Broadcaster Inc – ‘10-K/A’ for 6/30/99

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Amendment to Annual Report   —   Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K/A      Amendment to Annual Report                            85    426K 
 2: EX-21.1     Subsidiaries of the Registrant                         1      4K 
 3: EX-23.1     Consent of Experts or Counsel                          1      6K 
 4: EX-23.2     Consent of Experts or Counsel                          1      6K 
 5: EX-27.1     Financial Data Schedule                                1      6K 

10-K/A   —   Amendment to Annual Report
Document Table of Contents

10-K/A
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 FORM 10-K/A

[X]     Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Fiscal Year ended June 30, 1999             

or

[ ]     Transition report pursuant to Section 13 or 15(d) of the Exchange Act of
1934 for the Transition Period from _____ to _____              

Commission File No. 0-15949                       

INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
(Exact name of registrant as specified in its charter)

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

75 ROWLAND WAY, NOVATO, CALIFORNIA                94945         
(Address of principal executive offices)          (Zip code)    

  Registrant's telephone number, including area code: (415) 878-4000

Securities registered pursuant to Section 12(b) of the Act: None

  Securities registered pursuant to Section 12(g) of the Act: common
stock, no par value                                             

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

 Yes   X        No
           -----         -----

     Indicate by check mark if disclosure of delinquent filers pursuant to
   Item 405 of Regulation S-K is not contained herein, and will not be
   contained, to the best of registrant's knowledge, in the definitive
        proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. [X]          

   The aggregate market value of the voting stock of the registrant by
non-affiliates of the registrant as of October 20, 1999 was     
approximately $15,949,750.                                      

      As of October 20, 1999, 7,024,409 Shares of Registrant's common stock,
no par value, were outstanding.                                 

 DOCUMENTS INCORPORATED BY REFERENCE

None.                                                           

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INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
 FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED JUNE 30, 1999

 TABLE OF CONTENTS

                                                                [Download Table]
                                                                                 
                                     PART I                                      

Item 1.   Business                                                             3 

Item 2.   Properties and Facilities                                           11 

Item 3.   Legal Proceedings                                                   11 

Item 4.   Submission of Matters to a Vote of Security Holders                 12 

                                     PART II                                     

Item 5.   Market for the Registrant's Common Equity and Related Stockholder      
          Matters                                                             13 

Item 6.   Selected Financial Data                                             14 

Item 7.   Management's Discussion and Analysis of Financial Condition and        
          Results of Operations                                               15 

Item 7a.  Quantitative and Qualitative Disclosures about Market Risk          33 

Item 8.   Financial Statements and Supplementary Data                         33 

Item 9.   Changes in and Disagreements with Accountants on Accounting and        
          Financial Disclosure                                                33 

                                    PART III                                     

Item 10.  Directors and Executive Officers of the Registrant                  35 

Item 11.  Executive Compensation                                              37 

Item 12.  Security Ownership of Certain Beneficial Owners and Management      40 

Item 13.  Certain Relationships and Related Transactions                      40 

                                     PART IV                                     

Item 14.  Exhibits, Financial Statements, Schedules, and Reports on Form 8-K  41 

Signatures                                                                    70 

Exhibit Index                                                                 71 

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              PART I

FORWARD-LOOKING INFORMATION                                                     

This Annual Report of International Microcomputer Software, Inc ("IMSI") on Form
10-K contains certain forward-looking statements, particularly those identified 
with the words, "anticipates," "believes," "expects," "plans," and similar      
expressions. These statements reflect management's best judgement based on      
factors known to them at the time of such statements. Discussions containing    
such forward-looking statements may be found in the material set forth under    
"Legal Proceedings" and "Management's Discussion and Analysis of Financial      
Condition and Results of Operations", generally, and specifically therein under 
the captions "Liquidity and Capital Resources" and "Future Performance and      
Additional Risk Factors" as well as elsewhere in this Annual Report on Form     
10-K. Actual events or results may differ materially from those discussed       
herein. The risk factors discussed under "Future Performance and Additional Risk
Factors", among others, should be considered carefully by the reader in         
evaluating our prospects and future financial performance.                      

ITEM 1. BUSINESS                                                                

GENERAL                                                                         

International Microcomputer Software, Inc. ("IMSI" ) was incorporated in        
California in November 1982. Our corporate headquarters are in Novato,          
California, with subsidiary and branch offices maintained in the United Kingdom,
Germany, Australia, South Africa, France, Sweden, and Canada. We are a developer
and publisher of PC productivity software in the precision design, graphic      
design, business applications and utilities categories targeted primarily to    
small to medium-sized businesses, professionals and consumers. The precision    
design category includes IMSI's computer assisted drawing ("CAD") products; the 
graphic design category includes IMSI's visual content products. IMSI sells its 
software in 10 languages in more than 40 countries. IMSI's best-known product   
families include TurboCAD and FloorPlan in the precision design category,       
MasterClips in the graphic design category and Org Plus and FormTool in the     
business applications category.                                                 

We develop and market productivity software in categories that extend the basic 
functionality of PCs beyond the word processing, spreadsheet, electronic mail   
and database applications provided by standard office productivity software     
suites. Our products enhance PC functionality by providing and/or expanding     
capabilities in areas such as precision drawing, graphics, forms automation,    
project management and scheduling. IMSI has sought to create product franchises 
by developing, licensing or acquiring products in categories where it believes  
it can capture market share with better technology, lower prices or a more      
extensive distribution network. Our PC applications have appealed to a broad    
variety of users, particularly professionals and small to medium-sized          
businesses, in categories under-served by major software vendors. IMSI is       
refocusing on providing community and destination web sites addressing the      
precision design and graphic design markets.                                    

IMSI distributes its products worldwide, primarily through the retail channel.  
In addition, we sell directly to the corporate, education and government markets
as well as to other consumers through strategic partners, direct mail and       
e-mail. Since 1998, IMSI has focused on building relationships with online      
resellers and distributors. We are also building an Internet based revenue      
stream from our visual content web sites, especially ArtToday.com, and our new  
precision design web sites, SolutionCity.com, Floorplan.com and Turbocad.com.   
Although selling our product through our traditional network of domestic and    
international retail distribution relationships achieved poor results in fiscal 
year 1999 when compared to prior years, as of June 30, 1999 these traditional   
distribution channels remained IMSI's primary source of revenue.                

As announced on June 24, 1999, IMSI initiated a company-wide restructuring of   
its operations in response to its large year to date losses in fiscal year 1999.
The major components of the restructuring plan were as follows:                 

-   Manufacturing and warehouse outsourcing                             

-   Facilities consolidation                                            

-   Personnel reductions                                                

   -   Divestiture of non-core products and focus on high margin product lines

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IMSI's goal is to complete its restructuring by December 31, 1999.              

BACKGROUND                                                                      

IMSI completed its initial public offering in July 1987, raising net proceeds of
approximately $2,600,000. In August 1988, we acquired Milan Systems America,    
Inc. and the rights to TurboCAD. In September 1995, we acquired the rights to   
the FloorPlan product line from Forte/ComputerEasy International, Inc. On       
September 30, 1997, we acquired the rights to established products, Corel Flow, 
Corel Family Tree, and Lumiere, and four in-process technologies, CorelCAD,     
Click and Create, VisualCADD and Corel Personal Architect in the CAD,           
diagramming and consumer categories from Corel. In October 1998, we acquired all
the outstanding stock of Zedcor, Inc., an Internet provider of art and visual   
content and owner of the web site, ArtToday.com.                                

STRATEGY                                                                        

Our objective is to effectively transition from a productivity software company 
to a company that provides community and destination web sites addressing the   
precision design and graphic design markets. To achieve its objective, IMSI's   
strategy includes the following key elements:                                   

Precision Design - Our precision design strategy is based on web-enabling the   
functionality of our FloorPlan and TurboCAD software, and enhancing these       
products with the scheduling capabilities of our TurboProject software. We      
believe these products are well positioned for the online home design and       
remodeling markets since they improve the user experience by making it more     
interactive. IMSI is evaluating strategic partnering opportunities to assist in 
enhancing the experience of home design and remodeling over the Internet.       

Graphic Design - IMSI plans to build on its ArtToday web site to offer relevant 
content, community, and an affinity network for graphic design professionals.   
ArtToday.com, which has over 75,000 paid subscribers and one million visits per 
month, offers users unlimited access to more than 750,000 graphic images, web   
art, photos, fonts, and animations. IMSI is building a network of affinity      
partners and affiliates to drive traffic and build content.                     

Transition Out of Non-Core Products: Historically, we have followed a strategy  
of growth by expansion of product franchises. While that strategy has had       
previous success, it was not successful during fiscal 1999. IMSI is planning to 
sell or license its non-core products. In this way, IMSI hopes to obtain the    
cash resources necessary to fund its transition to the Internet as well as meet 
interim operating costs. Toward this end, IMSI sold its Easy Language product   
line for $1.7 million in August 1999. IMSI hopes to sell the rights to some or  
all of its non-core software product line during fiscal year 2000.              

PRODUCTS                                                                        

PRECISION DESIGN                                                                

Our precision design products accounted for 35%, 25% and 27% of our net revenues
in fiscal 1999, 1998 and 1997, respectively. IMSI's precision design products   
include the following:                                                          

-   TURBOCAD is a CAD software product that allows a user to create precision   
drawings. TurboCAD offers comprehensive functionality for the technical 
    professional combined with ease-of-use for the novice user. TurboCAD is used
by architects, engineers and contractors in small- and medium-sized     
   businesses, as well as by workgroups within many large corporations such as
    Pennzoil, Dow Chemical, Bechtel, Babcock & Wilcox, Houston Lighting & Power,
and Motorola. TurboCAD includes integrated 3D construction capabilities,
   file compatibility with other CAD software (including AutoCAD by Autodesk),
and integrated raster-to-vector conversion. TurboCAD v6 Professional    
 includes a software development kit that permits end-user and third-party
developer customization of the software.                                

-   TURBOCAD SOLID MODELER is a 3D CAD program that allows users to             
   conceptualize, construct and revise product models and prototypes. Designed
for engineering professionals, TurboCAD Solid Modeler uses the          
 industry-standard ACIS drawing engine and includes many advanced features
   such as a recordable tree history, 2D and 3D constraint systems, rendering,
programmable scripting language, a customizable user interface and      
dimensioning.                                                           

-   FLOORPLAN 3D is a software tool for residential and commercial space layout 
that allows a user to view and walk through                             

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plans in three dimensions.                                              

-   STANLEY HOME DESIGN is a software tool that allows residential home         
remodelers to draw and preview a prospective home. The product is a     
combination of the software capabilities found in IMSI's FloorPlan and  
  TurboProject products. Stanley Home Design is marketed through an alliance
with The Stanley Works. Stanley Home Design was released by IMSI in the 
first quarter of fiscal year 2000.                                      

GRAPHIC DESIGN.                                                                 

Our visual content products include art images, photographs, video clips,       
animations and fonts stored in electronic form that can be used to enhance      
communication by making online, onscreen and printed output more visually       
appealing. Graphic design products accounted for 34%, 31% and 47% of our net    
revenues in fiscal 1999, 1998 and 1997, respectively. Our visual content        
products include the following:                                                 

-   MASTERCLIPS PREMIUM IMAGE COLLECTION includes collections of up to  
       1,250,000 unique art and photographic images. MasterClips Premium Image
        Collection products include a browser, clip art editor and design guide.

-   ARTTODAY ONLINE offers a collection of approximately 750,000        
downloadable images on line at www.arttoday.com for an annual   
subscription fee.                                               

-   MASTERPHOTOS is a collection that includes medium to high-resolution
photo images. The MasterPhotos 50,000 and MasterPhotos 25,000   
        collections cover categories such as animals, transportation, sports and
    foods and include unique historical images of many subjects, such as
famous people and major events.                                 

-   MASTERPHOTOS STUDIO is a software suite that enables users to edit, 
     enhance, manage and catalog photographs. MasterPhotos Studio supports
    scanners, digital cameras, Internet file formats and Adobe PhotoShop
plug-in filters.                                                

  -   GRAPHICS CONVERTER converts most visual content, sound, font and video
  files to one of over 65 file formats and allows users to organize,
    browse, manipulate, compress and retrieve an array of file types and
   formats. Users can also compress and catalog files to create custom
content libraries.                                              

BUSINESS APPLICATIONS                                                           

Our business applications products include business graphics and general office 
products. These products accounted for 21%, 14% and 6% of IMSI's net revenues in
fiscal 1999, 1998 and 1997, respectively. IMSI's business applications products 
include the following:                                                          

-   FLOW! enables general business users to create a wide variety of    
     diagrams, including flowcharts, organization charts, timelines, block
  diagrams, geographic maps and marketing charts. Flow also includes
  features that allow the user to enhance the information content of
 diagrams. Flow users can link diagrams to databases and associate
non-graphical data with shapes within a diagram.                

-   MASTERPUBLISHER is a desktop publishing suite that allows users to  
       create custom, high-quality publications for both business and personal
use. MasterPublisher's design and layout tools include fonts,   
       professionally drawn images and hundreds of useful templates. Completed
documents can be published on the World Wide Web.               

 -   LUMIERE VIDEO STUDIO is a digital video editing software program that
   enables users to assemble excerpts from a variety of media sources,
including video, audio and still images. Lumiere's easy to use  
        drag-and-drop features enable users to create professional looking audio
       and video tracks for multimedia presentations, training demonstrations,
advertising campaigns, movies and home viewing.                 

-   MULTIMEDIA FUSION is an easy-to-use software application that allows
        users to create multimedia presentations, applications, games and screen
savers. This product includes a number of powerful tools and    
       comprehensive libraries to combine text, graphics, video, animation and
audio into professional multimedia projects, without additional 
programming or scripting.                                       

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 -   HIJAAK is a professional 32-bit graphics toolkit that allows users to
       convert, manage and view over 85 graphics file formats including 3D and
full Postscript files.                                          

-   TURBOPROJECT is a sophisticated project management tool that allows 
     users to create and manage a project schedule, allocate resources and
     establish and track project budgets. TurboProject Professional allows
   users to divide large projects into sub-projects and distribute the
sub-projects to individual managers over company networks. The  
sub-projects can then be reintegrated to update a master project
schedule.                                                       

  -   FORMTOOL is a forms automation product that allows users to design and
print personal forms quickly, or choose from over 400 pre-built 
       templates. The user can then complete and electronically sign and route
    the form over a company Intranet to other users in the organization.
  Data is automatically stored in an integrated relational database.
       FormTool Scan & OCR includes optical character recognition and scanning
features for easier form design.                                

 -   PEOPLESCHEDULER is an application designed for an organization of any
size to manage and schedule hourly employees and resources.     
 PeopleScheduler includes the ability to manage budgeting, shifts,
breaks, lunches, vacations and attendance.                      

   -   MAPLINX allows users to map data and visualize geographical information
      from a database, including data related to customers, branch locations
   and personnel. MapLinx works with most contact management programs,
spreadsheets and databases.                                     

-   ORG PLUS is an application designed for creating professional       
    organization charts. Org Plus completely automates chart creation so
    that no drawing or manual positioning of boxes is required. Org Plus
features automated sorting and drag and drop capabilities.      

UTILITIES PRODUCTS. Our utilities products enable the more efficient and secure 
use of PCs. These products accounted for 11%, 19% and 12% of IMSI's net revenues
in fiscal 1999, 1998 and 1997, respectively. Our utilities products include the 
following:                                                                      

-   NETACCELERATOR is a caching product that speeds up web surfing by   
    pre-fetching links on a web page and then simultaneously downloading
    both the links' text and graphic content. This process maximizes the
        efficiency of the PC modem, browser and Internet connection. When a link
        is selected, if it has been pre-fetched, the downloaded page will appear
almost immediately.                                             

-   WINDELETE uninstalls, archives, moves and transports Windows        
    applications and manages their Internet cache to free up wasted hard
   drive space, prevents accidental deletions and maximizes hard drive
     performance. WinDelete also includes virus protection and compression
features.                                                       

    -   UPDATENOW! is designed to enable PC users to keep their systems current,
      thereby enhancing overall system performance and avoiding the problems
  frequently encountered as a result of outdated software and device
    drivers. UpdateNow allows PC users to easily locate many of the most
   recent software updates and patches applicable to their systems and
   download and install them automatically via the Internet. A bundled
      version of UpdateNow, Year2000 Now, adds increased Y2K capabilities to
the UpdateNow product.                                          

OTHER PRODUCTS. IMSI also markets other products, including but not limited to  
EASY Language (which was sold by IMSI in August 1999 for $1.7 million to        
Learnout and Hauspie), MICROCOOKBOOK for recipe and menu planning and the IMSI  
MOUSE line of input devices.                                                    

SALES AND DISTRIBUTION                                                          

We sell our products worldwide primarily to small to medium-sized businesses,   
professionals and consumers through the retail channel. IMSI also utilizes      
direct mail and e-mail in the consumer, corporate, education and government     
markets. In addition, IMSI sells product via the Internet.                      

RETAIL. In North America, IMSI sells its products primarily through a network of
distributors, including Ingram Micro, Merisel, GT Interactive and Navarre, which
in turn distribute IMSI's products to over 12,000 retail stores in North        
America, such as Staples, Office Depot, OfficeMax, PriceCostco, Sam's Club,     
CompUSA, Micro Center, WalMart and Best Buy. In addition,                       

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IMSI has direct purchase agreements with major retailers such as Electronics    
Boutique, Hastings, MusicLand and Babbages. IMSI and its distributors also sell 
its products through catalog resellers and online stores. Ingram Micro          
represented 18.3%, 20.4% and 11.9% and Tech Data represented 9.0%, 12.7% and    
10.9% of IMSI's net revenues for fiscal 1999, 1998 and 1997 respectively. No    
single direct-to-retail customer accounted for more than 10% of IMSI's net      
revenues in fiscal 1999, 1998 or 1997.                                          

Internationally, IMSI sells its products in more than 40 countries through a    
network of subsidiary offices and distributors. IMSI maintains sales offices in 
the United Kingdom, France, Germany, Sweden, Australia, and South Africa and has
distributors and republishers in several other countries. As part of its        
restructuring plan, IMSI is consolidating European operations in Germany. While 
the United Kingdom and France will still have sales offices, Sweden will be     
completely serviced from Germany. Internationally, IMSI sells its products      
through the retail, online and OEM channels. IMSI generally localizes its       
products for international markets by translating the documentation, software   
and marketing programs into up to 10 different languages, including French,     
Spanish, German, Italian, Japanese and Portuguese. Our international business is
subject to certain risks common to international operations, such as government 
regulations, import restrictions, currency fluctuations and restrictions and    
reduced protection for IMSI's copyrights and trademarks.                        

IMSI's agreements with its distributors are generally nonexclusive and may be   
terminated by either party without cause. Our distributors may decide not to    
continue carrying our products due to our declining sales revenue. Our          
distributors are not within our control, are not obligated to purchase our      
products and represent other vendors' product lines, including competing        
products. On September 27, 1999, one of our primary distributors, Tech Data,    
terminated its agreement with us. Our largest retailer, CompUSA, which was      
served by Tech Data, continues to carry our products and is now served by an    
alternative distributor. We expect other retailers that were served by Tech Data
to switch to alternative distributors.                                          

Our return policy allows our distributors, subject to certain limitations, to   
return purchased products primarily in exchange for new products or for credit  
towards future purchases as part of stock balancing programs. In addition, IMSI 
provides price protection to its distributors when it reduces the price of its  
products. End users may return products through dealers and distributors within 
a reasonable period of time from the date of purchase for a full refund.        
Retailers may return older versions of products. Product returns often occur    
when IMSI introduces upgrades and new versions of products or competitive       
products are introduced into the market. Our channel sales force works with     
major customers to help manage appropriate inventory levels.                    

DIRECT MAIL. We conduct direct mail campaigns to existing customers for new     
products and upgrades of existing products. These mailings generally offer a    
specially priced specific product, as well as complementary or enhanced products
for a further charge. Our database of registered users includes 700,000         
customers worldwide. Direct mail sales represented approximately 11%, 11% and   
13% of IMSI's net revenues in fiscal 1999, 1998 and 1997, respectively.         

CORPORATE. IMSI believes that certain of its products, particularly its         
TurboCAD, TurboProject, Org Plus and Hijaak are well-suited for use within      
larger corporations. Over the past year, IMSI has sold site licenses to some    
large companies, including Fortune 100 companies. IMSI markets to these         
corporations through a combination of telemarketing, mailings and e-mailing.    

ONLINE. IMSI markets its products via the Internet from its own web sites, as   
well as through strategic partnerships with online resellers such as America    
Online, Buy.com, Outpost.com, Beyond.com, Digital River, Bitsource,             
Releasenow.com, Netsales.com, and Egghead.com. Net revenues from this           
distribution channel have not been significant to date. IMSI has recently       
established a web site, SolutionCity.com, which offers light versions of its    
products free to consumers. Several thousand of its products have been          
downloaded from this site. Many of these customers have been converted to paying
customers through e-mail campaigns.                                             

OTHER. IMSI also sells its products worldwide through hardware and software     
OEMs, who republish or bundle its products for either a fixed royalty or a per  
copy royalty. IMSI also sells its products to educational institutions through  
campus resellers, bookstores and educational mail order companies. Finally, IMSI
sells certain non-competitive products of other companies in its international  
markets. Net revenues from these distribution channels have not been significant
to date.                                                                        

MARKETING                                                                       

Our marketing efforts include retail marketing and merchandising. These efforts 
are directed at strengthening IMSI's product and corporate brands, building     
customer loyalty, maximizing upgrade and repeat purchases and developing        
incremental revenue opportunities. Our retail marketing strategy typically      
focuses on high impact product packaging and retail promotions such as end-cap  
displays, special pricing and rebate coupons. In addition, IMSI actively        
participates in cooperative advertising                                         

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programs with its reseller customers, including advertising, brochures and      
catalogs. IMSI also seeks to increase market share and brand recognition through
public relations activities and participation in popular trade and computer     
shows.                                                                          

CUSTOMER SUPPORT                                                                

IMSI provides professional customer support to its end-users by telephone,      
facsimile, and e-mail at no-charge for 90-days for all products. IMSI also      
offers extensive quality customer support on its web site by offering answers to
frequently asked questions, providing product discussion forums and making      
intelligent help and search engines available. In addition, several newer       
products released by IMSI contain an online link to web-based support that      
automatically updates or patches the user's software via the web. Support       
representatives are extensively trained in IMSI's products; customer feedback is
shared among support representatives. This feedback is also made available to   
quality assurance and product management in order to track product operability  
and enhance the development of product improvements and upgrades. Our worldwide 
customer support center is located in Albuquerque, New Mexico, and is           
supplemented with additional customer support provided internationally through  
IMSI's various subsidiary offices. Additional support staffs are employed       
directly by IMSI's various distributors.                                        

PRODUCT DEVELOPMENT                                                             

We develop products primarily for the Microsoft Windows platform and, in some   
cases, for the Macintosh operating system. IMSI targets PC applications that    
have been under-served by major software vendors but that have immediate        
benefits and appeal to a broad variety of users, particularly professionals and 
small- and medium-sized businesses. IMSI generally creates product              
specifications and manages the product development and quality assurance process
from its offices in Novato, California. Engineering management and certain      
programming is carried out from IMSI's development center in Ottawa, Canada.    
Most program coding and quality testing is performed using contract programmers 
in development centers in various locations in Russia. Contract programmers     
located outside the United States are generally dedicated on a full-time basis  
to IMSI's products. The cost of programmers in foreign countries is generally   
lower than programmers available in the United States. In addition, programming 
talent is generally more available outside the United States than in the United 
States, where the market for programmers is highly competitive. IMSI makes      
extensive use of the Internet and Internet-based development tools to facilitate
programming in remote locations.                                                

Our general policy is to own, either through internal development or            
acquisition, the core technology of our principal products. Where appropriate,  
IMSI will augment its core technology with licensed technology. IMSI possesses  
and is continually enhancing its core technology in vector graphics, precision  
design, project management technology, and project and time management          
processes.                                                                      

As of June 30, 1999, we had 76 employees in our product and development         
organization, and we contracted with approximately 77 independent contractors,  
substantially all of which were located overseas. Our research and development  
expenses totaled $8.1 million, $8.6 million (excluding purchased in-process     
research and development expenses), and $4.6 million for fiscal 1999, 1998 and  
1997, respectively.                                                             

ACQUISITION AND LICENSING                                                       

Historically, IMSI has created new product franchises in part by licensing and  
acquiring products in growing segments of its existing product categories where 
it believed it could capture market share with better technology, lower prices  
and its extensive distribution. We sought to acquire or license early stage     
products, where we could add value through our global distribution network and  
development resources. We target product or company acquisitions or product or  
technology licenses when time-to-market or cost considerations outweigh the     
value of developing the product in-house or where we do not have the necessary  
development expertise. Due to the skills, infrastructure and expense required to
market software products effectively, IMSI has been frequently approached by    
software developers who desire that IMSI license or acquire their products. In  
addition, from time to time larger companies have approached us with products   
that they wish to divest. We may continue acquiring companies and products and  
licensing products and technologies to the extent that such companies, products 
or technologies become available and we believe that they would further enhance 
our product portfolio.                                                          

However, as part of our restructuring plan announced on June 24, 1999, we are in
the process of reducing our gross product SKU's by approximately 75% in order to
concentrate more fully on our strongest core products. IMSI plans to divest     
non-core products when opportunities to do so are presented. In August 1999,    
IMSI sold the rights to its Easy Language product for $1.7 million. IMSI hopes  
to sell the rights to some or all of its non-core software product line during  
fiscal year 2000.                                                               

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Currently, IMSI licenses MasterClips E-Mail Animator, RamShield, MasterPhotos   
Studio, Update Now! and Web Business Builder. We have acquired the technology   
for TurboCAD Solid Modeler and 3D Modeler, Visual CADD, MapLinx,                
PeopleScheduler, Flow, FloorPlan Design Suite, Lumiere, Multimedia Fusion and   
HiJaak. We also license and acquire visual content from third parties, including
artists, photographic agencies and visual content aggregators. Where feasible,  
IMSI endeavors to acquire images on a perpetual, worldwide basis and with       
electronic download rights. The licenses have terms ranging from one year to    
perpetual and are generally not exclusive. Licensing fees associated with       
licensed technology are generally paid by way of sales-based royalties, which   
are included in our product costs.                                              

OPERATIONS                                                                      

IMSI controls the purchasing, inventory and marketing associated with its       
products primarily from its headquarters in Novato, California. Our product     
development organization produces master diskettes or CD-ROMs and the           
documentation for each product. The duplication of such diskettes or CD-ROMs,   
the printing of the documentation and the packaging for the products are        
performed by third parties in accordance with our specifications. IMSI          
warehouses and ships the final products from its Vacaville, California facility,
as well as from various international locations. IMSI also contracts with third 
parties in Europe to handle the duplication, printing, packaging and fulfillment
of a number of its products intended for international distribution.            

As part of its restructuring effort, in July 1999, IMSI and DisCopyLabs (DCL)   
finalized an agreement whereby DCL will gradually assume all of IMSI's U.S.     
fulfillment, warehousing, and product shipping duties. Accordingly, IMSI will be
closing its warehouse facility in Vacaville. IMSI anticipates completing this   
transition by December 31, 1999. DCL will charge IMSI per unit fees for its     
services. Under this new variable cost production fulfillment model, IMSI       
believes it will be better able to manage and predict its product costs,        
especially during periods of fluctuating sales volumes.                         

IMSI has multiple sources of supply for substantially all product components. To
date, IMSI has not experienced any material difficulties or delays in the       
printing, packaging or assembly of its products. During fiscal year 2000 and    
beyond, IMSI will become dependent on a single vendor, DCL, for the fulfillment,
warehousing, and shipping of its products. To the extent that this vendor is    
unable to perform these functions in a cost-efficient and timely manner, and if 
a transition to a substitute vendor cannot be completed in a timely fashion,    
IMSI's business, operating results and financial condition could be adversely   
affected.                                                                       

COMPETITION                                                                     

The PC productivity software industry is highly competitive and is characterized
by rapid changes in technology and customer requirements. Important factors in  
the market include product features and functionality, quality and performance, 
reliability, brand recognition, ease of understanding and operation, advertising
and dealer merchandising, access to distribution channels and retail shelf      
space, marketing, pricing, availability and quality of support services. There  
has been a consolidation among competitors in the market for IMSI's products.   
Many of IMSI's current and potential competitors have larger technical staffs,  
more established and larger marketing and sales organizations, significantly    
greater financial resources, greater name recognition and better access to      
consumers than does IMSI. Our relatively small size could adversely affect our  
ability to compete with larger companies for sales to dealers, distributors and 
retail outlets, to obtain shelf space for our products in retail outlets and to 
acquire products from third parties, who may desire to have their products sold 
or published by larger entities. The rapid pace of technological change         
constantly creates new opportunities for existing and new competitors and can   
quickly render existing technologies less valuable. It also requires IMSI to    
enhance its existing products and to offer new products on a timely basis. IMSI 
has limited resources and therefore must restrict its product development       
efforts to a relatively small number of projects.                               

IMSI competes with other software companies in its efforts to acquire products  
or companies and to publish software developed by third parties. The competition
to publish software developed by third parties is primarily on the basis of     
brand-name reputation, the terms offered to software developers and the ability 
to market new products.                                                         

Each of our major products competes with one or more products from one or more  
major independent software vendors. For example, TurboCAD competes with AutoCAD 
from Autodesk Inc. and IntelliCAD from Visio Corporation. On September 15, 1999 
Microsoft, announced it would acquire Visio Corporation. FloorPlan competes with
3D Architect from Broderbund Software Inc., a subsidiary of Mattel, Home        
Architect from Cendant Corporation, Home Design Suite from Autodesk, Dream Home 
Designer from Alpha Software Corporation, Home Design 3D from Expert Software,  
Inc. and Punch Software's Home Design Suite. TurboProject competes with         
MicrosoftProject. MasterClips competes with ClickArt from Broderbund Software   
Inc., MegaGallery from Corel Corporation, Holy Cow! from Macmillan Digital      
Publishing USA and Art Explosion from Nova                                      

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Development. WinDelete competes with Uninstaller from CyberMedia Inc.,          
CleanSweep and Norton Uninstaller from Symantec Corporation. Net Accelerator    
competes with SurfExpress from Connectix, Speed Surfer from Kissco and Net.jet  
from Peak Technologies.                                                         

Our strategy has been to develop productivity and utility applications that do  
not compete directly with applications or features included in operating systems
and applications suites offered by major software vendors such as Microsoft,    
Lotus Development Corp. and Corel. However, such software vendors may in the    
future choose to expand the scope and functionality of their products to support
some or all of the features currently offered by certain of IMSI's products,    
which could adversely affect demand for our products. In particular, Microsoft  
has periodically added utility features, e.g. disk compression utilities and    
desk-top facing features, to its Windows operating systems that were previously 
only supported by third-party vendors and that materially reduced demand for    
third-party utility products. In addition, Microsoft's Windows 98 contains      
features for the automatic updating of Windows 98, including third party device 
drivers, and many Microsoft applications via the Internet, which could adversely
impact sales of IMSI's Update Now! product. Windows 98 also contains the latest 
version of Microsoft's Internet Explorer, which handles the caching of Web pages
more efficiently. This feature may adversely impact sales of IMSI's Net         
Accelerator product family.                                                     

The Internet is having a pronounced effect on the traditional retail channels   
through which many of our products are sold. Increasing numbers of software     
users are buying their software over the Internet rather than from a retail     
outlet. We may not be able to transition our business to the Internet quickly or
effectively enough to take advantage of this change in buyer preference. In     
addition, our traditional distribution channel, the retail market, will likely  
be diminished by this change.                                                   

The software industry has limited barriers to entry, and the availability of    
personal computers with continuously expanding capabilities, at progressively   
lower prices, contributes to the ease of market entry. IMSI believes that       
competition in the industry will continue to intensify as a number of software  
companies extend their product lines into additional product categories and as  
additional competitors enter the market. In addition, widespread use of the     
Internet has reduced barriers to entry in the software market by allowing       
software developers to distribute their products online without relying on      
access to traditional distribution networks. As a result of the proliferation of
competing software developers, more products are competing for limited shelf    
space. We cannot assure investors that our products will achieve and/or sustain 
market acceptance and generate significant levels of revenues in future periods 
or that we will have the resources required to compete successfully in the      
future.                                                                         

The markets for IMSI's products are characterized by significant price          
competition, and IMSI expects it will continue to face increasing pricing       
pressures. In response to such competitive pressures, IMSI has reduced the price
of some of its products. Product prices may continue to decline and we may not  
be able to respond to such declines with additional product price reductions. If
we significantly reduced the prices of one or more of our products, there can be
no assurance that such price reductions would result in an increase in unit     
sales volume. Prolonged price competition would have a material adverse effect  
on our operating results, including reduced profit margins and loss of market   
share.                                                                          

Approximately 67% of IMSI's revenues were derived from sales of the TurboCAD,   
Floorplan and MasterClips product lines in fiscal year 1999 as compared to 53%  
in fiscal year 1998. Sales of TurboCAD and MasterClips significantly declined in
fiscal year 1999, from $29 million to $20 million, primarily due to lower unit  
sales. A continued decline in TurboCAD and MasterClips sales, a decline in      
Floorplan sales, or a decline in the gross margin on one or more of these       
products could worsen IMSI's results of operations. Thus, IMSI may be more      
vulnerable to market declines and competition in the markets for such products  
than companies with more diversified sources of revenues.                       

PROPRIETARY RIGHTS AND LICENSES                                                 

Our ability to compete effectively depends in part on our ability to develop and
maintain proprietary aspects of our technology. To protect our technology, we   
rely on a combination of copyrights, trademarks, trade secret laws, restrictions
on disclosure and transferring title and other methods. We hold no patents, and 
existing copyright and trade secret laws afford only limited protection. We also
generally enter into confidentiality or license agreements with our employees   
and consultants, and control access to and distribution of our documentation and
other proprietary information.                                                  

Despite the foregoing precautions, it may be possible for a third-party to copy 
or otherwise obtain and use IMSI's products or technologies without             
authorization, or to develop similar technologies independently. IMSI does not  
include in its products any mechanism to prevent or inhibit unauthorized        
copying. Policing unauthorized use of IMSI's technology is difficult, and while 

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IMSI is unable to determine the extent to which software piracy of its products 
exists, software piracy can be expected to be a persistent problem. If a        
significant amount of unauthorized copying of IMSI's products were to occur,    
IMSI's business, operating results and financial condition could be adversely   
affected. In addition, effective copyright, trademark and trade secret          
protection may be unavailable or limited in certain foreign countries, and the  
global nature of the Internet makes it virtually impossible to control the      
ultimate destination of IMSI's products. There can be no assurance that the     
steps taken by IMSI will prevent misappropriation or infringement of its        
technology. In addition, litigation may be necessary to protect IMSI's trade    
secrets or to determine the validity and scope of the proprietary rights of     
others. Such litigation could result in substantial costs and diversion of      
resources that could have a material adverse effect on IMSI's business,         
operating results and financial condition.                                      

As the number of software products in the industry increases and the            
functionality of these products further overlaps, software developers and       
publishers may increasingly become subject to infringement claims. From time to 
time, IMSI has received, and may receive in the future, notice of claims of     
infringement of other parties' proprietary rights. Although IMSI investigates   
claims and responds as it deems appropriate, there can be no assurance that     
infringement or invalidity claims (or claims for indemnification resulting from 
infringement claims) will not be asserted or prosecuted against IMSI.           
Irrespective of the validity or the successful assertion of such claims, IMSI   
would incur significant costs and diversion of resources with respect to the    
defense thereof, which could have a material adverse effect on IMSI's business, 
operating results and financial condition. If any valid claims or actions were  
asserted against IMSI, we might seek to obtain a license under a third party's  
intellectual property rights. There can be no assurance, however, that under    
such circumstances a license would be available on commercially reasonable      
terms, or at all.                                                               

IMSI provides its products to end users under non-exclusive licenses, which     
generally are non-transferable and have a perpetual term. IMSI makes source code
available for certain products. The provision of source code may increase the   
likelihood of misappropriation or other misuse of IMSI's intellectual property. 
IMSI licenses all of its products pursuant to shrink-wrap licenses, or Internet 
click-wrap licenses, that are not signed by licensees and therefore may be      
unenforceable under the laws of certain jurisdictions.                          

EMPLOYEES                                                                       

       As of June 30, 1999, IMSI had approximately 221 employees, including 69
in sales and marketing, 76 in product development, 41 in operations and 35 in   
administration and finance. In addition, IMSI has about 77 Russian software     
developers working as contractors under a software development contract. None of
IMSI's employees are represented by a labor union, and IMSI has experienced no  
work stoppages. As part of IMSI's restructuring plan, currently 90 employees    
have been, or are scheduled for termination in the following departments: sales 
and marketing, 22; general and administrative, 8; manufacturing, 23; and R&D,   
37. Our success depends to a significant extent upon the performance of our     
executive officers and key technical and marketing personnel. IMSI's large year 
to date losses and headcount reductions may have hurt employee morale and caused
employees concern about our viability. IMSI has lost, and may continue to lose, 
key personnel due to these events.                                              

ITEM 2. PROPERTIES AND FACILITIES                                               

Our principal administrative, sales and marketing, as well as certain research  
and development facilities are located in Novato, California, occupying         
approximately 36,000 square feet of office space. As part of its restructuring  
efforts, IMSI has subleased approximately 50% of its Novato headquarters office.
IMSI also leases 58,000 square feet of warehouse space in Vacaville, California.
In July 1999, IMSI and DisCopyLabs (DCL) finalized an agreement whereby DCL will
gradually assume all of IMSI's fulfillment, warehousing, and product shipping   
duties. Accordingly, IMSI will be shutting down its warehouse facility in       
Vacaville. IMSI anticipates closing its warehouse facility by December 31, 1999.

In addition, IMSI leases additional facilities in Albuquerque, New Mexico;      
Sydney, Australia; Paris, France; Munich, Germany; Johannesburg, South Africa;  
Stockholm, Sweden; London, the United Kingdom; and Ottawa, Canada. As part of   
IMSI's plan of restructuring, warehousing and back office functions for the     
United Kingdom, France, Sweden and Germany will be consolidated in Germany.     
Facilities in the United Kingdom and France will be reduced to sales offices and
all functions for Sweden will provided by the German office.                    

ITEM 3. LEGAL PROCEEDINGS                                                       

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On April 23, 1998 IMSI began arbitration proceedings against Imageline, Inc.    
before the American Arbitration Association in San Francisco, California. IMSI  
requested that all matters within the scope of the agreements between Imageline 
and IMSI be resolved by arbitration, including a dispute in which Imageline sued
Mindscape, Inc. for alleged copyright infringement, for which IMSI may be       
required to indemnify Mindscape, in whole or in part. IMSI further requested    
that the arbitration decide the rights and liabilities of the parties, and the  
validity of the copyrights under which Imageline asserted its claims against    
IMSI. IMSI also requested compensatory damages and attorney's fees.             

On August 12, 1999 Imageline filed a counterclaim in the arbitration, alleging  
breach by IMSI of an agreement between the parties, including unauthorized      
sublicensing, and instituting arbitration proceedings without notice and        
opportunity to cure. Imageline requested liquidated damages, alleged to be more 
than $200,000, compensatory damages of at least $500,000, punitive damages,     
legal fees, interest and costs. On January 14, 2000, Imageline received a $2.6  
million arbitration award against IMSI for intellectual property violations.    
IMSI is appealing the award in the federal district court in Richmond, VA.      

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

There were no matters submitted to a vote of security holders during the fiscal 
year ended June 30, 1999 other than the election of nominees to IMSI's Board of 
Directors and approval of the amendment to IMSI's Employee Incentive Plan.      

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 PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER       
MATTERS                                                                         

Presently, our common stock is traded on the NASDAQ National Market under the   
symbol "IMSI." Historically, trading volume of our common stock has been very   
small. The market for the common stock has been materially less liquid than that
of most other publicly traded companies. Significant sales of common stock by   
officers and directors or other shareholders could have an adverse effect on the
market price of our common stock.                                               

The following table sets forth the quarterly high bid and low asked prices of   
the common stock for fiscal 1998 and fiscal 1999, as quoted on the NASDAQ. Such 
prices represent prices between dealers and do not include retail mark-ups,     
markdowns or commissions and may not represent actual transactions.             

                                                                [Download Table]

                                   CLOSING SALES PRICES    

Fiscal Year 1998                High Bid          Low Asked
                                --------          ---------
                                                           
First Quarter                    $13.63            $ 9.63  
Second Quarter                    18.38             13.00  
Third Quarter                     17.13             12.44  
Fourth Quarter                    18.00             14.00  

Fiscal Year 1999                                           

First Quarter                     15.13              5.63  
Second Quarter                    10.25              3.63  
Third Quarter                     14.00              8.75  
Fourth Quarter                    11.88              4.79  

There were approximately 1,097 holders of record of the common stock as of      
October 20, 1999. IMSI believes that additional beneficial owners of its common 
stock hold their shares in street names.                                        

IMSI has not paid any cash dividends on its common stock and does not plan to   
pay any such dividends in the foreseeable future. Its Board of Directors will   
determine IMSI's future dividend policy on the basis of many factors, including 
results of operations, capital requirements and general business conditions.    

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ITEM 6. SELECTED FINANCIAL DATA                                                 

The following selected financial data should be read in conjunction with the    
Consolidated Financial Statements, including the related notes, and Item 7 -    
Management's Discussion and Analysis of Financial Condition and Results of      
Operations.                                                                     

                                                        [Enlarge/Download Table]

STATEMENT OF OPERATIONS DATA:             (Amounts in thousands except per share amounts)         
Year ended June 30,                1999          1998           1997          1996           1995 
-------------------                ----          ----           ----          ----           ---- 
                                          RESTATED(2)                                             
                                                                                                  
Net Revenues                   $ 37,679      $ 62,065        $41,839       $25,679       $ 20,300 

Operating income (loss)         (23,890)           86          4,367         1,801           (370)

Income (loss) before income                                                                       
taxes and extraordinary item    (25,770)         (673)         4,237         1,539           (424)

Extraordinary item(1)              (959)           --             --            --             -- 

Net income (loss)               (26,966)         (370)         2,597           954           (435)

Net income (loss) Per share:                                                                      
   Basic                       $  (4.30)     $  (0.07)       $  0.53       $  0.20       $  (0.09)
   Diluted                     $  (4.30)     $  (0.07)       $  0.46       $  0.18       $  (0.09)

Weighted average common                                                                           
Shares                                                                                            
  Basic                           6,275         5,513          4,946         4,795          4,705 
  Diluted                         6,275         5,513          5,682         5,288          4,705 

                                                                [Download Table]

BALANCE SHEET DATA:                                                       
As of June 30,                1999          1998     1997     1996    1995
--------------                ----          ----     ----     ----    ----
                                     RESTATED(2)                          
                                                                          
Working capital           $ (1,227)      $ 6,572  $ 7,334  $ 3,092  $1,967

Total assets                27,144        35,655   17,573   11,058   7,470

Long term debt and other                                                  
Obligations                  6,599         1,682    2,042      565     103

Stockholders' equity      $  1,442       $13,411  $ 7,495  $ 4,522  $3,397

(1) Extraordinary item related to debt extinguishment.                          
(2) See Note 16 to the consolidated financial statements.                       

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS 
OF OPERATIONS                                                   

RESTATEMENT, AS OF AND FOR THE YEAR ENDED JUNE 30, 1998                         

Subsequent to the issuance of IMSI's 1998 financial statements, IMSI's          
management, after consultation with our current auditors, determined that we    
should have deferred the recognition of revenue related to three advanced       
royalty payments recorded in fiscal 1998 for certain technology licensing       
agreements. Previously, IMSI recognized revenue in the amount of these advanced 
payments upon execution of the licensing agreement. Upon reviewing certain      
licensing agreements, IMSI determined that it should have deferred the amounts  
of these advanced payments. The revenue related to these advance payments should
have been recognized as it was earned as royalties under the terms of the       
agreements. As a result, the financial statements as of and for the year ended  
June 30, 1998 have been restated from amounts previously reported to defer      
recognition of $407,000 of revenue until earned as royalties in subsequent      
periods. See Note 16 to the consolidated financial statements.                  

RESULTS OF OPERATIONS                                                           

NET REVENUES                                                                    

Net revenues were $37.7 million, $62.1 million, and $41.8 million, in fiscal    
1999, 1998, and 1997 respectively. The drop in fiscal year 1999 net revenues    
represented a 39.3% decrease from fiscal year 1998 net revenues, which had risen
$20.2 million or 48.3 % from fiscal year 1997. Decreases in net revenues for the
fiscal year 1999 were experienced in all product families. Net revenues for each
of IMSI's principal product categories in absolute dollars and as a percentage  
of net revenues were as follows for the periods indicated (in thousands except  
for percentage amounts):                                                        

                                                        [Enlarge/Download Table]

                                                        YEAR ENDED JUNE 30,                              
                            ---------------------------------------------------------------------------- 
                                          1999                            1998                 1997      
                            -----------------------------------     ----------------       ------------- 
                                                  CHANGE FROM       As restated                          
                                                 PREVIOUS YEAR                                           
                                                ---------------                                          
                               $       %           $        %            $        %           $       %  
                            -------   ---       -------    ----       -------    ---       -------   --- 
                                                                                                         
Precision design            $13,168    35%     $ (2,490)    -16%      $15,658     25%      $11,302    27%
Graphic design               12,928    34%       (5,983)    -32%       18,911     31%       19,461    47%
Business applications         8,013    21%         (968)    -11%        8,981     14%        2,558     6%
Utilities                     3,921    11%       (7,838)    -67%       11,759     19%        4,816    12%
Other products                2,511     7%       (5,649)    -69%        8,160     13%        4,656    10%
Increase in sales reserves   (2,862)   -8%       (1,458)   -104%       (1,404)    -2%         (954)   -2%
                            -------   ---      --------    ----       -------    ---       -------   --- 
Total net revenues          $37,679   100%     $(24,386)    -39%      $62,065    100%      $41,839   100%
                            =======   ===      ========    ====       =======    ===       =======   === 

Net revenues from sales of products in the precision design category fell by    
$2.5 million or 16%, after increasing in fiscal year 1998 by $4.4 million or 39%
from fiscal year 1997. Sales revenue from IMSI's flagship product, TurboCAD,    
declined by 34% in fiscal year 1999. The percentage decline of TurboCAD sales   
was greater in the international market than the North American market. Sales of
FloorPlan increased by approximately 44% during fiscal year 1999 compared to    
fiscal 1998.                                                                    

Net revenues from sales of products in the graphic design category fell by $6   
million or 32% from fiscal year 1998 net revenues. Sales revenue from the most  
significant revenue producing product line within this category, MasterClips,   
decreased by approximately 30% in fiscal year 1999. The decline in MasterClips  
sales was primarily due to a significant increase in competitive product        
offerings and discount pricing in the visual content market. Revenues from      
IMSI's wholly owned subsidiary, Zedcor, Inc., owner of the ArtToday.com and     
other visual content web sites, are included in this category. Because Zedcor's 
revenues are based on subscriptions, these amounts are initially deferred and   
then amortized over the subscription, generally over 12 to 15 months. As of June
30, 1999, approximately $1,758,000 of revenue related to ArtToday.com and IMSI's
other visual content web sites remained deferred.                               

During fiscal year 1999, we offered hybrid products which included both a       
MasterClips product and a subscription to ArtToday.com. These hybrid products   
were not well received by consumers and contributed to the decline in           
MasterClips sales.                                                              

Net revenues from sales of products in the business application category fell by
$1.0 million or 11% from fiscal year 1998 after                                 

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increasing $6.4 million or 251% from fiscal year 1997. Sales of TurboProject,   
FormTool, HiJaak, MapLinx, People Scheduler and Web Business Builder, all       
declined in fiscal year 1999. Sales of Flow, Lumiere, and MultiMedia Fusion,    
which were introduced in the second half of fiscal year 1998, increased in      
fiscal year 1999. Sales of Org Plus and Sales Forecaster, which were introduced 
in fiscal year 1999, added to fiscal year 1999 revenues. Declines in business   
application revenues reflect the general decline in our overall product sales.  

Net revenues from sales of products in the utilities category fell by $7.8      
million or 67% from fiscal year 1998 after increasing $6.9 million or 144% from 
fiscal year 1997. The decrease in net revenues during fiscal 1999 was primarily 
due to lower unit sales of WinDelete, NetAccelerator, and Voice Direct. The     
decline in revenue was primarily due to the utility market undergoing increased 
competition, heavy price discounting and rebating. Certain of IMSI's single     
product utility offerings were unable to compete against popular utility suite  
products offered by larger and better-known companies such as Network Associates
(McAfee) and Symantec. Due to the sales revenue from UpdateNow and Year2000 Now 
being based on subscriptions, these revenue amounts are initially deferred and  
then amortized over the subscription, generally over 15 months. As of June 30,  
1999, $1,053,000 of UpdateNow and Year2000 Now revenue remained deferred.       

In the first half of fiscal 1999, market conditions deteriorated for IMSI's     
products in the visual content and utilities categories. In June 1998, The      
Learning Company purchased Broderbund, the publisher of Click Art, a product    
competitive to IMSI's MasterClips product. In subsequent months, Broderbund and 
Corel aggressively reduced prices and offered rebates to increase their sales   
and market share. IMSI responded in some instances with matching discounts and  
rebates, but nevertheless experienced a significant decline in sales due to     
these competitive pressures.                                                    

In September 1998, Network Associates purchased Cybermedia, developer of        
uninstaller, a competitor to IMSI's WinDelete product. In October 1998, Symantec
purchased Quarterdeck, the developer of Cleansweep, a product that is also a    
competitor to IMSI's Windelete product. Symantec and Network Associates are two 
of the largest and most formidable competitors in the PC productivity software  
market. In both instances Symantec and Network Associates relaunched these      
products with aggressive marketing campaigns, and in product bundles with their 
other products. The affect of these actions was increased competition and a     
reduction in sales of Windelete, an IMSI utilities product.                     

In the first half of fiscal 1999, IMSI also experienced significant competition 
in the voice recognition category. Dragon Systems, IBM, Learnout & Haspie and   
Philips all introduced new products and reduced prices during this period,      
resulting in significant declines in sales of VoiceDirect, IMSI's voice         
recognition product.                                                            

The foregoing events, unprecedented intense pricing pressure, aggressive        
competitive market campaigns by larger and more well-known competitors, and     
IMSI's inability to support proactive marketing programs due to cash flow       
concerns caused a general decline in sales and significant product returns to   
IMSI from our distributors.                                                     

On September 27, 1999, TechData notified us that it would terminate its         
distribution agreement with us within 60 days as a result of a disagreement over
payment terms. Although TechData was one of our largest distributors, we        
anticipate only a minimal impact on future sales because other distributors     
assumed substantially all of the accounts previously serviced by TechData.      

Based on reports received from TechData, we estimated, as of September 27, 1999,
that Tech Data held $566,000 of IMSI product in its inventory. Because our      
distributorship agreement with TechData allowed for product returns upon        
termination, our return reserve included an allowance of $566,000 for TechData's
entire reported inventory as of September 30, 1999. After September 30, 1999,   
Tech Data requested to return $575,000 of IMSI inventory. We received inventory 
of approximately $265,000 on December 19, 1999 and approximately $257,000 on    
January 27, 2000, for a total of approximately $522,000. We do not anticipate   
receiving any further returns from TechData.                                    

IMSI's agreement with TechData required us to accept returns of the products in 
TechData's inventory at the price paid by TechData less any subsequent returns  
or credits, provided that the products were unopened and in their original      
factory sealed packages. To date, we have credited TechData for only $25,000 of 
the $522,000 in returns because we believe the remainder of the product         
inventory returned by TechData did not meet these conditions. TechData has      
contested our right to refuse the balance of the returns.                       

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IMSI's receivable balance from TechData as of September 30, 1999 was            
approximately $752,000. After applying the reserve for expected returns, the net
receivable due from TechData at September 30, 1999, was $186,000. We do not     
anticipate paying a cash refund to TechData for returned product. The financial 
statements as of December 31, 1999 will reflect the entire receivable due from  
TechData as uncollectable based on our subsequent discussions with and          
correspondence from TechData.                                                   

On December 31, 1999, IMSI wrote down the entire inventory returned to IMSI by  
TechData, which had been valued at $25,010, to zero.                            

Approximately 54%, 49% and 68% of IMSI's net revenues in fiscal 1999, 1998 and  
fiscal 1997, respectively, were comprised of net revenues derived from IMSI's   
two most popular product families, TurboCAD and MasterClips. Significant        
decreases in sales revenues occurred in IMSI's two most popular products,       
TurboCAD and MasterClips, which are the leading products in IMSI's precision    
design and graphic categories, respectively. Extended engineering delays in     
localizing TurboCAD for foreign markets hurt overseas sales.                    

Product upgrades, and their introduction dates, in fiscal year 1999 were:       

-   WinDelete v5 - October 31, 1998                             

-   TurboProject v3 - December 30, 1998                         

-   TurboCAD v6 - February 28, 1999                             

-   MasterClips 375,000 - March 30, 1999                        

-   MasterClips 1,250,000 - March 30, 1999                      

FormTool Scan and OCR was released on June 30, 1998, before the first quarter of
fiscal year 1999.                                                               

Product returns often increase when IMSI introduces upgrades and new versions of
products. New version releases may result in an increase in return reserves.    
Therefore, new product introductions by competitors also increase returns. As of
June 30, 1999, management considered likely product upgrades and factored in an 
appropriate increase in the return reserve for such products accordingly.       

Net revenues from international sales decreased 32.7% to $12.4 million in fiscal
1999 from $18.5 million in fiscal 1998, while net revenues from domestic sales  
decreased 42.1% to $25.2 million in fiscal 1999 from $43.6 million in fiscal    
1998. As a result, net revenues from international sales increased as a         
percentage of IMSI's net revenues to 33% in fiscal 1999 from 30% in fiscal 1998.
These absolute dollar decreases in net revenues from international sales were   
primarily the result of decreased sales through existing distribution channels. 
Our revenues from international sales in each of the periods were generated     
primarily from Germany, the United Kingdom and Australia. Although IMSI believes
that the risks associated with transactions in foreign currencies are mitigated 
by diversified exposure to multiple currencies, IMSI's operating results may be 
affected by the risks customarily associated with international operations,     
including a devaluation of the U.S. dollar, increases in duty rates, exchange or
price controls, longer collection cycles, government regulations, political     
instability and changes in international tax laws.                              

RESERVE FOR RETURNS, PRICE DISCOUNTS AND REBATES                                

IMSI recognizes revenue net of estimated returns and allowances for returns,    
price discounts and rebates, upon shipment of a product and only when no        
significant obligations remain and collectability is probable. 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, 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. In     
addition, foreign distributors can return product for payment if return amounts 
exceed amounts owed.                                                            

In December 1998, IMSI's primary distributor in Germany exited the software     
distribution business. On May 27, 1999, as a result of the termination, the     
German distributor returned $248,000 of previously paid resaleable product and  
IMSI refunded the full $248,000. . In March 1999, IMSI                          

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decided to terminate its relationship with its primary distributor in Australia 
and sell directly to retail outlets. The previously paid resaleable product     
returned upon termination by the Australian distributor was valued at $304,000. 
We paid $189,000 in June 1999 to the Australian distributor and relieved        
$115,000 in receivables as a result of that termination. IMSI anticipates that  
the German distributor will make additional claims in fiscal year 2000. As of   
June 30, 1999, IMSI had no current liability to any other foreign or domestic   
distributor for resaleable product returned on termination. In addition, IMSI   
provides price protection to its distributors when it reduces the prices of its 
products. End users may return products through dealers and distributors within 
60 days from the date of purchase for a full refund, and retailers may return   
older versions of products for a full refund. Generally, distributors and       
retailers have no time limit to return merchandise, except that distributors    
have 60-90 days to return merchandise upon termination of the distributorship   
agreement.                                                                      

Our allowances for returns, price protection and rebates are based upon our best
judgment and estimates at the time of preparing the financial statements.       
Reserves for returns, price discounts and rebates are estimated using, among    
other things, historical averages and a consideration of open return requests.  
Due to return activity that did not appear fully consistent with historical     
estimates, beginning with the quarter ended December 31, 1998, we supplemented  
the process by which we establish our reserve estimates with a consideration of 
channel inventories in the U.S., recent product sell-through activity and market
conditions.                                                                     

Information available in regards to channel inventory and sell through activity 
is limited. This information, generated by third parties from whom IMSI         
purchases the data, does not cover all of our customers and is unaudited.       
Management is required to exercise judgement in estimating future returns, price
discounts and rebates. Total reserves for returns, price discounts and rebates, 
not including reserves for bad debt, were 50%, 20%, and 19% of gross receivables
at June 30, 1999, 1998 and 1997, respectively.                                  

In establishing return reserves at June 30, 1999, we obtained information about 
inventory levels at our primary U.S. distributors and retailers. We compared    
these inventory levels to our estimates of future sell-through based on         
information obtained about the U.S. market from PC Data. Based on this          
information and our historical experience, we established the amount of return  
reserves. We also considered the actual results subsequent to the end of the    
fiscal year up to the filing of the Form 10-K in establishing our return        
reserve.                                                                        

Current and planned product upgrades are now among the factors used to establish
reserves for product inventory. Other factors include product sales trends,     
competition from other products, and product inventory on hand. Prior to        
December 31, 1998, the Company did not consider separately the effect of product
upgrades in determining the reserve for returns because it believed that the    
impact of product upgrades on returns was already appropriately reflected in the
historical estimates.                                                           

Reserves are subjective estimates of future activity, that are subject to       
certain risks and uncertainties, which could cause actual results to differ     
materially from estimates.                                                      

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The following table details our allowances for rebates, sales returns and price 
discounts for the periods presented (in thousands):                             

                                                                [Download Table]

                         Rebates   Returns    Discount   Total   
                         -------   --------   --------  -------- 
                                                                 
Reserve balance 6/30/96  $    --   $  1,049   $   101   $  1,150 
Additions to reserve          --      4,681     1,899      6,580 
Charges                       --     (4,141)   (1,454)    (5,595)
                         -------   --------   -------   -------- 
Reserve balance 6/30/97       --      1,589       546      2,135 

Additions to reserve          --      9,355     2,050     11,405 
Charges                       --     (7,946)   (2,313)   (10,259)
                         -------   --------   -------   -------- 
Reserve balance 6/30/98       --      2,998       283      3,281 

Additions to reserve       2,474     17,714     6,146     26,334 
Charges                   (2,376)   (15,463)   (5,610)   (23,449)
                         -------   --------   -------   -------- 
Reserve balance 6/30/99  $    98   $  5,249   $   819   $  6,166 
                         =======   ========   =======   ======== 

During fiscal year 1999, we received about $4.3 million of product returns from 
fiscal year 1998 sales. As of June 30, 1998, we reserved approximately $3.0     
million for returns. Accordingly, of the $17.7 million of additions to the      
return reserves recorded in fiscal year 1999, $16.4 million of the additions    
related to fiscal year 1999 sales. Although the dollar value of the reserve     
balance at June 30,1999 is much lower than sales reserved in fiscal 1999, this  
lower amount is justified by the continuing decline in our gross revenues       
throughout fiscal year 1999. The return reserve balance at June 30, 1999 is also
consistent with the reduced level of inventory in the channel associated with   
the declining shipments of our products. The following table illustrates the    
percentage impact of returns, rebates, and price discounts on gross revenue of  
$64,013,000, $73,470,000, and $48,419,000 in fiscal year 1999, 1998, and 1997,  
respectively, and the resulting net revenues, as reflected in the consolidated  
statement of operations.                                                        

                                                                [Download Table]

(in thousands)            1999          1998 (as restated)        1997       
                     ----------------   ------------------  ---------------- 
                     Amount      %      Amount       %      Amount       %   
                     -------    -----   --------    ------  -------    ----- 
                                                                             
Gross Revenues       $64,013    100.0%   $73,470    100.0%  $48,419    100.0%

Additions to                                                                 
Reserves for:                                                                
    Returns           17,714     27.7%     9,355     12.7%    4,681      9.7%
    Price discounts    6,146      9.6%     2,050      2.8%    1,899      3.9%
    Rebates            2,474      3.9%        --       --        --       -- 
                     -------    -----    -------    -----   -------    ----- 
                     $26,334     41.2%   $11,405     15.5%  $ 6,580     13.6%
                     -------    -----    -------    -----   -------    ----- 
Net Revenues         $37,679     58.8%   $62,065     84.5%  $41,839     86.4%
                     =======    =====    =======    =====   =======    ===== 

PRODUCT COSTS                                                                   

Our product costs include the costs of diskette and CD-ROM duplication, printing
of manuals, packaging and fulfillment, freight-in, license fees, royalties that 
IMSI pays to third parties based on sales of published software and amortization
of capitalized software acquisition and development costs. Costs associated with
the return of products, such as refurbishment and the write down in value of    
returned goods are also included in Product Costs. A change in retail market    
conditions caused a significant increase in fiscal year 1999 returns. Product   
costs represented 67%, 38%, and 40% of net revenues in fiscal 1999, 1998 and    
fiscal 1997, respectively.                                                      

IMSI reviews its product inventories for obsolescence at the end of each        
reporting period. IMSI reserves a portion of its recorded inventory book        

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value to account for its anticipated inability to sell certain products or the  
anticipated inability to sell certain products at a net realizable value that is
greater than their recorded cost. Products that are in IMSI's inventory but are 
not currently being sold are fully reserved. As part of its restructuring plan, 
IMSI identified a limited number of core products that it plans to continue to  
sell on a long-term basis. Reserves for non-core products that IMSI will        
continue to sell in the normal course of business but will no longer manufacture
or actively market have been increased as part of the Company's restructuring.  
As of June 30, 1999, IMSI reserved $2,184,000 for non-core products in its      
inventory. IMSI also completely reserved $1,017,000 of other products in its    
inventory that it no longer sells, and reserved $144,000 of core products       
inventory that it estimated to be in excess of consumer demand.                 

At the end of each quarter, IMSI performs a physical inventory, evaluates this  
inventory for impairment, and records the value of inventory, including any     
returned products from both foreign and domestic distributors, at the lower of  
cost or market. While IMSI believes there is a market for both core and non-core
products, it has reduced the carrying value of non-core products as a result of 
its decision to focus solely on core products and discontinue supporting        
non-core products.                                                              

IMSI amortizes capitalized software development costs on a product-by-product   
basis. The amortization recorded for each product is the greater of the amount  
computed using (a) the ratio of current gross revenues to the total of current  
and anticipated future gross revenues for the product or (b) the economic life  
of such product. Aggregate amortization of such costs was $2,429,000,           
$1,196,000, and $224,000 in fiscal 1999, 1998 and fiscal 1997, respectively. The
increase in product costs as a percentage of net revenues in fiscal year 1999   
was primarily attributable to a lower sales volume over which to spread fixed   
manufacturing burden and overhead costs, costs associated with high product     
returns, increased purchase discounts offered to customers and increased        
end-user rebates.                                                               

SALES AND MARKETING EXPENSES                                                    

Our sales and marketing expenses consist primarily of salaries and benefits for 
sales and marketing personnel, commissions, advertising, printing and direct    
mail expenses. Sales and marketing expenses decreased 1% to $18.4 million in    
fiscal 1999 from $18.6 million in fiscal 1998, which represented an increase of 
55% from $12.0 million in fiscal 1997. Cost reduction efforts associated with   
IMSI's restructuring plan did not significantly reduce sales and marketing      
expenses in fiscal year 1999 due to these measures being initiated late in the  
year. The slight decrease in sales and marketing expenses during fiscal year    
1999 was due to lower headcount that was offset by additional cooperative       
advertising. The increase in 1998 was primarily due to increased headcount,     
additional cooperative advertising and increased commissions to support a higher
level of sales. IMSI had 69, 141 and 76 sales and marketing personnel at June   
30, 1999, 1998 and 1997, respectively. Sales and marketing expenses represented 
49%, 30%, and 29% of net revenues in fiscal 1999, 1998 and fiscal 1997,         
respectively.                                                                   

GENERAL AND ADMINISTRATIVE EXPENSES                                             

Our general and administrative expenses consist primarily of salaries and       
benefits for employees in the legal, finance, accounting, human resources,      
information systems and operations departments and fees to IMSI's professional  
advisors. General and administrative expenses increased 63% to $8.2 million in  
fiscal 1999 from $5.0 million in fiscal 1998, which represented a 25% increase  
from $4.0 million in fiscal 1997. At the beginning of fiscal 1999 IMSI was in a 
growth pattern, increasing general and administrative expenses, when market     
conditions deteriorated for its products. IMSI had 35, 56 and 45 administrative 
personnel at June 30, 1999, 1998 and 1997, respectively. The decrease in fiscal 
year 1999 headcount is related to IMSI's downsizing. During fiscal year 1999,   
IMSI had significant increases in accounting, legal and consulting fees paid to 
outside third parties, particularly in connection with litigation, which caused 
a significant increase in administrative expenses. The increases during fiscal  
1998 from 1997 were primarily due to continued infrastructure improvements and  
headcount additions, primarily in the areas of information systems, human       
resources, accounting and operations. General and administrative expenses       
represented 22%, 8% and 10% of net revenues in fiscal 1999, 1998 and fiscal     
1997, respectively. Although the sharp increase in these percentages from fiscal
1998 to fiscal 1999 was partly due to the increase in general and administrative
expenses in absolute dollars, it is primarily attributable to the steep decline 
in fiscal 1999 revenues.                                                        

RESEARCH AND DEVELOPMENT EXPENSES                                               

Our research and development expenses consist primarily of salaries and benefits
for research and development employees and payments to independent contractors. 
Research and development expenses decreased 6% to $8.1 million in fiscal 1999   
from $8.6 million in fiscal 1998, which represented an 89% increase from $4.6   
million in fiscal 1997. The fiscal year 1998 increases                          

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were due to domestic headcount increases, utilization of additional software    
development contractors outside of the United States and growth in other        
third-party development costs relating to development and expansion of IMSI's   
product offerings. IMSI had 76, 115 and 80 research and development employees at
June 30, 1999, 1998 and 1997, respectively. In addition, IMSI used significant  
numbers of independent research and development contractors outside of the      
United States. The additional contractors hired were engaged primarily in       
enhancing and modifying products and in-process technologies that IMSI had      
acquired from third parties and, to a lesser extent, in developing new products.
For fiscal 1999, 1998 and fiscal 1997, IMSI capitalized software acquisition and
development costs of $3.2 million, $3.2 million, and $44,000, respectively.     
Research and development expenses represented 21%, 14% and 11% of net revenues  
in fiscal 1999, 1998 and 1997, respectively. The increase in this percentage    
during fiscal year 1999 was attributable to the relative steep decline in fiscal
1999 revenues.                                                                  

RESTRUCTURING CHARGE                                                            

In response to its large losses in fiscal year 1999, after approval by IMSI's   
Board of Directors, a plan of restructuring was announced on June 24, 1999, and 
IMSI initiated a company-wide restructuring of its operations. The four major   
components of the restructuring plan were manufacturing and warehouse           
outsourcing, facilities consolidation, personnel reductions, and divestiture of 
non-core products to focus on high margin product lines.                        

All appropriate costs associated with implementing the restructuring plan,      
whether paid in fiscal year 1999 or beyond, are recognized as a cost or expense 
on IMSI's fiscal year end June 30, 1999 income statement. Some of the           
restructuring costs or expenses represent a write-off of existing assets. Costs 
or expenses related to the restructuring that are not from write-offs of        
existing assets or were not paid by June 30, 1999, $1,440,000 in total, are     
accrued and recognized as a liability, within accrued and other liabilities, on 
IMSI's June 30, 1999 balance sheet.                                             

IMSI began its restructuring in June 1999 and anticipates completing its        
restructuring by end of fiscal year 2000. Restructuring costs of $3,271,000 that
would have been recognized through cost of sales in the normal course of        
business (inventory, royalties, license fees, capitalized software, warehouse   
costs, warehouse outsourcing costs) are included in the income statement as a   
component of costs of goods sold. Restructuring costs of $1,508,000 that would  
have been reported as operating expenses in the normal course of business are   
reported in the income statement under the "restructuring charge" line item.    

The fair value of furniture, fixtures, equipment and leasehold improvements not 
associated with specific product lines was based on current market prices for   
used equipment and furniture, less disposal costs. The fair value of the        
intangible assets associated with the non-core product lines held for sale,     
including EZ Language and business utility product lines, was determined from   
pending discussions with potential purchasers of these product lines.           

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The following table summarizes these restructuring costs by segment:            

                                                        [Enlarge/Download Table]

(in thousands)                                      COST OF GOODS SOLD OPERATING EXPENSE      
                                              North                   North                   
                                              America        UK       America     UK    Total 
                                              ------         ---      ------      ----  ------
                                                                                              
Write down of inventory of non-core products  $2,096         $88                        $2,184
Write down of intangibles associated with                                                     
Non-core products, total:                                                                     
   License Fees                                  217                                       217
   Goodwill                                                                5                 5
   Prepaid Royalties                             143                                       143
   Capitalized Software                          159                                       159
Write down of furniture, fixtures,                                                            
equipment and leasehold improvements:                                                         
   Novato -                                                                                   
      Computers and peripherals                                          150               150
      Tenant improvements                                                139               139
      Furniture and fixtures                                             109               109
   Vacaville & Albuquerque -                                                                  
      Furniture and fixtures                                              25                25
   U.K. -                                                                                     
      Furniture and fixtures                                                        41      41
Abandoned leases and associated costs:                                                        
   Novato -                                                                                   
      Rent                                                               180               180
      Broker's fee                                                        65                65
      Excess furniture lease                                              14                14
      Additional walls and doors                                          29                29
      Miscellaneous charges                                                3                 3
   Vacaville warehouse  -                                                                     
      Rent                                       249                                       249
      Broker's fee                                                       103               103
   Albuquerque tech support facility                                     110               110
   U.K. -                                                                                     
      Rent                                                                           6       6
      Labor cost for shutdown of office                                             19      19
Warehouse transition costs                       284                                       284
Personnel reduction and severance costs:                                                      
   U.S.                                           35                     470               505
   U.K.                                                                             41      41
                                              ------         ---      ------      ----  ------
                                              $3,183         $88      $1,402      $107  $4,780
                                              ======         ===      ======      ====  ======

Write down of inventory of non-core products. In the restructuring, we          
identified products in our precision design and graphic design categories, or   
those in our business application category sold in combination with our design  
products, such as TurboProject, as "core products" that we will continue to sell
and support. "Non-core products" consist of those products in our inventory     
that, due to the restructuring plan, we will continue to sell, but no longer    
support with upgrades, improvements, or marketing programs. "Other products"    
refers to products that we no longer sell.                                      

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Non-core products include current and previous versions of:                     

                                                                [Download Table]
                                                                                
3D Artist                 Graphics Converter    People Scheduler     VoiceDirect
CD Copier                 Hijaak                Solid Modeler                   
Conversational Skills     Lumiere               TurboSketch                     
Cookbook                  MapLinx               UpdateNow                       
E-mail animator           MasterPublisher       MasterPhotos                    
EZ Language               Mouse                 WebArt                          
Family Home CollectioN    MultiMedia Fusion     Web Business Builder            
Flow                      Net Accelerator       WinDelete                       
FormTool                  Org Plus              Year 2000                       

Non-core products also include older versions of FloorPlan, MasterClips, and    
TurboCAD. We estimate that sales of all non-core products will be discontinued  
by June 30, 2000.                                                               

Our restructuring charge included $2,184,000 in inventory write-downs related to
non-core products, $2,096,000 of which we included in our U.S. segment. We based
this impairment of the value of our inventory on our subjective estimate,       
product by product, of how much our inventory exceeds customer demand, looking  
at factors such as inventory levels at IMSI facilities and as reported by       
distributors, sales data from internal sources and PC Data, and marketing and   
sales department estimates based on historical and current market trends. Market
conditions continue to change, which may necessitate reserving product          
inventories in the future at higher levels than that recorded as of June 30,    
1999.                                                                           

At June 30, 1999, the adjusted cost basis of non-core products, after           
considering the $2,184,000 write down in value of these products, was           
$1,079,000. We believe this value of the non-core product inventory will be     
recovered, consistent with our restructuring plan, through a combination of     
sales in our existing distribution channels, sales through alternative channels,
such as software liquidators, or by the sale or license of the rights to the    
non-core product lines.                                                         

Write down of intangible assets associated with non-core products. We reviewed  
our intangible assets associated with non-core product lines for impairment in  
accordance with SFAS 121 and adjusted the carrying value of these assets as     
necessary. These intangible assets included license fees, capitalized goodwill  
and brand names, prepaid royalties, and capitalized software. We believed these 
assets were impaired because we no longer manufacture or actively market the    
non-core products with which they are associated. The intangible assets         
associated with Easy Language and our business utility product lines were not   
written off in the restructuring. We determined that the net realizable value of
these intangible assets associated with the remainder of our non-core product   
lines was $0, and accordingly wrote down $525,000 in our U.S. segment.          

The following table provides a summary of the carrying value of all assets      
associated with our non-core products as of June 30, 1999.                      

                                                                [Download Table]

                                                  Write down in                
                                                   connection     Adjusted cost
                                 Cost basis           with          basis at   
                              at June 30, 1999    restructuring   June 30, 1999
                              ----------------    -------------   -------------
                                                                               
Inventory                          $3,263            $2,184          $1,079    
License fees                          217               217               0    
Goodwill                                5                 5               0    
Prepaid royalties                     224               143              81    
Capitalized software                  336               159             177    
                                   ------            ------          ------    
                                   $4,045            $2,708          $1,160    
                                   ------            ------          ------    

Write down of furniture, fixtures, equipment and leasehold improvements. Because
our restructuring plan called for the reduction of employees and the            
consolidation of facilities, we determined to write down $464,000 of furniture, 
fixtures, equipment and leasehold improvements at our Novato headquarters,      
Vacaville, California and Albuquerque, New Mexico facilities, and our U.K.      
office. The write down of $398,000 of fixed assets in Novato consisted of       
$150,000 of computers                                                           

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and peripherals, $139,000 of tenant improvements, and $109,000 of furniture and 
fixtures. The write down of $25,000 and $41,000 of fixed assets in Vacaville and
Albuquerque and the U.K., respectively, consisted of furniture and fixtures.    
These assets were abandoned and are no longer being used in the operation of the
business.                                                                       

Abandoned leases and associated costs. We wrote off a total of $778,000 for     
abandoned leases and associated costs in both U.S. and U.K. segments. As part of
the restructuring, we vacated half of the office space leased at our Novato     
headquarters in June 1999, which we plan to sublease. The write down of $291,000
in Novato consisted of four months rent for the space to be subleased of        
$180,000, the broker's fee to sublease the space of $65,000, an excess furniture
lease of $14,000, the cost of additional walls and doors to partition the space 
of $29,000, and miscellaneous charges of $3,000.                                

As part of the restructuring, we plan to vacate the Vacaville warehouse entirely
by February 2000. We determined that about 50% of the costs of the warehouse    
should be written off ($249,000), along with a broker's fee to sublet unoccupied
space ($103,000), in the restructuring. Because of the reduction in product     
lines and corresponding reduction in the need for technical support, we wrote   
off 50% ($110,000) of the future rent for the Albuquerque technical support     
facility. Because the restructuring plan calls for the consolidation of our     
foreign offices, we wrote down $25,000 in expenses associated with vacating our 
U.K. office.                                                                    

Warehouse transition costs. As we make the transition to outsourcing of our     
warehouse, fulfillment, and shipping functions, we included warehouse transition
costs of $284,000 in the restructuring charge. We estimated that our warehouse  
would remain open for four months during the transition and that 50% of the     
operating expenses were associated with shutting down the facility. We accrued  
50% of the cost of operating the warehouse for this four-month period as an     
operating expense and will recognize the remaining costs (those that benefit the
future period) as cost of sales.                                                

Personnel reduction and severance costs. As part of the restructuring plan, IMSI
planned to terminate 90 employees by the end of fiscal year 2000 in the         
following departments: sales and marketing (22); general and administrative (8);
manufacturing (23); and research and development (37). Our total restructuring  
charge relating to personnel reduction and severance costs was $546,000, of     
which $505,000 applied to the U.S. segment and $41,000 to the U.K. segment.     
These costs were recorded as operating expenses. We also forgave a $35,000 note 
receivable from a shareholder and company executive who was terminated as part  
of the restructuring. We recorded this amount as a cost of goods sold.          

As a result of the restructuring, IMSI expects reduced future costs and reduced 
future revenues. IMSI expects to reduce payroll costs by approximately $266,000 
per month and expects to reduce rent costs by approximately $71,000 per month as
a result of the its warehouse closing, the closing of its U.K. office, and the  
subleasing of half of its headquarters office space, and corresponding reduction
in employees. Due to the write off of approximately $464,000 in furniture and   
equipment assets, depreciable over 3 to 5 years, future periods will be relieved
of this depreciation charge. IMSI expects revenues to decline substantially     
because it is marketing and selling fewer products and the demand for current   
products is declining. The following table details the classification of cash   
and non-cash amounts.                                                           

                                                                [Download Table]

                                    Cash          Non-Cash         Total   
                                 ----------      ----------      ----------
                                                                           
Restructuring Charge             $  956,000      $  552,000      $1,508,000

Product Costs                       657,000       2,615,000       3,272,000
                                 ----------      ----------      ----------
                                 $1,613,000      $3,167,000      $4,780,000
                                 ==========      ==========      ==========

       Non-cash restructuring charges relate to the write off or write down of
fixed assets, inventory, license fees, goodwill, prepaid royalties and          
capitalized software. See Note 2 of the June 30, 1999 consolidated financial    
statements.                                                                     

WRITE OFF OF PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT                      

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     In the fiscal year ended June 30, 1998, IMSI expensed $6.4 million of
purchased in-process research and development resulting from the acquisitions   
from Quarterdeck, Computer Concepts, MediaPaq and Corel. No such charges were   
incurred in connection with the acquisitions made in 1999. See Note 3 to the    
June 30, 1999 consolidated financial statements.                                

INTEREST AND OTHER EXPENSE, NET                                                 

Our interest and other expenses, net are comprised of interest accrued on debt  
instruments, amortization of the fair value of warrants issued in connection    
with debt, foreign currency transaction gains and losses, and other             
non-recurring items. Interest and other expense, net was $1,880,000, $759,000   
and $130,000 in fiscal 1999, fiscal 1998 and fiscal 1997, respectively.         

Interest and other expense net, excluding foreign currency transactions and     
other de minimus items, was $1,650,000, $603,000, and $164,000 in fiscal 1999,  
1998 and fiscal 1997, respectively. Interest expense on debt instruments        
increased to $1,082,000 in fiscal year 1999, consistent with IMSI's increased   
long term borrowings and higher interest rates in fiscal year 1999.             
Approximately $246,000 and $65,000 of other expense in 1999 relates to the      
issuance of 40,476 shares and 10,000 shares respectively to Zedcor shareholders 
as discussed in Note 7 to the consolidated financial statements. Approximately  
$237,000 of other expense relates to the amortization of the warrants issued to 
Silicon Valley Bank and BayStar Capital, L.P. as discussed in Notes 5 and 6 to  
the consolidated financial statements.                                          

Foreign currency transaction loss was $235,000 in fiscal 1999 and $153,000 in   
fiscal 1998. There was a foreign currency gain of $34,000 in fiscal 1997. IMSI  
does not attempt to hedge its foreign currency positions.                       
PROVISION (BENEFIT) FOR INCOME TAXES                                            

Our effective tax rate was 0.1 %, (45.0 %), and 38.7% in fiscal 1999, fiscal    
1998 and fiscal 1997, respectively. We recorded a valuation allowance of        
$11,126,000 in fiscal year 1999 due to the uncertainty of realizing deferred tax
assets, which reduced the effective rate in 1999. See Note 11 to the            
consolidated financial statements.                                              

LIQUIDITY AND CAPITAL RESOURCES                                                 

Our operating activities used net cash of $2.7 million, $1.6 million and        
$400,000, respectively in fiscal 1999, 1998, and 1997. Excluding the changes in 
operating assets and liabilities, operating activities in fiscal year 1999 used 
$16.2 million in cash, due to IMSI's large operating losses. Large reductions in
accounts receivable and inventories and an increase in accrued and other        
liabilities minimized the use of cash caused by IMSI's large net loss. Accrued  
liabilities increased as IMSI slowed its payments as a result of declining cash 
receipts. In particular, accrued rebates payable increased significantly because
of the intense price competition and increase in rebates offered during fiscal  
year 1999. In fiscal year 1998, net cash used by operating activities resulted  
primarily from a $5.4 million increase in receivables, a $3.1 million increase  
in inventories and a $3.3 million increase in prepaid royalties and licenses,   
which were not entirely offset by IMSI's net income before depreciation and     
amortization of $4.1 million. In fiscal 1997, net cash used by operating        
activities resulted primarily from increases in receivables of $3.4 million,    
inventories of $934,000 and prepaid royalties and licenses of $1.8 million,     
offset in part by IMSI's income before depreciation and amortization of $2.1    
million and increases in trade accounts payable of $1.4 million and smaller     
increases in other payables.                                                    

Our investing activities used net cash of $5.7 million, $3.9 million and        
$367,000 in fiscal 1999, 1998 and fiscal 1997, respectively. In fiscal 1999, net
cash used by investing activities resulted primarily from the purchase of $1.2  
million of equipment, the acquisition of $2.2 million of software development   
costs and $2.4 million of goodwill, trademark and brand. These amounts are      
primarily associated with the Zedcor, Inc. acquisition and the Org Plus         
acquisition (See Note 3 to the June 30, 1999 consolidated financial statements).
In fiscal year 1998, net cash used by investing activities resulted primarily   
from the addition of $2.7 million to capitalized software acquisition and       
development costs and $1.0 million of equipment purchases. In fiscal 1997, net  
cash used by investing activities resulted primarily from $323,000 of equipment 
purchases.                                                                      

Net cash provided by financing activities was $10.1 million, $6.6 million and   
$1.6 million in fiscal 1999, 1998 and fiscal 1997, respectively. In fiscal 1999,
net cash provided by financing activities resulted primarily from term loan     
borrowings of $7.5 million and the issuance of $6.2 million of common stock (See
Note 7 to the June 30, 1999 consolidated financial statements). This inflow of  
cash was partially offset by a net repayment of $2.5 million on IMSI's credit   
line from Union Bank of California                                              

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(See Note 4 to the June 30, 1999 consolidated financial statements). On November
3, 1998, IMSI borrowed $2.5 million under a three-year subordinated loan        
facility with Silicon Valley Bank (See Note 5 to the June 30, 1999 financial    
statements). On May 26, 1999, IMSI issued to BayStar Capital, LP a three-year $5
million principal amount 9% subordinated convertible note (see Note 6 to the    
June 30, 1999 consolidated financial statements).                               

In fiscal 1998, net cash provided by financing activities resulted primarily    
from $16.4 million of borrowings under IMSI's credit line, offset in part by    
$10.3 million of repayments under capital leases, term loans and other          
obligations, and $526,000 from the issuance of common stock. In fiscal 1997, net
cash provided by financing activities resulted primarily from $1.5 million of   
net borrowings under a term loan and $481,000 from sales of common stock, offset
in part by $373,000 of capital lease and other obligations repayments.          

On March 3, 1999, IMSI entered into a stock purchase agreement and related      
agreements with Capital Ventures International ("CVI"). Under the terms of the  
agreement, CVI paid IMSI $5 million and IMSI issued 437,637 shares of its common
stock. IMSI may be required to issue additional shares depending on the market  
price of the common stock at certain future dates. Additionally, pursuant to the
CVI agreement, CVI can purchase up to $3 million worth of additional shares of  
common stock, up to a maximum number of 375,117 shares. CVI also acquired a     
warrant to purchase 131,291 shares of common stock, at an initial exercise price
of $14.8525 per share. See Note 7 to the consolidated financial statements,     
"Issuance of Common Stock".                                                     

On May 4, 1998 IMSI entered into a line of credit agreement with Union Bank     
under which it could borrow the lesser of $13,500,000 or 80% of eligible        
accounts receivable, at Union Bank's reference rate plus 1/2 % or LIBOR plus 2  
%, at IMSI's option. We borrowed up to approximately $10.0 million under the    
line of credit agreement . Union Bank also provided a $1.5 million term loan at 
the same interest rate. The line of credit was to expire on October 31, 1999 and
the repayment of the term loan was due by the same date.                        

Due to our defaults under the agreements, the line of credit was changed to a   
non-revolving, reducing loan with no further borrowings available. The interest 
rate is now at Union Bank's reference rate plus 3%. Under the terms of the      
agreements, all assets not subject to liens of other financial institutions were
pledged as collateral against the loans. The amended loan agreements still      
require us to comply with certain financial covenants including maintenance of  
net worth and working capital requirements. We are in default of many of these  
covenants.                                                                      

We made payments to Union Bank that decreased the amount owed to $6,150,000 as  
of June 30, 1999. Union Bank can declare all loans, and the obligations under   
the agreements, to be immediately due and payable and can commence immediate    
enforcement and collection actions.                                             

The loans provided that they were due on September 30, 1999. As of September 30,
1999, we had reduced the debt owed to Union Bank to about $4.8 million. We      
anticipate that we will be able to repay the remaining amount owed with proceeds
we expect to generate from the sale of non-core product lines. Given our intent 
to repay Union Bank with such proceeds, IMSI is in the process of negotiating a 
60-day forbearance from September 30, 1999 to cure its defaults. Enforcement and
collection actions by Union Bank could have a material adverse effect on IMSI's 
business, operating results and financial condition.                            

On May 26, 1999 we announced a private placement transaction with BayStar       
Capital, L.P. We issued a three year $5 million principal amount 9% Senior      
Subordinated Convertible Note, and a warrant to acquire 250,000 shares of our   
common stock, to BayStar. The note is convertible into shares of common stock at
an initial conversion price of $7.5946 per share.                               

The conversion price is subject to adjustment, including adjustment to a reset  
conversion price on May 24, 2000, which may be as low as $4.6228 per share, or  
lower if defined events occur, such as the issuance of common stock, or grant   
rights to purchase stock, at a price lower than the then existing conversion    
price. These conditions are designed to prevent dilution of the conversion      
feature of the convertible note and dilution of the exercise price of the       
warrant. The trading value of IMSI's common stock on the date of issuance of the
subordinated convertible debt was $6.50. The value of the contingent beneficial 
conversion feature at the date of commitment, and the potential charge to       
earnings, is $2,030,000. See Note 6 to the consolidated financial statements,   
"Convertible Subordinated Debt."                                                

Although our cash and cash equivalents increased $1.6 million to $3.7 million at
June 30, 1999 from $2.1 million at June 30, 1998, working capital declined from 
$6.6 million at June 30, 1998 to a negative $1.2 million at June 30, 1999. The  
sharp decline in working capital is partially due to the accumulation of $3.2   
million in deferred revenue as of June 30, 1999. Excluding deferred revenue,    
working capital declined $5.0 million to $2.0 million. IMSI believes that its   
existing cash and cash                                                          

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equivalents will be insufficient to satisfy IMSI's working capital and capital  
expenditure requirements over the next 12 months.                               

Deferred revenue increased from $407,000 in fiscal 1998 to $3,178,000 in fiscal 
1999. Most of the increase was attributable to deferred revenue from            
ArtToday.com subscriptions. Standard 12-month subscriptions, accounting for     
$1,316,000 of deferred revenues, are recognized over 12 months from the date of 
purchase. IMSI also sells ArtToday.com subscriptions in combination with        
subscriptions to utility programs, which are recognized over 15 months. The     
deferred revenue from these combined subscriptions was $2,728,000. Deferred     
revenue also included a $200,000 receivable from TLC whose collection was not   
assured. The remaining $136,000 of deferred revenue related to other license or 
pre-paid contracts. Previously deferred revenue of $1,609,000 was recognized in 
1999.                                                                           

The financial statements have been prepared on a basis that contemplates IMSI's 
continuation as a going concern and the realization of our assets and           
liquidation of our liabilities in the ordinary course of business. We have an   
accumulated deficit of $25,963,000 at June 30, 1999, and negative cash flows    
from operations of $2,741,000 in fiscal 1999. IMSI is also in default of various
loan covenants. These matters, among others, raise substantial doubt about our  
ability to remain a going concern for a reasonable period of time. The financial
statements do not include any adjustments relating to the recoverability or     
classification of assets or the amounts and classification of liabilities that  
might result from the outcome of this uncertainty. IMSI's continued existence is
dependent on its ability to obtain additional financing sufficient to allow it  
to meet its obligations as they become due and to achieve profitable operations.
See Note 1 to the consolidated financial statements, "Basis of Presentation and 
Realization of Assets."                                                         

IMSI will require additional working capital to meet its ongoing operating      
expenses, to execute its planned transition to the Internet, to develop new     
products, and to conduct other activities. Historically, IMSI has financed its  
working capital and capital expenditure requirements primarily from retained    
earnings, short-term and long-term bank borrowings, capitalized leases and sales
of common stock. During fiscal year 1999, IMSI relied primarily on the issuance 
of long-term debt and the issuance of common stock. In fiscal year 1999, short  
term net credit line borrowings decreased $2.5 million while borrowings under   
term loans, primarily long term, increased $7.5 million. Common stock increased 
by $14.8 million, of which $6.2 million was issued for cash. A portion of the   
stock issued in fiscal year 1999 was used to retire debt and other liabilities. 
The large accumulated losses of IMSI and the relative small amount of           
shareholder's equity remaining as of June 30, 1999 will make it difficult for   
IMSI to obtain new debt financing or to obtain equity financing at attractive   
prices.                                                                         

To a large extent, IMSI plans to meet its working capital needs in the coming   
fiscal year through sales or license of the rights to its non-core products. As 
part of its restructuring strategy, IMSI plans to reduce the number of its      
product categories by approximately 75% through sales of its non-core product   
lines. To this end, IMSI sold the rights to the EZ Language product for $1.7    
million in August 1999. Moreover, IMSI has engaged in, and expects to engage in,
discussions with third parties concerning sale or license of a material part of 
its remaining non-core product lines. The sale of the rights to these products  
is consistent with our strategy of focusing on our core products while          
transitioning to the Internet. This strategy also includes reducing our costs   
through manufacturing and warehouse outsourcing, facilities consolidation, and  
personnel reductions.                                                           

As of June 30, 1999, we had $3.7 million of cash and cash equivalents. To date, 
IMSI has received $1.3 million in tax refunds in the first quarter of fiscal    
year 2000 and $2.1 million in the second quarter of fiscal year 2000. We        
anticipate that we will receive an additional $300,000 in income tax refunds in 
fiscal year 2000. IMSI believes that the cash derived from the sale or license  
of non-core product lines and its tax refunds will improve its working capital  
position significantly. If our restructuring efforts succeed in improving our   
financial performance, management believes it will be able to obtain the        
additional financing our working capital needs require. There can be no         
assurance that we will be successful in our efforts.                            

Our forecast period of time through which our financial resources will be       
adequate to support our working capital and capital expenditure requirements is 
a forward-looking statement that involves risks and uncertainties, and actual   
results could vary. The factors described in "Risk Factors" will affect our     
future capital requirements and the adequacy of our available funds. No         
assurance can be given that needed financing will be available on terms         
attractive to us, or at all. Furthermore, any additional equity financing, if   
available, may be dilutive to shareholders, and debt financing, if available,   
may involve restrictive covenants. If IMSI fails to raise capital when needed,  
then lack of capital will have a material adverse effect on IMSI's business,    
operating results, financial condition and ability to continue as a going       
concern.                                                                        

Although IMSI had no material commitments for capital expenditures, as of June  
30, 1999 it has long term debt obligations of $6.6 million, as well as          
obligations totaling $1.8 million and $6.0 million due over the next five years 
under capital and                                                               

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operating leases, respectively.                                                 

IMSI's international revenues are generally denominated in foreign currencies of
IMSI's subsidiaries. Consequently, a decrease in the value of a relevant foreign
currency in relation to the U.S. dollar can adversely affect IMSI's net         
revenues. Further, a decrease in the value of a relevant foreign currency in    
relation to the U.S. dollar occurring after sale and before receipt of payment  
by IMSI would have an adverse effect on IMSI's results of operations. IMSI had a
$235,000 loss, a $153,000 loss, and a $34,000 gain related to foreign currency  
transactions in fiscal 1999, 1998 and 1997, respectively.                       

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FUTURE PERFORMANCE AND ADDITIONAL RISK FACTORS                                  

PERFORMANCE AND OPERATING RESULTS CONTINUE TO DECLINE DURING FISCAL 1998 AND    
1999. IMSI has experienced, and may continue to experience, deteriorating       
operating results due to a variety of factors. The following table shows IMSI's 
operating income (loss) and net income (loss) for the periods presented (in     
thousands), as restated.                                                        

                                                                [Download Table]

                              FISCAL 1999              FISCAL 1998 (RESTATED)  
                       --------------------------    --------------------------
QUARTER ENDING           OPERATING     NET INCOME      OPERATING     NET INCOME
                       INCOME (LOSS)     (LOSS)      INCOME (LOSS)     (LOSS)  
                       -------------   ----------    -------------   ----------
                                                                               
September 30             $ (1,719)      $ (1,106)      $(4,668)       $(3,114) 
December 31                (6,033)        (4,274)         2,140          1,220 
March 31                   (6,231)       (10,739)         1,894          1,000 
June 30                    (9,907)       (10,847)           720            524 
                         --------       --------       --------       -------- 
                         $(23,890)      $(26,966)      $     86       $   (370)
                         ========       ========       ========       ======== 

We experienced growth during fiscal 1997. However, starting in fiscal year 1998,
our operating results began to steadily worsen. For the quarter ended September 
30, 1997, IMSI reported a net loss of approximately $3.1 million, reflecting in 
part, charges related to the write-off of in-process research and development,  
amounting to approximately $6.4 million from several product acquisition and    
licensing transactions. Although we were profitable for the remaining quarters  
of fiscal year 1998, the amount of profits declined after the quarter ending    
December 31, 1997. IMSI reported steadily worsening losses during fiscal year   
1999.                                                                           

Beginning in the quarter ended March 31, 1999, we recorded valuation allowances 
against our deferred tax assets to reduce our accumulated tax benefit to the    
amount anticipated to be realized. This valuation allowance caused the net loss 
for this period to be greater than its operating losses. During fiscal 1999, we 
recorded an extraordinary expense of $959,000 related to the issuance of our    
common stock at a discount for the repayment of debt and for settlement of other
contractual obligations.                                                        

Factors that may cause fluctuations of, or a continuing decline in, operating   
results in the future include, but are not limited to,                          

  -   market acceptance of our products or those of our competitors;

   -   the timing of introductions of new products and new versions of
existing products;                                      

  -   expenses relating to the development and promotion of such new
products and new version introductions;                 

-   product returns and reserves;                               

-   intense price competition and numerous end-user rebates;    

-   projected and actual changes in platforms and technologies; 

       -   the accuracy of forecasts of, and fluctuations in, consumer demand;

-   the extent of third party royalty payments;                 

-   the rate of growth of the consumer software market;         

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-   fluctuations in foreign exchange rates;                     

    -   the timing of orders or order cancellation from major customers;

-   changes or disruptions in the consumer software distribution
channels;                                               

 -   the acquisition and successful integration of new businesses,
products and technologies;                              

      -   the timing of any write-offs in connection with such acquisitions;
and                                                     

-   economic conditions, both generally and within our industry.

We may pay fees in advance or guarantee royalties, which may be 
substantial, to obtain software licenses from third parties. Because of these   
and other factors, our operating results in any given period are difficult to   
predict. As occurred in fiscal year 1999, any significant shortfall in revenues 
and earnings from the levels expected by securities analysts and stockholders   
could result in a substantial decline in the market price of our common stock.  

Although we suffered a general decline in revenues during fiscal year 1999,     
historically our business has been affected somewhat by seasonal trends,        
including higher net revenues in the fiscal quarter ended December 31 as a      
result of strong calendar year-end holiday purchases by end users of our        
products. As a result, we may experience lower net revenues in the fiscal       
quarters ended March 31, June 30 and September 30. Seasonality of the European, 
Asia/Pacific and other international markets could also impact our operating    
results and financial condition in a particular quarter because international   
sales are a significant portion of net revenues.                                

Products are generally shipped as orders are received. Therefore, we have       
historically operated with little order backlog. Sales and operating results for
any quarter have depended on the volume and timing of orders received during    
that quarter, which cannot be predicted with any degree of certainty. A         
significant portion of our operating expenses are relatively fixed. Planned     
expenditures are based on sales forecasts. If revenue levels are below          
expectations, operating results are likely to be materially adversely affected. 
Without growth in revenues in any particular quarter, our fixed operating       
expenses could cause net income to decline when compared to the same period in  
the previous year or the immediately preceding quarter. In such event, the      
market price of our common stock might be materially adversely affected. Due to 
all of the foregoing factors, IMSI believes that quarter to quarter comparisons 
of its operating results are not necessarily meaningful and should not be relied
upon as indications of future performance.                                      

OUR RELATIVELY SMALL SIZE IN AN INTENSELY COMPETITIVE, RAPIDLY CHANGING         
MARKETPLACE, OUR LESS RECOGNIZED BRAND COMPARED TO LARGER AND BETTER RECOGNIZED 
COMPETITORS, CREATES THE RISK THAT WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY IN
THE FUTURE. We face competition from a large number of sources, and from larger 
competitors. Many of our current and potential competitors have larger technical
staffs, more established and larger marketing and sales organizations,          
significantly greater financial resources, greater name recognition, and better 
access to consumers than we do.                                                 

       Our relatively small size could adversely affect our ability to compete
with larger companies, for sales to dealers, distributors, and retail outlets,  
and to acquire products from third parties, who may desire to have their        
products sold or published by larger entities. Larger companies may be more     
successful in obtaining shelf space in retail outlets, and in competing for     
sales to dealers and distributors.                                              

Technological change constantly creates new opportunities, and can quickly      
render existing technologies less valuable. Change requires us to enhance our   
existing products and to offer new products on a timely basis. We have limited  
resources and therefore must restrict our product development efforts to a      
relatively small number of projects.                                            

We compete with other software companies to acquire products or companies, and  
to publish software developed by third parties. Competition to publish software 
developed by third parties is primarily on the basis of brand-name reputation,  
the terms offered to software developers, and the ability to market new         
products.                                                                       

The PC productivity software market is highly competitive. Important factors in 
the market include product features and functionality, quality and performance, 
reliability, brand recognition, ease of understanding and operation, rapid      
changes in                                                                      

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technology, advertising and dealer merchandising, access to distribution        
channels and retail shelf space, marketing, pricing and availability and quality
of support services.                                                            

        Each of our major products competes with products from major independent
software vendors:                                                               

    -   TurboCAD competes with AutoCAD from Autodesk Inc. and IntelliCAD
       from Visio Corporation. Microsoft, the world's largest software
      company, announced on September 15, 1999 that it would acquire
Visio.                                                  

        -   FloorPlan competes with 3D Architect from Broderbund Software, Inc.,
       Home Architect from Cendant Corporation, Home Design Suite from
         Autodesk, Dream Home Designer from Alpha Software Corporation and
Home Design 3D from Expert Software, Inc.               

     -   MasterClips competes with ClickArt from Broderbund Software Inc.,
            MegaGallery from Corel Corporation, Holy Cow! from Macmillan Digital
Publishing USA and Art Explosion from Nova Development. 

-   TurboProject competes with Microsoft Project.               

 -   WinDelete competes with Uninstaller from CyberMedia, Inc. and
    CleanSweep and Norton Uninstaller from Symantec Corporation.

   -   Net Accelerator competes with SurfExpress from Connectix, Speed
Surfer from Kissco and Net.jet from Peak Technologies.  

Our strategy has been to develop productivity and utility applications that do  
not compete directly with applications, or features included in operating       
systems and applications suites, offered by major software vendors such as      
Microsoft, Lotus Development Corp. and Corel. However, such software vendors may
in the future choose to expand the scope and functionality of their products to 
support some or all of the features currently offered by certain of our         
products, which could adversely affect demand for our products.                 

The software industry has limited barriers to entry. The availability of        
personal computers with continuously expanding capabilities, at progressively   
lower prices, contributes to the ease of market entry. We believe that          
competition in the industry will continue to intensify as a number of software  
companies extend their product lines into additional product categories and as  
additional competitors enter the market.                                        

Use of the Internet reduces barriers to entry in the software market. Software  
developers distribute their products online without relying on access to        
traditional distribution networks. Because of the proliferation of competing    
software developers, an increasingly large number of products compete for       
limited shelf space.                                                            

There can be no assurance that our products will achieve or sustain market      
acceptance, and generate significant levels of revenues in subsequent quarters, 
or that we will have the resources required to compete successfully in the      
future.                                                                         

UNPRECEDENTED PRICING PRESSURE, AND NUMEROUS END-USER REBATE PROGRAMS, CONTINUE 
TO IMPACT OUR FINANCIAL RESULTS. The markets for our products are characterized 
by significant price competition. We expect to continue to face increasing      
pricing pressures. In fiscal year 1999, IMSI faced unprecedented price          
pressures. In response to such competitive pressures, IMSI significantly reduced
the price of several of its products and offered numerous end-user rebate       
programs. There can be no assurance that product prices will not continue to    
decline or that IMSI will not respond to such declines with additional product  
price reductions and rebates. Despite a significant reduction in the prices of  
one or more of our products, there can be no assurance that such price          
reductions will result in an increase in unit sales volume. Prolonged price     
competition has had a material adverse effect on our operating results,         
including reduced profit margins and loss of market share, and is likely to     
continue to do so in the future.                                                

WE HAVE REDUCED AVAILABILITY OF BANK FINANCING, CREATING A RISK OF LACK OF      
LIQUIDITY. As discussed under "Liquidity and Capital Resources", we are in      
default under our line of credit agreement with Union Bank of California. IMSI  
currently has no borrowing availability under this or any other credit facility.
No assurance can be given that we will be successful in obtaining               

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new sources of credit in the future. Our reduced availability of bank financing 
could have a material adverse effect on management's ability to execute its     
operating plans.                                                                

WE NEED TO RAISE ADDITIONAL FUNDS. ADDITIONAL DILUTION, OR SENIOR RIGHTS,       
PREFERENCES OR PRIVILEGES, MAY RESULT FROM ADDITIONAL EQUITY OR CONVERTIBLE DEBT
ISSUES. We anticipate that available funds and cash flows generated from        
operations will not be sufficient to meet our needs for working capital and     
capital expenditures for the next 12 months. Therefore, we will need to raise   
significant new working capital in the near future, to support operations and to
fund our plans. Our plans include Internet expansion, developing new or enhanced
products, and responding to competitors.                                        

If we raise funds, we may issue equity or convertible debt, and we intend to    
sell or license product lines as part of our restructuring. If we issue equity  
or convertible debt, the percentage of ownership of current stockholders will be
reduced. Stockholders will experience additional dilution, and such securities  
may have rights, preferences or privileges senior to those of the holders of our
common stock. We may also raise funds by selling assets.                        

We don't know whether additional financing will be available on terms favorable 
to us, or at all. If adequate funds are not available, or are not available on  
acceptable terms, or if we are not able to sell assets, we may not be able to   
meet existing obligations, fund our Internet plans, develop or enhance services 
or products, or respond to competitive pressures. Lack of funds could have a    
material adverse effect on our business, operating results and financial        
condition. See "Liquidity and Capital Resources."                               

POTENTIAL PENALTIES FOR AGREEMENTS RELATING TO REGISTRATION OF SHARES. We agreed
to file one or more registration statements covering the resale of the shares   
described in Notes 6 and 7 to the consolidated financial statements, including  
shares issued or issuable under agreements with The Learning Company (now       
Mattel, Inc.), Capital Ventures International, BayStar Capital, Americ Disc and 
Homestyles. We have filed registration statements pursuant to these agreements. 
The SEC Division of Corporate Finance has had, and continues to have, comments  
related to the registration statements. We plan to continue to work with the SEC
to resolve those comments. However, as a result of delays in the effectiveness  
of the registration statements, we may be liable for financial penalties or     
other payments under the terms of the agreements. The aggregate amount of one or
more of these penalties or other payments could be a material amount. IMSI is   
negotiating with some of these entities, including negotiations for the issuance
of additional shares of common stock, but there is no guarantee that such       
negotiations will be successful. See Notes 6 and 7 to the consolidated financial
statements.                                                                     

OUR ABILITY TO CONTINUE AS A GOING CONCERN DEPENDS ON GENERATING CASH FLOW TO   
MEET OBLIGATIONS, REPAYING OR REFINANCING BANK DEBT, RAISING FUNDS, AND         
IMPLEMENTING THE RESTRUCTURING PLAN SUCCESSFULLY. Because of our need for funds,
and our substantial losses during fiscal 1999, we instituted measures intended  
to reduce costs, improve operations and cash flows. The actions included        
substantial personnel reductions and cost cutting programs. IMSI may take       
further measures, including further personnel reductions, during fiscal 2000 and
thereafter.                                                                     

Our continuation as a going concern is dependent upon our ability to obtain     
additional financing or refinancing, to generate sufficient cash flow to meet   
our obligations on a timely basis, to implement our restructuring plans, and    
ultimately to achieve successful operations. The restructuring plan calls for a 
divestiture of non-core products and a concentration on the core graphics and   
precision design product lines.                                                 

We plan to raise funds through product spin-offs and product rights sales, as   
part of the restructuring. In August 1999, IMSI sold the Easy Language product  
to Lernout & Hauspie for $1.7 million. Additionally, we received an income tax  
refund of approximately $3.4 million after June 30, 1999. We expect to receive  
additional tax refunds of approximately $300,000 during fiscal year 2000.       

OUR SMALL SIZE AND LIMITED RESOURCES, IN A MARKET WITH RAPIDLY CHANGING         
TECHNOLOGY, CREATES THE RISK OF LACK OF CUSTOMER ACCEPTANCE OF OUR PRODUCTS,    
BECAUSE OF POTENTIAL FAILURE TO UPGRADE EXISTING PRODUCTS, OR POTENTIAL FAILURE 
TO DEVELOP NEW PRODUCTS. The markets for our products have rapidly changing     
technology. New products are introduced frequently. New and emerging            
technologies create uncertainty. Customer requirements and preferences change   
frequently. Product obsolescence and advances in computer software and hardware 
require us to develop new products and to enhance our products to remain        
competitive.                                                                    

    The pace of change is accelerating in both hardware and software. PC
hardware steadily advances in power and                                         

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function. Software is increasingly complex and flexible. Software development   
costs increase, and development takes longer.                                   

Despite testing, errors or "bugs" may still be found in new software releases.  
Delays in shipping new products or upgrades, as well as the discovery of errors 
or "bugs" after release, may result in adverse publicity, customer              
dissatisfaction and delay or loss of product revenues. Errors or "bugs" could   
require significant design modification or corrective releases, and could result
in an increase in product returns. We cannot provide assurance that future      
products and upgrades will be released in a timely manner or that they will     
receive market acceptance, if and when released.                                

New products, capabilities or technologies may replace or shorten the life      
cycles of our existing products. The announcement of new products by us or by   
our competitors may cause customers to defer purchasing our existing products,  
or cause distributors to return products to us. Rapid changes in the market, and
more new products available to consumers, increase the degree of consumer       
acceptance risk for our products.                                               

There is a risk of failure in our product development efforts. We may not have  
the resources required to respond to technological changes or to compete        
successfully in the future. Delays or difficulties associated with new product  
introductions or upgrades could have a material adverse effect on our business, 
operating results and financial condition.                                      

Because software development costs increase, and software market introduction   
costs increase, the financial risks for new product development will increase.  
The risks of delays in the introduction of such new products will also increase.
If we fail to develop or acquire new products in a timely manner, as revenues   
decrease from products reaching the end of their natural life cycles, our       
operating results will be adversely affected.                                   

Because of our small size and capital resources relative to some of our         
competitors, our ability to avoid technological obsolescence through acquisition
or development of new products or upgrades of existing products may be more     
limited than companies with more funds.                                         

COMPETITION WITHIN DISTRIBUTION CHANNELS, PRODUCT RETURNS OR PRICE PROTECTION,  
OR VARIANCE FROM RETURN ESTIMATES, MAY ADVERSELY AFFECT OUR BUSINESS.           
Competition for distribution channels, and for retail shelf space, is intense.  
We have no long-term distribution agreements with any reseller. We cannot       
provide any assurance that our distributors and retailers will continue to      
purchase our products, or provide shelf space and promotional support. We cannot
provide any assurance that the Internet will be an effective new distribution   
channel.                                                                        

Our distributors and retailers carry competing product lines. There is          
substantial pressure from distributors and retailers to obtain marketing and    
promotional funds, for price discounts and favorable return policies in         
connection with access to shelf space, and for in-store promotions and sales of 
products, which has an adverse impact on our net revenues and profitability.    
Consolidation among the companies within our distribution channels has reduced  
the number of available distributors, which has increased the competition for   
shelf-space. We cannot provide any assurance that these pressures will not      
continue or increase.                                                           

Intense competition and continuing uncertainties characterize the distribution  
channels through which consumer software products are sold. New resellers have  
emerged, such as general mass merchandisers and superstores. New channels have  
developed, such as the Internet. Large customers, such as retail chains and     
corporate users, seek to purchase directly from software developers, instead of 
purchasing from distributors or resellers. Although IMSI is attempting to take  
advantage of these new distribution channels, no assurance can be given that    
these efforts will be successful. Consolidations, and financial difficulties of 
some distributors and resellers, are additional uncertainties.                  

We allow distributors to return products in exchange for new products, or for   
credit towards future purchases, as part of stock balancing programs. We provide
price protection to our distributors when we reduce the price of our products.  
End users may return products through dealers and distributors within a         
reasonable period from the date of purchase for a full refund. Retailers may    
return older versions of products. These practices are standard in the software 
industry. IMSI makes these allowances to remain competitive with other software 
manufacturers. There are shipping, handling and refurbishment costs associated  
with receiving returns and processing them for resale.                          

IMSI's high rate of returns during fiscal 1999 contributed to our negative      
financial results. We may experience significant product returns in future      
periods due to product update cycles, new product releases, software quality,   
and introduction of new competitive products by other companies.                

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The announcement of a new product or product version (an upgrade) requires IMSI 
to clear the channel of distribution of the older version of the product being  
replaced by the upgrade. Price protection and product returns may occur to clear
the channel. Price protection primarily takes place when inventory at a         
particular reseller is not sufficient to offset the cost of returning product to
IMSI.                                                                           

Large distributors may attempt to exert their influence on us in order to alter 
terms of trade. Large retailers may exert similar influences. Such tactics, if  
resisted by us, could trigger termination. In the event of termination, the     
distributor or retailer will generally be entitled to full credit for all       
products returned to us in resaleable condition. Returns may cause shipping,    
handling and processing costs, and may cause unplanned surges in inventory      
levels, which we may be unable to liquidate at normal selling prices.           

We attempt to monitor channel inventories and provide appropriate reserves.     
Actual product returns may differ from our reserve estimates. Such differences  
could be material to our operating results and financial condition.             

We manufacture our products based upon estimated future sales, and accordingly, 
if the level of actual orders of products falls short of management's estimates,
inventory levels could be excessive, which could add to inventory write-offs and
have an adverse impact on our business, operating results and financial         
condition.                                                                      

BECAUSE A SUBSTANTIAL AMOUNT OF OUR REVENUE DEPENDS ON A FEW DISTRIBUTORS AND   
RETAILERS, AN ADVERSE CHANGE IN OUR RELATIONSHIP WITH ANY OF THESE FEW          
DISTRIBUTORS AND RETAILERS COULD MATERIALLY AFFECT US. Sales to a limited number
of distributors and retailers are, and are expected to continue to be, a        
substantial amount of our revenues. Sales to our two largest distributors       
accounted for approximately 27% of net revenues during fiscal year 1999, and 33%
in fiscal 1998.                                                                 

Arrangements with our distributors and retailers may generally be terminated at 
any time by the distributor or retailer. On September 27, 1999, one of our      
primary distributors, Tech Data, terminated its agreement with us. Our largest  
retailer, CompUSA, which was served by Tech Data, continues to carry our        
products and is now served by an alternative distributor. We expect other       
retailers that were served by Tech Data to switch to alternative distributors.  

If we are unable to collect receivables from any of our largest customers, then 
our operating results and financial condition could be materially adversely     
affected. The loss of, or reduction in sales to, or any other adverse change in 
our relationship with any of our principal distributors or retailers, or        
principal accounts sold through such distributors, could materially adversely   
affect our operating results and financial condition.                           

Sales of our products are typically made on credit, with terms that vary        
depending upon the customer and the nature of the product. Our distributors and 
retailers compete in a volatile industry. They are subject to the risk of       
bankruptcy or other business failure. Some distributors and retailers have      
experienced difficulties. IMSI does carry receivables insurance on approximately
15 of its largest customers. Although we maintain a reserve for uncollectible   
receivables, we cannot provide any assurance that our reserve will prove to be  
sufficient or that the difficulties for these or additional distributors and    
retailers will not continue, which could have an adverse effect on our business,
operating results and financial condition.                                      

OUR INTELLECTUAL PROPERTY MAY BE VULNERABLE TO UNAUTHORIZED USE, AND THE RISKS  
OF INFRINGEMENT OR LAWSUITS. Our ability to compete effectively depends in part 
on our ability to develop and maintain proprietary aspects of our technology. To
protect our technology, we rely on a combination of copyrights, trademarks,     
trade secret laws, restrictions on disclosure and transferring title, and other 
methods. We hold no patents. Copyright and trade secret laws afford limited     
protection. IMSI also generally enters into confidentiality or license          
agreements with employees and consultants. We generally control access to and   
distribution of documentation and other proprietary information.                

Despite precautions, it may be possible for a third party to copy or otherwise  
obtain and use our products or technologies without authorization, or to develop
similar technologies independently. We do not include in our products any       
mechanism to prevent or inhibit unauthorized copying. Policing unauthorized use 
of our technology is difficult. We are unable to determine the extent to which  
software piracy of our products exists. Software piracy is a persistent problem.
If a significant amount of unauthorized copying of our products were to occur,  
our business, operating results and financial condition could be adversely      
affected.                                                                       

In addition, effective copyright, trademark and trade secret protection may be  
unavailable or limited in certain foreign countries.                            

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The global nature of the Internet makes it virtually impossible to control the  
ultimate destination of IMSI's products. There can be no assurance that the     
steps we take will prevent misappropriation or infringement of IMSI's           
technology. Litigation may be necessary to protect our trade secrets or to      
determine the validity and scope of the proprietary rights of others. Such      
litigation could result in substantial costs and diversion of resources that    
could have a material adverse effect on our business, operating results and     
financial condition.                                                            

Software developers and publishers are increasingly subject to infringement     
claims. From time to time, we have received, and may receive in the future,     
notice of claims of infringement of other parties' proprietary rights. We       
investigate claims and respond, as we deem appropriate. We cannot provide any   
assurance that infringement or invalidity claims, or claims for indemnification 
resulting from infringement claims, will not be asserted or prosecuted against  
us.                                                                             

Defending such claims is expensive and diverts resources. If any valid claims or
actions were asserted against us, we might seek to obtain a license under a     
third party's intellectual property rights. We cannot provide any assurance,    
however, that under such circumstances a license would be available on          
commercially reasonable terms, or at all.                                       

We provide our products to end users under non-exclusive licenses, which        
generally are non-transferable and have a perpetual term. We make source code   
available for certain of our products. Providing source code increases the      
likelihood of misappropriation or other misuse of our intellectual property. We 
license all of our products pursuant to shrink-wrap licenses, or click-wrap     
licenses on the Internet, that are not signed by licensees and therefore may be 
unenforceable under the laws of certain jurisdictions.                          

OUR DEPENDENCE ON THIRD PARTY DEVELOPERS COULD HAVE A MATERIAL ADVERSE EFFECT ON
OUR BUSINESS, BECAUSE OF THE RISK OF LOSS OF LICENSES TO SOFTWARE DEVELOPED BY  
THIRD PARTIES, OR LOSS OF SUPPORT FOR THOSE LICENSES. Our business strategy has 
historically depended in part on our relationships with third-party developers, 
who provide products that expand the functionality of our software. Many of     
these licenses require payment of royalties based on the number of products     
sold. In other cases, we may be required to pay substantial up-front royalties  
and development fees to software developers before the commercial viability of  
their products has been tested.                                                 

If such products fail to achieve success, then we could have substantial charges
against our earnings. Licenses from third parties for several of our products   
have limited terms and are non-exclusive. We cannot provide any assurance that  
these third-party software licenses for current products or for new products    
will continue to be available on commercially reasonable terms, or that the     
software will be appropriately supported, maintained or enhanced by the         
licensors.                                                                      

If we were to lose licenses for software developed by third parties, then we    
would have increased costs and lost sales. Product shipments would be delayed or
reduced until equivalent software could be developed, which would have a        
material adverse effect on our business, operating results and financial        
condition.                                                                      

Talented development personnel are in high demand. We cannot provide any        
assurance that independent developers will be able to provide development       
support to us in the future. If sales of software utilizing third-party         
technology increase disproportionately, operating income as a percent of revenue
may be below historical levels due to third-party royalty obligations.          

OUR USE OF DEVELOPMENT TEAMS OUTSIDE THE UNITED STATES INVOLVES RISK, INCLUDING 
CONTROL AND COORDINATION RISKS. We program code and quality test most of our    
products outside the United States. We use contract programmers in development  
centers in Russia, Ukraine, India, and other countries. The cost of programmers 
outside of the United States is lower than the cost of programmers in the United
States.                                                                         

Relying on foreign contractors presents a number of risks. Managing, overseeing 
and controlling the programming process is more difficult because of the        
distance between our management and the contractors. Our contractors have       
different cultures and languages from our managers, making coordination more    
difficult.                                                                      

Our agreements provide that we own the source code developed by the programmers.
But the location of the source code outside the United States makes it more     
difficult for us to ensure that access to our source code is protected. If we   
lose the services of these programmers, then our business, operating results and
financial condition would be materially adversely affected. We probably could   
find other programmers in the United States or in other countries, but the costs
could significantly increase our expenses.                                      

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ACQUIRING PRODUCTS AND TECHNOLOGIES CREATES THE RISK OF FAILURE TO INTEGRATE AND
MANAGE THE ACQUIRED BUSINESS. IMSI has in the past acquired, and expects to     
continue from time to time in the future to acquire, businesses, technologies,  
services, product lines and/or content databases that are complementary to      
IMSI's business in order to broaden its product lines and geographic sales      
channels. For example, in October 1998, IMSI acquired all the outstanding common
stock of Zedcor, Inc., an Internet provider of art and visual content, which    
maintains the ArtToday.com web site, at www.arttoday.com..                      

We may face in the future increased competition for acquisition opportunities,  
which may inhibit our ability to complete acquisitions, and increase the costs  
of completing acquisitions. Further, there can be no assurance that IMSI will be
successful in identifying suitable acquisition opportunities in the future, or  
that IMSI will be able to successfully integrate acquired technologies,         
services, product lines or businesses.                                          

      Acquisitions entail a number of risks, including managing a larger and
more geographically disparate business; diversion of management attention;      
successfully completing development of and marketing acquired products to       
markets with which we may not be familiar; integrating the acquired products    
into our product lines; coordinating diverse operating structures, policies and 
practices; and integrating the employees of the acquired companies into our     
organization and culture.                                                       

       If we fail to integrate and manage acquired businesses successfully, to
retain our employees, and to successfully address new markets associated with   
such acquired businesses, then our business, operating results and financial    
condition would be materially adversely effected. Some of our acquisitions      
involved issuances of equity securities, and resulted in various charges and    
expenses that have adversely affected, and will continue to adversely affect,   
our operating results and financial condition.                                  

 Future acquisitions may also result in potential charges that may
adversely affect our earnings and may involve the issuance of shares of our     
stock to owners of acquired businesses, resulting in dilution in the percentage 
of our stock owned by other stockholders.                                       

        We believe that our future growth will depend, in part, upon the success
of our past and possible future acquisitions. We cannot provide assurances that 
the anticipated benefits of business combinations and product acquisitions will 
be realized. We cannot provide assurances that we will be able successfully to  
integrate acquired technologies, services, product lines or businesses.         

OUR INTERNET STRATEGY CREATES ADDITIONAL COSTS AND INTRODUCES NEW UNCERTAINTIES 
WITH NO ASSURANCE OF RESULTS. Our marketplace now has a higher emphasis on the  
Internet, on Internet-related services, and on content tailored for the         
Internet. We plan to take advantage of opportunities created by the Internet and
online networks. During fiscal year 1999, we incurred, and expect in the future 
to incur, significant costs for our Internet infrastructure. The costs include  
additions to hardware, increases in Internet personnel, acquisitions and cross  
licenses to drive traffic to our web sites, and a transition to an Internet     
sales and marketing strategy.                                                   

We cannot provide any assurance that our Internet strategy will be successful,  
or that the costs and investments in this area will provide adequate, or any,   
results. Delivery of software using the Internet will necessitate some changes  
in our business. These changes include addressing operational challenges such as
improving download time for pictures, images and programs, ensuring proper      
regulation of content quality and developing sophisticated security for         
transmitting payments. If we fail to adapt to and utilize such technologies and 
media successfully and in a timely manner, then our competitive position and our
financial results could be materially and adversely affected.                   

WE FACE RISKS, INCLUDING CURRENCY RISKS, ASSOCIATED WITH OUR INTERNATIONAL      
OPERATIONS. International sales represented 33% of IMSI's revenues during fiscal
1999 and 30% in fiscal 1998. Our international sales are denominated in foreign 
currencies. We expect that international sales will continue to account for a   
significant portion of our revenues in the future. If a relevant foreign        
currency decreases in relation to the U.S. dollar, monetary assets held in      
foreign currency can decrease in dollar value as a result. We do not hedge      
foreign currency risk.                                                          

    Difficulties managing foreign accounts receivable, longer collection
cycles from foreign customers, repatriation restrictions or other restrictions  
on foreign currencies, and tariffs, may affect our international results. Other 
risks occur in international operations, including difficulties managing foreign
operations, the timely and successful launch of foreign products, government    
regulations, import and export restrictions, changes in international tax laws, 
political instability and, in certain jurisdictions, reduced protection for our 
intellectual property rights.                                                   

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       We commit significant time, and development resources, to localizing or
customizing certain of our products for selected international markets. We      
develop and support international sales channels. Our efforts to develop        
products for targeted international markets, or to develop additional           
international sales and support channels, can entail considerable expense, and  
may not be successful. If our effort to target a specific market fails, the     
failure could have a material adverse effect on our business, operating results 
and financial condition.                                                        

WE MAY NOT BE ABLE TO ATTRACT AND RETAIN KEY PERSONNEL. Our success depends to a
significant extent on the performance and continued service of our senior       
management and key employees. We maintain no key person insurance. We do not    
have employment agreements or non-competition agreements with all of our key    
employees. Competition for highly skilled employees with technical, Internet,   
management, marketing, sales, product development and other specialized training
is intense, and the supply is limited.                                          

The strong demand for these skills in the United States continued during fiscal 
2000. We cannot provide any assurance that we will be successful in attracting, 
motivating and retaining such personnel. Our significant losses in fiscal 1999  
and the decline in our stock price are additional risks that have contributed to
high staff turnover in areas such as accounting and research and development.   
This turnover has contributed to disruption in continuity in our knowledge base 
and may continue to do so in the future.                                        

Our board of directors and management experienced changes in fiscal 1999. As    
previously reported in a press release and in our quarterly Report on Form 10-Q 
for the period ended March 31, 1999, IMSI announced the appointment of Costa    
John, our Chief Financial Officer, as our Chief Executive Officer. Mr. John     
remains the Chief Financial Officer, and became a member of the Board of        
Directors. Martin Sacks, formerly Chief Executive Officer and President of IMSI,
resigned as CEO and President but remains a director and was elected Chairman of
the Board. As part of the restructuring of the management team and the Board,   
Geoffrey Koblick, formerly Chief Operating Officer and Chairman, retired from   
both positions, and as a director, but continues to be available as an advisor  
to IMSI. Robert Mayer, who continues as executive Vice President of Worldwide   
Sales and Marketing, has resigned as a director.                                

We have historically experienced difficulty in attracting highly qualified      
programmers and software engineers in the U.S. We cannot provide any assurance  
that we will be successful in attracting, motivating and retaining such         
personnel. We cannot provide any assurance that one or more key employees will  
not leave us or compete against us. If we fail to attract qualified employees or
to retain the services of key personnel, then our business, operating results   
and financial condition could be materially adversely affected.                 

DIRECTORS AND OFFICERS HAVE A SIGNIFICANT INFLUENCE OVER OUR COMPANY, BECAUSE   
THEY BENEFICIALLY OWN A SIGNIFICANT PERCENTAGE OF OUR SHARES. As of June 30,    
1999, the present directors and executive officers of IMSI and their respective 
affiliates, in the aggregate, beneficially own approximately 15% of the         
outstanding common stock. As a result, these shareholders may possess influence 
over IMSI. Such influence may have the effect of delaying or preventing a change
in control of IMSI, impeding a merger, consolidation, takeover or other business
combination involving IMSI or discouraging a potential acquirer from making a   
tender offer or otherwise attempting to obtain control of IMSI.                 

OUR RELIANCE ON OUTSOURCING COULD MATERIALLY ADVERSELY AFFECT OUR OPERATING     
RESULTS BECAUSE OF LACK OF SUPPLY. We outsource most of the production of our   
products. Production primarily involves duplication of media and printing user  
manuals and packaging materials. In July 1999, IMSI and DisCopyLabs ("DCL")     
finalized an agreement under which DCL will gradually assume all of IMSI's      
fulfillment, warehousing, and shipping functions. Due to this change, IMSI will 
be closing its primary warehouse in Vacaville, California. We intend to continue
outsourcing in the future, as long as it is economical to do so. We believe that
we have adequate alternative suppliers of outsourcing services. But the loss of 
a supplier, especially DCL, or our inability to obtain contract services, could 
materially adversely affect our operating results.                              

While DCL holds some inventory for shipment, IMSI has not transferred title to  
any assets to DCL. The transition of product inventory and information systems  
to DCL was still in the implementation phase at September 30, 1999. Systems     
integration risks and inventory and fulfillment risks may affect our ability to 
ship products effectively and cause costly delays or cancellation of customer   
orders. Our divestiture of non-core products may reduce unit sales to the point 
that outsourced costs of production may increase.                               

OUR COMMON STOCK PRICE IS HIGHLY VOLATILE AND IS SUBJECT TO WIDE
FLUCTUATIONS AND MARKET RISK. The market price of our common stock is highly    
volatile. Our stock is subject to wide fluctuations in response to factors such 
as:                                                                             

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-   actual or anticipated variations in our operating results,  

-   announcements of technological innovations,                 

 -   new products or services introduced by us or our competitors,

-   changes in financial estimates by securities analysts,      

-   conditions and trends in the software market,               

-   general market conditions, and                              

      -   other factors, such as recessions, interest rates or international
currency fluctuations.                                  

Historically, the trading volume of our common stock has been very small. The   
market for our common stock has been materially less liquid than that of most   
other publicly traded companies. Small trading volume and a less liquid market  
may amplify price changes in our stock. If a significant amount of our common   
stock is sold, then our stock price could decline significantly.                

The NASDAQ Stock Market, where our stock is traded, experiences extreme price   
and volume fluctuations that have particularly affected the market prices for   
stock in technology companies. Price fluctuations in technology stock prices are
often unrelated or disproportionate to the operating performance of technology  
companies. The trading prices of many technology companies' stocks are at or    
near historical highs and reflect price to earnings ratios substantially above  
historical levels.                                                              

We cannot provide any assurance that these trading prices and price to earnings 
ratios will be sustained. The market price of our common stock may be adversely 
affected by these broad market factors.                                         

OUR REGISTRATION OF A SIGNIFICANT NUMBER OF SHARES FOR POSSIBLE PUBLIC RESALE   
COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK. On June 8, 1999, we
filed a registration statement covering the possible resale from time to time of
approximately 1,100,857 outstanding shares of common stock held by, and         
approximately 1,223,966 shares that may be issued in the future to, the selling 
stockholders named in that registration statement. On June 25, 1999, we filed   
another registration statement covering possible resale of approximately 85,677 
outstanding shares held by the selling stockholders, 263,000 shares that may be 
issued if warrants are exercised by the selling stockholders, 658,362 shares    
issuable on conversion of a note held by the selling stockholders, and 490,151  
shares issuable because of price adjustments in agreements with the selling     
stockholders named in that registration statement. On October 20, 1999 we had   
7,024,409 shares outstanding. The total shares covered by those two registration
statements, 3,822,013 shares, represent about 54% of the currently outstanding  
shares. Sales of the shares covered by those registration statements could      
adversely affect the market price of our common stock.                          

YEAR 2000 ISSUES COULD AFFECT OUR BUSINESS IF OUR PRODUCTS, OR THE SYSTEMS WE   
USE, OR THE SYSTEMS OUR SUPPLIERS USE FAIL BECAUSE THEY ARE NOT YEAR 2000       
COMPLIANT. Software, embedded processors, or computer systems may fail if they  
do not accurately recognize the Year 2000. We recognize the need to ensure that 
our operations will not be adversely impacted by Year 2000 software failures.   
Software failures due to processing errors potentially arising from calculations
using the Year 2000 date are a known risk. We established procedures for        
evaluating and managing the risks and costs associated with this problem. As    
part of the general upgrade of our information systems, we are putting in place 
systems that will be Year 2000 compliant.                                       

We have initiated a Year 2000 Compliance Plan that addresses three types of     
systems that must be Year 2000 compliant.                                       

Products: Our software products have been undergoing Year 2000 Compliance       
testing since January 1998. All current versions of our products are Year 2000  
compliant. Our products that are no longer current and products developed years 
ago may not be Year 2000 compliant. We advise our customers to upgrade to       
current versions of our products.                                               

INFORMATION TECHNOLOGY SYSTEMS: We identified all internal data processing and  
networking systems that we believe are at risk from the Year 2000 problem, and  
reviewed the manufacturer's Year 2000 Compliance statement for each system. Any 
systems that are determined to be non-compliant will be upgraded or replaced.   
Internal testing was done for any mission critical system for which the         
manufacturer's Year 2000 Compliance statement was not adequate to ensure the    
reliability                                                                     

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of the system. All information technology systems will be verified as Year 2000 
Compliant by November 1999. In addition, no new information technology systems  
will be implemented without first ensuring that they are Year 2000 Compliant.   

NON-INFORMATION TECHNOLOGY SYSTEMS: We have identified a wide range of general  
computing and facilities systems that must be verified as Year 2000 Compliant.  
The majority of these systems will be upgraded or replaced as necessary during  
normal maintenance if they are not compliant. The manufacturer's Year 2000      
Compliance statements are currently under review for the remaining systems and  
will be upgraded or replaced if necessary. Because new systems are continually  
being integrated, the effort to ensure Year 2000 Compliance for these systems is
an ongoing effort.                                                              

We have communicated with our customers and suppliers to determine their Year   
2000 compliance readiness, and the extent to which we are vulnerable to any     
third party Year 2000 issues. However, there can be no guarantee that the       
systems of other companies on which our systems rely will be timely converted.  
Failure to convert by another company, or a conversion that is incompatible with
our systems, would have a material adverse effect on us, our results of         
operations and our financial condition.                                         

OUR BOARD OF DIRECTORS MAY ISSUE PREFERRED STOCK TO PREVENT A TAKEOVER. The     
Board of Directors is authorized to issue up to 20,000,000 shares of Preferred  
Stock and to determine the price, rights, preferences, privileges and           
restrictions, including voting rights, of those shares without any further vote 
or action by the shareholders. The rights of the holders of common stock will be
subject to, and may be adversely affected by, the rights of the holders of any  
Preferred Stock that may be issued in the future. The issuance of Preferred     
Stock, while providing desirable flexibility in connection with possible        
acquisitions and other corporate purposes, could have the effect of delaying,   
deferring or preventing a change in control of IMSI. IMSI has no current plans  
to issue shares of Preferred Stock.                                             

ITEM 7a.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK            

IMSI is exposed to the impact of interest rate and foreign currency             
fluctuations. IMSI's objective in managing its exposure to interest rate changes
and foreign currency fluctuations is to limit the impact of interest rate       
changes on earnings and cash flow and to lower its overall borrowing costs.     
IMSI's major market risk exposure is changing interest rates in the United      
States, which would change interest expense on IMSI's line of credit and term   
loan.                                                                           

Most of IMSI's international revenues are denominated in foreign currencies.    
Consequently a decrease in the value of a relevant foreign currency in relation 
to the U.S. dollar could adversely affect IMSI's net revenues. IMSI's foreign   
currency transactional exposures exist primarily with the U.K. pound and German 
mark.                                                                           

IMSI does not hedge interest rate or foreign currency exposure.                 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                             

Financial Statements and the financial statement schedule are attached as an    
exhibit at Item 14(a).                                                          

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND         
FINANCIAL DISCLOSURE                                            

On April 19, 1999, IMSI was informed by Deloitte & Touche LLP ("D&T"), that it  
had resigned as IMSI's independent accounting firm. D&T's audit reports on our  
financial statements for the fiscal years ended June 30, 1998 and 1997 did not  
contain an adverse opinion or a disclaimer of opinion and were not qualified or 
modified as to uncertainty, audit scope or accounting principles.               

In connection with the audits of IMSI's consolidated financial statements for   
each of the two fiscal years ended June 30, 1998 and 1997, and in the interim   
periods subsequent to June 30, 1998, preceding the date of D&T's resignation,   
there were no "reportable events," as that term is defined in the instructions  
to Form 8-K and the applicable regulations. In connection with the audits of our
consolidated financial statements for each of the two fiscal years ended June   
30, 1998 and 1997, and in the interim periods subsequent to June 30, 1998,      
preceding the date of D&T's resignation, there were no "disagreements" with D&T 
on any matter of accounting principles or practices, financial statement        
disclosure or auditing scope or procedure which, if not resolved to the         
satisfaction of D&T would have caused D&T to make reference to the matter in    
their report, except as follows:                                                

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On September 29, 1998, The Learning Company ("TLC") paid IMSI approximately     
$1.69 million, representing amounts due to IMSI from the sale of the Family     
Heritage line of software products by IMSI to TLC ($1.26 million) and other     
existing contractual agreements ($430,000). IMSI had not recorded revenues or   
receivables for such amounts due from TLC in its financial statements for prior 
periods. On October 2, 1998, TLC and IMSI entered into a software license       
agreement whereby TLC sold Org Plus, a software program, to IMSI in exchange for
$3.5 million as follows: $1.7 million paid by IMSI on October 2, 1998, and      
$450,000 due on each of January 1, 1999,April 1, 1999, July 1, 1999 and October 
1, 1999. IMSI initially believed that revenue should be recognized on a cash    
basis in the quarter ended September 30, 1998 for the $1.69 TLC payment, and    
that the full acquisition price of $3.5 million, for IMSI's acquisition of Org  
Plus should be accounted for separately in the quarter ended December 31,1998.  
D&T's position was that the two transactions should be treated as one           
transaction in the quarter ended December 31, 1998 due to several factors. The  
audit committee of our Board of Directors discussed the subject matter of the   
accounting disagreement with Deloitte & Touche. IMSI discussed the subject      
matter of the accounting disagreement with other independent accounting firms.  
After these discussions with D&T, the Company agreed and accounted for the above
transactions in accordance with D&T's position. Accordingly, IMSI did not       
recognize revenue for the quarter ended September 30, 1998 for the cash receipt 
from TLC. In the quarter ending December 31, 1998, IMSI recorded the acquisition
of OrgPlus at a net amount of $1,810,000.                                       

On May 5, 1999, the Board of Directors of IMSI, pursuant to the recommendation  
of the audit committee, approved a resolution authorizing management to engage  
Grant Thornton LLP ("Grant Thornton") as IMSI's independent auditor, upon such  
terms as may be negotiated by management. On May 5, 1999, the Company appointed 
Grant Thornton as IMSI's independent auditor. IMSI previously reported on a Form
8-K filed April 26, 1999, that on April 19, 1999, IMSI received a letter from   
Deloitte & Touche LLP ("D&T"), resigning as IMSI's independent accounting firm. 
During IMSI's two most recent fiscal years and the subsequent interim period    
before engaging Grant Thornton, neither IMSI nor anyone acting on its behalf    
consulted Grant Thornton regarding (i) either: the application of accounting    
principles to a specified transaction, either completed or proposed; or the type
of audit opinion that might be rendered on IMSI's financial statements; or (ii) 
any matter that was either the subject of a disagreement or a reportable event  
(as defined in Item 304 of Regulation S-K).                                     

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                     

DIRECTORS                                                                       

The names of all members of the Board of Directors of IMSI, and information     
about them as of October 1, 1999 are set forth below:                           

                                                                [Download Table]

NAME                              AGE      OCCUPATION                    SINCE
                                                                              
William H. Lane III(1)(2)         61       Former Vice President,        1999 
                                           Chief Financial Officer,           
                                           Secretary and Treasurer of         
                                           Intuit, Inc.                       
Abe Ostrovsky(1)(2)               56       Chairman of JetForm           1998 
                                           Corporation                        
Martin Sacks                      39       Chairman of the Board of      1988 
                                           the Company                        
Costa John                        43       President, Chief Executive    1999 
                                           Officer, and Chief                 
                                           Financial Officer of the           
                                           Company                            

(1) Member of the Compensation Committee.   (2) Member of the Audit Committee.  

Mr. Lane became a director in February 1999. Mr. Lane is President and CEO of   
Canyon Vista, Inc., a management consulting company. Mr. Lane retired from      
Intuit, Inc. in 1996, having served as its Vice President, Chief Financial      
Officer, Secretary and Treasurer. Mr. Lane also served in a similar capacity at 
ChipSoft, Inc., before Intuit acquired the company in December 1993. Mr. Lane   
also serves on the boards of Cyberian Outpost, Inc., MetaCreations Corporation, 
and Aspect Technology. Mr. Lane received a Bachelor of Arts degree in Economics 
from Columbia University and a certificate from the Advanced Management Program 
at the Harvard Graduate School of Business Administration.                      

Mr. Ostrovsky became a director in August 1998. Mr. Ostrovsky joined JetForm    
Corporation in 1991 as Chief Operations Officer and became Chief Executive      
Officer and Chairman in 1992. In December 1995, Mr. Ostrovsky resigned as an    
officer of JetForm and continues as Chairman of the Board of that company. Mr.  
Ostrovsky also serves on the boards of NetManage, Inc., Seec, Inc., Genicom,    
Inc. and Ixla Corp. (Australia). Mr. Ostrovsky studied mechanical engineering at
the University of Miami.                                                        

Mr. Sacks became Chairman of the Board in May 1999. Mr. Sacks joined IMSI in    
1988 when the company he founded, Milan Systems America, Inc., merged with IMSI.
Mr. Sacks served as President and Chief Executive Officer of IMSI from 1990     
until May 1999. Mr. Sacks received his Bachelor of Commerce and Bachelor of     
Accounting degrees from the University of Witwatersrand, South Africa.          

Mr. John joined IMSI in February 1999. He was appointed Chief Financial Officer 
in April 1999 and Chief Executive Officer in May 1999. He was elected to the    
Board of Directors in August 1999. Mr. John was a Management Consulting Partner 
until February 1995 at Grant Thornton, International. From March 1995 to March  
1999, Mr. John was Chief Executive Officer of Didactix, Inc., a strategic       
financial advisory company. Mr. John was appointed in June 1998 to serve as     
Chief Executive Officer of San Francisco Blues, Inc., until March 1999. Mr. John
received Bachelors degrees in Accounting and in Business Economics, and a       
Masters degree in Financial Management, from the University of Witwatersrand,   
South Africa.                                                                   

Charles Federman served as a member of the Board of Directors from May 1996     
until September 30, 1999, when he resigned from the Board. Mr. Federman is 43   
years old and is Chairman of the Executive Committee and a Managing Director of 
the BRM Group, an information and technology mergers and acquisitions firm. Mr. 
Federman was with Broadview Associates from October 1983 to January 1998, where 
he was Chairman of the Executive Committee from 1994 to 1996 and Chairman of the
Board from 1996 to 1997. He serves on the boards of Brio Technology, Inc. and   
BackWeb Technologies, Ltd., and was formerly on the boards of Phoenix           
Technologies Ltd. and Mathsoft, Inc. Mr. Federman received a Bachelor of Science
degree from the University of Pennsylvania, Wharton School of Business.         

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All directors hold office until the next annual meeting of shareholders and     
until their successors are elected and qualified, or until their earlier        
resignation, removal or death. Executive officers are chosen by, and serve at   
the discretion of, the Board.                                                   

EXECUTIVE OFFICERS                                                              

The names of the Executive Officers of IMSI during fiscal 1999 and information  
about them are set forth below:                                                 

Robert Mayer has served as IMSI's Vice President of Sales since 1990, as a      
director from 1985 to May 1999, and is currently Executive Vice President of    
Worldwide Sales. Mr. Mayer is 45 years old. He received a Bachelor of Arts      
degree from the University of California, and Bachelor and Masters of Science   
degrees from the University of Washington.                                      

Geoffrey Koblick was Chairman of the Board of Directors and Secretary of IMSI   
from its inception in 1982 until May 1999. Mr. Koblick served as President of   
IMSI from 1982 through September 1987, and from July 1988 to June 1990, as      
General Counsel from 1982 to May 1999, and as Chief Operating Officer from 1988 
to May 1999. Mr. Koblick is 45 years old. He is currently a consultant to IMSI  
under a severance agreement until May 2000.                                     

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE                         

Section 16(a) of the Exchange Act requires the Company's directors and executive
officers, and persons who own more than ten percent of a registered class of the
Company's equity securities, to file with the Commission initial reports of     
ownership and reports of changes in ownership of the Company's Common Stock and 
other equity securities of the Company. Officers, directors and greater than ten
percent shareholders are required by the Commission's regulations to furnish the
Company with copies of all Section 16(a) forms they filed. To the Company's     
knowledge, based on review of the copies of such reports furnished to the       
Company, during the last fiscal year all Section 16(a) filing requirements      
applicable to the Company's officers, directors, and greater than ten percent   
beneficial owners were complied with.                                           

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ITEM 11. EXECUTIVE COMPENSATION                                                 

The following table sets forth all compensation awarded, earned or paid for     
services rendered in all capacities to the Company and its subsidiaries during  
each of the fiscal years ended June 30, 1999, 1998 and 1997 to (i) the Company's
chief executive officer during fiscal 1999, and (ii) the Company's other        
executive officers other than the Chief Executive Officer, who were serving as  
executive officers at the end of fiscal 1999 whose compensation exceeded        
$100,000 for fiscal 1999 (collectively, "Named Persons"). Messrs. Sacks and     
Koblick were executive officers during part of fiscal 1999 but were not         
executive officers at the end of fiscal 1999.                                   

SUMMARY COMPENSATION TABLE

                                                        [Enlarge/Download Table]

                                                                                        LONG-TERM     
                                                                                       COMPENSATION   
                                                                                          AWARDS      
                                        ANNUAL COMPENSATION                         ------------------
NAME AND                               -----------------------     OTHER ANNUAL        SECURITIES     
PRINCIPAL POSITIONS       FISCAL YEAR  SALARY($)(1)   BONUS($)  COMPENSATION($)(2)  UNDERLYING OPTIONS
-------------------       -----------  ------------   --------  ------------------  ------------------
                                                                                                      
Costa John(3)                1999         66,667            0             0                --         
President, Chief                                                                                      
Executive Officer, and                                                                                
Chief Financial Officer                                                                               

Martin Sacks                 1999        220,000        9,706         5,141                --         
Chairman of the Board(4)     1998        200,000       48,137         7,346            50,000         
                             1997        200,000       22,500         5,249                --         

Geoffrey B. Koblick          1999        200,000        9,706         7,252                --         
Consultant(5)                1998        176,667       38,937         6,256            45,000         
                             1997        160,000       16,000         5,249                           

Robert Mayer                 1999        180,000        4,171         7,367                           
Executive Vice President     1998        143,387       59,864         7,603            30,000         
of Worldwide Sales           1997        138,000        8,511         5,249                --         

(1)  Amounts stated above are the actual amounts received, and were based upon  
 an annual salary of $220,000, $220,000, $200,000, $180,000, for Messrs.
John, Sacks, Koblick, Mayer, respectively.                            

(2)  Includes payments of medical and dental insurance premiums by the Company. 

(3)  Mr. John joined the company in February 1999, became Chief Financial       
    Officer in April 1999, and became President and Chief Executive Officer in
May 1999, when his salary was increased from $160,000 to $220,000.    

(4)  Acted as President and Chief Executive Officer until May 1999.             

(5)  Acted as Chairman of the Board, Chief Operating Officer and General Counsel
    until May 1999. Mr. Koblick is currently a Consultant to the company under
a severance agreement until May 5, 2000.                              

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OPTION GRANTS                                                                   

The following table sets forth information regarding individual grants of       
options to acquire the Company's Common Stock during fiscal 1999 to each Named  
Person.                                                                         

 OPTION GRANTS IN LAST FISCAL YEAR

                                                        [Enlarge/Download Table]

                     INDIVIDUAL GRANTS                                                             
                     -----------------                                                             
                                                                                     RATES OF      
                                                                                    STOCK PRICE    
                                                                                    APPRECIATION   
                                        % OF TOTAL       EXERCISE                FOR OPTION TERM(4)
                                      OPTIONS GRANTED       OR                   ------------------
                         OPTIONS       TO EMPLOYEES     BASE PRICE  EXPIRATION                     
NAME                    GRANTED(1)   IN FISCAL YEAR(2)  ($/SHR)(3)    DATE       5%($)     10%($)  
----                    ----------   -----------------  ----------  ----------   -----     ------  
                                                                                                   
Costa John                60,000            8%            12.13       2/1/09    457,800   1,074,000
Martin Sacks             100,000           14%             6.50      10/6/08    408,000   1,036,000
Geoffrey B. Koblick       90,000           13%             6.50      10/6/08    368,100     932,400
Robert Mayer              80,000           11%             6.50      10/6/08    327,200     828,800

(1)  The options granted during fiscal year 1999 vest over a five-year period of
time, with 20% of the options vesting upon completion of each year of 
    service. On July 1, 1999 vesting was changed to 4 year vesting for options
granted on or after July 1, 1999.                                     

(2)  The Company granted options to purchase 719,825 shares of Common Stock to  
employees during fiscal 1999.                                         

(3)  The exercise price may be paid in cash, or the Administrator of the Plan   
may in its discretion authorize the acceptance of full recourse notes,
   securities, surrender of shares issuable upon exercise with a fair market
value equal to the exercise price, or any other property.             

(4)  The 5% and 10% assumed compound rates of stock appreciation are mandated by
  the rules of the Securities and Exchange Commission and do not represent
the Company's estimate or projection of future Common Stock prices.   

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OPTIONS EXERCISED                                                               

The following table sets forth information with respect to the options exercised
during fiscal 1999 by the Named Persons during fiscal 1999, including the       
aggregate value of gains on the date of exercise. In addition, this table       
includes the number of shares covered by both exercisable and non-exercisable   
stock options as of June 30, 1999. Also reported are the values for             
"in-the-money" options, which represent the positive spread between the exercise
price of any such existing stock options and the fiscal year-end price of the   
Common Stock.                                                                   

 AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FY-END OPTION/SAR VALUES

                                                        [Enlarge/Download Table]

                                               NUMBER OF UNEXERCISED      VALUE OF UNEXERCISED   
                                                    OPTIONS/SARs          IN-THE-MONEY OPTIONS   
                                                  AT JUNE 30, 1999        AT JUNE 30, 1999($)    
                                  VALUE                                                          
NAME                EXERCISE #  REALIZED($)  EXERCISABLE/UNEXERCISABLE  EXERCISABLE/UNEXERCISABLE
----                ----------  -----------  -------------------------  -------------------------
                                                                                                 
Costa John              0           0                    0/60,000(1)             0/0(2)          
Martin Sacks            0           0             250,771/137,500(1)       537,677/0(2)          
Geoffrey B. Koblick     0           0             142,500/123,750(1)       237,405/0(2)          
Robert Mayer            0           0              66,108/102,500(1)       136,411/0(2)          

(1)  These options, which have a five-year vesting period, become exercisable   
  over time based on continuous employment with the Company and in certain
cases are subject to various performance criteria or vest in full upon
acquisition of the Company.                                           

(2)  Based on the difference between the market price of the Common Stock at    
June 30, 1999 ($4.875 per share), and the aggregate exercise prices of
options shown in the table.                                           

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT         

The following table sets forth, as of September 30, 1999, the beneficial        
ownership of the Company's Common Stock by (i) each person who is known by the  
Company to own of record or beneficially more than five percent (5%) of the     
Company's Common Stock, (ii) each director or nominee, (iii) each other         
executive officer (of which there are none) named in the Summary Compensation   
Table, above in Item 11, and (iv) all directors and executive officers as a     
group. Except as otherwise indicated, the shareholders listed in the table have 
sole voting and dispositive power with respect to the shares indicated, subject 
to community property laws where applicable. The business address of Messrs.    
Mayer, Sacks, and Ostrovsky is 75 Rowland Way, Novato, California 94945. The    
business address of Mr. Lane is 10695 Magdalena, Los Altos Hills, California    
94024. The business address of Mr. Koblick is 5 Hill Road, Ross, California     
94957. The business address of BayStar Capital. L.P. is 505 Montgomery Street,  
20th Floor, San Francisco, California 94111. The business address of Capital    
Ventures International is in care of Heights Capital Management, 425 California 
Street, Suite 1100, San Francisco, California 94104.                            

                                                        [Enlarge/Download Table]

NAME AND ADDRESS                                                                          
OF BENEFICIAL OWNER                   SHARES BENEFICIALLY OWNED(1)  PERCENTAGE OF CLASS(1)
-------------------                   ----------------------------  ----------------------
                                                                                          
BayStar Capital, L.P.(2)                         908,362                     11.45%       
Martin Sacks(3)                                  554,133                       7.6%       
Geoffrey Koblick(4)                              526,350                       7.3%       
Robert Mayer(5)                                  475,694                       6.7%       
Capital Ventures International                   437,637                       5.9%       
Charles Federman(6)                               53,750                          *       
All directors and executive officers                                                      
as a group (8 persons)(7)                      1,086,822                      14.7%       

------------------------                                                        
* Less than one percent of the Company's outstanding common stock.              

(1)  Assumes that the person has exercised, to the extent exercisable on or     
before 60 days from the date of the table, all options, convertible   
   securities, and warrants to purchase Common Stock held by such person and
 that no other person has exercised any outstanding options, convertible
securities or warrants.                                               

(2)  Includes 658,362 shares issuable to BayStar on conversion of a note and    
250,000 shares issuable to BayStar on exercise of a warrant.          

(3)  Includes 263,271 shares issuable upon the exercise of stock options held by
Mr. Sacks within 60 days from the date of the table.                  

(4)  Includes 153,750 shares issuable upon the exercise of stock options held by
Mr. Koblick within 60 days from the date of the table.                

(5)  Includes 73,608 shares issuable upon the exercise of stock options held by 
Mr. Mayer within 60 days from the date of the table.                  

(6)  Includes 30,125 shares issuable upon the exercise of options held by Mr.   
Federman within 60 days from the date of the table.                   

(7)  Includes 369,804 shares subject to options so exercisable held by all      
officers and directors as a group.                                    

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                         

There is a severance agreement between IMSI and Geoffrey Koblick, a founder of  
the Company. Mr. Koblick is receiving as separation payments twelve months of   
his base salary of $200,000 from May 5, 1999 to May 5, 2000, and Mr. Koblick is 
a consultant to the Company during this time. IMSI forgave a promissory note in 
the amount of $35,000. Mr. Koblick is entitled to exercise his stock options as 
incentive options, and vesting continues, until May 5, 2000.                    

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 PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K      

  (a)    DOCUMENTS FILED AS PART OF THIS ANNUAL REPORT ON FORM 10-K:

                                                                [Download Table]
                                                                      
1. Financial Statements                                               

   Independent Auditors' Report for the years ended                   
   June 30, 1998 and 1997                                          42 

   Independent Auditors' Report for the year ended                    
   June 30, 1999                                                   43 

   Consolidated Balance Sheets at June 30, 1999 and                   
   1998 (restated)                                                 44 

   Consolidated Statements of Operations for the                      
   years ended June 30, 1999, 1998 (restated) and                     
   1997                                                            45 

   Consolidated Statements of Shareholders' Equity                    
   for the years ended June 30, 1999, 1998 (restated)                 
   and 1997                                                        46 

   Consolidated Statements of Cash Flows for the                      
   years ended June 30, 1999, 1998 (restated) and                     
   1997                                                            47 

   Notes to Consolidated Financial Statements                      48 

2. Financial Statement Schedule                                       

       Schedule II - Valuation and Qualifying Accounts                
       for the years ended June 30, 1999, 1998 and 1997            68 

(b)    REPORTS ON FORM 8-K:                                        69 

(c)    EXHIBITS: SEE EXHIBIT INDEX                                 71 

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INDEPENDENT AUDITORS' REPORT                                                    

To the Board of Directors and Shareholders                                      
International Microcomputer Software, Inc.                                      

We have audited the accompanying consolidated balance sheet of International    
Microcomputer Software, Inc. and subsidiaries (the "Company") as of June 30,    
1998 and the related consolidated statements of operations, shareholders'       
equity, and cash flows for the fiscal years ended June 30, 1998 and 1997. Our   
audits also included the financial statement schedule for the years ended June  
30, 1998 and 1997, listed in the Index at Item 14(a) 2. These financial         
statements and financial statement schedule are the responsibility of IMSI's    
management. Our responsibility is to express an opinion on these financial      
statements and financial statement schedule based on our audits.                

We conducted our audits in accordance with audit standards generally accepted in
the United States of America. Those standards require that we plan and perform  
the audit to obtain reasonable assurance about whether the financial statements 
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An 
audit also includes assessing the accounting principles used and significant    
estimates made by management, as well as evaluating the overall financial       
statement presentation. We believe that our audits provide a reasonable basis   
for our opinion.                                                                

In our opinion, the consolidated financial statements referred to above, present
fairly, in all material respects, the financial position of International       
Microcomputer Software, Inc. and subsidiaries as of June 30, 1998 and the       
results of their operations and their cash flows for the fiscal years ended June
30, 1998 and 1997 in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, such financial statement    
schedule for the years ended June 30, 1998 and 1997, when considered in relation
to the basic consolidated financial statements taken as a whole, presents       
fairly, in all material respects, the information set forth therein.            

As discussed in Note 16, the accompanying consolidated financial statements as  
of and for the fiscal year ended June 30, 1998 have been restated.              

/s/ DELOITTE & TOUCHE LLP                                                       
-------------------------                                                       

San Francisco, California                                                       
August 5, 1998 (October 22, 1999 as to Note 16)                                 

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INDEPENDENT AUDITORS' REPORT                                                    

To the Board of Directors and Shareholders                                      
International Microcomputer Software, Inc.                                      

We have audited the accompanying consolidated balance sheet of International    
Microcomputer Software, Inc. and subsidiaries (the "Company") as of June 30,    
1999, and the related consolidated statements of operations, shareholders'      
equity, and cash flows for the year then ended. These financial statements are  
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.                    

We conducted our audit in accordance with auditing standards generally accepted 
in the United States of America. Those standards require that we plan and       
perform the audit to obtain reasonable assurance about whether the financial    
statements are free of material misstatement. An audit includes examining, on a 
test basis, evidence supporting the amounts and disclosures in the financial    
statements. An audit also includes assessing the accounting principles used and 
significant estimates made by management, as well as evaluating the overall     
financial statement presentation. We believe that our audit provides a          
reasonable basis for our opinion.                                               

In our opinion, the consolidated financial statements referred to above present 
fairly, in all material respects, the consolidated financial position of        
International Microcomputer Software, Inc. and subsidiaries as of June 30, 1999,
and the consolidated results of their operations and their consolidated cash    
flows for the year then ended in conformity with accounting principles generally
accepted in the United States of America.                                       

We have also audited Schedule II as listed in the Index at Item 14(a) 2 for the 
year ended June 30, 1999. In our opinion, this schedule presents fairly, in all 
material respects, the information required to be set forth therein.            

As discussed in the last paragraph of Note 7, the Company has restated its 1999 
financial statements.                                                           

The accompanying financial statements have been prepared assuming that the      
Company will continue as a going concern. As shown in the financial statements, 
the Company incurred a net loss of $26,966,000 during the year ended June 30,   
1999, and, as of that date, the Company's current liabilities exceeded its      
current assets by $1,227,000 and it was in default of various loan covenants.   
These factors, among others, as discussed in Note 1 to the financial statements,
raise substantial doubt about the Company's ability to continue as a going      
concern. Management's plans in regard to these matters are also described in    
Note 1. The financial statements do not include any adjustments that might      
result from the outcome of this uncertainty.                                    

/s/GRANT THORNTON LLP                                                           
---------------------                                                           

San Francisco, California                                                       
October 22, 1999 (except for the last paragraph of                              
Note 7 as to which the date is September 8, 2000)                               

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INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES
 CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

                                                                [Download Table]

                                                                  1999       1998 
                                                                  ----       ---- 
                                                              Restated   Restated 
                                                                                  
ASSETS                                                                            
Current assets:                                                                   
  Cash and cash equivalents                                   $  3,681   $  2,093 
  Receivables, less allowances for doubtful                                       
    accounts, discounts and returns of $7,445 and $4,081         4,933     13,299 
  Inventories                                                    2,895      6,549 
  Prepaid royalties and licenses                                 1,858      2,517 
  Income tax receivable                                          3,751         -- 
  Deferred taxes                                                    --      1,917 
  Other current assets                                             758        759 
                                                              --------   -------- 
      Total current assets                                      17,876     27,134 

Furniture and equipment                                          3,632      3,430 
Deferred tax assets                                                465      2,676 
Capitalized software development costs                           2,856      2,101 
Other assets                                                     2,315        314 
                                                              --------   -------- 
       Total assets                                           $ 27,144   $ 35,655 
                                                              ========   ======== 

LIABILITIES AND SHAREHOLDERS' EQUITY                                              
Current liabilities:                                                              
   Current portion of long term debt                          $  7,110   $ 10,224 
   Trade accounts payable                                        2,256      5,916 
   Accrued and other liabilities                                 5,119      4,015 
   Accrued restructuring charges                                 1,440         -- 
   Deferred revenue                                              3,178        407 
                                                              --------   -------- 
     Total current liabilities                                $ 19,103   $ 20,562 

Long term debt and other obligations                             6,599      1,682 
                                                              --------   -------- 
      Total liabilities                                       $ 25,702   $ 22,244 

Commitments and contingencies                                       --         -- 

Shareholders' equity:                                                             
   Common stock, no par value; 300,000,000 authorized;                            
       Issued and outstanding 7,014,078 and 5,684,179 shares    27,526     12,718 
   Retained earnings (Accumulated deficit)                     (25,963)     1,003 
   Accumulated other comprehensive income (loss)                   129        (25)
   Notes receivable from shareholders                             (250)      (285)
                                                              --------   -------- 
      Total shareholders' equity                                 1,442     13,411 
                                                              --------   -------- 
           Total liabilities and shareholders' equity         $ 27,144   $ 35,655 
                                                              ========   ======== 

See Notes to Consolidated Financial Statements

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INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF OPERATIONS YEARS
ENDED JUNE 30, 1999, 1998 AND 1997 (IN
THOUSANDS, EXCEPT PER SHARE AMOUNTS)

                                                                [Download Table]

                                                1999          1998         1997
                                            --------      --------      -------
                                            Restated      Restated             
                                                                               
Net revenues                                $ 37,679      $ 62,065      $41,839
Product costs                                 25,424        23,382       16,893
                                            --------      --------      -------
Gross margin                                  12,255        38,683       24,946
                                            --------      --------      -------

Costs and expenses:                                                            
   Sales and marketing                        18,387        18,611       12,026
   General and administrative                  8,181         5,005        3,988
   Research and development                    8,069         8,614        4,565
   Restructuring charge                        1,508            --           --
   Write off purchased in process                                              
     research and development                     --         6,367           --
                                            --------      --------      -------
   Total operating expenses                   36,145        38,597       20,579
                                            --------      --------      -------

Operating income (loss)                      (23,890)           86        4,367

Interest and other expense, net                1,880           759          130
                                            --------      --------      -------

Income (loss) before income taxes and                                          
   extraordinary item                        (25,770)         (673)       4,237

Income tax provision (benefit)                   237          (303)       1,640
                                            --------      --------      -------

Income (loss) before extraordinary item      (26,007)     $   (370)     $ 2,597

Extraordinary loss on extinguishment                                           
   of debt                                      (959)           --           --
                                            --------      --------      -------
Net income (loss)                           $(26,966)     $   (370)     $ 2,597
                                            ========      ========      =======

Basic income (loss) per share               $  (4.30)     $  (0.07)     $  0.53

Diluted income (loss) per share             $  (4.30)     $  (0.07)     $  0.46

Shares used in calculating:                                                    
     Basic income (loss) per share             6,275         5,513        4,946
     Diluted income (loss) per share           6,275         5,513        5,682

See Notes to Consolidated Financial Statements

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INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
 YEARS ENDED JUNE 30, 1999 AS RESTATED, 1998 AS RESTATED AND
 1997 (IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)

                                                        [Enlarge/Download Table]

                                                                                                    Comprehensive           
                                                               Retained     Accumulated                 Notes               
                                            Common Stock       Earnings        Other                 Receivable             
                                            ------------      Accumulated  Comprehensive   Income       from                
                                          Shares     Amount    Deficit)    Income (Loss)   (Loss)    Shareholders   Total   
                                         ---------  --------   --------    -------------  --------   ------------  -------- 
                                                                                                                            
Balance at July 1, 1996                  4,834,689  $  5,973   $ (1,224)       $  66                    $(293)     $  4,522 
Issuance of common stock under             294,070       480                                                            480 
  stock bonus and option plans                                                                                              
Net income                                                        2,597                   $  2,597                    2,597 
Foreign currency translation                                                    (112)         (112)                    (112)
                                                                                          --------                          
Comprehensive income                                                                      $  2,485                          
                                                                                          ========                          
Payment of note receivable                                                                                  8             8 
                                         ---------  --------   --------        -----                    -----      -------- 
Balance at June 30, 1997                 5,128,759     6,453      1,373          (46)                    (285)        7,495 
Issuance of common stock under                                                                                              
  stock bonus and option plans                                                                                              
  and for exercise of warrant              189,400       623                                                            623 
Issuance of common stock                                                                                                    
    - Corel                                346,020     5,000                                                          5,000 
    - MediaPaq                              20,000       240                                                            240 
Deferred compensation                                     30                                                             30 
amortization                                                                                                                
Tax benefit from exercise of                                                                                                
  stock options                                          372                                                            372 
Net loss, as restated                                              (370)                  $   (370)                    (370)
Foreign currency translation                                                                                                
  adjustment                                                                      21            21                       21 
                                         ---------  --------   --------        -----      --------      -----      -------- 
Comprehensive loss                                                                        $   (349)                         
                                                                                          ========                          

Balance at June 30, 1998, as restated    5,684,179    12,718      1,003          (25)                    (285)       13,411 
Issuance of common stock under                                                                                              
  stock bonus and option plans             163,365       960                                                            960 
Issuance of common stock related to:                                                                                        
   - Acquisitions                          194,508     1,107                                                          1,107 
   - Settlement of debt                    503,913     5,696                                                          5,696 
   - Zedcor agreement                       50,476       311                                                            311 
   - Capital Ventures agreement            437,637     5,000                                                          5,000 
Value attributed to warrants:                            776                                                            776 
   - Silicon Valley Bank                                                                                                    
   - Baystar Capital, L.P.                             1,162                                                          1,162 
Common stock received in satisfaction                                                                                       
  of receivable                            (20,000)     (320)                                                          (320)
Forgiveness of notes receivable from                                                                                        
  shareholder                                                                                              35            35 
Deferred compensation amortization                       116                                                            116 
Net loss                                                        (26,966)                  $(26,966)                 (26,966)
Foreign currency translation adjustment                                          154           154                      154 
                                                                                          --------                          
Comprehensive Loss                                                                        $(26,812)                         
                                                                                          ========                          
Balance at June 30, 1999                 7,014,078  $ 27,526   $(25,963)       $ 129                    $(250)     $  1,442 
                                         =========  ========   ========        =====                    =====      ======== 

See Notes to Consolidated Financial Statements

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INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(IN THOUSANDS)

                                                        [Enlarge/Download Table]

                                                                           1999       1998      1997   
                                                                         --------   --------   ------- 
                                                                         Restated   RESTATED           
                                                                                                       
Cash flows from operating activities:                                                                  
   Net income (loss)                                                     $(26,966)  $   (370)  $ 2,597 
   Adjustments to reconcile net income (loss) to net                                                   
      cash used by operating activities                                                                
         Depreciation and amortization                                      4,308      4,147     2,098 
         Amortization of deferred compensation                                116        402        -- 
         Amortization of warrants                                             237         --        -- 
         Bad debt reserve                                                     479         (8)      656 
         Returns reserve                                                    2,251      1,409       540 
         Rebates reserve                                                       98          0         0 
         Price discounts reserve                                              536       (263)      445 
         Provision for inventory obsolescence                                 238        472       (37)
         Deferred taxes                                                     4,128     (2,855)     (602)
         Forgiveness of notes receivable from shareholders                     35         --         8 
         Loss on disposal of fixed assets                                     232         --        -- 
         Write-off of purchased in-process research and development            --      6,367        -- 
         Restructuring charges                                              3,167         --        -- 
         Foreign currency translation                                         235        153       (34)
         Charge related to stock issued at discount                           918         --        -- 
         Changes in assets and liabilities:                                                            
              Receivables                                                   4,568     (6,581)   (5.055)
              Inventories                                                   1,232     (3,533)     (897)
              Prepaid royalties and licenses                                  196     (3,277)   (1,779)
              Income taxes receivable                                      (3,751)        --        -- 
              Other current assets                                             51       (281)       (8)
              Trade accounts payable                                         (422)       943     1,424 
              Accrued and other liabilities                                 1,162      1,289       244 
              Accrued restructuring charges                                 1,440                      
              Deferred revenue                                              2,771        407        -- 
                                                                         --------   --------   ------- 
   Net cash used by operating activities                                   (2,741)    (1,579)     (400)
                                                                         --------   --------   ------- 

Cash flows from investing activities:                                                                  
   Purchase of equipment                                                   (1,190)    (1,026)     (323)
   Acquisitions of software development                                    (2,171)    (2,708)      (44)
      costs and in-process technologies                                                                
   Purchase of goodwill, trademark and brand                               (2,404)        --        -- 
   Other                                                                       36       (170)       -- 
                                                                         --------   --------   ------- 
   Net cash used by investing activities                                   (5,729)    (3,904)     (367)
                                                                         --------   --------   ------- 

Cash flows from financing activities:                                                                  
   Credit line borrowings                                                   2,025     16,358     4,869 
   Credit line repayments                                                  (4,573)    (8,410)   (4,869)
   Borrowings (repayments) under term loans - net                           7,496     (1,282)    1,476 
   Capital lease and other obligations repayment - net                       (992)      (611)     (373)
   Proceeds from issuance of common stock                                   6,183        526       481 
                                                                         --------   --------   ------- 
   Net cash provided by financing activities                               10,139      6,581     1,584 

Effect of exchange rate change on cash and cash equivalents                   (81)      (131)      (78)
                                                                         --------   --------   ------- 
Net increase in cash and cash equivalents                                   1,588        967       739 
Cash and cash equivalents at beginning of year                              2,093      1,126       387 
                                                                         --------   --------   ------- 
Cash and cash equivalents at end of the year                             $  3,681   $  2,093   $ 1,126 
                                                                         ========   ========   ======= 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                                                       
Interest paid                                                            $  1,584   $    552   $   178 
Income taxes paid                                                        $    308   $  2,592   $ 1,910 

SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING AND INVESTING ACTIVITIES                                
Equipment acquired through capital lease obligations                     $    984   $  1,462   $   768 
Common stock received in satisfaction of receivable                           320         --        -- 
Repayment of payables and accrued and other liabilities                                                
   with IMSI common stock                                                   3,090         --        -- 
Repayment of term loans with IMSI common stock                              2,606         --        -- 
Acquisition of technology and assets in exchange for:                                                  
   Long term debt                                                              --        300        -- 
   Trade payables                                                              --        383        -- 
   Notes payable                                                            4,030      1,034        -- 
   Common stock                                                             1,107      5,240        -- 

See Notes to Consolidated Financial Statements

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INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES                                   

ORGANIZATION                                                                    

International Microcomputer Software, Inc. ("IMSI" or the "Company") was        
incorporated in California in November 1982. IMSI has wholly-owned subsidiaries 
located in Tucson, Arizona; Munich, Germany; Sydney, Australia; London, England;
Johannesburg, South Africa; Paris, France; and Stockholm, Sweden. IMSI develops 
and publishes PC productivity software in the precision design (computer        
assisted drawing), graphic design (visual content), business applications, and  
utilities categories targeted to small to medium-size businesses, professionals,
and consumers.                                                                  

BASIS OF PRESENTATION AND REALIZATION OF ASSETS                                 

The financial statements have been prepared on a basis that contemplates IMSI's 
continuation as a going concern and the realization of our assets and           
liquidation of our liabilities in the ordinary course of business. We have an   
accumulated deficit of $25,963,000 at June 30, 1999, and negative cash flows    
from operations of $2,741,000 in fiscal 1999. IMSI is also in default of various
loan covenants. These matters, among others, raise substantial doubt about our  
ability to remain a going concern for a reasonable period of time. The financial
statements do not include any adjustments relating to the recoverability or     
classification of assets or the amounts and classification of liabilities that  
might result from the outcome of this uncertainty. IMSI's continued existence is
dependent on its ability to obtain additional financing sufficient to allow it  
to meet its obligations as they become due and to achieve profitable operations.

IMSI plans to meet its working capital needs in the coming fiscal year through  
sales or license of the rights to its non-core products. As part of its         
restructuring strategy, IMSI plans to reduce the number of its product          
categories by approximately 75% through sales of its non-core product lines. To 
this end, IMSI sold the rights to the Easy Language product for $1.7 million in 
August 1999. Moreover, IMSI has engaged in, and expects to engage in,           
discussions with third parties concerning sale of a material part of its        
remaining non-core product lines. The sale of the rights to these products is   
consistent with our strategy of focusing on our core products while             
transitioning to the Internet. This strategy also includes reducing our costs   
through manufacturing and warehouse outsourcing, facilities consolidation, and  
personnel reductions.                                                           

IMSI has received $1.3 million in tax refunds in the first quarter of fiscal    
year 2000 and $2.1 million in the second quarter of fiscal year 2000. We        
anticipate that we will receive an additional $300,000 in income tax refunds in 
fiscal year 2000. IMSI believes that the cash derived from the sale of non-core 
product lines and its tax refunds will improve its working capital position     
significantly. If our restructuring efforts succeed in improving our financial  
performance, management believes it will be able to obtain the additional       
financing our working capital needs require. There can be no assurance that we  
will be successful in our efforts.                                              

PRINCIPLES OF CONSOLIDATION                                                     

The consolidated financial statements include the accounts of IMSI and its      
wholly owned subsidiaries. All significant intercompany balances and            
transactions have been eliminated in consolidation.                             

USE OF ESTIMATES                                                                

The preparation of financial statements in conformity with generally accepted   
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and the accompanying    
notes. Significant estimates used in the consolidated financial statements      
include the estimates of (i) doubtful accounts, sales returns, price protection 
and rebates (ii) anticipated future gross revenues from products for which      
software development costs have been capitalized, (iii) provision for income    
taxes and realizability of the deferred tax assets, (iv) the life and           
realization of identifiable intangible assets, (v) restructuring costs and (vi) 
provisions for obsolete inventory. The amounts IMSI will                        

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ultimately incur or recover could differ materially from IMSI's current         
estimates. The underlying assumptions and facts supporting these estimates could
change in fiscal 2000 or thereafter.                                            

REVENUE RECOGNITION                                                             

Revenue is recognized when earned. For fiscal 1999 the Company has adopted      
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. Prior to fiscal 1999 the Company followed SOP  
91-1. Revenue from packaged product sales to distributors, resellers and end    
users is recorded when related products are shipped. For software delivered via 
the Internet, revenue is recorded when the customer downloads the software.     
Subscription revenue is recognized ratably over the contract period, generally  
12 to 15 months. Revenue from hybrid products is allocated to the underlying    
components based on the ratio of the value of each component to the total price 
and that portion is recognized accordingly. Non-refundable advanced payments    
received under license agreements are recognized as revenue when the customer   
accepts the delivered software. Revenue from software licensed to developers,   
including royalties earned in excess of non-refundable advanced payments, is    
recorded as the developers ship products containing the licensed software. Costs
related to post-contract customer support, which are minimal and include limited
telephone support and on-line maintenance for certain products, are accrued.    
Sales to distributors permit limited rights of return upon termination or when a
product is defective. Reserves for returns, price discounts and rebates are     
estimated using historical averages and a consideration of open return requests.
Beginning with the quarter ended December 31, 1998, we also considered channel  
inventories, recent product sell-through activity and market conditions in      
establishing our reserves.                                                      

CONCENTRATIONS                                                                  

Financial instruments that potentially subject IMSI to concentrations of credit 
risk consist of cash and cash equivalents and accounts receivable. IMSI sells a 
majority of its products to a limited number of distributors. At times, cash    
balances held at financial institutions were in excess of federally insured     
limits. We place our cash and cash equivalents at well-known, quality financial 
institutions. Cash held at foreign locations totaled $959,000 as of June 30,    
1999. Although IMSI maintains receivable insurance on its largest customers and 
also performs ongoing credit evaluations in the normal course of business, it   
generally requires no collateral on its product sales.                          

Two distributors accounted for more than 10% of IMSI's net revenue in fiscal    
1999, 1998, and 1997. Ingram Micro represented 18.3%, 20.4% and 11.9% and Tech  
Data represented 9.0%, 12.7% and 10.9% of IMSI's net revenues for fiscal 1999,  
1998, and 1997 respectively.                                                    

ROYALTY AGREEMENTS                                                              

IMSI has entered into certain agreements whereby it is obligated to pay         
royalties on software published. Royalties are generally paid based on a        
percentage of sales on respective products or on a fee per unit sold basis.     
Software royalties are expensed as product costs during the period in which the 
related revenues are recorded.                                                  

CASH AND CASH EQUIVALENTS                                                       

IMSI considers all highly liquid investments purchased with an original maturity
of 90 days or less to be cash equivalents.                                      

CAPITALIZED SOFTWARE DEVELOPMENT COSTS AND LICENSE FEES                         

Costs incurred in the initial design phase of software development are expensed 
as incurred as 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."   
IMSI ceases capitalizing computer software costs when the product is available  
for general release to customers. Costs associated with acquired completed      
software are capitalized. Total capitalized software development costs at June  
30, 1999 and 1998 were $8,289,000 and $5,261,000 respectively, less accumulated 
amortization of $5,433,000 and $3,160,000, respectively.                        

IMSI amortizes capitalized software development costs on a product-by-product   
basis. The amortization for each product is the                                 

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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 or 36 months, depending on the product. IMSI evaluates the net realizable
value of each software product at each balance sheet date and records           
write-downs to net realizable value for any products for which the carrying     
value is in excess of the estimated net realizable value.                       

Effective April 1, 1998, IMSI increased the amortization period from 18 to 36   
months for costs related to visual content license fees. IMSI now adheres to a  
36 month amortization period for all visual content license fees, excluding     
those visual content assets obtained in the Zedcor, Inc. acquisition (see Note  
3). These Zedcor, Inc. acquisition costs are being amortized over 60 months.    
Total amortization expense of capitalized software and license fees, all of     
which was charged to product costs, was $3,000,000, $1,196,000, and $224,000 in 
fiscal years 1999, 1998, and 1997, respectively.                                

INVENTORIES                                                                     

Inventories, consisting primarily of diskettes, manuals, hardware, freight in,  
production costs and packing supplies, 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.                                            

IMSI reserves a portion of its inventory book value to account for anticipated  
inability to sell some products at a net realizable value greater than their    
recorded cost. Reserves for non-core products, products that IMSI will continue 
to sell in the normal course of business but will no longer manufacture or      
actively market, have been increased $2,184,000 as part of IMSI's restructuring.
Other products in IMSI's inventory that are no longer being sold are fully      
reserved. All inventory reserves are recognized as a component of cost of goods 
sold.                                                                           

FURNITURE AND EQUIPMENT                                                         

Furniture and equipment are stated at cost. Depreciation of furniture and       
equipment is computed using the straight-line method over the estimated useful  
lives of the respective assets of 3 to 5 years. Depreciation of software and    
computer equipment is computed using the straight-line method over an estimated 
useful life of 3 years.                                                         

INCOME TAXES                                                                    

Income taxes are accounted for using the asset and liability approach for       
financial reporting. IMSI recognizes deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between the financial 
statement carrying amount and the tax basis of assets and liabilities and net   
operating loss and tax credit carry forwards. Valuation allowances are          
established when necessary to reduce deferred tax assets to the amounts expected
to be realized.                                                                 

FOREIGN CURRENCY TRANSLATION                                                    

The asset and liability accounts of foreign subsidiaries are translated from    
their respective functional currencies at the rates in effect at the balance    
sheet date, and revenue and expense accounts are translated at weighted average 
rates during the periods. Foreign currency translation adjustments are included 
in other comprehensive income. Foreign currency transaction gains and losses are
included in the Statement of Operations.                                        

LONG LIVED ASSETS                                                               

IMSI follows SFAS No. 121, Accounting for the Impairment of Long-Lived Assets   
and for Long-Lived Assets To Be Deposed Of which requires that long-lived       
assets, certain identifiable intangibles, and goodwill related to those assets  
be written down to fair value whenever events or changes indicate that the      
carrying amount of an asset may not be recoverable. IMSI's policy is to review  
the recoverability of all intangible assets at a minimum of once per year and   
record an impairment loss when the undiscounted cash flows do not exceed the    
carrying amount of the asset.                                                   

FAIR VALUE OF FINANCIAL INSTRUMENTS                                             

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The fair value of cash and cash equivalents, accounts receivable and accounts   
payable approximates carrying value due to the short-term nature of such        
instruments. The fair value of long-term obligations are not determinable due to
covenant defaults.                                                              

RECENT ACCOUNTING PRONOUNCEMENTS                                                

In March 1998, the AcSEC issued SOP 98-1, Accounting for the Costs of Computer  
Software Developed or Obtained for Internal Use. This statement requires        
companies to capitalize qualifying computer software costs incurred during the  
application development stage and amortize them over the software's estimated   
useful life. IMSI currently capitalizes the costs associated with developing or 
purchasing internal use software and amortizes these costs over the software's  
estimated useful life.                                                          

In June 1998, The Financial Accounting Standards Board ("FASB") issued SFAS No  
133, Accounting for Derivative Instruments and Hedging Activities, which defines
derivatives, requires that all derivatives be carried at fair value and provides
for hedge accounting when certain conditions are met. SFAS No. 133, as amended  
by SFAS No. 137, is effective for IMSI in fiscal 2002. Although IMSI has not    
fully assessed the implications of SFAS No. 133 as amended, IMSI does not       
believe that the adoption of this statement will have a material effect on      
financial condition or results of operations.                                   

RECLASSIFICATIONS                                                               

Certain fiscal 1998 and 1997 amounts have been reclassified to conform to the   
fiscal 1999 presentation.                                                       

2. RESTRUCTURING CHARGE                                                         

In response to its large year to date losses in fiscal year 1999, IMSI initiated
a company-wide restructuring of its operations. After approval by IMSI's Board  
of Directors, IMSI announced on June 24, 1999 that it had completed development 
of its plan of restructuring. The major actions of the restructuring plan were  
as follows:                                                                     

-   Manufacturing and warehouse outsourcing.                            

-   Facilities consolidation.                                           

-   Personnel reductions.                                               

-   Divestiture of non-core products and focus on core product lines.   

IMSI began its restructuring in June 1999 and anticipates completing its        
restructuring by the end of the fiscal year 2000. Restructuring costs of        
$3,271,000 that would have been recognized through cost of sales in the normal  
course of business (inventory, royalties, license fees, capitalized software,   
warehouse costs, warehouse outsourcing costs) are included in the income        
statement as a component of costs of goods sold.Restructuring costs of          
$1,508,000 that would have been reported as operating expenses in the normal    
course of business are reported in the income statement under the "restructuring
charge" line item.                                                              

The fair value of furniture, fixtures, equipment and leasehold improvements not 
associated with specific product lines was based on current market prices for   
used equipment and furniture, less disposal costs. The fair value of the        
intangible assets associated with the non-core product lines held for sale,     
including EZ Language and business utility product lines, was determined from   
pending discussions with potential purchasers of these product lines.           

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The following table details the restructuring charge by segment and the         
components that comprise the operating expense and costs of goods sold. For a   
complete description of the items in the table, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations."                     

                                                        [Enlarge/Download Table]

(in thousands)                           COST OF GOODS SOLD OPERATING EXPENSE             
                                          North                North                      
                                         America        UK    America      UK      Total  
                                         -------------------------------------------------
                                                                                          
Write down of inventory of non-core        $2,096       $88                        $2,184 
products                                                                                  
Write down of intangibles associated with                                                 
non-core products, total:                                                                 
   License Fees                               217                                     217 
   Goodwill                                                           5                 5 
   Prepaid Royalties                          143                                     143 
   Capitalized Software                       159                                     159 
Write down of furniture, fixtures,                                                        
equipment and leasehold improvements:                                                     
   Novato -                                                                               
      Computers and peripherals                                     150               150 
      Tenant improvements                                           139               139 
      Furniture and fixtures                                        109               109 
   Vacaville & Albuquerque -                                                              
      Furniture and fixtures                                         25                25 
   U.K. -                                                                                 
      Furniture and fixtures                                                   41      41 
Abandoned leases and associated costs:                                                    
   Novato -                                                                               
      Rent                                                          180               180 
      Broker's fee                                                   65                65 
      Excess furniture lease                                         14                14 
      Additional walls and doors                                     29                29 
      Miscellaneous charges                                           3                 3 
   Vacaville warehouse -                                                                  
      Rent                                    249                                     249 
      Broker's fee                                                  103               103 
   Albuquerque tech support facility                                110               110 
   U.K. -                                                                                 
      Rent                                                                      6       6 
      Labor cost for shutdown of office                                        19      19 
Warehouse transition costs                    284                                     284 
Personnel reduction and severance costs:                                                  
   U.S.                                        35                   470               505 
   U.K.                                                                        41      41 
                                         -------------------------------------------------
                                           $3,183       $88      $1,402      $107  $4,780 

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In accordance with EITF 94-3, the restructuring charges recognized as of June   
30, 1999, are not associated with or do not benefit activities that will be     
continued and are not associated with or are not incurred to generate revenues  
after the restructuring plan's commitment date. These costs are either          
incremental to other costs incurred by IMSI in the conduct of its activities    
prior to the commitment date and will be incurred as a direct result of the     
restructuring plan or represent amounts under a contractual obligation that     
existed prior to the commitment date and will either continue after the         
restructuring plan is completed, with no economic benefit to the enterprise, or 
IMSI will incur a penalty to cancel the contractual obligation.                 

As part of the restructuring plan, IMSI planned to terminate 90 
      employees by the end of fiscal year 2000 in the following departments:
       sales and marketing (22); general and administrative (8); manufacturing
       (23); and research and development (37). Our total restructuring charge
    relating to personnel reduction and severance costs was $546,000, of
  which $505,000 applied to the U.S. segment and $41,000 to the U.K.
 segment. These costs were recorded as operating expenses. We also
forgave a $35,000 note receivable from a shareholder and company
      executive who was terminated as part of the restructuring. We recorded
this amount as a cost of goods sold.                            

The following chart summarizes the cash and non-cash portions of the            
restructuring charge (in thousands):                                            

                                                                [Download Table]

                                                Cash   Non-Cash  Total 
                                                                       
Write down of inventory for non-core products  $   --   $2,096   $2,096
Write down of furniture, fixtures, equipment       --      423      423
and leasehold improvements                                             
Write down of intangibles associated with          --      525      525
non-core products                                                      
Abandoned leases and associated costs             753       --      753
Warehouse transition costs                        284       --      284
Personnel reduction and severance costs           469       35      504
                                               ------   ------   ------
     U.S. Segment Subtotal                      1,506    3,079    4,585
                                               ------   ------   ------

Foreign                                           107       88      195
                                               ------   ------   ------
     Total restructuring charge:               $1,613   $3,167   $4,780
                                               ======   ======   ======

3. ACQUISITIONS                                                                 

Zedcor, Inc.                                                                    

In October 1998, IMSI acquired all the outstanding common stock of Zedcor, Inc.,
an Internet provider of art and animations. The total purchase price of $3.5    
million consisted of $970,000 in IMSI stock (176,455 shares at $5.50 per share),
$300,000 in cash (paid by IMSI in November 1998), and $2,230,000 payable        
pursuant to an 8% secured promissory note. The original repayment terms for the 
promissory note called for quarterly payments of $188,000 of principal, plus    
interest accrued as of the date of payment. The note also called for full       
payment on the sooner of: (1) 36 months from the closing, (2) any increase in   
the capital of IMSI by a new stock offering in excess of 20% of the then        
outstanding shares of common stock, (3) the sale of substantially all of the    
assets of IMSI or (4) the merger of IMSI with another entity. As of June 30,    
1999, the note balance was satisfied by IMSI (see Note 7, "Zedcor Fee           
Agreement"). The operating results of Zedcor are included in the statement of   
operations from the date of acquisition. The purchase price for Zedcor, Inc. was
allocated as follows:                                                           

                                                                [Download Table]
                                                                                
Net working capital                                                   $   93,000
Capitalized software development costs (visual content products)       3,000,000
Goodwill                                                                 407,000
                                                                      ----------
                                                                      $3,500,000
                                                                      ==========

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Pro forma results of operations for fiscal 1998 (as restated), assuming that the
Zedcor acquisition occurred at the beginning of each year would be as follows   
(in thousands except per share amounts). Pro forma results for fiscal 1999 would
not be materially different from those reported and are not presented:          

                                                                [Download Table]

                                         1998 (Unaudited)
                                         ----            
                                                         
Revenues                                $62,988          

Income (loss) before taxes                 (978)         

Net income (loss)                          (538)         

Diluted earnings (loss) per share       $ (0.10)         

Org Plus                                                                        

On March 13, 1998, IMSI sold the rights to Family Heritage, a product acquired  
from Corel Corp. in September 1997, to Mindscape, Inc., which was subsequently  
acquired by The Learning Company ("TLC"), for a purchase price of $2.5 million  
(plus $115,000 for inventories and prepaid royalties). The purchase price was   
split into four equal payments of $625,000, the first of which was paid upon    
closing, and the second payment was paid July 15, 1998. The remaining           
installments were due October 15, 1998, and January 15, 1999. However, no       
separate notes payable for such amounts were issued by Mindscape. On September  
29, 1998, TLC paid IMSI approximately $1.7 million representing amounts due to  
IMSI, from the Family Heritage sale ($1,250,000) and other existing contractual 
agreements ($430,000). On October 2, 1998, TLC and IMSI entered into a software 
license agreement whereby TLC sold Org Plus to IMSI in exchange for $3.5 million
as follows: $1.7 million paid by IMSI on October 2, 1998, and $450,000 payments 
due on each of January 1, 1999, April 1, 1999, July 1, 1999, and October 1,     
1999. The September 29, 1998 $1.7 million cash receipt from TLC and the $3.5    
million October 2, 1998 purchase of Org Plus from TLC were accounted for as one 
transaction; accordingly, IMSI recorded the acquisition of Org Plus at a net    
amount of $1.8 million, with $900,000 allocated to goodwill and $900,000        
allocated to capitalized brand names. No revenue was recognized by IMSI as a    
result of these transactions.                                                   

In January 1999, IMSI and TLC agreed to amend the terms of the Org Plus         
agreement to allow IMSI to settle the $1.8 million cash obligation by the       
issuance of 200,000 shares of IMSI common stock. The January Fee Agreement      
required IMSI to file a registration statement by February 28, 1999, but it did 
not specify a remedy if IMSI failed to do so.                                   

In April 1999, IMSI agreed that if TLC sells any shares within 30 days following
the effectiveness of a registration statement covering the 200,000 shares, IMSI 
will pay TLC the difference between the sales price and $8.50 per share, such   
payment to be made either in cash, or by issuing additional shares based on the 
average share price during the thirty day price protection period, at IMSI's    
option. This April amendment required IMSI to file a registration statement by  
May 15, 1999 and to use its "best efforts" to have the registration statement   
declared effective by July 31, 1999. The April Amendment did not specify any    
remedy if IMSI did not file the registration statement or have it declared      
effective by the respective dates.                                              

Based on the June 30, 1999 share price, IMSI was contingently liable to pay TLC 
$725,000 under the April Amendment protection clause. IMSI filed a registration 
statement on June 8, 1999 for the 200,000 shares, but that registration         
statement is not yet effective.                                                 
.                                                                             

On August 27, 1999, TLC (now owned by Mattel) served upon IMSI an arbitration   
demand based on allegations that IMSI failed to timely file the registration    
statement and asserting that the original obligation was revived. Management    
believed that it had reached an agreement in principal with Mattel for the      
issuance of 300,000 additional shares of common stock in satisfaction of its    
claim. However, no written agreement has been executed between the parties.     

In September 1999, IMSI and TLC orally agreed that, in consideration for 300,000
shares and the waiver of a $200,000 receivable due from TLC, TLC would not      
terminate the April agreement and seek $1.8 million in cash and that it would   

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deem any claim that TLC may have for additional shares to be satisfied. No      
written agreement was executed and no shares have been delivered.               

In view of the length of time that has passed since TLC and IMSI reached a      
verbal agreement, during which time IMSI's stock price has fallen and TLC's     
current shares remain unregistered, it is unlikely that TLC will continue to    
accept 300,000 shares in satisfaction of all claims. The nature of the claims   
that TLC might assert based on the agreements described above, and the          
resolution of these potential claims, is highly speculative. Based on the terms 
of the April agreement, no penalties have been incurred. The price protection   
feature of the April agreement is contingent and a charge will be taken at the  
time the contingency is resolved.                                               

Fiscal Year 1998                                                                

During the first quarter of fiscal year 1998, IMSI completed the
following four acquisitions accounted for using purchase accounting. The        
aggregate purchase prices for the acquisitions were comprised, and allocated, as
follows:                                                                        

COMPONENTS OF PURCHASE PRICES FOR ACQUISITIONS                                  

                                                        [Enlarge/Download Table]

                     NUMBER OF                                                           
                     SHARES OF   VALUE OF                         ASSUMPTION    AGGREGATE
                      COMMON      COMMON     NOTES                  OF NET      PURCHASE 
SELLER                 STOCK      STOCK     PAYABLE      CASH     LIABILITIES    PRICE   
------                 -----      -----     -------      ----     -----------    -----   
                                                                                         
Quarterdeck.........       --   $       --  $     --  $1,000,000    $     --   $1,000,000
MapLinx.............       --           --   233,500     233,500     383,000      850,000
MediaPaq............   20,000      240,000        --          --     160,000      400,000
Corel...............  346,020    5,000,000   640,000          --          --    5,640,000
                      -------   ----------  --------  ----------    --------   ----------
                      366,020   $5,240,000  $873,500  $1,233,500    $543,000   $7,890,000
                      =======   ==========  ========  ==========    ========   ==========

ALLOCATION OF AGGREGATE PURCHASE PRICES OF ACQUISITIONS                         

                                                                [Download Table]

                         PURCHASED IN-PROCESS                                   
                             RESEARCH AND                                       
SELLER                        DEVELOPMENT       CAPITALIZED SOFTWARE    GOODWILL
                         --------------------   --------------------    ------- 
                                                                                
Quarterdeck..........         $  517,000             $  483,000         $    -- 
MapLinx..............            506,000                331,000          13,000 
MediaPaq.............            300,000                100,000              -- 
Corel................          5,044,000                517,000          79,000 
                              ----------             ----------         ------- 
                              $6,367,000             $1,431,000         $92,000 
                              ==========             ==========         ======= 

ACQUISITION OF PRODUCTS AND IN-PROCESS TECHNOLOGIES FROM COREL CORPORATION      

On September 30, 1997, the Company acquired the rights to three completed       
products (Corel(R)Flow, Lumiere(TM) and Family Heritage(TM)(formerly, Corel     
Family Tree(TM))) and four in-process technologies (CorelCAD(TM), Corel Click   
and Create(TM), Visual CADD(TM) and Corel Personal Architect(TM)) in the CAD,   
diagramming and consumer categories from Corel (the "Acquisition"), for $5      
million in IMSI common stock (346,020 shares valued at approximately $14.45 per 
share) and $640,000 in notes payable due in two installments, $140,000 due in   
March 1998 (which was paid on June 3, 1998 with the proceeds from the Company's 
borrowings under its new May 4, 1998 bank credit line), and $500,000 due in     
September 1998. The Company allocated the $5,640,000 as described below, based  
upon a discounted net cash flow analysis utilizing management's estimates and   
costs to enable such technologies to reach technological feasibility and upon a 
valuation.                                                                      

The discounted net cash flow analysis as of September 30, 1997 was based upon   
management's estimates of future net revenues from each of the three products   
and four in-process technologies over the next four fiscal years, based upon    
expected product costs and other operating expenses. The expected future net    
cash flows were discounted using a 23% rate from in process technologies and 18%
for existing products.                                                          

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As of September 30, 1997, the Company estimated that total future revenues from 
all seven products/technologies acquired from Corel could exceed approximately  
$20 million (approximately $17 million related to the in-process technologies   
and approximately $3 million related to the developed technologies) over the    
next four fiscal years. This is a forward-looking statement. There can be no    
assurance that any revenues from such products/technologies will be generated by
the Company.                                                                    

-   $5,044,000 relating to the four in-process technologies was expensed as     
    purchased in-process research and development in the quarter ended September
 30, 1997. At the time of the Acquisition, the Company determined that the
 technological feasibility of the four in-process technologies had not yet
  been established and that, as of September 30, 1997, such technologies had
   no alternative future uses. These technologies required additional research
    and developmental efforts to develop these products into commercially viable
  products. From September 30, 1997 through June 30, 1998, the Company spent
approximately $300,000 on research and development to have the four     
  in-process technologies reach technological feasibility. CorelCAD products
    (now called TurboCAD Solid Modeler and TurboCAD 3D Modeler) were released in
  March 1998. Sales for the two products for fiscal year ended June 30, 1998
   were approximately $700,000 and approximately $100,000 in fiscal year 1999.
Products called Click and Create and Personal Architect were released in
June 1998. Click and Create, now called Multimedia Fusion, had sales of 
   $244,000 in fiscal year 1998 and $340,000 in fiscal year 1999. The relevant
technology in Personal Architect was included in the new version of     
  Floorplan. Floorplan sales totaled $13,166,000 in fiscal year 1999. Visual
   CADD (version 3) was released in the second quarter of fiscal year 1999 and
had fiscal year 1999 sales of $419,000.                                 

-   $517,000 relating to the three completed products was allocated to          
capitalized software to be amortized over the shorter of the period of  
expected revenues or 18 months, pursuant to the Company's amortization  
  policy for capitalized software development costs discussed in Note 1. The
 Family Heritage product was released in two versions, Family Heritage and
  Family Heritage Deluxe, which were released in November and December 1997,
 respectively. The Company had net revenues of approximately $300,000 from
 Family Heritage products during the fiscal year 1998. The Family Heritage
  product was sold on March 13, 1998. The Company released products formerly
   known as Lumiere and Flow in June 1998. Sales of Lumiere and Flow in fiscal
year 1999 were $385,000 and $634,000, respectively.                     

-   $79,000 was allocated to goodwill to be amortized over 3 years.             

ACQUISITION OF PRODUCTS AND IN-PROCESS TECHNOLOGIES FROM QUARTERDECK CORPORATION

On July 1, 1997, the Company acquired certain products and in-process           
technologies from Quarterdeck, who was subsequently purchased by Symantec, for a
cash payment of $1 million. The Company utilized a discounted net cash flow     
model with various estimates and assumptions to allocate the purchase price. The
discounted net cash flow analysis as of July 1, 1997 was based upon management's
estimates of future net revenue from the products/technologies over the next    
three fiscal years, based upon expected unit sales and average selling prices of
comparable products, expected product costs and other operating expenses. The   
expected future net cash flows were discounted using a 23% rate for in-process  
technologies and 18% for existing products. Based upon the Company's estimates  
of future cash flows and costs to have certain of these technologies reach      
technological feasibility and based upon a valuation, the Company allocated the 
purchase price as follows:                                                      

-   $517,000 was allocated to purchased in-process research and development     
related to Quarterdeck's "EZ Impact" technology. At the time of the     
    acquisition, management believed that technological feasibility of EZ Impact
  had not yet been established and that, as of July 1, 1997, this technology
 had no alternative future uses. The most significant estimate made by the
    Company in determining the amount to be allocated to in-process research and
development was that the Company estimated future net revenues from EZ  
    Impact over the next three years, based upon expected unit sales and average
  selling prices of comparable products. After the Company's in-depth review
of the competitive marketplace and the state of the EZ Impact technology
   acquired in late calendar 1997, the Company determined that EZ Impact would
not ever become an economically viable product and abandoned further    
development efforts.                                                    

-   $483,000 was allocated to capitalized software to be amortized over the     
shorter of the life of the products' expected revenues or 18 months,    
pursuant to the Company's amortization policy for capitalized software  
   development costs discussed in Note 1. Such capitalized software related to
    Quarterdeck's product Hijaak Pro. During the fiscal year ended June 30, 1998
    and 1999, the Company had net revenues from Hijaak Pro of approximately $2.0
million and $1.2 million, respectively.                                 

-   ACQUISITION OF PRODUCTS AND IN-PROCESS TECHNOLOGIES FROM MAPLINX CORPORATION

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On July 1, 1997, the Company acquired certain products and in-process           
technologies from MapLinx Corporation for a total purchase price of $850,000 as 
follows: $233,500 in cash, a note payable for $233,500 and $383,000 in assumed  
net liabilities. The Company utilized a discounted net cash flow model with     
various estimates and assumptions to allocate the purchase price. The discounted
net cash flow analysis as of July 1, 1997 was based upon management's estimates 
of future net revenues from the product/technologies over the next three fiscal 
years, based upon expected unit sales and average selling prices of comparable  
products, expected product costs and other operating expenses. The expected     
future net cash flows were discounted using a 23% rate for in-process           
technologies and 18% for existing products. Based upon the Company's estimates  
of future cash flows and costs to have certain technologies reach technological 
feasibility and based upon a valuation, the Company allocated the purchase price
between two products, MapLinx Mail Manager and MapLinx, and goodwill as follows:

-   $506,000 was allocated to purchased in-process research and development     
   related to MapLinx Mail Manager. At the time of the acquisition, management
   believed that technological feasibility of MapLinx Mail Manager had not yet
been established and that, as of July 1, 1997, these technologies had no
 alternative future uses. This technology required additional research and
developmental efforts to develop these products into commercially viable
   products. During the fiscal years ended June 30, 1998 and 1999, the Company
spent approximately $120,000 and $80,000, respectively, on research and 
development. MapLinx Mail Manager was released in the second quarter of 
 fiscal 1999. Revenue from MapLinx Mail Manager totaled $394,000 in fiscal
year 1999.                                                              

-   $331,000 was allocated to capitalized software related to the MapLinx       
product, to be amortized over the shorter of the life of the period of  
expected revenues or 18 months, pursuant to the Company's amortization  
policy for capitalized software development costs discussed in Note 1.  
During the fiscal year ended June 30, 1998, the Company had net revenues
    from MapLinx of approximately $1.5 million. MapLinx had revenues of $439,000
in fiscal year 1999.                                                    

-   $13,000 was allocated to goodwill to be amortized over three years.         

ACQUISITION OF MEDIAPAQ, INC.                                                   

On August 22, 1997, the Company acquired 100% of the common stock of MediaPaq   
for a total purchase price of $400,000 as follows: $240,000 in IMSI common stock
(20,000 shares at $12.00 per share) and $160,000 in assumed liabilities.        
MediaPaq's products and in-process technologies consisted primarily of browser  
software features that the Company believed it could incorporate into existing  
products and future products under development in the Company's MasterClips     
family of products. The expected future net cash flows as of August 22, 1997    
were based upon management's estimates of future net revenues from the          
product/technologies, based upon expected unit sales and average selling prices 
of comparable products, expected product costs and other operating expenses. The
expected future net cash flows were discounted using a 23% rate for in-process  
technologies and 18% for existing products. Based upon the Company's estimates  
of future cash flows and costs to have certain of MediaPaq's products and       
in-process technologies reach technological feasibility, the Company allocated  
the purchase price as follows:                                                  

-   $300,000 was allocated to purchased in-process research and development     
  related to browser software features that were expected to be incorporated
into the next version of MasterClips. At the time of the acquisition,   
management believed that technological feasibility of certain of the    
 acquired technologies had not yet been established and that, as of August
    22, 1997, these technologies had no alternative future uses. This technology
required additional research and developmental efforts to develop these 
products into commercially viable products. From August 22, 1997 through
March 1998, the Company spent approximately $100,000 on research and    
development to have the in-process technologies reach technological     
feasibility. In March 1998, the Company released MasterClips 303,000    
incorporating such browser software features.                           

-   $100,000 was allocated to capitalized software related primarily to browser 
   software features that were incorporated into existing products MasterClips
202,000 and MasterClips 150,000 to be amortized over the shorter of the 
products' expected revenues or 18 months, pursuant to the Company's     
   amortization policy for capitalized software development costs discussed in
Note 1.                                                                 

-   Sales of MasterClips family products totaled $17 million in fiscal 1998 and 
$12 million in fiscal 1999.                                             

4. AMENDED BANK LINE OF CREDIT AND TERM LOAN                                    

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On May 4, 1998 IMSI entered into a line of credit agreement with Union Bank of  
California ("Union") under which it could borrow the lesser of $13.5 million or 
80% of eligible accounts receivable, at Union's reference rate plus 1/2 % or    
LIBOR plus 2 %, at IMSI's option. We borrowed up to approximately $10.0 million 
under the line of credit agreement. Union also provided IMSI a $1.5 million term
loan at the same interest rate. The line of credit was to expire on October 31, 
1999 and the repayment of the term loan was due on the same date. Due to IMSI's 
defaults under the agreements, the line of credit was revised as of September   
24, 1998 to a non-revolving, reducing loan with no further borrowings available.
The interest rate was set at Union's reference rate plus 3%. The amended loan   
agreements require IMSI to comply with certain financial covenants including    
maintenance of net worth and working capital requirements. The revised loans    
were due on September 30, 1999. Under the terms of the agreements, all assets   
not subject to liens of other financial institutions have been pledged as       
collateral against the loans.                                                   

As of September 30, 1999, IMSI is in default of many of these covenants. IMSI   
reduced the debt owed to Union to approximately $4.8 million. IMSI anticipates  
it will be able to repay the remaining amount owed to Union with proceeds to be 
received from non-core product line sales or license. Given the intent of IMSI  
to repay Union with such proceeds, IMSI is negotiating with Union to obtain a   
60-day forbearance to provide time to allow IMSI to cure its defaults.          

5. SUBORDINATED LOAN FACILITY WITH WARRANTS                                     

On November 3, 1998, IMSI borrowed $2.5 million under a three-year subordinated 
loan facility with Silicon Valley Bank. The interest rate is 12%. As part of the
loan facility, detachable warrants, which have a five-year term, are issuable to
purchase shares of IMSI's common stock as follows:                              

                                                                [Download Table]

If not paid in full prior to:   Warrants to be issued   Exercise price per share
-----------------------------   ---------------------   ------------------------
                                                                                
     November 3, 1998                   30,000                    $7.00         
     October 31, 1999                    5,000                     7.00         
     January 31, 2000                   25,000                     7.00         
     April 30, 2001                     65,000                     6.00         
     October 31, 2001                  125,000                     5.00         

Management estimated that the fair value of the warrants, using the Black       
Scholes option-pricing model, was $776,000. This value will be recorded as      
additional interest expense over the life of the loan. IMSI has recorded        
interest expense of $172,000 for the year ended June 30, 1999 for these         
warrants. The valuation assumes the loan will not be repaid until November 3,   
2001 and all warrants will be issued. The assumptions used in the valuation were
exercise of the warrants at expiration, 57% volatility and a risk-free interest 
rate of 5.5%                                                                    

6. SUBORDINATED CONVERTIBLE DEBT                                                

On May 24, 1999, IMSI entered into a securities purchase agreement and related  
agreements with BayStar Capital, L.P. ("BayStar"). We issued BayStar a three    
year $5 million principal amount 9% Senior Subordinated Convertible Note, due   
May 24, 2002 with interest paid quarterly. The note is convertible, at BayStar's
option, into shares of common stock at any time at an initial conversion price  
of $ 7.5946 per share, which is 115% of the market price of the common stock on 
the closing date of the transaction. We agreed to register the shares issuable  
to BayStar.                                                                     

The conversion price is subject to adjustment if we issue or sell stock in      
defined transactions for less than the conversion price. Additionally, on the 12
month anniversary of the closing date, if the market price of the common stock  
is lower than $6.604, then the conversion price will be adjusted to the greater 
of (i) 115% of the average of the price of the common stock for the twenty (20) 
trading days immediately preceding May 24, 2000 or (ii) $4.6228. The trading    
value of its common stock on the date of issuance of the subordinated           
convertible debt was $6.50. The value of the contingent beneficial conversion   
feature at the date of commitment, and the potential charge to earnings, is     
$2,030,000.                                                                     

BayStar also received a warrant to purchase 250,000 shares of common stock at an
initial exercise price of $7.5946. Management estimated that the fair value of  
the warrants, using the Black Scholes option-pricing model, was $1,162,000. This
value will be recorded as additional interest expense over the life of the loan.
IMSI has recorded interest expense of $65,000 for the year ended June 30, 1999  
for this warrant. The assumptions used in the valuation were exercise of the    
warrants at expiration, 105% volatility and a risk-free interest rate of 5.5%.  
We may be required to issue additional shares depending on                      

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the occurrence of specified events, including the failure to make timely        
interest payments on the convertible note. In particular, in lieu of any late   
interest payment, we may be required to issue shares of common stock to BayStar 
equal to 200% of the amount of the late interest payment divided by the closing 
price of the common stock on the date prior to payment. Furthermore, we may need
to adjust the stated interest rate, adjust the conversion price of the note,    
adjust the exercise price of the warrant, or issue additional shares to prevent 
dilution resulting from stock splits, stock dividends or other equity or debt   
placements. A penalty of 1% of the principal amount per month accrues for each  
month subsequent to September 21, 1999 until the shares to be issued to BayStar 
are included in an effective registration statement. A registration statement on
Form S-3 was filed on June 25, 1999 which includes 1,375,000 shares of stock    
issuable to BayStar, but that registration statement is not yet effective.      

7. COMMON STOCK                                                                 

On June 30, 1999, IMSI sold images to Corel Corporation in consideration for    
20,000 of shares of IMSI common stock, out of a total of 346,020 shares Corel   
acquired in September 1997 in connection with the purchase of several product   
lines. The value attributed to the 20,000 shares ($320,000), and the images     
sold, was the trading price of the shares on June 30, 1999. This royalty        
transaction was among those transactions for which IMSI determined that revenue 
should have been deferred to a subsequent period, as described in Note 16.      

Shares of common stock were issued as a result of the following agreements that 
IMSI entered into during fiscal year 1999:                                      

Zedcor Fee Agreement. On February 25, 1999, IMSI entered into a fee agreement   
with the former shareholders of Zedcor. Under the terms of the Zedcor Fee       
Agreement, IMSI issued 150,321 shares of common stock, with a market value of   
$11.44 per share, in satisfaction of $1,503,000 (less total cash payments of    
$727,000) owed to the former shareholders of Zedcor under the terms of the      
acquisition described in Note 3. In May 1999, IMSI agreed with the former Zedcor
shareholders to issue an additional 50,476 shares of common stock, valued at the
market price of $6.56 per share. Of the 50,476 shares issued, IMSI issued 40,476
shares under the Fee Agreement and 10,000 shares in consideration of the release
of a security interest held by the former Zedcor shareholders. We recognized a  
charge of $311,000 upon the issuance fo the 50,476 shares.                      

The May 1999 amendments to the Zedcor Fee Agreement provide for the issuance of 
additional shares if the average market price of IMSI stock is less that $8 per 
share three days before the registration of the shares issued is declared       
effective. This price protection applies only to the 190,797 shares issued for  
the (i) conversion of the note balance into 150,321 shares, and (ii) the        
issuance of the additional 40,476 shares under the May amendments to the Zedcor 
Fee Agreement.                                                                  

Asset Purchase Agreement. On December 24, 1998, IMSI purchased certain assets of
Clipartconnection.com, an Internet provider of art and animation, for a purchase
price of 18,053 shares of common stock valued at $150,000.                      

Garay Fee Agreement. On January 11, 1999, IMSI entered into a fee agreement with
the Law Offices of Mark Garay, Inc. ("Garay") Under the terms of the Garay Fee  
Agreement, IMSI issued 11,112 shares of common stock, valued at $10.25 per      
share, in satisfaction of a $100,000 debt owed for legal services performed.    

TLC Fee Agreement. On October 2, 1998, The Learning Company ("TLC") and IMSI    
entered into a software license agreement whereby TLC sold Org Plus to IMSI in  
exchange for current and future cash payments. In January 1999, IMSI and TLC    
agreed to amend the terms of the Org Plus agreement to allow IMSI to settle the 
$1.8 million portion of the unpaid purchase price by the issuance of 200,000    
shares of common stock, valued at $12.00 per share. See Note 3, above. See also 
"Future Performance and Additional Risk Factors - Potential Penalties for       
Agreements Relating to Registration of Shares."                                 

Greentree Fee Agreement. On February 18, 1999, IMSI entered into a fee agreement
with Greentree to satisfy a $150,000 debt owed to Greentree under the terms of a
software license agreement between IMSI and Greentree. In settlement of this    
debt, IMSI issued to Greentree 18,053 shares, valued at $11.00 per share.       

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Capital Ventures International Agreement. On March 3, 1999, we entered into a   
stock purchase agreement with Capital Ventures International ("CVI"). CVI paid  
us $5 million and we issued 437,637 shares of our common stock, valued at $11.42
per share.                                                                      

The agreement required us to issue additional shares to CVI if the market price 
of our common stock on future dates before March 4, 2000 is less than $11.42.   
Our obligation to issue additional shares to CVI is subject to a share limit,   
initially defined as an additional 187,558 shares, which may be increased if we 
conduct an equity or convertible rights transaction, within defined parameters, 
on or before March 4, 2000.                                                     

Additionally, either 18 months after March 3, 1999, or if we announce within    
that time period a capital transaction as defined in the agreement, then CVI can
purchase up to $3 million worth of additional shares of our common stock, at a  
price initially defined as not less than $7.9975, which allows CVI to purchase a
maximum of 375,117 additional shares. The price for the optional purchase of    
additional shares may be adjusted, with provisions that protect CVI against     
dilution by a stock split, and ensure that CVI will realize the benefit of any  
merger or distribution of shares.                                               

CVI also received a warrant to purchase 131,291 shares of common stock with an  
initial exercise price of the warrant of $14.8525 per share. The warrant expires
March 5, 2003. The warrant may be exercised at any time after March 3, 2000, or 
earlier in the event we have a capital transaction as defined in the agreement. 
The initial exercise price is $14.8525 per share. The exercise price and number 
of shares issued is subject to adjustment with anti-dilution provisions similar 
to the provisions for the optional additional share purchase.                   

We believed a total of 1,131,603 shares were potentially issuable to CVI. We    
filed a registration statement on Form S-3 on June 8, 1999 for that number of   
shares, but that registration statement is not effective. Under the agreement   
with CVI, if the registration statement was not declared effective before July  
3, 1999, then we are obligated to pay CVI one percent of the amount invested by 
CVI for the first month after July 3, 1999, and two percent for each month      
thereafter until the registration statement is declared effective.              

Homestyles Agreement. On January 11, 1999, IMSI entered into a fee agreement    
with Homestyles to satisfy a $90,000 debt IMSI owed under the terms of various  
software license agreements. In settlement of this debt, IMSI issued 10,000     
shares of common stock, valued at $10.25 per share.                             

Minnevich Agreement. On January 11, 1999, IMSI entered into a fee agreement with
Minnevich to satisfy a $45,000 debt owed under the terms of various software    
license agreements. In settlement of this debt, IMSI issued 5,000 shares of     
common stock, valued at $10.25 per share.                                       

Gateway Agreement. On March 1, 1999, IMSI entered into a fee agreement with     
Gateway to satisfy a $72,000 debt owed under the terms of various manufacturing 
agreements. In settlement of this debt, IMSI issued 8,000 shares of common      
stock, valued at $11.438 per share.                                             

Spatial Agreement. On March 25, 1999, IMSI entered into a fee agreement with    
Spatial to satisfy a $45,000 debt owed under the terms of various software      
license agreements. In settlement of this debt, IMSI issued 5,000 shares of     
common stock, valued at $11.25 per share.                                       

StarBase Agreement. On March 26, 1999, IMSI entered into a fee agreement with   
StarBase to satisfy a $121,000 debt owed under the terms of various software    
license agreements. In settlement of this debt, IMSI issued 10,750 shares of    
common stock, valued at $10.25 per share.                                       

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Americ Disc Agreement On April 5, 1999, IMSI entered into a stock transfer      
agreement with Americ Disc to satisfy a $700,000 debt owed for an outstanding   
balance relating to duplication services. In settlement of this debt, IMSI      
issued 63,987 shares of common stock, valued at $10.94 per share. Additionally, 
Americ Disc received warrants to purchase 13,000 shares at $14.23 exercisable   
for a period of four years.                                                     

Software Syndicate Fee Agreement. On June 7, 1999, IMSI entered in a fee        
agreement with Software Syndicate to satisfy a $152,000 debt owed under terms of
various license agreements. In settlement, IMSI issued 21,690 shares of common  
stock, valued at $7.00 per share.                                               

Pursuant to the agreements described above, IMSI issued 503,913 shares, whose   
cumulative value based on the closing price of the common stock on the date of  
settlement was $5,696,000, to retire debt totalling $4,778,000. Because the     
value of the shares issued was $918,000 greater than the face value of the      
respective debt retired, IMSI recorded an extraordinary charge for the          
extinguishment of debt of $959,000, or $0.15 per share, after including $41,000 
for the costs incurred to issue and register the shares. This is summarized in  
the following table:                                                            

                                                        [Enlarge/Download Table]

                                                                   Face       Difference 
                              Number of    Closing   Closing      Value of        in     
                            Shares Issued   Price     Value         Debt        Values   
                            -------------  -------  ----------   ----------   ---------- 
                                                                                         
Zedcor Fee Agreement           150,321     $11.44    $1,720,000   $1,503,000    $217,000 
Garay Fee Agreement             11,112      10.25       114,000      100,000      14,000 
TLC Fee Agreement              200,000      12.00     2,400,000    1,800,000     600,000 
Greentree Fee Agreement         18,053      11.00       199,000      150,000      49,000 
Homestyles Agreement            10,000      10.25       103,000       90,000      13,000 
Minnevich Agreement              5,000      10.25        51,000       45,000       6,000 
Gateway Agreement                8,000      11.44        91,000       72,000      19,000 
Spatial Agreement                5,000      11.25        56,000       45,000      11,000 
StarBase Agreement              10,750      10.25       110,000      121,000     (11,000)
Americ Disc Agreement           63,987      10.94       700,000      700,000           0 
Software Syndicate              21,690       7.00       152,000      152,000           0 
                               -------               ----------   ----------    -------- 
                  Total:       503,913               $5,696,000   $4,778,000    $918,000 
                               =======               ==========   ==========    ======== 

Cost of registration/issuance                                                     41,000 
                                                                                ---------
Total extraordinary charge                                                      $959,000 
                                                                                ======== 

IMSI had originally determined that the extraordinary charge related to the     
extinguishment of debt amounted to $1,398,000. This amount was reduced to       
$959,000 after IMSI reviewed the calculation of the loss associated with the    
Zedcor Fee Agreement. The 1999 financial statements reflect the reduction of the
extraordinary loss to $959,000.                                                 

8.  SEGMENT INFORMATION                                                         

IMSI has four reportable operating segments: North America, the United Kingdom, 
Germany and Australia Each segment generates revenues and incurs expenses       
related to the sale of our PC productivity software. Revenues and expenses      
related to our expansion to the Internet are not material and are included in   
the results of North America. IMSI has determined that the chief operating      
decision maker is the Company's CEO who regularly reviews separate country      
profit and loss reports. For purposes of reporting segment information under    
SFAS No. 131, we have combined those countries that do not meet the quantitative
threshold in "Rest of World." General and administrative costs at the corporate 
level, interest expense and the amortization of intangibles, capitalized        
software development costs and license fees are not allocated to individual     
countries and are included in the North America segment. Intangible assets are  
included in the assets of the North America segment and are not allocated to the
other segments. Inter-segment revenues represent sales between segments and are 
accounted for at cost plus a predetermined margin. The inter-segment            
transactions are eliminated in the preparation of the consolidated financial    
statements.                                                                     

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The following table details segment information as of and for the years ended   
June 30 as follows (in thousands):                                              

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                                                        [Enlarge/Download Table]

                                        North                                    Rest of   Elimin-             
                                       America      UK      Germany   Australia   World     ations      Total  
                                       --------   -------   -------   ---------  -------   --------    ------- 
Fiscal year 1999:                                                                                              
                                                                                                               
Net Revenues - external customers      $ 25,249   $ 3,188   $ 4,199    $ 2,471   $ 2,572               $37,679 
             - inter-segment              2,736        --        --         --        --     (2,736)        -- 
Operating Income (loss)                 (23,259)       42    (1,152)       414        65               (23,890)
Interest and other expense, net          (1,900)        0         1          6        13                (1,880)
Identifiable assets                      22,446       827     1,757      1,038     1,076                27,144 
Depreciation and amortization expense     4,133        62        72         23        18                 4,308 
Income tax expense (benefit)                (22)      113         0         34        68                   237 
Extraordinary item                         (959)       --        --         --        --                  (959)
Net Income (loss)                       (26,027)      (71)   (1,151)       386      (103)              (26,966)

Fiscal year 1998:                                                                                              
Net Revenues - external customers        43,593     5,193     7,195      3,585     2,499                62,065 
             - inter-segment              5,294        --        --         --        --     (5,294)        -- 
Operating Income (loss)                  (5,444)    1,585     1,742      1,498       705                    86 
Interest income (expense)                  (766)      (15)       12          3         7                  (759)
Identifiable assets                      29,435     1,224     2,787      1,453       756                35,655 
Depreciation and amortization expense     3,979        77        46         27        18                 4,147 
Income tax expense (benefit)               (334)        0         0         31         0                  (303)
Net Income (loss)                        (5,812)    1,551     1,754      1,465       672                  (370)

Fiscal year 1997:                                                                                              
Net Revenues - external customers        27,632     3,923     5,724      2,685     1,875                41,839 
             - inter-segment              6,991                                              (6,991)           
Operating Income (loss)                   3,570      (354)    1,474       (310)      (13)                4,367 
Interest income (loss)                     (130)       (5)        0          3         2                  (130)
Identifiable assets                      12,799     1,280     1,334      1,147     1,013                17,573 
Depreciation and amortization expense     1,974        61        21         26        16                 2,098 
Income tax expense (benefit)              1,609         0         0         31         0                 1,640 
Net Income (loss)                      $  2,033   $  (411)  $ 1,473    $  (420)  $   (78)             $  2,597 

Each segment generates revenues from all of our product categories. Revenues by 
categories are as follows (in thousands):                                       

                                                                [Download Table]

                                 1999            1998            1997      
                            --------------   -------------   ------------- 
                               $        %       $       %       $       %  
                            -------    ---   -------   ---   -------   --- 
                                                                           
Precision design            $13,168     35%  $15,658    25%  $11,302    27%
Graphic design               12,928     34%   18,911    31%   19,461    47%
Business applications         8,013     21%    8,981    14%    2,558    6% 
Utilities                     3,921     11%   11,759    19%    4,816    12%
Other products                2,511      7%    8,160    13%    4,656    10%
Increase in sales reserves   (2,862)    -8%   (1,404)   -2%     (954)   -2%
                            -------    ---   -------   ---   -------   --- 
Total net revenues          $37,679    100%  $62,065   100%  $41,839   100%
                            =======    ===   =======   ===   =======   === 

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9. INVENTORIES                                                                  

At June 30, inventories consist of (in thousands):                              

                                                                [Download Table]

                                1998           1999  
                                ----           ----  
                                                     
Raw materials                  $ 2,343        $2,882 
Finished goods                   3,897         4,282 
                               -------        ------ 
                                 6,240         7,164 
Reserves for obsolescence       (3,345)         (615)
                               -------        ------ 
                               $ 2,895        $6,549 
                               =======        ====== 

As of June 30, 1999, IMSI's inventory reserves for obsolescence included charges
of $2,184,000 related to the Company's restructuring and its plan to divest     
non-core product lines in order to focus on a limited number of core product    
lines.                                                                          

10.  FURNITURE AND EQUIPMENT                                                    

At June 30, furniture and equipment consist of (in thousands):                  

                                                                [Download Table]

                                 1999          1998   
                                 ----          ----   
                                                      
Computer and office equipment   $ 5,575       $ 4,965 
Software                            944           701 
                                -------       ------- 
                                  6,519         5,666 
Accumulated depreciation         (2,887)       (2,236)
                                -------       ------- 
                                $ 3,632       $ 3,430 
                                =======       ======= 

11.  INCOME TAXES                                                               

The provision (benefit) for taxes on income for the years ended June 30, 1999,  
1998, and 1997 was comprised of the following (in thousands):                   

                                                                [Download Table]
                                 1999        1998        1997  
                                 ----        ----        ----  
                                                               
Current:                                                       
             Federal            $(3,990)    $ 2,065     $1,778 
             State                    0         397        324 
             Foreign                215         211        140 
                                -------     -------     ------ 
                                 (3,775)      2,673      2,242 
                                -------     -------     ------ 
Deferred                                                       
             Federal              3,565      (2,424)      (285)
             State                  447        (431)       (63)
             Foreign                  0        (121)      (254)
                                -------     -------     ------ 
                                  4,012      (2,976)      (602)
                                -------     -------     ------ 
Total tax provision (benefit)   $   237     $  (303)    $1,640 
                                =======     =======     ====== 

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Deferred tax balances consisted of the following (in thousands):                

                                                                [Download Table]

                                                               June 30,        
                                                          1999          1998   
                                                        --------       ------- 
                                                                               
Current assets                                                                 
       Allowance for doubtful accounts and returns      $  2,125       $ 1,362 
       Accrued vacation and other liabilities                 97           293 
       Inventory reserve                                     386           192 
       Foreign reserves and other                             --           157 
       Accrued restructuring costs                           574            -- 
       Research and development credit                        95            -- 
                                                        --------       ------- 
                                                           3,277         2,004 
Noncurrent assets                                                              
       Package design costs                                  154           176 
       NOL carryforward                                    4,396            58 
       Purchased intangibles                               3,790         2,596 
       Other                                                   0            80 
                                                        --------       ------- 
                                                          11,617         4,914 

Valuation allowance                                      (11,126)           -- 
                                                        --------       ------- 
Total assets                                                 491         4,914 
                                                        --------       ------- 
Current liabilities                                           --           (87)
Noncurrent liabilities                                                         
       Capitalized software development costs                 --            (5)
       Deferred state taxes                                   --          (229)
       Other                                                 (26)           -- 
                                                        --------       ------- 
Total liabilities                                            (26)         (321)
                                                        --------       ------- 
Net deferred tax assets                                 $    465       $ 4,593 
                                                        ========       ======= 

At June 30, 1999, IMSI had an operating loss carryforward of approximately      
$11,400,000 for federal tax purposes, which expires in various amounts from 2001
to 2019 and related carryforwards for state purposes.                           

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The effective tax rate differs from the federal statutory rate for the years    
ended June 30 as follows (in thousands):                                        

                                                                [Download Table]
                                            1999         1998          1997  
                                            ----         ----          ----  
                                                                             
Federal tax at 34% statutory rate         $ (8,762)      $(229)      $ 1,441 

State tax provision, net of                                                  
   federal benefit                          (1,504)        (56)          172 

Change in valuation allowance               11,126          --          (138)

Cost (benefit) related to offshore                                           
   intellectual property                        --        (335)          335 

In-process technology write off,                                             
   nondeductible for tax                        --         102            -- 

Foreign sales corporation benefit               --          --           (68)

Other                                         (623)        215          (102)
                                          --------       -----       ------- 
Total income tax provision (benefit)      $    237       $(303)      $ 1,640 
                                          ========       =====       ======= 

12. EARNINGS PER SHARE                                                          

Basic earnings per share is computed by dividing net income (loss) by the       
weighted average number of common shares outstanding for the period. Diluted    
earnings per share reflects the potential dilution that could occur from common 
shares issuable as a result of the exercise or conversion of stock options,     
warrants or other convertible securities. A total of 1,611,100 potentially      
dilutive securities for the year ending June 30, 1999 and 627,517 for the year  
ending June 30, 1998 have not been included because their inclusion would be    
anti-dilutive.                                                                  

The weighted average numbers of shares outstanding (denominator) used to        
calculate basic earnings per share are reconciled to the numbers of shares used 
in calculating diluted earnings (loss) per share as follows (in thousands):     

                                                                [Download Table]

                                       FOR THE YEARS ENDED JUNE 30,
                                       ----------------------------
                                        1999       1998       1997 
                                        ----       ----       ---- 
                                                                   
Shares used to compute basic EPS        6,275      5,513      4,946
Add effect of dilutive securities:                                 
  Stock options                            --         --        736
                                        -----      -----      -----
Shares used to compute diluted EPS      6,275      5,513      5,682
                                        =====      =====      =====

13.  STOCK OPTIONS AND EMPLOYEE STOCK INCENTIVE PLANS                           

IMSI's 1992 Stock Option Plan authorizes the issuance of up to 900,000 shares of
common stock. The 1993 Employee                                                 

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Incentive Plan, as amended, permits IMSI to grant options to purchase up to     
2,925,000 shares of common stock to employees, directors and consultants at     
prices not less than the fair market value at date of grant for incentive stock 
options and not less than 85% of fair market value for nonstatutory stock       
options. These options generally expire 10 years from the date of grant and     
become exercisable ratably over a 4 to 5-year period. At June 30, 1999, 743,943 
shares were available for future grants under the 1993 Plan.                    

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Option activity under the plans is as follows:                                  

                                                                [Download Table]

                                                                     WEIGHTED   
                                                     NUMBER OF       AVERAGE    
                                                      SHARES      EXERCISE PRICE
                                                                                
Outstanding, July 1, 1997                            1,323,662        $ 3.19    
Granted (weighted average fair value of $5.65)         316,914          7.69    
Exercised                                             (133,456)         1.80    
Canceled                                              (239,500)         4.21    
                                                     ---------        ------    
Outstanding, June 30, 1997                           1,267,620          4.27    
Granted (weighted average fair value of $7.58)         925,525         13.13    
Exercised                                             (171,952)         2.77    
Canceled                                              (173,055)        11.39    
                                                     ---------        ------    
Outstanding, June 30, 1998                           1,848,138          8.18    
Granted (weighted average fair value of $5.39)       1,049,825          7.60    
Exercised                                             (164,150)         4.92    
Canceled                                              (800,556)        10.81    
                                                     ---------        ------    
Outstanding, June 30, 1999                           1,933,257        $ 7.00    
                                                     =========        ======    

Additional information regarding options outstanding as of June 30, 1999 is as  
follows:                                                                        

                                                        [Enlarge/Download Table]

                      OPTIONS OUTSTANDING                                   OPTIONS EXERCISABLE      
---------------------------------------------------------------------  ----------------------------- 
                                        WEIGHTED AVG.                                                
                                          REMAINING                                                  
RANGE OF                NUMBER           CONTRACTUAL   WEIGHTED AVG.     NUMBER        WEIGHTED AVG. 
EXERCISE PRICES       OUTSTANDING         LIFE (YRS)   EXERCISE PRICE  EXERCISABLE     EXERCISE PRICE
                                                                                                     
$0.11 -   3.56           365,894             4.5          $ 1.92         355,880          $ 1.89     
$3.67 -   5.92           271,506             6.9            4.34         199,209            4.21     
$5.97 -  12.00         1,048,975             8.9            7.83         125,190            8.75     
$12.13 - 18.38           246,882             8.9           14.01           9,859           13.64     
                       ---------             ---          ------         -------          ------     
                       1,933,257             7.8          $ 7.00         690,138          $ 3.98     
                       =========             ===          ======         =======          ======     

IMSI continues to account for stock-based awards issued to employees using the  
intrinsic value method in accordance with Accounting Principles Board No. 25,   
Accounting for Stock Issued to Employees and its related interpretations.       
Accordingly, no compensation expense has been recognized in the financial       
statements for employee stock arrangements as all grants have been made at fair 
market value. SFAS No. 123, Accounting for Stock-Based Compensation, requires   
the disclosure of pro forma net income and earnings per share had IMSI adopted  
the fair value method in SFAS No. 123. Under this method, the fair value of     
stock-based awards to employees is calculated through the use of option pricing 
models, even though such models were developed to estimate the fair value of    
freely tradable, fully transferable options without vesting restrictions, which 
significantly differ from IMSI's stock option awards. These models also require 
subjective assumptions, including future stock price volatility and expected    
time to exercise, which greatly affect the calculated values. IMSI's            
calculations were made using the Black-Scholes option pricing model with the    
following weighted average assumptions: expected life of 5 years in 1999 and    
1998 and 7 years in 1997; stock volatility, 105% in fiscal 1999, 57% in fiscal  
1998 and 72% in fiscal 1997; risk free interest rates, 5.5% in 1999, 5.77% in   
1998 and 6.70% in 1997; and no dividends during the expected term. IMSI's       
calculations are based on a single option valuation approach and forfeitures are
recognized as they occur.                                                       

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If the computed fair values of the 1999, 1998 and 1997 awards had been amortized
to expense over the vesting period of the awards, pro forma amounts would have  
been:                                                                           

                                                                [Download Table]

                                                   Restated               
                                       1999          1998          1997   
                                       ----          ----          ----   
                                                                          
Net income (loss)                                                         
      As reported                  $(26,966,000)  $  (370,000)  $2,597,000
      Pro forma                     (27,306,000)   (1,839,000)   2,074,000
Diluted earnings (loss) per share                                         
      As reported                  $      (4.30)  $     (0.07)  $     0.46
      Pro forma                           (4.35)        (0.33)        0.37

14. COMMITMENTS                                                                 

IMSI leases its facilities and certain equipment under various noncancelable    
operating lease agreements expiring through 2004. IMSI also leases equipment    
under capital leases, which expire at various dates through 2002. IMSI is       
required to pay property taxes, insurance, and normal maintenance costs on most 
property leases. Future minimum payments for capital leases and rental          
commitments for noncancelable operating leases with remaining terms of over one 
year at June 30, 1999 are as follows (in thousands):                            

                                                                [Download Table]

                                    Capital Lease          Operating
                                     Obligations            Leases  
                       Fiscal:                                      
                                                                    
                       2000            $1,018               $1,480  
                       2001               674                1,441  
                       2002               118                1,374  
                       2003                                  1,206  
                       2004                                    462  
Total minimum lease payments            1,810               $5,963  
                                       ------               ======  
Less amount representing interest          51                       
                                       ------                       
Capital lease obligations               1,759                       
Less current portion                      960                       
                                       ------                       
Long term portion                      $  799                       
                                       ======                       

Capital lease obligations consist primarily of borrowings for computer          
equipment, furniture and fixtures and leasehold improvements. The average term  
is 3 years. Total rent expense for all operating leases was $1,294,000,         
$965,000, and $727,000 for the fiscal years ended June 30, 1999, 1998, and 1997 
respectively.                                                                   

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15.  LONG-TERM DEBT.                                                            

Long-term debt consists of the following (in thousands):                        

                                                                [Download Table]

                                                        June 30,       
                                                        --------       
                                                   1999          1998  
                                                  ---------------------
                                                                       
Bank line of credit and term note (Note 4)        $ 6,154      $ 9,448 
Subordinated loan facility, net of                  1,896            - 
unamortized warrant cost of $604 (Note 5)                              
Subordinated convertible debt, net of               3,900            - 
unamortized warrant cost of $ 1,100 (Note 6)                           
Various promissory notes from product                                  
acquisitions                                            -          684 
Capital leases                                      1,759         1,774
                                                  -------      --------
Total                                              13,709        11,906
Less current portion                                7,110        10,224
                                                  -------      --------
Total long term debt                              $ 6,599      $  1,682
                                                  =======      ========

16. RESTATEMENT.                                                                

AS OF AND FOR THE YEAR ENDED JUNE 30, 1998                                    

Subsequent to the issuance of IMSI's 1998 financial statements, IMSI's          
management determined that the Company should have deferred the recognition of  
revenue related to three advanced royalty payments recorded in fiscal 1998 for  
certain technology licensing agreements. Previously, IMSI recognized revenue in 
the amount of these advanced payments upon execution of the licensing agreement.
Upon reviewing certain licensing agreements, IMSI determined that it should have
deferred the amounts of these advanced payments. The revenue related to these   
advance payments should have been recognized as it was earned as royalties under
the terms of the agreements. As a result, the financial statements as of and for
the year ended June 30, 1998 have been restated from amounts previously reported
to defer recognition of $346,000 of revenue until earned as royalties in fiscal 
year 1999, and $61,000 of revenue until earned in fiscal year 2000.             

The significant effects of the restatement are as follows (in thousands, except 
per share data):                                                                

                                                                [Download Table]

                                              As                        
                                              Previously        As      
                                              Reported          Restated
                                                                        
FOR THE YEAR ENDED JUNE 30, 1998                                        
Revenues                                      $62,472           $62,065 
Income (loss) before taxes                       (266)             (673)
Net income (loss)                                (118)             (370)

Income (loss) per share - basic and diluted   $ (0.02)          $ (0.07)

AT JUNE 30, 1998                                                        

Deferred revenues                                   0               407 
Retained earnings                             $ 1,255           $ 1,003 

FOR THE FISCAL 1999 AND 1998 QUARTERLY PERIODS (UNAUDITED)                      

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As of July 1, 1998, IMSI changed the amortization period for visual content from
36 months to 60 months. In the fourth quarter of fiscal year 1999, reevaluating 
the amortization periods, the Company's management revised the amortization     
period for visual content to 36 months, effective for the entire fiscal year. As
a result, additional amortization charges of $99, $84 and $85 are attributable  
to the quarterly periods ended September 30, 1998, December 31, 1998 and March  
31, 1999, respectively.                                                         

                                                                [Download Table]

                                                    Increased                   
                                                   amortization                 
                                   Amortization   resulting from      Total     
                                  recorded using   revision to     amortization 
Quarter ending                      60 months       36 months     after revision
                                                                                
  September 30, 1998                  $158            $ 99             $257     
  December 31, 1998                    183              84              267     
  March 31, 1999                       187              85              272     
                                      ----            ----             ----     
                                      $528            $268             $796     
                                      ====            ====             ====     

IMSI recorded amortization of $569,000 for visual content in the quarter ending 
June 30, 1999, including the $268,000 of amortization from the revision to a 36 
month amortization period.                                                      

Additionally, as discussed in Note 7, IMSI recorded an extraordinary charge     
related to the retirement of debt through the issuance of common stock. This    
charge, amounting to $959,000, resulted from transactions that occurred in the  
quarter ended March 31, 1999. The unaudited quarterly financial statements      
included in the Form 10-Q for the quarter ended March 31, 1999, did not include 
this charge as the Company originally had determined that the common stock      
issued in exchange for the debt had been issued at fair value. IMSI subsequently
recognized the difference between the value of the liability converted and the  
value of the common stock issued based on the closing price of the Company's    
common stock on the date of settlement as a charge to earnings.                 

IMSI's management also determined that one $500,000 advanced royalty payment    
recognized in the first quarter of fiscal 1997 should have been recognized in   
the second, third and fourth quarters of fiscal year 1997.                      

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The effect of restating previously issued quarterly financial information for   
revenue recognition related to technology license agreements in fiscal 1997,    
1998 and 1999, for the amortization of visual content assets and for recording  
discounts associated with the retirement of debt with common stock, is as       
follows (in thousands). Information relative to quarterly periods is unaudited. 

                                                        [Enlarge/Download Table]

                              Revenues             Net Income after       Diluted income (loss) 
                                                 extraordinary charge            per share      

                                                                          Diluted income (loss) 

Quarter Ended          As Reported    Restated  As Reported    Restated  As Reported    Restated
                                                                                                
   September 30, 1998      $13,360     $13,695    $ (1,214)   $ (1,106)     (0.21)        (0.20)
   December 31, 1998        10,261      10,275      (4,199)     (4,274)     (0.73)        (0.74)
   March 31, 1999            7,281       7,278      (9,692)    (10,739)     (1.52)        (1.68)
   June 30, 1999             6,431       6,431     (12,245)    (10,847)     (1.89)        (1.67)
Fiscal Year 1999           $37,333     $37,679    $(27,350)   $(26,966)     (4.25)        (4.30)

  September 30, 1997       $12,511     $12,511    $ (3,114)   $ (3,114)     (0.60)        (0.60)
  December 31, 1997         16,380      16,380       1,220       1,220       0.19          0.19 
  March 31, 1998            16,671      16,436       1,145       1,000       0.18          0.15 
  June 30, 1998             16,910      16,738         631         524       0.21          0.20 
Fiscal year 1998           $62,472     $62,065    $   (118)   $   (370)     (0.02)        (0.07)

  September 30, 1996        $8,112      $7,612        $410        $104     $ 0.07        $ 0.02 
  December 31, 1996         11,791      12,040         706         859       0.12          0.15 
  March 31, 1997            10,489      10,701         622         752       0.11          0.13 

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                                                                [Download Table]
                                                                     
  June 30, 1997    11,447   11,486       859        882   0.16   0.16
                  -------  -------  --------  ---------  -----  -----
Fiscal year 1997  $41,839  $41,839  $  2,597  $   2,597  $0.46  $0.46
            ====  =======  =======  ========  =========  =====  =====

17. CONTINGENCIES                                                               

Various lawsuits, claims and proceedings of a nature considered normal to our   
business are pending or have been asserted against us. Significantly, on April  
23, 1998 IMSI began arbitration proceedings against Imageline, Inc. before the  
American Arbitration Association in San Francisco, California. IMSI requested   
that all matters within the scope of the agreements between Imageline and IMSI  
be resolved by arbitration, including a dispute in which Imageline sued         
Mindscape, Inc. for alleged copyright infringement, for which IMSI may be       
required to indemnify Mindscape, in whole or in part. IMSI further requested    
that the arbitration decide the rights and liabilities of the parties, and the  
validity of the copyrights under which Imageline asserted its claims against    
IMSI. IMSI also requested compensatory damages and attorney's fees.             

On August 12, 1999 Imageline filed a counterclaim in the arbitration, alleging  
breach by IMSI of an agreement between the parties, including unauthorized      
sublicensing, and instituting arbitration proceedings without notice and        
opportunity to cure. Imageline requested liquidated damages, alleged to be more 
than $200,000, compensatory damages of at least $500,000, punitive damages,     
legal fees, interest and costs. IMSI cannot provide any assurance as to the     
outcome of the arbitration. An adverse outcome on this matter could require IMSI
to pay a large amount of damages to Imageline.                                  

18. SUBSEQUENT EVENTS - UNAUDITED                                               

Zedcor                                                                          

In the third quarter of fiscal year 2000, IMSI agreed to immediately issue to   
the former Zedcor shareholders an additional 185,005 shares, the maximum number 
of additional shares to which they were entitled under the price protection, in 
settlement of all claims. Written execution of this agreement is awaiting final 
approval of the banks and creditors, who have already indicated that approval   
will be granted. Because IMSI was not contractually obligated to offer the price
protection under the original Zedcor Fee Agreement, it will recognize a charge  
equal to 185,005 shares times the market price of IMSI stock on the date of the 
execution of the settlement agreement.                                          

CVI                                                                             

On March 1, 2000, IMSI agreed to settle its price protection adjustment         
obligations to CVI with the issuance of 2,062,363 additional shares. Under this 
agreement, IMSI has no further obligation to issue any additional adjustment    
shares or other consideration to CVI and is relieved of making any payments to  
CVI in connection with its failure to obtain effectiveness of the respective    
registration statement. Since this resolution provides CVI with fewer shares    
than it was entitle to under the original price protection agreement, no        
additional charge was required to be booked.                                    

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SCHEDULE II                                                                     

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INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.                                      
AND SUBSIDIARIES                                                                

Valuation and Qualifying Accounts                                               

Years ended June 30, 1999, 1998 and 1997 (in thousands)                         

                                                                [Download Table]

                                              Additions                            
                               Balance at     charged to                           
                               beginning of   costs and               Balance at   
Description                    period         Expenses    Deductions  end of period
                                                                                   
Year ended June 30, 1999                                                           
      Allowance for doubtful                                                       
      accounts                   800            623          144      1,279        
      Return reserve           2,998         17,714       15,463      5,249        
      Price discounts reserve    283          6,146        5,610        819        
      Rebates reserve                         2,474        2,376         98        
      Inventory reserve          615          3,555          825      3,345        
                               -----          -----       ------      -----        

Year ended June 30, 1998                                                           
      Allowance for doubtful                                                       
      accounts                   808          1,610         1618        800        
      Return reserve           1,589          9,355        7,946      2,998        
      Price discounts reserve    546          2,050        2,313        283        
      Rebates reserve                                          0                   
      Inventory reserve          436            526          347        615        
                               -----          -----       ------      -----        

Year ended June 30, 1997                                                           
      Allowance for doubtful                                                       
      accounts                   152          1,069          413        808        
      Return reserve           1,049          4,681        4,141      1,589        
      Price discounts reserve    101          1,899        1,454        546        
      Rebates reserve                                                              
      Inventory reserve          455            125          144        436        
                               -----          -----       ------      -----        

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(b) Reports on Form 8-K                                                         

Three reports on Form 8-K were filed during the last quarter of the fiscal year:

     On April 26, 1999, IMSI filed a report on Form 8-K reporting that its
independent auditor, Deloitte & Touche LLP, resigned.           

     On May 12, 1999, IMSI filed a report on Form 8-K reporting that Grant
      Thornton LLP was approved by a resolution of the Board of Directors as
the Company's independent auditor.                              

    On May 24, 1999, IMSI filed a report on Form 8-K reporting that IMSI
 raised $5 million through a private placement of a three-year, 9%
      subordinated convertible note, with a fund managed by BayStar Capital,
       L.P. See Note 6 to the consolidated financial statements, "Subordinated
Convertible Debt".                                              

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SIGNATURES                                                                      

Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange   
Act of 1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Novato, State of         
California on October 27, 1999.                                                 

INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.                                      

By:  /s/ GEOFFREY KOBLICK                                                       
---------------------                                                 
Geoffrey Koblick                                                      
Chief Executive Officer                                               

By:  /s/ JEFFREY MORGAN                                                         
---------------------                                                 
Jeffrey Morgan                                                        
Chief Financial Officer (Principal Accounting Officer)                

 POWER OF ATTORNEY

KNOW ALL BY THESE PRESENTS that each individual whose signature appears below   
constitutes and appoints Geoffrey Koblick and Jeffrey Morgan, and each of them, 
his attorneys-in-fact, and agents, each with the power of substitution, for him 
and in his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Report, and to file the
same, with all exhibits thereto and all documents in connection therewith, with 
the Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and   
every act and thing requisite and necessary to be done in and about the         
premises, as fully to all intents and purposes as he might or could do in       
person, hereby ratifying and confirming all that said attorneys-in-fact and     
agents or any of them, or his or their substitute or substitutes, may lawfully  
do or cause to be done by virtue hereof.                                        

Pursuant to the Requirement of the Securities Exchange Act of 1934, the         
following persons in the capacities and on August 10, 2000 have signed this     
report below.                                                                   

By:  /s/ Geoffrey Koblick                                                       
---------------------                                                 
Geoffrey Koblick                                                      
Chairman of the Board of Directors                                    

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By:  /s/ Mark Boyer                                                             
------------------------                                              
Mark Boyer                                                            
Director                                                              

By:  /s/ Richard Hall                                                           
------------------------                                              
Richard hall                                                          
Director                                                              

By:  /s/ Robert Mayer                                                           
------------------------                                              
Robert Mayer                                                          
Director                                                              

By:  /s/ Michael Gariepy                                                        
------------------------                                              
Michael Gariepy                                                       
Director                                                              

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INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
1999 FORM 10-K ANNUAL REPORT

 EXHIBIT INDEX

                                                                [Download Table]

Exhibit Number                      Exhibit Title                               Page
--------------                      -------------                               ----
                                                                                    
    3.01       Registrant's Amended and Restated Articles of Incorporation(1)       

    3.02       Registrant's Bylaws, as amended to date(1)                           

    4.1        Securities Purchase Agreement dated March 3, 1999, between IMSI      
               and Capital Ventures International.(2)                               

    4.1a       Securities Purchase Agreement dated May 24, 1999, between IMSI       
               and BayStar Capital, L.P.(3)                                         

    4.2        9% Senior Subordinated Convertible Note dated May 24, 1999,          
               between IMSI and BayStar Capital, L.P.(4)                            

    4.3        Common Stock Purchase Warrant Certificate dated May 24, 1999,        
               between IMSI and BayStar Capital, L.P.(4)                            

    4.4        Registration Rights Agreement dated May 24, 1999, between IMSI       
               and BayStar Capital, L.P.(4)                                         

   21.1        Subsidiaries of the Registrant                                       

   23.1        Independent Auditors' Consent                                        

   23.2        Independent Auditors' Consent                                        

   27.1        Financial Data Schedule                                              

(1)  Incorporated by reference to exhibits of the same number to Registrant's   
   Registration Statement on Form S-3 (File no. 33-69206) filed on September
22, 1993.                                                             

(2)  Incorporated by reference to an exhibit of the same number to Registrant's 
Report on Form 8-K filed on March 23, 1999.                           

(3)  Incorporated by reference to an exhibit numbered 4.1 to Registrant's Report
on Form 8-K filed on May 24, 1999.                                    

(4)  Incorporated by reference to an exhibit of the same number to Registrant's 
Report on Form 8-K filed on May 24, 1999.                             

85

Dates Referenced Herein   and   Documents Incorporated by Reference

				Referenced-On Page
This ‘10-K/A’ Filing		Date		First		Last			Other Filings
		3/5/03		66
		5/24/02		64
		11/3/01		64
Filed on:		9/13/00							10-Q/A
		9/8/00		49
		8/10/00		83
		6/30/00		23					10-K,  NT 10-K
		5/24/00		26		64
		5/5/00		43		46
		3/4/00		66
		3/3/00		66
		3/1/00		79
		1/27/00		16
		1/14/00		12
		12/31/99		4		17			10-Q,  10-Q/A,  NT 10-Q
		12/19/99		16
		10/31/99		26		64
		10/27/99		83
		10/22/99		48		49
		10/20/99		1		38
		10/1/99		40		60
		9/30/99		16		64			10-Q,  10-Q/A
		9/27/99		7		34
		9/21/99		65
		9/15/99		9		31
		8/27/99		60
		8/12/99		12		79
		7/31/99		60
		7/3/99		66
		7/1/99		40		60
For Period End:		6/30/99		1		81			10-K405,  10-K405/A
		6/25/99		38		65			S-3
		6/24/99		3		57
		6/8/99		38		66			S-3
		6/7/99		67
		5/27/99		17
		5/26/99		26
		5/24/99		64		85			8-K
		5/15/99		60
		5/12/99		82					8-K
		5/5/99		40		46			8-K
		4/26/99		40		82			8-K
		4/19/99		39		40			8-K
		4/5/99		67
		4/1/99		40		60
		3/31/99		29		77			10-Q
		3/30/99		17
		3/26/99		66
		3/25/99		66
		3/23/99		85					8-K
		3/3/99		26		85
		3/1/99		66
		2/28/99		17		60
		2/25/99		65
		2/18/99		65
		1/15/99		60
		1/11/99		65		66
		1/1/99		40		60
		12/31/98		18		77			10-Q
		12/30/98		17					DEFR14A
		12/24/98		65
		11/3/98		26		64
		10/31/98		17
		10/15/98		60
		10/2/98		40		65
		9/30/98		40		78			10-Q
		9/29/98		40		60
		9/24/98		64
		8/5/98		48
		7/15/98		60
		7/1/98		77
		6/30/98		15		81			10-K,  10-K/A
		6/3/98		61
		5/4/98		26		64
		4/23/98		12		79
		4/1/98		56
		3/13/98		60		62
		12/31/97		29					10-Q
		9/30/97		4		78			10-Q,  8-K
		8/22/97		63
		7/1/97		62		63
		6/30/97		18		81			10-K
		9/30/96		78					10-Q
		9/22/93		85
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