**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      DC 20549


**Form
      10-KSB**


**(Mark
      One)**





x
            **ANNUAL
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934**
              for
                the fiscal year ended September 30,
                2007




**OR**




o
            **TRANSITION
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934**
              for
                the transition period from __________to
                __________




_____________________________________


Commission
      file number 0-21831




**INTERACTIVE
      SYSTEMS WORLDWIDE INC.**


(Name
      of
      small business issuer in its charter)





**Delaware**
              (State
                or other jurisdiction of incorporation or organization)
            **22-3375134**
              (I.R.S.
                Employer Identification No.)**2 Andrews
                Drive, 2****nd****Floor,**
              **West
                Paterson, New Jersey**
              (Address
                of principal executive offices)
            **07424-2672**
              (Zip
                Code)





Issuer’s
      telephone number: **(973)
      256-8181**




Securities
      registered under Section 12(b) of the Exchange Act: **None**





Securities
      registered under Section 12(g) of the Exchange Act: **Common
      Stock, $.001 par value**




(Title
      of
      class)


_____________________________________




Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act. o




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




Check
      if
      there is no disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to
      the best of registrant’s knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-KSB or any
      amendment to this Form 10-KSB. x




Indicate
      by a check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act):   YES o NO x




The
      issuer’s revenues for its most recent fiscal year (ended September 30,
      2007) were $500,000.




The
      aggregate market value of the voting and non-voting common equity (consisting
      of
      Common Stock, par value $.001) held by non-affiliates computed using the average
      bid and asked price as of January 7, 2008 was approximately
      $3,781,550.




The
      number of shares of Common Stock, $.001 par value, outstanding as of January
      7,
      2008 **** was
      12,265,715 **.**




DOCUMENTS
      INCORPORATED BY REFERENCE


NONE




Transitional
      Small Business Disclosure Format (check one):   YES o **** NO x









**PART
      I**





**Item
      1.**  **Description
      of Business**





**The
      Company**





Interactive
      Systems Worldwide Inc. (“ISWI”) has designed, developed and patented an
      interactive hardware and proprietary software system (the
“SportXction ® System”)
      that enables users to wager at fixed prices during the course of a sporting
      event, such as soccer, football, baseball, basketball, golf, tennis, rugby,
      cricket and snooker, among many others. The SportXction ® System
      accepts bets not only on the outcome of a sporting event, but also on discrete
      parts of the event and on specific game situations. These include such wagers
      as
      will a team make a first down, which player will score next, will a batter
      get
      on base or will a penalty shot be successful. The SportXction ® System
      is unique in that it permits betting continuously while the game is in progress,
      or between game events, such as downs, pitches, changes in ball possession
      and
      similar situations, permitting more frequent placing and cashing of
      wagers.





The
      SportXction ® System
      software monitors and changes the odds on the contestants in a sporting event
      to
      induce the players to wager such that the betting pool for each betting
      proposition is continuously driven toward a financial balance, to within a
      pre-set level. In general, a balanced pool is achieved when the money bet on
      the
      losing outcomes of a betting proposition is sufficient to pay off the winning
      outcomes of that proposition plus provide the operator with a commission for
      brokering the transactions. The SportXction ® System
      maintains a record of all wagers placed by each bettor and keeps an account
      for
      each bettor, subtracting bet amounts and adding payouts. The
      SportXction ® System
      has been developed to allow wagers to be placed simultaneously through a variety
      of input devices, all interconnected to our central system, such as interactive
      television set-top boxes, personal computers communicating via the Internet,
      wireless hand-held devices, mobile telephones and standalone kiosks. The Company
      has also developed a non-wagering (i.e. competition) version of the
      SportXction ® System.





On
      July
      31, 2002, ISWI, through a wholly-owned subsidiary, acquired all of the
      outstanding share capital of Global Interactive Gaming Limited (“GIG”) a British
      interactive gaming service provider located in London, England, that markets
      its
      services to interactive television carriers which employ satellite, cable and
      terrestrial programming, mobile telephone operators, licensed bookmakers and
      casinos. Prior to the acquisition, GIG had been ISWI’s worldwide exclusive
      licensee for its technology in all business activities for which the technology
      was legally usable other than wagering in Nevada and for securities transactions
      and lotteries. GIG has wholly owned subsidiaries, GIG Operations Limited and
      Brightform Limited.





The
      Company makes available free of charge through our website, www.isw.com ,
      the
      Company’s annual report on Form 10-KSB, quarterly reports on Form 10-QSB,
      current reports on Form 8-K, and amendments to these reports, as soon as
      practicable after the Company has electronically filed such material with,
      or
      furnished such material to, the SEC.





As
      used
      in this Report the term “Company”, unless the context otherwise requires, means
      ISWI and its wholly-owned subsidiaries, including GIG.




2




**History**





ISWI’s
      SportXction ® System
      was conceived by its founder, Mr. Barry Mindes, who together with Mr. Bernard
      Albanese, the Company’s Chairman and Chief Executive Officer, developed a
      simulation of the SportXction ® System
      for use in determining whether casinos in Nevada had interest in the
      SportXction ® System.
      Additionally, patent applications covering the SportXction ® System
      were prepared and filed with the U.S. Patent and Trademark Office and
      corresponding foreign patent applications were also filed. In May 1995, shortly
      after the Company was organized and commenced operations, the Company raised
      an
      initial round of capital privately and during the next year developed and tested
      the SportXction ® System.
      Thereafter, in mid-1996, the Company sought approval for use of the System
      from
      the Nevada Gaming Authorities (as hereinafter defined). On December 11,
      1996, the Company consummated its initial public offering (the “IPO”) pursuant
      to which it sold 1,725,000 Units for gross proceeds of $10,350,000. Each Unit
      consisted of one share of Common Stock, and one redeemable Warrant
      (collectively, the “Redeemable Warrants”) to purchase one share of Common Stock
      at an exercise price of $7.20 per share. The Redeemable Warrants expired on
      February 25, 2002 without any having been exercised. On May 18, 2007, as a
      result of failing to comply with NASDAQ’s shareholders’ equity requirement, the
      Company’s Common Stock was de-listed from the NASDAQ Capital Market. The
      Company’s Common Stock is currently quoted on
      the
      Over-the-Counter Bulletin Board maintained by the NASD and the
      Pink Sheets, an electronic quotation service for securities traded
      over-the- counter.





After
      completing trials of the SportXction ® System,
      it was approved for use in January 1997 by the Nevada Gaming Authorities. The
      Company initially used the SportXction ® System
      in several individual casinos; subsequently in a group of inter-linked casinos;
      and ultimately from remote, non-casino locations, from 1998 until early 2000.
      At
      that time, the Company concluded that although the SportXction ® System
      functioned properly and was well received by players, it was not attracting
      a
      sufficient number of players in the casino environment or producing sufficient
      revenues to warrant the investment required to continue to build the customer
      base and operate within the Nevada market.





The
      focus
      of ISWI then shifted to being a licensor as a result of the signing of License
      Agreements (collectively, the “License Agreements”) with GIG in March 2000.
      Under the terms of the License Agreements, ISWI granted to GIG exclusive
      licenses to market, distribute and use ISWI’s interactive
      SportXction ® System
      software, technology and patents on the Internet and interactive television,
      in
      all business activities in which such technology was legally usable, including
      for contests and wagering on sporting events world-wide. Excluded from the
      licenses were the continued use of the SportXction ® System
      in Nevada for wagering, and the application of ISWI’s basic technology and
      patents to lotteries and financial transactions (stock, bond, option and
      currency trading and the like). The License Agreements provided that ISWI would
      be paid the lesser of 25% of the gross profit or 1% of the gross handle, subject
      to guaranteed annual minimums during the term of the License Agreements. ISWI’s
      efforts between early 2000 and 2002 focused on enhancing the
      SportXction ® System
      for use by GIG. GIG’s majority stockholders were Prisma iVentures Ltd., a U.K.
      company and subsidiary of The Kirch Group, a German media conglomerate, and
      MultiSport Games Development, Inc., a Delaware corporation (“MultiSport”). As a
      result of Kirch Media’s insolvency filing in Germany in April 2002, an event
      unrelated to ISWI, The Kirch Group ceased providing funding for GIG. On July
      31,
      2002, ISWI acquired GIG. Since that time, the Company, through GIG, provides
      interactive gaming services using the SportXction ® System
      to business partners such as licensed bookmakers, mobile telephone companies,
      cable and satellite television companies and operators of Internet wagering
      sites, in locations where legally permitted. Subsequent to the acquisition,
      the
      License Agreements were modified and no longer provide an exclusive license
      to
      GIG or guaranteed annual minimums.




3




**Industry
      Overview**





In
      sports
      wagering, the gaming establishment, or “house,” generally seeks to maintain a
“balanced book.” A balanced book is achieved when the money bet on the losing
      outcomes of a betting proposition is sufficient to pay off the bets on the
      winning outcome of that proposition. To accomplish this, the house gives either
      a handicap (the point spread or margin by which the favorite must win) or odds
      (a greater than equal payout on winning to the underdog or a lesser one to
      the
      favorite) on the outcome of the event, or a combination of both. The house’s
      goal in general is to have the funds paid to the winners equal the amount
      received from the losers, less the commissions that the house charges for
      brokering the transactions and the use of its facilities.





Sports
      bettors want to know the odds or point spread (the “line”) of the wager at the
      time the bet is placed. While the odds or point spread might change as the
      house
      attempts to balance its book, the terms for previously placed bets remain the
      same. Thus, bettors who place several bets on the same team or contestant over
      a
      period of time could have different odds or point spreads on each wager
      depending upon when the bet was placed.





The
      profits of dedicated sports wagering facilities (“Sports books”) depend upon the
      reliability of the odds and its adjustment of the odds when necessary. On
      occasion, the house’s initial handicap or odds will not result in a balanced
      book because the players do not agree with the house’s assessment of the
      expected outcome of the contest or an event that takes place during the contest
      for which a betting proposition is being offered. The house will attempt to
      attract bets on one potential outcome of the proposition by changing or moving
      the line up or down to induce a betting pattern which will lead toward a
      balanced book. If this is not possible, the house may only accept bets which
      are
      matched in payout so that no further imbalance will be created, refuse to accept
      wagers on one of the contestants or limit the maximum amount of money that
      will
      be accepted on a betting line to attempt to avoid the risk of taking an
      unacceptable number of bets on one potential outcome of a betting proposition.
      When the limit is reached, the line is moved. Currently, sports wagering
      establishments do not change odds or handicaps frequently in order to balance
      pools. The odds or handicaps are changed usually only after the book gets
      substantially out of balance, if at all. Sports books currently are rarely
      perfectly balanced. To the extent that the book is not balanced, the sports
      book
      takes risk on the outcome of the game or event which varies directly with the
      level of imbalance. As a result, although the operator can gain extraordinary
      profits if the outcome of the proposition favors the side which has too little
      payout associated with it, the operator is gambling on a given outcome, instead
      of brokering a transaction for a fee.





The
      Internet is the largest present venue for sports wagering worldwide as it is
      legal in many countries outside of the United States. According to Global
      Betting & Gaming Consultants (“GBGC”), a market-research firm, t he
      global
      online sports betting market, including betting exchanges, was estimated to
      be
      worth approximately $5.6 billion in 2006, having grown at a compound annual
      rate
      since 2000 of 21%. Excluding the US, which is estimated to be the largest online
      sports betting market in the world, GBGC estimates that the size of the online
      sports betting market was approximately $2.6 billion in 2006.




4




In
      the
      United States, gambling over the Internet is illegal both for players and
      operators of Internet wagering sites. United States law prohibits players
      located in the United States from placing bets on Internet sites that are
      operated by legally licensed foreign nationals. As a result of the Unlawful
      Internet Gambling Enforcement Act of 2006, credit cards and other payment
      providers have stopped accepting charges from residents of the United States.
      The agreements between the Company and its partners precludes the partners
      from
      using the Company’s SportXction ® System
      software to accept wagers from the United States and any other location where
      it
      is illegal to do so. The Company has also implemented controls which prevent
      potential users from the United States from being able to use the Company’s
      SportXction ® System.





Although
      not currently operating in Nevada, ISWI holds a gaming license as an operator
      of
      an “inter-casino linked system” and is registered with the Nevada Gaming
      Commission as a publicly-traded corporation. The Company retains the right
      to
      re-enter the Nevada sports wagering market at some future date, which it might
      do with its SportXction ® System
      or a subset thereof.




System
      DeploymentStatus





The
      SportXction ® System
      is currently operated across several interactive mediums, including the internet
      and wireless, touch screen, handheld devices and is capable of operating on
      interactive television, mobile phones and standalone kiosks. GIG currently
      offers live play-by-play wagering for soccer, cricket (both one day and test
      matches), golf, rugby union, tennis, football, basketball, snooker and darts.
      The Company also has developed a baseball version of the SportXction ® System
      which Hipodromo de Agua Caliente S.A. de C.V. (“Caliente”), GIG’s Latin American
      partner, offers.





GIG
      offered live play-by-play wagering on approximately 2800 events during the
      year
      ending September 30, 2007. GIG intends to offer wagering on approximately 3200
      events during fiscal year 2008. The SportXction ® System
      allows wagering using multiple currencies and provides players with a choice
      of
      languages. The Company’s current revenue primarily consists of minimum monthly
      service charges for furnishing the technology and in some cases operating the
      system. In addition, after achieving certain thresholds, the Company may be
      entitled to a share of the net wagering revenue generated by its
      SportXction ® System.
      This component of revenue may be reduced for certain pool imbalance risks that
      arise from being a part of the house.





***Internet***





The
      Company has several non-exclusive agreements with bookmakers in the UK and
      Gibraltar. Under these agreements, GIG furnishes the technology and operates
      the
      system, and the partner is responsible for marketing the product, first level
      customer support and for processing customer financial transactions.




5




The
      Company currently offers a fully integrated product configuration and
      operational services package, which is provided to the Company’s wagering
      partners. By providing a real-time, interactive data stream, the Company’s
      play-by-play betting propositions are placed seamlessly within our business
      partners’ betting offerings, maintaining a consistent “look and feel” with the
      partner’s other betting offerings. The user can then place wagers from its
      existing account in the same manner as all other bets made with that partner.
      The betting offerings managed by GIG’s staff, utilizing the SportXction® System,
      are indistinguishable from the betting offerings managed by our business
      partner’s employees.





On
      December 5, 2006, the Company announced that it had launched this integrated
      version of its SportXction ® System
      with Interactive Sports Limited, a wholly-owned subsidiary of Sportingbet.
      On
      January 9, 2007, the Company announced that it had launched this integrated
      version of its SportXction ® System
      with Ladbrokes eGaming Ltd.





As
      of
      September 1, 2007, the Company had discontinued its stand-alone product
      configuration with BetShop Group (Europe) Ltd., Victor Chandler UK Ltd., and
      Victor Chandler International. The Company is currently in discussions with
      some
      of our former stand-alone business partners and with potential new partners
      regarding the integrated product.





***Hand-held
      devices***





Under
      a
      three year agreement entered into in August 2006, GIG provides software and
      services that enable Caliente, one of Latin America’s largest gaming companies,
      to offer an enhanced play-by-play sports betting service in all of its Race
      & Sports Books locations. Caliente owns and/or provides services to 160
      betting shops, known as Race & Sports Books, throughout Mexico, Central and
      South America and the Caribbean. Since September 2006, the Company’s
      SportXction ® System
      has been deployed in ten locations using hand held, touch screen devices. The
      SportXction ® System
      is also expected to be offered on Caliente’s website in 2008.





Caliente
      is operating the play-by-play betting service using its own personnel. GIG
      has
      provided initial set-up support and some software customization and training,
      and will provide on-going technical assistance. The agreement specifies monthly
      service fees for technical assistance, as well as monthly license fees based
      on
      the handle derived from the enhanced play-by-play betting service.





***Anticipated
      deployments***





On
      September 17, 2007, the Company announced that it had received a purchase order
      from the Ontario Lottery and Gaming Corporation ("OLG"), which authorizes the
      spending of up to $175,000 for software development and other services. This
      software development is required for the modification of the Company's
      SportXction ® System
      to add certain features, including the offering of parlay wagering, required
      by
      OLG. OLG is authorized under Canadian and provincial law to operate gaming
      and
      wagering businesses within the Province of Ontario.




6




The
      Company and OLG are currently negotiating a development/licensing agreement,
      which would allow OLG to conduct a six-month field trial of the modified
      SportXction ® System,
      after its completion, for use in up to two casinos. The purchase order allowed
      the commencement of software development while the definitive licensing
      agreement is being negotiated. Actual delivery of the modified software will
      not
      occur until after signing the licensing agreement. The Company is optimistic
      that this field trial will lead to a broader implementation in multiple casinos
      and other on-site gaming venues throughout Ontario, Canada. If successful,
      the
      system will have applicability in other Canadian provinces, as
      well.





On
      December 5, 2007, the Company announced that it has signed an Agreement in
      Principle with Neptune Race and Sports Book, Inc. ("Neptune"). This non-binding
      agreement provides the commercial framework for an anticipated licensing
      agreement to be negotiated between the two parties for the use of the Company's
      SportXction ® System .





Neptune
      currently provides turnkey race and sports wagering systems and services for
      use
      on cruise ships and in resort casinos. The intention of this agreement is for
      Neptune to license the Company's SportXction ® System in order
      to add play-by-play wagering to its existing capabilities for use in its current
      and future casino venues. It is anticipated that Neptune's personnel will
      operate the SportXction ® System from its
      operations hub located in Nevada. The Company anticipates receiving initial
      upfront service fees as well as a share of the revenue.




***Non-wagering
      product***





The
      Company has a non-gambling version of its SportXction ® System
      which allows users to predict the outcome of events during a sporting event.
      This product was successfully introduced in the U.K. during fiscal 2004. Users
      earn points for correct predictions, bonuses for strings of successful
      predictions and for correct answers to sport’s trivia questions and compete on
      the basis of their scores for a variety of prizes. The Company is currently
      marketing the contest product to professional leagues, professional teams and
      sports rights holders in the United States, the U.K. and Europe.





***Racing
      product***





The
      Company also intends to complete development of a fixed-odds / pari-mutuel
      hybrid racing product for the U.S. market. The Company has filed a patent
      application with the intent of commercializing a product that will combine
      the
      advantages of fixed-odds wagering while satisfying the current U.S. pari-mutuel
      rules and regulations. The Company believes that this offering will provide
      an
      improved alternative to traditional pari-mutuel wagering in the interstate
      horse
      racing market.





**Marketing
      and Sales Strategy**





The
      Company is in discussions with several companies in the U.K., Europe and
      elsewhere in the world for the incorporation of the SportXction ® System
      into the offerings of these companies. In this regard, the Company is pursuing
      a
“business to business” strategy, partnering with companies who possess an
      existing betting customer base. This strategy offers the benefits of potentially
      more immediate revenues as well as a lower marketing investment to gain players.




7




The
      focus
      of the Company’s current marketing efforts is in the U.K. and Europe although
      opportunities elsewhere in the world are also being pursued. The Company may
      enter other foreign markets acting solely as a licensor of the
      SportXction ® System,
      similar to its agreement with Caliente in Mexico. The Company may also re-enter
      the Nevada market and its Nevada gaming license has been maintained for that
      purpose.





**Intellectual
      Property**





The
      Company regards the SportXction ® System
      as proprietary. The Company has two U.S. patents covering its proprietary
      wagering methods and its related computer processing system. Corresponding
      applications for each of the two patents have been filed and approved in 17
      foreign countries. The Company also has a patent pending to use its technology
      in a fixed-odds/pari-mutuel hybrid for use in wagering on horse races.





On
      March
      26, 2007, the Company announced that it had settled all claims pertaining to
      the
      patent infringement lawsuit filed by ISWI in December 2005 concerning
      Progressive Gaming International Corporation's Rapid Bet Live TM ("RBL")
      product. The parties signed a licensing agreement that grants Progressive Gaming
      a worldwide, non-exclusive license to practice ISWI's existing patent portfolio
      regarding sports wagering. The Company received an initial license payment,
      and
      may be entitled to an ongoing royalty based on product placement milestones
      and
      the revenues generated by RBL as well as other related products.




It
      is the
      Company’s policy that all employees and outside consultants involved in research
      or development activities sign proprietary information, non-disclosure and
      patent assignment agreements. This may, however, not afford adequate protection
      for the Company’s know-how and proprietary products. Other parties may develop
      products similar to the SportXction ® System
      or otherwise attempt to duplicate the SportXction ® System
      in ways which circumvent the Company’s technology and existing or future
      patents.





The
      Company has not recently received any claim that it is infringing any patents
      of
      others. However, there can be no assurance that third parties will not assert
      infringement claims against the Company, which claims the Company would be
      required to defend at considerable expense or enter into arrangements requiring
      the Company to pay royalties or other damages, any of which could materially
      and
      adversely affect the Company’s business.





The
      Company applied for Federal trademark registration and for State of Nevada
      servicemark registration for the name SportXction ® ,
      both of
      which have been issued.





**Competition**





Sports
      wagering both within the United States and in foreign countries competes with
      other forms of gambling available to the general public, including, but not
      limited to, casino games (such as traditional slot machines, video slot, poker
      and blackjack machines, roulette, card games, keno and craps), bingo,
      state-sponsored lotteries, on-and-off track betting on horses and dogs, jai
      alai, off-shore cruise ships, riverboats, Native American gaming operations
      and
      wagering via the Internet, iTV and mobile phones.




8




The
      Company’s primary competitors include the operators of sports wagering sites on
      the Internet. These operators accept traditional pre-game wagers and recently
      have expanded the number of wagers being offered during the course of an event
      on sporting events. They operate from locations outside of the United States,
      as
      this type of wagering is illegal in the United States. Well-financed, long
      established bookmaking firms with significantly more financial resources than
      the Company operate some of these Internet sites. Many of these have
      substantially more experience than the Company in the wagering business. While,
      to the best of the Company’s knowledge, none of these sites offer products which
      are similar to the SportXction ® System
      in any significant degree, it cannot be assured that such competition might
      not
      arise, or that the Company’s patents will provide sufficient protection against
      such competition. To the extent that such competition arose, the market for
      the
      SportXction ® System
      might be diluted. In addition, no assurance can be given that other systems
      similar to the SportXction ® System
      do not exist or are not under development.





**Personnel**





The
      Company currently has two full-time employees in the United States and 5
      full-time employees in England. The Company considers its relations with its
      employees to be good. The Company also utilizes outside consultants and two
      part-time employees (one in the United states and one in England) to perform
      the
      accounting function and for specific assignments or projects. The Company may
      seek to hire additional programmers, technicians and administrative
      personnel.





**Research
      and Development**





During
      the fiscal years ended September 30, 2007 and 2006, the Company spent
      approximately $377,000 and $497,000, respectively, on research and development
      activities. These expenses included primarily, programmers’ salaries and
      benefits, consultants’ fees, amortization expense associated with capitalized
      development costs and the depreciation expense associated with computer
      equipment used in the development of the SportXction ® System.
      During the fiscal years ended September 30, 2007 and 2006, all of the Company’s
      research and development expense reflect costs associated with supporting the
      SportXction ® System.
      The Company intends to continue to expend significant sums on such
      activities.





During
      the fiscal years September 30, 2007 and 2006, the Company capitalized $103,000
      and $439,000, respectively, of expenses related to enhancements of its
      SportXction ® System.
      These amounts will be amortized over their estimated useful life (generally
      three years) after they were put into commercial use.




**The
      SportXction** **®** **Sports Wagering System**





**Overview
      of the System**





The
      SportXction ® sports
      wagering System permits continuous fixed price betting during the course of
      a
      sporting event by continuously attempting to balance the betting pool on each
      betting proposition to within a pre-set level. It allows bettors to view a
      live
      sporting event, wager throughout that event as it progresses and cash winning
      bets. The period during which wagers may be placed is thereby extended. The
      SportXction ® System
      accepts bets on the outcome of the sporting event, on discrete parts of the
      event, and on specific game situations, such as will a team get a first down,
      which player will score next, or will a player make two foul shots. The
      SportXction ® System
      can also accept traditional pre-game side and totals wagers as well as some
      forms of parlays.




9




The
      SportXction ® System
      is capable of being used with interactive television, over the Internet, over
      a
      dedicated private network, or over a wireless network utilizing mobile phones,
      PDAs or other hand held devices, as input devices. Furthermore, in addition
      to
      following the sporting event on television or using a television card or video
      streaming technology with a personal computer, a player could follow the game
      on
      the radio, in a sports bar or betting shop, or even while attending a live
      event, with wagers being entered via in-place terminals or from hand held
      devices.





**Operation
      of the System**





The
      SportXction ® System
      operator begins by setting up a number of pools or wagering propositions (for
      example, the scorer of the next goal, the winner of a game or the team leading
      at the end of a particular period of play, over or under scoring on the game
      or
      period, and wagers on specific events or games situations). Prior to
      commencement of the sporting event, the SportXction ® System
      operator sets the odds or handicap (point spread) on certain betting
      propositions, with greater odds given to the less capable contestant. These
      are
      usually based upon statistical data from previous events plus research on the
      teams, players, game conditions, injuries, etc. Once the sporting event begins,
      the SportXction ® System
      sets the initial odds on other betting propositions. The SportXction ® System
      changes the odds automatically as bets are made in order to induce a betting
      pattern that would lead to a balanced pool. The bettor may therefore make
      multiple wagers on the same betting proposition as the odds change. As wagering
      continues, one of the potential outcomes of a betting proposition may have
      more
      money bet on it than expected and thereby become underfunded (that is, the
      SportXction ® System
      will not have enough money to pay the bettors should this potential outcome
      win). If this occurs, and if the underfunded potential outcome of the betting
      proposition wins, the house would make less profit than desired, and in some
      cases, might even have to pay out more money to the winning bettors than the
      house would have received from the bettors on the other potential outcomes
      (i.e.
      the potential outcomes that are overfunded). Of course, if the potential outcome
      that is overfunded wins, the house would win more than expected. To limit the
      house’s exposure, the SportXction ® System
      is designed to automatically adjust the odds to induce more bettors to wager
      on
      the potential outcomes of the betting proposition that are overfunded, and
      to
      discourage bettors to wager on the potential outcomes that are underfunded,
      thereby attempting to bring the pool more into balance.





It
      is not
      necessary that the book be perfectly balanced, but only that the imbalances
      be
      within a pre-set level, typically less than some percentage of the pool or
      dollar amount set by the house. Under these circumstances, the house can
      generally ensure that its exposure is no more than a fixed percentage or dollar
      amount, which is an acceptable portion of the profit from its commissions.
      The
      SportXction ® System
      is generally able to automatically prevent the house exposure from exceeding
      a
      specified maximum amount by changing the betting terms in the pool to induce
      bettors to wager on the potential outcomes that are overfunded. In extreme
      cases, the house or the SportXction ® System
      may automatically stop accepting bets on an underfunded potential outcome when
      the exposure limit is reached while continuing to accept bets on the other
      potential outcomes. Under these circumstances, the pool will presumably tend
      to
      return to balance after which the house can resume taking bets on the side
      of
      the proposition for which betting was suspended.




10




The
      SportXction ® System
      permits, and the sports wagering operator is likely to have, both long- and
      short-term propositions on a sporting event. Long-term propositions may be
      based
      upon the outcome of an entire game or discrete segments of a game. Wagering
      continues on the long-term propositions even as game conditions change, causing
      the odds on the outcome to change during the course of the event. Examples
      of
      typical short-term propositions are, in football, will the offensive team make
      a
      first down on a specific possession; and in basketball, which team will be
      the
      next to score 10 points. Betting is almost continuous until the specific event
      occurs or the specific game situation is completed. Since short-term pools
      open
      and close rapidly, sometimes in several minutes or less, there are new
      propositions constantly available for players during the entire
      contest.





The
      SportXction ® System
      works on a “bet against deposited funds” basis. When a bettor wishes to wager
      using the SportXction ® System,
      he must establish an account and fund it by depositing a sum of money in the
      account. The bettor places wagers using his funds on deposit. The
      SportXction ® System
      automatically adds the bettor’s payouts and subtracts amounts bet from his
      account. When the player wishes to commence play, he signs on to the
      SportXction ® System
      through an input device which can be an on-line computer terminal, interactive
      TV, mobile phone, PDA, or like device (“Player Betting Device”). The screen or
      monitor on the Player Betting Device will show the bettor’s available balance,
      initially equal to his deposit. As wagers are placed, this balance is reduced
      by
      the amounts wagered. When the bettor wins, his Player Betting Device shows
      that
      he has won and his balance is automatically increased by the wager’s
      payout.





The
      SportXction ® System
      produces time-stamped records, providing regulatory authorities as well as
      gaming establishments with the ability to audit, analyze and control a
      game.





**System
      Components**





The
      Company’s proprietary software and state-of-the-art, commonly available
      hardware, is configured in an arrangement designed specifically for use with
      the
      SportXction ® System.
      The software permits the operator to make available a wide variety of betting
      propositions to players. The SportXction ® System
      has been designed to work with a variety of Player Betting Devices (e.g. PC’s
      running a browser, television set-top boxes, mobile phones, PDAs, and similar
      devices) each of which has different inherent capabilities and limitations,
      some
      of which are more “intelligent” than others. These Player Betting Devices are
      connected to the SportXction ® System
      utilizing several types of networks (e.g. Internet, dedicated private network
      or
      wireless networks). As a result of this flexibility, the SportXction ® System
      has a variety of different client interface and interconnection modules that
      may
      be used as determined by the configuration of a particular instance of the
      SportXction ® System.
      The Player Betting Device enables bettors to enter bets into the
      SportXction ® System.
      The System displays the wagers available, the prices, the payoff to be received,
      the status of the player’s available balance and open bet amounts. It also
      allows for signing on and off, selecting a game, reviewing and sending bets,
      reviewing bet history and other information appropriate to interactive
      wagering.




11




The
      major
      back-end server elements of the SportXction ® System
      include the Hub Server, which includes the Pool Processor, plus numerous input
      and control software modules that run on individual computers connected to
      the
      Hub Server. These modules include the Game Controller Module, Game Supervisor
      Module, Manager Module, Administrative Module and Cashier Module, among others,
      all of which are controlled by proprietary software. The SportXction ® System
      uses redundant hardware and re-start and recovery software to maximize
      SportXction ® System
      up-time in the event of component failure.





All
      Player Betting Devices are connected to the Hub Server via a client/server
      network. The Hub Server Modules are software components on a network of server
      computers. The transmission of data between the various elements of the Hub
      Server operates in real time utilizing sophisticated mathematical algorithms
      for
      high speed. As a result, the SportXction ® System
      is very scalable and able to handle large numbers of users and wagering
      transactions. The Hub Server Modules maintain all pools, calculate odds, open
      and close all wagering on all pools, control security for all input devices,
      produce all management and regulatory reports and is the repository of all
      current and historical data on the wagering system. The proprietary software
      contained in the Pool Processor permits continuous, rapid recalculation of
      odds,
      based upon changing betting patterns and an evaluation of bets that have been
      placed and can be augmented with event statistics and statistical modeling,
      if
      available.





Other
      server modules include the following:





The
      Game
      Controller Module permits the entry of data relating to all substantive events
      during the course of a sporting event that affect the betting odds. The
      SportXction ® System
      sends this information to the Pool Processor to open and close betting
      propositions, determine unofficial proposition winners and set opening lines,
      among other things.





The
      Game
      Supervisor Module is used to manually open betting lines, enter data to attempt
      to maintain the desired level of house commission as pool balances change,
      close
      or suspend one or both sides of a betting proposition and declare official
      pool
      winners.





The
      Manager Module is used to monitor the overall SportXction ® System
      activity and volume, perform hardware and software system configuration
      functions and monitor System alerts.





The
      Administrative Module is the main management Module in the
      SportXction ® System.
      It is used to control security, maintain the schedule of future events and
      maintain the SportXction ® System
      tables which control the propositions being offered and the business rules
      to be
      followed by the SportXction ® System.
      It is through this module that most reports are accessed.




12




The
      Cashier Module can access the status of every player’s account. It is the link
      through which funds can be manually entered into and withdrawn from accounts,
      adjustments are made, and other manual interactions with player accounts are
      accomplished in the casino version of the SportXction ® System.
      For on-line implementations, the SportXction ® System’s
      design also allows players to transfer funds securely from financial
      institutions into and out of their SportXction ® accounts. The SportXction ® System
      can also be interfaced to third-party accounting systems, so that money can
      be
      transferred between the System and the accounts of players who have signed
      up
      with the Company’s business partners.





**Traditional
      Pre-Game Wagering**





When
      the
      SportXction ® System
      was operational in Nevada, it also accepted traditional pre-game side and totals
      wagers as well as some forms of parlays. Pre-game wagers are treated by the
      SportXction ® System
      in the same way as the play-by-play wagers. Because pre-game wagers arrive
      at a
      slower pace than play-by-play wagers, less reliance is needed on the automatic
      line movement features of the SportXction ® System.
      Additional financial analysis programs are available for manual review and
      control of the wagering pools.





The
      current version of the SportXction ® System
      has not been modified to include this traditional pre-game wagering capability.
      However, the Company does not consider such a modification to the software,
      as
      it exists, to be of significant difficulty or scope.





**Government
      Regulation**





**United
      Kingdom**




Prior
      to
      September 2007, the Company’s indirect, wholly-owned subsidiaries, Brightform
      Limited (“Brightform”) and GIG Operations Limited (“GIG Operations”) provided
      betting services within the United Kingdom and needed to comply with betting
      legislation in the United Kingdom. Betting was regulated in the United Kingdom
      under the Betting Gaming and Lotteries Act 1963 (“the Betting Act”), Betting and
      Gaming Duties Act 1981 (“the Duties Act”) and associated regulations (all
      collectively referred to as the “Acts”).





The
      Betting Act regulated on-course (betting taking place at a licensed track)
      and
      off-course betting (telephone, Internet and other betting not undertaken at
      a
      licensed track) as well as pool betting in the United Kingdom. The Betting
      Act
      dealt with, among other things, applications for bookmakers’ permits, the
      conduct of bookmakers and the running of licensed betting premises by bookmakers
      and/or bookmakers’ agents in the United Kingdom. The Duties Act and associated
      regulations primarily dealt with the financial reporting and taxation
      responsibilities of those involved in the bookmaking and gaming
      industry.





The
      Betting Act provided the framework for the control of betting in the United
      Kingdom. It is based on the prohibition of betting in streets or public places,
      other than on racecourses (on days when racing was taking place), and in
      premises operating under a license. It also prohibited any person from acting
      as
      a bookmaker without a license and restricted pool betting and betting on
      tracks.




13




In
      order
      to obtain a bookmaker’s permit in the United Kingdom an application had to be
      made to the Licensing Justices at the applicable Magistrates Court (in England
      and Wales) or the Local Authority Licensing Board in Scotland. The essential
      tests applied by the licensing justices when considering an application were
      whether or not the applicant was a fit and proper person to hold a bookmakers’
permit, whether they were competent to operate a bookmaking business and whether
      they had sufficient financial resources to meet the potential liabilities that
      may arise. Brightform applied for and acquired a bookmaker’s permit on April 28,
      2003. This permit was renewed on April 28, 2006 and
      was
      due to expire on May 31, 2009 .
      Separately, GIG Operations applied for and acquired a betting agency permit
      in
      respect of its customer, UKbetting, on January 20, 2003 and in respect of its
      customer, Sportingbet, on October 20, 2003. These permits were renewed on April
      28, 2006 and were due to expire on May 31, 2009.





In
      order
      to use any premises for betting transactions in circumstances where persons
      were
      physically present, a bookmaker had also to obtain a betting office license
      for
      the particular premises. In order to provide fixed odds betting services on
      interactive television or over the Internet, a company operating in the United
      Kingdom needed only to have a bookmaker’s permit. A betting office license was
      not required as it related to specific premises in which customers placed
      bets.





Both
      bookmakers’ permits and betting office licenses remained valid during the
      applicable licensing period (a maximum of three years) and all permits and
      licenses expired by elapse of time. Bookmakers and/or bookmakers’ agents had to
      make applications for the renewal of their permits and/or betting office
      licenses.





In
      September 2007, the system for licensing betting activities was replaced by
      a
      new licensing regime under the Gambling Act 2005 (the “Act”). The Act created a
      framework that seeks to modernize the current gaming legislation and importantly
      to regulate Internet, interactive television, and other remote forms through
      a
      new licensing regime. A new body, the Gambling Commission, was created to
      regulate the industry. Prior to September 2007, the Company discontinued the
      use
      of its stand-alone product in the UK. The integrated version of the Company’s
      product provides a data stream containing suggested betting propositions,
      including pertinent characteristics such as handicaps and betting odds. The
      Company’s business partners’ systems receive this data stream and may offer some
      or all of the betting opportunities to their customers. The SportXction® System
      is configured also to optionally provide risk management recommendations to
      its
      partners relating to the betting opportunities offered. Wager’s are received,
      processed, and tracked by the partner’s systems. Because the Company’s software
      is not directly responsible for the processing of wagers, the Company believes
      that neither its UK subsidiaries nor its software is required to be licensed
      under the Act.





**Nevada**





Prior
      to
      April 2000, ISWI conducted business in the State of Nevada as the operator
      of a
      sports wagering system. As such, it was required to obtain a gaming license
      as
      an operator of an “inter-casino linked system” (“OILS License”) and to register
      with the Nevada Gaming Commission as a publicly traded corporation (a
“Registered Corporation”). ISWI is not currently operating in Nevada, although
      it continues to hold its OILS License and is still a Registered Corporation.
      ISWI is currently marketing its current System to software providers and casinos
      in Nevada. These marketing efforts are aimed at licensing the Company’s
      SportXction ® System
      to software providers and casinos in order for them to operate a system
      utilizing the Company’s SportXction ® System
      software. The Company has no current plans to re-enter the business of operating
      a sports wagering system in Nevada. Nevertheless, in order to maintain its
      OILS
      License, the Company must continue to comply with Nevada gaming law. If the
      Company decided that it is not likely that it will operate a sports wagering
      system in Nevada, it may decide to withdraw its license.




14




The
      ownership and operation of casino gaming facilities in Nevada, including sports
      pools, the operation of an inter-casino linked system, the manufacture, sale
      and
      distribution of gaming devices for use or play in Nevada or for distribution
      outside of Nevada, and the manufacture, sale and distribution of associated
      equipment for use or play in Nevada is subject to The Nevada Gaming Control
      Act
      and the regulations promulgated there under (collectively, the “Nevada Act”) and
      various local ordinances and regulations. Such activities are subject to the
      licensing and regulatory control of the Nevada Gaming Commission (“Nevada
      Commission”), the Nevada State Gaming Control Board (“Nevada Board”), and
      various local, city and county regulatory agencies. (The Nevada Commission
      and
      Nevada Board are collectively referred to herein as the “Nevada Gaming
      Authorities.”)





The
      laws,
      regulations and supervisory procedures of the Nevada Gaming Authorities are
      based upon declarations of public policy which are concerned with, among other
      things: (i) the prevention of unsavory or unsuitable persons from having a
      direct or indirect involvement with gaming, or manufacturing or distribution
      of
      gaming devices at any time or in any capacity; (ii) the strict regulation
      of all persons, locations, practices, associations and activities related to
      the
      operation of licensed gaming establishments and the manufacture or distribution
      of gaming devices and equipment; (iii) the establishment and maintenance of
      responsible accounting practices and procedures; (iv) the maintenance of
      effective controls over the financial practices of licensees, including the
      establishment of minimum procedures for internal fiscal affairs and the
      safeguarding of assets and revenues, providing reliable record keeping and
      requiring the filing of periodic reports with the Nevada Gaming Authorities;
      (v) the prevention of cheating and fraudulent practices; and
      (vi) providing a source of state and local revenues through taxation and
      licensing fees.





Within
      the United States, sports wagering is currently legal only in Nevada. Pursuant
      to the Professional and Amateur Sports Protection Act, 28 U.S.C. Section 3701,
      et. seq. (hereinafter referred to as the “Sports Act”), which became effective
      January 1, 1993, the proliferation of legalized sports books was
      significantly curtailed. Although the Sports Act generally prohibits sports
      wagering in every jurisdiction in the United States, including those
      jurisdictions subject to the Indian Gaming Regulatory Act (25 U.S.C. Section
      2701 et. seq.), the Sports Act currently permits such wagering in those
      jurisdictions that authorized sports wagering prior to the effective date of
      the
      Act. 28 U.S.C. Section 3704. Thus, sports books and wagering are permitted
      to
      continue to operate in Nevada. Moreover, the Interstate Wire Act, 18 U.S.C.
      Section 1084, also prohibits those in the business of betting and wagering
      from
      utilizing a wire communication facility for the transmission in interstate
      or
      foreign commerce of any bets, wagers or information assisting in the placing
      of
      such bets and wagers on any sporting event or contest unless such betting or
      wagering activity is specifically authorized in each jurisdiction
      involved.




15




On
      April 23, 1998, the Nevada Commission granted ISWI an OILS License and
      registered it as a Registered Corporation. The Nevada Commission further granted
      an exemption from the requirements of its Regulation 16.100(1), which would
      have
      otherwise prohibited ISWI, as a Registered Corporation, from holding a Nevada
      OILS License. ISWI’s OILS License has a number of conditions, all of which were
      agreed to by the Company, relating to the Company’s operations and to the
      SportXction ® System’s
      method of operation and accounting. As a Registered Corporation and a gaming
      licensee (“Gaming Licensee”) the following regulatory requirements apply to the
      Company:





·
            The
                Company is required to maintain a regulatory compliance committee
                and
                periodically to submit detailed financial and operating reports to
                the
                Nevada Commission and to furnish any other information which the
                Nevada
                Commission may require.





·
            The
                Nevada Gaming Authorities may investigate any individual who has
                a
                material relationship to, or material involvement with, the Company
                in
                order to determine whether such individual is suitable or should
                be
                licensed as a business associate. Changes in licensed positions must
                be
                reported to the Nevada Gaming Authorities and, in addition to their
                authority to deny an application for a finding of suitability of
                licensure, the Nevada Gaming Authorities have jurisdiction to disapprove
                a
                change in corporate position or sever a relationship with such person.
                Bernard Albanese (Chairman of the Board and Chief Executive Officer)
                has
                been approved for licensure.





·
            If
                it were determined that the Nevada Act was violated by the Company,
                the
                registration and OILS Licenses it holds could be limited, conditioned,
                suspended or revoked, subject to compliance with certain statutory
                and
                regulatory procedures.





·
            Any
                beneficial holder of the Company’s voting securities, regardless of the
                number or shares owned, may be required to file an application, be
                investigated, and have his suitability determined as a beneficial
                holder
                of the Company’s voting securities if the Nevada Commission has reason to
                believe that such ownership would otherwise be inconsistent with
                the
                declared policies of the State of Nevada. The applicant must pay
                all costs
                of investigation incurred by the Nevada Gaming Authorities in conducting
                any such investigation.





·
            The
                Nevada Act requires any person who acquires beneficial ownership
                of more
                than 5% of a Registered Corporation’s voting securities to report the
                acquisition to the Nevada Commission. The Nevada Act requires that
                beneficial owners of more than 10% of a Registered Corporation’s voting
                securities apply to the Nevada Commission for a finding of suitability
                within thirty days after the Nevada Board Chairman mails the written
                notice requiring such filing. Under certain circumstances, an
                “institutional investor,” as defined in the Nevada Act, which acquires
                more than 10%, but not more than 15%, of the Registered Corporation’s
                voting securities may apply to the Nevada Commission for a waiver
                of such
                finding of suitability if such institutional investor holds the voting
                securities for investment purposes only. In certain circumstances,
                an
                institutional investor may hold up to 19% of a Registered Corporation’s
                voting securities for a limited period of time and maintain such
                a waiver.
                The applicant is required to pay all costs of
                investigation.




16




·
            Any
                person who fails or refuses to apply for a finding of suitability
                or a
                license within thirty days after being ordered to do so by the Nevada
                Commission or the Nevada Board Chairman, may be found unsuitable.
                The same
                restrictions apply to a record owner if the record owner, after request,
                fails to identify the beneficial owner. Any stockholder found unsuitable
                and who holds, directly or indirectly, any beneficial ownership of
                the
                common stock beyond such period of time as may be prescribed by the
                Nevada
                Commission may be guilty of a criminal offense.





·
            The
                Nevada Commission may, in its discretion, require the holder of any
                debt
                security of a Registered Corporation to file applications, be investigated
                and be found suitable to own the debt security of a Registered Corporation
                if the Nevada Commission has reason to believe that its acquisition
                of
                such debt security would otherwise be inconsistent with the declared
                policy of the State of Nevada. If the Nevada Commission determines
                that a
                person is unsuitable to own such security, then pursuant to the Nevada
                Act, the Registered Corporation can be
                sanctioned.





·
            The
                Company is required to maintain a current stock ledger in Nevada
                which may
                be examined by the Nevada Gaming Authorities at any time. If any
                securities are held in trust by an agent or by a nominee, the record
                holder may be required to disclose the identity of the beneficial
                owner to
                the Nevada Gaming Authorities. A failure to make such disclosure
                may be
                grounds for finding the record holder unsuitable. To date, the Commission
                has not required the Company to disclose its’ beneficial
                owners.





·
            A
                Registered Corporation may not make a public offering of its securities
                without the prior approval of the Nevada Commission if the securities
                or
                proceeds there from are intended to be used to construct, acquire
                or
                finance gaming facilities or operations in Nevada, or to retire or
                extend
                obligations incurred for such purposes.





·
            Changes
                in control of a Registered Corporation through merger, consolidation,
                stock or asset acquisitions, management or consulting agreements,
                or any
                act or conduct by a person whereby he obtains control, may not occur
                without the prior approval of the Nevada Commission. Entities seeking
                to
                acquire control of a Registered Corporation must satisfy the Nevada
                Board
                and the Nevada Commission in a variety of stringent standards prior
                to
                assuming control of such Registered Corporation. The Nevada Commission
                may
                also require controlling stockholders, officers, directors and other
                persons having a material relationship or involvement with the entity
                proposing to acquire control, to be investigated and licensed as
                part of
                the approval process relating to the
                transaction.





·
            The
                Nevada legislature has declared that some corporate acquisitions
                opposed
                by management, repurchases of voting securities and corporate defense
                tactics affecting Nevada corporate gaming licensees, and Registered
                Corporations that are affiliated with those operations, may be injurious
                to stable and productive corporate gaming. Approvals are, in certain
                circumstances, required from the Nevada Commission before the Registered
                Corporation can make exceptional repurchases of voting securities
                above
                the current market price thereof and before a corporate acquisition
                opposed by management can be consummated. The Nevada Act also requires
                prior approval of a plan or recapitalization proposed by the Registered
                Corporation’s board of directors in response to a tender offer made
                directly to the Registered Corporation’s stockholders for the purposes of
                acquiring control of the Registered
                Corporation.




17




·
            License
                fees and taxes, computed in various ways depending on the type of
                gaming
                or activity involved, are payable to the State of Nevada and to the
                counties and cities in which gaming operations are to be conducted.
                Depending upon the particular fee or tax involved, these fees and
                taxes
                are payable either monthly, quarterly or annually and are based upon
                either (i) a percentage of the gross revenues received; or
                (ii) the number of gaming devices operated. Under 1999 Nevada
                legislation, operators of inter-casino linked systems are required
                to
                share a proportionate percentage of such taxes. Annual fees are also
                payable to the State of Nevada for renewal of licenses as a manufacturer
                and distributor.





·
            Any
                person who is licensed, required to be licensed, registered, required
                to
                be registered, or is under common control with such persons (collectively,
                “Licensees”), and who proposes to become involved in a gaming venture
                outside of Nevada, is required to deposit with the Nevada Board,
                and
                thereafter maintain, a revolving fund in the amount of $10,000 to
                pay the
                expenses of investigation by the Nevada Board of their participation
                in
                such foreign gaming. The revolving fund is subject to increase or
                decrease
                in the discretion of the Nevada Commission. Thereafter, Licensees
                are
                required to comply with certain reporting requirements imposed by
                the
                Nevada Act. A Licensee is also subject to disciplinary action by
                the
                Nevada Commission if it knowingly violates any laws of the foreign
                jurisdiction pertaining to the foreign gaming operation, fails to
                conduct
                the foreign gaming operation in accordance with the standards of
                honesty
                and integrity required of Nevada gaming operations, engages in activities
                or enters into associations that are harmful to the State of Nevada
                or its
                ability to collect gaming taxes and fees, or employs, contracts with,
                or
                associates with a person in the foreign operation who has been denied
                a
                license or finding of suitability in Nevada on the ground of
                unsuitability. As a result of the acquisition of GIG, the Company
                filed a
                Foreign Gaming Notification Statement and established a revolving
                investigation fund of $10,000 in October 2002. The Company continues
                to
                comply with ongoing foreign gaming reporting requirements regarding
                GIG.





The
      Company may also be required to make annual filings with the Attorney General
      of
      the United States in connection with the operation of the
      SportXction ® System.





It
      is
      possible that the Company may be regulated or required to be licensed in various
      foreign countries, including the United Kingdom, or that the Company’s
      SportXction ® System
      software may be required to be approved for use in such foreign countries prior
      to its use or operation by the Company. Although the Company is not currently
      aware of any such requirements, the Company has only done a limited inquiry
      with
      respect thereto. If the Company is required to be licensed or its
      SportXction ® System
      software is required to be approved in any foreign countries, there is no
      assurance that such licensing or approval could be obtained, although the
      Company is not aware of any reason why it could not be so licensed or its
      SportXction ® System
      software would not be approved.




18


**SAFE
      HARBOR STATEMENT**





**Important
      Factors Regarding Forward Looking Statements and Other
      Risks**





This
      Report on Form 10-KSB (“Report”), except for the historical information
      contained herein, contains “forward-looking statements” within the meaning of
      Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
      Securities Exchange Act of 1934, as amended. Such forward looking statements
      include, without limitation, statements regarding the length of time that the
      Company will incur losses and negative cash flow, the length of time the
      Company’s cash resources will last and its ability to meet its cash
      requirements, the ability of the Company to raise additional funds or execute
      a
      strategic transaction and if it does raise additional funds, the terms and
      conditions thereof and the dilutive impact to existing stockholders, the
      ultimate dilutionary effect that the preferred stock, warrants and options
      will
      have on existing stockholders, whether the Company will offer wagering on 3200
      events during fiscal year 2008, whether there is a significant potential market
      for the Company’s horseracing product under development, whether the Company
      will be able to enter into additional agreements for the fully integrated system
      implementation, whether the Company will enter into definitive agreements with
      the Ontario Lottery Board or the Neptune Race and Sports Book, Inc., the
      likelihood that the Company will receive and maintain any needed gaming licenses
      or other approvals for use of its products, the ability of the Company to
      attract adequate numbers of players to the SportXction ® System
      for sports wagering and sports contests, whether legal or regulatory
      requirements will inhibit marketing of the products as intended by the Company,
      whether the Company will enter into agreements with others for use of the
      SportXction ® System,
      whether the Company will extend or renew its employment agreement with its
      Chief
      Executive Officer, and whether the Company will complete product extensions
      to
      the SportXction ® System.
      Such forward-looking statements involve known and unknown risks, uncertainties
      and other factors which may cause the actual results, performance or
      achievements of the Company, or industry results, to be materially different
      from any future results, performance, or achievements, expressed or implied,
      by
      such forward-looking statements. Such risks and factors include, among others,
      those listed below. When used in this Report, statements that are not statements
      of current or historical fact may be deemed to be forward-looking statements.
      Without limiting the foregoing, the words “anticipates,” “plans,” “intends,”
“expects,” “believes” and similar expressions are intended to identify such
      forward-looking statements. Readers are cautioned that these forward-looking
      statements are inherently uncertain and are cautioned not to place undue
      reliance on these forward-looking statements, which speak only as of the date
      hereof. The Company undertakes no obligation to publicly release the result
      of
      any revisions to these forward-looking statements that may be made to reflect
      events or circumstances after the date hereof or to reflect the occurrence
      of
      unanticipated events. ****




19


**RISK
      FACTORS**




**We
      will need to raise additional capital or execute a strategic transaction for
      us
      to continue our operations.**





The
      Company must raise additional capital to fund its future operations or consider
      other strategic alternatives, including a possible merger, sale of assets or
      other business combination or restructuring transactions. There can be no
      assurance that additional financing or strategic alternatives will be available
      on terms acceptable to the Company, or at all. If additional funds are raised
      by
      issuing equity securities, dilution to existing stockholders will result and
      future investors may be granted rights superior to those of existing
      stockholders. The Series C Preferred Stock contain certain negative covenants
      including limitations with respect to borrowings. Moreover, raising additional
      funds in the future are likely to trigger the anti-dilution provisions in our
      Series C Preferred Stock and in the Company’s outstanding warrants, resulting in
      further significant dilution to existing stockholders and certain other rights
      to holders of the Series C Preferred Stock.





As
      of
      September 30, 2007, the Company had liquid resources totaling $284,000
      consisting of cash and cash equivalents. Management believes that these
      resources, without any significant increase in revenues, will only be sufficient
      to fund operations through January 2008. Accordingly, the Company must raise
      additional capital or pursue strategic alternatives immediately. If the Company
      cannot raise additional capital immediately, its liquidity, financial condition
      and business prospects will be materially and adversely affected and it may
      have
      to cease operations.





**There
      is substantial doubt about our ability to continue as a going concern due to
      our
      cash requirements, which means that we may not be able to continue operations
      unless we obtain additional funding or execute a strategic
      transaction.**





Our
      independent registered public accounting firm’s report on our financial
      statements for the fiscal year ended September 30, 2007 includes an explanatory
      paragraph regarding our ability to continue as a going concern. Note 2 to
      the financial statements states that our ability to continue operations, meet
      our operational goals and pursue our long-term strategy is dependent upon our
      raising additional capital, which raises substantial doubt about our ability
      to
      continue as a going concern. Further, the registered public accounting firm’s
      report states that the financial statements do not include any adjustments
      that
      might result from the outcome of this uncertainty.





**The
      public market for our stock is limited, and stockholders may not be able to
      resell their shares at or above the purchase price paid by such stockholder,
      or
      at all.**





On
      May
      18, 2007, our shares were delisted from the NASDAQ Capital Market. The
      Company’s Common Stock is currently quoted on
      the
      Over-the-Counter Bulletin Board maintained by the NASD and on
      the Pink Sheets, an electronic quotation service for securities traded
      over-the- counter.
      As a result, there is currently only a limited public market for our common
      stock. We cannot assure you that an active public market for our Common Stock
      will develop or be sustained in the future. The effects of delisting include
      the
      limited publication of the market prices of the Company’s securities and limited
      news coverage of the Company. Delisting may reduce investors’ interest in the
      Company’s securities and materially adversely affect the trading market and
      prices for such securities and the Company’s ability to issue additional
      securities or to secure additional financing.




20




Low
      price
      stocks like ours are at risk for volatile price changes and are subject to
      the
      additional risks of federal and state regulatory requirements and the potential
      loss of effective trading markets. In particular, since our Common Stock has
      been delisted from trading on NASDAQ and because the trading price of the Common
      Stock is less than $5.00 per share, the Common Stock is subject to Rule 15g-9
      under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)
      which, among other things, requires that broker/dealers satisfy special sales
      practice requirements, including making individualized written suitability
      determinations and receive purchasers’ written consent, prior to any
      transaction. The Company’s Common Stock is also deemed a penny stock under the
      Securities Enforcement and Penny Stock Reform Act of 1990, which requires
      additional disclosures in connection with trades in the Company’s Common Stock,
      including the delivery of a disclosure schedule explaining the nature and risks
      of the penny stock market. The SEC’s regulations define a “penny stock” to be
      any non-NASDAQ equity security that has a market price (as therein defined)
      of
      less than $5.00 per share or with an exercise price of less than $5.00 per
      share, subject to certain exceptions. These requirements limit the liquidity
      of
      the Company’s securities.





**The
      delisting of our shares from the Nasdaq Capital Market has triggered certain
      provisions of the Company’s Series C Preferred Stock.**





As
      a
      result of the delisting from NASDAQ, each holder of the Series C Preferred
      Stock
      has the right (which has not yet been exercised) to require the Company to
      redeem the Series C Preferred Stock (generally at 120% of the stated value
      thereof) for the Company’s Common Stock (at approximately 90% of the market
      value of the Common Stock) subject to an ownership limitation or to increase
      the
      dividend on the Series C Preferred Stock to 12% per annum. In addition, the
      Company is unable to satisfy the quarterly dividend payments on the Series
      C in
      shares of Common Stock without the consent of the holders of the Series C.
      The
      Company failed to make the mandatory quarterly dividend payments on its Series
      C
      Preferred Stock in the amount of $56,000 (calculated at the rate of 6% per
      annum), which were due on July 2 and October 1, 2007. The unpaid dividends
      are
      subject to a late fee (which must be paid in cash) at the rate of 12% per annum.
      The payment of dividends and late fees in cash will reduce the amount of cash
      available to fund operations.





**If
      we violate certain provisions of the Company’s Series C Preferred Stock and are
      forced to redeem the Preferred Stock for cash, we may not have enough cash
      to
      fund our operations and may not be able to obtain additional financing.
      Anti-dilution provisions of the Series C Preferred Stock may limit our ability
      to obtain necessary new financing.**





The
      Company’s Series C Preferred Stock issued in August 2005 contain certain
      provisions and restrictions under the Company’s control, which if violated,
      could give the holders of the Series C Preferred Stock the right to require
      the
      Company to redeem their shares of Series C Preferred Stock for cash. If such
      an
      event occurred and a holder of the Series C Preferred Stock exercised its right
      to require the Company to redeem its shares, the Company would not have the
      cash
      resources to redeem such shares. The Series C Preferred Stock also contains
      anti-dilution provisions that may limit the Company’s ability to obtain
      additional financing on favorable terms, or at all, notwithstanding that the
      Company now needs new equity financing in order to continue operations beyond
      January 2008. New investors would likely expect to purchase any privately placed
      securities at some discount to current market price. The “full ratchet” dilution
      protection contained in the Series C Preferred Stock and certain of the
      outstanding warrants would result in the conversion price of the Series C
      Preferred Stock being substantially reduced from the current $3.75, and the
      warrant exercise price being reduced from their current price, and as a
      consequence, many more shares would become issuable upon conversion (or
      exercise), and could potentially be sold into the market. This market “overhang”
may deter potential new investors.




21




**If
      the holders of our outstanding Series C Preferred Stock, options and warrants
      convert or exercise those securities, or if we obtain the consent of the holders
      of the Series C Preferred Stock to pay dividends on the Series C Preferred
      Stock
      with shares of our Common Stock, our existing stockholders will be significantly
      diluted. In addition, sales of substantial amounts of our Common Stock could
      cause the market price to go down.**





To
      the
      extent that the shares of Series C Preferred Stock are converted or redeemed
      for
      common stock and/or the options or warrants are exercised, a significantly
      greater number of shares of our Common Stock will be outstanding and the
      interests of our existing stockholders will be substantially diluted (even
      more
      if the conversion occurs after a downward adjustment to the Series C Preferred
      Stock conversion price). If these additional shares are sold into the market,
      it
      could decrease the market price of our Common Stock and encourage short sales.
      Short sales and other hedging transactions could place further downward pressure
      on the price of our Common Stock. We cannot predict whether or how many
      additional shares of our Common Stock will become issuable as a result of these
      provisions. Additionally, although because of the delisting from NASDAQ, we
      are
      currently unable to pay dividends on the Series C Preferred Stock in shares
      of
      our Common Stock, we may seek the consent of the holders of the Series C
      Preferred Stock to pay dividends on the Series C Preferred Stock in shares
      of
      our Common Stock which could result in increased downward pressure on our stock
      price and further dilution to our existing stockholders.





**Our
      success is dependant on our ability to market, and the market’s acceptance of, a
      single product.**





The
      Company’s success will depend primarily on the success of a single product, the
      SportXction ® System,
      and the ability of the Company and its business partners and customers to market
      the SportXction ® System
      and develop a significant number of players with interest in wagering or playing
      contests utilizing the SportXction ® System.
      Previously, the Company pursued an aggressive marketing and advertising campaign
      to introduce the SportXction ® System
      to the gaming public in Nevada. Nonetheless, the total number of players who
      used the SportXction ® System
      in Nevada was limited, and the total amount wagered through the
      SportXction ® System
      in Nevada was modest, as a result of which the Company ceased its Nevada
      operations. To achieve commercial success, the SportXction ® System,
      must be accepted by a significant number of gaming patrons. There can be no
      assurance that the SportXction ® System
      will be accepted by its intended market. If the SportXction ® System
      does not achieve sufficient market acceptance, the Company’s business, financial
      condition and results of operations would be materially and adversely
      affected.





22




**We
      have a history of losses and the likelihood of our success depends on many
      factors, including some that are out of our control.**





Until
      entering into the License Agreements with GIG in 2000, the Company was in the
      development stage and generated limited revenues from the
      SportXction ® System.
      As of September 30, 2007 and September 30, 2006, the Company had cumulative
      net losses since inception of approximately $27.9 million and $25.6 million,
      respectively. The Company incurred a net loss applicable to common shareholders
      of $2.2 million during the year ended September 30, 2007.  The likelihood
      of the Company’s success must be considered in light of the problems, delays,
      expenses and difficulties encountered by an enterprise in the Company’s stage of
      development, some of which may be beyond the Company’s control. These include,
      but are not limited to, the ability of the Company to operate its anticipated
      business; delays in commencement of operation of the SportXction ® System
      by the Company’s business partners; the ability of the Company and its business
      partners to attract a sufficient number of players desirous of utilizing the
      SportXction ® System;
      unanticipated problems relating to further software enhancement and development;
      acceptance of the SportXction ® System
      by the wagering public; gaming regulations and gaming taxes (including those
      in
      the United States, United Kingdom and other foreign countries); the competitive
      and regulatory environment in which the Company operates; marketing problems;
      and additional costs and expenses that may exceed current
      estimates.





**We
      do not intend to pay cash dividends on our Common Stock for the foreseeable
      future.**





The
      Company has not paid any dividends on its Common Stock since its inception
      and
      does not intend to pay any dividends on our Common Stock in the foreseeable
      future. The Company currently intends to reinvest earnings, if any, in the
      development and expansion of its business.





**We
      anticipate continued losses and negative cash flow, and we can not predict
      whether or when we will again become profitable.**





The
      Company expects to incur losses and negative cash flow at least for the fiscal
      year ending September 30, 2008. The Company expects revenue to increase as
      a
      result of its existing agreements as well as anticipated new licensees but
      can
      give no assurance that will occur or if it does when or whether we will again
      achieve profitability.




**We
      rely on a limited number of partners for our revenues.**





Revenues
      from three customers (Interactive Sports Limited, Ladbrokes and Caliente)
      represented over 90% of the Company’s revenues in the year ended September 30,
      2007. The Company expects a significant portion of its future revenues to
      continue to be generated by a limited number of bookmakers. The loss of any
      of
      these bookmakers or any substantial reduction in betting activity by any of
      their customers could materially and adversely affect the Company’s operating
      results.




23




**A
      significant amount of our revenue is derived from monthly
      minimums.**





In
      May
      2007, the Company restructured its agreements on a temporary basis with two
      of
      its largest customers (Interactive Sports Limited and Ladbrokes) to provide
      the
      Company with either fixed or minimum monthly fees, rather than a share of the
      revenue. Although the Company is still being paid on the basis of monthly
      minimum fees, there is no assurance that it will continue to be so paid. If
      the
      Company’s agreements were to revert back to a revenue share basis, the Company’s
      revenue would become more variable on a monthly basis, and may decrease overall
      depending on the number of customers using the system, the amount wagered and
      the performance of the system with regard to the amount held.





**Our
      sales and integration cycles with potential business partners are long and
      unpredictable, and may encounter unanticipated problems.**





The
      sales
      and integration cycles with potential business partners for the Company’s
      SportXction ® System
      are long and unpredictable. Potential business partners typically undertake
      a
      lengthy evaluation process. As a result, the Company may not recognize revenue
      from sales efforts for an extended period of time, if at all. Assuming an
      agreement is reached, the SportXction ® System
      must then be integrated with the business partner’s technical environment. The
      length of time to complete the integration process may be adversely impacted
      by
      a number of factors, including the business partner’s system infrastructure, its
      strategic priorities and technical resources. Unanticipated problems during
      the
      integration process could result in extensive delays in launching the
      SportXction ® System
      or termination of an agreement, which could materially and adversely affect
      the
      Company’s business, financial condition and results of operations.





**Our
      international operations subject us to currency exchange risks.**





A
      significant portion of the Company’s operations and its sales are in the United
      Kingdom and denominated in British Pounds. As a result, the Company’s operating
      results may be adversely affected by changes in exchange rates. Given the
      volatility of currency exchange rates, the Company cannot predict the effect
      of
      exchange rate fluctuations on the Company’s future operating
      results.




**Our
      business is reliant on obtaining and retaining certain gaming licenses.**





Sports
      wagering and wagering over the Internet is highly regulated throughout the
      world. The inability of the Company to obtain and/or retain any gaming licenses
      or other approvals that may be required could have a material adverse impact
      on
      the Company (see “Government Regulation”).




24




**We
      face substantial competition in the gaming industry and may not be able keep
      up
      with future technological changes.**





The
      Company’s SportXction ® System
      and the business operated by the Company competes with other forms of gambling,
      including, but not limited to, sports wagering as currently conducted
      world-wide, casino games (such as traditional slot machines, video slot, poker
      and blackjack machines, roulette, card games, keno and craps), bingo,
      government-sponsored lotteries, on-and off- track betting on horses and dogs,
      jai alai, offshore cruise ships, riverboats, illegal wagering of all types
      and
      Native American gaming operations. The gaming industry is also subject to
      shifting consumer preferences and perceptions. A shift in consumer acceptance
      or
      interest in gaming could adversely affect the Company. There can be no assurance
      that future technological advances will not result in improved products or
      services that could adversely affect the Company’s business or that the Company
      will be able to develop and introduce competitive uses for its products and
      to
      bring such uses to market in a timely manner.





**Our
      success depends significantly upon our ability to protect our intellectual
      property and to avoid infringing the intellectual property of third parties,
      which could result in costly and time-consuming litigation.**





The
      Company regards the SportXction ® System
      and related technology as proprietary and relies primarily on a combination
      of
      patent, trademark, copyright and trade secret laws and employee and third-party
      non-disclosure agreements to protect its proprietary rights. The Company has
      two
      United States patents for its proprietary wagering methods and its related
      computer processing system. Corresponding patents have been granted in 16
      foreign countries for one or both of these patents. The Company is also required
      to pay yearly taxes in each jurisdiction for each patent to maintain its status.
      The Company also has a patent pending to use its technology in a
      fixed-odds/pari-mutuel hybrid for horse race wagering. No assurance can be
      given
      that any of the Company’s pending domestic or foreign patent applications will
      issue as patents, that the Company will have the funds available to maintain
      all
      of the issued patents, that any issued patents will provide the Company with
      significant competitive advantages, or that challenges will not be instituted
      against the validity or enforceability of any patent owned by the Company or,
      if
      instituted, that such challenges will not be successful. Defense of intellectual
      property rights can be difficult and costly, in particular in certain foreign
      countries, and there can be no assurance that the Company will be able
      effectively to protect our technology from misappropriation by competitors.
      Additionally, third party infringement claims may result in the Company being
      required to enter into royalty arrangements or pay damages, any of which could
      materially and adversely affect the Company’s business, financial condition and
      results of operations.





As
      the
      number of software products in the industry increases and the functionality
      of
      these products further overlap, software developers and publishers may
      increasingly become subject to infringement claims. There can be no assurance
      that the Company will not face such claims, with or without merit, in the
      future. Any such claims or litigation could be costly and could result in a
      diversion of management’s attention, which could have a material adverse effect
      on the Company’s business, financial condition and results of operations. Any
      settlement of such claims or adverse determinations in such litigation could
      also have a material adverse effect on the Company’s business, financial
      condition and results of operations.




25




**Our
      success depends on our ability to attract and retain key personnel.**





The
      Company is dependent upon the continued efforts and abilities of its executive
      officer and other key personnel. The Company has entered into an employment
      agreement with its Chairman and Chief Executive Officer that expires June
      30,2008. No assurance can be given that this agreement will be extended or
      renewed by the Company and if not extended or renewed, whether an individual
      with similar background and experience could be hired to replace him. The
      Company does not maintain and does not intend to obtain key person life
      insurance on the life of its executive officer. The Company’s operations will
      also depend to a great extent on the Company’s ability to attract new key
      personnel and retain existing key personnel in the future. Competition is
      intense for highly skilled employees and there can be no assurance that the
      Company will be successful in attracting and retaining such personnel, or that
      it can avoid increased costs in order to do so. The Company’s failure to attract
      additional qualified employees or to retain the services of key personnel could
      have a material adverse effect on the Company’s business, financial condition
      and results of operations.





**The
      Company’s retired founder, Barry Mindes, may have the ability to exercise
      effective control of our Company as he and his affiliates own and control a
      significant percentage of our outstanding Common Stock** .





As
      of
      December 21, 2007, Barry Mindes and Mindes Family Limited Partnership, of which
      an entity controlled by Mr. Mindes is general partner, together
      beneficially own approximately 25% of the outstanding shares of Common Stock.
      As
      a result of such ownership, such stockholders may have the ability to control
      the election of the directors of the Company and the outcome of issues submitted
      to a vote of the stockholders of the Company.





**The
      market price of our Common Stock may be highly volatile.**





The
      market price of securities of many emerging and high technology companies has
      been highly volatile, experiencing wide fluctuations not necessarily related
      to
      the operating performance of such companies. Factors such as the Company’s
      operating results and announcements by the Company or its competitors concerning
      technological innovations, new products or systems may have a significant impact
      on the market price of the Company’s securities.





**Certain
      provisions of our Certificate of Incorporation and Delaware law may have the
      effect of discouraging, delaying or preventing a change of control that our
      stockholders may consider favorable.**





The
      Company’s Certificate of Incorporation authorizes the issuance of 2,000,000
      shares of preferred stock (of which 60,000 shares have been designated as Series
      A Preferred Stock, 3,000 shares have been designated as Series B Preferred
      Stock
      and 4,000 shares have been designated as Series C Preferred Stock) with such
      designations, rights and preferences as may be determined from time to time
      by
      the Board of Directors. Accordingly, the Board of Directors is empowered,
      without obtaining stockholder approval, to issue such preferred stock with
      dividend, liquidation, conversion, voting or other rights that could adversely
      affect the voting power or other rights of the holders of the Common Stock.
      In
      the event of issuance, the preferred stock could be utilized, under certain
      circumstances, as a method of discouraging, delaying or preventing a change
      in
      the control of the Company. Certain provisions of Delaware law may also
      discourage third party attempts to acquire control of the Company.




26




**Item
      2.**  **Description of Property**




The
      Company currently leases approximately 2,500 square feet of space in West
      Paterson, New Jersey under a lease which expires on June 30, 2009. Lease
      payments for this facility, at which all development and administrative
      functions in the United States are currently conducted, during the fiscal year
      ended September 30, 2007, were approximately $37,500. For the fiscal year
      ending September 30, 2008, lease payments for this facility are expected to
      be approximately $37,500.





The
      Company currently licenses for use approximately 900 square feet of office
      space, in London, England under a use license, which expires in March 2008.
      Lease payments for this facility, at which all operations and administrative
      functions in England are currently conducted, during the year ended
      September 30, 2007, were approximately $175,388. For the fiscal year ending
      September 30, 2008, lease payments for this facility are expected to be
      approximately $246,112.





**Item
      3.**  **Legal Proceedings**




See
      “Business - Intellectual Property”.




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





The
      2007
      Annual Meeting of Stockholders was held on September 17, 2007. The following
      matters were voted upon at the meeting and received the number of votes
      indicated:




To
      elect
      a board of three directors to serve until the next Annual Meeting of
      Stockholders and until their respective successors are elected and
      qualified.




**For**
            **Withheld**Bernard
                Albanese
            8,125,097
            502,063Bruce
                Feldman
            8,130,405
            496,755Philip
                Rule
            8,130,405
            496,755





To
      approve an amendment to the Certificate of Incorporation of the Company to
      increase the number of authorized shares of Common Stock by 60,000,000 shares,
      from 20,000,000 to 80,000,000.




For:
            8,083,229Against:
            543,930Abstain:
            0Broker
                non-votes:
            0





To
      ratify
      the selection of Eisner LLP as the Company’s independent registered public
      accounting firm for the fiscal year ending September 30, 2007.




For:
            8,544,340Against:
            66,735Abstain:
            16,085


27


**PART
      II**




**Item
      5. Market for Common Equity, Related Shareholder Matters and Small Business
      Issuer Purchases of Equity Securities**





**Market
      Information**





The
      following table sets forth, for the periods indicated and as reported by NASDAQ
      or the OTC Bulletin Board, the high and low sales prices for shares of the
      Company’s Common Stock until May 18, 2007 and the high and low bid prices for
      the periods thereafter. The bid quotations reflect inter-dealer prices without
      retail mark-up or commission and may not represent actual transactions. On
      May
      18, 2007, as a result of failing to comply with NASDAQ’s shareholders’ equity
      requirement, the Company’s Common Stock was de-listed from the NASDAQ Capital
      Market. The
      Company’s Common Stock is currently quoted on
      the
      Over-the-Counter Bulletin Board maintained by the NASD and on
      the Pink Sheets, an electronic quotation service for securities traded
      over-the- counter:




Quarter
              
              High
              
              LowOctober 1,
                  2005 to December 31, 2005
              
              $
              3.34
              
              $
              1.94January 1,
                  2006 to March 31, 2006
              
              
              2.83
              
              
              1.82April 1,
                  2006 to June 30, 2006
              
              
              2.31
              
              
              1.68July 1,
                  2006 to September 30, 2006
              
              
              1.87
              
              
              1.02October 1,
                  2006 to December 31, 2006
              
              
              3.48
              
              
              1.10January 1,
                  2007 to March 31, 2007
              
              
              2.58
              
              
              0.98April 1,
                  2007 to June 30, 2007
              
              
              1.10
              
              
              0.25July 1,
                  2007 to September 30, 2007
              
              
              0.45
              
              
              0.21





The
      high
      and low bid prices on January 07, 2008 were $0.40 and $0.34, respectively.




**Current
      Holders of Common Stock**





Based
      upon information supplied to the Company by its transfer agent, there were
      approximately 50 stockholders of record of the Common Stock on December 14,
      2007. The Company believes there are in approximately 1,600 beneficial owners
      of
      its Common Stock whose shares are held in “Street Name.”





**Dividends**





The
      Company has never paid cash dividends with respect to its Series A Preferred
      Stock, Series B Preferred Stock or its Common Stock. In January 2005, the
      Company declared a cash dividend with respect to its Series C Preferred Stock
      of
      $24,000. Although holders of our Series C Preferred Stock are entitled to
      receive dividends, we have elected to pay such dividends in shares of our Common
      Stock. As a result of the delisting from the NASDAQ Capital Market, the Company
      is not permitted to pay the dividends on the Series C Preferred Stock in shares
      of Common Stock, and is required to pay them in cash. The Company did not pay
      the dividends due to the holders of the Series C Preferred Stock on July 1,
      2007
      or October 1, 2007. The Company intends to retain future earnings, if any,
      which
      may be generated from the Company’s operations to help finance the operations
      and expansion of the Company and accordingly does not plan, for the foreseeable
      future, to pay cash dividends to holders of Common Stock. Any decision as to
      the
      future payment of dividends on preferred stock or Common Stock (other than
      that
      required in respect of the Series C Preferred Stock) will depend on the results
      of operations and financial position of the Company and such other factors
      as
      the Company’s Board of Directors, in its discretion, deems
      relevant.




**Issuances
      of Common Stock**





We
      made
      no sales of unregistered securities during the quarter ended September 30,
      2007.




28


**Item
      6.**  **Management’s Discussion and Analysis** **or Plan of Operation**





**** The
      following discussion and analysis of financial condition and results of
      operations should be read in conjunction with the Consolidated Financial
      Statements and Notes thereto included elsewhere in this Form 10-KSB.





**Overview**





Interactive
      Systems Worldwide Inc. (“ISWI”) has designed, developed and patented an
      interactive hardware and proprietary software system (the
“SportXction ® System”)
      that enables users to wager at fixed prices during the course of a sporting
      event, such as soccer, football, baseball, basketball, golf, tennis, rugby,
      cricket and snooker, among many others. The SportXction ® System
      accepts bets not only on the outcome of a sporting event, but also on discrete
      parts of the event and on specific game situations. These include such wagers
      as
      will a team make a first down, which player will score next, will a batter
      get
      on base or will a penalty shot be successful. The SportXction ® System
      is unique in that it permits betting continuously while the game is in progress,
      or between game events, such as downs, pitches, changes in ball possession
      and
      similar situations, permitting more frequent placing and cashing of
      wagers.





On
      July
      31, 2002, ISWI, through a wholly-owned subsidiary, acquired all of the
      outstanding share capital of Global Interactive Gaming Limited (“GIG”), a
      British interactive gaming service provider which was previously ISWI’s
      exclusive licensee. GIG markets its services to licensed bookmakers, casinos
      and
      other gambling operators and is located in London, England.





Since
      the
      acquisition, which transformed ISWI from a licensor to an operator of the
      SportXction ® System,
      the Company has formed strategic partnerships primarily with bookmakers in
      the
      U.K and Gibraltar. A factor which will be critical to our success will be the
      ability of the Company and its business partners to market the
      SportXction ® System.
      To achieve commercial success, the SportXction ® System
      must be accepted by a significant number of users.





During
      the years ended September 30, 2007 (“Fiscal 2007”) and 2006 (“Fiscal 2006”), the
      Company’s revenue primarily consisted of license fees and service charges from
      providing interactive gaming services using the SportXction ® System
      to business partners such as licensed bookmakers and others located in the
      United Kingdom, Gibraltar and Mexico.





**Going
      Concern Considerations**





The
      accompanying financial statements have been prepared assuming that the Company
      will continue as a going concern. As shown in the accompanying financial
      statements, the Company has incurred recurring losses from operations and has
      not generated positive net cash flows from operations. There can be no assurance
      that the Company will generate sufficient cash flows to meet its cash flow
      and
      working capital needs. The Company requires additional financing or the
      execution a strategic transaction to continue operations, meet its operational
      goals and to pursue its long term strategy. Management has developed and is
      attempting to implement a plan to address these issues and allow the Company
      to
      continue as a going concern through at least the fiscal year ending September
      30, 2008. The plan includes (i) securing
      minimum monthly cash receipts from existing customers and new
      licensees ,
      (ii) a
      program to reduce costs, (iii) seeking equity or debt financing and (iv) considering
      other strategic alternatives, including a possible merger, sale of assets or
      other business combination or restructuring transactions.




29




There
      is
      no assurance, however, that the Company will be able to raise additional
      financing or execute a strategic transaction on commercially reasonable terms,
      if at all, or that the Company will be able to meet its future contractual
      obligations. The failure to raise financing or execute a strategic transaction
      will negatively impact the Company and its growth plans and its financial
      condition and results of operations, and could force the Company to cease
      operations. The financial statements do not include any adjustments that might
      result from the outcome of this uncertainty.





On
      May
      18, 2007, as a result of failing to comply with NASDAQ’s shareholders’ equity
      requirement, the Company’s Common Stock was de-listed from the NASDAQ Capital
      Market. The
      Company’s Common Stock is currently quoted on
      the
      Over-the-Counter Bulletin Board maintained by the NASD and the
      Pink Sheets, an electronic quotation service for securities traded
      over-the- counter.





**Critical
      Accounting Policies and Estimates**





The
      Company prepares its financial statements in conformity with accounting
      principles generally accepted in the United States of America. Certain of the
      Company’s accounting policies, including accounting for software development
      costs; depreciation and amortization of long-lived assets, including intangible
      assets and deferred income taxes require that the Company apply significant
      judgment in defining the appropriate assumptions for calculating financial
      estimates. These estimates and judgments are subject to an inherent degree
      of
      uncertainty and are evaluated by the Company on an ongoing basis. The Company
      bases its estimates and judgments on its historical experience and other
      relevant factors, the results of which form the basis in making judgments about
      the carrying values of assets and liabilities that are not readily apparent
      from
      other sources.




The
      Company accounts for software development costs in accordance with Statement
      of
      Financial Accounting Standards ("SFAS") No. 86 “Computer Software To Be
      Sold, Leased, or Otherwise Marketed”. Such costs are expensed prior to a product
      or product enhancement’s achievement of technological feasibility and thereafter
      are capitalized. The Company defines a product enhancement as an improvement
      to
      an existing product that is intended to extend the life or improve significantly
      the marketability of the original product. In order to meet the requirements
      for
      capitalization, a product enhancement should involve considerable development
      resources, requires a product design and may require a redesign of all or part
      of the existing product. The Company stops capitalizing software costs relating
      to a particular enhancement when the enhanced product is available for general
      release to its customers. Amortization expense, which has been computed on
      a
      straight-line basis and an estimated economic life of three years, amounted
      to
      $155,000 and $165,000 for the years ended September 30, 2007 and 2006,
      respectively.




30




At
      each
      balance sheet date, the Company compares unamortized capitalized software costs
      to net realizable value on a project-by-project basis and writes off any excess
      of the unamortized cost over the net realizable value. The net realizable value
      is the estimated future gross revenues for that product or product enhancement
      reduced by the estimated future costs of completing and disposing of that
      product or product enhancement, including the costs of performing maintenance
      and support.





See
      Note
      3 to the Company’s Financial Statements for a full discussion of the Company’s
      critical accounting policies and estimates.




**Results
      of Operations**





Revenues
      for Fiscal 2007 were $500,000, as compared to $111,000 during Fiscal 2006.
      The
      increase was primarily due to the launching of the Company’s new integrated
      version of its SportXction® System in combination with Company’s agreements with
      Sportingbet, Ladbrokes and Caliente which provide certain minimum
      payments.





Cost
      of
      revenues for Fiscal 2007 were $531,000, as compared to $542,000 during Fiscal
      2006. The decrease in Fiscal 2007 was primarily due to lower amortization
      expenses associated with capitalized product enhancements that had become fully
      amortized.





Research
      and development expense for Fiscal 2007 was $377,000, as compared to $497,000
      during Fiscal 2006. The decrease in Fiscal 2007 was primarily due to lower
      payroll costs partially offset by a reduction in the amount of software
      development costs which met the criteria for capitalization.





General
      and administrative expenses during Fiscal 2007 were $2,289,000, as compared
      to
      $3,526,000 during Fiscal 2006. The decrease was primarily due to lower payroll
      costs, lower professional fees, lower compensation costs and a reduction in
      marketing costs.





Interest
      income during Fiscal 2007 was $55,000, as compared to interest expense of $2,000
      during Fiscal 2006. In Fiscal 2006, the Company incurred interest expense in
      relation to its outstanding Debentures, which have been satisfied primarily
      through the issuance of shares of Common Stock. The Debentures were fully repaid
      in May 2006.





Other
      income for the Fiscal 2007 was $460,000, as compared to $3,000 during Fiscal
      2006. In Fiscal 2007, other income represents settlement of a dispute with
      a
      vendor as well as settlements from the Company’s patent infringement litigation.
      In Fiscal 2006, other income represents the change in value of the Company’s
      liability associated with the registration rights agreements associated with
      its
      private placements.





Net
      loss
      and net loss per share applicable to common stock (basic and diluted) for Fiscal
      2007 were $2,421,000 and $0.20, respectively, as compared to $4,721,000 and
      $0.40, respectively, during Fiscal 2006.  The
      decrease was primarily due to lower expenses and increased revenue and other
      income (as described above).





31





**Financial
      Condition; Liquidity** **and Capital Resources**




As
      of
      September 30, 2007, the Company had liquid resources totaling $284,000
      which consisted of cash and cash equivalents.





The
      Company’s operations currently do not generate positive cash flow. The Company
      anticipates that, based on its current level of cash receipts and disbursements,
      its existing resources will be adequate to fund its capital and operating
      requirements through January 2008.





The
      Company is currently in discussions with several additional gambling companies
      to provide services. There is no assurance however, that the
      SportXction ® System
      will be launched as planned with additional business partners or accepted by
      potential users. In addition, there is no assurance that any additional
      agreements will be signed.





We
      cannot
      assure you that we will be able to successfully implement our plans to raise
      additional capital or execute a strategic transaction. We may not be able to
      obtain the required additional capital or execute a strategic transaction,
      on
      favorable terms, or at all. If we cannot successfully implement our plans,
      our
      liquidity, financial condition and business prospects will be materially and
      adversely affected and we may have to cease operations.





Capital
      expenditures which primarily consist of additional computer equipment are not
      expected to be significant and are expected to be funded from existing
      resources. The Company’s capital requirements may vary materially from those now
      planned due to a number of factors, including the rate at which the Company
      can
      introduce its system, the market acceptance and competitive position of the
      System and the response of competitors to the System.





**Off-Balance
      Sheet Arrangements**




None




**Item
      7.**  **Financial Statements**





See
      Page
      F-1





**Item
      8.**  **Changes
      in and Disagreements With Accountants on Accounting and**  **Financial
      Disclosure**





None





**Item
      8A. Controls and Procedures**





(a)
      Disclosure Controls and Procedures. The Company's management, with the
      participation of the Company's Chief Executive Officer and acting Chief
      Financial Officer, has evaluated the effectiveness of the Company's disclosure
      controls and procedures (as such term is defined in Rules 13a-15(e) and
      15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange
      Act")) as of the end of the period covered by this report. Based on such
      evaluation, the Company's Chief Executive Officer and acting Chief Financial
      Officer has concluded that, as of the end of such period, the Company's
      disclosure controls and procedures are effective to ensure that information
      relating to the Company (including its consolidated subsidiaries) required
      to be
      disclosed in the Company's periodic SEC filings is recorded, processed,
      summarized and reported within the time periods specified in the rules and
      forms
      of the SEC.




(b)
      Internal Control Over Financial Reporting. There have not been any changes
      in
      the Company's internal control over financial reporting (as such term is defined
      in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal
      quarter ended September 30, 2007 that have materially affected, or are
      reasonably likely to materially affect, the Company’s internal control over
      financial reporting.




**Item
      8B. Other Information**





None




32


**Part
      III**





**Item
      9. Directors, Executive Officers, Promoters, Control Persons and Corporate
      Governance; Compliance with Section 16(a) of the Exchange
      Act**




Set
      forth
      below is certain information, as of January 7, 2008, regarding the directors,
      executive officers and key personnel of the Company.




**Name**
            **Age**
            **Positions
                with the Company**Bernard
                Albanese
            60
            Chairman
                of the Board, Chief Executive Officer, President, Director and Acting
                Principal Financial OfficerBruce
                Feldman
            59
            DirectorPhilip
                Rule
            71
            Director




Bernard
      Albanese has served as Chairman of the Board of the Company since March 2006,
      as
      Chief Executive Officer of the Company since January 2006, as Acting Principal
      Financial Officer since June 2007, as President of the Company since September
      1996, as Treasurer between July 1995 and March 2002, as Vice President-Systems
      from July 1995 until August 1996, and as a director since October 1996. From
      1993 to 1995, Mr. Albanese was Vice President—Operations of Advanced Data
      Systems Inc., a provider of medical-related computer systems, in which position
      he was responsible for all installation, training and telephone support for
      an
      installed base of over 1,000 customers. Mr. Albanese was a co-founder of Script
      Systems Inc. and was its Executive Vice President until 1993. From 1980 to
      1986,
      Mr. Albanese served as Vice President of Information Industries, Inc., in which
      position he was responsible for, among other things, software development for
      the Midwest Stock Exchange and other large projects.





Bruce
      Feldman has served as a director of the Company since March 2004. Mr. Feldman
      is
      a senior partner of Feldman Sablosky Massoni & Co., a public accounting firm
      where he has served since 1989. Mr. Feldman has extensive experience assisting
      companies with their S.E.C. filings, has worked with several companies in their
      initial public offerings and has over thirty years experience in the practice
      of
      public accounting. Mr. Feldman is a member of the American Institute of
      Certified Public Accountants and the New Jersey Society of Public
      Accountants.





Philip
      Rule has served as a director of the Company since March 2006. Mr. Rule is
      a
      technology and software executive with over 35 years experience. Mr. Rule is
      currently the Non-executive Chairman of Safe Computing Ltd., a software firm
      in
      England as well as the Non-executive Chairman of Rule Financial Ltd, an
      information technology consulting firm in London. In the early 1970s, Mr. Rule
      founded Safe Computing Ltd. in partnership with the Chubb Group. Over the next
      several decades, he developed Safe Computing into a leading supplier in its
      market sectors. Mr. Rule has been a non-executive director of Kode International
      plc, an electronics group, and United Computing and Technology Holdings Plc,
      a
      venture capital company, as well as a number of private companies providing
      computer services. Mr. Rule has written numerous articles and has lectured
      extensively in the UK and Europe.




33




**Audit
      Committee Financial Expert**





The
      Board
      of Directors has determined that Bruce Feldman, a member of the Board’s Audit
      Committee, is an audit committee financial expert. Mr. Feldman is “independent”
as independence for audit committee members is defined in NASDAQ
      standards.





**Section
      16(a) Beneficial Ownership Reporting Compliance**





Section
      16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s
      directors, executive officers and persons who own beneficially more than 10%
      of
      the Company’s Common Stock, to file reports of ownership and changes in
      ownership of such stock with the SEC. Directors, executive officers and greater
      than 10% stockholders are required by SEC regulations to furnish the Company
      with copies of all such reports they file. To the Company’s knowledge, based
      solely on a review of the copies of such reports furnished to the Company or
      filed with the SEC and written representations that no other reports were
      required, its directors, executive officers and greater than 10% stockholders
      complied with these requirements during the fiscal year ended September 30,
      2007.





**Code
      of Ethics**





The
      Company has adopted a code of ethics and business conduct that applies to its
      principal executive officer, principal financial and accounting officer and
      other employees. The Code of Ethics and Business Conduct is available on the
      Company’s website at www.isw.com. The Company intends to satisfy the disclosure
      requirements under Item 5.05 of Form 8-K regarding any amendment or waiver
      of
      the code with respect to its principal executive officer or principal financial
      or accounting officer by posting such information on the Company’s
      website.




34


**Item
      10. Executive Compensation**





**Summary
      Compensation Table**





The
      following summary compensation table sets forth the aggregate compensation
      for
      the fiscal year ended September 30, 2007 earned by or paid to our principal
      executive officer and other executive officers and key personnel (the “Named
      Executive Officers”) whose total compensation exceeded $100,000 for that fiscal
      year.





**Summary
      Compensation Table**




**Name
                and Principal Positions**
            
            **Years**
            
            **Salary**
            
            **Bonus**
            
            **Options
                Awards (1)**
            
            **All
                Other Compen-sation (2)**
            
            **Total**($)
            
            ($)
            
            ($)
            
            ($)
            
            ($)Bernard
                Albanese
              Chief
                Executive Officer, Chairman of the Board and Acting Principal Financial
                Officer
            
            
            2007
            
            
            200,769
            
            
            -0-
            
            
            36,000
                (3
            )
            
            -0-
            
            
            236,769Andrew
                Harbison (4)
              Vice
                President-Software Development
            
            
            2007
            
            
            100,559
            
            
            -0-
            
            
            2,800
                (4
            )
            
            -0-
            
            
            103,359


______________


(1)
            The
                aggregate grant date fair value of these options, computed in accordance
                with FAS 123R and recognized for financial statement purposes, is
                reflected in the table. See “Accounting for Stock Based Compensation” in
                Note 3 to the Consolidated Financial
                Statements.


(2)
            Excludes
                prerequisites and other personal benefits which did not exceed in
                the
                aggregate $10,000. No person listed in the Table received prerequisites
                and other personal benefits during the year shown that exceeded $10,000.
                (See “Employment Agreement” for a description of the employment agreement
                between the Company and Mr. Albanese, including the benefits payable
                thereunder.)


(3)
            On
                June 7, 2007, Mr. Albanese was granted options to purchase 100,000
                shares
                of the Company’s Common Stock at an exercise price of $0.45 per share. The
                options become exercisable as to 50,000 shares on September 5, 2007,
                as to
                25,000 shares on December 7, 2007 and as to 25,000 shares on June
                7, 2008
                and expire on June 7, 2017.


(4)
            On
                April 19, 2007, Mr. Harbison was granted options to purchase 28,000
                shares
                of the Company’s Common Stock at an exercise price of $0.72 per share. The
                options were immediately exercisable and were to have expired on
                April 19,
                2017. Mr. Harbison’s employment with the Company terminated on April 20,
                2007 and these options have
                terminated.




**Employment
      Agreement and Termination of Employment Benefits**





On
      August
      10, 2007, the Company entered into an amended and restated one year employment
      agreement (the "Agreement") with Bernard Albanese, its Chairman of the Board,
      Chief Executive Officer and President, and acting Principal Financial Officer,
      for the period from July 1, 2007 through June 30, 2008 (the "Term"), amending
      and restating the terms of Mr. Albanese's employment agreement dated as of
      June
      19, 2007 (the "Prior Agreement"). The primary purpose of the amended terms
      is to
      reduce the salary obligations of the Company in the event of early termination
      (i.e. prior to the completion of the Term) of Mr. Albanese's employment. In
      the
      Prior Agreement, if the Company terminated Mr. Albanese's employment, other
      than
      for cause, the Company would have still been obligated to pay Mr. Albanese
      $300,000 in salary, less the salary and Bonus (as defined below) he had already
      been paid during the Term. This salary obligation has been replaced with a
      60-day notification period.




35




The
      Agreement provides that Mr. Albanese is to receive a base salary of not less
      than $240,000 per annum plus an incentive compensation bonus of $30,000 for
      each
      $1 million of revenue realized by the Company and its subsidiaries on a
      consolidated basis during the Term, up to a maximum bonus of $120,000 if
      revenues of $4 million are realized during the Term (the "Bonus").





The
      compensation described above is unchanged from the Prior Agreement and from
      Mr.
      Albanese's employment agreement in effect during the period from July 1, 2006
      through June 30, 2007. Since January 2007, Mr. Albanese has voluntarily reduced
      his base compensation from an annual rate of $240,000 to $180,000, a 25%
      reduction. It is Mr. Albanese's current intention to continue this voluntary
      reduction for the foreseeable future until such time as the Company can resolve
      its cash resources issues. The Prior Agreement included certain benefits for
      Mr.
      Albanese upon termination following a "change of control" which are not included
      in the Agreement.





The
      Agreement provides that Mr. Albanese will be entitled to: (i) such salary
      increases, bonuses or other incentive compensation as may be approved by the
      Board of Directors; (ii) health and life insurance and other fringe benefits
      substantially similar to those provided in the past and not less than those
      provided by the Company to its other executive employees; (iii) four weeks
      of
      vacation each year; and (iv) severance in the amount of $300,000 and
      continuation of fringe benefits for one year, in the event (a) the Company
      terminates his employment other than for "cause" (as defined in the Agreement),
      or he resigns or if his employment terminates as a result of his death or
      disability during the Term, or (b) of expiration of the Term without a new
      employment agreement being entered into which is at least as beneficial to
      Mr.
      Albanese as the Prior Agreement. If during the Term the Company terminates
      Mr.
      Albanese's employment other than for cause or he resigns or his employment
      terminates as a result of death or disability, the Bonus to which he is entitled
      shall be determined after annualizing the revenue realized by the Company from
      July 1, 2007 through the last day of the calendar month in which the termination
      occurred. Under the Prior Agreement revenues would not have been annualized
      for
      determining the Bonus. Mr. Albanese is also entitled, at the Company's expense,
      to the use of a leased automobile, including all operating, maintenance and
      insurance expenses. The Agreement also provides that if his employment
      terminates for any reason whatsoever, including his death or disability, other
      than by the Company for cause, all stock options theretofore granted to him
      which have not become exercisable shall vest and become exercisable and remain
      exercisable in accordance with the Company's 1995, 1996 and 2006 Stock Option
      Plans and related stock option agreements, as applicable. The Agreement also
      provides that Mr. Albanese has the right, in his discretion, to voluntarily
      retire from the Company and upon such retirement he is entitled to receive
      $300,000 and continuation of his benefits for a period of one year.




36





Mr.
      Albanese has entered into an agreement restricting competitive activities for
      12
      months following termination of his employment and prohibiting disclosure of
      confidential information of the Company.





**Outstanding
      Equity Awards at Fiscal Year-End**





The
      following table set forth certain information with respect to the number of
      unexercised outstanding equity awards held by each Named Executive Officer
      on
      September 30, 2007.





**Outstanding
      Equity Awards at Fiscal Year-End**




**Name**
            
            **Number
                of Securities Underlying Unexercised Options (#)
                Exercisable**
            
            **Number
                of Securities Underlying Unexercised Options (#)
                Unexercisable**
            
            **Option
                Exercise**
              **Price
                ($)**
            
            **Option
                Expiration Date**Bernard
                Albanese
            
            
            80,000
            
            
            -
                0 -
            
            $
            0.72
            
            
            03/16/200845,000
            
            
            -
                0 -
            
            $
            1.41
            
            
            12/21/200860,000
            
            
            -
                0 -
            
            $
            0.69
            
            
            10/12/200915,000
            
            
            -
                0 -
            
            $
            1.87
            
            
            07/31/201275,000
            
            
            25,000
            (1)
            $
            0.45
            
            
            06/07/2017Andrew
                Harbison
            
            
            -
                0 -
            
            
            -
                0 -


___________


(1)
            These
                options become exercisable on June 7,
                2008




**Director
      Compensation**





The
      Company pays each outside director $12,000 per year, payable quarterly. During
      the Fiscal Year ending September 30, 2007, each of the outside directors has
      voluntarily given up one quarterly payment of $3,000. The Company also
      periodically grants to outside directors options to purchase Common Stock.
      Each
      of the outside directors have been granted options in prior fiscal years, all
      of
      which have been described in proxy statements previously furnished to the
      Company’s stockholders (see “Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters”).





The
      following table set forth certain information with respect to the compensation
      of directors (other than Named Executive Officers) for our last completed fiscal
      year and (in the footnotes to the table) the aggregate number of option awards
      outstanding to each such director at fiscal year end.





**Director
      Compensation**




**Name**
            
            **Fees
                Earned or Paid**
              **in
                Cash ($)**
            
            **Option
                Awards ($)**
            
            **All
                Other**
              **Compensation
                ($)**
            
            **Total
                ($)**Bruce
                Feldman
            
            $
            9,000
            
            $
            7,200
                (2)(3
            )
            
            
            
            $
            16,200Philip
                Rule
            
            $
            9,000
            
            $
            7,200
                (2)(4
            )
            
            
            
            $
            16,200Vincent
                Caldwell (1)
            
            $
            3,000
            
            
            -
                0 - (5
            )
            $
            22,500
                (6
            )
            $
            25,500


___________________________


(1)
            Mr.
                Caldwell resigned as a director, effective March 30,
                2007.


(2)
            Consists
                of options to purchase 20,000 shares at an exercise price of $0.45
                granted
                on June 7, 2007. The options become exercisable as to 10,000 shares
                on
                September 3, 2007, as to 5,000 shares on December 7, 2007 and as
                to 5,000
                shares on June 7, 2008, and expire on June 7, 2017. The aggregate
                grant
                date fair value of these options, computed in accordance with FAS
                123R and
                recognized for financial statement purposes, is reflected in the
                table.
                See “Accounting for Stock Based Compensation” in Note 3 to the
                Consolidated Financial Statements.


(3)
            At
                September 30, 2007 Mr. Feldman held in the aggregate outstanding
                options
                having ten year terms to purchase 60,000
                shares.


(4)
            At
                September 30, 2007 Mr. Rule held in the aggregate outstanding options
                having ten year terms to purchase 60,000
                shares.


(5)
            Mr.
                Caldwell was not granted any options during the fiscal year ended
                September 30, 2007, and at September 30, 2007 the options previously
                granted to Mr. Feldman had
                terminated.


(6)
            Mr.
                Caldwell served as a consultant. See Item 12 - “Certain Relationships and
                Related Transactions.”




37




**Item
      11. Security Ownership and Certain Beneficial Owners and Management and Related
      Stockholder Matters**





The
      following table sets forth, as of January 7, 2008, certain information regarding
      the beneficial ownership of the Company’s outstanding Common Stock by (i) each
      person known by the Company to beneficially own more than five percent of the
      outstanding Common Stock, (ii) each current director and executive officer
      of
      the Company, (iii) all directors and executive officers as a group. As of
      January 7, 2008, there were outstanding 12,265,715 shares of the Company’s
      Common Stock, 60,000 shares of the Company’s Series A Preferred Stock and 3,742
      shares of the Company’s Series C Preferred Stock. The Series C Preferred Stock
      are non-voting securities but are convertible into Common Stock. No current
      director, executive officer, or person known by the Company to beneficially
      own
      more than five percent of the outstanding Common Stock owns any shares of Series
      A Preferred Stock. All shares of Series A Preferred Stock that are outstanding
      as of January 7, 2008 are owned by MultiSport Games Development Inc., a Delaware
      corporation.




**Name
                and Address of Beneficial Owner (1)**
            
            **Amount
                and Nature of Beneficial Ownership (2)**
            
            **Percent
                of Class (3)**Barry
                Mindes (4)
            
            
            3,023,952
            
            
            24.7Mindes
                Family Limited Partnership (5)
            
            
            1,511,523
            
            
            12.3Midsummer
                Investment, Ltd. (6)
            
            
            613,158
            
            
            4.9Bernard
                Albanese (7) (8)
            
            
            501,728
            
            
            4.0The
                Marie Albanese Trust, Marie Albanese and Christine Albanese, trustees
                (8)
            
            
            302,304
            
            
            2.5Bruce
                Feldman (9)
            
            
            75,000
            
            
            *Philip
                Rule (10)
            
            
            98,300
            
            
            *Andrew
                Harbison (11)
            
            
            75,521
            
            
            *All
                directors and executive officers as a group (3 persons)
                (12)
            
            
            675,028
            
            
            5.4


___________________________


*Less
      than 1% of the Common Stock outstanding.




38




(1)
            The
                address of each beneficial owner identified is c/o Interactive Systems
                Worldwide Inc., 2 Andrews Drive, West Paterson, NJ 07424, except
                as
                indicated in Notes 5 and 6.


(2)
            Unless
                otherwise indicated, the Company believes that all persons named
                in the
                table have sole voting and investment power with respect to all shares
                of
                Common Stock beneficially owned by them. A person is deemed to be
                the
                beneficial owner of Common Stock that can be acquired by such person
                within 60 days of the date hereof upon the exercise of options or
                warrants
                or conversion of convertible
                securities.


(3)
            Each
                beneficial owner’s percentage ownership is determined by assuming that (i)
                options, warrants or convertible securities that are held by such
                person
                (but not those held by any other person) and which are exercisable
                or
                convertible within 60 days of the date hereof, have been exercised
                or
                converted and are outstanding and (ii) 12,265,715 shares of Common
                Stock
                are outstanding, before any consideration is given to options, warrants
                or
                convertible securities.


(4)
            Includes
                1,511,523 shares held by Mindes Family Limited Partnership, the general
                partner of which is an entity wholly-owned by Mr. Mindes. Mr. Mindes
                disclaims beneficial ownership of the shares owned by Mindes Family
                Limited Partnership to the extent such shares of Common Stock exceed
                his
                proportionate interest therein.


(5)
            The
                address for Mindes Family Limited Partnership is 100 Old Palisade
                Rd.,
                Unit PL5, Fort Lee, NJ 07024.


(6)
            Includes
                shares issuable upon conversion of Series C Preferred Stock and exercise
                of warrants. Pursuant to the terms of the Series C Preferred Stock
                and
                warrants, Midsummer Investment, Ltd. (“Midsummer”) may not convert its
                Series C Preferred Stock or exercise its warrants to the extent that
                such
                conversion or exercise would result in it and its affiliates beneficially
                owning more that 4.99% of the outstanding shares of Common Stock.
                Without
                such limitations, Midsummer would beneficially own 1,005,327 shares,
                or
                7.6% of the outstanding shares of Common Stock. Midsummer Capital,
                LLC is
                the investment manager to Midsummer. By virtue of such relationship,
                Midsummer Capital, LLC may be deemed to have dispositive power over
                the
                shares owned by Midsummer. Midsummer Capital, LLC disclaims beneficial
                ownership of such shares. Mr. Michel Amsalem and Mr. Scott Kaufman
                have
                delegated authority from the members of Midsummer Capital, LLC with
                respect to the shares of Common Stock owned by Midsummer. Messrs.
                Amsalem
                and Kaufman may be deemed to share dispositive power over the shares
                of
                Common Stock owned by Midsummer. Messrs. Amsalem and Kaufman disclaim
                beneficial ownership of such shares of Common Stock and neither person
                has
                any legal right to maintain such delegated authority. The address
                for
                Midsummer is 295 Madison Avenue, New York, NY
                10017.


(7)
            Includes
                275,000 shares underlying options held by Mr. Albanese which are
                exercisable within 60 days of the date
                hereof.


(8)
            Marie
                Albanese and Christine Albanese are the wife and daughter, respectively,
                of Mr. Albanese. Mr. Albanese disclaims beneficial interest in the
                shares
                of Common Stock held in such Trust.


(9)
            Includes
                35,000 shares underlying options held by Mr. Feldman which are exercisable
                within 60 days of the date hereof.


(10)
            Includes
                20,000 shares underlying options held by Mr. Rule which are exercisable
                within 60 days of the date hereof.


(11)
            Information
                regarding Mr. Harbison, whose employment terminated on April 20,
                2007, is
                given to the Company’s knowledge.


(12)
            Includes
                (i) an aggregate of 330,000 shares underlying options held by all
                directors and executive officers as a group which are exercisable
                within
                60 days of the date hereof. Does not include 302,304 shares held
                by The
                Marie Albanese Trust (see Note 8
                above).


39




**Equity
      Compensation Plan Information**





The
      following table sets forth certain information as of September 30, 2007
      regarding the Company’s equity compensation plans:




**Plan
                Category**
            
            **Number
                of Securities to be Issued upon Exercise of Outstanding Options,
                Warrants
                and Rights**
              **(a)**
            
            **Weighted-average
                Exercise Price of Outstanding Options, Warrants and
                Rights**
              **(b)**
            
            **Number
                of Securities Remaining Available for Future Issuance under Equity
                Compensation Plans (excluding securities reflected in column
                (a))**
              **(c)
                (1)**Equity
                compensation plans approved by security holders
            
            
            638,000
            
            $
            1.22
            
            
            621,034Equity
                compensation plans not approved by security holders
            
            
            -0-
            
            
            N/A
            
            
            N/A


___________________________


(1)
            In
                January 2006, the Board of Directors adopted, and in March 2006 the
                stockholders approved, the 2006 Stock Option Plan (the “2006 Plan”). There
                are 500,000 shares of Common Stock authorized and available for issuance
                pursuant to options that may be granted thereunder, plus any shares
                subject to the 1,172,669 options under the 1995 Plan and 1996 Plan
                which
                were outstanding at March 30, 2006 that expire or terminate. Through
                September 30, 2007, options to purchase 505,034 shares which were
                outstanding at March 30, 2006 under the 1995 Plan and 1996 Plans
                expired.





**Item
      12. Certain Relationships and Related Transactions, and Director
      Independence**





During
      the year ended September 30, 2007, the Company paid $22,500 in consulting fees
      to Vincent Caldwell, a former director of the Company, under an agreement which
      the Company paid $7,500 per month between September and December 2006. The
      agreement was terminated in December 2006.





The
      Board
      of Directors has determined, after review of all relevant transactions or
      relationships between each director, or any of his family members, and the
      Company, its senior management and independent registered public accounting
      firm, that Bruce Feldman and Philip Rule, constituting a majority of the board
      of directors, are “independent” directors under the “independent director”
definition and standards of NASDAQ; and that Vincent Caldwell, who resigned
      as a
      director of the Company effective March 30, 2007, was also an “independent
      director” under NASDAQ standards, the Board having considered the
      above-mentioned consulting agreement in this regard. Messrs. Feldman and Rule
      are the only members of the Board’s Audit Committee, Nominating Committee and
      Stock Option Committee. Mr. Albanese, the Company’s other director, is not
      independent.




40




**Item
      13. Exhibits**





The
      following exhibits are filed herewith:




2.1
            
            Stock
                Purchase Agreement, dated as of July 3, 2002, between Prisma iVentures
                Ltd. and ISW Acquisition Co., LLC. (1)2.2
            
            Stock
                Purchase Agreement, dated as of July 30, 2002, between Global Interactive
                Gaming Ltd., MultiSport Games Development Inc., Peter G. Sprogis,
                ISW
                Acquisition Co., LLC and Interactive Systems Worldwide Inc. (with
                respect
                only to certain Sections). (1)3.1
            
            Certificate
                of Incorporation of the Company. (2)3.1(a)
            
            Amendment,
                filed October 24, 1996, to Certificate of Incorporation of the
                Company. (2)3.1(b)
            
            Amendment,
                dated February 28, 2001, to Certificate of Incorporation of the Company.
                (3)3.1(c)
            
            Amendment
                dated September 17, 2007 to Certificate of Incorporation of the Company.
                (41)3.1(d)
            
            See
                Items 4.1, 4.6, 4.9 and 4.103.2
            
            By-Laws
                of the Company, as amended through December 28, 2005.
                (4)4.1
            
            Certificate
                of Designation relating to the Series A Preferred Stock dated July
                31,
                2002. (1)4.2
            
            Warrant
                to Purchase 150,000 Shares of Common Stock, par value $.001 per share,
                of
                Interactive Systems Worldwide Inc., dated as of May 15, 2006 issued
                to
                Faraway Partners LLC. (13)4.3
            
            Form
                of 7.5% Convertible Debenture due April 1, 2006 (6)4.4
            
            Form
                of Common Stock Purchase Warrant issued to certain investors dated
                November 24, 2003. (7)4.5
            
            Form
                of Common Stock Purchase Warrant issued to Brandon Ross dated November
                24,
                2003. (8)4.6
            
            Form
                of Certificate of Designation relating to the Series B Convertible
                Preferred Stock dated November 12, 2004. (9)4.7
            
            Form
                of Common Stock Purchase Warrant issued to certain investors dated
                November 12, 2004. (10)4.8
            
            Form
                of Common Stock Purchase Warrant issued to Maxim Group LLC dated
                November
                12, 2004. (11)4.9
            
            Certificate
                of Designation relating to the Series C Preferred Stock dated August
                3,
                2005. (29)4.10
            
            Amendment
                No. 1 to the Certificate of Designation relating to the Series C
                Preferred
                Stock dated September 7, 2005. (30)4.11
            
            Form
                of Common Stock Purchase Warrant issued to certain investors dated
                August
                3, 2005. (31)




41




4.12
            
            Amendment
                to Common Stock Purchase Warrant issued to certain investors dated
                September 5, 2005. (32)4.13
            
            Form
                of Common Stock Purchase Warrant issued to Finder dated August 3,
                2005.
                (33)4.14
            
            Amendment
                to Common Stock Purchase Warrant issued to Finder dated September
                5, 2005.
                (34)10.1
            
            Employment
                Agreement between the Company and Bernard Albanese, dated as of June
                19,
                2007. (42) (a)10.1(a)
            
            Amended
                and Restated Employment Agreement between the Company and Bernard
                Albanese
                dated as of August 10, 2007 (12)(a)10.2
            
            Form
                of Proprietary Information, Inventions and Non-Solicitation Agreement.
                (17) (a)10.3
            
            Form
                of Indemnification Agreement entered into between the Company and
                its
                directors and executive officers. (18) (a)10.4
            
            1995
                Stock Option Plan, as amended January 7, 1999. (19)
                (a)10.5
            
            1996
                Stock Option Plan, as amended January 2, 2003. (14)
                (a)10.6
            
            2006
                Stock Option Plan. (15) (a)10.7
            
            Form
                of Incentive Stock Option Agreement under 1995 and 1996 Stock Option
                Plans. (20) (a)10.8
            
            Form
                of Non-Qualified Stock Option Agreement under 1995 and 1996 Stock
                Option
                Plans. (21) (a)10.9
            
            Form
                of Incentive Stock Option Agreement under 2006 Stock Option Plan.
                (16)
                (a)10.10
            
            Form
                of Non-Qualified Stock Option Agreement (U.S.) under 2006 Stock Option
                Plan. (38) (a)10.11
            
            Form
                of Non-Qualified Stock Option Agreement (U.K.) under 2006 Stock Option
                Plan. (39) (a)10.12(a)
            
            License
                Agreement dated as of March 17, 2000 by and among the Company and
                Global Interactive Gaming Limited (formerly Global Interactive Gaming
                AG).
                (22)10.12(b)
            
            First
                Amendment to the License Agreement, dated as of July 1, 2003, by
                and among
                the Company and Global Interactive Gaming Limited (formerly known
                as
                Global Interactive Gaming AG). (5)10.13
            
            Securities
                Purchase Agreement dated as of November 24, 2003. (23)10.14
            
            Registration
                Rights Agreement dated as of November 24, 2003. (24)10.15
            
            Intentionally
                left blank10.16
            
            Securities
                Purchase Agreement dated as of November 12, 2004. (25)10.17
            
            Registration
                Rights Agreement dated as of November 12, 2004. (26)10.18
            
            Letter
                Agreement, dated as of November 2, 2004, between the Company and
                Maxim
                Group LLC. (27)10.19
            
            Letter
                Agreement, dated April 27, 2004, between the Company and James McDade.
                (28) (a)10.20
            
            Securities
                Purchase Agreement dated as of August 3, 2005. (35)10.21
            
            Registration
                Rights Agreement dated as of August 3, 2005. (36)10.22
            
            Letter
                Agreement, dated July 26, 2005, between the Company and the Finder.
                (37)




42




10.23
            
            Letter
                of Agreement, dated as of July 11, 2006, between the Company and
                the
                Investor Relations Group Inc. (13)10.24
            
            Non-Exclusive
                Consulting Services Agreement dated May 15, 2006, between the Company
                and
                Heller Capital Partners.(13)10.25
            
            Consulting
                Agreement, dated as of September 5, 2006, between the Company and
                Vincent
                Caldwell. (40) (a)10.26
            
            Consulting
                Agreement, dated as of August 2, 2006, between the Company and Techmatics,
                a Corporation whose Chairman is Barry Mindes. (13)23.1
            
            Consent
                of Eisner LLP.*24.1
            
            Power
                of Attorney (Included on signature page hereto).31.01
            
            Certification
                of Bernard Albanese, Chairman of the Board and Chief Executive Officer
                and
                acting Chief Financial Officer of Interactive Systems Worldwide Inc.,
                pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002.*32.01
            
            Certification
                of Bernard Albanese, Chairman of the Board and Chief Executive Officer
                and
                acting Chief Financial Officer of Interactive Systems Worldwide Inc.,
                pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections
                (a)
                and (b) of Section 1350, Chapter 63 of Title 18, United States
                Code).*






(a)
            Management
                contract or compensatory plan or arrangement.1.
            Incorporated
                by reference to the Exhibit with the corresponding number contained
                in the
                Company’s Current Report on Form 8-K dated August 15,
                2002.2.
            Incorporated
                by reference to the Exhibit with the corresponding number contained
                in the
                Company’s Registration Statement on Form SB-2 (Reg. No. 333-15005) which
                was declared effective by the Securities and Exchange Commission
                on
                December 11, 1996.3.
            Incorporated
                by reference to the Exhibit with the corresponding number contained
                in the
                Company’s Current Report on Form 8-K dated February 28,
                2001.4.
            Incorporated
                by reference to the Exhibit with the corresponding number contained
                in the
                Company’s Report on Form 10-KSB dated and filed December 29,
                2005.5.
            Incorporated
                by reference to Exhibit 10.11(b) contained in the Company’s Annual Report
                on Form 10-KSB dated December 24,
                2003.




43




6.
            Incorporated
                by reference to Exhibit 4.1 contained in the Company’s Current Report on
                Form 8-K dated November 24, 2003.7.
            Incorporated
                by reference to Exhibit 4.2 contained in the Company’s Current Report on
                Form 8-K dated November 24, 2003.8.
            Incorporated
                by reference to Exhibit 4.3 contained in the Company’s Current Report on
                Form 8-K dated November 24, 2003.9.
            Incorporated
                by reference to Exhibit 4.1 contained in the Company’s Current Report on
                Form 8-K dated November 18, 2004.10.
            Incorporated
                by reference to Exhibit 4.2 contained in the Company’s Current Report on
                Form 8-K dated November 18, 2004.11.
            Incorporated
                by reference to Exhibit 4.3 contained in the Company’s Current Report on
                Form 8-K dated November 18, 2004.12.
            Incorporated
                by reference to Exhibit 10.1 contained in the Company’s Current Report on
                Form 8-K dated August 10, 2007.13.
            Incorporated
                by reference to the Exhibit with the corresponding number contained
                in the
                Company’s Annual Report on Form 10-KSB for the fiscal year ended September
                30, 2006, filed on January 16, 2007.14.
            Incorporated
                by reference to Exhibit 10.8 contained in the Company’s Annual Report on
                Form 10-KSB dated December 24, 2003.15.
            Incorporated
                by reference to Exhibit 10.1 contained in the Company’s Current Report on
                Form 8-K dated April 4, 2006.16.
            Incorporated
                by reference to Exhibit 10.2 contained in the Company’s Current Report on
                Form 8-K dated April 4, 2006.17.
            Incorporated
                by reference to Exhibit 10.3 contained in the Company’s Registration
                Statement on Form SB-2 (Reg. No. 333-15005) which was declared effective
                by the Securities and Exchange Commission on December 11,
                1996.18.
            Incorporated
                by reference to Exhibit 10.10 contained in the Company’s Registration
                Statement on Form SB-2 (Reg. No. 333-15005) which was declared effective
                by the Securities and Exchange Commission on December 11,
                1996.19.
            Incorporated
                by reference to Exhibit 10.11 contained in the Company’s Annual Report on
                Form 10-KSB dated December 22,
                2000.




44




20.
            Incorporated
                by reference to Exhibit 4.3 contained in the Company’s Registration
                Statement on Form S-8 (Reg. No. 333-41847) which was declared effective
                by
                the Securities and Exchange Commission on December 10,
                1997.21.
            Incorporated
                by reference to Exhibit 4.4 contained in the Company’s Registration
                Statement on Form S-8 (Reg. No. 333-41847) which was declared effective
                by
                the Securities and Exchange Commission on December 10,
                1997.22.
            Incorporated
                by reference to Exhibit 10.15 contained in the Company’s Current Report on
                Form 8-K dated March 23, 2000.23.
            Incorporated
                by reference to Exhibit 10.1 contained in the Company’s Current Report on
                Form 8-K dated November 24, 2003.24.
            Incorporated
                by reference to Exhibit 10.2 contained in the Company’s Current Report on
                Form 8-K dated November 24, 2003.25.
            Incorporated
                by reference to Exhibit 10.1 contained in the Company’s Current Report on
                Form 8-K dated November 18, 2004.26.
            Incorporated
                by reference to Exhibit 10.2 contained in the Company’s Current Report on
                Form 8-K dated November 18, 2004.27.
            Incorporated
                by reference to Exhibit 10.3 contained in the Company’s Current Report on
                Form 8-K dated November 18, 2004.28.
            Incorporated
                by reference to Exhibit 10.1 contained in the Company’s Quarterly Report
                on Form 10-QSB for the quarter ended March 31, 2004 dated May 17,
                2004.29.
            Incorporated
                by reference to Exhibit 4.1 contained in the Company’s Current Report on
                Form 8-K dated August 5, 2005.30.
            Incorporated
                by reference to Exhibit 4.1 contained in the Company’s Current Report on
                Form 8-K dated September 12, 2005.31.
            Incorporated
                by reference to Exhibit 4.2 contained in the Company’s Current Report on
                Form 8-K dated August 5, 2005.32.
            Incorporated
                by reference to Exhibit 4.2 contained in the Company’s Current Report on
                Form 8-K dated September 12, 2005.33.
            Incorporated
                by reference to Exhibit 4.3 contained in the Company’s Current Report on
                Form 8-K dated August 5, 2005.




45




34.
            Incorporated
                by reference to Exhibit 4.3 contained in the Company’s Current Report on
                Form 8-K dated September 12, 2005.35.
            Incorporated
                by reference to Exhibit 10.1 contained in the Company’s Current Report on
                Form 8-K dated August 5, 2005.36.
            Incorporated
                by reference to Exhibit 10.2 contained in the Company’s Current Report on
                Form 8-K dated August 5, 2005.37.
            Incorporated
                by reference to Exhibit 10.3 contained in the Company’s Current Report on
                Form 8-K dated August 5, 2005.38.
            Incorporated
                by reference to Exhibit 10.3 contained in the Company’s Current Report on
                Form 8-K dated April 4, 2006.39.
            Incorporated
                by reference to Exhibit 10.4 contained in the Company’s Current Report on
                Form 8-K dated April 4, 2006.40.
            Incorporated
                by reference to Exhibit 10.1 contained in the Company’s Current Report on
                Form 8-K dated September 8, 2006.41.
            Incorporated
                by reference to Exhibit 3.1 contained in the Company’s Current Report on
                Form 8-K dated and filed on September 18, 2007.42.
            Incorporated
                by reference to Exhibit 10.1 contained in the Company’s Current Report on
                Form 8-K dated and filed June 22,
                2007




*  Filed
      herewith




**Item
      14. Principal Accountants Fees and Services**





*Audit
      Fees:*





Fees
      billed to the Company by Eisner LLP for the Company’s fiscal years ended
      September 30, 2007 and 2006 for the audit of the Company’s annual financial
      statements and the review of the financial statements included in the Company’s
      quarterly reports on Form 10-QSB for the periods ended December 31, March 31,
      and June 30, totaled $110,000 and $112,000, respectively.





*Audit-Related
      Fees:*





No
      fees
      were billed to the Company by Eisner LLP for audit-related services during
      the
      fiscal years ended September 30, 2007 and 2006.




46




*Tax
      Fees*





The
      Company engaged Eisner LLP to provide professional services for tax compliance,
      tax advice and tax planning during the fiscal year ended September 30, 2007.
      Fees billed for these services totaled $8,899. No fees for such services were
      billed to the Company by Eisner LLP for the fiscal year ended September 30,
      2006.




*All
      Other Fees:*





The
      Company engaged Eisner LLP to provide professional services relating to the
      review of a registration statement and related matters during the year ending
      September 30, 2007. Fees billed for these services totaled $5,000. No fees
      for
      such services were billed to the Company by Eisner LLP for the fiscal year
      ended
      September 30, 2006.





The
      Audit
      Committee’s policy is to pre-approve all services (audit and non-audit) to be
      provided to the Company by the independent auditor. All services (audit and
      non-audit) provided to the Company during fiscal years ended September 30,
      2007
      and 2006 were pre-approved. The Audit Committee believes that any non-audit
      services provided by Eisner to the Company did not impair the auditor’s
      independence.





47




**SIGNATURES**





In
      accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
      this report to be signed on its behalf by the undersigned, thereunto duly
      authorized.




INTERACTIVE
                SYSTEMS WORLDWIDE INC.
              
              
              By:/s/
                Bernard
                Albanese
              Bernard
                Albanese, Chairman of the Boardand
                Chief Executive Officer
              
              (Principal
                Executive Officerand
                Principal Financial Officer)
              
              January
                14**,**2008







**POWER
      OF ATTORNEY**





KNOW
      ALL
      MEN BY THESE PRESENTS, that each person whose signature appears below hereby
      severally constitutes and appoints Bernard Albanese, his true and lawful
      attorney-in-fact and agent, with full power of substitution and resubstitution,
      for him and in his name, place and stead, in any and all capacities, to sign
      any
      and all amendments to this Report and all documents relating thereto, and to
      file the same, with all exhibits thereto, and other documents in connection
      therewith, with the Securities and Exchange Commission, granting unto said
      attorney-in-fact and agent, full power and authority to do and perform each
      and
      every act and thing necessary or advisable 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 attorney-in-fact and agent, or his
      substitute, may lawfully do or cause to be done by virtue hereof.





In
      accordance with the Exchange Act, this report has been signed below by the
      following persons on behalf of the registrant and in the capacities and on
      the
      dates indicated.




*Signature*
            
            *Title*
            
            *Date*/s/
                Bernard Albanese
            
            Chairman
                of the Board and Chief Executive Officer and Director
              (Principal
                Executive Officer and Principal Financial Officer)
            
            January
                14, 2008Bernard
                Albanese/s/
                Bruce Feldman
            
            Director
            
            January
                14, 2008Bruce
                Feldman/s/
                Philip Rule
            
            Director
            
            January
                14, 2008Philip
                Rule








Interactive
        Systems Worldwide Inc. and Subsidiaries
 Index
        to
        Consolidated Financial Statements
 
 PageReport
                  of Independent Registered Public Accounting Firm
              F-2Consolidated
                  Balance Sheets as of September 30, 2007 and 2006
              F-3Consolidated
                  Statements of Operations for the years endedSeptember
                  30, 2007 and 2006
              F-4Consolidated
                  Statements of Stockholders' Equity for the years endedSeptember
                  30, 2007 and 2006
              F-5
                  and F-6Consolidated
                  Statements of Cash Flows for the years endedSeptember
                  30, 2007 and 2006
              F-7Notes
                  to Consolidated Financial Statements
              F-8
 
 F-1
 
 REPORT
        OF
        INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 Board
        of
        Directors and Stockholders
 Interactive
        Systems Worldwide Inc.
 
 We
        have
        audited the accompanying consolidated balance sheets of Interactive Systems
        Worldwide Inc. and subsidiaries as of September 30, 2007 and 2006, and the
        related consolidated statements of operations, stockholders' equity and cash
        flows for the years 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 audits.
 
 We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). 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 financial statements referred to above present fairly, in all
        material respects, the consolidated financial position of Interactive Systems
        Worldwide Inc. and subsidiaries as of September 30, 2007 and 2006, and the
        consolidated results of their operations and their cash flows for the years
        then
        ended in conformity with accounting principles generally accepted in the
        United
        States of America.
 
 The
        accompanying financial statements have been prepared assuming the Company
        will
        continue as a going concern. As discussed in Note 2 to the financial
        statements, the Company has incurred net losses and used cash in its operating
        activities in fiscal 2007 and 2006. Further, the Company had a working capital
        deficiency at September 30, 2007 and will require additional financing to
        meet
        its forecasted cash requirements during fiscal 2008. These events and conditions
        raise substantial doubt about the Company’s ability to continue as a going
        concern. Management’s plans regarding those matters are also described in
        Note 2. The financial statements do not include any adjustments that might
        result from the outcome of this uncertainty.
 
 
 /s/
        EISNER LLP
 
 New
        York,
        New York
 January
        10, 2008
 
 F-2
  Part
        I:
        Financial Information
 
 Item
        1.
        Financial Statements
 
 Interactive
        Systems Worldwide Inc. and Subsidiaries
 Consolidated
        Balance Sheets
 September
        30, 2007 and 2006
 (Amounts
        in thousands except share data)


2007
              
              2006Current
                  assets:Cash
                  and cash equivalents
              
              $
              284
              
              $
              1,207Accounts
                  receivable
              
              
              121
              
              
              46Investments
                  in marketable securities
              
              
              --
              
              
              975Other
                  receivables
              
              
              17
              
              
              57Prepaid
                  expenses and other current assets
              
              
              51
              
              
              138Total
                  current assets
              
              
              473
              
              
              2,423Property
                  and equipment, net
              
              
              4
              
              
              16Capitalized
                  software, net of accumulatedamortization
                  of $1,112 and $957, respectively
              
              
              376
              
              
              428Other
                  assets
              
              
              48
              
              
              305Total
                  assets
              
              $
              901
              
              $
              3,172Liabilities
                  and Stockholders' EquityCurrent
                  liabilities:Accounts
                  payable
              
              $
              87
              
              $
              205Dividend
                  and late fees payable on preferred stock
              
              
              114
              
              
              --Accrued
                  expenses and other
              
              
              634
              
              
              794Total
                  liabilities
              
              
              835
              
              
              999Stockholders'
                  Equity:Preferred
                  stock, par value $.001 per share;2,000,000
                  shares authorized,
                60,000
                  Series A outstanding and 3,742 and
                4,000
                  Series C outstanding ($3,742 and $4,000 liquidation
                  preference)
              
              
              --
              
              
              --Common
                  stock par value $.001 per share;80,000,000
                  and 20,000,000 shares authorized in 2007 and 2006, respectively;12,507,715
                  and 12,296,173 issued in 2007 and 2006, respectively
              
              
              12
              
              
              12Additional
                  paid-in capital
              
              
              28,371
              
              
              28,142Treasury
                  stock, at cost, 242,000 common shares
              
              
              (441
              )
              
              (441
              )Accumulated
                  other comprehensive income
              
              
              55
              
              
              34Accumulated
                  deficit
              
              
              (27,931
              )
              
              (25,574
              )Total
                  stockholders' equity
              
              
              66
              
              
              2,173Total
                  liabilities andstockholders'
                  equity
              
              $
              901
              
              $
              3,172




See
      accompanying notes to consolidated financial statements




F-3





Interactive
      Systems Worldwide Inc. and Subsidiaries


Consolidated
      Statements of Operations


(Amounts
      in thousands except share and per share data)





Years
                EndedSeptember
                30,2007
            
            2006Revenues
            
            $
            500
            
            $
            111Costs
                and expenses:Cost
                of revenues
            
            
            531
            
            
            542Research
                and development expense
            
            
            377
            
            
            497General
                and administrative expense
            
            
            2,289
            
            
            3,5263,197
            
            
            4,565Operating
                loss
            
            
            (2,697
            )
            
            (4,454
            )Interest
                (income) expense, net
            
            
            (55
            )
            
            2Other
                income
            
            
            (460
            )
            
            (3
            )Net
                loss
            
            
            (2,182
            )
            
            (4,453
            )Preferred
                Stock dividends
            
            
            (239
            )
            
            (268
            )Net
                loss applicable to common stock
            
            $
            (2,421
            )
            $
            (4,721
            )Net
                loss per share applicable to commonstock
                - basic and diluted
            
            $
            (0.20
            )
            $
            (0.40
            )Weighted
                average basic and dilutedcommon
                shares outstanding
            
            
            12,210,918
            
            
            11,844,557




See
      accompanying notes to consolidated financial statements





F-4





Interactive
      Systems Worldwide Inc.


Consolidated
      Statement of Stockholders’ Equity


For
      the
      Year Ended September 30, 2006


(Amounts
      in thousands except number of shares)




AccumulatedAdditional
            
            
            
            OtherPreferred
                stock
            
            Common
                stock
            
            Paid-In
            
            Treasury
            
            Comprehensive
            
            AccumulatedShares
            
            Amount
            
            Shares
            
            Amount
            
            Capital
            
            Stock
            
            Income
            
            Deficit
            
            TotalBalance
                at September 30, 2005
            
            
            64,164
            
            $
            --
            
            
            11,792,702
            
            $
            12
            
            $
            27,200
            
            $
            (441
            )
            $
            (50
            )
            $
            (20,874
            )
            $
            5,847Dividends
                on Series B and Series C Preferred Stock
            
            
            --
            
            
            --
            
            
            114,938
            
            
            --
            
            
            247
            
            
            --
            
            
            --
            
            
            (247
            )
            
            --Issuance
                of common stock in Payment of Debenture principal and
                interest
            
            
            --
            
            
            --
            
            
            159,417
            
            
            --
            
            
            392
            
            
            --
            
            
            --
            
            
            --
            
            
            392Issuance
                of common stock through conversion of Series B Preferred
                Stock
            
            
            (164
            )
            
            --
            
            
            53,420
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --Issuance
                of common stock through exercise of options
            
            
            --
            
            
            --
            
            
            56,742
            
            
            --
            
            
            44
            
            
            --
            
            
            --
            
            
            --
            
            
            44Net
                share settlement on cashless exercise of stock options
            
            
            --
            
            
            --
            
            
            68,954
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --Issuance
                of common stock to consultant
            
            
            --
            
            
            --
            
            
            50,000
            
            
            --
            
            
            38
            
            
            --
            
            
            --
            
            
            --
            
            
            38Compensation
                cost associated with stock options and warrants
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            221
            
            
            --
            
            
            --
            
            
            --
            
            
            221Net
                loss
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            (4,453
            )
            
            (4,453
            )Foreign
                currency translation income
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            84
            
            
            --
            
            
            84Comprehensive
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (4,369
            )Balance
                at September 30, 2006
            
            
            64,000
            
            $
            --
            
            
            12,296,173
            
            $
            12
            
            $
            28,142
            
            $
            (441
            )
            $
            34
            
            $
            (25,574
            )
            $
            2,173





See
      accompanying notes to consolidated financial statements




F-5




Interactive
      Systems Worldwide Inc.


Consolidated
      Statement of Stockholders’ Equity


For
      the
      Year Ended September 30, 2007


(Amounts
      in thousands except number of shares)


AccumulatedAdditional
              
              
              
              OtherPreferred
                  stock
              
              Common
                  stock
              
              Paid-In
              
              Treasury
              
              Comprehensive
              
              AccumulatedShares
              
              Amount
              
              Shares
              
              Amount
              
              Capital
              
              Stock
              
              Income
              
              Deficit
              
              TotalBalance
                  at September 30, 2006, as reported
              
              
              64,000
              
              $
              --
              
              
              12,296,173
              
              $
              12
              
              $
              28,142
              
              $
              (441
              )
              $
              34
              
              $
              (25,574
              )
              $
              2,173Cumulative
                  effect of change in accounting for registration rights
                  liability
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              27
              
              
              27Dividends
                  on Series C Preferred Stock paid in common stock
              
              
              --
              
              
              --
              
              
              131,746
              
              
              --
              
              
              202
              
              
              --
              
              
              --
              
              
              (202
              )
              
              --Dividends
                  and fees on Series C Preferred Stock Payable in cash
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              (114
              )
              
              --
              
              
              --
              
              
              --
              
              
              (114
              )Issuance
                  of common stock through conversion of Series C Preferred
                  Stock
              
              
              (258
              )
              
              --
              
              
              68,800
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --Net
                  share settlement on cashless exercise of stock options
              
              
              --
              
              
              --
              
              
              10,996
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --Issuance
                  of common stock to consultant
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              42
              
              
              --
              
              
              --
              
              
              --
              
              
              42Compensation
                  costs associated with stock options and warrants
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              99
              
              
              --
              
              
              --
              
              
              --
              
              
              99Net
                  loss
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              (2,182
              )
              
              (2,182
              )Foreign
                  currency translation income
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              21
              
              
              --
              
              
              21Comprehensive
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (2,161
              )Balance
                  at September 30, 2007
              
              
              63,742
              
              $
              --
              
              
              12,507,715
              
              $
              12
              
              $
              28,371
              
              $
              (441
              )
              $
              55
              
              $
              (27,931
              )
              $
              66




See
      accompanying notes to consolidated financial statements





F-6




Interactive
      Systems Worldwide Inc. and Subsidiaries


Consolidated
      Statements of Cash Flows


(Amounts
      in thousands)




Years
                EndedSeptember
                30,2007
            
            2006Cash
                flows from operating activities:Net
                loss
            
            $
            (2,182
            )
            $
            (4,453
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
                and amortization
            
            
            176
            
            
            261Non-cash
                interest expense
            
            
            --
            
            
            145Non-cash
                common stock, option and warrant charges
            
            
            141
            
            
            259Non-cash
                amortization of debt issuance costs
            
            
            --
            
            
            38Non-cash
                other income
            
            
            --
            
            
            (3
            )Changes
                in assets and liabilitiesAccounts
                receivable
            
            
            (75
            )
            
            (5
            )Other
                receivables
            
            
            40
            
            
            (43
            )Prepaid
                expenses and other current assets
            
            
            87
            
            
            1Other
                assets
            
            
            257
            
            
            (4
            )Accounts
                payable
            
            
            (118
            )
            
            4Accrued
                expenses and other
            
            
            (160
            )
            
            (324
            )Net
                cash used in operating activities
            
            
            (1,834
            )
            
            (4,124
            )Cash
                flows from investing activities:Purchase
                of investments
            
            
            --
            
            
            (2,810
            )Proceeds
                from sales of investments
            
            
            975
            
            
            2,815Purchase
                of property and equipment
            
            
            (10
            )
            
            (5
            )Proceeds
                from sales of property and equipment
            
            
            2
            
            
            --Capitalized
                software
            
            
            (103
            )
            
            (439
            )Net
                cash provided by (used in) investing activities
            
            
            864
            
            
            (439
            )Cash
                flows from financing activities:Proceeds
                from issuance of common stock
            
            
            --
            
            
            44Net
                cash provided by financing activities
            
            
            --
            
            
            44Net
                decrease in cash and cash equivalents
            
            
            (970
            )
            
            (4,519
            )Effect
                of exchange rate on cash
            
            
            47
            
            
            71Cash
                and cash equivalents, beginning of year
            
            
            1,207
            
            
            5,655Cash
                and cash equivalents, end of year
            
            $
            284
            
            $
            1,207Non-cash
                financing activity:Issuance
                of common stock in relation to principal payments on
                Debentures
            
            $
            --
            
            $
            333Issuance
                of common stock in relation to dividend payments on Series B andSeries
                C Preferred Stock
            
            $
            202
            
            $
            247





See
      accompanying notes to consolidated financial statements




F-7




Interactive
      Systems Worldwide Inc. and Subsidiaries


Notes
      To
      Consolidated Financial Statements


September
      30, 2007 and 2006





(1)  Description
      of Business





Interactive
      Systems Worldwide Inc. (“ISWI”) developed an interactive, client/server based
      computer system for purposes of wagering on sporting events. On July 31,
      2002, ISWI acquired all of the outstanding share capital of Global Interactive
      Gaming Limited (“GIG”), a United Kingdom company, which had been the Company’s
      exclusive licensee and was a development stage company. This acquisition
      transformed ISWI from a licensor to an operator of the computer system.
      Subsequent thereto, ISWI's activities through GIG consist of generating revenue
      by providing interactive gaming services using the SportXction ® System
      to business partners such as licensed bookmakers and others located in the
      United Kingdom, Gibraltar and Mexico.




The
      consolidated financial statements include the accounts of Interactive Systems
      Worldwide Inc., its wholly owned subsidiaries, ISW Acquisition Co., LLC, and
      Global Interactive Gaming Limited and its subsidiaries (collectively the
“Company”). All significant intercompany balances and transactions have been
      eliminated.





(2)  Basis
      of
      Preparation





The
      accompanying financial statements have been prepared assuming that the Company
      will continue as a going concern. As shown in the accompanying financial
      statements, the Company has incurred net losses and used cash in its operating
      activities during the years ended September 30, 2007 and 2006. In addition,
      the
      Company had a working capital deficiency at September 30, 2007 and requires
      additional financing to meet its forecasted cash requirements and continue
      operations during fiscal 2008. These events and conditions raise substantial
      doubt about the Company’s ability to continue as a going concern. Management has
      developed and is attempting to implement a plan to address these issues and
      allow the Company to continue as a going concern through at least the fiscal
      year ending September 30, 2008. The plan includes (i) securing
      minimum monthly cash receipts from existing customers and new
      licensees ,
      (ii) a
      program to reduce costs, (iii) seeking debt and/or equity financing and (iv)
      pursuing other strategic transactions. There is no assurance, however, that
      the
      Company will be able to raise equity financing or execute a strategic
      transaction on commercially reasonable terms, if at all, or that the Company
      will be able to meet its future contractual obligations.





The
      Company’s ability to continue as a going concern is contingent upon obtaining
      adequate financing to meet its funding requirements and ultimately generating
      sufficient revenue and achieving profitability. The financial statements do
      not
      include any adjustments that might result from the outcome of this uncertainty.





F-8





Interactive
      Systems Worldwide Inc. and Subsidiaries


Notes
      To
      Consolidated Financial Statements


September
      30, 2007 and 2006




(3)  Summary
      of Significant Accounting Policies





Use
      of
      Estimates:





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosure of contingent assets and liabilities at the date
      of
      the financial statements and the reported amounts of revenues and expenses
      during the reporting period. Actual results could differ from those
      estimates.




Reclassifications:




Certain
      amounts have been reclassified in the 2006 Statement of Operations to conform
      to
      the current year presentation.


Cash
      and
      Cash Equivalents:





Cash
      equivalents consist of funds held on deposit with banking institutions with
      original maturities of less than 90 days.





Property
      and Equipment:





Property
      and equipment are stated at cost, net of accumulated depreciation and
      amortization. Depreciation and amortization are provided over the estimated
      useful lives of the respective assets, generally three to ten years, using
      the
      straight-line method. Expenditures for repairs and maintenance are charged
      to
      expense as incurred.





Investments:




Investments
      at September 30, 2006 consist of Auction Rate Securities issued by
      corporate entities. These securities are debt securities classified as trading
      securities in accordance with Statement of Financial Accounting Standard 115,
      “Accounting for Investments in Debt and Equity Securities.” Trading securities
      are recorded at fair value with changes in fair value recorded in earnings.
      At
      September 30, 2006, the remaining auction days for these securities were between
      4 - 25 days.




Software
      Development Costs:





The
      Company accounts for software development costs in accordance with Statement
      of
      Financial Accounting Standards ("SFAS") No. 86 “Computer Software To Be
      Sold, Leased, or Otherwise Marketed”. Such costs are expensed prior to
      achievement of technological feasibility and thereafter are capitalized. The
      Company defines a product enhancement as an improvement to an existing product
      that is intended to extend the life or improve significantly the marketability
      of the original product. In order to meet the requirements for capitalization,
      a
      product enhancement should involve considerable development resources, requires
      a product design and may require a redesign of all or part of the existing
      product. Capitalized costs relate to product enhancements to the
      SportXction ® product
      which had achieved technological feasibility. The Company stops capitalizing
      software costs relating to a particular enhancement when the enhanced product
      is
      available for general release to its customers. Amortization of capitalized
      amounts, which begins with the enhanced product’s availability for general
      release to a customer, has been computed on a straight-





F-9





Interactive
      Systems Worldwide Inc. and Subsidiaries


Notes
      To
      Consolidated Financial Statements


September
      30, 2007 and 2006





(3)  Summary
      of Significant Accounting Policies (continued)




line
      basis and an estimated economic life of 3 years and amounted to $155,000 and
      $165,000 for the years ended September 30, 2007 and 2006, respectively.





At
      each
      balance sheet date, the Company compares unamortized capitalized software costs
      to net realizable value on a project-by-project basis and writes off any excess
      of the unamortized cost over the net realizable value.





Revenue
      Recognition:





The
      Company's revenue during the years ended September 30, 2007 and 2006 primarily
      consisted of license fees and service charges for the use of the
      SportXction ® product
      from service agreements with bookmakers located in the United Kingdom, Gibraltar
      and Mexico. In Fiscal 2006, revenue consisted primarily of service charges
      calculated based on a percentage share of net wagering revenue after payment
      of
      winnings and taxes. In Fiscal 2007, the Company’s revenue primarily consists of
      minimum monthly service charges for furnishing the technology and in some cases
      operating the system. In addition, after achieving certain thresholds, the
      Company may be entitled to a share of the net wagering revenue generated by
      its
      SportXction ® System.
      This component of revenue may be reduced for certain pool imbalance risks that
      arise from being a part of the house. The Company recognizes revenue as it
      is
      earned according to the terms of the related agreement.





Fair
      Value of Financial Instruments:





SFAS
      No.107, "Disclosures About Fair Value of Financial Instruments," defines the
      fair value of a financial instrument as the amount at which the instrument
      could
      be exchanged in a current transaction between willing parties and requires
      disclosure of the fair value of certain financial instruments. Investments
      are
      carried at fair value or at amounts which approximate fair value. The Company
      believes that there is no material difference between the fair value and the
      reported amounts of other financial instruments in the balance sheets due to
      the
      short term maturity of these instruments.




Income
      Taxes:





Deferred
      income taxes reflect the net tax effects of net operating loss carryforwards
      and
      temporary differences between the carrying amounts of assets and liabilities
      for
      financial reporting purposes and the amounts used for income tax purposes.
      Deferred income taxes are measured using the enacted tax rates and laws that
      are
      anticipated to be in effect when the differences are expected to reverse. A
      valuation allowance is established if it is more likely than not that a portion
      of the deferred tax asset will not be realized.




F-10




Interactive
      Systems Worldwide Inc. and Subsidiaries


Notes
      To
      Consolidated Financial Statements


September
      30, 2007 and 2006





(3)  Summary
      of Significant Accounting Policies (continued)





Impairment
      of Long-Lived Assets and Long-Lived Assets to Be Disposed Of:





Long-lived
      assets and identifiable intangibles subject to amortization are reviewed for
      impairment whenever events or changes in circumstances indicate that the
      carrying amount of an asset may not be recoverable. Recoverability of assets
      to
      be held and used is measured by a comparison of the carrying amount of an asset
      to future undiscounted cash flows expected to be generated by the asset. If
      such
      assets are considered to be impaired, the impairment to be recognized is
      measured by the amount by which the carrying amount of the assets exceeds the
      fair value of the assets. Assets to be disposed of are reported at the lower
      of
      the carrying amount or fair value less costs to sell.





Accounting
      for Stock Based Compensation:





Effective
      October 1, 2005, the Company adopted the fair value recognition provisions
      of
      SFAS No. 123(R), “Share-Based Payment”, using the
      modified-prospective-transition method. Under that transition method,
      compensation cost recognized after the effective date includes: (a) compensation
      cost for all share-based payments granted prior to, but not yet vested as of
      October 1, 2005, based on the grant date fair value estimated in accordance
      with
      original provisions of Statement 123, and (b) compensation cost for all
      share-based payments granted subsequent to October 1, 2005, based on the grant
      date fair value estimated in accordance with the provisions of Statement 123(R)
      and (c) compensation costs for share-based awards modified, repurchased or
      cancelled after such date.




Stock-based
      employee and director compensation costs charged to general and administrative
      expense during the years ended September 30, 2007 and 2006 amounted to $60,000
      and $175,000, respectively.





F-11





Interactive
      Systems Worldwide Inc. and Subsidiaries


Notes
      To
      Financial Statements


September
      30, 2007 and 2006





(3)  Summary
      of Significant Accounting Policies (continued)





Accounting
      for Stock Based Compensation:




The
      fair
      value of the stock options granted is estimated at grant date using the
      Black-Scholes option pricing model with the following weighted average
      assumptions for Fiscal 2007 and 2006, respectively: expected dividend yield
      0.0%
      (in both periods), risk free interest rate of 4.94% and 4.43%, expected
      volatility of 71% and 68% and an expected life of 5 years. The weighted average
      fair value of options granted in 2007 and 2006 was $0.24 and $1.72,
      respectively. Expected volatilities are based on historical volatility of the
      Company’s stock price. The Company uses historical data to estimate option
      exercise and employee termination within the valuation model. The risk-free
      rate
      for periods within the contractual life of the option is based on the U.S.
      Treasury yield curve in effect at the time of grant.




The
      Company accounts for equity awards issued as compensation to non-employees
      at
      fair value as measured on the date that performance is complete. During the
      years ended September 30, 2007 and 2006, the Company recognized compensation
      expense of $81,000 and $84,000, respectively, which was charged to general
      and
      administrative expense in relation to options, warrants and common stock which
      were granted to consultants.





Basic
      and
      Diluted Net Loss per Common Share:





Basic
      and
      diluted net loss per common share is computed by dividing net loss as increased
      by cumulative preferred stock dividends by the weighted average number of common
      shares outstanding during the period. In computing diluted net loss per share
      for Fiscal 2007 and 2006, no adjustment has been made to the weighted average
      outstanding common shares as the assumed exercise of outstanding options and
      warrants and the assumed conversion of preferred stock and Debentures is
      anti-dilutive.





Potential
      common shares not included in calculating diluted net loss per share are as
      follows:


2007
              
              2006Stock
                  options
              
              
              638,000
              
              
              1,064,191Stock
                  warrants
              
              
              1,765,825
              
              
              1,765,825Convertible
                  Preferred Stock (a) (b)
              
              
              997,867
              
              
              1,066,667Total
              
              
              3,401,692
              
              
              3,896,683





(a)
              Excludes
                  Series A Preferred Stock convertible on a cashless basis as number
                  of
                  common shares obtainable upon conversion is based upon market price
                  of
                  common stock and no shares are obtainable until the common stock
                  exceeds
                  $15.00 per share (see Note 6).





(b)
              Does
                  not include the potential common shares issuable on redemption
                  of the
                  Series C Convertible Preferred Stock (see Note
                  4).




F-12





Interactive
      Systems Worldwide Inc. and Subsidiaries


Notes
      To
      Financial Statements


September
      30, 2007 and 2006





(3)  Summary
      of Significant Accounting Policies (continued)




Comprehensive
      Loss:





Comprehensive
      loss consists of net loss adjusted for the results of certain stockholders'
      equity changes not reflected in net loss such as the gain or loss on foreign
      currency translation.





Foreign
      Currency Translation:





The
      functional currency of GIG, ISWI's United Kingdom subsidiary, is the pound
      sterling. GIG's assets and liabilities are translated at the exchange rate
      at
      the balance sheet date and its revenue and expenses are translated at the
      weighted average rate for the period. Gains or losses from translation
      adjustments are recorded in the accumulated other comprehensive loss section
      of
      stockholders’ equity.





(4)  Series
      C
      Convertible Preferred Stock





On
      August
      3, 2005, the Company entered into a financing agreement relating to a $4.0
      million private placement with institutional investors consisting of
      4,000 shares of the Company’s newly issued Series C Convertible Preferred Stock
      (“Series C”). Series C has a stated value of $1,000 per share, is non-voting and
      is initially convertible into the Company’s Common Stock at $3.75 per share,
      subject to adjustment, including full ratchet antidilution protection in the
      event of the issuance of additional shares of Common Stock at a price below
      the
      conversion price. The investors also received warrants that expire in August
      2010 to purchase 557,103 shares of Common Stock at $3.95 per share, subject
      to
      adjustment which were valued at $929,000 using the Black-Scholes option pricing
      model. Net proceeds from the financing after costs and expenses were
      approximately $3.7 million.




The
      Series C is initially convertible into an aggregate of 1,066,667 shares of
      Common Stock. Holders of Series C are entitled to receive a cumulative 6% annual
      dividend, payable quarterly in cash or, subject to certain conditions (which
      the
      Company no longer satisfies because its Common Stock is no longer listed on
      NASDAQ), shares of Common Stock at the Company’s option. During the three months
      ended December 31, 2006, a holder of the Series C converted 258 shares of Series
      C into 68,800 shares of Common Stock and there are currently 3,742 remaining
      Series C outstanding. During the years ended September 30, 2007 and 2006,
      respectively, the Company declared dividends of $202,000 and $240,000 on the
      Series C which were satisfied by the issuance of 131,746 and 112, 537 shares
      of
      common stock. As of September 30, 2007, unpaid cumulative dividends on the
      Series C amounted to $112,000. These dividends are subject to a late fee at
      the
      rate of 12% per annum (which must be paid in cash). A placement agent in this
      transaction received a cash fee of $120,000 and warrants to purchase 65,753
      shares of the Company’s Common Stock expiring in August 2010, which are
      exercisable at $4.38 per share. The warrants were valued at $132,000 using
      the
      Black-Scholes option pricing model.





F-13





Interactive
      Systems Worldwide Inc. and Subsidiaries


Notes
      To
      Financial Statements


September
      30, 2007 and 2006





(4)  Series
      C
      Convertible Preferred Stock (continued)





Under
      the
      terms of the private placement, and subject to certain conditions, the Company
      has the right to force conversion of all or a portion of the Series C into
      Common Stock. The Series C also provides that if certain events (all of which
      are within the control of the Company) occur such holder would have the right
      to
      require the Company to redeem the Series C for cash. Upon the occurrence of
      certain other events (including, without limitation, failure to be listed on
      the
      NASDAQ Capital Market for more than 10 consecutive trading days), each holder
      of
      Series C would have the right to require the Company to redeem the Series C
      (generally at 120% of the stated value thereof) for the Company’s Common Stock
      (at approximately 90% of the market value thereof), subject to an ownership
      limitation, or increase the dividend on the Series C to 12% per annum. On May
      18, 2007, as a result of failing to comply with NASDAQ’s shareholders’ equity
      requirement, the Company’s Common Stock was de-listed from the NASDAQ Capital
      Market. As of January 10, 2008, the Company has not been notified of any
      election having been made by the Series C holders as to the exercise of either
      of their rights. If the Series C holders elected to require the Company to
      redeem their shares, absent the holders’ limitations, the Company would be
      required to issue approximately 14,675,000 common shares based on the
      quoted market price for its common stock on September 30, 2007.





As
      a
      result of the de-listing from NASDAQ, the holders of Series C currently have
      the
      right to require that, commencing with the July 2007 dividend payment, dividend
      payments be made in cash. The unpaid quarterly dividends (which accrued for
      the
      quarter ended June 30, 2007 and September 30, 2007), amounting to $112,000,
      has
      been accrued as a liability in the accompanying balance sheet at September
      30,
      2007. The unpaid quarterly dividend has been accrued at 6% (rather than 12%)
      per
      annum because the holders of the Series C have not exercised either of their
      rights resulting from the NASDAQ de-listing. As of January 10, 2008, the Company
      has not made the mandatory dividend payments, which were due on July 2, 2007
      and
      October 1, 2007. Such dividend is subject to a 12% late fee to be paid in cash
      accruing from such payment date. A late fee for the dividend due on July 2,
      2007, amounting to $2,000, has been accrued as a liability in the accompanying
      balance sheet at September 30, 2007.





The
      Series C investor warrants and placement agent warrants are subject to certain
      anti-dilution protection similar to that applicable to the Series C. The Series
      C contains certain negative covenants including limitations with respect to
      borrowings and prohibition on payment by the Company of dividends and
      distributions on Common Stock.





Registration
      rights agreements were entered into in connection with private placements which
      required the Company to file registration statements for the resale of the
      common shares issuable upon conversion of debentures and Series B Preferred
      Stock (all of which have been converted or repaid) and Series C Preferred Stock
      and upon the exercise of warrants issued in connection with the private
      placements and to use commercially reasonable efforts to have the registration
      statements declared effective by the end of a specified grace period. In
      addition, the Company is required to use commercially reasonable efforts to
      maintain the effectiveness of the registration statements until all such common
      shares have been sold or may be sold without volume restrictions pursuant to
      Rule 144(k) of the Securities Act. If the Company fails to have the registration
      statement declared effective within the grace period or if effectiveness is
      not
      maintained, the agreements require cash payments of liquidated damages




F-14




Interactive
      Systems Worldwide Inc. and Subsidiaries


Notes
      To
      Financial Statements


September
      30, 2007 and 2006





(4) Series
        C
        Convertible Preferred Stock (continued)





by
      the
      Company to the investors of 2.0% per month or 1.5% per month of the amounts
      invested by the investors until the failure is cured with no limitation on
      the
      maximum liquidated damages.





Registration
      statements were filed and declared effective within the specified periods with
      respect to the three private placements. See Note 5 - Accounting Change
      regarding a change in accounting principle associated with the liquidated
      damages provisions of these registration rights agreements.




(5)  Accounting
      Change





As
      described in Note 4, registration rights agreements were entered into in
      connection with three of the Company’s private placements. Prior to October 1,
      2006, the Company accounted for the registration rights agreements as a separate
      free-standing instrument and accounted for the liquidated damages provision
      as a
      derivative liability subject to SFAS 133, “Accounting for Derivative Instruments
      and Hedging Activities.” Accordingly, the liability was recorded at estimated
      fair value based on an estimate of the probability and costs of cash penalties
      being incurred and is revalued at each balance sheet date with changes in value
      recorded in other income. As of September 30, 2006, the liability amounted
      to
      $27,000 and was included in accrued expenses.





In
      December 2006, FASB Staff Position EITF 00-19-2 was issued which specified
      that
      the contingent obligation to make future payments under a registration payment
      arrangement should be separately recognized and measured in accordance with
      SFAS
      5, “Accounting for Contingencies” which states that a liability is recorded if
      the obligation is probable and can be reasonably estimated. In addition, SFAS
      133 was amended to exclude registration payment arrangements from its scope.
      As
      of September 30, 2007, as the obligation was not considered probable, the
      Company has recorded no liability associated with these arrangements. Effective
      October 1, 2006, the Company adopted EITF 00-19-2 and reported a change in
      accounting principle through a reversal of the liability and as a decrease
      to
      the opening balance of accumulated deficit.




(6)  Stockholders’
      Equity





On
      September 17, 2007, the Company’s stockholders approved an amendment to the
      Company's Certificate
      of Incorporation to increase the number of authorized shares of common stock
      to
      80 million shares.





The
      designations, rights, and preferences of the Company's Preferred Stock are
      to be
      determined by the Board of Directors at the time of issuance. In connection
      with
      the acquisition of GIG, the Company issued 60,000 shares of a new class of
      Series A Preferred Stock ("Series A"). Each share of Series A has
      one vote, is convertible through July 31, 2009 into 10 shares of the
      Company’s Common Stock at $15 per common share on a cashless basis and is
      redeemable by the Company on such date for nominal consideration if not
      previously converted into Common Stock. The holder of Series A is entitled
      to a non-cumulative dividend of 6% per annum if and when declared by the Board
      of Directors. Series A has no liquidation preference. See Note (4)
      regarding the Company’s Series C Preferred Stock.




F-15




Interactive
      Systems Worldwide Inc. and Subsidiaries


Notes
      To
      Consolidated Financial Statements


September
      30, 2007 and 2006





(7)  Stock
      Options





In
      May
      1995, the Board of Directors adopted and the stockholders approved the 1995
      Stock Option Plan (the “1995 Plan”). The 1995 Plan provides for the grant of
      incentive stock options (“ISOs”) and nonqualified stock options (“NQSOs”). On
      May 24, 2005, the term of the 1995 Plan expired and thus, no additional options
      may be granted under this plan. In October 1996, the Board of Directors adopted
      and the stockholders approved the 1996 Stock Option Plan (the “1996 Plan”). The
      1996 Plan, as amended, is substantially similar to the 1995 Plan, except that
      there are 1,500,000 shares of Common Stock authorized and available for issuance
      pursuant to options that may be granted thereunder. The 1996 Plan is
      administered by the Stock Option Committee. On October 24, 2006, the term of
      the
      1996 Plan expired; thus no additional options may be granted under this plan.
      In
      January 2006, the Board of Directors adopted and in March 2006 the stockholders
      approved the 2006 Stock Option Plan (the “2006 Plan”). The 2006 Plan is
      substantially similar to the 1995 and 1996 Plans, except that there are 500,000
      shares of Common Stock authorized and available for issuance pursuant to options
      that may be granted thereunder, plus any shares subject to the 1,172,669 options
      under the 1995 Plan and 1996 Plan which were outstanding at March 30, 2006
      that
      expire or terminate. Through September 30, 2007, 505,034 shares which were
      subject to options which were outstanding at March 30, 2006 under the 1995
      Plan
      and 1996 Plans expired.




ISOs
      may
      be granted to individuals, who, at the time of grant, are employees of the
      Company. NQSOs may be granted to officers, directors, agents, employees and
      consultants of the Company, whether or not the individual is an employee of
      the
      Company. The Plans provide that the exercise price for ISOs shall be no less
      than the fair market value per share of the Common Stock at the date of grant.
      The exercise price of NQSOs shall be determined by the Board of Directors.
      Options granted under the Plans may not be exercisable for terms in excess
      of
      ten years from the date of grant, with vesting periods varying for option
      grants.




Activity
      related to the 1995, 1996 and 2006 Plans for the year ended September 30, 2007  is
      as
      follows:




Options
              
              Shares
              
              Weighted
                Average
                Exercise
                Price
              
              Weighted
                Average
                Remaining
                Contractual
                Term
              
              Aggregate
                Intrinsic
                ValueOutstanding
                  at September 30, 2006
              
              
              1,064,191
              
              $
              1.58Granted
              
              
              266,000
              
              
              0.50Exercised
              
              
              (90,691
              )
              
              0.70Forfeited
                  or expired
              
              
              (601,500
              )
              
              1.63Outstanding
                  at September 30, 2007
              
              
              638,000
              
              
              1.22
              
              
              4.2
              
              $
              --Vested
                  or expected to vest
              
              
              638,000
              
              
              1.22
              
              
              4.2
              
              $
              --Exercisable
                  at September 30, 2007
              
              
              463,000
              
              
              1.36
              
              
              3.0
              
              $
              --




F-16





Interactive
      Systems Worldwide Inc. and Subsidiaries


Notes
      To
      Consolidated Financial Statements


September
      30, 2007 and 2006




(7)  Stock
      Options (continued)





The
      total
      intrinsic value of options exercised during the years ended September 30, 2007
      and 2006 was $9,000 and $201,000, respectively. As of September 30, 2007, there
      was $83,000 of total unrecognized compensation cost related to nonvested options
      granted under the Plans. That cost is expected to be recognized over a
      weighted-average period of 1 year. During the quarter ended December 31, 2005,
      the Company effectively extended the contractual life of 90,692 fully vested
      share options held by an officer by canceling existing options and replacing
      them with new options at the same exercise price. As a result of that
      modification, the Company recognized additional compensation expense of $6,000
      for the year ended September 30, 2006, measured as the excess of fair market
      value of the new options over the fair market value of the cancelled options
      as
      of the cancellation date.





(8)  Warrants





At
      September 30, 2007, outstanding warrants to acquire shares of the Company’s
      Common Stock consist of the following:





Expiration
              Date
            
            Exercise
              Price
            
            Common
              Shares11/24/08
            
            
            4.58
            
            
            281,24911/24/08
            
            
            5.06
            
            
            95,8085/15/09
            
            
            2.13
            
            
            150,000
            (a)11/12/09
            
            
            3.36
            
            
            513,1725/13/10
            
            
            3.50
            
            
            102,7408/3/10
            
            
            3.95
            
            
            557,1038/3/10
            
            
            4.38
            
            
            65,7531,765,825





(a)
      Granted to consultant during the year ended September 30, 2006





F-17





Interactive
      Systems Worldwide Inc. and Subsidiaries


Notes
      To
      Consolidated Financial Statements


September
      30, 2007 and 2006





(9)  Property
      and Equipment





Property
      and equipment at September 30, 2007 and 2006 consist of the
      following:





2007
            
            2006Furniture
                and fixtures
            
            $
            9,000
            
            $
            62,000Building
                and improvements
            
            
            32,000
            
            
            118,000Computer
                equipment
            
            
            173,000
            
            
            252,000214,000
            
            
            432,000Less
                accumulated depreciationand
                amortization
            
            
            (210,000
            )
            
            (416,000
            )$
            4,000
            
            $
            16,000





During
      the year ended September 30, 2007, the Company wrote-off $214,000 of fully
      depreciated property and equipment which was no longer in use, realized proceeds
      from disposal of property and equipment of $2,000 and recorded a loss on
      disposal of property and equipment of $12,000.





(10)  Accrued
      Expenses and Other





Accrued
      expenses and other at September 30, 2007 and 2006 consist of the
      following:





2007
            
            2006Professional
                fees
            
            $
            208,000
            
            $
            229,000Payroll
                and related costs
            
            
            397,000
            
            
            526,000Other
            
            
            29,000
            
            
            39,000$
            634,000
            
            $
            794,000





(11)  Taxes




The
      sources of loss for the years ended September 30, 2007 and 2006 consist of
      the following:





2007
            
            2006United
                States
            
            
            ($1,037,000
            )
            
            ($2,489,000
            )United
                Kingdom
            
            
            (1,145,000
            )
            
            (1,964,000
            )($2,182,000
            )
            
            ($4,453,000
            )








F-18





Interactive
      Systems Worldwide Inc. and Subsidiaries


Notes
      To
      Consolidated Financial Statements


September
      30, 2007 and 2006




(11)  Taxes
      (continued)




The
      income tax benefit for the years ended September 30, 2007 and 2006 differed
      from the amounts computed by applying the federal income tax rate of 34% to
      pre-tax loss as a result of the following:





2007
            
            2006Computed
                benefit at 34%
            
            $
            (742,000
            )
            $
            (1,514,000
            )State
                tax benefit net of federal effect
            
            
            (28,000
            )
            
            (267,000
            )Potential
                benefits from net operating loss carryforward
                in United States and UnitedKingdom
                which are not being recognized
            
            
            770,000
            
            
            1,815,000Other
            
            
            --
            
            
            (34,000
            )Income
                tax benefit
            
            $
            --
            
            $
            --





The
      tax
      effects of temporary differences and loss carryforwards that give rise to
      deferred tax assets and deferred tax liabilities at September 30, 2007 and
      2006 are presented below:





2007
            
            2006Deferred
                tax assets:Federal
                and state net operating loss carryforward
            
            
            
            
            $
            6,135,000
            
            $
            5,867,000United
                Kingdom net operating loss carryforward
            
            
            
            
            
            11,699,000
            
            
            8,119,000Tax
                basis for capitalized license fees paid toThe
                Company by GIG prior to acquisition
            
            
            
            
            
            --
            
            
            4,107,000Property
                and equipment
            
            
            
            
            
            341,000
            
            
            328,000Employee
                compensation and benefits
            
            
            
            
            
            208,000
            
            
            179,000Total
                gross deferred tax assets
            
            
            
            
            
            18,383,000
            
            
            18,600,000Deferred
                tax liabilities:Capitalized
                software
            
            
            
            
            
            (150,000
            )
            
            (171,000
            )Net
                deferred tax asset
            
            
            
            
            
            18,233,000
            
            
            18,429,000Less
                valuation allowance
            
            
            (a
            )
            
            18,233,000
            
            
            18,429,000Net
                deferred tax asset
            
            
            
            
            $
            0
            
            $
            0





(a)
              Includes
                  $11,912,000 and $12,420,000 in 2007 and 2006, respectively, applicable
                  to
                  subsidiary in United Kingdom.




F-19





Interactive
      Systems Worldwide Inc. and Subsidiaries


Notes
      To
      Consolidated Financial Statements


September
      30, 2007 and 2006





(11)  Taxes
      (continued)





As
      of
      September 30, 2007, the Company had a net operating loss carryforward of
      approximately $15,338,000 for Federal and state income tax reporting purposes
      available to offset future Federal taxable income through the year 2027 and
      future state taxable income through the year 2014, which may be subject to
      an
      annual limitation on its utilization under Section 382 of the Internal Revenue
      Code. In addition, GIG had a net operating loss carryforward of approximately
      $41,783,000, which is available to offset future taxable income in the United
      Kingdom. As the Company is unable to conclude that it is more likely than not
      that the benefits of the carryforwards and deductible temporary differences
      will
      be realized it has provided a valuation allowance to offset the related deferred
      tax asset.





(12)  Commitments,
      Contingencies and Other





(a)  The
      Company leases office facilities in the U.S. under an operating lease which
      has
      a monthly payment of $3,125 and expires in June 2009. The Company has the right
      to terminate the lease at any time by providing four months written
      notice.





Rent
      expense under operating leases during 2007 and 2006 was $222,000 and $300,000,
      respectively. On December 4, 2006, the Company exercised the break clause within
      its lease to vacate its offices in London, England on February 4, 2007 at no
      cost.





(b)  The
      Company entered into an employment agreement with one of its employees. The
      agreement, which expires in June 2008, provides for minimum compensation and
      certain benefits. Compensation expense recognized under this agreement during
      the years ended September 30, 2007 and 2006 was $201,000 and $285,000,
      respectively. The agreement also provides for severance payments upon certain
      events, as defined.




(c)  Other
      income for the years ended September 30, consists of the following:




2007
            
            2006Settlement
                dispute with a vendor
            
            $
            370,000
            
            
            --Settlement
                of patent infringement litigation
            
            
            90,000
            
            
            --Miscellaneous
            
            
            --
            
            $
            3,000$
            460,000
            
            $
            3,000














F-20





Interactive
      Systems Worldwide Inc. and Subsidiaries


Notes
      To
      Consolidated Financial Statements


September
      30, 2007 and 2006




(13)  Concentration
      of Revenues





Revenues
      from Sportingbet (32%), Ladbrokes (24%) and Caliente (41%), represented over
      90%
      of revenues in the year ended September 30, 2007. Revenues from Sportingbet
      (60%) and Caliente (23%) represented over 80% of revenues for the year ended
      September 30, 2006. The Company expects a significant portion of its future
      revenues to continue to be generated by a limited number of bookmakers. The
      loss
      of any of these bookmakers or any substantial reduction in betting activity
      by
      any of their customers could materially and adversely affect the Company’s
      operating results.




(14)  Related
      Party Transactions





During
      the year ended September 30, 2006, the Company paid $29,000 in consulting fees
      to Barry Mindes, the founder and former Chairman of the Board and Chief
      Executive Officer of the Company. In addition, the Company entered into a
      consulting agreement in September 2006 with Vincent Caldwell, a former director
      of the Company, under which the Company paid Mr. Caldwell $22,500 and $7,500
      in
      consulting fees in the years ended September 30, 2007 and 2006,
      respectively.





(15)  Fourth
      Quarter Adjustment (Unaudited)





The
      Company recorded an adjustment in the fourth quarter of fiscal 2006 to
      capitalize software development costs amounting to $342,000 ($0.03 per share)
      which had previously been incorrectly charged to research and development
      expense during the previous interim quarters of 2006. The effect on the previous
      quarters was not material in any individual quarter.




F-21