**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,
                  2006
  **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:
                
                **Common
                  Stock, $.001 par value**
                (Title
                  of class)Securities
                  registered under Section 12(g) of the Exchange Act:**None**
  
 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. o
  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,
        2006) were $111,000.
  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 8, 2007 was approximately
        $18,090,000.
  The
        number of shares of Common Stock, $.001 par value, outstanding as of
        January 8, 2007 **** was
        12,202,738 **.**
  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 and mobile telephones. 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,
        which
        holds a British bookmaker’s agency permit, and Brightform Limited, which holds a
        British bookmaker’s permit, and is therefore capable of offering its own
        complete betting service.
  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.
  2
  As
        used
        in this Report the term “Company”, unless the context otherwise requires, means
        ISWI and its wholly-owned subsidiaries, including GIG.
  **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. The Common Stock
        currently trades on the NASDAQ Capital Market SM .
  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, a market-research firm, revenues from online
        gambling totaled $13 billion in 2005. A significant amount of sports wagering
        internationally also takes place in betting parlors, where bettors place
        bets
        and redeem winnings; and to a lesser degree, in betting facilities where
        bettors
        view sporting events while wagering.
  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
        Deployment** Status
  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 and mobile phones. 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, intends to offer. Development is underway to add fixed-odds horse
        racing to the range of sports for which the SportXction ® System
        may be used.
 
 GIG
        offered live play-by-play wagering on approximately 1,600 events during the
        year
        ending September 30, 2006. GIG intends to offer wagering on approximately
        1,800
        events during fiscal year 2007. The SportXction ® System
        allows wagering using multiple currencies and provides players with a choice
        of
        languages. The Company’s revenue primarily consists of service charges
        calculated based on net wagering revenue after payment of winnings and taxes.
        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, which provide the Company with a share of the wagering revenue
        generated by its SportXction ® System.
        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 both a fully integrated and stand-alone product
        configuration. These products are provided on a white-label basis branded
        by the
        Company’s wagering partners. In the fully integrated configuration, the
        Company’s play-by-play betting propositions are placed seamlessly within our
        business partners’ betting offerings, thus maintaining a consistent “look and
        feel”. The user can then place wagers from its existing account in the same
        manner as all other bets made with that partner.
 
 On
        December 5, 2006, the Company announced that it had launched the 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 the integrated
        version of its SportXction ® System
        with Ladbrokes eGaming Ltd. The Company is currently in discussions with
        other
        existing and new partners regarding this approach.
 
 In
        addition, the Company continues to offer its stand-alone product configuration
        accessable through a link on the partner’s website, which launches a pop-up
        window, and the user is able to place play-by-play bets after entering a
        username and password and transferring funds into his or her
        account.
 
 The
        stand-alone product is currently in operation with the following
        partners:
 
 **Partner**
              
              **Websites**BetShop
                  Group (Europe) Ltd.
              
              betshop.comVictor
                  Chandler UK Ltd
              
              victorchandler.co.uk,
                  vcbet.co.ukVictor
                  Chandler International
              
              victorchandler.com,
                  vcbet.com
  ***Hand-held
        devices***
 
 On
        August
        11, 2006, the Company announced that GIG had entered into an agreement with
        Caliente, one of Latin America’s largest gaming companies. Caliente owns and/or
        provides services to 160 betting shops, known as Race & Sports Books,
        throughout Mexico, Central and South America and the Caribbean.
 
 Under
        the
        terms of this three year agreement, GIG provides software and services that
        enable Caliente to offer an enhanced play-by-play sports betting service
        in all
        of its Race & Sports Books locations. On September 7, 2006, the Company
        announced the SportXction ® System
        was successfully deployed in ten locations using hand held, touch screen
        devices. The SportXction ® system
        is expected to be rolled out throughout Caliente’s Race & Sports Books
        during 2007. The enhanced betting capabilities are also expected to be available
        on Caliente’s website in early 2007.
 
 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.
  6
 
 ***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 is also developing 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 US 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 licensed sports wagering Internet web sites and the inclusion of the
        SportXction ® System
        into the interactive television, mobile phone, and betting shop product offering
        of bookmakers. 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.
  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 following the launch of products in the U.K. 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 horse racing wagering.
  On
        December 15, 2005, the Company **** announced
        that it had filed a complaint against defendants Mikohn Gaming Corporation
        (d/b/a Progressive Gaming International Corporation) and STB Holdings in
        the
        U.S. District Court in New Jersey, for infringement of two patents held by
        the
        Company ( United
        States Patent Nos. 5,573,244 and 5,842,921 ).
        In
        December 2006, the litigation with STB Holdings was settled. The case against
        Mikohn Gaming Corporation is now pending in the U.S. District Court in Las
        Vegas, Nevada. The Company intends to take all appropriate steps to defend
        its
        intellectual property against misappropriation.
  7
  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 was contacted in May of 2006 by Mel Molnick, President of Home Gambling
        Network, Inc. (“HGN”).  HGN was granted a U.S. patent (No. 5,800,268) on
        September 1, 1998.  HGN’s patent concerns a “Method of Participating in a
        Live Casino Game from a Remote Location.”  HGN was recently granted a
        corresponding patent by the European Patent Office; to date, corresponding
        individual country patents have been granted in Austria and Germany.   Mr.
        Molnick identified that he was suing Ladbrokes and Sportingbet in the U.S.
        for
        violating his U.S. patent.  He claimed that the Company’s
        recently-announced partnerships with those companies would make the Company
        a
        contributory infringer. The Company's patent counsel sent a letter to HGN’s
        lawyer on June 8, 2006, outlining the Company’s responses to Mr. Molnick’s
        infringement allegations. HGN’s case against Ladbrokes has been dismissed and
        Sportingbet has withdrawn from the U.S. market. The Company believes that
        the
        asserted claims against it by HGN are without merit and intends to vigorously
        defend any claims if they are formally asserted.
 
 The
        Company has not received any other 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.
  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.
  8
  **Personnel**
  The
        Company currently has seven full-time employees in the United States and
        six
        full-time employees in England. The Company considers its relations with
        its
        employees to be good. The Company also utilizes outside consultants on 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, 2006 and 2005, the Company spent
        approximately $662,000 and $1,483,000, 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, 2006 and 2005, 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 year September 30, 2006, the Company capitalized $439,000 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.
  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.
  9
  **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.
  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.
  10
  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.
  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.
  11
  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.
  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.
  12
  **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**
  The
        Company’s indirect, wholly-owned subsidiaries, Brightform Limited (“Brightform”)
        and GIG Operations Limited (“GIG Operations”) provide betting services within
        the United Kingdom and must comply with betting legislation in the United
        Kingdom. Betting is regulated in the United Kingdom under the Betting Gaming
        and
        Lotteries Act 1963 (“the Betting Act”) and the Betting and Gaming Duties Act
        1981 (“the Duties Act”) and associated regulations (all collectively referred to
        as the “Acts”).
 
 The
        Betting Act regulates 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
        deals 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 deal with the financial reporting and taxation
        responsibilities of those involved in the bookmaking and gaming
        industry.
 
 The
        Betting Act provides 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 is taking place), and in premises
        operating under a license. It also prohibits any person from acting as a
        bookmaker without a license and restricts pool betting and betting on
        tracks.
 
 In
        order
        to obtain a bookmaker’s permit in the United Kingdom an application must 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 are whether
        or
        not the applicant is a fit and proper person to hold a bookmakers’ permit,
        whether they are competent to operate a bookmaking business and whether they
        have sufficient financial resources to meet the potential liabilities that
        may
        arise. Brightform applied for and acquired a bookmakers’ permit on April 28,
        2003. This permit was renewed on April 28, 2006 and
        will
        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 will expire on May 31, 2009.
  13
  In
        order
        to use any premises for betting transactions in circumstances where persons
        are
        physically present, a bookmaker must also 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 need only have a bookmaker’s permit. A betting office license is not
        required as it relates to specific premises in which customers place
        bets.
 
 Both
        bookmakers’ permits and betting office licenses remain valid during the
        applicable licensing period (a maximum of three years) and all permits and
        licenses expire by elapse of time. Bookmakers and/or bookmakers’ agents must
        make applications for the renewal of their permits and/or betting office
        licenses.
 
 The
        U.K.
        Gambling Act 2005 (the “Act”) received Royal Assent in April 2005. The UK
        government is committed to full implementation of the Act by September 1,
        2007.
        The Act created a framework which 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, has been created to regulate the industry. The Company will need
        to
        apply for a new remote gambling operating license in July 2007, subject to
        the
        relevant regulations being laid before the UK Parliament. None of the activities
        for which Brightform or GIG Operations are currently licensed is expected
        to be
        adversely affected by the new legislative regime to be established by 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.
  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.”)
  14
  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.
  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)
                  and
                  James McDade (Chief Financial Officer) have been approved for licensure.
  15
  ·
              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.
  ·
              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.
  16
  ·
              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.
  ·
              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.
  17
  ·
              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 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 whether the Company will
        offer
        wagering on 1,800 events during fiscal year 2007, whether the Company will
        add
        horseracing to the range of sports for which the SportXction ® System
        may be used, 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
        and
        whether this new methodology will yield improved financial results, 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, 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 shareholders, whether legal or regulatory
        requirements will inhibit marketing of the products as intended by the Company,
        the likelihood that the Company’s securities will continue to be listed on
        NASDAQ, 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, whether the Company will complete product extensions to
        the
        SportXction ® System
        and the ultimate dilutionary effect that the preferred stock, warrants and
        options will have on existing stockholders. 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, further 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 may trigger the anti-dilution provisions in our Series
        C
        Preferred Stock and in the Company’s outstanding warrants, resulting in further
        dilution to existing stockholders and certain other rights to holders of
        the
        Series C Preferred Stock.
 
 As
        of
        September 30, 2006, the Company had liquid resources totaling $2,182,000.
        These include cash and cash equivalents in the amount of $1,207,000 and
        investments in the amount of $975,000. Management believes that these resources,
        without any significant increase in revenues, will only be sufficient to
        fund
        operations through March 2007. Accordingly, the Company must raise additional
        capital or pursue strategic alternatives immediately. If the Company cannot
        raise additional capital within the next 90 days, 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, 2006 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.
 **There
        are no assurances that we can maintain our listing on The Nasdaq Capital
        Market,
        and the failure to maintain this listing could adversely affect the liquidity
        and price of our common stock and trigger certain provisions of the Company’s
        Series C Preferred Stock.**
 
 The
        trading of the Company’s Common Stock on NASDAQ is conditioned upon the Company
        meeting certain asset, capital and surplus earnings and stock price tests
        set
        forth by NASDAQ. To maintain eligibility for trading on the NASDAQ Capital
        Market, the Company will be required to, among other things, (i) maintain
        stockholders’ equity of at least $2,500,000, have a market capitalization of $35
        million, or have net income from continuing operations of $500,000 in the
        most
        recently completed fiscal year or in two out of the last three most recently
        completed fiscal years; (ii) maintain a minimum bid price of $1.00 per share;
        and (iii) adhere to certain corporate governance provisions. The Company
        no
        longer satisfies the requirements in clause (i) above.
 
 In
        three
        instances in the past, the Company has received correspondence from NASDAQ
        indicating that it did not meet the requirements for continued listing on
        the
        NASDAQ Capital Market. In each of those instances, the Company was able to
        overcome these problems, achieve compliance with the requirements for continued
        listing and was able to have its Common Stock continue to be listed on the
        NASDAQ Capital Market. But there is no assurance that the Company will now
        be
        able to achieve compliance with the listing requirements and have its Common
        Stock continue to be so listed.
  20
  If
        we
        fail to meet NASDAQ Capital Market’s continued listing requirements, our shares
        may be delisted, which could reduce the liquidity of our Common Stock, make
        it
        more difficult to raise capital, and will result in certain penalties under
        our
        Series C Preferred Stock.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.
  In
        the
        event that the Company’s shares are delisted and the Company does not promptly
        have its Common Stock quoted on the OTC Bulletin Board or does not use
        commercially reasonable efforts to have its Common Stock re-listed or re-quoted
        on the NASDAQ Capital Market or listed or quoted on another principal market
        as
        soon as reasonably practicable, the holders of the Series C Preferred Stock
        may
        require the Company to redeem all of their Series C Preferred Stock which
        will
        immediately become payable in cash. In the event that the Company’s shares fail
        to be listed or traded on the NASDAQ Capital Market or listed or quoted on
        another principal market for more than 10 consecutive trading days, the holders
        of the Series C Preferred Stock shall be entitled to either favorable redemption
        terms in shares of Common Stock or an increase to the dividend to 12% per
        annum
        for the Series C Preferred Stock. In addition, the Company would be unable
        to
        satisfy the quarterly dividend payments on the Series C Preferred Stock in
        shares of Common Stock, which would reduce the amount of cash available to
        fund
        operations.
  In
        addition to the risk of volatile stock prices and possible delisting, low
        price
        stocks are subject to the additional risks of federal and state regulatory
        requirements and the potential loss of effective trading markets. In particular,
        if the Common Stock was delisted from trading on NASDAQ and the trading price
        of
        the Common Stock was less than $5.00 per share, the Common Stock could be
        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 receiving purchasers’ written consent, prior to
        any transaction. If the Company’s securities were also deemed penny stocks under
        the Securities Enforcement and Penny Stock Reform Act of 1990, additional
        disclosures in connection with trades in the Company’s securities, including the
        delivery of a disclosure schedule explaining the nature and risks of the
        penny
        stock market would be required. 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. Such requirements could severely limit
        the
        liquidity of the Company’s securities.
  **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.
  21
 
 **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, 2006 and September 30, 2005, the Company had cumulative
        net losses since inception of approximately $25.6 million and $20.9 million,
        respectively. The Company incurred a net loss applicable to common shareholders
        of $5.1 million during the year ended September 30, 2006.  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 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. Although holders of our Series C Preferred Stock are entitled to
        receive
        dividends, we may elect to pay such dividends in cash or shares of Common
        Stock,
        subject to certain conditions, at our option. 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, 2007. The Company expects revenue to increase as
        a
        result of the implementation of its integrated betting products among other
        reasons but can give no assurance that will occur or if it does when or whether
        we will again achieve profitability.
 
 22
 **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 might not have
          the cash
          resources to redeem such shares. Subject to certain conditions (including,
          among
          others, that the Common Stock continue to be listed on NASDAQ, which the
          Company
          cannot assure because it no longer meets the requirements for continued
          listing), the quarterly dividend payments on the Preferred Stock may be
          paid, at
          the Company’s option, in cash or additional shares of Common Stock. If the
          Company makes these payments in cash rather than additional shares of Common
          Stock, it would reduce the amount of cash available to fund operations.
          The
          Series C Preferred Stock also contains anti-dilution provisions which may
          limit
          the Company’s ability to obtain additional financing on favorable terms, or at
          all, not withstanding that the Company now needs new equity financing in
          order
          to continue operations beyond March 31, 2007. New investors would likely
          expect
          to purchase any privately placed securities at some discount to current
          market
          price. But the “full ratchet” dilution protection which the Series C Preferred
          Stock and certain of the outstanding warrants have 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 many more shares becoming issuable upon, and potentially
          being sold into the market after, conversion (or exercise). This market “overhang” may deter
          potential new investors.
 
 **If
          the holders of our outstanding Series C Preferred Stock, options and warrants
          convert or exercise those securities, or if we elect 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 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,
          we may elect 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.
 **We
        rely on a limited number of partners for our revenues.**
 
 Revenues
        from Interactive Sports Limited, a wholly-owned subsidiary of Sportingbet
        Plc,
        represented approximately 60% and 81% of revenues in the years ended September
        30, 2006 and 2005. 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
  **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”).
 
 **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.
  24
  **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 applications have been filed in
        certain foreign countries some of which have been issued and some of which
        are
        pending. 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 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.
  **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
        officers and other key personnel. The Company has entered into employment
        agreements with certain executive officers which have a defined term. No
        assurance can be given that those agreements will be extended or renewed
        by the
        Company or the employees upon expiration of their term and if not extended
        or
        renewed, whether individuals with similar backgrounds and experience could
        be
        hired to replace them. The Company does not maintain and does not intend
        to
        obtain key person life insurance on the life of any of its executive officers.
        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.
  25
  **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
        January 8, 2007, Barry Mindes, 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, 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.
  **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, 2007. 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, 2006, were approximately $37,500. For the fiscal year
        ending September 30, 2007, lease payments for this facility are expected to
        be approximately $37,500. The Company also leases off-site facilities in
        Nevada
        for the storage of equipment.
  26
  The
        Company currently leases approximately 2,000 square feet, in London, England
        under a fifteen month lease which expires in July 2007. On December 4, 2006,
        the
        Company exercised the break clause within its lease to vacate these offices
        on
        February 4, 2007 at no cost. Lease payments for this facility (net of rental
        income), at which all development and administrative functions in England
        are
        currently conducted, during the year ended September 30, 2006, were
        approximately $198,000. For the fiscal year ending September 30, 2007,
        lease payments for this facility are expected to be approximately $123,000.
  **Item
        3.**  **Legal Proceedings**
  See
        “Business - Intellectual Property”.
  **Item
        4. Submission of Matters to a Vote of Security Holders**
  No
        matters were submitted to a vote of security holders during the quarter ended
        September 30, 2006.
  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,
        the high and low sales prices for shares of the Company’s Common Stock. The
        quotations reflect inter-dealer prices without retail mark-up or commission
        and
        may not represent actual transactions. The Company’s Common Stock is traded on
        the NASDAQ Capital Market:
 
 Quarter
              
              High
              
              LowOctober 1,
                  2004 to December 31, 2004
              
              $
              4.90
              
              $
              2.55January 1,
                  2005 to March 31, 2005
              
              
              7.32
              
              
              3.97April 1,
                  2005 to June 30, 2005
              
              
              5.39
              
              
              3.04July 1,
                  2005 to September 30, 2005
              
              
              4.32
              
              
              1.79October 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
              
              
              1.02
  The
        high
        and low sales prices on January 8, 2007 were $2.17 and $2.06, 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 January 8,
        2007. The Company believes there are in excess of 1,900 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 cash or shares
        of
        our Common Stock, subject to certain conditions. 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
        preferred stock or Common Stock; except that if the Company fails to satisfy
        certain conditions, it will not be permitted to pay the dividends on the
        Series
        C Preferred Stock in shares of Common Stock, but will be required to pay
        them in
        cash. 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.
  28
  **Issuances
        of Common Stock**
  On
        July
        5, 2006, the Company issued 34,421 shares of Common Stock to the holders
        of its
        outstanding privately placed Series C Preferred Stock to satisfy the dividend
        due thereunder. These issuances were made in reliance on the exemption provided
        by Section 4(2) of the Securities Act of 1933, as amended (the “Act”), for
        transactions by an issuer not involving any public offering.
 
 On
        August
        1, 2006, the Company issued 50,000 shares of the Company’s Common Stock to a
        consultant. The shares were issued in reliance on the exemption provided
        by
        Section 4(2) of the Act, for transactions by an issuer not involving any
        public
        offering.
 
 29
  **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 interactive television carriers
        which employ satellite, cable and terrestrial programming, mobile telephone
        operators, licensed bookmakers and casinos 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, 2006 (“Fiscal 2006”) and 2005 (“Fiscal 2005”), 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 during
        the
        year ended September 30, 2006 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, 2007. The plan includes (i) a program to
        reduce costs, (ii) seeking equity financing and (iii) considering
        other strategic alternatives, including a possible merger, sale of assets
        or
        other business combination or restructuring transactions.
  30
  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
        failure to raise equity 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.
  **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
        $165,000 and $315,000 for the years ended September 30, 2006 and 2005,
        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. 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.
  31
  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 2006 were $111,000, as compared to $162,000 during Fiscal 2005.
        The
        decrease in Fiscal 2006 was primarily because the Spanish, Greek, and Turkish
        affiliates of Sportingbet discontinued the use of the Company’s stand-alone
        product during Fiscal 2006, partially offset by a new agreement with Hipodromo
        de Agua Caliente S.A. de C.V. (Caliente). In April 2006, the Company entered
        into a new agreement with Sportingbet to provide an enhanced integrated product.
        Subsequently, Sportingbet completed the migration of its foreign affiliates
        to
        its next generation back-end software and ceased using the Company’s stand-alone
        product. On December 5, 2006, the Company announced the launch of this enhanced
        product with Sportingbet. The Company also announced on January 9, 2007 the
        launch of its enhanced product with Ladbrokes eGaming Ltd. The Company believes
        this enhanced product will result in a significant increase to revenues
        following launch.
 
 Cost
        of
        revenues for Fiscal 2006 were $377,000, as compared to $434,000 during Fiscal
        2005. The decrease in Fiscal 2006 was due to lower personnel costs.
  Research
        and development expense for Fiscal 2006 were $662,000, as compared to $1,483,000
        during Fiscal 2005. The decrease in Fiscal 2006 was primarily due to certain
        development costs which met the criteria for capitalization, lower amortization
        expenses associated with capitalized product enhancements that had become
        fully
        amortized and lower payroll and technical consulting costs.
  General
        and administrative expenses during Fiscal 2006 were $3,526,000, as compared
        to
        $3,207,000 during Fiscal 2005. The increase was primarily due to higher
        professional fees and increased non-cash compensation expense associated
        with
        employee stock options due to the adoption of Statement of Financial Accounting
        Standards No. 123(R) partially offset by lower payroll and travel
        expenses.
  Interest
        expense during Fiscal 2006 was $2,000, as compared to $885,000 during Fiscal
        2005. This expense
        has declined due to a decrease in the Company’s 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 represents changes in value associated with the registration rights
        agreements entered into in connection with the private placements which have
        been accounted for as a separate freestanding instrument in accordance with
        SFAS
        133. See Note 4 to the Company’s financial statements for a detailed
        discussion.
  32
  In
        connection with the issuance of the Series B Convertible Preferred Stock
        (“Series B”) in November 2004, the Company recorded a dividend to Series B
        shareholders of $552,000 representing the beneficial conversion feature.
        In
        connection with the issuance of the Series C Convertible Preferred Stock
        (“Series C”) in August 2005, the Company recorded a dividend to Series C
        shareholders of $777,000 representing the beneficial conversion feature.
        In each
        of these issuances, the beneficial feature resulted from the difference between
        the effective conversion price and the quoted market price of the Company’s
        Common Stock at the date of issuance. These preferred stock dividends did
        not
        require the payment of cash or the issuance of additional shares of Common
        Stock.
  Net
        loss
        and net loss per share applicable to common stock (basic and diluted) for
        Fiscal
        2006 were $4,721,000 and $0.43, respectively, as compared to $7,314,000 and
        $0.71, respectively, during Fiscal 2005. The decrease is primarily due to
        lower
        interest expense, the beneficial conversion feature associated with the Series
        B
        and Series C Preferred Stock in Fiscal 2005 and lower research and development
        expense (as described above).
  **Liquidity** **and Capital Resources**
  As
        of
        September 30, 2006, the Company had liquid resources totaling $2,182,000.
        These include cash and cash equivalents in the amount of $1,207,000 and
        investments in the amount of $975,000. Investments at September 30, 2006
        consist of Auction Rate Securities issued by corporate entities with remaining
        auction days between 4 - 25 days.
 
 The
        Company’s operations currently do not generate positive cash flow and are not
        expected to do so during the fiscal year ending September 30, 2007. The Company
        anticipates that, based on its current level of spending, its existing resources
        will be adequate to fund its capital and operating requirements through March
        2007 without any significant increase in revenues. The Company has initiated
        several actions to reduce its payroll and consulting costs. In addition,
        the
        Company has identified additional reductions relating to payroll and rent
        which
        it expects to realize during the quarter ending March 31, 2007.
 
 The
        Company is currently in discussions with several additional bookmakers,
        interactive television companies and mobile phone 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 reduce
        our expenses, 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
 33
  **Item
        7.**  **Financial Statements**
   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, 2006 and 2005
                  
                  F-3Consolidated
                      Statements of Operations for the years endedSeptember
                      30, 2006 and 2005
                  
                  F-4Consolidated
                      Statements of Stockholders' Equity for the years endedSeptember
                      30, 2006 and 2005
                  
                  F-5
                      and F-6Consolidated
                      Statements of Cash Flows for the years endedSeptember
                      30, 2006 and 2005
                  
                  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, 2006 and 2005, 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, 2006 and 2005, 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 2006 and 2005. Further, the Company will require
            additional
            financing to meet its forecasted cash requirements during fiscal 2007.
            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, 2007
 
 F-2
  Part
            I:
            Financial Information
 
 Item
            1.
            Financial Statements
  Interactive
            Systems Worldwide Inc. and Subsidiaries
 Consolidated
            Balance Sheets
 September
            30, 2006 and 2005
 (Amounts
            in thousands except share data)
  2006
                  
                  2005Current
                      assets:Cash
                      and cash equivalents
                  
                  $
                  1,207
                  
                  $
                  5,655Accounts
                      receivable
                  
                  
                  46
                  
                  
                  41Investments
                      in marketable securities
                  
                  
                  975
                  
                  
                  980Other
                      receivables
                  
                  
                  57
                  
                  
                  14Prepaid
                      expenses and other current assets
                  
                  
                  138
                  
                  
                  139Total
                      current assets
                  
                  
                  2,423
                  
                  
                  6,829Property
                      and equipment, net
                  
                  
                  16
                  
                  
                  91Capitalized
                      software, net of accumulatedamortization
                      of $957 and $791, respectively
                  
                  
                  428
                  
                  
                  154Other
                      assets
                  
                  
                  305
                  
                  
                  339Total
                      assets
                  
                  $
                  3,172
                  
                  $
                  7,413Liabilities
                      and Stockholders' EquityCurrent
                      liabilities:Accounts
                      payable
                  
                  $
                  205
                  
                  $
                  201Accrued
                      expenses and other
                  
                  
                  794
                  
                  
                  1,126Total
                      current liabilities
                  
                  
                  999
                  
                  
                  1,327Long-term
                      debt:Debentures,
                      net of unamortizeddiscount
                      of $94
                  
                  
                  —
                  
                  
                  239Total
                      liabilities
                  
                  
                  999
                  
                  
                  1,566Stockholders'
                      Equity:Preferred
                      stock, par value $.001 per share;2,000,000
                      shares authorized,
                    60,000
                      Series A outstanding, 164 Series B outstanding in 2005 and
                    4,000
                      Series C outstanding ($4,000 liquidation preference)
                  
                  
                  —
                  
                  
                  —Common
                      stock par value $.001 per share;20,000,000
                      shares authorized;12,296,173
                      and 11,792,702 issued in 2006 and 2005, respectively
                  
                  
                  12
                  
                  
                  12Additional
                      paid-in capital
                  
                  
                  28,142
                  
                  
                  27,200Treasury
                      stock, at cost, 242,000 common shares
                  
                  
                  (441
                  )
                  
                  (441
                  )Accumulated
                      other comprehensive income (loss)
                  
                  
                  34
                  
                  
                  (50
                  )Accumulated
                      deficit
                  
                  
                  (25,574
                  )
                  
                  (20,874
                  )Total
                      stockholders' equity
                  
                  
                  2,173
                  
                  
                  5,847Total
                      liabilities andstockholders'
                      equity
                  
                  $
                  3,172
                  
                  $
                  7,413
 
 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
                      30,2006
                  
                  2005Revenues
                  
                  $
                  111
                  
                  $
                  162Costs
                      and expenses:Cost
                      of revenues
                  
                  
                  377
                  
                  
                  434Research
                      and development expense
                  
                  
                  662
                  
                  
                  1,483General
                      and administrative expense
                  
                  
                  3,526
                  
                  
                  3,2074,565
                  
                  
                  5,124Operating
                      loss
                  
                  
                  (4,454
                  )
                  
                  (4,962
                  )Interest
                      expense, net
                  
                  
                  2
                  
                  
                  885Other
                      income
                  
                  
                  (3
                  )
                  
                  (25
                  )Net
                      loss
                  
                  
                  (4,453
                  )
                  
                  (5,822
                  )Preferred
                      Stock dividends (includes beneficialconversion
                      feature of $1,329 in 2005)
                  
                  
                  (268
                  )
                  
                  (1,492
                  )Net
                      loss applicable to common stock
                  
                  $
                  (4,721
                  )
                  $
                  (7,314
                  )Net
                      loss per share applicable to commonstock
                      - basic and diluted
                  
                  $
                  (0.40
                  )
                  $
                  (0.71
                  )Weighted
                      average basic and dilutedcommon
                      shares outstanding
                  
                  
                  11,844,557
                  
                  
                  10,362,019
 See
            accompanying notes to consolidated financial statements
 
 F-4
  Interactive
            Systems Worldwide Inc.
 Consolidated
            Statement of Stockholders’ Equity
 For
            the
            Year Ended September 30, 2005
 (Amounts
            in thousands except number of shares)
 
 AccumulatedAdditional
                  
                  
                  
                  OtherPreferred
                      stock
                  
                  Common
                      stock
                  
                  Paid-In
                  
                  Treasury
                  
                  Comprehensive
                  
                  AccumulatedShares
                  
                  Amount
                  
                  Shares
                  
                  Amount
                  
                  Capital
                  
                  Stock
                  
                  Loss
                  
                  Deficit
                  
                  TotalBalance
                      at September 30, 2004
                  
                  
                  60,000
                  
                  $
                  —
                  
                  
                  9,799,418
                  
                  $
                  10
                  
                  $
                  15,958
                  
                  $
                  (441
                  )
                  $
                  (26
                  )
                  $
                  (13,609
                  )
                  $
                  1,892Issuance
                          of 3,000 shares of Series B Preferred Stock and 4,000 shares
                          of Series C
                          Preferred Stock including warrants to purchase common stock
                          through
                          private placement, net of expenses of $648
                  
                  
                  7,000
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  6,320
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  6,320Dividends
                          on Series B and Series C Preferred Stock including beneficial
                          conversion
                          feature of $1,329
                  
                  
                  —
                  
                  
                  —
                  
                  
                  28,160
                  
                  
                  —
                  
                  
                  1,419
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (1,443
                  )
                  
                  (24
                  )Issuance
                        of common stock in payment of Debenture principal and
                        interest
                  
                  
                  —
                  
                  
                  —
                  
                  
                  274,562
                  
                  
                  1
                  
                  
                  1,003
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  1,004Issuance
                      of common stock on conversion of Debentures
                  
                  
                  —
                  
                  
                  —
                  
                  
                  236,536
                  
                  
                  —
                  
                  
                  1,083
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  1,083Issuance
                        of common stock through conversion of Series B Preferred
                        Stock
                  
                  
                  (2,836
                  )
                  
                  —
                  
                  
                  923,778
                  
                  
                  1
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  1Issuance
                      of common stock through exercise of options
                  
                  
                  —
                  
                  
                  —
                  
                  
                  209,206
                  
                  
                  —
                  
                  
                  321
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  321Issuance
                      of common stock through exercise of warrants
                  
                  
                  —
                  
                  
                  —
                  
                  
                  257,652
                  
                  
                  —
                  
                  
                  1,090
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  1,090Net
                      share settlement on cashless exercise of stock options
                  
                  
                  —
                  
                  
                  —
                  
                  
                  63,390
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —Issuance
                      of stock options to consultant
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  6
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  6Net
                      loss
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (5,822
                  )
                  
                  (5,822
                  )Foreign
                      currency translation loss
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (24
                  )
                  
                  —
                  
                  
                  (24
                  )Comprehensive
                      loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (5,846
                  )Balance
                      at September 30, 2005
                  
                  
                  64,164
                  
                  $
                  —
                  
                  
                  11,792,702
                  
                  $
                  12
                  
                  $
                  27,200
                  
                  $
                  (441
                  )
                  $
                  (50
                  )
                  $
                  (20,874
                  )
                  $
                  5,847
  See
            accompanying notes to consolidated financial statements
 
 F-5
  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
                  
                  Loss
                  
                  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-6
  Interactive
            Systems Worldwide Inc. and Subsidiaries
 Consolidated
            Statements of Cash Flows
 (Amounts
            in thousands)
  Years
                      EndedSeptember
                      30,2006
                  
                  2005Cash
                      flows from operating activities:Net
                      loss
                  
                  $
                  (4,453
                  )
                  $
                  (5,822
                  )Adjustments
                      to reconcile net loss to net cash used in operating
                      activities:Depreciation
                      and amortization
                  
                  
                  261
                  
                  
                  398Non-cash
                      interest expense
                  
                  
                  145
                  
                  
                  774Non-cash
                      common stock, option and warrant charges
                  
                  
                  259
                  
                  
                  6Non-cash
                      amortization of debt issuance costs
                  
                  
                  38
                  
                  
                  216Non-cash
                      other income
                  
                  
                  (3
                  )
                  
                  (25
                  )Changes
                      in assets and liabilitiesAccounts
                      receivable
                  
                  
                  (5
                  )
                  
                  (34
                  )Other
                      receivables
                  
                  
                  (43
                  )
                  
                  17Prepaid
                      expenses and other current assets
                  
                  
                  1
                  
                  
                  19Other
                      assets
                  
                  
                  (4
                  )
                  
                  1Accounts
                      payable
                  
                  
                  4
                  
                  
                  48Accrued
                      expenses and other
                  
                  
                  (324
                  )
                  
                  212Net
                      cash used in operating activities
                  
                  
                  (4,124
                  )
                  
                  (4,190
                  )Cash
                      flows from investing activities:Purchase
                      of investments
                  
                  
                  (2,810
                  )
                  
                  (1,946
                  )Proceeds
                      from sales of investments
                  
                  
                  2,815
                  
                  
                  1,251Purchase
                      of property and equipment
                  
                  
                  (5
                  )
                  
                  (26
                  )Capitalized
                      software
                  
                  
                  (439
                  )
                  
                  —Net
                      cash used in investing activities
                  
                  
                  (439
                  )
                  
                  (721
                  )Cash
                      flows from financing activities:Proceeds
                      from issuance of preferred stock and warrants
                  
                  
                  —
                  
                  
                  7,000Proceeds
                      from issuance of common stock, options and warrants
                  
                  
                  44
                  
                  
                  1,411Payment
                      of dividends on Series B Preferred Stock
                  
                  
                  —
                  
                  
                  (24
                  )Costs
                      associated with private placements
                  
                  
                  —
                  
                  
                  (648
                  )Net
                      cash provided by financing activities
                  
                  
                  44
                  
                  
                  7,739Net
                      (decrease) increase in cash and cash equivalents
                  
                  
                  (4,519
                  )
                  
                  2,828Effect
                      of exchange rate on cash
                  
                  
                  71
                  
                  
                  (5
                  )Cash
                      and cash equivalents, beginning of year
                  
                  
                  5,655
                  
                  
                  2,832Cash
                      and cash equivalents, end of year
                  
                  $
                  1,207
                  
                  $
                  5,655Non-cash
                      financing activity:Issuance
                      of warrants to finder and placement agent in connection with
                      private
                      placements
                  
                  $
                  —
                  
                  $
                  298Beneficial
                      conversion feature of Series B and Series C Preferred
                      Stock
                  
                  $
                  —
                  
                  $
                  1,329Debentures
                      converted into common stock
                  
                  $
                  —
                  
                  $
                  1,083Issuance
                      of common stock in relation to principal payments on
                      Debentures
                  
                  $
                  333
                  
                  $
                  750Issuance
                      of common stock in relation to dividend payments on Series
                      B andSeries
                      C Preferred Stock
                  
                  $
                  247
                  
                  $
                  90
  See
            accompanying notes to consolidated financial statements
 
 F-7
  Interactive
            Systems Worldwide Inc. and Subsidiaries
 Notes
            To
            Consolidated Financial Statements
 September
            30, 2006 and 2005
 
 (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 and Gibraltar.
  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, 2006 and 2005. In addition,
            the
            Company requires additional financing to meet its forecasted cash requirements
            and continue operations during fiscal 2007. 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, 2007. The plan includes (i) a program
            to reduce
            costs, (ii) seeking equity financing and (iii) 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.
 
 (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.
  F-8
  Interactive
            Systems Worldwide Inc. and Subsidiaries
 Notes
            To
            Consolidated Financial Statements
 September
            30, 2006 and 2005
 
 (3)  Summary
            of Significant Accounting Policies (continued)
 
 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. Investments at September 30, 2005, consist of certificates of
            deposit which are stated at cost plus accrued interest which approximates
            market.
  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-line basis and
            an
            estimated economic life of 3 years and amounted to $165,000 and $315,000
            for the
            years ended September 30, 2006 and 2005, 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.
 
 F-9
  Interactive
            Systems Worldwide Inc. and Subsidiaries
 Notes
            To
            Consolidated Financial Statements
 September
            30, 2006 and 2005
 
 (3)  Summary
            of Significant Accounting Policies (continued)
  Revenue
            Recognition:
 
 The
            Company's revenue during the years ended September 30, 2006 and 2005
            consisted
            of license fees and service charges for the use of the SportXction ® product
            from service agreements with bookmakers and interactive content providers
            located in the United Kingdom, Gibraltar and Mexico. Revenue consists
            primarily
            of service charges calculated based on a percentage share of net wagering
            revenue after payment of winnings and taxes. 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, or with respect to outstanding
            Debentures at September 30, 2005, stated interest rate approximated then
            current
            borrowing rates available to the Company.
 
 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.
 
 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.
 
 F-10
  Interactive
            Systems Worldwide Inc. and Subsidiaries
 Notes
            To
            Consolidated Financial Statements
 September
            30, 2006 and 2005
 
 (3)  Summary
            of Significant Accounting Policies (continued)
 
 Accounting
            for Stock Based Compensation:
 
 Prior
            to
            October 1, 2005, the Company accounted for its stock-based compensation
            to
            employees in accordance with the recognition and measurement provisions
            of
            Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
            Employees” and related Interpretations, as permitted by SFAS No. 123,
“Accounting for Stock-Based Compensation”. No stock-based employee compensation
            cost was reflected in the Statement of Operations for the year ended
            September
            30, 2005, as all options granted under the Company’s stock option plans
            described in Note 6 had an exercise price equal to the market value of
            the
            underlying common stock on the date of grant. 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. Results for prior
            periods
            have not been restated.
  Stock-based
            employee compensation costs charged to operations during the year ended
            September 30, 2006 amounted to $175,000. As a result of adopting Statement
            123(R) on October 1, 2005, the Company’s net loss for the year ended September
            30, 2006 is $6,000 lower than if it had continued to account for share-based
            compensation under Opinion 25. This results from a change in the method
            of
            measurement of compensation cost under Statement 123(R) arising from
            a
            modification which extended the life of options held by an officer (see
            Note
            7).
 
 Had
            the
            Company determined compensation cost based on the fair value at the grant
            date
            consistent with the provisions of SFAS No. 123, the Company's net loss
            and net
            loss per share for the year ended September 30, 2005 would have been
            increased
            to the pro forma amounts indicated below (amounts in thousands):
 
 Net
                      loss - as reported
                  
                  
                  ($5,822
                  )Total
                      stock-based employee compensation expensedetermined
                      under fair value based method,net
                      of related tax effects
                  
                  
                  100Net
                      loss - pro forma
                  
                  
                  ($5,922
                  )Net
                      loss per share applicable to common stockbasic
                      and diluted - as reported
                  
                  
                  ($0.71
                  )Net
                      loss per share applicable to common stockbasic
                      and diluted - pro forma
                  
                  
                  ($0.72
                  )
  F-11
 
 Interactive
            Systems Worldwide Inc. and Subsidiaries
 Notes
            To
            Financial Statements
 September
            30, 2006 and 2005
 
 (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 2006 and 2005, respectively: expected dividend
            yield 0.0%
            (in both periods), risk free interest rate of 4.43% and 3.91%, expected
            volatility of 68% (in both periods) and an expected life of 5 years (see
            Note 7
            relating to modification) and 7 years. The weighted average fair value
            of
            options granted in 2006 and 2005 was $1.72 and $2.23, 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, 2006 and 2005, the Company recognized compensation
            expense of $84,000 and $6,000, 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 2006 and 2005, 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:
  2006
                    
                    2005Stock
                        options
                    
                    
                    1,064,191
                    
                    
                    1,166,480Stock
                        warrants
                    
                    
                    1,765,825
                    
                    
                    1,615,825Convertible
                        Debentures
                    
                    
                    —
                    
                    
                    72,780Convertible
                        Preferred Stock (a)
                    
                    
                    1,066,667
                    
                    
                    1,120,359Total
                    
                    
                    3,896,683
                    
                    
                    3,975,444
 
 (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
                          5).
 
 F-12
 
 Interactive
            Systems Worldwide Inc. and Subsidiaries
 Notes
            To
            Financial Statements
 September
            30, 2006 and 2005
 
 (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)  Private
            Placements
 
 On
            November 24, 2003, the Company entered into a financing agreement relating
            to a
            $3.9 million private placement with institutional investors consisting
            of $2.6 million of 7.5% Convertible Debentures (“Debentures”) and $1.3 million
            for 390,390 shares of the Company’s Common Stock ($3.33 per share). The
            investors also received warrants (“Investor Warrants”) that expire in November
            2008 to purchase 281,250 shares of Common Stock at $4.58 per share, subject
            to
            adjustment. Net proceeds from the financing after costs and expenses
            were
            approximately $3,435,000. In addition, a finder in connection with the
            private
            placement received warrants to purchase an aggregate of 95,808 shares
            of Common
            Stock at $5.06 per share, which were valued at $274,000 using the Black
            Scholes
            option pricing model on the date of issuance. The proceeds as well as
            the costs
            and expenses of the transaction were allocated to debt and equity based
            on their
            relative fair values. The expense amount allocated to equity was recorded
            as a
            reduction of additional paid in capital and the amount allocated to debt
            was
            amortized over the life of the Debentures. The Debentures have been repaid
            in
            full and thus there are currently no remaining Debentures outstanding.
 
 On
            November 12, 2004, the Company entered into a financing agreement relating
            to a
            $3.0 million private placement with institutional investors consisting
            of 3,000 shares of the Company’s newly issued Series B Convertible Preferred
            Stock (“Series B”). Series B had a stated value of $1,000 per share, was
            non-voting and was initially convertible into the Company’s Common Stock at
            $3.07 per share, subject to adjustment. The investors also received warrants
            that expire in November 2009 to purchase 513,172 shares of Common Stock
            at $3.36
            per share, subject to adjustment which were valued at $681,000 using
            the Black
            Scholes option pricing model. Net proceeds from the financing after costs
            and
            expenses were approximately $2.6 million.
  F-13
  Interactive
            Systems Worldwide Inc. and Subsidiaries
 Notes
            To
            Consolidated Financial Statements
 September
            30, 2006 and 2005
 
 (4)  Private
            Placements (continued)
 
 The
            Series B was initially convertible into an aggregate of 977,470 shares
            of Common
            Stock. In connection with the issuance of the Series B, the Company recorded
            a
            dividend to Series B shareholders of $552,000 representing the beneficial
            conversion feature resulting from the difference between the effective
            conversion price and the quoted market price of the Company’s Common Stock at
            the date of issuance. In addition, holders of Series B were entitled
            to receive
            a cumulative 6% annual dividend, payable quarterly in cash or, subject
            to
            certain conditions, shares of Common Stock at the Company’s option. During the
            year ended September 30, 2005, holders of the Series B converted 2,836
            shares of
            Series B into 923,778 shares of Common Stock. During the year ended September
            30, 2005, the Company declared dividends of $114,000 on the Series B,
            $90,000 of
            which were satisfied by the issuance of 28,160 shares of Common Stock
            and
            $24,000 was paid in cash. A placement agent in this transaction received a cash
            fee of $180,000 and warrants to purchase 102,740 shares of the Company’s Common
            Stock expiring in May 2010 which are exercisable at $3.50 per share.
            The
            warrants were valued at $166,000 using the Black Scholes option pricing
            model.
            In October 2005, investors converted their remaining 164 outstanding
            shares of
            Series B into 53,420 shares of Common Stock. In addition, in October
            2005, the
            Company declared dividends of $6,000 on the Series B which were satisfied
            by the
            issuance of 2,401 shares of Common 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. 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. In connection with the issuance of the Series C, the Company
            recorded a dividend to Series C shareholders of $777,000 representing
            the
            beneficial conversion feature resulting from the difference between the
            effective conversion price and the quoted market price of the Company’s Common
            Stock at the date of issuance. In addition, holders of Series C are entitled
            to
            receive a cumulative 6% annual dividend, payable quarterly in cash or,
            subject
            to certain conditions, shares of Common Stock at the Company’s option. During
            the year ended September 30, 2006, the Company declared dividends of
            $240,000 on
            the Series C which were satisfied by the issuance of 112,537 shares of
            Common
            Stock. As of September 30, 2006, unpaid cumulative dividends on the Series
            C
            amounted to $60,000. 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-14
  Interactive
            Systems Worldwide Inc. and Subsidiaries
 Notes
            To
            Consolidated Financial Statements
 September
            30, 2006 and 2005
 
 (4)  Private
            Placements (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. For certain other
            events,
            such holder would have the right to require the Company to redeem the
            Series C
            for the Company’s Common Stock or increase the dividend on the Series C to 12%
            per annum. In addition, the Series C, investor warrants and placement
            agent
            warrants are subject to certain anti-dilution protection. 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
            require the Company to file registration statements for the resale of
            the common
            shares issuable upon conversion of the Debentures and the Series B and
            Series C
            and upon the exercise of the warrants 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 by the Company to the investors of 2.0% per month
            with
            respect to the November 2003 private placement and 1.5% per month with
            respect
            to the November 2004 and August 2005 private placements of the amounts
            paid by
            the investors until the failure is cured. As of September 30, 2005, registration
            statements were filed and declared effective within the specified grace
            periods
            with respect to the three private placements.
 
 The
            Company accounts for the registration rights agreements as a separate
            freestanding instrument and accounts for the liquidated damages provision
            as a
            derivative liability subject to SFAS No. 133, “Accounting for Derivative
            Instruments and Hedging Activities”, as amended. Accordingly, the liability is
            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. The liability amounted
            to
            $27,000 and $30,000 at September 30, 2006 and 2005, respectively, and
            is
            included in accrued expenses.
 
 F-15
  Interactive
            Systems Worldwide Inc. and Subsidiaries
 Notes
            To
            Consolidated Financial Statements
 September
            30, 2006 and 2005
 
 (5)  Debt
 
 The
            7.5%
            Debentures were convertible into shares of Common Stock at $4.58 per
            share
            subject to adjustment (initially 567,686 shares), and were repayable
            in 24 equal
            monthly installments ($108,333) which began in May 2004 with interest
            payable
            quarterly. Under the terms of the transaction, and subject to certain
            conditions, the Company may make periodic interest and principal payments
            in
            shares of the Company’s Common Stock valued at a discount from the weighted
            average market price prior to such payments. During the year ended September
            30,
            2005, investors converted $1,083,333 of their outstanding Debentures
            into
            236,536 shares of the Company’s Common Stock. In connection with these
            conversions, the Company accelerated the amortization of $315,000 of
            the related
            discount recorded upon issuance of theDebentures and $127,000 of debt
            issuance
            costs which were recorded as additional interest expense. During the
            years ended
            September 30, 2006 and 2005, 159,417 and 274,562 shares of Common Stock
            were
            issued, respectively, in satisfaction of principal and interest payments
            on the
            Debentures. Such shares were accounted for based on their quoted market
            price at
            the date of issuance. As the Company intended to pay the required principal
            payments during the year ended September 30, 2006 amounting to $333,333
            by
            issuing common shares, such amount has not been classified as a current
            liability in the accompanying balance sheet at September 30, 2005. The
            final
            principal payment on the Debentures occurred in May 2006 and as of September
            30,
            2006, none of such Debentures were outstanding.
  (6)  Preferred
            Stock
 
 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) -
            Private Placements regarding the Company’s Series B and Series C Preferred
            Stock.
  F-16
  Interactive
            Systems Worldwide Inc. and Subsidiaries
 Notes
            To
            Consolidated Financial Statements
 September
            30, 2006 and 2005
 
 (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, 2006, 4,534 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, 2006  is
            as
            follows:
  WeightedWeighted
                  
                  
                  AverageAverage
                  
                  
                  Remaining
                  
                  
                  AggregateExercise
                  
                  
                  Contractual
                  
                  
                  IntrinsicOptions
                  
                  
                  Shares
                  
                  
                  Price
                  
                  
                  Term
                  
                  
                  ValueOutstanding
                      at September 30, 2005
                  
                  
                  1,166,480
                  
                  
                  1.45Granted
                  
                  
                  228,691
                  
                  
                  1.64Exercised
                  
                  
                  (169,755
                  )
                  
                  0.73Forfeited
                      or expired
                  
                  
                  (161,225
                  )
                  
                  1.64Outstanding
                      at September 30, 2006
                  
                  
                  1,064,191
                  
                  
                  1.58
                  
                  
                  4.3
                  
                  $
                  373,000Vested
                      or expected to vest
                  
                  
                  1,026,191
                  
                  
                  1.53
                  
                  
                  4.2
                  
                  $
                  373,000Exercisable
                      at September 30, 2006
                  
                  
                  866,191
                  
                  
                  1.36
                  
                  
                  3.3
                  
                  $
                  373,000
 
 F-17
 
 Interactive
            Systems Worldwide Inc. and Subsidiaries
 Notes
            To
            Consolidated Financial Statements
 September
            30, 2006 and 2005
  (7)  Stock
            Options (continued)
 
 The
            total
            intrinsic value of options exercised during the year ended September
            30, 2006
            was $201,000. As of September 30, 2006, there was $257,000 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 2
            years.
            During the quarter ended December 31, 2005, the Company effectively extended
            the
            contractual life of 90,691 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 the fair value of the new options over the
            fair value
            of the cancelled options as of the cancellation date.
  (8)  Warrants
 
 At
            September 30, 2006, 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-18
  Interactive
            Systems Worldwide Inc. and Subsidiaries
 Notes
            To
            Consolidated Financial Statements
 September
            30, 2006 and 2005
 
 (9)  Property
            and Equipment
 
 Property
            and equipment at September 30, 2006 and 2005 consist of the
            following:
 
 2006
                  
                  2005Furniture
                      and fixtures
                  
                  $
                  62,000
                  
                  $
                  62,000Building
                      and improvements
                  
                  
                  118,000
                  
                  
                  118,000Computer
                      equipment
                  
                  
                  252,000
                  
                  
                  246,000432,000
                  
                  
                  426,000Less
                      accumulated depreciation
                    and
                      amortization
                  
                  
                  (416,000
                  )
                  
                  (335,000
                  )$
                  16,000
                  
                  $
                  91,000
 
 During
            the year ended September 30, 2005, the Company wrote-off $1,348,000 of
            fully
            depreciated computer equipment which was no longer in use.
 
 (10)  Accrued
            Expenses and Other
 
 Accrued
            expenses and other at September 30, 2006 and 2005 consist of the
            following:
 
 2006
                  
                  2005Professional
                      fees
                  
                  $
                  229,000
                  
                  $
                  108,000Payroll
                      and related costs
                  
                  
                  526,000
                  
                  
                  891,000Other
                  
                  
                  39,000
                  
                  
                  127,000$
                  794,000
                  
                  $
                  1,126,000
 
 (11)  Taxes
  The
            sources of loss for the years ended September 30, 2006 and 2005 consist of
            the following:
 
 2006
                  
                  2005United
                      States
                  
                  
                  ($2,489,000
                  )
                  
                  ($4,061,000
                  )United
                      Kingdom
                  
                  
                  (1,964,000
                  )
                  
                  (1,761,000
                  )($4,453,000
                  )
                  
                  ($5,822,000
                  )
 
 F-19
  Interactive
            Systems Worldwide Inc. and Subsidiaries
 Notes
            To
            Consolidated Financial Statements
 September
            30, 2006 and 2005
  (11)  Taxes
            (continued)
  The
            income tax benefit for the years ended September 30, 2006 and 2005 differed
            from the amounts computed by applying the federal income tax rate of
            34% to
            pre-tax loss as a result of the following:
 
 2006
                  
                  2005Computed
                      benefit at 34%
                  
                  
                  ($1,514,000
                  )
                  
                  ($1,980,000
                  )State
                      tax benefit net of federal effect
                  
                  
                  (267,000
                  )
                  
                  (349,000
                  )Potential
                      benefits from net operating loss
                    carryforward
                      in United States and UnitedKingdom
                      which are not being recognized
                  
                  
                  1,815,000
                  
                  
                  2,410,000Other
                  
                  
                  (34,000
                  )
                  
                  (81,000
                  )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, 2006 and
            2005 are presented below:
 
 2006
                  
                  2005Deferred
                      tax assets:Federal
                      and state net operating loss carryforward
                  
                  
                  
                  
                  $
                  5,867,000
                  
                  $
                  4,579,000United
                      Kingdom net operating loss carryforward
                  
                  
                  
                  
                  
                  8,119,000
                  
                  
                  6,846,000Tax
                      basis for capitalized license fees paid tothe
                      Company by GIG prior to acquisition
                  
                  
                  
                  
                  
                  4,107,000
                  
                  
                  3,883,000Property
                      and equipment
                  
                  
                  
                  
                  
                  328,000
                  
                  
                  298,000Employee
                      compensation and benefits
                  
                  
                  
                  
                  
                  179,000
                  
                  
                  335,000Total
                      gross deferred tax assets
                  
                  
                  
                  
                  
                  18,600,000
                  
                  
                  15,941,000Deferred
                      tax liabilities:Capitalized
                      software
                  
                  
                  
                  
                  
                  (171,000
                  )
                  
                  (62,000
                  )Net
                      deferred tax asset
                  
                  
                  
                  
                  
                  18,429,000
                  
                  
                  15,879,000Less
                      valuation allowance
                  
                  
                  (a
                  )
                  
                  18,429,000
                  
                  
                  15,879,000Net
                      deferred tax asset
                  
                  
                  
                  
                  $
                  0
                  
                  $
                  0
 
 (a)
                  Includes
                      $12,420,000 and $10,900,000 in 2006 and 2005, respectively,
                      applicable to
                      subsidiary in United Kingdom.
 
 F-20
  Interactive
            Systems Worldwide Inc. and Subsidiaries
 Notes
            To
            Consolidated Financial Statements
 September
            30, 2006 and 2005
 
 (11)  Taxes
            (continued)
 
 As
            of
            September 30, 2006, the Company had a net operating loss carryforward of
            approximately $14,667,000 for Federal and state income tax reporting
            purposes
            available to offset future Federal taxable income through the year 2026
            and
            future state taxable income through the year 2013, 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
            $27,064,000 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
            and Contingencies
 
 (a)  The
            Company leases office facilities and equipment under operating leases
            expiring
            through June 2007. The remaining minimum rental commitments under the leases at
            September 30, 2006 amounted to $206,000.
 
 Rent
            expense under operating leases during 2006 and 2005 was $300,000 and
            $324,000,
            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. Rent expense (net of rental income) for this space amounted to
            $198,000
            during 2006.
 
 (b)  The
            Company entered into an employment agreement with one of its employees.
            The
            agreement, which expires in June 2007, provides for minimum compensation
            and
            certain benefits. Compensation expense recognized under this agreement
            during
            the years ended September 30, 2006 and 2005 was $285,000 and $300,000,
            respectively. The agreement also provides for severance payments upon
            certain
            events, as defined.
  (c)  In
            October 2002, GIG was issued a Certificate of Registration for value
            added tax
            (“VAT”) by HM Customs and Excise (“Customs”), with an effective date of May
            2001, which required it to charge VAT on its sales and allowed it to
            recover VAT
            on its eligible business costs. In November 2002, GIG filed a tax return
            for a
            refund of $1,073,000 due to the overpayment of VAT taxes which it received
            in
            January 2003. In November 2005, Customs issued a “protective” VAT assessment
            against GIG for the VAT refunded to GIG plus interest. In January 2006,
            GIG
            filed an appeal with the VAT Tribunal. In March 2006, Customs withdrew
            its
            assessment against GIG and agreed to pay certain costs incurred in GIG’s
            appeal.
  F-21
  Interactive
            Systems Worldwide Inc. and Subsidiaries
 Notes
            To
            Consolidated Financial Statements
 September
            30, 2006 and 2005
  (13)  Concentration
            of Revenues
 
 Revenues
            from Interactive Sports Limited, a wholly-owned subsidiary of Sportingbet
            Plc,
            represented approximately 60% and 81% of revenues in the years ended
            September
            30, 2006 and 2005, respectively. 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 director
            of the
            Company, under which the Company paid Mr. Caldwell $30,000 in consulting
            fees
            ($7,500 per month) through December 2006.
 
 (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 fiscal 2006. The effect
            on the
            previous interim quarters was not material to any individual quarter.
  F-22
 
 **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 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 Chief Financial Officer have 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, 2006 that have materially affected, or are
        reasonably likely to materially affect, the Company’s internal control over
        financial reporting.
 
 34
  **Part
        III**
  **Item
        9. Directors, Executive Officers, Promoters and Control
        Persons**
  Set
        forth
        below is certain information, as of January 8, 2007, regarding the directors,
        executive officers and key personnel of the Company.
  **Name**
              
              **Age**
              
              **Positions
                  with the Company**Bernard
                  Albanese
              
              59
              
              Chairman
                  of the Board, Chief Executive Officer, President and
                  DirectorVincent
                  Caldwell
              
              45
              
              DirectorBruce
                  Feldman
              
              58
              
              DirectorHarold
                  Rapaport
              
              84
              
              DirectorPhilip
                  Rule
              
              70
              
              DirectorJames
                  McDade
              
              40
              
              Vice
                  President - Chief Financial OfficerAndrew
                  Harbison
              
              48
              
              Vice
                  President - Software DevelopmentStephen
                  Salmon
              
              42
              
              Chief
                  Operating Officer of the Company’s Subsidiary, Global Interactive Gaming
                  Ltd. (“GIG”)
  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 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.
  Vincent
        Caldwell has served as a director of the Company since March 2006. Mr. Caldwell
        is an executive with over 25 years of experience in the gaming industry.
        He was
        instrumental in building and managing several gaming companies in the U.S.,
        U.K.
        and Ireland. He currently serves as Executive Business Development Manager
        and
        Player Development Manager for US Off-Track LLC. Previously, he was the founder,
        Chairman and Managing Director of betinternet.com PLC, a publicly traded
        company
        on the AIM market of the London Stock Exchange. He also was the General Manager
        of a number of retail betting shops for Stanley Leisure PLC and Joe Jennings
        in
        the U.K. and was the owner and operator of several retail betting shops in
        Ireland. Mr. Caldwell is a frequent speaker at gaming industry events and
        was
        the Chairman of a U.K. Bookmakers Association between 1998 and
        2003.
  35
  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.
  Harold
        Rapaport has served as a director of the Company since July 1995. Mr. Rapaport
        is an electronics, communications and computer executive with over 40 years
        experience in management, technology and marketing. He is President of Rapaport
        Associates, management consultants to high technology businesses. From 1982
        until 1995, he was Chairman of Control Transaction Corporation, a manufacturer
        of computer-based point of sale systems. Mr. Rapaport served as Chairman
        of the
        Board of RE Harrington Inc. from 1987 to 1996, when it was acquired by Health
        Plan Services Inc.
  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.
 
 Andrew
        Harbison has served as Vice President - Software Development of the Company
        since October 1996. From June 1995 to October 1996, Mr. Harbison served as
        Manager of Software Development of the Company. From 1993 to 1995, Mr. Harbison
        served as Vice President of Programming of Infomed Holdings, Inc., in which
        position he was in charge of the programming and data conversion department
        consisting of 25 individuals involved in developing computer systems for
        medical
        billing, clinical records and managed care systems.
  James
        McDade has served as Vice President - Chief Financial Officer since July
        2002.
        From 2000 to 2001, Mr. McDade served as Chief Financial Officer of Uvine.com
        Ltd., a U.K.-based company, where he was also a Director. From 1999 to 2000,
        he
        served as Assistant Director with PricewaterhouseCoopers in London, England.
        From 1988 to 2000, Mr. McDade held several positions with PricewaterhouseCoopers
        in both the U.S. and U.K., primarily as a reorganization and corporate finance
        consultant.
  Stephen
        Salmon served as Chief Operating Officer of GIG from July 2004 until January
        12,
        2007. Mr. Salmon joined GIG in November 2001 and resigned effective January
        12,
        2007. From August 2000 to November 2001, Mr. Salmon was a founding member
        and
        Acting Head of Consulting for SmashedAtom. SmashedAtom was a joint venture
        interactive TV company between Telewest and Stanford Research Institute.
        From
        1998 to 2000, Mr. Salmon worked for Stanford Research Institute Consulting
        Ltd
        as a Principal Consultant and Head of Voice Professional Services. From 1996
        to
        1998, Mr. Salmon was a Managing Consultant for Bossard Consultancy, which
        was
        taken over by Gemini Consultancy (now CGEY).
  36
  **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, other than Mr. Caldwell, who filed a Form 3 late, and Mr. Albanese,
        who filed a Form 4 late, its directors, executive officers and greater than
        10%
        stockholders complied with these requirements during the fiscal year ended
        September 30, 2006.
  **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.
  37
  **Item
        10. Executive Compensation**
 
 **Summary
        Compensation Table**
 
 The
        following summary compensation table sets forth the aggregate compensation
        paid
        or accrued by the Company for the fiscal years ended September 30, 2006,
        2005
        and 2004 to Barry Mindes, the Company’s Chief Executive Officer through December
        31, 2005, Bernard Albanese, the Company’s Chief Executive Officer since January
        1, 2006 and to executive officers and key personnel, whose annual base salary
        and bonus compensation exceeded $100,000 for the last completed fiscal year.
  **Summary
          Compensation Table**
 **Annual
                  Compensation (1)**
              
              **Long
                  Term Compensation****Awards**
              
              **Payouts****Name
                  and Principal Positions**
              
              **Year**
              
              **Salary**
              
              **Bonus**
              
              **Securities
                  Underlying Options**
              
              **All
                  Other Compensation****($)**
              
              **($)**
              
              **(#)**
              
              **($)**Barry
                  Mindes (2)
              
              
              2006
              
              
              94,231
              
              
              -0-
              
              
              -0
              -
              
              350,000
              (2)Chief
                  Executive Officer
              
              
              2005
              
              
              350,000
              
              
              -0-
              
              
              -0
              -
              
              -0
              -and
                  Chairman of the Board
              
              
              2004
              
              
              350,000
              
              
              -0-
              
              
              -0
              -
              
              -0
              -Bernard
                  Albanese (3)
              
              
              2006
              
              
              286,154
              
              
              -0-
              
              
              90,691
              
              
              -0
              -Chief
                  Executive Officer
              
              
              2005
              
              
              300,000
              
              
              -0-
              
              
              -0
              -
              
              -0
              -and
                  Chairman of the Board
              
              
              2004
              
              
              300,000
              
              
              -0-
              
              
              -0
              -
              
              -0
              -Andrew
                  Harbison (4)
              
              
              2006
              
              
              179,550
              
              
              -0-
              
              
              -0
              -
              
              -0
              -Vice
                  President-Software
              
              
              2005
              
              
              173,631
              
              
              -0-
              
              
              5,000
              
              
              -0
              -Development
              
              
              2004
              
              
              168,462
              
              
              -0-
              
              
              -0
              -
              
              -0
              -James
                  McDade (5)
              
              
              2006
              
              
              149,462
              
              
              -0-
              
              
              24,000
              
              
              -0
              -Vide
                  President-Chief
              
              
              2005
              
              
              141,000
              
              
              -0-
              
              
              30,000
              
              
              -0
              -Financial
                  Officer
              
              
              2004
              
              
              127,692
              
              
              -0-
              
              
              -0
              -
              
              -0
              -Stephen
                  Salmon (6)
              
              
              2006
              
              
              189,221
              
              
              -0-
              
              
              -0
              -
              
              -0
              -Chief
                  Operating Officer of
              
              
              2005
              
              
              182,292
              
              
              -0-
              
              
              30,000
              
              
              -0
              -GIG
              
              
              2004
              
              
              162,167
              
              
              -0-
              
              
              30,000
              
              
              -0
              -
  
 (1)
              Excludes
                  personal benefits which did not exceed the lesser of $50,000 or
                  10%, on
                  annual basis, of such person’s salary and bonus. No person listed in the
                  Table received benefits or other annual compensation during the
                  years
                  shown that exceeded the lesser of $50,000 or 10% of such person’s salary
                  and bonus. (See “Employment Agreements” for a description of the
                  employment agreements between the Company and each of Messrs. Mindes
                  and
                  Albanese, including the benefits payable
                  thereunder.)
 (2)
              The
                  employment agreement between Mr. Mindes and the Company terminated
                  in
                  accordance with its terms on December 31, 2005 and was not renewed.
                  In
                  accordance with the terms of such Agreement, Mr. Mindes received
                  a
                  $350,000 severance payment in January 2006. Mr. Mindes resigned
                  as
                  Chairman of the Board and a director on February 8,
                  2006.
   38
  (3)
              Mr.
                  Albanese became Chief Executive Officer of the Company on January
                  1, 2006.
                  Prior to that, he was President of the Company. On October 20,
                  2005, the
                  Company effectively extended the term of 90,691 vested share options
                  held
                  by Mr. Albanese by canceling existing options to purchase the Company’s
                  common stock and replaced them with new options at the same exercise
                  price.
 (4)
              On
                  June 1, 2005, Mr. Harbison was granted options to purchase 5,000
                  shares of
                  the Company’s Common Stock at an exercise price of $3.92 per
                  share.
 (5)
              On
                  March 30, 2006, Mr. McDade was granted options to purchase 24,000
                  shares
                  of the Company’s Common Stock at an exercise price of $3.92 per share. On
                  November 29, 2004, Mr. McDade was granted options to purchase 30,000
                  shares of the Company’s Common Stock at an exercise price of $3.04 per
                  share.
 (6)
              On
                  August 2, 2004, Mr. Salmon was granted options to purchase 30,000
                  shares
                  of the Company’s Common Stock at an exercise price of $3.49 per share. On
                  November 29, 2004, Mr. Salmon was granted options to purchase 30,000
                  shares of the Company’s Common Stock at an exercise price of $3.04 per
                  share. Mr. Salmon resigned on January 12,
                  2007.
  **Stock
        Option Tables**
 
 **Option
        Grants in Last Fiscal Year**
  The
        following table sets forth for the fiscal year ended September 30, 2006,
        the
        options to purchase Common Stock granted to the executives named below.
  **Individual
                  Grants****Name**
              
              **Number
                  of Securities Underlying Options Granted**
              
              **Percent
                  of Total Options Granted to Employees in Fiscal Year
                  (1)**
              
              **Exercise
                  Price ($/Sh) (2)**
              
              **Market
                  Price on Date of Grant**
              
              **Expiration
                  Date**Barry
                  Mindes
              
              
              -0-
              
              
              -0-
              
              
              -0-
              
              
              N/A
              
              
              N/ABernard
                  Albanese
              
              
              90,691
              
              
              53.8
              %
              $
              0.73
              
              $
              2.63
              (2)
              
              4/30/2007Andrew
                  Harbison
              
              
              -0-
              
              
              -0-
              
              
              -0-
              
              
              N/A
              
              
              N/AJames
                  McDade
              
              
              24,000
              
              
              14.2
              %
              $
              2.28
              
              $
              2.28
              
              
              3/30/2016Stephen
                  Salmon
              
              
              -0-
              
              
              -0-
              
              
              -0-
              
              
              N/A
              
              
              N/A
  
 (1)
              During
                  the fiscal year ended September 30, 2006, the Company granted a
                  total of
                  168,691 options to employees under the 1996 Stock Option Plan and
                  no
                  options were granted to employees under the 1995 Stock Option Plan
                  or the
                  2006 Stock Option Plan. The total number of options granted in
                  the fiscal
                  year ended September 30, 2006 was used in calculating the percentages
                  set
                  forth above.
 (2)
              The
                  exercise price for the grant to Mr. Albanese is equal to the exercise
                  price of the options which this grant replaced (See Note 3 to Summary
                  Compensation Table). The exercise price for all other grants of
                  stock
                  options is equal to the fair market value of the Common Stock on
                  the date
                  of the grant of such options.
 
 39
  **Aggregated
        Option Exercises in Last Fiscal Year and Fiscal Year-End Option
        Values**
  The
        following table sets forth, as of September 30, 2006, information concerning
        outstanding options to purchase Common Stock held by the executives named
        below.
  **Number
                  of Securities**
                **Underlying
                  Unexercised**
                **Options
                  at September 30, 2006**
              
              **Value
                  of Unexpected**
                **“In
                  the Money” Options**
                **at
                  September 30, 2006 ($)(1)****Name**
              
              **Shares
                  Acquired on Exercise**
              
              **Value
                  Realized (2)**
              
              **Exercisable**
              
              **Unexercisable**
              
              **Exercisable**
              
              **Unexercisable**Barry
                  Mindes
              
              
              -0-
              
              
              -0-
              
              
              -0-
              
              
              -0-
              
              
              -0-
              
              
              -0-Bernard
                  Albanese
              
              
              75,576
              
              $
              95,732
              
              
              290,691
              
              
              -0-
              
              $
              187,481
              
              
              -0-Andrew
                  Harbison
              
              
              18,138
              
              $
              23,706
              
              
              95,000
              
              
              -0-
              
              $
              47,040
              
              
              -0-James
                  McDade
              
              
              5,000
              
              $
              2,450
              
              
              60,000
              
              
              34,000
              
              
              -0-
              
              
              -0-Stephen
                  Salmon
              
              
              -0-
              
              
              -0-
              
              
              48,000
              
              
              20,000
              
              
              -0-
              
              
              -0-
  
 (1)
              Options
                  are “in-the-money” at the fiscal year-end if the fair market value of the
                  Common Stock on such date exceeds the exercise price of the option.
                  The
                  last sales price of the securities underlying the options on September
                  30,
                  2006, was $1.50 per share.
 (2)
              Value
                  realized is the closing market price of the Common Stock on the
                  date of
                  exercise less the option price, multiplied by the number of shares
                  acquired, or that could be acquired, on
                  exercise.
 
 **Employment
        Agreements**
 
 The
        Company entered into an employment agreement with Barry Mindes dated as of
        December 30, 2003, for the period from January 1, 2004 through December 31,
        2005, pursuant to which (i) Mr. Mindes was to receive a base salary of not
        less
        than $350,000 per annum; (ii) such salary increases, bonuses or other incentive
        compensation as may be approved by the Board; (iii) such health and life
        insurance and other fringe benefits as may be provided to other executives
        of
        the Company; (iv) six weeks of vacation each year; (v) the use of a leased
        automobile including all operating, maintenance and insurance expenses; and
        (vi)
        severance equal to one year’s base salary and continuation of fringe benefits
        for one year after the end of the term of the Agreement. In addition, in
        lieu of
        participating in the health insurance program provided by the Company, Mr.
        Mindes may elect to participate in other health insurance (including Medicare),
        in which case the Company shall pay or reimburse him for (i) any deductible
        or
        co-payments required to be paid by him, (ii) any medical or hospitalization
        costs not reimbursed to him by such other health insurance (and/or Medicare)
        and
        (iii) the premiums for his existing life insurance policies in the amount
        of
        $200,000, provided that the aggregate payment or reimbursement per annum
        to
        which he shall be entitled for all of the foregoing during the term of the
        Agreement shall not exceed $13,400. Mr. Mindes’ base salary in 2005 was $350,000
        per annum. As previously reported, Mr. Mindes decided not to renew his
        employment agreement, so it terminated in accordance with its terms on December
        31, 2005, and accordingly he received a $350,000 severance payment shortly
        after
        the expiration date and is entitled to continuation of the health, life
        insurance and other fringe benefits mentioned above for one year from the
        expiration date and continued use of the leased automobile until the expiration
        of the then existing lease. The Company entered into a one-year consulting
        agreement with Barry Mindes which expires on June 30, 2007 (See “Item 12.
        Certain Relationships and Related Transactions”).
  40
  The
        Company entered into an employment agreement with Bernard Albanese dated
        as of
        June 27, 2006, for the period from July 1, 2006 through June 30, 2007, pursuant
        to which Mr. Albanese receives (i) a base salary of not less than $240,000
        per
        annum; (ii) certain incentive compensation bonuses dependent on the Company
        achieving certain revenue targets ($30,000 per $1 million of revenue realized
        by
        the Company and its subsidiaries on a consolidated basis during the one-year
        term of the Agreement, up to a maximum bonus of $120,000); (iii) such salary
        increases, bonuses or other incentive compensation as may be approved by
        the
        Board; (iv) such health and life insurance and other fringe benefits as may
        be
        provided to other executives of the Company; (v) four weeks of vacation each
        year; and (vi) severance equal to $300,000 and continuation of fringe benefits
        for one year, in the event (a) the Company requests that he relocate and,
        as a
        consequence, he voluntarily terminates his employment, or (b) the Company
        terminates his employment other than for “cause” (as defined in the Agreement)
        or if his employment terminates as a result of his death or disability during
        the term or after the term but while he continues to be employed by the Company,
        or (c) upon expiration of the term of the Agreement without the Agreement
        being
        renewed or replaced. If during the term of the Agreement, (x) the Company
        terminates Mr. Albanese’s employment other than for cause or (y) Mr. Albanese
        voluntarily terminates his employment following a request that he relocate,
        he
        will also be entitled to another $300,000 less the base salary and bonus
        he was
        paid during the one-year term of the Agreement. In addition, in the event
        of a
“change of control” (as defined in the Agreement) of the Company, followed by
        termination of his employment either (i) by the Company, other than as a
        result
        of death or disability or for cause, or (ii) by him for “good reason” (as
        defined in the Agreement), he is entitled to (a) if termination occurs during
        the term, continued payment of base salary and benefits until the end of
        the
        term but not for less than one year, or (b) if termination occurs after the
        term, but while he is still employed by the Company, payment of one year’s base
        salary and continuation of benefits for one year. 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 or by him voluntarily (other
        than as permitted by the Agreement), 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 and 1996 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.
  41
  Each
        of
        Messrs. Mindes and Albanese has entered into agreements restricting competitive
        activities for 12 months following termination of their employment and
        prohibiting disclosure of confidential information of the Company.
  The
        Company entered into a letter agreement with James McDade dated as of April
        27,
        2004, pursuant to which Mr. McDade agreed to continue to perform his functions
        consistent with his background and experience for a period of six months
        following a “change of control” (as defined in the 1996 Stock Option Plan) of
        the Company. In addition, if within one year following a change of control,
        Mr.
        McDade’s employment is terminated for any reason other than for “cause”, the
        Company must provide either six months notice of termination or six months
        severance equivalent to his base salary or a combination thereof. Mr. McDade’s
        current base salary is $155,000 per annum.
  **Director
        Compensation**
  The
        Company pays each outside director $12,000 per year, payable quarterly. 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”).
  For
        a
        description of consulting arrangements entered into with Barry Mindes, former
        Chairman of the Board of the Company, and Vincent Caldwell, a current director
        of the Company, see “Certain Relationships and Related
        Transactions.”
 
 **Item
        11. Security Ownership and Certain Beneficial Owners and Management and Related
        Stockholder Matters**
 
 The
        following table sets forth, as of January 8, 2007, 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 8, 2007, there were outstanding 12,202,738 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. 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 8, 2007 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
              
              
              24.8Mindes
                  Family Limited Partnership
              
              
              1,511,523
              
              
              12.4Omicron
                  Master Trust (5)
              
              
              610,015
              
              
              4.9Midsummer
                  Investment, Ltd. (6)
              
              
              610,015
              
              
              4.9Bernard
                  Albanese (7) (8)
              
              
              497,419
              
              
              4.0The
                  Marie Albanese Trust, Marie Albanese and Christine Albanese, trustees
                  (8)
              
              
              302,304
              
              
              2.5Bruce
                  Feldman (9)
              
              
              60,000
              
              
              0.5Harold
                  Rapaport (10)
              
              
              92,573
              
              
              0.8Philip
                  Rule
              
              
              78,300
              
              
              0.6Vincent
                  Caldwell
              
              
              0
              
              
              —Andrew
                  Harbison (11)
              
              
              170,521
              
              
              1.4James
                  McDade (12)
              
              
              65,000
              
              
              0.5Stephen
                  Salmon (13)
              
              
              48,000
              
              
              0.4All
                  directors and executive officers as a group (8 persons)
                  (14)
              
              
              1,009,295
              
              
              7.9
  
 (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,
                  warrants
                  or 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
                  within
                  60 days of the date hereof, have been exercised or converted and
                  are
                  outstanding and (ii) 12,202,738 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.
  42
  (5)
              Includes
                  shares issuable upon exercise of warrants. Pursuant to the terms
                  of the
                  warrants, Omicron Master Trust, a trust formed under the laws of
                  Bermuda
                  (“Omicron”) may not exercise its warrants to the extent that such exercise
                  would result in it and its affiliates beneficially owning more
                  that 4.99%
                  of the outstanding shares of Common Stock. Without such limitations,
                  Omicron would beneficially own 760,136 shares, or 6.0% of the outstanding
                  shares of Common Stock. Omicron Capital, L.P., a Delaware limited
                  partnership (“Omicron Capital”), serves as investment manager to Omicron;
                  Omicron Capital, Inc., a Delaware corporation (“OCI”), serves as general
                  partner of Omicron Capital; and Winchester Global Trust Company
                  Limited
                  (“Winchester”) serves as the trustee of Omicron. By reason of such
                  relationships, Omicron Capital and OCI may be deemed to share dispositive
                  power over the shares of Common Stock beneficially owned by Omicron,
                  and
                  Winchester may be deemed to share voting and dispositive power
                  over the
                  shares of Common Stock beneficially owned by Omicron. Omicron Capital,
                  OCI
                  and Winchester disclaim beneficial ownership of such shares of
                  our Common
                  Stock. As of the date of this report, Mr. Olivier H. Morali, an
                  officer of
                  OCI, and Mr. Bruce T. Bernstein, a consultant to OCI, have delegated
                  authority from the board of directors of OCI regarding the portfolio
                  management decisions with respect to the shares of the Company’s common
                  stock owned by Omicron. By reason of such delegated authority,
                  Messrs.
                  Morali and Bernstein may be deemed to share dispositive power over
                  the
                  shares of the Company’s common stock owned by Omicron. Messrs. Morali and
                  Bernstein disclaim beneficial ownership of such shares of our common
                  stock
                  and neither of such persons has any legal right to maintain such
                  delegated
                  authority.No
                  other person has sole or shared voting or dispositive power with
                  respect
                  to the shares of Common Stock beneficially owned by Omicron, as
                  those
                  terms are used for purposes under Regulation 13D-G of the Securities
                  Exchange Act of 1934, as amended. Omicron and Winchester are not
                  “affiliates” of one another, as that term is used for purposes of the
                  Securities Exchange Act of 1934, as amended. No person or “group” (as that
                  term is used in Section 13(d) of the Securities Exchange Act of
                  1934, as
                  amended, or the SEC’s Regulation 13D-G) controls Omicron and Winchester.
                  The address for Omicron is 650 Fifth Avenue, New York, NY
                  10019.
 (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 996,509 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
                  290,691 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
                  20,000 shares underlying options held by Mr. Feldman which are
                  exercisable
                  within 60 days of the date hereof.
 (10)
              Includes
                  75,000 shares underlying options held by Mr. Rapaport which are
                  exercisable within 60 days of the date
                  hereof.
 (11)
              Includes
                  95,000 shares underlying options held by Mr. Harbison which are
                  exercisable within 60 days of the date
                  hereof.
 (12)
              Includes
                  60,000 shares underlying options held by Mr. McDade which are exercisable
                  within 60 days of the date hereof.
 (13)
              Represents
                  48,000 shares underlying options held by Mr. Salmon which are exercisable
                  within 60 days of the date hereof.
 (14)
              Includes
                  (i) an aggregate of 588,691 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).
  43
  **Equity
        Compensation Plan Information**
  The
        following table sets forth certain information as of September 30, 2006
        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**
                  **(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
                
                
                1,064,191
                
                $
                1.58
                
                
                504,534Equity
                    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, 2006, options to purchase 4,534 shares which were
                  outstanding at March 30, 2006 under the 1995 Plan and 1996 Plans
                  expired.
 
 **Item
        12. Certain Relationships and Related 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 pursuant to a one-year consulting agreement
        which expires on June 30, 2007. In addition, the Company entered into a
        consulting agreement in September 2006 with Vincent Caldwell, a director
        of the
        Company, under which the Company paid Mr. Caldwell $30,000 in consulting
        fees
        ($7,500 per month) through December 2006. The agreement was terminated in
        December 2006.
  **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)
              
              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)
  44
  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.*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)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 27,
                  2006. (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)
  45
  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
              
              Agreement,
                  dated as of September 5, 2003, by and between the Company and Brandon
                  Ross. (13)10.16
              
              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)10.23
              
              Letter
                  of Agreement, dated as of July 11, 2006, between the Company and
                  the
                  Investor Relations Group Inc.*10.24
              
              Non-Exclusive
                  Consulting Services Agreement dated May 15, 2006, between the Company
                  and
                  Heller Capital Partners.*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.*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 of
                  Interactive Systems Worldwide Inc., pursuant to Section 302 of
                  the
                  Sarbanes-Oxley Act of 2002.*31.02
              
              Certification
                  of James McDade, Vice President - 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 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).*32.02
              
              Certification
                  of James McDade, Vice President - 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).*
  46
  
 (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, 2003.6.
              
              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 July 3, 2006.13.
              
              Incorporated
                  by reference to Exhibit 10.14 contained in the Company’s Annual Report on
                  Form 10-KSB dated December 24, 2003.
  47
  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, 2000.20.
              
              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.
  48
  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, 2005.34.
              
              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.
  *  Filed
        herewith
  49
  **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, 2006 and 2005 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 $75,400 and $83,000, 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, 2006 and 2005.
  *Tax
        Fees*
  No
        fees
        were billed to the Company by Eisner LLP for any professional services for
        tax
        compliance, tax advice and tax planning during the fiscal years ended September
        30, 2006 and 2005.
  *All
        Other Fees:*
  The
        Company engaged Eisner LLP to provide professional services relating to the
        review of several registration statements and related matters during the
        year
        ending September 30, 2005. Fees billed for these services totaled
        $16,500.
  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,
        2006
        and 2005 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.
  50
  **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 AlbaneseBernard Albanese, Chairman of the Board
                and Chief Executive Officer
                
                (Principal Executive Officer)
                
                January 16**,**2007
 
 
 
 **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)
              
              January
                  16, 2007Bernard
                  Albanese/s/
                  James McDade
              
              Vice
                  President - Chief Financial Officer
                (Principal
                  Financial and Accounting Officer)
              
              January
                  16, 2007James
                  McDade/s/
                  Vincent Caldwell
              
              Director
              
              January
                  16, 2007Fredric
                  Kupersmith/s/
                  Bruce Feldman
              
              Director
              
              January
                  16, 2007Bruce
                  Feldman/s/
                  Harold Rapaport
              
              Director
              
              January
                  16, 2007Harold
                  Rapaport/s/
                  Philip Rule
              
              Director
              
              January
                  16, 2007Philip
                  Rule