**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, 2006**





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





For
      the
      transition period from: _______ to _______





Commission
      File Number  0-15949








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


(Exact
      name of Small business issuer in its charter)








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







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





Indicate
      by check mark whether the registrant is a shell company (as defined in rule
      12b-2 of the Exchange Act). YES [
       ] NO [X]




As
      of **** May
      9,
      2006, 30,947,719 **** shares
      of
      Issuer’s common stock, no par value, were outstanding.





Transitional
      Small Business Disclosure Format: YES [ 
      ] NO [X]








**INTERNATIONAL
      MICROCOMPUTER SOFTWARE, INC.**


**AND
      SUBSIDIARIES**





**Table
      of Contents**




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







2


**PART
      I - FINANCIAL INFORMATION**




**Item1-
      Condensed Consolidated Financial Statements**




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


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


(In
      thousands, except share amounts)




**March
                31, 2006**
            
            **June
                30, 2005****Unaudited****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            
            $9,723
            
            
            $4,347Trading
                securities
            
            
            0
            
            
            714Receivables,
                less allowances for doubtful accounts, discounts and returns of $493
                as of
              March
                31, 2006 and $626 as of June 30, 2005.
            
            
            989
            
            
            773Inventories,
                net
            
            
            910
            
            
            758Receivables,
                other (related to discontinued operations)
            
            
            0
            
            
            2,000Receivables,
                other
            
            
            0
            
            
            30Other
                current assets
            
            
            1,479
            
            
            530Assets
                related to discontinued operations
            
            
            0
            
            
            12,231**Total
                current assets**
            
            
            **13,101**
            
            
            **21,383****Fixed
                assets, net**
            
            
            **302**
            
            
            **377**Intangible
                assetsCapitalized
                software, net
            
            
            231
            
            
            494Domain
                names and brands, net
            
            
            1,818
            
            
            1,574Distribution
                rights and proprietary plans, net
            
            
            753
            
            
            170Capitalized
                customer lists, agreements and relationships, net
            
            
            1,227
            
            
            326Goodwill
            
            
            3,852
            
            
            2,090Trademarks,
                net
            
            
            18
            
            
            1**Total
                intangible assets**
            
            
            **7,899**
            
            
            **4,655****Total
                assets**
            
            
            **$21,302**
            
            
            **$26,415****LIABILITIES
                AND SHAREHOLDERS' EQUITY**Current
                liabilities:Short-term
                debt
            
            
            93
            
            
            2,764Trade
                accounts payable
            
            
            1,315
            
            
            2,245Accrued
                and other liabilities
            
            
            1,598
            
            
            1,871Deferred
                revenues
            
            
            26
            
            
            38Liabilities
                related to discontinued operations
            
            
            0
            
            
            1,037**Total
                current liabilities**
            
            
            **3,032**
            
            
            **7,955**Long-term
                debt and other obligations
            
            
            176
            
            
            230**Total
                liabilities**
            
            
            **3,208**
            
            
            **8,185**Shareholders'
                equityCommon
                stock, no par value; 300,000,000 authorized; 30,144,160 issued and
                outstanding
              as
                of March 31, 2006 and 28,796,886 issued and outstanding as of June
                30,
                2005
            
            
            44,854
            
            
            43,663Accumulated
                deficit
            
            
            (26,911
            )
            
            (25,331
            )Accumulated
                other comprehensive income (loss)
            
            
            151
            
            
            (102
            )**Total
                shareholders' equity**
            
            
            **18,094**
            
            
            **18,230****Total
                liabilities and shareholders' equity**
            
            
            **$21,302**
            
            
            **$26,415**




See
      Notes
      to Condensed Consolidated Financial Statements


3


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


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


(In
      thousands, except per share amounts)


**(Unaudited)**




**Three
                months ended March 31,**
            
            **Nine
                months ended March 31,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Net
                revenues
            
            
            $4,029
            
            
            $3,799
            
            
            $11,714
            
            
            $10,412Product
                costs
            
            
            1,424
            
            
            1,272
            
            
            4,207
            
            
            3,415**Gross
                margin**
            
            
            **2,605**
            
            
            **2,527**
            
            
            **7,507**
            
            
            **6,997****Costs
                and expenses**Sales
                and marketing
            
            
            1,669
            
            
            1,635
            
            
            4,859
            
            
            4,523General
                and administrative
            
            
            1,047
            
            
            932
            
            
            3,801
            
            
            2,773Research
                and development
            
            
            486
            
            
            418
            
            
            1,474
            
            
            1,255**Total
                operating expenses**
            
            
            **3,202**
            
            
            **2,985**
            
            
            **10,134**
            
            
            **8,551****Operating
                loss**
            
            
            **(597**
            **)**
            
            **(458**
            **)**
            
            **(2,627**
            **)**
            
            **(1,554**
            **)****Other
                income (expense)**Interest
                and other, net
            
            
            93
            
            
            (61
            )
            
            40
            
            
            (22
            )Realized
                / unrealized gain on securities
            
            
            -
            
            
            (276
            )
            
            765
            
            
            145**Loss
                before income tax**
            
            
            **(504**
            **)**
            
            **(795**
            **)**
            
            **(1,822**
            **)**
            
            **(1,431**
            **)**Income
                tax provision
            
            
            (21
            )
            
            (2
            )
            
            (60
            )
            
            (9
            )**Loss
                from continuing operations**
            
            
            **(525**
            **)**
            
            **(797**
            **)**
            
            **(1,882**
            **)**
            
            **(1,440**
            **)**Income
                from discontinued operations, net of income tax
            
            
            -
            
            
            411
            
            
            -
            
            
            855Gain
                (loss) from the sale of discontinued operations,
              net
                of income tax
            
            
            776
            
            
            -
            
            
            302
            
            
            53**Net
                income (loss)**
            
            
            **$251**
            
            
            **($386**
            **)**
            
            **($1,580**
            **)**
            
            **($532**
            **)**Other
                comprehensive income (loss)Foreign
                currency translation adjustments
            
            
            62
            
            
            (5
            )
            
            253
            
            
            (38
            )**Comprehensive
                income (loss)**
            
            
            **$313**
            
            
            **($391**
            **)**
            
            **($1,327**
            **)**
            
            **($570**
            **)****Basic
                earnings (loss) per share:**Loss
                from continuing operations
            
            
            ($0.01
            )
            
            ($0.01
            )
            
            ($0.06
            )
            
            ($0.01
            )Income
                from discontinued operations, netof
                income tax
            
            
            $0.00
            
            
            $0.00
            
            
            $0.00
            
            
            $0.00Gain
                (loss) from the sale of discontinuedoperations,
              net
                of income tax
            
            
            $0.02
            
            
            $0.01
            
            
            $0.01
            
            
            $0.03Net
                income (loss)
            
            
            $0.01
            
            
            ($0.01
            )
            
            ($0.05
            )
            
            ($0.02
            )**Diluted
                earnings (loss) per share:**Loss
                from continuing operations
            
            
            ($0.01
            )
            
            ($0.01
            )
            
            ($0.06
            )
            
            ($0.01
            )Income
                from discontinued operations, net ofincome
                tax
            
            
            $0.00
            
            
            $0.00
            
            
            $0.00
            
            
            $0.00Gain
                (loss) from the sale of discontinuedoperations,
              net
                of income tax
            
            
            $0.02
            
            
            $0.01
            
            
            $0.01
            
            
            $0.03Net
                income (loss)
            
            
            $0.01
            
            
            ($0.01
            )
            
            ($0.05
            )
            
            ($0.02
            )Shares
                used in computing basic earnings (loss) per share
            
            
            30,043
            
            
            28,051
            
            
            29,850
            
            
            27,623Shares
                used in computing diluted earnings (loss) per share
            
            
            30,043
            
            
            28,051
            
            
            29,850
            
            
            27,623





See
      Notes
      to Condensed Consolidated Financial Statements


4


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


**CONDENSED
      CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY**


Nine
      months ended March 31, 2006


(In
      thousands, except share amounts)


**(Unaudited)**




**Common
                Stock****Shares**
            
            **Amount**
            
            **Accumulated
                deficit**
            
            **Accumulated
                other comprehensive income (loss)**
            
            **Total****Balance
                at July 1, 2005**
            
            **28,796,886**
            
            **$43,663**
            
            **($25,331)**
            
            **($102)**
            
            **$18,230**Issuance
                of common stock related to:Stock
                options exercised
            
            
            99,291
            
            
            80
            
            
            
            
            
            
            
            
            -Warrants
                exercised and other
            
            
            428,673
            
            
            -
            
            
            
            
            
            
            
            
            80Acquisitions
            
            
            826,583
            
            
            1,021
            
            
            
            
            
            
            
            
            1,021Finder's
                fee related to acquisition
            
            
            20,000
            
            
            25
            
            
            
            
            
            
            
            
            25Issuance
                of stock options related to:Consulting
                services rendered
            
            
            
            
            
            21
            
            
            
            
            
            
            
            
            21Issuance
                of warrants related to:Acquisitions
            
            
            
            
            
            6
            
            
            
            
            
            
            
            
            6Procurement
                of short-term debt
            
            
            
            
            
            68
            
            
            
            
            
            
            
            
            68Stock
                buy back
            
            
            (27,273
            )
            
            (30
            )
            
            
            
            
            
            
            
            (30
            )Issuance
                of stock options
            
            
            
            
            
            2
            
            
            
            
            
            
            
            
            2Variable
                accounting adjustment
            
            
            
            
            
            (2
            )
            
            
            
            
            
            
            
            (2
            )Net
                loss
            
            
            
            
            
            
            
            
            (1,580
            )
            
            
            
            
            (1,580
            )Foreign
                currency translation adjustment
            
            
            
            
            
            
            
            
            
            
            
            253
            
            
            253**Balance
                at March 31, 2006**
            
            
            **30,144,160**
            
            
            **$44,854**
            
            
            **($26,911**
            **)**
            
            **$151**
            
            
            **$18,094**





See
      Notes
      to Condensed Consolidated Financial Statements


5


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


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


(In
      thousands)


(Unaudited)




**Nine
                months ended March 31,****2006**
            
            **2005****Cash
                flows from operating activities:****Net
                cash provided by (used in) operating activities**
            
            
            **($948**
            **)**
            
            **$237****Cash
                flows from investing activities:**Proceeds
                from sale of discontinued operations
            
            
            10,242
            
            
            608Proceeds
                from sale of product line
            
            
            -
            
            
            258Acquisition
                of subsidiaries
            
            
            (1,807
            )
            
            (1,356
            )Acquisition
                of software development, domain names and trademarks
            
            
            -
            
            
            (602
            )Purchases
                of equipment and software
            
            
            (31
            )
            
            (213
            )Transfer
                cash to escrow for Jupitermedia
            
            
            -
            
            
            (499
            )Proceeds
                from the sale of marketable securities
            
            
            1,524
            
            
            1,780Other
            
            
            (8
            )
            
            371Cash
                provided by discontinued operations in investing activities
            
            
            -
            
            
            470**Net
                cash provided by investing activities**
            
            
            **9,920**
            
            
            **817****Cash
                flows from financing activities:**Proceeds
                from borrowings
            
            
            850
            
            
            400Repayments
                of notes
            
            
            (4,579
            )
            
            (2,368
            )Proceeds
                from warrants and options exercised
            
            
            80
            
            
            152Cash
                provided by discontinued operations in financing activities
            
            
            -
            
            
            (20
            )**Net
                cash used in financing activities**
            
            
            **(3,649**
            **)**
            
            **(1,836**
            **)****Effect
                of exchange rate change on cash and cash equivalents**
            
            
            53
            
            
            (39
            )**Net
                increase (decrease) in cash and cash equivalents**
            
            
            5,376
            
            
            (821
            )**Cash
                and cash equivalents at beginning of period**
            
            
            4,347
            
            
            3,212**Cash
                and cash equivalents at end of the period**
            
            
            **$9,723**
            
            
            **$2,391**




**Nine
                months ended March 31,****2006**
            
            **2005****SUPPLEMENTAL
                DISCLOSURE OF CASH FLOW INFORMATION**Interest
                paid
            
            
            2
            
            
            189Income
                tax paid
            
            
            66
            
            
            2**SUPPLEMENTAL
                DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES**Capital
                stock issued in conjunction with acquisitions
            
            
            1,046
            
            
            1,602Warrants
                issued in conjunction with acquisitions
            
            
            6
            
            
            -Notes
                payable incurred in conjunction with acquisitions
            
            
            1,000
            
            
            480Warrants
                issued in conjunction with short-term debt
            
            
            68
            
            
            -





See
      Notes
      to Condensed Consolidated Financial Statements


6


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


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**





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





The
      interim condensed consolidated financial statements have been prepared from
      the
      records of International Microcomputer Software, Inc., a California corporation,
      and Subsidiaries ("we" or the “Company”) 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,
      2006 and the results of operations and cash flows for the three and nine months
      ended March 31 ,
      2006
      and 2005, 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, 2005. The results of operations for the three
      and
      nine months ended March 31 ,
      2005
      are not necessarily indicative of the results to be expected for any other
      interim period or for the full year.





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




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




**3.**
            **Reclassifications**




Reclassifications
      have been made to the amounts reported for the three and nine months ended
      March
      31, 2005 to conform to the current period’s presentation. The amounts reported
      for the three and nine months ended March 31, 2005, present the assets,
      liabilities and results of operations for Allume Systems, Inc. (“Allume”) as
      discontinued operations due to the sale of Allume to Smith Micro Software Inc.
      (“Smith Micro”) on July 1, 2005.






Also,
      the
      amounts reported for the nine months ended March 31, 2005 include the assets,
      liabilities and results of operations for Keynomics, Inc. (“Keynomics”) as
      discontinued operations due to the sale of Keynomics on July 29,
      2004.




**4.**
            **Discontinued
                Operations**





**4a
      Gain (loss) from the sale of discontinued operations, net of income
      tax** ****





**Three
      and nine months ended March 31, 2006: Sale of Allume**





On
      July
      1, 2005, we sold all of the issued and outstanding capital stock of Allume
      to
      Smith Micro for an aggregate sales price of $12.8 million made up as
      follows:





(In
      millions)


**Description**
            
            **Amount**Cash
            
            
            $ 
                11.0Fair
                value of 397,547 unregistered shares of our Smith Micro common stock
            
            
            1.8**Total**
            
            
            **$
                12.8**





The
      fair
      value of the common stock was based on the five-trading-day average price of
      Smith Micro’s common stock surrounding the date the business combination was
      announced.





7


At
      closing an indemnity escrow was established to secure certain representations
      and warranties included in our stock purchase agreement with Smith Micro. The
      following sale proceeds were deposited into the escrow.





(In
      millions)


**Description**
            
            **Amount**Cash
            
            
            $    1.25170,398
                unregistered shares of our Smith Micro common stock
            
            
            0.784**Total**
            
            
            **$
                2.034**





The
      value
      of the common stock was based on the date of closing.





On
      November 2, 2005, we replaced the shares of Smith Micro common stock in escrow
      with cash, as permitted by the escrow agreement.





On
      November 10, 2005, we sold 100% of our holdings of Smith Micro shares at a
      gain
      of $923,000 which was shown in Other Income as Realized Gain on Securities
      in
      the December quarter.





Pursuant
      to the stock purchase agreement, Smith Micro released $500,000 plus interest
      of
      $7,000 and $750,000 plus interest of $26,000 of the escrowed cash to us in
      December 2005 and March 2006, respectively. These amounts, when released, added
      to our calculation of gain or loss on the sale.





As
      a
      result of this sale, we have categorized the assets, liabilities and operations
      of Allume as discontinued operations for the three and nine months ended March
      31, 2005 and in the three months ended March 31, 2006 we recorded a gain on
      the
      sale of discontinued operations of $776,000 representing the amount released
      from escrow on March 31, 2006 plus accrued interest. The gain on the sale of
      Allume totaled $302,000 as of March 31, 2006. This gain calculation does not
      consider the remaining cash held in escrow of approximately $0.3 million and
      is
      subject to change in future reporting periods depending upon the future release
      of cash from escrow.




**Nine
      months ended March 31, 2005: Sale of Keynomics**





In
      July
      2004, we sold the assets and customer related liabilities of our wholly owned
      subsidiary Keynomics. The $53,000 gain from the sale of discontinued operations
      for the nine months ended March 31, 2005 relates to the sale of Keynomics and
      represents the excess of the total consideration received over its net carrying
      value.





**4b
      Income from discontinued operations, net of income tax**





Income
      from discontinued operations totaling $411,000 for the three months ended March
      31, 2005 represents the pre-tax net income from Allume. Allume’s net revenues
      were $2.5 million for the three months ended March 31, 2005. Income from
      discontinued operations totaling $855,000 for the nine months ended March 31,
      2005 represents the pre-tax net income of Allume of $860,000 offset by the
      net
      loss of Keynomics of $5,000. Allume’s net revenues were $7.6 million and
      Keynomics net revenues were $68,000 for the nine months ended March 31, 2005.




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





On
      July,
      1, 2005, Houseplans, Inc. (“Houseplans”), our wholly owned subsidiary,
      consummated the acquisition of all of the issued and outstanding stock of
      Weinmaster Homes, Ltd. (“WHL”), pursuant to a Stock Purchase Agreement, between
      WHL, Bruce and Janice Weinmaster and Houseplans.





8


The
      preliminary purchase price of approximately $4.2 million was comprised as
      follows:





(In
      millions)


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





The
      fair
      value of our common stock was determined based on 826,583 shares issued to
      Bruce
      Weinmaster and priced based on the five-trading-day average price of our common
      stock surrounding the date the business combination was announced. The
      preliminary purchase price may increase if we incur additional costs related
      to
      this acquisition in future periods. The outstanding debt related to this
      acquisition is now paid in full, with payments of $250,000 and $750,000 on
      July
      1, 2005 and January 4, 2006, respectively. Costs incurred to consummate the
      acquisition include legal and accounting fees and finder’s fees paid in cash and
      through the issuance of 20,000 shares of our common stock.





The
      allocation of the preliminary purchase price to the assets acquired and
      liabilities assumed based on their preliminary estimated fair values was as
      follows:





(In
      millions)


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





The
      allocation of the purchase price was determined based on a valuation of assets
      acquired and liabilities assumed determined with the assistance of an
      independent appraisal. This allocation was based on the estimated fair value
      of
      these assets determined by management using information from the independent
      appraisal. The fair values and the allocation may change as we gather
      information on the fair value of acquired assets and liabilities and its tax
      effect.





The
      assets will be amortized or depreciated over a period of years shown on the
      following table:




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





Goodwill
      in the amount of $1.5 million represents the excess of the purchase price over
      the fair value of the net tangible and intangible assets acquired, and is not
      deductible for tax purposes. Goodwill will not be amortized and will be tested
      for impairment at least annually.





This
      transaction was not deemed to be a material business combination; therefore,
      no
      pro forma results are required under the Statement of Financial Accounting
      Standards No. 141.





The
      following attributes of the combination of the WHL and Houseplans businesses
      were considered significant factors to the establishment of the purchase price,
      resulting in the recognition of goodwill:





9


WHL
      is
      the operator of the #4 Google ranked globalHouseplans.com website as well as
      the
      Canadian focused Weinmaster.com. WHL, one of the leading marketers of stock
      house plans in Canada, has operated its plans business in the United States
      and
      Canada for more than twenty-five years, and is one of the leading innovators
      in
      the market. In addition to more than 16,300 plans available to customers, which
      includes over 500 proprietary Weinmaster plans, WHL has an impressive array
      of
      content and tools to help homeowners and their builders economically build
      their
      dream homes. Potential operating synergies are anticipated to arise and are
      likely to include sales growth from joint marketing programs, utilization of
      best practices developed in each organization, shared content and reduced common
      product development costs and limited reductions in administrative
      costs.





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





On
      December 16, 2005, AccessMedia Networks, Inc. (“AccessMedia”), a Delaware
      corporation, AccessMedia’s stockholders, ACCM Acquisition Corp., a Delaware
      corporation and our wholly owned subsidiary (“Merger Sub”) and we, entered into
      an agreement and plan of merger (“Agreement”), under which Merger Sub will be
      merged with and into AccessMedia, with AccessMedia continuing after the merger
      as the surviving corporation and our wholly-owned subsidiary. This agreement
      was
      amended and restated on March 24, 2006.





Under
      the
      Agreement, we will issue 29 million shares of our common stock to AccessMedia’s
      stockholders at the closing of this transaction, representing approximately
      48.4% of our outstanding stock at such time. Following the closing, we may
      issue
      up to 35 million additional shares of our common stock to AccessMedia’s
      stockholders if AccessMedia achieves certain revenue goals prior to December
      31,
      2008 (subject to certain extensions as provided in the Agreement). The closing
      of the transaction is anticipated to occur in the second calendar quarter of
      2006. Concurrent with the closing, we intend to change our name to Broadcaster,
      Inc.





The
      Agreement has been approved by both AccessMedia’s and our Boards of Directors,
      and the transactions contemplated thereby are subject to customary closing
      conditions. IMSI has scheduled a stockholder meeting for May 23, 2006 and filed
      a definitive proxy on May 5, 2006 containing proposals for the stockholders,
      one
      of which is the approval of this transaction by IMSI stockholders. Following
      an
      affirmative stockholder vote, the transaction would be expected to close less
      than a week thereafter. The shareholders will also consider authorizing the
      Board to execute a reverse (1:2) stock split.





Concurrently
      with the execution of the Agreement, we entered into a joint operating
      agreement, under which we agreed to loan AccessMedia up to $3.0 million prior
      to
      the closing of the merger pursuant to a joint operating plan and an operating
      budget to be delivered to a joint operating committee comprised of
      representatives of AccessMedia and our Company. In addition, we agreed to fund
      up to $7.0 million of net working capital needs of the surviving entity if
      certain operating milestones are achieved, as outlined in the joint operating
      agreement. AccessMedia has not yet requested funding under this
      arrangement.





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





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





As
      discussed in note 4 above, we currently have approximately $0.3 million of
      cash
      in escrow. Our cash and cash equivalents do not reflect the cash that remain
      in
      escrow.





As
      of
      June 30, 2005 we had $0.7 million classified as trading securities on our
      condensed consolidated balance sheets representing the market value of our
      investment portfolio. The
      fair
      value of trading securities is based upon quoted market prices.





**8.**
            **Intangible
                Assets**





**Software
      Development Costs and License Fees**




Costs
      incurred in the initial design phase of software development are expensed as
      incurred in research and development. Once the point of technological
      feasibility is reached, direct production costs are capitalized in compliance
      with Statement of Financial Accounting Standards (“SFAS”) No. 86, *Accounting
      for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed.* We
      cease
      capitalizing computer software costs when the product is available for general
      release to customers. Costs associated with acquired completed software are
      capitalized.




10


We
      amortize capitalized software development costs and visual content license
      fees
      on a product-by-product basis. The amortization for each product is the greater
      of the amount computed using (a) the ratio of current gross revenues to the
      total of current and anticipated future gross revenues for the product or (b)
      18, 36, or 60 months, depending on the product. We evaluate the net realizable
      value of each software product at each balance sheet date and record write-downs
      to net realizable value for any products for which the carrying value is in
      excess of the estimated net realizable value.




**Other
      Intangible Assets**





Other
      intangible assets other than goodwill represent Internet domain names, acquired
      customer lists and contracts, distribution rights and relationships, proprietary
      plans, trade names and trademarks. These assets are amortized using the
      straight-line method over the estimated useful lives, generally five to fifteen
      years.





**Impairment
      of Long Lived Assets**




We
      review
      long-lived assets and identifiable intangible assets for impairment whenever
      events or changes in circumstances indicate that the carrying amount of these
      assets may not be recoverable. We assess these assets for impairment based
      on
      estimated undiscounted future cash flows from these assets. If the carrying
      value of the assets exceeds the estimated future undiscounted cash flows, a
      loss
      is recorded for the excess of the asset’s carrying value over the fair value. We
      did not recognize any impairment related to long-lived assets for the three
      and
      nine months ended March 31, 2006 and 2005.




**Goodwill**




In
      accordance with SFAS No. 142, *Goodwill
      and Intangible Assets,* goodwill
      is assessed for impairment annually (in our first fiscal quarter) or more
      frequently if circumstances indicate impairment. We had goodwill in the amount
      of $3.9 million and $2.1 million as of March 31, 2006 and June 30, 2005,
      respectively, mainly related to the acquisitions we made during the quarter
      ended September 30, 2005 and during the last two fiscal years ended June 30,
      2005 and 2004. We did not recognize any impairment related to goodwill for
      the
      three and nine months ended March 31, 2006 and 2005.





**9.**
            **Debt**





The
      following table details our outstanding debt as of March 31, 2006:





(In
      thousands)


**As
                of March 31, 2006****Short-term**Acquisition
                related obligations Weinmaster
            
            $  
                 -Cardiff
                Consultants, Ltd.
            
            91Other
                obligations
            
            2**Subtotal
                short-term**
            
            **93****Long-term**Acquisition
                related obligationsULTRYX
            
            176Other
                obligations
            
            -**Subtotal
                long-term**
            
            **176****Grand
                total**
            
            **$269**





As
      discussed above in note 5, the purchase of WHL was financed by a $1.0 million
      promissory note which had been paid in full as of March 31, 2006. Cardiff
      Consultants, Ltd. was owed non-interest bearing amounts with the final payment
      due September 2006, with $91,000 fair value classified as short-term debt.





ULTRYX,
      Inc. was owed non-interest bearing amounts with the final payment due February
      2012, shown as $176,000 in long-term debt.





11


As
      of
      June 30, 2005, we owed $2.0 million on a 4% secured promissory note to Monterey
      Bay Tech., Inc. (“MBYI”) with the final payment during May 2007. This note arose
      in connection with the acquisition of Allume from MBYI in April 2004. Also
      in
      connection with this transaction, MBYI also was owed $667,000, non-interest
      bearing and due in August 2005. Following the sale of Allume to Smith Micro
      in
      July 2005, we repaid the MYBI obligations. As of June 30, 2005, we recorded
      $94,000 and $61,000 in short-term and long-term debt, respectively, payable
      to
      Cardiff Consultants, Ltd. (which includes the payment of $65,000 of principal
      during the nine months ended March 31, 2006), $168,000 in long-term debt to
      ULTRYX and $3,000 and $1,000 in long-term and short-term debt for other
      obligations.





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





The
      following table details the realized and unrealized net loss on marketable
      securities that we recognized on our condensed consolidated statements of
      operations and comprehensive income/(loss) for the three and nine months ended
      March 31, 2006 and 2005, respectively:





(In
      thousands)


**Gain
                (loss) on marketable securities for the three months ended March
                31,
                2006****Realized**
            
            **Unrealized**
            
            **Total****Description**
            
            
            
            Reversal
                of
              unrealized
                gain /
              (loss)
                recognized in
              prior
                periods
            Unrealized
                gain / (loss) for the three months ended March 31, 2006
            
            Sub
                total
              Unrealized
                gain /
              (loss)$-
            
            -
            -
            
            -
            
            $-**Total**
            
            **$-**
            
            **-**
            **-**
            
            **-**
            
            **$-****Gain
                (loss) on marketable securities for the three months ended March
                31,
                2005****Realized**
            
            **Unrealized**
            
            **Total****Description**
            
            
            
            Reversal
                of
              unrealized
                gain /
              (loss)
                recognized in
              prior
                periods
            Unrealized
                gain / (loss) for the three months ended March 31, 2005
            
            Sub
                total
              Unrealized
                gain /
              (loss)$-
            
            -
            -
            
            -
            
            $-





**Gain
                (loss) on marketable securities for the nine months ended March 31,
                2006****Realized**
            
            **Unrealized**
            
            **Total****Description**
            
            
            
            Reversal
                of
              unrealized
                gain /
              (loss)
                recognized in
              prior
                periods
            Unrealized
                gain / (loss) for the nine months ended March 31, 2006
            
            Sub
                total
              Unrealized
                gain /
              (loss)Smith
                Micro common stock
            
            $923
            
            
            
            
            
            
            $923Other
                stock in investment portfolio
            
            ($234)
            
            $90
            ($14)
            
            $76
            
            ($158)**Total**
            
            **$689**
            
            **$90**
            **($14)**
            
            **$76**
            
            **$765****Gain
                (loss) on marketable securities for the nine months ended March 31,
                2005****Realized**
            
            **Unrealized**
            
            **Total****Description**
            
            
            
            Reversal
                of
              unrealized
                gain /
              (loss)
                recognized in
              prior
                periods
            Unrealized
                gain / (loss) for the nine months ended March 31, 2005
            
            Sub
                total
              Unrealized
                gain /
              (loss)Stock
                in investment portfolio
            
            $2,239
            
            ($2,067)
            ($27)
            
            ($2,094)
            
            $145****





12


The
      Smith
      Micro shares were registered and sold by us in November 2005 resulting in a
      realized gain of $923,000.





**11.**
            **Marketable
                Securities Activity**





(In
      thousands)


**Nine
                Months Ended March 31****2006**
            
            **2005****Beginning
                balance of marketable securities July 1**
            
            
            $714
            
            
            $2,151Net
                cash transferred in (out) of marketable securities account
            
            
            (2,755
            )
            
            16Securities
                received from sale of subsidiary
            
            
            1,832
            
            
            -Purchases
                of marketable securities
            
            
            -
            
            
            (3,885
            )Realized
                gain
            
            
            689
            
            
            2,181Unrealized
                loss
            
            
            76
            
            
            (2,061
            )Borrowings
                from (repayment of) margin account
            
            
            (558
            )
            
            3,885Interest
                and dividends earned
            
            
            2
            
            
            -Margin
                interest paid
            
            
            -
            
            
            (29
            )Wire
                fees
            
            
            -Net
                change in marketable securities
            
            
            (714
            )
            
            107**Ending
                balance of marketable securities March 31**
            
            
            $0
            
            
            $2,258




**12.**
            **Segment
                Information**




We
      have
      two reportable operating segments which are based on our product families that
      generate revenues and incur expenses related to the sale of our software and
      Internet content. All inter-company amounts are eliminated through
      consolidation. Certain general and administrative expenses are allocated among
      our different segments.




(In
      thousands)


**Three
                months ended March, 31 2006**
            
            **Three
                months ended March, 31 2005****Software
                Segment**
            
            **Internet
                Content Segment**
            
            **Total**
            
            **Software
                Segment**
            
            **Internet
                Content Segment**
            
            **Total**Net
                revenues
            
            
            $1,814
            
            
            $2,215
            
            
            **$4,029**
            
            
            $2,319
            
            
            $1,480
            
            
            **$3,799**Gross
                margin
            
            
            1,157
            
            
            1,448
            
            
            **$2,605**
            
            
            1,686
            
            
            841
            
            
            **$2,527**Operating
                Income (loss)
            
            
            (985
            )
            
            388
            
            
            ($597
            )
            
            (459
            )
            
            1
            
            
            ($458
            )Total
                Assets
            
            
            $15,883
            
            
            $5,419
            
            
            **$21,302**
            
            
            $22,307
            
            
            $3,745
            
            
            **$26,052**




13


**Nine
                months ended March, 31 2006**
            
            **Nine
                months ended March, 31 2005****Software
                Segment**
            
            **Internet
                Content Segment**
            
            **Total**
            
            **Software
                Segment**
            
            **Internet
                Content Segment**
            
            **Total**Net
                revenues
            
            
            $6,266
            
            
            $5,448
            
            
            **$11,714**
            
            
            $7,427
            
            
            $2,985
            
            
            **$10,412**Gross
                margin
            
            
            4,049
            
            
            3,458
            
            
            **$7,507**
            
            
            5,350
            
            
            1,647
            
            
            **$6,997**Operating
                Income (loss)
            
            
            (2,415
            )
            
            (212
            )
            
            **($2,627**
            **)**
            
            (1,280
            )
            
            (274
            )
            
            **($1,554**
            **)**Total
                Assets
            
            
            $15,883
            
            
            $5,419
            
            
            **$21,302**
            
            
            $22,307
            
            
            $3,745
            
            
            **$26,052**




The
      following table details the breakdown of our net revenues and total assets
      by
      geographical location. The International column includes revenues relating
      to
      our Canadian, German and Australian wholly-owned subsidiaries, WHL, IMSI GmbH
      and IMSI Australia PTY Ltd, and sales derived from international distribution
      and republishing agreements we have in Europe (France, England), Asia (Japan
      and
      China) and Australia. The International column also includes the total assets
      held by our Canadian, German and Australian wholly-owned
      subsidiaries.




(In
      thousands)


**Three
                months ended March, 31 2006**
            
            **Three
                months ended March, 31 2005****Domestic**
            
            **International**
            
            **Total**
            
            **Domestic**
            
            **International**
            
            **Total**Net
                revenues
            
            
            $3,064
            
            
            $965
            
            
            **$4,029**
            
            
            $3,403
            
            
            $396
            
            
            **$3,799**Total
                Assets
            
            
            $15,847
            
            
            $5,455
            
            
            **$21,302**
            
            
            $25,558
            
            
            $494
            
            
            **$26,052****Nine
                months ended March, 31 2006**
            
            **Nine
                months ended March, 31 2005****Domestic**
            
            **International**
            
            **Total**
            
            **Domestic**
            
            **International**
            
            **Total**Net
                revenues
            
            
            $8,670
            
            
            $3,044
            
            
            **$11,714**
            
            
            $8,872
            
            
            $1,540
            
            
            **$10,412**Total
                Assets
            
            
            $15,847
            
            
            $5,455
            
            
            **$21,302**
            
            
            $25,558
            
            
            $494
            
            
            **$26,052**








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




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 on exercise of stock options and
      warrants (using the treasury stock method). Potentially dilutive securities
      are
      excluded from the computation if their effect is anti-dilutive. The following
      table summarizes the weighted average shares outstanding:




(In
      thousands)


**Three
                months ended March 31,****2006**
            
            **2005****Basic
                weighte****d
                average shares ou****tstanding**
            
            **30,043**
            
            **28,051**Total
                stock options outstanding
            
            
            4,761
            
            
            3,761Less:
                anti dilutive stock options
            
            
            (4,761
            )
            
            (3,761
            )Total
                warrants outstanding
            
            
            5,814
            
            
            6,623Less:
                anti dilutive warrants
            
            
            (5,814
            )
            
            (6,623
            )**Diluted
                weighted average shares outstanding**
            
            
            **30,043**
            
            
            **28,051**





14


**Nine
                months ended March 31,****2006**
            
            **2005****Basic
                weighted average shares outstanding**
            
            
            **29,850**
            
            
            **27,623**Total
                stock options outstanding
            
            
            4,761
            
            
            3,761Less:
                anti dilutive stock options due to loss
            
            
            (4,761
            )
            
            (3,761
            )Total
                warrants outstanding
            
            
            5,814
            
            
            6,623Less:
                anti dilutive warrants due to loss
            
            
            (5,814
            )
            
            (6,623
            )**Diluted
                weighted average shares outstanding**
            
            
            **29,850**
            
            
            **27,623**





**14.**
            **Stock
                Based Awards**





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





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





Beginning
      on July 1, 2006, we will adopt the accounting treatment required by SFAS 123
      (revised 2004) which will require us to measure all employee stock-based
      compensation awards using a fair value method and record such expense in our
      consolidated financial statements.





Under
      variable plan accounting, we recognize a charge equal to the per share change
      in
      the share value until the underlying options expire or are exercised. During
      the
      three months ended March 31, 2006 and 2005, we recognized an expense of $2,000
      and $2,000 respectively related to variable awards. During the nine months
      ended
      March 31, 2006 and 2005, we recognized a benefit of ($2,000) and ($5,000)
      respectively related to variable awards.





Had
      compensation cost for the stock-based compensation plans been determined based
      upon the fair value at grant dates for awards under those plans consistent
      with
      the method prescribed by SFAS 123, net income and net loss would have been
      decreased and increased, respectively, to the pro forma amounts indicated below.
      The pro forma consolidated financial information should be read in conjunction
      with the related historical information and is not necessarily indicative of
      actual results.





(In
      thousands, except per share amounts)


**Three
                months ended March 31,****2006**
            
            **2005****Net
                income , as reported**
            ****
            **$251**
            
            **$(386)**Intrinsic
                compensation charge recorded under APB 25
            
            3
            
            8Pro
                forma compensation charge under SFAS 123, net of tax
            
            (89)
            
            (90)**Pro
                forma net income (loss)**
            ****
            **$165**
            
            **$(468)**Earnings
                (loss) per share:Basic—as
                reported
            
            $0.01
            
            ($0.01)Basic—pro
                forma
            
            $0.01
            
            $0.00Diluted—as
                reported
            
            $0.01
            
            ($0.01)Diluted—pro
                forma
            
            $0.01
            
            $0.00




15




**Nine
                months ended March 31,****2006**
            
            **2005****Net
                loss, as reported**
            ****
            **$(1,580)**
            
            **$(532)**Intrinsic
                compensation charge recorded under APB 25
            
            21
            
            23Pro
                forma compensation charge under SFAS 123, net of tax
            
            (249)
            
            (507)**Pro
                forma net loss**
            ****
            **$(1,808)**
            
            **$(1,016)**Loss
                per share:Basic—as
                reported
            
            ($0.05)
            
            ($0.02)Basic—pro
                forma
            
            ($0.06)
            
            ($0.04)Diluted—as
                reported
            
            ($0.05)
            
            ($0.02)Diluted—pro
                forma
            
            ($0.06)
            
            ($0.04)




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




**Nine
                months ended March 31,****2006**
            
            **2005**Risk-free
                interest rates
            
            4.9%
                - 4.2%
            
            4.5%
                - 4.1%Expected
                dividend yields
            
            -
            
            -Expected
                volatility
            
            75.0%
                - 69.2%
            
            66.2%
                - 55.0%Expected
                option life (in years)
            
            10
            
            10




The
      weighted average fair values as of the grant date for grants made during the
      three and nine months ended March 31, 2006 were $0.69 and $0.84,
      respectively.




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




16


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





**Overview**




The
      following Management’s Discussion and Analysis of Financial Condition and
      Results of Operations (“MD&A”) is intended to provide readers with an
      understanding of the Company. The following are included in our MD&A:




•
            Overview;


•
            Significant
                Trends and Developments in Our
                Business;


•
            How
                We Generate Revenue;


•
            Recent
                Events;


•
            Forward
                Looking Statements;


•
            Results
                of Operations;


•
            Liquidity
                and Capital Resources;


•
            Critical
                Accounting Policies; and


•
            Factors
                That May Impact Future Operating Results.





We
      are a
      leading provider of stock house plans over the Internet with the largest
      selection of plans for consumers and builders. We also sell a variety of related
      content and services over the Internet. In addition, we are a developer and
      publisher of software solutions which we market and sell to individuals and
      small business users through an array of distribution channels. We are committed
      to being a leading provider of these applications and services to businesses
      and
      consumers.





**Significant
      Trends and Developments in Our Business**




Since
      the
      beginning of July 2004, we have acquired two house plans businesses: Abbisoft
      House Plans Inc. (“Abbisoft”) and Weinmaster Homes Ltd. (“WHL”) to add to
      Houseplans. We sold subsidiaries Keynomics and Allume, which are software and
      productivity enhancement businesses now shown as discontinued operations. We
      show stronger growth, both organic and acquired, in the Houseplans business
      line. Our software businesses present a higher gross margin but show slower
      growth and negative growth comparisons in some periods. Both businesses have
      seasonality. Software is affected by the annual release cycle and Houseplans
      is
      correlated with the building season. We expect growth trends to continue, with
      the impact of any housing slowdown cushioned by our consumer-friendly business
      model. Expense levels are expected to continue near current dollar levels and
      increasing at less than the rate of revenue growth. Additional cost savings
      are
      expected to be implemented by management as opportunities arise.




As
      combined, the businesses have not yet achieved breakeven with economies of
      scale. In order to achieve profitability, we will need to generate significantly
      higher revenue and continue to manage our expenses. Our ability to generate
      higher revenues and achieve profitability depends on many factors, including
      the
      demand for our products and services, the level of product and price
      competition, market acceptance of our new products, general economic conditions
      and the successful integration of Abbisoft and WHL. In this regard, we continue
      to invest in areas that we believe can accelerate revenue growth and to manage
      expenses to align our operations and cost structure with market conditions.




Over
      the
      past twelve months we have completed several acquisitions aimed at growing
      our
      revenues and strengthening our financial results. Management believes that
      good
      value target companies, presenting a strategic fit with our current operations,
      are still present in the marketplace and that potential business combinations
      with these entities, such as our planned merger with AccessMedia, would help
      us
      increase shareholder value. If the AccessMedia transaction were not to occur,
      significant non-contingent transaction costs would appear as general and
      administrative expense in the period.





**How
      We Generate Revenue**




We
      lead
      the market for house plans sold over the Internet with the largest selection
      of
      plans for consumers and builders. We also sell a variety of related content
      and
      services over the Internet. Additionally, we develop, publish, market and sell
      a
      variety of software titles and services that are targeted to a wide array of
      users primarily for individuals and small businesses. To efficiently serve
      our
      customers and maximize our revenue opportunities, we have aligned our business
      along two segments as described below:




17


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





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




Our
      market-leading house plans are physically delivered either by our organization
      or by our designer partners.




Our
      software products are sold either as electronic software download (“ESD”) or as
      physical products. Our physical distribution network includes leading
      distributors and retailers in North America and worldwide.




Our
      distribution methods are comprised of the following three major
      channels:




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




We
      conduct postal and email direct mail campaigns to businesses and end users
      for
      our existing and new products in addition to upgrades of existing products,
      as
      well as third-party offers. These mailings generally offer a specially priced
      product, as well as complementary or enhanced products for additional fees.
      We
      also maintain e-commerce websites and employ a sales force internally and
      through strategic partnerships.




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




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




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




We
      have
      republishing agreements domestically and internationally which typically include
      minimum guaranteed royalty payments.





18


**Recent
      Events**





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





On
      July
      1, 2005, Houseplans, Inc, our wholly owned subsidiary, consummated the
      acquisition of all the stock of WHL, pursuant to a stock purchase agreement
      between WHL, Bruce and Janice Weinmaster and Houseplans, Inc. The purchase
      price
      of approximately $4.2 million consisted of $2.0 million in cash, $1.0 million
      in
      a promissory note, transaction costs of $0.2 million and $1.0 million (based
      on
      the five-trading-day average price of our common stock surrounding the date
      the
      business combination was announced) in our unregistered common stock, which
      we
      have committed to register with the SEC within sixty days of the completion
      of
      the AccessMedia transaction pursuant to an amended registration rights agreement
      dated October 28, 2005.





**The
      Sale of Allume**





On
      July
      1, 2005, we sold all of the issued and outstanding capital stock of Allume
      to
      Smith Micro for an aggregate sales price of $12.8 million made up as
      follows:





(In
      millions)


**Description**
            
            **Amount**Cash
            
            
            $
                11.0Fair
                value of 397,547 unregistered shares of our Smith Micro common stock
            
            
            1.8**Total**
            
            
            **$
                12.8**





The
      fair
      value of the common stock was based on the five-trading-day average price of
      Smith Micro’s common stock surrounding the date the business combination was
      announced.





At
      closing an indemnity escrow was established to secure certain representations
      and warranties included in our stock purchase agreement with Smith Micro. The
      following sale proceeds were deposited into the escrow.





(In
      millions)


**Description**
            
            **Amount**Cash
            
            
            $   
                1.25170,398
                unregistered shares of our Smith Micro common stock
            
            
            0.784**Total**
            
            
            **$
                2.034**





The
      value
      of the common stock was based on the date of closing.





On
      November 2, 2005, we replaced the shares of Smith Micro common stock in escrow
      with cash, as permitted by the escrow agreement.





On
      November 10, 2005, we sold 100% of our holdings of Smith Micro shares at a
      gain
      of $923,000 which was shown in Other Income as Realized Gain on Securities
      in
      the December quarter.





Pursuant
      to the stock purchase agreement, Smith Micro released $500,000 plus interest
      of
      $7,000 and $750,000 plus interest of $26,000 of the escrowed cash to us in
      December 2005 and March 2006, respectively. These amounts, when released, added
      to our calculation of gain or loss on the sale.





As
      a
      result of this sale, we have categorized the assets, liabilities and operations
      of Allume as discontinued operations for the three and nine months ended March
      31, 2005 and in the three months ended March 31, 2006 we recorded a gain on
      the
      sale of discontinued operations of $776,000 representing the amount released
      from escrow on March 31, 2006 plus accrued interest. The gain on the sale of
      Allume totaled $302,000 as of March 31, 2006. This gain calculation does not
      consider the remaining cash held in escrow of approximately $0.3 million and
      is
      subject to change in future reporting periods depending upon the future release
      of cash from escrow.





19


**Plan
      of Merger with AccessMedia**





On
      December 16, 2005, AccessMedia Networks, Inc. (“AccessMedia”), a Delaware
      corporation and the stockholders of AccessMedia, ACCM Acquisition Corp., a
      Delaware corporation and our wholly owned subsidiary (also referred to as Merger
      Sub), and we entered into an Agreement and Plan of Merger (“Agreement”), under
      which Merger Sub will be merged with and into AccessMedia, with AccessMedia
      continuing after the merger as the surviving corporation and our wholly-owned
      subsidiary. This agreement was amended and restated on March 24,
      2006.





Under
      the
      agreement, we will issue 29 million shares of our common stock to AccessMedia’s
      stockholders at the closing, representing approximately 48.4% of our outstanding
      stock at such time. Following the closing, we may issue up to 35 million
      additional shares to AccessMedia’s stockholders if AccessMedia achieves certain
      revenue goals prior to December 31, 2008 (subject to certain extensions as
      provided in the Agreement). The closing of the transaction is anticipated to
      occur in the second calendar quarter of 2006. Concurrent with the closing,
      we
      intend to change our name to Broadcaster, Inc. The shareholders will also
      consider authorizing the Board to execute a reverse (1:2) stock
      split.





The
      Agreement has been approved by both AccessMedia’s and our Boards of Directors,
      and the transactions contemplated thereby are subject to customary closing
      conditions. IMSI has scheduled a stockholder meeting for May 23, 2006 and filed
      a definitive proxy on May 5, 2006 containing proposals for the stockholders,
      one
      of which is the approval of this transaction by IMSI stockholders. Following
      an
      affirmative stockholder vote, the transaction would be expected to close less
      than a week thereafter.





Concurrently
      with the execution of the Agreement, we entered into a joint operating
      agreement, under which we agreed to loan AccessMedia up to $3.0 million prior
      to
      the closing of the merger pursuant to a joint operating plan and an operating
      budget to be delivered to a joint operating committee comprised of
      representatives of our Company and AccessMedia. In addition, we agreed to fund
      up to $7.0 million of net working capital needs of the surviving entity if
      certain operating milestones are achieved. AccessMedia has not yet requested
      funding under this arrangement.





**Forward
      Looking Statements**




The
      following information should be read in conjunction with our consolidated
      financial statements and the notes thereto and in conjunction with “Management’s
      Discussion and Analysis of Financial Condition and Results of Operations” in our
      June 30, 2005 Annual Report on Form 10-KSB, as amended. This quarterly report
      on
      Form 10-QSB, and in particular this “Management’s Discussion and Analysis of
      Financial Condition and Results of Operations,” may contain forward-looking
      statements regarding future events or our future performance. These future
      events and future performance involve certain risks and uncertainties including
      those discussed in the “Factors That May Impact Future Operating Results”
section of this Form 10-QSB, as well as in our Fiscal 2005 Form 10-KSB, as
      amended, as filed with the U.S. 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.




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




**Results
      of Operations**





The
      following tables sets forth our results of operations for the three and nine
      months ended March 31, 2006 and 2005 in absolute dollars and as a percentage
      of
      net revenues. It also details the changes from the prior fiscal year in absolute
      dollars and in percentages.




20


**(** In
      Thousands **)**


**Three
                months ended March 31,****$
                Change from**
              **previous
                year****2006**
            
            **2005****$**
            **As
                %**
              **of
                sales**
            
            **$**
            **As
                %**
              **of
                sales**
            
            **Variance**
            **%**Net
                revenues
            
            $4,029
            100%
            
            $3,799
            100%
            
            $230
            6%Product
                cost
            
            1,424
            35%
            
            1,272
            33%
            
            152
            12%**Gross
                margin**
            
            **2,605**
            **65%**
            
            **2,527**
            **67%**
            
            **78**
            **3%**Operating
                expensesSales
                & marketing
            
            1,669
            41%
            
            1,635
            43%
            
            34
            2%General
                & administrative
            
            1,047
            26%
            
            932
            25%
            
            115
            12%Research
                & development
            
            486
            12%
            
            418
            11%
            
            68
            16%**Total
                operating expenses**
            
            **3,202**
            **79%**
            
            **2,985**
            **79%**
            
            **217**
            **7%****Operating
                loss**
            
            **(597)**
            **-15%**
            
            **(458)**
            **-12%**
            
            **(139)**
            **30%**Other
                income (expenses)Interest
                expense
            
            26
            1%
            
            (64)
            -2%
            
            90
            -141%Interest
                income
            
            56
            1%
            
            22
            1%
            
            34
            155%Gain
                (loss) sale of product line
            
            -
            0%
            
            -
            0%
            
            -
            0%Gain
                (loss) on disposal of subsidiaries
            
            -
            0%
            
            -
            0%
            
            -
            0%Realized
                gain (loss) - Securities
            
            -
            0%
            
            100
            3%
            
            (100)
            -100%UnRealized
                gain (loss) - Securities
            
            -
            0%
            
            (376)
            -10%
            
            376
            100%Foreign
                exchange gain/loss
            
            11
            0%
            
            (19)
            -1%
            
            30
            -158%**Total
                other income**
            
            **93**
            **2%**
            
            **(337)**
            **-9%**
            
            **430**
            **-128%****Income
                (loss) before income tax**
            
            **(504)**
            **-13%**
            
            **(795)**
            **-21%**
            
            **291**
            **-37%**Income
                tax benefit (provision)
            
            (21)
            -1%
            
            (2)
            0%
            
            (19)
            950%**Income
                loss from continuing operations**
            
            **(525)**
            **-13%**
            
            **(797)**
            **-21%**
            
            **272**
            **-34%**Income
                (loss) from discontinued operations, net of income tax
            
            -
            0%
            
            (449)
            -12%
            
            449
            -100%Gain
                from the sale of discontinued operations, net of income tax
            
            776
            19%
            
            860
            23%
            
            (84)
            -10%**Net
                income (loss)**
            
            **$251**
            **6%**
            
            **($386)**
            **-10%**
            
            **$637**
            **-165%**





21


**(** In
      Thousands **)**


**Nine
                months ended March 31,****$
                Change from**
              **previous
                year****2006**
            
            **2005****$**
            **As
                %**
              **of
                sales**
            
            **$**
            **As
                %**
              **of
                sales**
            
            **Variance**
            **%**Net
                revenues
            
            $11,714
            100%
            
            $10,412
            100%
            
            $1,302
            13%Product
                cost
            
            4,207
            36%
            
            3,415
            33%
            
            792
            23%**Gross
                margin**
            
            **7,507**
            **64%**
            
            **6,997**
            **67%**
            
            **510**
            **7%**Operating
                expensesSales
                & marketing
            
            4,859
            41%
            
            4,523
            43%
            
            336
            7%General
                & administrative
            
            3,801
            32%
            
            2,773
            27%
            
            1,028
            37%Research
                & development
            
            1,474
            13%
            
            1,255
            12%
            
            219
            17%**Total
                operating expenses**
            
            **10,134**
            **87%**
            
            **8,551**
            **82%**
            
            **1,583**
            **19%****Operating
                loss**
            
            **(2,627)**
            **-22%**
            
            **(1,554)**
            **-15%**
            
            **(1,073)**
            **69%**Other
                income (expenses)Interest
                expense
            
            (118)
            -1%
            
            (189)
            -2%
            
            71
            -38%Interest
                income
            
            161
            1%
            
            91
            1%
            
            70
            77%Gain
                (loss) sale of product line
            
            (1)
            0%
            
            33
            0%
            
            (34)
            -103%Gain
                (loss) on disposal of subsidiaries
            
            -
            0%
            
            -
            0%
            
            -
            0%Realized
                gain (loss) - Securities
            
            689
            6%
            
            2,239
            22%
            
            (1,550)
            -69%UnRealized
                gain (loss) - Securities
            
            76
            1%
            
            (2,094)
            -20%
            
            2,170
            100%Foreign
                exchange gain/loss
            
            (2)
            0%
            
            43
            0%
            
            (45)
            -105%**Total
                other income**
            
            **805**
            **7%**
            
            **123**
            **1%**
            
            **682**
            **554%****Income
                (loss) before income tax**
            
            **(1,822)**
            **-16%**
            
            **(1,431)**
            **-14%**
            
            **(391)**
            **27%**Income
                tax benefit (provision)
            
            (60)
            -1%
            
            (9)
            0%
            
            (51)
            567%**Income
                loss from continuing operations**
            
            **(1,882)**
            **-16%**
            
            **(1,440)**
            **-14%**
            
            **(442)**
            **31%**Income
                (loss) from discontinued operations, net of income tax
            
            -
            0%
            
            (5)
            0%
            
            5
            -100%Gain
                from the sale of discontinued operations, net of income tax
            
            302
            3%
            
            913
            9%
            
            (611)
            -67%**Net
                income (loss)**
            
            **($1,580)**
            **-13%**
            
            **($532)**
            **-5%**
            
            **($1,048)**
            **197%**







22


**Net
      Revenues**




The
      following illustrations of our net revenue reflect the allocation of our
      products across our business segments and across the distribution channels
      as
      well as the breakdown of our net sales domestically and internationally for
      the
      three and nine months ended March 31, 2006 and 2005.




(In
      thousands)


**Three
                months ended March 31, 2006**
            
            
            
            **Nine
                months ended March 31, 2006****Software
                Segment**
            **Internet
                Content Segment**
            
            **Total**
            
            
            
            **Software
                Segment**
            **Internet
                Content Segment**
            
            **Total**Net
                Revenues
            
            $1,814
            $2,215
            
            **$4,029**
            
            Net
                Revenues
            
            $6,266
            $5,448
            
            **$11,714**Channel
                Revenues
            
            
            
            
            
            
            Channel
                RevenuesDirect
                Marketing
            
            885
            2,215
            
            **3,100**
            
            Direct
                Marketing
            
            2,974
            5,448
            
            **8,422**Retail
                / Distribution
            
            172
            0
            
            **172**
            
            Retail
                / Distribution
            
            627
            0
            
            **627**Republishing
                / OEM
            
            757
            0
            
            **757**
            
            Republishing
                / OEM
            
            2,665
            0
            
            **2,665****Subtotal**
            
            **1,814**
            **2,215**
            
            **4,029**
            
            **Subtotal**
            
            **6,266**
            **5,448**
            
            **11,714**Domestic
                Revenues
            
            1,494
            1,570
            
            **3,064**
            
            Domestic
                Revenues
            
            4,895
            3,775
            
            **8,670**International
                Revenues
            
            319
            646
            
            **965**
            
            International
                Revenues
            
            1,371
            1,673
            
            **3,044****Subtotal**
            
            **$1,813**
            **$2,216**
            
            **$4,029**
            
            **Subtotal**
            
            **$6,266**
            **$5,448**
            
            **$11,714****Three
                months ended March 31, 2005**
            
            
            
            **Nine
                months ended March 31, 2005****Software
                Segment**
            **Internet**
              **Content**
              **Segment**
            
            **Sub
                Total**
            
            
            
            **Software
                Segment**
            **Internet**
              **Content**
              **Segment**
            
            **Sub
                Total**Net
                Revenues
            
            $2,319
            $1,480
            
            **$3,799**
            
            Net
                Revenues
            
            $7,428
            $2,984
            
            **$10,412**Channel
                Revenues
            
            
            
            
            
            
            Channel
                RevenuesDirect
                Marketing
            
            1,305
            1,480
            
            **2,785**
            
            Direct
                Marketing
            
            3,862
            2,984
            
            **6,846**Retail
                / Distribution
            
            308
            0
            
            **308**
            
            Retail
                / Distribution
            
            1,056
            0
            
            **1,056**Republishing
                / OEM
            
            706
            0
            
            **706**
            
            Republishing
                / OEM
            
            2,510
            0
            
            **2,510****Subtotal**
            
            **2,319**
            **1,480**
            
            **3,799**
            
            **Subtotal**
            
            **7,428**
            **2,984**
            
            **10,412**Domestic
                Revenues
            
            1,923
            1,480
            
            **3,403**
            
            Domestic
                Revenues
            
            5,888
            2,984
            
            **8,872**International
                Revenues
            
            396
            0
            
            **396**
            
            International
                Revenues
            
            1,540
            0
            
            **1,540****Subtotal**
            
            **$2,319**
            **$1,480**
            
            **$3,799**
            
            **Subtotal**
            
            **$7,428**
            **$2,984**
            
            **$10,412**







**Revenues
      by Business Segment**




We
      have
      two business segments: Internet Content Segment and the Software Segment.





**Internet
      Content Segment:** We
      introduced this segment upon the acquisition of Houseplans, Inc. completed
      during the quarter ended December 31, 2003. During the nine months ended March
      31, 2005, we completed the acquisition of Abbisoft House Plans, Inc. We
      continued to grow this segment to build a leading position in the sale of stock
      house plans online. During the nine months ended March 31, 2006, we completed
      the acquisition of Weinmaster Homes, Ltd., operator of globalHouseplans.com
      website as well as the Canadian-focused Weinmaster
      website .





23


The
      Internet Content Segment is primarily comprised of a network of highly ranked
      websites hosting an extensive library of unique stock house plans and marketed
      under the Houseplans ,
      homeplanfinder, houseplanguys, globalHouseplans
      and Weinmaster websites.
      These websites are targeted to general contractors, consumers and designers.





Revenues
      generated by this segment grew substantially during the three and nine months
      ended March 31, 2006 as compared to the same period in the previous fiscal
      year.
      In addition to the revenues generated from our new acquisition in this segment,
      Weinmaster Homes, Ltd., which amounted to $645,589 and $1,673,169 for the three
      and nine months ended March 31, 2006, the revenue increase (6.1% and 26.5%
      year
      over year without WHL) for the Internet Content Segment highlights the organic
      growth of the underlying business. During the past few months, we were able
      to
      focus our direct marketing message, improve our websites, introduce new services
      and increase the number of units sold and the average selling price of our
      house
      plans.





This
      increase in revenues should continue during future reporting periods as we
      focus
      on improving the branding and marketing of our main websites and as we continue
      to successfully integrate the businesses we acquired. We expect some impact
      from
      the macroeconomics of the housing market but cannot predict the slowdown, if
      any, for our business. The prime building season ends in the fall and we expect
      our sales will then move to a lower, off-season level until early in
      2007.





**Software
      Segment:** The
      software segment is comprised of the precision design software, the business
      applications and other software product families.





Within
      this business segment, revenues from the sale of the precision design software
      product family slightly decreased with the anticipation of the new version
      of
      our TurboCad products which was released at the end of March 2006, thus
      resulting in a pre-release decline in the sale of the business applications
      and
      other software product family resulting in an overall 21.8% and 15.7% decrease
      in the revenues derived from the software business during the three and nine
      months ended March 31, 2006 as compared to the same period from the previous
      fiscal year.




**Precision
      design software product family:** This
      product family which includes our flagship product, TurboCAD as well as other
      widely recognized brand names such FloorPlan, DesignCAD and the Instant Series
      had decreased revenues during the three and nine months ended March 31, 2006
      as
      compared to the same period from the previous fiscal year. The anticipation
      of
      the new version of our TurboCad products released at the end of March 2006
      accounted for the majority of the revenue decline in this product family.




**Business
      applications and other software product family:** This
      product family mainly includes third party product brands that we license from
      other software publishers and market to our client base along with certain
      software titles that we develop internally.




The
      decline in sales in this product family during the three and nine months ended
      March 31, 2006 was mainly the result of the decline in the revenues generated
      from the sale of third party products (including titles published by Allume
      that
      we were able to cross sell to our customers during previous quarters prior
      to
      our divestiture of Allume on July 1, 2005). The decline in revenues from the
      sale of FormTool and Hijaak (two internally developed products whose current
      versions are nearing the end of their life cycles) also contributed to the
      decline in revenues in this product family for fiscal 2006 as compared to the
      previous fiscal year.




**Revenues
      by Distribution Channel**




Direct
      marketing accounted for the majority of our sales by distribution channel (77%).
      Revenues derived from the Internet Content Segment are exclusively sold through
      the direct marketing channel, therefore, the substantial increase in sales
      of
      the Internet Content Segment during the three and nine months ended March 31,
      2006 accounted for the substantial boost in sales through the direct marketing
      channel for the same period as compared to the same period from the previous
      fiscal year. Additionally, a substantial amount of our software segment sales
      were also fulfilled through our direct marketing channel where the more
      profitable Electronic Software Distribution (ESD) is the delivery method of
      choice.




We
      are
      reducing our focus on the retail / distribution channel as the retail consumer
      software market involves publishing competition, promotional expense and product
      returns relative to direct distribution. The decline in revenues from the retail
      / distribution and from the republishing / OEM channels $136,000 and $429,000
      during the three and nine months ended March 31, 2006 as compared to the same
      period from the previous fiscal year reflects our increased focus on the direct
      marketing distribution channel. Revenues from republishing / OEM channel are
      mainly revenues derived from minimum guaranteed royalty agreements we have
      with
      domestic and international republishing partners.




**Domestic
      and International Revenues**




We
      distribute our products through our wholly owned Canadian, Australian and German
      subsidiaries and republishing partners in Europe and Asia. Historically, our
      international activities relate mainly to the software segment but, with the
      acquisition of Weinmaster Homes, Ltd. in July 2005, we are increasing our
      presence on the international markets for the Internet Content Segment. The
      sharp increase in our international revenues for the quarter ended March 31,
      2006, both in absolute dollars and as a percentage of total sales, is mainly
      attributable to the revenues generated from our newly acquired Canadian
      subsidiary.





24


Revenues
      from our German subsidiary declined slightly to $153,000 for the quarter ended
      March 31, 2006, but increased to $731,000 for the nine months ended March 31,
      2006 from $161,000 and $639,000 for the same periods in the previous fiscal
      year. Introduction of new versions and updates of our software titles, better
      acceptance of our products in the European markets and improved focus on the
      retail and direct marketing channels were mainly the reasons for the revenues
      derived from our German subsidiary.





Revenues
      from our Australian subsidiary are primarily derived from royalty payments
      from
      a third party publisher after we licensed the distribution rights of certain
      products in Australia during fiscal 2003. Revenue from our Australian subsidiary
      amounted to approximately $20,000 and $84,000 for the three and nine months
      ended March 31, 2006 from $25,000 and $120,000 for the same period in the
      previous year.





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
      consolidated gross margins decreased to 64.7% and 64.1% for the three months
      and
      nine months ended March 31, 2006 from 66.5% and 67.2% during the comparable
      period of the previous fiscal year. The growing share (“mix”) of the lower
      margin Internet Content Segment as a percentage of our total revenues was the
      primary reason for the decrease in our consolidated gross margins.





We
      were
      able to significantly improve the gross margin of our Internet Content Segment
      as we negotiated more competitive royalty rates with our vendors, increased
      our
      collection of proprietary royalty-free content and worked to integrate the
      acquisition we made in this segment. We believe that gross margins in the
      Internet Content Segment will modestly improve in the near-term as we continue
      our integration of WHL and as we leverage our leading position in the
      marketplace.





Despite
      a
      consolidation in sales of the more profitable precision design software product
      family, gross margin of the Software Segment decreased 31.4% and 24.3% during
      the three and nine months ended March 31, 2006 as compared to the same period
      from the previous fiscal year. The products in the precision design software
      product family carry a lower cost as compared to products in the business
      applications and other software family as we own the majority of their
      underlying technology. The decrease in the Software Segment margins was mainly
      due to obsolete inventory write offs, increases in shipping costs and the effect
      of fixed costs. The margins achieved during the three and nine months ended
      March 31, 2006 in this segment may fluctuate during future reporting periods
      given the uncertain product lifecycle for some of our historically high margin
      products and depending on the success of the release of newer software versions.
      However, as we are able to shift sales mix by distribution channel toward the
      more profitable direct marketing channel, we should witness improvement in
      on
      our overall profit margin.





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





Our
      product costs also include the amortization of capitalized software, a component
      of our overall product costs. These amortization expenses amounted to $91,000
      and $107,000 for the three months ended March 31, 2006 and 2005, respectively.
      As we continue to acquire businesses and product lines, we are likely to
      increase our basis in certain intangible assets, the amortization of which
      may
      negatively affect our gross margin in the future.





**Sales
      and Marketing**





Sales
      and
      marketing expenses for the Internet Content Segment increased during the three
      and nine months ended March 31, 2006 as compared to the same period from the
      previous fiscal year. This increase was mainly the result of the additional
      sales and marketing expenses related to our newly acquired business (WHL),
      the
      increased direct marketing expenses, especially relating to advertising
      necessary to increase the traffic to our websites and to the increased payroll
      and related expenses from additional headcount. Despite the increase in sales
      and marketing expenses for this segment during the quarter ended March 31,
      2006
      as compared to the same period from the previous fiscal year, we continue to
      integrate the acquisitions and we continue to implement savings and identify
      synergies among our business units.





25


The
      increase in sales and marketing expenses for the Internet Content Segment was
      in
      part offset by a decrease in sales and marketing expenses for the Software
      Segment during the three and nine months ended March 31, 2006 as compared to
      the
      same periods from the previous fiscal year. The decrease in the sales and
      marketing expenses for the Software Segment was mainly the result of decreased
      consulting expenses, commissions paid to outside E-commerce partners and
      advertising expenses relating to the retail distribution channel.





Sales
      and
      marketing expenses consist primarily of salaries and benefits of sales and
      marketing personnel, commissions, advertising, printing and direct mail
      expenses. We continue to improve our focus on the direct marketing distribution
      channel and the ESD delivery method by improving our internal sales force and
      partnering with outside service providers of sales forces and E-commerce
      systems.





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





The
      increase in our general and administrative expenses for the three and nine
      months ended March 31, 2006 as compared to the same period from the previous
      fiscal year is mainly attributable to severance pay accrued for an executive,
      increased payroll and related benefit expenses due to additional headcount,
      increased accounting fees, and real estate lease termination expenses relating
      to the Allume business we sold in July 2005. A significant portion of lease
      expenses related to the Allume business was accrued as of our year ended June
      30, 2005. The accrual as of June 30, 2005 was based upon our decision to
      sublease the Allume facility. During the quarter ended September 30, 2005,
      we
      decided against subleasing the property and chose to incur a lease buy out
      option increasing our liability by about $25,000.





The
      additional general and administrative expenses we incurred as a result of the
      WHL acquisition also accounted for the increase in general and administrative
      expenses relating to Internet Content Segment. During the three and nine months
      ended March 31, 2006, the Internet Content Segment assumed a larger share of
      common general and administrative expenses than for the previous comparable
      periods. If the growth of this business continues to outpace Software, this
      shift will continue.





**Research
      and Development**





Our
      research and development expenses consist primarily of salaries and benefits
      for
      research and development employees and payments to independent contractors,
      mainly our third party contract development teams in Russia with whom we
      continue to maintain a strong partnership at competitive costs.





Research
      and development expenses for the three and nine months ended March 31, 2006
      increased as compared to the same period from the previous fiscal year. The
      increase was related to the development cost associated to the new releases
      in
      the Software Segment, TurboCAD version 12 which was released at the end of
      March
      2006. We continue a steady investment in research and development in the
      Software Segment. This is a reflection of our commitment to improving our
      existing core products and developing new titles, features and functionalities.
      Our management believes that product innovation and new technology integration
      is essential to proactively respond to the ever-evolving customer demands.




**Interest
      and Other, Net**





Interest
      and other, net, include interest earned on cash and cash equivalents, interest
      expense on debt instruments, foreign currency transaction gains and losses,
      and
      other non-recurring items. A positive interest expense for the quarter ended
      March 31, 2006 is the result of the waiving of accrued interest on an obligation
      of an acquisition. The following table summarizes the components of interest
      and
      other, net for the three and nine months ended March 31, 2006 and
      2005:





26


(In
      thousands)


**Three
                months ended March 31,**
            
            **Nine
                months ended March 31,****2006**
            **2005**
            
            **$
                Change from**
              ******previous
                year**
            
            **2006**
            **2005**
            
            **$
                Change from**
              **previous
                year****$**
            **$**
            
            **$
                Increase / (Decrease)**
            **%**
            
            **$**
            **$**
            
            **$
                Increase / (Decrease)**
            **%**Interest
                & Other, netInterest
                expense
            
            $27
            ($64)
            
            $90
            -142%
            
            ($118)
            ($189)
            
            $71
            -38%Interest
                income
            
            56
            22
            
            35
            155%
            
            161
            91
            
            70
            77%Gain
                on Sale of Product Line
            
            -
            -
            
            -
            
            
            (1)
            33
            
            (34)
            -103%Foreign
                exchange gain
            
            10
            (19)
            
            29
            -153%
            
            (2)
            43
            
            (45)
            -105%-
            
            
            
            
            
            -**Total
                Interest & Other, Net**
            
            **$93**
            **($61)**
            
            **$154**
            **-252%**
            
            **$40**
            **($22)**
            
            **$62**
            **-282%**







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




The
      following table details the realized and unrealized net loss on marketable
      securities that we recognized on our condensed consolidated statements of
      operations and comprehensive income/(loss) for the three and nine months ended
      March 31, 2006 and 2005, respectively:





(In
      thousands)


**Gain
                (loss) on marketable securities for the three months ended March
                31,
                2006****Realized**
            
            **Unrealized**
            
            **Total****Description**
            
            
            
            Reversal
                of
              unrealized
                gain /
              (loss)
                recognized in
              prior
                periods
            Unrealized
                gain / (loss) for the three months ended March 31, 2006
            
            Sub
                total
              Unrealized
                gain /
              (loss)$-
            
            -
            -
            
            -
            
            $0**Total**
            
            **$-**
            
            **-**
            **-**
            
            **-**
            
            **$0****Gain
                (loss) on marketable securities for the three months ended March
                31,
                2005****Realized**
            
            **Unrealized**
            
            **Total****Description**
            
            
            
            Reversal
                of
              unrealized
                gain /
              (loss)
                recognized in
              prior
                periods
            Unrealized
                gain / (loss) for the three months ended March 31, 2005
            
            Sub
                total
              Unrealized
                gain /
              (loss)$-
            
            -
            -
            
            -
            
            -**Total**
            
            **$-**
            
            **-**
            **-**
            
            **-**
            
            **-**





27




**Gain
                (loss) on marketable securities for the nine months ended March 31,
                2006****Realized**
            
            **Unrealized**
            
            **Total****Description**
            
            
            
            Reversal
                of
              unrealized
                gain /
              (loss)
                recognized in
              prior
                periods
            Unrealized
                gain / (loss) for the nine months ended March 31, 2006
            
            Sub
                total
              Unrealized
                gain /
              (loss)Smith
                Micro common stock
            
            $923
            
            
            
            
            
            
            $923Other
                stock in investment portfolio
            
            ($234)
            
            $90
            ($14)
            
            $76
            
            ($158)**Total**
            
            **$689**
            
            **$90**
            **($14)**
            
            **$76**
            
            **$765****Gain
                (loss) on marketable securities for the nine months ended March 31,
                2005****Realized**
            
            **Unrealized**
            
            **Total****Description**
            
            
            
            Reversal
                of
              unrealized
                gain /
              (loss)
                recognized in
              prior
                periods
            Unrealized
                gain / (loss) for the nine months ended March 31, 2005
            
            Sub
                total
              Unrealized
                gain /
              (loss)Stock
                in investment portfolio
            
            $2,239
            
            ($2,067)
            ($27)
            
            ($2,094)
            
            $145**Total**
            
            **$2,239**
            
            **($2,067)**
            **($27)**
            
            **($2,094)**
            
            **$145**





The
      Smith
      Micro shares were registered and sold by us in November 2005 resulting in a
      realized gain of $923,000 for the three months ended December 31, 2005.





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





We
      recorded income tax expense of $21,000 and $2,000 for the three months ended
      March 31, 2006 and 2005, respectively. The tax expense for the three and nine
      months ended March 31, 2006 primarily represented accrued Canadian income taxes.
      The tax expense for the three and nine months ended March 31, 2005 represented
      state income taxes accrued where we have operations.





We
      have
      not recorded a tax benefit for domestic tax losses because of the uncertainty
      of
      realization. We adhere to SFAS No. 109, *Accounting
      for Income Taxes* ,
      which
      requires an asset and liability approach to financial accounting and reporting
      for income taxes. Valuation allowances are established when necessary to reduce
      deferred tax assets to the amount expected to be realized. Consistent with
      our
      past practice, we have recorded a full valuation allowance at March 31, 2006
      as
      the realizeability of our net operating loss carry-forwards is not determinable.





**Gain
      (loss) from Discontinued Operations**





**Three
      and nine months ended March 31, 2006: Sale of Allume**





On
      July
      1, 2005, we sold all of the issued and outstanding capital stock of Allume
      to
      Smith Micro for an aggregate sales price of $12.8 million consisting of $11.0
      million cash and 397,547 unregistered shares of Smith Micro’s common stock,
      having a market value (based on the five-trading-day average price of Smith
      Micro’s common stock surrounding the date the business combination was
      announced) of $1.8 million. At closing, a portion of the proceeds from the
      sale
      was deposited in an indemnity escrow, which included $1.25 million in cash
      and
      170,378 shares of Smith Micro’s common stock having a closing date market value
      of $784,000, to secure certain representations and warranties included in our
      stock purchase agreement with Smith Micro. In November 2005, we replaced the
      shares of Smith Micro common stock in escrow with cash, as permitted by the
      escrow agreement and sold 100% of our holdings of Smith Micro shares at a gain
      of $923,000. Smith Micro released $500,000 and $750,000 of the escrowed cash
      to
      us in December 2005 and March 2006, respectively.




28


As
      a
      result of this sale, we have categorized the assets, liabilities and operations
      of Allume as discontinued operations for the three and nine months ended March
      31, 2005 and in the three months ended March 31, 2006 we recorded a gain on
      the
      sale of discontinued operations of $776,000 primarily representing the amount
      released from escrow on March 31, 2006 plus accrued interest. The gain on the
      sale of Allume for the nine months ended March 31, 2006 totaled $302,000. This
      gain calculation does not include the remaining cash held in escrow of
      approximately $0.3 million and is subject to change in future reporting periods
      depending upon the future release of cash from escrow.





**Nine
      months ended March 31, 2005: Sale of Keynomics**





In
      July
      2004, we sold the assets and customer related liabilities of our wholly owned
      subsidiary Keynomics, Inc. The $53,000 gain from the sale of discontinued
      operations for the nine months ended March 31, 2005 relates to the sale of
      Keynomics and represents the excess of the total consideration received over
      its
      net carrying value.





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





Income
      from discontinued operations totaling $411,000 for the three months ended March
      31, 2005 represents the pre-tax net income of Allume. Allume’s net revenues were
      $1.7 million for the three months ended March 31, 2005.





Income
      from discontinued operations totaling $913,000 for the nine months ended March
      31, 2005 represents the pre-tax net incomes of Allume of $860,000 offset by
      the
      net loss of Keynomics of $5,000. Allume’s net revenues were $7.6 million and
      Keynomics net revenues were $68,000 for the nine months ended March 31, 2005.





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





As
      of
      March 31, 2006, we had $9,723,000 in cash and cash equivalents. This represents
      a $164,000 decrease from the $9,887,000 balance as of December 31, 2005 and
      a
      $5,376,000 increase from the $4,347,000 balance as of June 30, 2005. Working
      capital at March 31, 2006 was $10,129,000. This represents an increase of
      $604,000 over the working capital at December 31, 2005 of $9,525,000 and a
      decrease of $3,299,000 over working capital at June 30, 2005 of $13,428,000.




Our
      operating activities used net cash of $948,000 following a net loss of
      $1,580,000 for the nine months ended March 31, 2006. This compares to net cash
      generated from operations of $237,000 for the nine months ended March 31, 2005.
      A non-cash loss on the sale of Allume in the amount of $474,000 during the
      nine
      months ended March 31, 2006 and a realized and unrealized gain on securities
      of
      $765,000 were the major items that helped reconcile the net loss to cash used
      by
      our operating activities.





Our
      investing activities provided net cash of $9,920,000 during the nine months
      ended March 31, 2006, as compared to net cash provided of $817,000 during the
      comparable period from the previous fiscal year. The sale of Allume to Smith
      Micro on July 1, 2005 accounted for the majority of the cash we generated during
      the nine months ended March 31, 2006. The cash we generated from the sale of
      Allume was partially used to finance the acquisition of Weinmaster Homes which
      we consummated in July 2005. The divestiture and acquisition we completed in
      the
      nine months ended March 31, 2006 are consistent with our strategy to grow our
      Internet Content Segment with a focus on products and services that complement
      our direct marketing and online distribution strengths.





Our
      financing activities consumed net cash of $3,649,000 for the nine months ended
      March 31, 2006. This compares to $1,836,000 of net cash used by financing
      activities during the comparable period from the previous fiscal year. The
      cash
      used by our financing activities for the nine months ended March 31, 2006 was
      primarily related to payments we made on notes relating to the acquisitions
      of
      Allume that we repaid in full after we sold Allume on July 1, 2005. This
      repayment of debt was in part offset by a short-term borrowing in the amount
      of
      $850,000 utilizing a 15% revolving note to a lender. The balance of this
      short-term financing including all accrued interest was due on September 30,
      2005. We repaid all amounts due under this note on October 3, 2005.





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 and the sale of Allume to Smith Micro in July 2005 provided us with
      additional sources of funds to support our growth strategy.





29


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 planned
      merger with AccessMedia is consistent with our growth strategy.





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





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





Pursuant
      to a joint operating agreement with AccessMedia, we have committed to fund
      development expenses for AccessMedia pending the completion of our merger in
      an
      amount up to $3 million. The funding is subject to various conditions, including
      mutual agreement on an operating budget with AccessMedia. In addition, our
      merger agreement with AccessMedia provides that we will commit up to $7 million
      to fund AccessMedia’s working capital after the closing so long as AccessMedia
      achieves certain milestones. AccessMedia has not yet requested funding under
      this arrangement.





**Critical
      Accounting Policies**





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





**Revenue
      Recognition**




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




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


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


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


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


·
            Subscription
                revenue is recognized ratably over the contract period.


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


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


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


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


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





30




**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 condensed consolidated financial statements. Reserves are
      subjective estimates of future activity that are subject to risks and
      uncertainties, which could cause actual results to differ materially from
      estimates.




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




**Inventories**




Inventories
      are valued at the lower of cost or market and are accounted for on the first-in,
      first-out basis. Management performs periodic assessments to determine the
      existence of obsolete, slow moving and non-salable inventories, and records
      necessary provisions to reduce such inventories to net realizable value. As
      of
      March 31, 2006, approximately $356,000 of our inventory was held by certain
      of
      our distributors under consignment arrangements.




**Software
      Development Costs and License Fees**




Costs
      incurred in the initial design phase of software development are expensed as
      incurred in research and development. Once the point of technological
      feasibility is reached, direct production costs are capitalized in compliance
      with SFAS No. 86, *Accounting
      for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed.* We
      cease
      capitalizing computer software costs when the product is available for general
      release to customers. Costs associated with acquired completed software are
      capitalized.




We
      amortize capitalized software development costs and visual content license
      fees
      on a product-by-product basis. The amortization for each product is the greater
      of the amount computed using (a) the ratio of current gross revenues to the
      total of current and anticipated future gross revenues for the product or (b)
      18, 36, or 60 months, depending on the product. We evaluate the net realizable
      value of each software product at each balance sheet date and record write-downs
      to net realizable value for any products for which the carrying value is in
      excess of the estimated net realizable value.




**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. We account for the impairment
      and
      disposition of long-lived assets in accordance with SFAS 144, *Accounting
      for the Impairment or Disposal of Long-Lived Assets* .
      In
      accordance with SFAS 144, long-lived assets are reviewed for impairment whenever
      events or changes in circumstances indicate that the carrying value of an asset
      may not be recoverable. Recoverability of assets to be held and used is measured
      by comparison of the carrying amount of an asset to future net cash flows
      expected to be generated by the asset. If such assets are considered to be
      impaired, the impairment to be recognized is measured by the amount by which
      the
      carrying amount of the assets exceeds the fair value of the assets.




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




31





**Factors
      That May Impact Future Operating Results**





Set
      forth
      below and elsewhere in this report and in other documents we file with the
      SEC
      are risks and uncertainties that could cause actual results to differ materially
      from the results contemplated by the forward-looking statements contained in
      this report.




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




Our
      operating results have been in the past, and will continue to be, subject to
      quarterly and annual fluctuations as a result of numerous factors. These factors
      include:




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


·
            Our
                ability to maintain appropriate inventory levels and purchase commitments


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


·
            Overall
                movement toward industry consolidation


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


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


·
            Fluctuations
                in our gross margins


·
            Our
                ability to achieve targeted cost reductions


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


·
            How
                well we execute on our strategy and operating plans


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


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


·
            Merger
                and acquisition activity




As
      a
      consequence, operating results for a particular future period are difficult
      to
      predict, and, therefore, prior results are not necessarily indicative of results
      to be expected in future periods. Any of the foregoing factors, or any other
      factors discussed elsewhere herein, could have a material adverse effect on
      our
      business, results of operations, and financial condition that could adversely
      affect our stock price.





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





Our
      products are associated with demand for software products and building starts
      and negative trends in those and other areas could harm our business, operating
      results, or financial condition.





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





As
      a
      result of a variety of factors discussed in this report, our revenue for a
      particular quarter is difficult to predict. Our net sales may grow at a slower
      rate than in past periods, or may decline. Our ability to meet financial
      expectations could also be adversely affected by the timing and mix of
      individual sales.





We
      plan
      our operating expense levels based primarily on forecasted revenue levels.
      These
      expenses and the impact of long-term commitments are relatively fixed in the
      short term. A shortfall in revenue could lead to operating results being below
      expectations because we may not be able to quickly reduce these fixed expenses
      in response to short-term business changes.





32


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





Our
      product gross margins may not be sustainable and may be adversely affected
      by
      numerous factors, including:





·
            Changes
                in customer, geographic, or product
                mix


·
            Introduction
                of new products


·
            Sales
                discounts and other promotional factors in retail channels


·
            Increases
                in material or labor input costs


·
            Obsolescence
                charges


·
            Changes
                in shipment volume


·
            Inventory
                costs resulting from forecasting variances


·
            Increased
                price competition


·
            Changes
                in distribution channels


·
            How
                well we execute on our strategy and operating
                plans


·
            Inability
                to achieve targeted cost reductions





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





If
      we
      fail to manage distribution of our products and services properly, or if the
      economics of our distribution channels change, our revenue and gross margins
      could be adversely affected.





A
      substantial portion of our software products are sold through our channel
      partners and the remainder is sold through direct sales. Our stock house plans
      and services are sold primarily with Internet marketing and distribution and
      the
      remainder are sold through call center or indirect sales. Changes in the
      effectiveness of these channels or the costs associated with these distribution
      methods could harm our business, operating results, or financial
      condition.





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





A
      substantial portion of our business and revenue depends on growth of the
      Internet and on the use of that as a sales and distribution mechanism. To the
      extent that the Internet does not support this activity whether through changes
      in its use, lowered reliability or other factors, we could experience material
      harm to our business, operating results, and financial condition.





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





In
      response to changes in industry and market conditions, we may be required to
      strategically realign our resources and consider restructuring, disposing of,
      or
      otherwise exiting businesses. Any decision to limit investment in or dispose
      of
      or otherwise exit businesses may result in the recording of special charges,
      such as inventory and technology-related write-offs, workforce reduction costs,
      charges relating to consolidation of excess facilities, or claims from third
      parties who were resellers or users of discontinued products. Our estimates
      with
      respect to the useful life or ultimate recoverability of our carrying basis
      of
      assets, including purchased intangible assets, could change as a result of
      such
      assessments and decisions. Additionally, we are required to perform goodwill
      impairment tests on an annual basis and between annual tests in certain
      circumstances, and future goodwill impairment tests may result in a charge
      to
      earnings.





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





Our
      growth depends upon market growth, our ability to enhance our existing products,
      and our ability to introduce new products on a timely basis. We intend to
      continue to address the need to develop new products and enhance existing
      products through acquisitions of other companies, product lines, technologies,
      and personnel. Acquisitions involve numerous risks, including the following:





33


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


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


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


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


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


·
            Insufficient
                revenue to offset increased expenses associated with acquisitions


·
            The
                potential loss of key employees of the acquired
                companies




Acquisitions
      may also cause us to:




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


·
            Assume
                liabilities


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


·
            Incur
                amortization expenses related to certain intangible assets


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


·
            Become
                subject to intellectual property or other litigation





Mergers
      and acquisitions of high-technology companies are inherently risky, and no
      assurance can be given that our previous or future acquisitions will be
      successful and will not materially adversely affect our business, operating
      results, or financial condition. Failure to manage and successfully integrate
      acquisitions could materially harm our business, operating results, or financial
      condition.





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





Currently,
      few laws or regulations apply directly to access or commerce on the Internet.
      We
      could be materially adversely affected by regulation of the Internet and
      Internet commerce in any country where we operate. Such regulations could
      include matters such as sales taxes on Internet product sales, and access
      charges for Internet service providers. The adoption of regulation of the
      Internet and Internet commerce could decrease demand for our products and,
      at
      the same time, increase the cost of selling our products, which could have
      a
      material adverse effect on our business, operating results, and financial
      condition.





While
      we
      do not anticipate regulation affecting software or stock house plans as
      products, this regulation could also harm our business, operating results,
      or
      financial condition.




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





Our
      success has always depended in large part on our ability to attract and retain
      highly skilled technical, managerial, sales, and marketing personnel. The loss
      of services of any of our key personnel, the inability to retain and attract
      qualified personnel in the future, or delays in hiring required personnel could
      make it difficult to meet key objectives and harm our business, operating
      results, or financial condition.





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





We
      are a
      party to lawsuits in the normal course of our business. Litigation can be
      expensive, lengthy, and disruptive to normal business operations. Moreover,
      the
      results of complex legal proceedings are difficult to predict. An unfavorable
      resolution of a particular lawsuit could have a material adverse effect on
      our
      business, operating results, or financial condition. For additional information
      regarding certain of the lawsuits in which we are involved, see Item 1, “Legal
      Proceedings,” contained in Part II of this report.





34


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





Our
      corporate headquarters is located Northern California, a region known for
      seismic activity. A significant natural disaster, such as an earthquake or
      a
      flood, could have a material adverse impact on our business, operating results,
      and financial condition.





**OUR
      STOCK PRICE MAY BE VOLATILE**





Our
      common stock may experience price volatility. This can be prompted by reported
      results, market conditions and/or general economic and political conditions,
      and
      these factors may materially adversely affect the market price of our common
      stock in the future.




**Item
      3- Controls and Procedures**





(a)
      Under
      the supervision and with the participation of our management, including our
      principal executive officer and principal financial officer, we conducted an
      evaluation of our disclosure controls and procedures (“Disclosure Controls”), as
      such term is defined under Rule
      13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended
      (the
“Exchange Act”), as of March 31, 2006, the end of the period covered by this
      quarterly report. Based on their evaluation, our principal executive officer
      and
      principal financial officer concluded that our disclosure controls and
      procedures are effective.





(b)
      We
      have evaluated our accounting procedures and control processes in place as
      of
      March 31, 2006 r elated
      to material
      transactions to ensure they are recorded timely and accurate ly
      in the
      financial statements. There have been no significant changes in our internal
      controls or in other factors that could significantly affect these controls
      subsequent to the date of the
      eval uation
      referenced in paragraph (a) above.




**PART
      II - OTHER INFORMATION**




**Item
      1 - Legal Proceedings**





From
      time
      to time, we may be involved in litigation relating to claims arising out of
      our
      operations in the normal course of business.





We
      were
      named as one of a number of co-defendants in a suit filed in the State of New
      York by Xand Corporation who has asserted a claim in the amount of $270,000
      arising out of a contract with Allume Systems, Inc. which would apply to periods
      during our fiscal years 2004 through 2007. We believe under some circumstances,
      we may be contractually indemnified against some or all of the claim. We believe
      the claim is without merit and intend to defend the actions vigorously, if
      required. While we believe there is no legal basis for liability, due to the
      uncertainty surrounding the litigation process, we are unable to reasonably
      estimate a range of loss, if any, at this time.





In
      addition, we are subject to legal proceedings, claims, and litigation arising
      in
      the ordinary course of business. While the outcome of these matters is currently
      not determinable, we do not expect that the ultimate costs to resolve these
      matters will have a material adverse effect on our consolidated financial
      position, results of operations, or cash flows.




There
      are
      no proceedings in which any of our directors, officers or affiliates, or any
      registered or beneficial shareholder, is an adverse party or has a material
      interest adverse to our interest.




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





During
      the quarter ended March 31, 2006, we sold no securities in transactions not
      registered under the Securities Act of 1933.




35


**Item
      3 - Defaults upon Senior Securities**





Not
      Applicable




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





Not
      Applicable




**Item
      5 - Other Information**





Not
      Applicable




**Item
      6 - Exhibits**




**Financial
      Statements**





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





Condensed
      Consolidated Balance Sheets
      at March 31, 2006 and June 30, 2005


Condensed
      Consolidated Statements of
      Operations for the Three and Nine Month Ended March 31, 2006 and
      2005


Condensed
      Consolidated Statements of Shareholders' Equity for the Nine Months Ended March
      31, 2006


Condensed
      Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2006
      and 2005


Notes
      to Condensed Consolidated
      Financial Statements





**Exhibits**




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




**Number**
            **Exhibit
                Title**
            **Note**
            **Page****2.1**
            Agreement
                and Plan of Merger dated as of March 24, 2006, by and among International
                Microcomputer Software, Inc., ACCM Acquisition Corp., AccessMedia
                Networks, Inc., and the stockholders of AccessMedia Networks,
                Inc.
            **(1)****2.2**
            Joint
                Operating Agreement dated as of August 8, 2005, between International
                Microcomputer Software, Inc. and AccessMedia Networks, Inc., including
                the
                form of Certificate of Designation attached as Exhibit B
                thereto.
            **(2)****2.3**
            Stock
                Purchase Agreement between International Microcomputer Software,Inc.
                (the
                Seller) and Smith Micro Software, Inc.
            **(3)****2.4**
            Weinmaster
                Homes, Ltd. Stock Purchase Agreement, dated July 1, 2005, between
                Weinmaster Homes, Ltd., Bruce Weinmaster & Janice Weinmaster and
                International Microcomputer Software, Inc
            **(3)****3.01**
            Amended
                and Restated Articles of Incorporation
            **(4)****3.02**
            Amended
                and Restated Bylaws
            **(5)****31.1**
            Certification
                of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002
            
            **Page
                39****31.2**
            Certification
                of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002
            
            **Page
                40****32.1**
            Certification
                of Chief Executive Officer & Chief Financial Officer Pursuant to
                Section 906 of the Sarbanes-Oxley Act of 2002
            
            **Page
                41**




**Notes****(1)**
            Incorporated
                by reference to exhibits to the Company's Current report on Form
                8-K filed
                on March 29, 2006**(2)**
            Incorporated
                by reference to exhibits to the Company's Current report on Form
                8-K filed
                on August 9, 2005**(3)**
            Incorporated
                by reference to exhibits to the Company's Current report on Form
                8-K filed
                on July 7, 2005**(4)**
            Incorporated
                by reference to exhibits to the Company's registration statement
                on Form
                S-3 filed on September 22, 1993**(5)**
            Incorporated
                by reference to exhibits to the Company's Current report on Form
                8-K filed
                on January 18, 2005





36




**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 15, 2006**








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


Martin
      Wade, III


Director
      & Chief Executive Officer







**By:
      /s/ Robert O’Callahan**


Robert
      O’Callahan


Chief
      Financial Officer (Principal Accounting Officer)






37


**INDEX
      TO EXHIBITS:**







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











38