resulted into
an overall decrease in this segment during the three and nine months ended March
31, 2004 as compared to the same periods of the previous  fiscal year.  Revenues
from Keynomics amounted to $71,000 and $549,000 during the three and nine months
ended March 31,  2004,  respectively  as compared  to $441,000  and  $1,066,000,
respectively in the comparable periods from the previous fiscal year.  Keynomics
produces  ergonomic  and  keyboard  training  applications  for  worker-enhanced
safety,  productivity and ergonomic compliance  improvements.  Keynomics markets
its applications mainly to call and data processing centers that have seen their
activities   increasingly   outsourced  to  foreign  competitors  and  therefore
negatively affecting the Company's revenues.

Internationally,  we distribute our products through our wholly owned German and
Australian   subsidiaries  and   republishing   partners  in  Europe  and  Asia.
International  revenues  during  the  quarter  ended  March 31,  2004  decreased
slightly  despite  increased  European  business.  This  was the  result  of the
decrease in the revenues  recognized  from our  Australian  subsidiary  after we
licensed the distribution rights of some of our products in Australia to a third
party publisher in exchange for royalty payments.  The increase in international
sales  during the nine months  ended March 31,  2004,  is  primarily  due to our
reentry into the European market by re-activating  our German  subsidiary during
the previous fiscal year. Total net sales from our German  subsidiary  accounted
for $104,000 and $354,000,  respectively  during the three and nine months ended
March 31, 2004. The following  table details the revenue  breakdown  between the
domestic and international markets for the periods indicated.

<TABLE>
<CAPTION>
---------------------- ------------------------------------------------------
                                   THREE MONTHS ENDED MARCH 31,
                       ------------------------------------------------------
                            2004            2003
                       --------------- ---------------
                         $       %        $       %     $ CHANGE   % CHANGE
                       ------- ------- -------- ------ ----------- ----------
<S>                    <C>      <C>    <C>      <C>     <C>         <C>
  Domestic sales       $2,300     83%   $2,125    81%        $175         8%
  International
    sales                 484     17%      500    19%        (16)        -3%
---------------------- ------- ------- -------- ------ ----------- ----------
 NET REVENUES          $2,784    100%   $2,625   100%        $159         6%
---------------------- ------- ------- -------- ------ ----------- ----------
</TABLE>

<TABLE>
<CAPTION>
----------------------- ------------------------------------------------------
                                     NINE MONTHS ENDED MARCH 31,
                        ------------------------------------------------------
                             2004            2003
                        --------------- ---------------
                          $       %       $       %     $ CHANGE    % CHANGE
                        ------- ------- ------- ------- ---------- -----------
<S>                     <C>      <C>    <C>      <C>    <C>          <C>
  Domestic sales        $5,969     82%  $6,074     85%     ($105)         -2%
  International
    sales                1,270     18%   1,094     15%        176         16%
----------------------  ------- ------- ------- ------- ---------- -----------
 NET REVENUES           $7,239    100%  $7,168    100%        $71          1%
----------------------- ------- ------- ------- ------- ---------- -----------
</TABLE>


We are currently serving the domestic and  international  retail markets using a
combination of direct sales 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.


                                       17
<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.

                  PRODUCT COSTS AND GROSS MARGIN

Our product costs include  license fees,  royalties that we pay to third parties
based on sales of  published  software,  amortization  of  capitalized  software
acquisition and development costs, the costs of CD-ROM duplication,  printing of
manuals,  packaging and  fulfillment,  and freight.  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.

Our gross  margin  improved  to 62% from 58% and to 67% from  63%,  respectively
during the three and nine months ended March 31, 2004. This  improvement was due
to our increased direct marketing emphasis on the higher margin precision design
products. These products carry a lower cost as compared to others in our product
mix as we own the majority of their underlying technology.  In addition, we have
experienced  a  significant  reduction  in  amortization  expenses  for software
products as a result of the products being fully amortized.  Future business and
product  line  acquisitions,   however,  will  increase  our  basis  in  certain
intangible  assets  (i.e.   capitalized   software   development   costs),   the
amortization of which may negatively affect our gross margin in the future.

Given the uncertain  product  lifecycle for some of our historically high margin
products and depending on the success of the release of newer software versions,
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
nine months ended March 31, 2004 was mainly attributable to the following:

      o     The additional sales and marketing  expenses we incurred relating to
            the Planworks business that we acquired during the second quarter of
            fiscal 2004.

      o     Increased  payroll and related  wage  expenses  due to  increases in
            headcount in order to strengthen our direct marketing presence.

      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.

                  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.

Our general and  administrative  expenses slightly  increased during the quarter
ended March 31, 2004 as compared to the same  quarter  from the  previous  year.
This increase is primarily due to additional IT and investors  relation expenses
in part offset by a decrease in legal costs.

The increase in general and administrative expenses during the nine months ended
March 31, 2004 as compared to the same reporting period from the previous fiscal
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
nine months  ended March 31,  2003,  $432,000 of already  incurred  amortization
expense  of the  intrinsic  value of  warrants  issued to Mr.  Wade  which  were
unvested.


                                       18
<PAGE>


Excluding the effect of the two transactions  above,  general and administrative
expenses would have declined by  approximately  $316,000  during the nine months
ended March 31, 2004 as  compared  to the same period from the  previous  fiscal
year.  This  decrease  is mainly  attributable  to the  decline of  general  and
administrative  expenses related to our Australian subsidiary as we switch their
business  model to a licensing  mode and to a  substantial  decline in our legal
fees as a  result  of the  settlement  of all  outstanding  legal  actions  from
previous periods.

                  RESEARCH AND DEVELOPMENT

Our research and development expenses consist primarily of salaries and benefits
for research and development employees and payments to independent  contractors.
Our management believes that investment in research and development is essential
to respond to ever-evolving  customers demands.  The increased ratio of research
and  development  expenses as a percentage of sales  reflects our  commitment to
investing in and developing our core products.  We continue to maintain a strong
partnership  with our third  party  development  team in  Russia at  competitive
costs.

The increase in research and  development  expenses in the three and nine months
ended March 31, 2004 as  compared  to the same period from the  previous  fiscal
year resulted mainly from increased  personnel and consulting costs. These costs
related to the development of our web properties  including  houseplans.com  and
the development of new versions of our software products  including the recently
released TurboCAD Professional Version 10 and OrgChart Professional.

                  INTEREST AND OTHER, NET

Interest  and other  expenses,  net,  include  interest  and  penalties  on debt
instruments,   foreign  currency   transaction  gains  and  losses,   and  other
non-recurring  items.  The following table summarizes the components of interest
and other, net for the three and nine months ended March 31, 2004 and 2003:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------- -----------------------------------------------
                                         THREE MONTHS ENDED MARCH 31,                     NINE MONTHS ENDED MARCH 31,
                               ------------------------------------------------- -----------------------------------------------
                                                             $ CHANGE FROM                                    $ CHANGE FROM
                                                             PREVIOUS YEAR                                    PREVIOUS YEAR
                                                        ------------------------                          ----------------------
                                  2004         2003                                 2004         2003
                               ------------ ----------- ------------------------ ------------ ----------- ----------------------
                                    $            $        $ INCREASE       %          $            $      $INCREASE/       %
                                                        / (DECREASE)                                      (DECREASE)
                               ------------ ----------- -------------- --------- ------------ ----------- ------------ ---------
<S>                             <C>           <C>       <C>            <C>        <C>         <C>         <C>          <C>
Interest & Other, net
  Interest (expense)                 ($23)      ($128)           $105      -82%        ($26)      ($304)         $278      -91%
  Interest income                       24           1             23     2300%           69           9           60      667%
  Foreign exchange gain (loss)         (1)          37           (38)     -103%           47          23           24      104%
  Other income (Expenses)               58       (109)            167     -153%          108       (109)          217     -199%
------------------------------------------- ----------- -------------- --------- ------------ ----------- ------------ ---------
TOTAL INTEREST & OTHER, NET            $58      ($199)           $257     -129%         $198      ($381)         $579     -152%
------------------------------------------- ----------- -------------- --------- ------------ ----------- ------------ ---------
</TABLE>

As previously  disclosed in our annual report for the fiscal year ended June 30,
2003, in September  2001 we undertook an intensive  reassessment  of the current
costs and future  potential  financial  benefits of the Design.NET  project,  an
online design and visualization  tool allowing users to design homes and offices
on the  Internet.  We concluded it would be in our best interest to spin off the
Design.NET  project.  Consequently,  we entered into an  agreement  with Michael
Gariepy (a former  Vice  president  of IMSI) to  transfer  the  majority  of the
ownership of the project (80.01%) to employees  (including Mr. Gariepy) who were
key to its continued  development while we retained a 19.99% ownership  interest
in the new  venture.  Based on our  understanding  of the  project and the risks
associated  with  its  technical  feasibility,  we  recorded  the  value  of our
ownership  with a zero book value.  Pursuant to that  agreement,  the  employees
resigned from IMSI and established Plan3D, Inc. to pursue the development of the
technology.  During the quarter  ended March 31, 2004,  we sold our ownership in
Plan3D to Mr. Gariepy in exchange for 45,000 shares of IMSI common stock that he
held. As a result, of this transaction, we recognized a gain of $58,000.


                                       19
<PAGE>


                  REALIZED GAIN ON MARKETABLE SECURITIES

During the quarter ended March 31, 2004 we realized a $76,000 gain on marketable
securities  as we sold  10,000  shares  of  Jupitermedia  common  stock  that we
received  as part of the  consideration  related to the sale of ArtToday on June
30, 2003.

                  UNREALIZED GAIN ON MARKETABLE SECURITIES

We recorded a $1.7  million and a $1.9  million  gain on  marketable  securities
during the three and nine months ended March 31, 2004,  reflecting  the increase
in the market value of our equity portfolio.  The following table summarizes the
net gain on marketable securities:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------- --------------------------------------
           DESCRIPTION                          THREE MONTHS ENDED MARCH 31, 2004         NINE MONTHS ENDED MARCH 31, 2004
           -----------                          ---------------------------------         --------------------------------
<S>                                                      <C>                                 <C>
Gain on Jupitermedia common stock                        $             1,660,000              $               1,800,000
Gain on professionally managed portfolio                                  27,681                                 64,526
--------------------------------------------------------------------------------- --------------------------------------
TOTAL                                                    $             1,687,681              $               1,864,526
--------------------------------------------------------------------------------- --------------------------------------
</TABLE>


                  GAIN ON EXTINGUISHMENT OF DEBT

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

During the nine months  ended March 31, 2003,  we  recognized a gain of $569,000
from the extinguishment of debt representing the difference between the carrying
balances and the settlement amounts payable to a variety of unsecured creditors.

                  PROVISION FOR STATE AND FEDERAL INCOME TAXES

In the three  months  ended March 31,  2004,  we recorded tax expense of $34,000
arising from state income tax incurred from the prior fiscal year.

We have not recorded a tax benefit for current  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.

                  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 nine months ended
March  31,  2003,  totaling  $419,000  and  $785,000,  respectively,  have  been
accounted for as discontinued operations.

         LIQUIDITY AND CAPITAL RESOURCES

As of March 31,  2004,  we had  $4,905,000  in cash and cash  equivalents.  This
represents a $344,000  decline from the $5,249,000  balance at December 31, 2003
and a $5,494,000 decline from the $10,399,000  balance at June 30, 2003. Working
capital at March 31, 2004 was  $6,032,000.  This represents a decline of $24,000
from the working  capital at December 31, 2003 and a decline of $2,624,000  from
the working capital at June 30, 2003 of $8,656,000.


                                       20
<PAGE>


Our  operating  activities  used net cash of  $2,450,000  during the nine months
ended March 31, 2004.  This  compares to net cash used in operations of $395,000
during the nine months  ended March 31,  2003.  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 nine months  ended March 31, 2004 as compared to
the same period from the  previous  fiscal  year.  Receivables  and  inventories
increased  during the nine months ended March 31, 2004 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.
During the quarter  ended  December 31, 2003, we recorded a gain of $1.0 Million
from the sale of discontinued operations representing the successful achievement
of the first earn-out from the sale of ArtToday. This earn-out was contingent on
ArtToday  reaching  certain  revenue  milestones.  The full  amount  of the $1.0
Million  earn-out  was earned  during the second  quarter of fiscal 2004 and was
paid per the stock purchase agreement on February 13, 2004.

 Our investing activities consumed net cash of $3,089,000 during the nine months
ended  March 31,  2004,  as  compared  to net cash used of  $233,000  during the
comparable  period from the previous  fiscal  year.  The cash was mainly used to
acquire Planworks and several new product lines and assets.  The following table
details the cash  outlays for the  significant  acquisitions  we made during the
nine months ended March 31, 2004 (including transaction fees).

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------- -------------------------
                                                         ACQUIRED IN                  CASH SPENT (IN $000)
WEBSITES, CONTENT AND NEW PRODUCT LINES:
<S>                                                  <C>                                  <C>
   Homeplans.com                                     3rd quarter of Fiscal 2004                    ($290)
   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                                                                                            ($2,116)
-------------------------------------------------------------------------------- -------------------------
</TABLE>


These  acquisitions  are  consistent  with our strategy to grow our software and
services  businesses  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 Aladdin  Systems,  Inc.  acquisition that we
consummated  subsequent  to this fiscal  quarter end,  will be funded  through 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  $367,000  during the nine  months  ended  March 30,  2004 in part
offset  by  proceeds  of  $116,000  we  collected  from the  sale of  marketable
securities.

Also,  during the first  quarter of fiscal 2004, we received a 15% one-year note
from DCDC when 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 called for DCDC not to sell
any IMSI common stock that it held with the  exception of private  sales of IMSI
common stock, prior to February 15, 2004.

Our  financing  activities  provided net cash of $85,000  during the nine months
ended March 31,  2004.  This  compares to $761,000 of net cash used by financing
activities  during the comparable  periods from the previous fiscal year. During
the quarter ended March 31, 2004 we issued a short term note secured by selected
accounts  receivable in the amount of $350,000 to one of our financing  partners
and paid off  $28,000  prior to  period  end.  We also  received  cash  from the
exercise  of  warrants  and  options in the  amounts of  $96,000  and  $111,000,
respectively  in the nine months ended March 31, 2004. 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.  In addition,  we partially  repaid notes  related to the  businesses we
acquired in the aggregate  amount of $220,000 during the nine months ended March
31, 2004.

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


                                       21
<PAGE>


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.

         CRITICAL ACCOUNTING POLICIES

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

                  REVENUE RECOGNITION

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


                                       22
<PAGE>


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

                  INVENTORIES

Inventories  are valued at the lower of cost or market and are  accounted for on
the first-in,  first-out  basis.  Management  performs  periodic  assessments to
determine the existence of obsolete,  slow moving and  non-salable  inventories,
and records  necessary  provisions to reduce such  inventories to net realizable
value.  As of March 31, 2004,  distributors  held  approximately  $18,000 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.

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.

         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.

      o     Market value fluctuations related to our investments.


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.


                                       23
<PAGE>


                           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 23, 2004,  we filed with the  Securities  and Exchange  Commission a
Definitive  Proxy  Statement on Schedule  14-A  pursuant to section 14(A) of the
Securities  Exchange Act Of 1934 in connection with the  solicitation of proxies
by the  board  of  directors  of  IMSI  for  use at the  annual  meeting  of the
shareholders.

The annual  meeting of the  shareholders  of IMSI was held on March 17, 2004 and
the following proposals were approved by the shareholders:

o The election of seven directors for a term of one year:

<TABLE>
<CAPTION>
------------------------ -------- -------------------------------------- ----------------- ---------------- -----------------
      NAME                AGE                  OCCUPATION                 DIRECTOR SINCE   VOTES CAST FOR    VOTES WITHHELD
------------------------ -------- -------------------------------------- ----------------- ---------------- -----------------
<S>                      <C>      <C>                                    <C>               <C>
Bruce Galloway           45       Chairman of the Board of Directors     2001                   18,430,101            28,729
------------------------ -------- -------------------------------------- ----------------- ---------------- -----------------
Martin Wade, III         54       Chief Executive Officer                2001                   18,435,351            23,479
------------------------ -------- -------------------------------------- ----------------- ---------------- -----------------
Evan Binn                64       Director                               2001                   17,677,611           781,219
------------------------ -------- -------------------------------------- ----------------- ---------------- -----------------
Donald Perlyn            60       Director                               2001                   17,677,161           781,669
------------------------ -------- -------------------------------------- ----------------- ---------------- -----------------
Robert Mayer             49       Executive Vice President               2000                   17,673,911           784,919
------------------------ -------- -------------------------------------- ----------------- ---------------- -----------------
Robert S. Falcone        57       Director                               2002                   18,443,051            15,779
------------------------ -------- -------------------------------------- ----------------- ---------------- -----------------
Richard J. Berman        61       Director                               2002                   18,442,901            15,929
------------------------ -------- -------------------------------------- ----------------- ---------------- -----------------
</TABLE>

o     The approval of the 2004  Incentive  Stock Option Plan.  This proposal was
      approved according to the votes as cast below:

      o     For: 17,980,913

      o     Against: 197,951

      o     Abstain: 279,966

o     The  authorization  of the issuance of options  aggregating up to 49.0% of
      the outstanding  capitalization.  This proposal was approved  according to
      the votes as cast below:

      o     For: 17,877,261

      o     Against: 321,777

      o     Abstain: 259,792


                                       24
<PAGE>


      o     The  ratification of the appointment of Grant Thornton LLP as IMSI's
            independent  auditors for the fiscal year ending June 30, 2004. This
            proposal was approved according to the votes as cast below:

      o     For: 18,329,509

      o     Against: 5,266

      o     Abstain: 124,055


ITEM 5- OTHER INFORMATION

Not Applicable


ITEM 6- EXHIBITS AND REPORTS ON FORM 8-K

         (A) 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:

      Condensed Consolidated Balance Sheet at March 31, 2004 and June 30, 2003

      Condensed  Consolidated  Statements of Operations for the interim  periods
      ended March 31, 2004 and 2003

      Condensed Consolidated  Statements of Shareholders' Equity for the interim
      period ended March 31, 2004

      Condensed  Consolidated  Statements of Cash Flows for the interim  periods
      ended March 31, 2004 and 2003

      Notes to Condensed 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

      (B) REPORTS ON FORM 8-K

      o     On February  11, 2004 we  furnished a report on Form 8-K to announce
            our  financial  results for the fiscal  quarter  ended  December 31,
            2003.

      o     On  January  23,  2004 we filed a Form 8-K to  announce  that we had
            entered into a definitive  agreement with Aladdin  Systems  Holding,
            Inc. to acquire its wholly owned subsidiary, Aladdin Systems, Inc.


                                       25
<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: MAY 13, 2004

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


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



                                       26
<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       30
31.2     Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002       31
32.1     Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002       32
32.2     Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002       33
</TABLE>



                                       27