<PAGE>

                                  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, 2002

                                       OR

| |  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                                       22-3375134
   (State or other jurisdiction                     (I.R.S. Employer
 of incorporation or organization)                  Identification No.)

       2 Andrews Drive, 2nd Floor,
        West Paterson, New Jersey                     07424-2672
 (Address of principal executive offices)             (Zip Code)


                    Issuer's telephone number: (973) 256-8181

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

Securities registered pursuant to Section 12(g) of the Exchange Act:

                          Common Stock, $.001 par value
                                (Title of class)

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

         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
                  ---     ---

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

         The issuer's revenues for its most recent fiscal year (ended
September 30, 2002) were $4,314,000.

         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 December 16, 2002 was approximately
$11,748,000.

         The number of shares of Common Stock, $.001 par value, outstanding as
of December 16, 2002 was 8,901,545.

         The issuer hereby incorporates by reference into Part III of this
report, its definitive proxy statement to be filed on or prior to January 28,
2003. If the definitive proxy statement is not filed on or prior to January 28,
2003, the information called for by Part III will be filed as an amendment to
this Form 10-KSB on or prior to January 28, 2003.

         Transitional Small Business Disclosure Format (check one):
YES | | NO |X|


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                                     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(TM) System") that enables users to wager at fixed prices during the
course of a sporting event, such as soccer, football, baseball, basketball,
golf, tennis and cricket, among many others. The SportXction(TM) 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, will a batter get on base, will a penalty shot be
successful, or will a player make two foul shots. The SportXction(TM) 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(TM) 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 one side of a betting proposition is sufficient
to pay off the winners on the other side of that proposition, should the other
side win. Wagers may be placed simultaneously through a variety of input
devices, such as interactive television set-top boxes and personal computer
terminals linked to the SportXction(TM) System. The SportXction(TM) System is
also being readied for use in conjunction with interactive television via
satellite and cable and for portable devices, such as mobile phones, personal
digital assistants ("PDAs") and the like. The SportXction(TM) System maintains a
record of all wagers placed by each bettor and keeps an account for each bettor,
subtracting bet amounts and adding payouts.

         On July 31, 2002, ISWI, though a wholly owned subsidiary, acquired all
of the outstanding share capital of Global Interactive Gaming Limited ("GIG") a
British interactive gaming service provider that markets its services to
interactive television carriers which employ satellite, cable and terrestrial
programming, mobile telephone operators, licensed bookmakers and casinos. GIG is
located in London, England. GIG was ISWI's worldwide exclusive licensee for its
technology in all business activities for which the technology is legally usable
other than wagering in Nevada and for securities, transactions and lotteries.
GIG has a wholly owned subsidiary, Brightform Limited, which holds a British
bookmaker's permit and is therefore capable of offering its own complete betting
service.

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

         Recent Developments

         On September 18, 2002, the Company announced that GIG had signed an
agreement with ukbetting plc, one of the United Kingdom's leading on-line sports
content and wagering service providers, for the incorporation of the
SportXction(TM) System into "totalbet live," a product to be used on ukbetting's
sports wagering web sites. The customer base of ukbetting includes more than
100,000 wagering accounts in the U.K. Pursuant to this non-exclusive agreement,
which provides both parties with a share of the wagering revenue, GIG furnishes
the technology and operates the system, and ukbetting is responsible for
marketing the product, first level customer support and processing customer
financial transactions.

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         In November 2002, totalbet live successfully completed live field
trials in which ukbetting customers used play money to test the system. In
addition, totalbet live was successfully launched through a gradual introduction
using a series of games during which the number of users playing was ramped up.
In early December 2002, the product was introduced to all of ukbetting's on-line
customers. An extensive marketing campaign by ukbetting using a variety of
advertising venues will be commenced in January 2003. The initial launch was for
soccer, with cricket planned for the spring of 2003, followed by other live
sports events including Rugby Union, Rugby League, Tennis and Golf.

         There are other potential uses for the Company's technology that the
Company has started planning and designing in other markets, such as transaction
processing for financial institutions for which a patent is pending. The Company
continues to improve the SportXction(TM) System and has initiated a major
enhancement to the product to allow wagering propositions that provide the
players with more than two wagering choices.

         History

         The Company's SportXction(TM) System was conceived by the Company's
founder, Mr. Barry Mindes, who together with Mr. Bernard Albanese, the Company's
President, developed a simulation of the SportXction(TM) System for use in
determining whether casinos in Nevada had interest in the SportXction(TM)
System. Additionally, patent applications covering the SportXction(TM) 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 commencing operations, the Company raised an initial round of capital
privately and during the next year developed and tested the SportXction(TM)
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 the Company's Common Stock, par value $.001
per share (the "Common Stock"), and one redeemable Warrant (collectively, the
"Warrants") to purchase one share of Common Stock at an exercise price of $7.20
per share. The Warrants expired on February 25, 2002 without any having been
exercised. The Common Stock currently trades on the NASDAQ SmallCap Market(SM).

         After completing trials of the SportXction(TM) System, it was approved
for use in January 1997 by the Nevada Gaming Authorities. The Company initially
used the SportXction(TM) 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(TM) 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.


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         The focus of ISWI then shifted to being a licensor as a result of the
signing of the License Agreements (collectively, the "Agreements") with GIG in
March 2000. Under the terms of the Agreements, ISWI granted exclusive licenses
to market, distribute and use ISWI's interactive SportXction(TM) 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(TM) 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 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 Agreements. The Agreements also provided for an
escrow account into which GIG deposited and maintained at all times, the minimum
royalties due to ISWI for 12 months (the "Escrow Account"). ISWI's efforts
between early 2000 and 2002 focused on enhancing the SportXction(TM) System for
use by GIG. GIG's majority shareholders 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, at the time a business with purported annual
revenues exceeding $2 billion, ceased providing funding for GIG. On July 31,
2002, ISWI acquired GIG, and as a result, the Company is now in the business of
providing interactive gaming services to partners such as licensed bookmakers,
mobile telephone companies, cable and satellite television companies and
operators of Internet wagering sites, in locations where legally permitted.

         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 one side of a betting proposition is sufficient to pay off the winners on
the other side of that proposition, should the other side win. 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 a previously
placed bet 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 outcome of the event. The house will attempt to attract bets on one side of
the proposition by changing or moving the line up or down to induce betting
patterns in order to balance the book. If this is not possible, the house may
also refuse to accept wagers on one of the contestants or limit the maximum
amount of money that will be accepted on a line to attempt to avoid the risk of
taking an unacceptable number of bets on one side 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.


                                       4
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         The Internet is the largest present venue for sports wagering worldwide
as it is legal in many countries outside of the United States. A significant
amount of sports wagering internationally also takes place in betting parlors,
where bettors merely place bets and redeem winnings; and to a lesser degree, in
betting facilities where bettors view sporting events while wagering.
Interactive wagering in conjunction with television broadcasts and using mobile
telephones is growing and is viewed as a potentially major market.

         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. Largely as a result of
increasing regulatory and financial pressure, credit cards and other payment
providers in the United States have stopped accepting charges from gambling
Internet sites. The Agreement between the Company and ukbetting precludes
ukbetting from using the Company's SportXction(TM) System software to accept
wagers from the United States and any other location where it is illegal to do
so.

         Sports wagering using interactive TV set-top boxes is currently under
development, with the product anticipated to be introduced in the U.K. during
2003. The Company expects to participate aggressively in this developing market,
since GIG intends to utilize ISWI's proprietary SportXction(TM) System software
in its overall system to enable players to make legal sports wagers by means of
interactive TV.

         Although not currently operating in Nevada, ISWI holds a gaming license
as an operator of an "inter-casino linked system" ("OILS License") 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 newly enhanced product or a subset
thereof.

         The SportXction(TM) Sports Wagering System

         Overview of the System

         The SportXction(TM) 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(TM) 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, will a batter get on
base, or will a player make two foul shots. The SportXction(TM) System can also
accept traditional pre-game side and totals wagers as well as some forms of
parlays.


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         The Sportxction(TM) 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, a player could follow the game on the radio, in a sports bar, or
even while attending a live event, with wagers being entered via in-place
terminals or from hand held devices.

         Operation of the System

         The SportXction(TM) System operator begins by setting up a number of
pools or wagering propositions (for example, 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(TM) System operator sets the
odds or handicap (point spread) on certain betting propositions, with greater
odds given to the less capable contestant. Once the sporting event begins, the
SportXction(TM) System sets the initial odds on other betting propositions. The
SportXction(TM) 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 side of a betting proposition may have more
money bet on it than expected and thereby become underfunded (that is, the
System will not have enough money to pay the bettors should this side win). If
this occurs, and if the underfunded side 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 side (i.e. the side that is overfunded). Of
course, if the side that is overfunded wins, the house would win more than
expected. To limit the house's exposure, the SportXction(TM) System is designed
to automatically adjust the odds to induce more bettors to wager on the side of
the betting proposition that is overfunded; and to discourage bettors to wager
on the side that is 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(TM) 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 side that is
overfunded. In extreme cases, the house or the SportXction(TM) System may
automatically stop accepting bets on the underfunded side when the exposure
limit is reached while continuing to accept bets on the other side. 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.


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

         The SportXction(TM) System works on a "bet against deposited funds"
basis. When a bettor wishes to wager using the SportXction(TM) 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(TM) 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(TM) 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 Player Betting Device will show his available balance, initially
equal to his deposit. As wagers are placed, this balance is reduced by the
amounts wagered. When the bettor wins, his Betting Device shows that he has won
and his balance is automatically increased by the wager's payout.

         The SportXction(TM) 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(TM) System. The software permits the operator to make
available a wide variety of betting propositions to players. The SportXction(TM)
System has been designed to work for a variety of Player Betting Devices (e.g.
PC's running a browser, television set-top boxes, mobile phones and similar
devices) each of which has different inherent capabilities and limitations, some
of which are more "intelligent" than others. In addition, these Player Betting
Devices are connected to the System utilizing several types of networks (e.g.
Internet, dedicated private network or wireless networks). As a result of this
flexibility, the 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 System. The Player Betting Device enables bettors to
enter bets into the SportXction(TM) 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(TM) 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(TM) System
uses redundant hardware and re-start and recovery software to maximize System
up-time in the event of component failure.


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         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 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(TM) 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 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(TM) System. It is used to control security, maintain the schedule of
future events and maintain the System tables which control the propositions
being offered and the business rules to be followed by the 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(TM) System.
For on-line implementations, the SportXction(TM) System's design also allows
players to transfer funds securely from financial institutions into and out of
their SportXction(TM) accounts. The SportXction(TM) 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.


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         Traditional Pre-Game Wagering

         When the SportXction(TM) 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(TM) 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(TM) System. Additional financial analysis programs
are available for manual review and control of the wagering pools.

         The Company has not yet completed modification of its traditional
pre-game wagering software to be compatible with an interactive television game
delivery mode. However, the Company does not consider such a modification to the
software, as it exists, to be of significant difficulty or scope.

         Multisided Propositions

          The current implementation of the SportXction(TM) System allows
players to wager on either side of a wagering proposition, for example in
soccer, "will Player X be the next player to score a goal?", where the choices
available are "yes" and "no". The Company has begun the development of a major
enhancement to the System to allow wagering propositions that provide the
players with more than two wagering choices. For example, "Which player will be
the next to score a goal?", where the choices might be, "Player W", "Player X",
"Player Y", "Player Z" and "anyone else".

         The Company believes that this enhancement will provide more exciting
wagering opportunities, with more choices and correspondingly longer odds
offered and larger payouts. In addition, traditionally, multi-sided propositions
allow bookmakers to offer wagering opportunities with inherently higher profit
margins. It is expected that this enhancement will be available for live testing
in the second quarter of the Company's 2003 fiscal year. This enhancement is
also a necessary foundation for any future products that address the fixed-odds
horseracing marketplace. Fixed odds horseracing is currently available in the
U.K. and many other countries, but not in the U.S.

         Marketing and Sales Strategy

         The Company is in discussions with several companies in the U.K. and
Europe for the incorporation of the SportXction(TM) System into licensed sports
wagering web sites and the inclusion of the SportXction(TM) System into the
interactive television 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 investment to gain
players. The Company is also in discussions with several interactive television
and mobile phone companies in the U.K. and Europe regarding use of the
SportXction(TM) System. In addition, during 2001, GIG had entered into contracts
with Telewest Communications and the English subsidiary of Italy's Freedomland
ITN S.p.A. These efforts involve a "business to consumer" model and involve
building a base of betting accounts since these potential partners do not have
existing betting customers. The Company is in discussions with potential
partners in an effort to convert these contracts into "business to business"
relationships.


                                       9
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         The focus of the Company's initial marketing efforts is in the U.K. and
Europe although opportunities elsewhere in the world are also being pursued. 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.

         The SportXction(TM) System is being readied for use in conjunction with
portable devices, such as mobile phones and PDAs. The Company hopes to have
systems in operation for all of these delivery modes in the next year or two.
The Company has also commenced preliminary marketing activities using its
patented technology in the financial transaction processing market. The
SportXction(TM) System is also useable for contests, rather than wagering, on
sporting events. GIG had previously begun discussions with a prospective
customer for use of the System for contests and the Company anticipates
marketing the System in the future for such use.

         Intellectual Property

         The Company regards the SportXction(TM) System as proprietary. The
Company has two U.S. patents covering its proprietary wagering methods and its
related computer processing system. Corresponding applications have been filed
in certain foreign countries and some of those have been issued or are pending.

         The Company also has a patent pending to use its technology in the
trading of financial instruments. The patent covers, in particular, an
"automated specialist," which uses artificial intelligence that permits trading
at much higher speeds, greater accuracy in balanced trading and much lower cost
than was possible heretofore.

         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(TM) System or otherwise
attempt to duplicate the System in ways which circumvent the Company's
technology and existing or future patents.

         The Company has not received any claim that it is infringing any
patents. 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 (see "Uncertainties Regarding
Intellectual Property").

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


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         Competition

         No assurance can be given that other competing systems do not exist or
are not under development. 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.

         There are currently a large number of operators of wagering sites
available on the Internet that accept traditional wagers 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 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(TM) System in any significant degree, and the
Company believes it has broad patent protection for its System in most countries
in which it is anticipated that the Company will operate, 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(TM) System might be diluted.

         Personnel

         The Company currently has nine full-time employees in the United States
and sixteen 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, 2002 and 2001, the Company
spent approximately $735,000 and $995,000, respectively, on research and
development activities. These expenses included primarily, programmers' salaries
and benefits, consultants' fees, and the depreciation expense associated with
computer equipment used in the development of the SportXction(TM) System. During
the fiscal years ended September 30, 2002 and 2001, all of the Company's
research and development expense reflect direct costs of revenue associated with
supporting the SportXction(TM) System. The Company intends to continue to expend
significant sums on such activities.

         As at September 30, 2002, the Company has capitalized $519,000 of
expenses related to enhancements of its SportXction(TM) System. In addition, in
connection with the allocation of purchase price for the acquisition of GIG,
ISWI recorded an asset of $566,000 relating to software developed for GIG. These
amounts will be amortized over their estimated useful life after they are put
into commercial use.


                                       11
<PAGE>

         Government Regulation

         United Kingdom

         The Company's indirect, wholly-owned subsidiaries, Brightform Limited
("Brightform") and GIG Operations Limited ("GIG Operations") intend to 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 (i.e. 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, among other things: that no person may use
any premises or cause or knowingly permit any premises to be used for effecting
betting transactions with persons resorting thereto (i.e. physically present)
unless they comply with certain provisions of the Betting Act; no person may act
as a bookmaker on his own account unless he holds a permit under the Betting Act
authorizing him to do so; and no person may by way of a business receive or
negotiate bets as a servant or agent to another bookmaker unless they are
authorized to do so in accordance with and comply with certain provisions of the
Betting Act. A person may receive and negotiate bets on behalf of another
bookmaker provided they are authorized to do so by that bookmaker in accordance
with the Betting Act. A person so authorized may then apply for a betting agency
permit and a betting office license.

         In order to obtain a bookmakers permit in the United Kingdom an
application must be made to the licensing justices of the Betting Licensing
Committee at the applicable Magistrates Court (in England and Wales) or the
Local Authority Licensing Board in respect of Scotland. The essential tests
applied by the licensing justices when considering an application is 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 July 12,
2001. This permit expires on May 31, 2003 and Brightform will be required to
apply to renew this permit. Separately, GIG Operations applied for a betting
agency permit in December 2002.


                                       12
<PAGE>

         In order to use any premises for the purposes of effecting betting
transactions with people resorting thereto, a bookmaker must also obtain a
betting office license for the particular premises. In relation to betting
office licenses, the licensing justices consider, among other things, whether
the premises are suitable for a betting office and assess whether there is
sufficient demand in the locality for such facilities (known as the "demand
test"). 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 U.K. bookmaker's permit. A betting office license is not required as
it relates to specific premises to which customers go to 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. government has proposed far reaching deregulation of the U.K.
betting and gaming industry, to be constituted in a new primary legislation,
expected to be announced in the November 2003 Queens Speech and enacted in some
time in 2004. None of the activities for which Brightform is currently licensed
is expected to be adversely affected by this new legislation.

         Nevada

         Prior to April 2000, ISWI conducted business in the State of Nevada. 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. ISWI is not currently
operating in Nevada, although it continues to hold its OILS License and is still
registered. It is marketing its current System to casinos in Nevada on a limited
basis. It may also elect to market its system in Nevada in the future. Any
continued marketing efforts are aimed at licensing the Company's SportXction(TM)
System to casinos in order for them to operate a system utilizing the Company's
SportXction(TM) 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.")

         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.


                                       13
<PAGE>

         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 the Company 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 the Company, as a Registered Corporation,
from holding a Nevada OILS License. The Company'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 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:

          o    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.

          o    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.
               Barry Mindes (Chairman of the Board and Chief Executive Officer)
               and Bernard Albanese (President) have been licensed. James McDade
               (Chief Financial Officer) applied for a license in November 2002.

          o    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.


                                       14
<PAGE>

          o    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.

          o    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. The applicant is required to pay all costs of
               investigation.

          o    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.

          o    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.

          o    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 ground for
               finding the record holder unsuitable. To date, the Commission has
               not required the Company to disclose its' beneficial owners.

          o    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 in Nevada, or to
               retire or extend obligations incurred for such purposes.


                                       15
<PAGE>

          o    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.

          o    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.

          o    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.

          o    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.


                                       16
<PAGE>

         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(TM) 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(TM)
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(TM) 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(TM) System software would not be approved.

                              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
cricket will be introduced to ukbetting's customers in the Spring of 2003,
whether sports wagering using interactive TV set-top boxes will be introduced in
the UK during 2003, whether the enhancement to the SportXction(TM) System
permitting wagering on multi-sided propositions will be available for live
testing in the second quarter of the Company's 2003 fiscal year, whether the
contracts with Telewest Communications and the English subsidiary of Italy's
Freedomland will be converted to "business to business" relationships, whether
the Company will have the SportXction(TM) System in operation utilizing portable
devices such as mobile phones and personal digital assistants in the next year
or two, potential market size for the SportXction(TM) System, 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(TM) 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 financing if required, 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 ISWI will enter into agreements with others for use of the
SportXction(TM) System, whether the Company will bring the SportXction(TM)
System to market using additional interactive mediums, whether the agreement
with ukbetting plc will produce revenues in the year ending September 30, 2003,
and whether the VAT receivable will be received in the second quarter of the
fiscal year ending September 30, 2003. 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.


                                       17
<PAGE>

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

         History of Losses. Until entering into the License Agreements with GIG,
ISWI was in the development stage and generated limited revenues from the
SportXction(TM) System. As of September 30, 2002 and September 30, 2001, the
Company had cumulative net losses since inception of approximately $2.0 and $4.0
million, respectively. Although the Company's results of operations during the
years ended September 30, 2002 and September 30, 2001 have been profitable and
the Company has been cash flow positive during those two fiscal years, the
Company does not expect to continue to achieve such results for the fiscal year
ending September 30, 2003. As a result of the acquisition of GIG on July 31,
2002, ISWI will no longer receive the minimum payments under the Agreements. The
$3,350,000 gain on default under the GIG Agreements during the year ending
September 30, 2002 will not recur. The Company's revenue will now be based upon
the ability of the Company and its business partners to generate revenue through
the SportXction(TM) System. 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; the ability
of the Company and its business partners to attract a sufficient number of
players desirous of utilizing the SportXction(TM) System; unanticipated problems
relating to further software enhancement and development; acceptance of the
SportXction(TM) 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.


                                       18
<PAGE>

         Projected Losses and Negative Cashflow. As a result of the acquisition
of GIG, the Company expects that projected short-term revenue, expenses and
overall profitability will be adversely impacted. By recovering its software
license, the Company will now act as the primary operator of the SportXction(TM)
System and be entitled to all of the net proceeds generated by its technology,
net of any revenue sharing arrangements with the Company's business partners,
rather than the fractional share it would have received as a licensor of its
technology. The Company will, however, now incur greater costs, including
operating, marketing, and advertising expenses without the comfort of previous
minimum license fees. The Company expects to incur losses and negative cash flow
at least for the fiscal year ending September 30, 2003.

         Cash Requirements; Need for Additional Financing. The Company
anticipates that its existing resources will be adequate to fund its capital and
operating requirements through at least the next 18 months based upon the
Company's current business plan (see "Management's Discussion and Analysis") and
longer, subject to the revenues generated by the SportXction(TM) System. The
Company's cash requirements may vary materially from those now planned due to a
number of factors, including the extent to which the Company develops the
SportXction(TM) System under its own brand and the response of competitors to
the SportXction(TM) System and the ability of the Company and its management to
satisfy applicable licensing requirements. The Company may need to raise
additional capital to fund its future operations. There can be no assurance that
additional financing will be available when needed 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. Insufficient funds
may prevent the Company from implementing its business strategy or may require
the Company to limit its operations significantly.

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

         Competition. The Company's SportXction(TM) System and the business
intended to be 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
including that conducted over the Internet, 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.


                                       19
<PAGE>

         Uncertainties Regarding Intellectual Property. The Company regards the
SportXction(TM) 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 or will be 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 the trading of
financial instruments. No assurance can be given that any of the Company's
pending domestic or foreign patent pending 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, and there can be no assurance that the Company will be
able effectively to protect its 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. Although the
Company has not received any claim that it is infringing any patent or trade
secrets and is not currently aware of any claim that it is infringing any such
rights of others, 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.

         Dependence on Key Personnel. The Company is dependent upon the
continued efforts and abilities of its executive officers and other key
personnel such as Barry Mindes, the Company's founder, Chairman of the Board and
Chief Executive Officer, and Bernard Albanese, a director of the Company and the
Company's President. The loss or unavailability of Messrs. Mindes or Albanese
for any significant period could have a material adverse effect on the Company's
business, financial condition and results of operations. Messrs. Mindes and
Albanese have entered into employment agreements with the Company which
terminate on December 31, 2003 and June 30, 2003, respectively. 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 either Messrs. Mindes or Albanese. 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 operating
results and financial condition.


                                       20
<PAGE>

         Control by Management. As of December 16, 2002, Barry Mindes, Mindes
Family Limited Partnership, of which an entity controlled by Mr. Mindes is
general partner, Bernard Albanese and the Marie Albanese Trust, a trust for the
benefit of Mr. Albanese's wife, together beneficially own approximately 39% of
the outstanding shares of Common Stock (excluding any stock options held by Mr.
Albanese which could, in the future, be exercised). As a result of such
ownership, such stockholders are likely to 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.

         Possible Volatility of Market Price of Common Stock. 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.

         NASDAQ Delisting; Low Stock Price; Net Tangible Assets. The trading of
the Company's Common Stock on NASDAQ will be 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 NASDAQ, 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 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.

         In two instances in the past, the Company has received correspondence
from NASDAQ indicating that it did not meet the requirements for continued
listing on NASDAQ. In each of the two prior instances that this occurred 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 SmallCap Market.

         The effects of delisting include the limited release of the market
prices of the Company's securities and limited news coverage of the Company.
Delisting may restrict 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 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, this would require additional disclosure 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. 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.


                                       21
<PAGE>

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

         Anti-Takeover Effects of Certain Provisions of Certificate of
Incorporation and Delaware Law. The Company's Certificate of Incorporation
authorizes the issuance of 2,000,000 shares of Preferred Stock (of which 60,000
have been designated as Series A Preferred Stock and are outstanding) with such
designations, rights and preferences as may be determined from time to time by
the Board of Directors (See Item 5. Recent Sales of Unregistered Securities).
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 five year lease which expires on June 30,
2005. 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, 2002, were approximately $36,000. For the
fiscal year ending September 30, 2003, lease payments for this facility are
expected to also be approximately $36,000. The Company also leases off-site
facilities in Nevada for the storage of equipment.

         The Company currently leases approximately 4,400 square feet in London,
England under a seven year lease which expires in March 2009. Lease payments for
this facility, at which all development and administrative functions in England
are currently conducted, during the period from August 1, 2002 to September 30,
2002, were approximately $62,000. For the fiscal year ending September 30, 2003,
lease payments for this facility are expected to be approximately $248,000.


                                       22
<PAGE>

         Item 3. Legal Proceedings

         None, as defined.

         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, 2002.


                                       23
<PAGE>

                                     PART II

         Item 5. Market for Common Equity and Related Shareholder Matters

         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 SmallCap MarketSM

    Quarter                                          High           Low
    -------                                          ----           ---
    October 1, 2000 to December 31, 2000           $1.250         $0.594
    January 1, 2001 to March 31, 2001               1.250          0.625
    April 1, 2001 to June 30, 2001                  3.590          0.750
    July 1, 2001 to September 30, 2001              5.090          2.420
    October 1, 2001 to December 31, 2001            8.240          3.960
    January 1, 2002 to March 31, 2002               8.200          4.120
    April 1, 2002 to June 30, 2002                  5.210          1.250
    July 1, 2002 to September 30, 2002              2.190          1.050

         The high and low sales prices on December 16, 2002 were $2.25 and
$2.17, respectively.

         Current Holders of Common Stock

         Based upon information supplied to the Company by its transfer agent,
there were approximately 50 stockholders of record of the Common Stock on
December 16, 2002. The Company believes there are in excess of 2,000 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 Preferred
Stock or its Common Stock. The Company intends to retain future earnings, if
any, that 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 dividends to holders of Preferred Stock or Common
Stock. Any decision as to the future payment of dividends on Preferred Stock or
Common 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.


                                       24
<PAGE>

         Recent Sales of Unregistered Securities

         On October 28, 1996, the Company issued 6 1/2 units in a bridge
financing (the "Bridge Units"), each Bridge Unit consisting of (i) a 10% Senior
Promissory Note (the "Bridge Notes") in the principal amount of $100,000 and
(ii) warrants to purchase 30,000 shares of the Company's Common Stock (the
"Bridge Warrants"), at an initial exercise price equal to the lesser of $3.60 or
60% of the initial Unit offering price in the Company's subsequent IPO.
Barington Capital Group, L.P. ("Barrington") acted as placement agent for the
offering of Bridge Units which were made to a limited number of accredited
investors pursuant to the exemption from the registration requirements of the
Act, afforded by Section 4(2) thereof. The aggregate offering price was
$650,000, of which net proceeds received by the Company amounted to
approximately $550,000. An aggregate of 195,000 Bridge Warrants were issued in
the bridge financing. The Bridge Warrants were exercisable at any time after
issuance and expired on October 28, 2001. The shares of Common Stock issuable
upon exercise of the Bridge Warrants were registered on a registration statement
on Form S-3 declared effective on May 5, 2000. Prior to expiration, all but one
of the Warrants were exercised, and all but one of the Warrants that were
exercised were done so on a cashless basis, resulting in the issuance of 45,277
additional shares of the Company's Common Stock, of which 12,213 shares were
issued during the fiscal year ended September 30, 2002. The Bridge Warrants
expired on February 25, 2002.

         In connection with the execution of the Agreements with GIG, the
Company issued to GIG a warrant to purchase 426,087 shares of the Company's
Common Stock at an exercise price of $4.38 per share (the "GIG Warrant"). The
GIG Warrant became exercisable on September 18, 2001 (18 months after issuance)
and was to remain exercisable through March 16, 2005. The GIG Warrant was
non-transferable other than to affiliates of GIG. The shares of Common Stock
issuable upon exercise of the GIG Warrant were registered on the Company's
Registration Statement on Form S-3 that was declared effective on May 5, 2000.
As a result of the breach of the Agreements by GIG, the warrants became
non-exercisable. In connection with the GIG acquisition, certain GIG
shareholders, MultiSport Games Development Inc. ("MultiSport") received 115,043
warrants and Peter Sprogis received 42,609 warrants. The warrants issued to GIG
shareholders have an exercise price of $4.38 per share and expire on March 16,
2005. The remaining 268,435 GIG warrants were cancelled on November 26, 2002.

         The Company's Certificate of Incorporation authorizes the issuance of
2,000,000 shares of 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 connection with the acquisition of
GIG, the Company also issued 60,000 shares of a new class of Series A Preferred
Stock to MultiSport. Each share of Preferred Stock has one vote, no liquidation
preferences, is entitled to a 6% non-cumulative dividend, if and when declared
by the Board of Directors, is convertible into 10 shares of the Company's Common
Stock at $15 per common share on a cashless basis and is redeemable by the
Company seven years after issuance for nominal consideration if not previously
converted into Common Stock. The Company issued the Series A Preferred Stock and
consented to the transfers of the Warrants in reliance on an exemption from the
Securities Act of 1933, as amended (the "Act") in reliance upon the exemption
provided by Section 4(2) of the Act and regulations thereunder. Both Mr. Sprogis
and MultiSport represented to the Company, among other things, that they were
"accredited investors" within the meaning of the Act.


                                       25
<PAGE>

         Item 6. Management's Discussion and Analysis

          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.

         Results of Operations

         In March 2000, ISWI became a licensor of interactive gaming software
through the signing of license agreements (the "License Agreements") with Global
Interactive Gaming ("GIG"). The License Agreements provided, among other things,
for the payment of minimum royalties on a quarterly basis and provided that the
minimum due to ISWI for the forthcoming 12 month period were held in a third
party escrow account ("Escrow Account"). During the years ended September 30,
2001 ("Fiscal 2001") and September 30, 2002 ("Fiscal 2002"), ISWI's revenues
solely represented minimum fees received pursuant to the terms of the License
Agreements. ISWI's efforts between early 2000 and 2002 focused on enhancing the
SportXction(TM) System for use by GIG. GIG's majority shareholder was Prisma
iVentures Ltd., a subsidiary of The Kirch Group, a German media conglomerate. As
a result of Kirch Media's insolvency filing in Germany in April 2002, an event
unrelated to ISWI, The Kirch Group, at the time a business entity with purported
annual revenues exceeding $2 billion, ceased providing funding for GIG. On July
31, 2002, ISWI acquired all of the outstanding share capital of GIG (see
"Acquisition of GIG"). As a result of the acquisition of GIG, ISWI will not
receive any further minimum royalties and will need to generate revenues based
upon use of the SportXction(TM) System, from service charges from existing
agreements and by entering into additional agreements. GIG's results of
operations from August 1, 2002 to September 30, 2002 are included in ISWI's
statement of operations for the year ended September 30, 2002.

         Net revenues for Fiscal 2002 decreased by 9% to $4,314,000. The
decrease in Fiscal 2002 is attributable to the discontinuation of the minimum
royalties due to GIG; default under the License Agreements and the eventual
acquisition of GIG as well as an acceleration of the deferred expense
amortization resulting from warrants granted in connection with the License
Agreements. These decreases were partially offset by an increase in the
guaranteed minimum amounts from the License Agreements received through
May 2002.

         Research and development expense for Fiscal 2002 declined by 26% to
$735,000. The decrease in Fiscal 2002 resulted primarily from the increased
capitalization of costs related to enhancing the SportXction(TM) System
partially offset by increased programming and development costs as a result of
the inclusion of GIG's expenses in the Company's consolidated results subsequent
to the acquisition.

         General and administrative expenses for Fiscal 2002 increased by 91% to
$2,355,000. The increase in Fiscal 2002 was primarily due to an increased cost
base as a result of the acquisition of GIG, the write-off of a doubtful account
with GIG relating to a bonus payment earned in Fiscal 2001, increased employee
salary and benefit expenses and increased professional fees.


                                       26
<PAGE>

         Upon consummation of the acquisition of all of the outstanding share
capital of GIG, the $3.1 million remaining in the Escrow Account was released to
ISWI and GIG. As a result of the default under the Agreements by GIG and the
resultant acquisition of GIG, ISWI recognized a gain of $3,350,000 representing
the remaining funds in the Escrow Account as well as the balance of deferred
revenue at July 31, 2002 of $250,000.

         Income before taxes increased 76% to $4,691,000 for Fiscal 2002,
primarily as a result of the default under of the License Agreements by GIG and
the subsequent acquisition of GIG, which was partially offset by the decrease in
revenue and an increase in expenses.

         Net income for Fiscal 2002 and net income per share (basic) decreased
by 63% to $1,954,000 and $0.22, respectively. These decreases largely reflect
offsetting non-cash tax accounting entries that were recorded in Fiscal 2001 and
Fiscal 2002. The result of these entries is that in Fiscal 2001 the Company's
net income increased by $2,681,000, and in Fiscal 2002, due to GIG's financial
condition, the net results of these entries were reversed, reducing net income
by the same amount (described below).

         As a result of losses prior to Fiscal 2001, the Company had a deferred
tax asset comprised principally of the tax benefit of net operating loss
carryforwards at September 30, 2001. In Fiscal 2001, the Company reversed the
valuation allowance of $2,681,000 for this deferred tax asset into income based
on its recent history of pre-tax profits, the minimum future fees to be received
under the License Agreements and the projected taxable income of the Company.
During Fiscal 2002, following the default under the License Agreements, the
Company determined that there would be limited additional revenues received
under the License Agreements. As a result, the Company provided a valuation
allowance of $621,000 to offset a portion of the deferred tax asset at September
30, 2002, which the Company recorded as income tax expense on its statement of
operations. In addition, during Fiscal 2002, income tax expense for Fiscal 2002
includes $2,060,000 representing the utilization during the year of the
Company's net operating loss carryforwards and deductible temporary differences
for which the tax benefit had been recognized in Fiscal 2001 and $56,000
relating to the tax benefit associated with the exercise of non-qualified stock
options which was credited to additional paid in capital.

         Liquidity and Capital Resources

         As of September 30, 2002, the Company had liquid resources totaling
$8,126,000 and a receivable relating to a U.K. tax refund of approximately
$1,105,000. The liquid resources include cash and cash equivalents in the amount
of $4,753,000 and investments in the amount of $3,373,000. Investments are
limited to investment grade marketable securities with maturities of less than
18 months. The tax receivable relates to a reclaim of Value Added Tax paid in
the United Kingdom by GIG from May 2001 through September 2002.

         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, 2003.
The Company anticipates that its existing resources will be adequate to fund its
capital and operating requirements through at least the next 18 months based
upon the Company's current business plan and longer, subject to the revenues
generated by the SportXction(TM) System. The Company believes that this is a
sufficient period of time to allow the Company to establish a successful
enterprise in the intended market.


                                       27
<PAGE>

         The Company expects its agreement with ukbetting plc (see "Recent
Developments") to produce revenues in the year ending September 30, 2003. The
Company is currently in discussions with interactive television providers and
other operators to provide services. There is no assurance however, that the
System will be launched as planned or accepted by potential users. In addition,
there is no assurance that any additional agreements will be signed. If these
agreements do not produce revenue as planned, it may be necessary for the
Company to seek additional funding, or reduce its expenses by limiting or
curtailing its efforts in the United Kingdom, or both.

         Capital expenditures are expected to be incurred in relation to system
rollout for existing contracts as well as the purchase of additional computer
equipment. Existing resources are expected to be able to fund these
requirements. 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 the product, the market acceptance and competitive position of the
product and the response of competitors to the product.

         Acquisition of GIG

         On July 31, 2002, ISWI acquired all of the outstanding share capital of
GIG, an interactive gaming service provider to licensed bookmakers and ISWI's
worldwide licensee of the SportXction(TM) software for $1,092,000 including
professional fees and acquisition costs of $536,000. The purchase price paid to
GIG's stockholders consisted of $365,000 in cash, 60,000 shares of a new class
of Series A Preferred Stock (convertible until July 31, 2009 into ISWI Common
Stock at $15 per share on a cashless basis) valued at $64,000 and warrants to
acquire 157,652 shares of ISWI's Common Stock (exercisable at $4.38 per share
which expire on March 16, 2005) valued at $127,000.


                                       28
<PAGE>

         As GIG was a development stage company and had not commenced planned
principal operations, the acquisition was accounted for as an acquisition of
assets and not a business combination. The total purchase consideration was
allocated to the tangible and intangible assets and liabilities as follows:

                                                        $(000s)
            Cash                                        $   44
            VAT tax receivable                           1,073
            Other current assets                           428
            Property and equipment                         257
            Capitalized software costs                     566
            Accounts payable                              (780)
            Accrued expenses                              (496)
                                                        ------
                                                        $1,092
                                                        ======

         In addition, an acquired deferred tax asset of $7,570,000, resulting
from an excess of the tax basis of the acquired net assets over the
consideration paid, in addition to the existence of a net operating loss
carryforward which GIG has available to offset future taxable income in the
United Kingdom, has been fully offset by a valuation allowance.

         GIG's results of operations from August 1, 2002 to September 30, 2002
are included in ISWI's statement of operations for the year ended September 30,
2002.

         Recent Developments

         On September 18, 2002, the Company announced that GIG had signed an
agreement with ukbetting plc ("ukbetting'), one of the United Kingdom's leading
on-line sports content and wagering service providers, for the incorporation of
the SportXction(TM) System into "totalbet live", a product to be used on
ukbetting's sports wagering web sites. The customer base of ukbetting includes
more than 100,000 wagering accounts in the U.K. In this non-exclusive agreement,
which provides both parties with a share of the wagering revenue, GIG furnishes
the technology and operates the system, and ukbetting is responsible for
marketing the product, first level customer support and processing customer
financial transactions.

         In November 2002, totalbet live successfully completed live field
trials in which ukbetting customers used play money to test the system. In
addition, totalbet live was successfully launched through a gradual introduction
using a series of games during which the number of users playing was ramped up.
In early December 2002, the product was introduced to all of ukbetting's on-line
customers. An extensive marketing campaign by ukbetting using a variety of
advertising venues will be commenced in January 2003. The initial launch was for
soccer, with cricket planned for the spring of 2003, followed by other live
sports events including Rugby Union, Rugby League, Tennis and Golf.

         Outlook

         The Company believes that its long term business outlook is optimistic.
By recovering its software license through the acquisition of GIG, the Company
is currently the primary operator of its SportXction(TM) System and is entitled
to all of the revenues generated by its technology, net of any revenue sharing
arrangements with the distributor of the technology to the end users, versus the
fractional share it would have received as licensor. However, without the
financial stability of the minimum license payments, and the greater costs
associated with the GIG acquisition, it is imperative that the Company continues
to diligently form additional strategic partnerships, such as that with
ukbetting. It remains the Company's objective to bring SportXction(TM) to market
across several different interactive mediums including interactive television,
the Internet, and hand held devices such as mobile telephones and PDA's. The
Company has significantly reduced its expectations of short term profitability
and cash flow. The Company expects its agreement with ukbetting to generate an
insignificant amount of revenue during the quarter ending December 31, 2002,
with increasing amounts in future quarters as the product is promoted by
ukbetting and number of users grow. The Company expects to incur losses and
negative cash flow for the year ended September 30, 2003.


                                       29
<PAGE>

         Significant 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, 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
others sources. See Note 2 to the Company's Financial Statements for a full
discussion of the Company's significant accounting policies.

         Item 7. Financial Statements

         See Page F-1

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

         Reference is made to the Company's Current Report on Form 8-K filed on
April 16, 2001 which is incorporated herein by reference.

                                    Part III

         The Company hereby incorporates by reference into this Part III, its
definitive proxy statement to be filed on or prior to January 28, 2003. If the
definitive proxy statement is not filed on or before January 28, 2003, the
information called for by this Part III will be filed as an amendment to this
Report on or prior to January 28, 2003.


                                       30
<PAGE>

Item 13. Exhibits and Reports on Form 8-K

(a)  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. (4)

3.1(a)   Amendment, filed October 24, 1996, to Certificate of Incorporation of
         the Company. (4)

3.1(b)   Amendment, dated February 28, 2001, to Certificate of Incorporation of
         the Company. (9)

3.2      By-Laws of the Company. (4)

4.1      Certificate of Designation of the Powers, Preferences and Relative,
         Participating, Optional and Other Special Rights of the Series A
         Preferred Stock and Qualifications, Limitations and Restrictions
         Thereof, dated July 31, 2002. (1)

4.2      Warrant to Purchase of 268,435 Shares of Common Stock, par value $.001
         per share, of Interactive Systems Worldwide Inc., dated as of July 31,
         2002, issued to Global Interactive Gaming Ltd. (1)

4.3      Warrant to Purchase of 115,043 Shares of Common Stock, par value $.001
         per share, of Interactive Systems Worldwide Inc., dated as of July 31,
         2002, issued to MultiSport Games Development, Inc. (1)

4.4      Warrant to Purchase of 42,609 Shares of Common Stock, par value $.001
         per share, of Interactive Systems Worldwide Inc., dated as of July 31,
         2002, issued to Peter Sprogis. (1)

4.5      Warrant Agreement dated as of December 11, 1996 by and between the
         Company and American Stock Transfer & Trust Company (4)

4.5(a)   Amendment dated as of December 4, 2001, to Warrant Agreement dated
         December 11, 1996 by and between Registrant and American Stock Transfer
         & Trust Company.

10.1(a)  Letter to Citibank, N.A., dated as of July 31, terminating Escrow
         Agreement and Directing Release of Funds from Escrow. (2)

10.1(b)  Letter Agreement, dated as of July 29, 2002, between Global Interactive
         Gaming Ltd. and KirchSport Limited. (3)

10.1(c)  Employment Agreement between the Company and Barry Mindes, dated as of
         March 17, 2000. (8)

10.1(d)  Amendment No. 1 to Employment Agreement between the Company and Barry
         Mindes, dated as of December 20, 2002.

10.2(b)  Employment Agreement between the Company and Bernard Albanese, dated as
         of March 17, 2000. (8)


                                       31
<PAGE>

10.3     Form of Proprietary Information, Inventions and Non-Solicitation
         Agreement. (4)

10.4     Form of Subscription Agreement. (4)

10.5     Rights Agreement among the Company and the investors listed on Schedule
         A therein, dated as of June 2, 1995. (4)

10.6     Stock and Warrant Purchase Agreement among the Company and the
         investors listed on Schedule A therein, dated as of June 2, 1995. (4)

10.7     Rights Agreement between the Company and Barry Mindes, dated as of June
         20, 1996. (4)

10.8     Form of Stockholders Agreement among the Company, Barry Mindes and all
         Stockholders of the Company (other than stockholders who are party to
         the Rights Agreement referred to in 10.6 above). (4)

10.10    Form of Indemnification Agreement entered into between the Company and
         its directors and executive officers. (4)

10.11    1995 Stock Option Plan, as amended January 7, 1999. (8)

10.12    1996 Stock Option Plan, as amended January 26, 2000. (8)

10.13    Form of Incentive Stock Option Agreement. (5)

10.14    Form of Non-Qualified Stock Option Agreement. (5)

10.15    License Agreement dated as of March 17, 2000 by and among the Company
         and Global Interactive Gaming Limited (formerly Global Interactive
         Gaming AG). (6)

10.16    License Agreement dated as of March 17, 2000 by and among the Company
         and Global Interactive Gaming LLC (formerly Global Interactive Gaming
         Inc.). (6)

10.17    Purchase and Sale Agreement dated as of April 10, 2000 by and among the
         Company and certain accredited investors. (7)

10.18    Purchase and Sale Agreement dated as of January 12, 2000 by and among
         the Company and certain accredited investors. (8)

10.19    Non-Transferable Warrant issued March 17, 2000 to Global Interactive
         Gaming Ltd. (8)

23.1     Consent of Eisner LLP.

24.1     Power of Attorney (Included on signature page hereto).

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

(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 exhibit 10.1 contained in the Company's
     Current Report on Form 8-K dated August 15, 2002.

(3)  Incorporated by reference to exhibit 10.2 contained in the Company's
     Current Report on Form 8-K dated August 15, 2002.

(4)  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.


                                       32
<PAGE>

(5)  Incorporated by reference to the exhibit with the corresponding number
     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.

(6)  Incorporated by reference to the exhibit with the corresponding number
     contained in the Company's Current Report on Form 8-K dated March 23, 2000

(7)  Incorporated by reference to the exhibit with the corresponding number
     contained in the Company's Current Report on Form 8-K dated April 11, 2000

(8)  Incorporated by reference to the exhibit with the corresponding number
     contained in the Company's Annual Report on Form 10-KSB dated December 22,
     2000

(9)  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

(b)  Reports on Form 8-K

The Company filed the following Current Reports on Form 8-K during the quarter
ended September 30, 2002:

Current Report on Form 8-K filed on August 14, 2002

Current Report on Form 8-K filed on August 15, 2002, as amended by the Current
Report on Form 8-K/A, filed on October 15, 2002.

Item 14.  Controls and Procedures

Evaluation of disclosure controls and procedures
Within 90 days prior to the date of this report (the "Evaluation Date"), the
Company's principal executive officer and principal financial officer carried
out an evaluation of the effectiveness of the Company's "disclosure controls and
procedures" (as defined in the Securities Exchange Act of 1934 Rules 13(a)-14(c)
and 15(d)-14(c)). Based on that evaluation, these officers have concluded that
as of the Evaluation Date, the Company's disclosure controls and procedures were
effective and designed to ensure that material information relating to the
Company and its consolidated subsidiaries would be made known to them by others
within these entities.


                                       33
<PAGE>

Changes in internal controls

There were no significant changes in the Company's internal controls, or in
other factors which could significantly affect these controls subsequent to the
Evaluation Date.


                                       34
<PAGE>

                                   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/ Barry Mindes
                                        -----------------------------------
                                     Barry Mindes, Chairman of the Board
                                     and Chief Executive Officer

                                     (Principal Executive Officer)


                                     December 24, 2002



<PAGE>

                                 CERTIFICATIONS


I, Barry Mindes certify that:

1.   I have reviewed this annual report on Form 10-KSB of Interactive Systems
     Worldwide Inc.;

2.   Based on my knowledge, this annual report does not contain any untrue
     statement of a material fact or omit to state a material fact necessary to
     make the statements made, in light of the circumstances under which such
     statements were made, not misleading with respect to the period covered by
     this annual report;

3.   Based on my knowledge, the financial statements, and other financial
     information included in this annual report, fairly present in all material
     respects the financial condition, results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual report;

4.   The registrant's other certifying officer and I are responsible for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

     (a)  designed such disclosure controls and procedures to ensure that
          material information relating to the registrant, including its
          consolidated subsidiaries, is made known to us by others within those
          entities, particularly during the period in which this annual report
          is being prepared;

     (b)  evaluated the effectiveness of the registrant's disclosure controls
          and procedures as of a date within 90 days prior to the filing date of
          this annual report (the "Evaluation Date"); and

     (c)  presented in this annual report our conclusions about the
          effectiveness of the disclosure controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The registrant's other certifying officer and I have disclosed, based on
     our most recent evaluation, to the registrant's auditors and the audit
     committee of registrant's board of directors (or persons performing the
     equivalent functions):

     (a)  all significant deficiencies in the design or operation of internal
          controls which could adversely affect the registrant's ability to
          record, process, summarize and report financial data and have
          identified for the registrant's auditors any material weaknesses in
          internal controls; and

     (b)  any fraud, whether or not material, that involves management or other
          employees who have a significant role in the registrant's internal
          controls; and

<PAGE>

6.   The registrant's other certifying officers and I have indicated in this
     annual report whether there were significant changes in internal controls
     or in other factors that could significantly affect internal controls
     subsequent to the date of our most recent evaluation, including any
     corrective actions with regard to significant deficiencies and material
     weaknesses.

Date: December 24, 2002

                                By: /s/ Barry Mindes
                                    ---------------------------------
                                Name: Barry Mindes
                                Title: Chairman of the Board and
                                       Chief Executive Officer

<PAGE>

I, James McDade certify that:

1.   I have reviewed this annual report on Form 10-KSB of Interactive Systems
     Worldwide Inc.;

2.   Based on my knowledge, this annual report does not contain any untrue
     statement of a material fact or omit to state a material fact necessary to
     make the statements made, in light of the circumstances under which such
     statements were made, not misleading with respect to the period covered by
     this annual report;

3.   Based on my knowledge, the financial statements, and other financial
     information included in this annual report, fairly present in all material
     respects the financial condition, results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual report;

4.   The Registrant's other certifying officer and I are responsible for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

     (a)  designed such disclosure controls and procedures to ensure that
          material information relating to the registrant, including its
          consolidated subsidiaries, is made known to us by others within those
          entities, particularly during the period in which this annual report
          is being prepared;

     (b)  evaluated the effectiveness of the registrant's disclosure controls
          and procedures as of a date within 90 days prior to the filing date of
          this annual report (the "Evaluation Date"); and

     (c)  presented in this annual report our conclusions about the
          effectiveness of the disclosure controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The registrant's other certifying officer and I have disclosed, based on
     our most recent evaluation, to the registrant's auditors and the audit
     committee of registrant's board of directors (or persons performing the
     equivalent functions):

     (a)  all significant deficiencies in the design or operation of internal
          controls which could adversely affect the registrant's ability to
          record, process, summarize and report financial data and have
          identified for the registrant's auditors any material weaknesses in
          internal controls; and

     (b)  any fraud, whether or not material, that involves management or other
          employees who have a significant role in the registrant's internal
          controls; and

<PAGE>

6.   The registrant's other certifying officers and I have indicated in this
     annual report whether there were significant changes in internal controls
     or in other factors that could significantly affect internal controls
     subsequent to the date of our most recent evaluation, including any
     corrective actions with regard to significant deficiencies and material
     weaknesses.

Date: December 24, 2002


                                      By: /s/ James McDade
                                          -----------------------------
                                      Name: James McDade
                                      Title: Chief Financial Officer

<PAGE>

                                POWER OF ATTORNEY

         KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below hereby severally constitutes and appoints Barry Mindes and Bernard
Albanese, and each of them, his true and lawful attorneys-in-fact and agents,
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 attorneys-in-fact and
agents , 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 attorneys-in-fact and agents, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.

         In accordance with the Exchange Act, this report has been signed by the
following persons in the capacities and on the dates stated.


<TABLE>
<CAPTION>
Signature                                Title                                               Date
---------                                -----                                               ---
<S>                                      <C>                                                 <C>

                                         Chairman of the Board and Director                  December 24, 2002
           /s/ Barry Mindes              (Principal Executive Officer)
----------------------------------------
             Barry Mindes

         /s/ Bernard Albanese            President and Director                              December 24, 2002
----------------------------------------
           Bernard Albanese

                                         Chief Financial Officer                             December 24, 2002
           /s/ James McDade              (Principal Financial and Accounting Officer)
----------------------------------------
             James McDade


        /s/ Fredric Kupersmith           Director                                            December 24, 2002
----------------------------------------
          Fredric Kupersmith


          /s/ Janet Mandelker            Director                                            December 24, 2002
----------------------------------------
            Janet Mandelker


          /s/ Harold Rapaport            Director                                            December 24, 2002
----------------------------------------
            Harold Rapaport

</TABLE>

<PAGE>

                       Interactive Systems Worldwide Inc.
                          Index to Financial Statements


                                                         Page
                                                         ----

Independent Auditors' Reports                            F-2

Balance Sheets as of September 30, 2002 and 2001         F-3

Statements of Operations for the years ended
September 30, 2002 and 2001                              F-4

Statements of Stockholders' Equity for the years ended
September 30, 2002 and 2001                              F-5

Statements of Cash Flows for the years ended
September 30, 2002 and 2001                              F-6

Notes to Financial Statements                            F-7


                                      F-1
<PAGE>

                          INDEPENDENT AUDITORS' REPORT


The Board of Directors and Stockholders
Interactive Systems Worldwide Inc.

We have audited the accompanying balance sheets of Interactive Systems Worldwide
Inc. as of September 30, 2002 and 2001, and the related 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Interactive Systems Worldwide
Inc. as of September 30, 2002 and 2001, and the results of its operations and
its cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.



/s/ EISNER LLP

New York, New York
November 26, 2002


                                      F-2
<PAGE>

      Part I:  Financial Information

Item 1.  Financial Statements

                       Interactive Systems Worldwide Inc.
                                 Balance Sheets
                           September 30, 2002 and 2001

                    (Amounts in thousands except share data)

<TABLE>
<CAPTION>
                                                                           2002          2001
                                                                         ---------      -------
                                                                       (Consolidated)
<S>                                                                      <C>         <C>
Current assets:
   Cash and cash equivalents                                             $  4,753    $  4,116
   Accounts receivable                                                         --         300
   Investments in marketable securities                                     3,183         949
   Deferred income tax                                                         --       1,791
   Other receivables                                                        1,108          --
   Prepaid expenses and other current assets                                  136          32
                                                                         --------    --------
       Total current assets                                                 9,180       7,188

   Property and equipment, net                                                314          60
   Investments in marketable securities, non current portion                  190          --
   Accounts receivable, non current portion                                    --         300
   Capitalized software                                                     1,110         121
   Deferred income tax                                                         --         890
   Other assets                                                               302          15
                                                                         --------    --------
                 Total assets                                            $ 11,096    $  8,574
                                                                         ========    ========

                      Liabilities and Stockholders' Equity
Current liabilities:
   Accounts payable                                                      $    387    $     40
   Accrued expenses                                                           439         304
   Deferred revenue                                                            --         625
                                                                         --------    --------
       Total current liabilities                                              826         969
                                                                         --------    --------

Stockholders' Equity:
   Preferred stock, par value $.001 per share;
       2,000,000 shares authorized, 60,000 Series A and 0 outstanding,
       respectively                                                            --          --
   Common stock par value $.001 per share;
       20,000,000 shares authorized;
       9,143,545 and 9,102,832 issued, respectively                             9           9
   Additional paid-in capital                                              12,749      13,326
   Treasury stock, at cost, 242,000 common shares                            (441)       (441)
   Deferred expense, net                                                       --      (1,291)
   Accumulated other comprehensive loss                                        (3)         --
   Accumulated deficit                                                     (2,044)     (3,998)
                                                                         --------    --------
             Total stockholders' equity                                    10,270       7,605
                                                                         --------    --------
                 Total liabilities and
                     stockholders' equity                                $ 11,096    $  8,574
                                                                         ========    ========
</TABLE>

See accompanying notes to financial statements


                                      F-3
<PAGE>

                       Interactive Systems Worldwide Inc.
                             Statement of Operations

             (Amounts in thousands except share and per share data)

<TABLE>
<CAPTION>
                                                         Years Ended
                                                        September 30,
                                                        -------------
                                                   2002               2001
                                                   ----               ----
                                              (Consolidated)
<S>                                            <C>                <C>
Revenues, net                                  $     4,314        $     4,747
                                               -----------        -----------

Costs and expenses:
   Cost of revenues, research
     and development expense                           735                995

   General and
     administrative expense                          2,355              1,232
                                               -----------        -----------
                                                     3,090              2,227
                                               -----------        -----------

        Operating income                             1,224              2,520

Gain related to licensee default
  under agreements                                   3,350
Interest income                                        117                142
                                               -----------        -----------

        Income before income taxes                   4,691              2,662

Income tax (expense) benefit                        (2,737)             2,681
                                               -----------        -----------

        Net income                             $     1,954        $     5,343
                                               ===========        ===========

Net income per
   common share-basic                          $      0.22        $      0.60
                                               ===========        ===========

Weighted average basic
  common shares outstanding                      8,897,297          8,909,132
                                               ===========        ===========

Net income per
   common share-diluted                        $      0.20        $      0.56
                                               ===========        ===========

Weighted average diluted
   common shares outstanding                     9,771,161          9,458,353
                                               ===========        ===========
</TABLE>


See accompanying notes to financial statements


                                      F-4
<PAGE>

                       Interactive Systems Worldwide Inc.
                       Statements of Stockholders' Equity
             Years Ended September 30, 2002 (Consolidated) and 2001

                    (Amounts in thousands except share data)

<TABLE>
<CAPTION>
                                                                                                  Accumulated
                                           Common Stock        Additional              Deferred     Other
                                        --------------------    Paid-In    Treasury    Expense,  Comprehensive  Accumulated
                                          Shares     Amount     Capital     Stock        net         Loss        Deficit     Total
                                          ------     ------     -------     -----        ---         ----        -------     -----
                                        --------------------------------------------------------------------------------------------
<S>                                     <C>        <C>        <C>         <C>         <C>         <C>         <C>         <C>
Balance at
  September 30, 2000                    9,030,992  $       9  $  13,283   $      --   $  (1,394)  $      --   $  (9,341)  $   2,557

Purchase of 242,000
  shares of common stock                       --         --         --        (441)         --          --          --        (441)

Issuance of common
  stock through
  exercise of options                      38,776         --         27          --          --          --          --          27

Net income                                     --         --         --          --          --          --       5,343       5,343

Options granted to
  third party                                                        16                                                          16

Amortization of GIG
  warrant                                      --         --         --          --         103          --          --         103

Issuance of common
  stock through exercise
  of bridge warrants                       33,064                    --          --          --          --          --
                                        --------------------------------------------------------------------------------------------

Balance at
  September 30, 2001                    9,102,832          9     13,326        (441)     (1,291)         --      (3,998)      7,605
                                                                                                                          ---------

Net income                                     --         --         --          --          --          --       1,954       1,954

Foreign currency
  translation loss                             --         --         --          --          --          (3)         --          (3)
                                                                                                                          ---------

Comprehensive income                                                                                                          1,951
                                                                                                                          ---------

Issuance of common
  stock through exercise of
  options (including tax
  benefit of $56,000)                      28,500         --         80          --          --          --          --          80

Issuance of 60,000
  shares of Series A
  preferred stock and warrants
  in connection with
  acquisition of GIG                           --         --        191          --          --          --          --         191

Options granted to third party                 --         --          4          --          --          --          --           4

Amortization and write-off of
  GIG warrant                                  --         --       (879)         --       1,291          --          --         412

Issuance of common stock through
  exercise of bridge warrants              12,213         --         27          --          --          --          --          27
                                        --------------------------------------------------------------------------------------------

Balance at
  September 30, 2002                    9,143,545  $       9  $  12,749   $    (441)  $      --   $      (3)  $  (2,044)  $  10,270
                                        ============================================================================================
</TABLE>

See accompanying notes to financial statements


                                      F-5
<PAGE>

                       Interactive Systems Worldwide Inc.
                            Statements of Cash Flows

                             (Amounts in thousands)

<TABLE>
<CAPTION>
                                                                                                     Years Ended
                                                                                                    September 30,
                                                                                                    -------------
                                                                                               2002               2001
                                                                                               ----               ----
                                                                                          (Consolidated)
<S>                                                                                          <C>                <C>
Cash flows from operating activities:
  Net income                                                                                 $  1,954           $  5,343
Adjustments to reconcile net income
  to net cash provided by
  operating activities:
  Depreciation and amortization                                                                    48                 49
  Non-cash warrant and option charge                                                              416                119
  Bad debt expense                                                                                300                 --
  Deferred income tax provision (benefit)                                                       2,737             (2,681)
Changes in assets and liabilities, net of effects of GIG acquisition:
  Accounts receivable                                                                             300               (598)
  Other receivables                                                                               (26)                --
  Prepaid expenses and other current assets                                                        32                 34
  Other assets                                                                                     (4)                --
  Accounts payable                                                                               (433)                24
  Deferred revenue                                                                               (625)               250
  Accrued expenses                                                                               (361)               235
                                                                                           --------------     --------------
         Net cash provided by operating activities                                              4,338              2,775
                                                                                           --------------     --------------

Cash flows from investing activities:
  Purchase of investments                                                                      (6,038)            (7,697)
  Proceeds from sales of investments                                                            3,614              9,462
  Net cash paid in connection with acquisition of GIG, including related costs                   (857)                --
  Purchase of property and equipment                                                              (45)               (30)
  Capitalized software                                                                           (423)              (121)
                                                                                           --------------     --------------
         Net cash (used in) provided by investing activities                                   (3,749)             1,614
                                                                                           --------------     --------------

Cash flows from financing activities:
  Net proceeds from issuance of common stock                                                       51                 27
  Purchase of treasury stock                                                                       --               (441)
                                                                                           --------------     --------------
         Net cash provided by (used in) financing activities                                       51               (414)
                                                                                           --------------     --------------

Net increase in cash and cash equivalents                                                         640              3,975
Effect of exchange rate on cash                                                                    (3)
Cash and cash equivalents, beginning of year                                                    4,116                141
                                                                                           --------------     --------------
Cash and cash equivalents, end of year                                                       $  4,753           $  4,116
                                                                                           ==============     ==============

Non-cash investing and financing activity in connection with the acquisition of GIG:
     Issuance of preferred stock and warrants                                                $    191
     Assumption of liabilities                                                               $  1,276
</TABLE>

See accompanying notes to financial statements


                                      F-6
<PAGE>

                       Interactive Systems Worldwide Inc.
                          Notes To Financial Statements
                           September 30, 2002 and 2001


(1)      Description of Business

         Interactive Systems Worldwide Inc. (the "Company") developed an
interactive, client/server based computer system for purposes of wagering on
sporting events. On March 17, 2000, the Company entered into License Agreements
(the "Agreements") with a United Kingdom company Global Interactive Gaming
Limited and its subsidiary (collectively "GIG"). Pursuant to the Agreements, the
Company granted GIG exclusive licenses to use the Company's interactive
SportXction(TM) software, technology and patents on the Internet and interactive
television, in all business activities in which such technology is legally
usable, including contests and wagering on sporting events world-wide.

         The Agreements provided that the Company would be paid 25% of the gross
profit, less direct expenses (such as credit card fees, prizes and taxes), for
the use of its technology for contests and other non-wagering transactions. For
wagering, the Company would be paid the lesser of 25% of the gross profit or 1%
of the gross handle, also less direct expenses. These percentage fees were
subject to guaranteed minimum annual license fees, payable quarterly. The
minimum in the first year was $3 million, increasing to $5 million in the second
year, $6 million in the third year, and continuing to increase by 20% per year
thereafter during the 14-year term, after which the licenses were to be fully
paid. At all times the minimum license fee for the next four quarters was to be
kept in a third party escrow account. Since the inception of the Agreements, the
Company was paid at the minimum rates because GIG had not commenced commercial
use of the software.

         GIG's majority shareholder was Prisma iVentures Ltd., a United Kingdom
company and subsidiary of The Kirch Group, a German media conglomerate. As a
result of Kirchmedia's insolvency filing in Germany in April 2002, The Kirch
Group ceased providing funding for GIG. On May 15, 2002, GIG failed to make the
required payment into the escrow account thus defaulting under the Agreements.
In order to enable GIG to continue its operations following the cessation of
funding from The Kirch Group, in May 2002 and July 2002 the Company and GIG
agreed to release a total of $3.2 million from the escrow account that had been
set up under the Agreements. On May 3, 2002, $1.5 million was released to the
Company as a prepayment of the minimum royalty due the Company on May 15, 2002,
and $1.5 million was released to GIG. On July 3, 2002, $100,000 was released to
the Company as a prepayment of the minimum royalty due the Company on August 15,
2002, and $100,000 was released to GIG. GIG was obligated to use the funds
released to it only in the ordinary course of its business and not make any
payments to its shareholders or affiliates of its shareholders. On July 31,
2002, the Company acquired all of the outstanding share capital of GIG which was
a development stage company (see Note 3). Subsequent thereto, the Company's
activities consist of attempting to generate revenue by providing interactive
gaming services to partners such as licensed bookmakers and others.


                                      F-7
<PAGE>

                       Interactive Systems Worldwide Inc.
                          Notes To Financial Statements
                           September 30, 2002 and 2001


(2)      Summary of Significant Accounting Policies

         Consolidated Financial Statements:

         The consolidated financial statements for the year ended September 30,
2002 include the accounts of Interactive Systems Worldwide Inc., and its wholly
owned subsidiaries, ISW Acquisition Co., LLC, and Global Interactive Gaming
Limited ("GIG"). All significant intercompany balances and transactions have
been eliminated.

         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.

         Cash and Cash Equivalents:

         Cash and 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, 2002 and 2001 consist of debt securities
issued by the Federal government and corporate entities. Investments at
September 30, 2002, are scheduled to mature from October 2002 to October 2003.
All of the Company's debt securities are classified as available-for-sale and
their fair value approximates cost. Available-for-sale securities are recorded
at fair value with any unrealized holding gains and losses recorded as a
component of other comprehensive income within stockholders' equity.


                                      F-8
<PAGE>

                       Interactive Systems Worldwide Inc.
                          Notes To Financial Statements
                           September 30, 2002 and 2001


(2)      Summary of Significant Accounting Policies (continued)

         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.
Capitalized amounts will be amortized commencing with the product's introduction
on a straight-line basis over its estimated economic life. During the years
ended September 30, 2002 and 2001, the Company capitalized software development
costs relating to certain enhancements to its SportXction(TM) product not
required under the GIG Agreements.

         During 2002 and 2001, substantially all of the Company's research and
development expense reflected direct costs related to required enhancements
under the GIG Agreements.

         Revenue Recognition:

         The Company's revenue consisted of license fees received under its
Agreements with GIG which are no longer being received as a result of the
insolvency filing of GIG's major shareholder and the resultant discontinuance of
funding provided to GIG (see Note 1). No revenues have been earned by the
Company subsequent to the acquisition of GIG on July 31, 2002 through September
30,2002.

         The Company recognized revenue under its Agreements with GIG based upon
the guaranteed annual minimum amounts due under the Agreements as GIG had not
commenced commercial use of the software. The Company recognized revenue for
each year's guaranteed minimum annual license fee, as reduced in 2002 for escrow
funds returned to GIG, on a straight-line basis over the respective contract
year. The Company received payments of the minimum amounts at predetermined
dates as stipulated in the Agreements. Accordingly, collections received in
advance of recognizing revenue were recorded as deferred revenue on the balance
sheet.

         The terms of the Agreements required the Company to make certain
modifications to the SportXction(TM) System to enhance its use on the Internet.
In September 2001, the Company received final acceptance of the first major
deliverable under the Agreements. With this formal acceptance, the Company
earned a bonus of $600,000 for its early completion of this deliverable. The
bonus, which was included in revenue in September 2001, was payable in two equal
installments of which $300,000 was received in February 2002 and the balance was
due nine months thereafter. As a result of the subsequent cessation of funding
by GIG's major shareholder, the $300,000 remaining balance of the receivable
from GIG was written off as a general and administrative expense in 2002.

         As a result of a default under the Agreements by GIG and the resultant
acquisition of GIG, the Company recognized, during the fourth quarter of fiscal
2002, a $3,350,000 gain representing the remaining balance of deferred revenue
together with the total remaining funds in the escrow account at July 31, 2002.


                                      F-9
<PAGE>

                       Interactive Systems Worldwide Inc.
                          Notes To Financial Statements
                           September 30, 2002 and 2001


(2)      Summary of Significant Accounting Policies (continued)

         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. The
Company believes that there is no material difference between the fair value and
the reported amounts of financial instruments in the balance sheets due to the
short term maturity of these instruments.

         Income Taxes:

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

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

         Long-lived assets and certain identifiable intangibles 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. No such events and
circumstances have occurred.

         Accounting for Stock Based Compensation:

         The Company accounts for its stock-based compensation to employees in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." The Financial Accounting Standards
Board ("FASB") issued SFAS No. 123, "Accounting for Stock-Based Compensation,"
which established a fair-value-based method of accounting for stock-based
compensation plans. The Company has adopted the disclosure-only alternative
under SFAS No. 123, which requires the disclosure of the pro forma effects on
earnings and earnings per share as if the accounting prescribed by SFAS No. 123
had been adopted, as well as certain other information.

         The Company accounts for equity awards issued as compensation to
non-employees at fair value as measured on the date that performance is
complete.


                                      F-10
<PAGE>

                       Interactive Systems Worldwide Inc.
                          Notes To Financial Statements
                           September 30, 2002 and 2001


(2)      Summary of Significant Accounting Policies (continued)

         Basic and Diluted Net Income per Common Share:

         Basic net income per share is computed by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
net income per share is computed by adjusting weighted average outstanding
shares for the dilutive effect of the assumed exercise of outstanding options
and warrants utilizing the treasury stock method and the assumed conversion of
preferred stock (see Note 10).

         Comprehensive Income:

         Comprehensive income consists of net income plus the results of certain
stockholders' equity changes not reflected in net income such as net unrealized
gains (losses) on available-for-sale securities, and the gain or loss on foreign
currency translation.

         Foreign Currency Translation

         The functional currency of GIG, the Company'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 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.

(3)      Acquisition of Global Interactive Gaming Limited

         On July 31, 2002, the Company acquired all of the outstanding share
capital of GIG, an interactive gaming service provider to licensed bookmakers
and the Company's worldwide licensee of its SportXction(TM) software for
$1,092,000, including professional fees and other acquisition costs of $536,000.
The purchase price paid to GIG's stockholders consisted of $365,000 in cash,
60,000 shares of a new class of Preferred Stock valued at $64,000 (see Note 4)
and warrants to acquire 157,652 shares of the Company's Common Stock valued at
$127,000 (see Note 5).

         As GIG was a development stage company and had not commenced planned
principal operations, the acquisition was accounted for as an acquisition of
assets and not a business combination. The total purchase consideration was
allocated to the tangible and intangible assets and liabilities as follows:

                                                             $(000s)
                                                             ------
Cash                                                         $   44
VAT tax receivable                                            1,073
Other current assets                                            428
Property and equipment                                          257
Software                                                        566
Accounts payable                                               (780)
Accrued expenses                                               (496)
                                                             ------
                                                             $1,092
                                                             ======


                                      F-11

<PAGE>
                       Interactive Systems Worldwide Inc.
                          Notes To Financial Statements
                           September 30, 2002 and 2001


(3)      Acquisition of Global Interactive Gaming Limited (continued)

         In addition, an acquired deferred tax asset of $7,570,000 resulting
from an excess of the tax basis of the acquired net assets over the
consideration paid, together with a net operating loss carryforward which GIG
has available to offset future taxable income in the United Kingdom, has been
fully offset by a valuation allowance.

         GIG's results of operations from August 1, 2002 to September 30, 2002
are included in the consolidated statement of operations for the year ended
September 30, 2002.

(4)      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 seven years after issuance for nominal consideration if not
previously converted into Common Stock. The holder of Series A is entitled to a
dividend of 6% per annum if and when declared by the Board of Directors. Series
A has no liquidation preference.

(5)      Warrants:

         Coincident with the signing of the Agreements (see Note 1), GIG was
granted a warrant to purchase a total of 426,087 shares of the Company's Common
Stock, at an exercise price of $4.38 per share. The fully vested warrant became
exercisable in September 2001 and was to remain exercisable through March 2005,
subject to the terms of the warrant agreement. The value of the warrants using a
Black-Scholes option pricing model was $1,450,000. Such amount, which was
accounted for as an increase in additional paid-in capital with a corresponding
offset recorded as deferred sales inducement expense within stockholders'
equity, was being amortized as a reduction of revenue over the term of the
Agreements. As a result of a default under the Agreements by GIG, the warrants
became nonexercisable and, accordingly, the $879,000 remaining unamortized
balance of the warrants was written off against additional paid-in capital in
the fourth quarter of 2002.

         In connection with the acquisition of GIG, certain GIG shareholders
received warrants to purchase 157,652 shares of the Company's Common Stock
originally issued to GIG and the remaining warrants issued to GIG to purchase
268,435 shares of the Company's Common Stock were cancelled. The warrants issued
to the GIG shareholders, which have an exercise price of $4.38 per share and
expire in March 2005, were valued at $127,000 using a Black-Scholes option
pricing model and have been accounted for as partial consideration for the
acquisition of GIG (see Note 3).


                                      F-12
<PAGE>

                       Interactive Systems Worldwide Inc.
                          Notes To Financial Statements
                           September 30, 2002 and 2001


(5)      Warrants: (continued)

         During the year ended September 30, 2001, holders of warrants to
purchase 170,442 shares of the Company's Common Stock, exercised their warrants
on a cashless basis pursuant to which the Company issued 33,064 shares of Common
Stock. As of September 30, 2001, warrants other than those held by GIG referred
to above, were outstanding to purchase 2,061,637 shares of the Company's Common
Stock at exercise prices ranging from $3.39 to $11.88 per share (weighted
average exercise price of $7.63). All warrants were exercisable with expiration
dates from October 2001 to December 2001.

         During the year ended September 30, 2002, holders of warrants to
purchase 28,673 shares of the Company's Common Stock exercised their warrants,
substantially all on a cashless basis, pursuant to which the Company issued
12,213 shares of Common Stock. During the year ended September 30, 2002,
2,032,964 warrants expired unexercised and accordingly as of September 30, 2002,
no warrants were outstanding other than those referred to above issued in
connection with the GIG acquisition.

(6)      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"). The total number of shares of Common Stock with respect to which
options may be granted under the 1995 Plan is 649,955. 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 1,175,000 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.

         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 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.


                                      F-13
<PAGE>

                       Interactive Systems Worldwide Inc.
                          Notes To Financial Statements
                           September 30, 2002 and 2001


(6)      Stock options (continued)

         Activity related to the 1995 and 1996 Plans is as follows:

                                                               Weighted
                                                               Average
                                              Shares        Exercise Price
                                              ------        --------------
Outstanding, September 30, 2000             1,153,195           $0.86
Granted                                       124,000            1.27
Exercised                                     (38,776)           0.69
Cancelled                                     (12,000)           0.97
                                            ---------
Outstanding September 30, 2001              1,226,419            0.91
Granted                                       285,000            2.13
Exercised                                     (28,500)           0.84
Cancelled                                     (57,000)           1.25
                                            ---------
Outstanding September 30, 2002              1,425,919           $1.14
                                            =========           =====

Exercisable at September 30, 2002           1,070,919
                                            =========

Available for grant at September 30, 2002     175,805
                                            =========

         On October 1, 2000 and October 1, 2001, respectively, the Company
issued options to purchase 40,000 shares and 10,000 shares of its common stock
at exercise prices ranging from $1.75 per share to $2.75 per share and $5.75 per
share to a third party consultant in connection with an agreement between the
Company and the consultant to provide investor relations and other services to
the Company for a one-year period. Options for 10,000 shares vested on each of
October 1, 2000, January 1, 2001, April 1, 2001, July 1, 2001 and October 1,
2002. The options remain exercisable until one year after termination of the
agreement. The Company valued the options granted on October 1, 2000 and October
1, 2001 at $16,000 and $4,000, respectively, using a Black-Scholes pricing model
at each vesting date and charged the cost to general and administrative expense.

         The following table summarizes information about stock options
outstanding at September 30, 2002.

<TABLE>
<CAPTION>
                                Options Outstanding                                        Options Exercisable
----------------------------------------------------------------------------         -------------------------------
                                                Weighted
                                                Average             Weighted                                Weighted
        Range of                               Remaining            Average                                  Average
        Exercise             Number           Contractual           Exercise           Number               Exercise
         Price            Outstanding             Life               Price           Outstanding              Price
         -----            -----------             ------             ------          -----------              -----
<S>                       <C>                      <C>               <C>             <C>                     <C>
   $ 0.67 - 0.77             854,919                5                 $0.71             787,919               $0.71
     1.06 - 1.87             504,000                8                  1.57             246,000                1.35
     2.08 - 2.75              37,000                8                  2.35              37,000                2.35
            4.53              20,000                9                  4.53                  --
            5.75              10,000                9                  5.75                  --
                           ---------                                                  ---------
                           1,425,919                7                  1.14           1,070,919                0.91
                           =========                                                  =========
</TABLE>


                                      F-14
<PAGE>

                       Interactive Systems Worldwide Inc.
                          Notes To Financial Statements
                           September 30, 2002 and 2001


(6)      Stock options (continued)

         The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-based Compensation" and applies APB Opinion 25 in
accounting for its plans in its financial statements. 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 income would have been decreased
to the pro forma amounts indicated below:

(Amounts in thousands except per share data)

                                                        2002             2001
                                                        ----             ----
Net income - as reported                               $1,954           $5,343
Net income - pro forma                                  1,790            5,187

Net income per share basic - as reported                 0.22             0.60
Net income per share basic - pro forma                   0.20             0.58

Net income per share diluted - as reported               0.20             0.56
Net income per share diluted - pro forma                 0.18             0.55

         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: expected dividend yield 0.0% (for both periods), risk free interest
rates of 4.17% and 4.37% in 2002 and 2001, respectively, expected volatility of
100% and 123% in 2002 and 2001, respectively, and an expected life of 7 years
(for both periods). The weighted average fair value of options granted in 2002
and 2001 was $1.71 and $0.70, respectively.

(7)      Property and Equipment

         Property and equipment at September 30, 2002 and 2001 consist of the
following:

                                                         2002           2001
                                                         ----           ----

  Furniture and fixtures                             $    62,000   $     31,000
  Building and improvements                              118,000          9,000
  Computer equipment                                   1,536,000      1,374,000
                                                     -----------   ------------
                                                       1,716,000      1,414,000

  Less accumulated depreciation and amortization      (1,402,000)    (1,354,000)
                                                     -----------   ------------
                                                     $   314,000   $     60,000
                                                     ===========   ============


                                      F-15
<PAGE>

                       Interactive Systems Worldwide Inc.
                          Notes To Financial Statements
                           September 30, 2002 and 2001


(8)      Accrued Expenses

         Accrued expenses at September 30, 2002 and 2001 consist of the
following:

                                                      2002               2001
                                                      ----               ----
Professional fees                                  $   73,000         $   20,000
Payroll and related costs                             296,000            184,000
Other                                                  70,000            100,000
                                                   ----------         ----------
                                                   $  439,000         $  304,000
                                                   ==========         ==========

(9)      Income Taxes

         The sources of income (loss) before income taxes for the years ended
September 30, 2002 and 2001 consist of the following:

                                                       2002             2001
                                                       ----             ----
United States                                       $5,245,000       $2,662,000
United Kingdom                                        (554,000)              --
                                                    ----------       ----------

                                                    $4,691,000       $2,662,000
                                                    ==========       ==========

         The income tax expense (benefit) for the years ended September 30, 2002
and 2001 consist of the following:

                                                       2002             2001
                                                       ----             ----
Deferred:
   Federal                                          $2,327,000      $(2,279,000)
   State                                               410,000         (402,000)
                                                    ----------      -----------

                                                    $2,737,000      $(2,681,000)
                                                    ==========      ===========


                                      F-16
<PAGE>

                       Interactive Systems Worldwide Inc.
                          Notes To Financial Statements
                           September 30, 2002 and 2001


(9) Income Taxes (continued)

         The income tax expense (benefit) for the years ended September 30, 2002
and 2001 differed from the amounts computed by applying the federal income tax
rate of 34% to pre-tax income as a result of the following:

<TABLE>
<CAPTION>
                                                             2002                  2001
                                                             ----                  ----
<S>                                                       <C>                <C>
    Computed tax expense at 34%                            $1,595,000         $   905,000
    State tax expense net of federal benefit                  281,000             133,000
    Losses in foreign jurisdiction for which no tax
      benefit is recognized                                   222,000                  --
    Tax benefit related to exercise of non qualified
      stock options credited to additional paid-in
      capital                                                  56,000
    Utilization of net operating loss carryforwards                            (1,042,000)
    Reduction in valuation allowance to recognize
      estimated future year benefit of carryforwards and
      deductible temporary differences                                         (2,681,000)
    Provision of valuation allowance to offset
      deferred United States tax assets                       621,000
    Other                                                     (38,000)              4,000
                                                           ----------         -----------
    Income tax expense (benefit)                           $2,737,000         $(2,681,000)
                                                           ==========         ===========
</TABLE>

         During the year ended September 30, 2001, the Company reversed
$2,681,000 of the valuation allowance for its deferred tax assets based on its
recent history of pre-tax profits, the minimum future royalty payments to be
received under the Agreements and the Company's projected taxable income.
Following the default under the Agreements by GIG, the Company was unable to
conclude that it was more likely than not that the deferred tax asset would be
realized and provided a valuation allowance of $621,000 to offset the deferred
tax asset at September 30, 2002 which increased income tax expense for the year
then ended. In addition, income tax expense for 2002 includes approximately
$2,060,000 representing the utilization during the year of a portion of the
Company's net operating loss carryforward and deductible temporary differences
for which the tax benefit had previously been recognized.


                                      F-17
<PAGE>

                       Interactive Systems Worldwide Inc.
                          Notes To Financial Statements
                           September 30, 2002 and 2001


(9)      Income Taxes (continued)

         The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at September 30, 2002 and 2001 are presented
below:

<TABLE>
<CAPTION>
                                                                2002           2001
                                                                ----           ----
<S>                                                        <C>               <C>
    Deferred tax assets:
    Federal and state net operating loss
      carryforward                                         $     638,000     $2,210,000
    United Kingdom net operating loss carryforward             2,941,000
    Tax basis for capitalized license fees paid to
      the Company by GIG prior to acquisition                  4,662,000             --
    Property and equipment                                       234,000        153,000
    Employee compensation and benefits                            80,000         74,000
    Deferred revenue and other                                                  292,000
                                                           -------------     ----------
    Total gross deferred tax assets                            8,555,000      2,729,000
    Deferred tax liabilities:
      Capitalized software                                       208,000         48,000
                                                           -------------     ----------
    Net deferred tax asset                                     8,347,000      2,681,000
    Less valuation allowance                           (a)     8,347,000             --
                                                           -------------     ----------
        Net deferred tax asset                             $           0     $2,681,000
                                                           =============     ==========
</TABLE>

         (a) Includes $7,736,000 applicable to subsidiary in United Kingdom
(see Note 3).

         As of September 30, 2002, the Company had a net operating loss
carryforward of approximately $1,600,000 for Federal and state income tax
reporting purposes available to offset future federal taxable income through the
year 2020 and future state taxable income through the year 2007, 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 $9,804,000 which is available to offset future taxable income in
the United Kingdom.


                                      F-18
<PAGE>

                       Interactive Systems Worldwide Inc.
                          Notes To Financial Statements
                           September 30, 2002 and 2001


(10)     Computation of Basic and Diluted Net Income Per Common Share:

         The following represents the calculations of the basic and diluted net
income per common share for the years ended September 30, 2002 and 2001.

                                                      2002              2001
                                                      ----              ----

        Net income                                 $1,954,000        $5,343,000
                                                   ==========        ==========

        Weighted average basic
          common shares outstanding                 8,897,297         8,909,132

        Effect of dilutive securities:
          stock options and warrants                  873,864           549,221
                                                   ----------        ----------

        Weighted average diluted
          common shares outstanding                 9,771,161         9,458,353
                                                   ==========        ==========

        Net income per share - basic               $     0.22        $     0.60
                                                   ==========        ==========

        Net income per share - diluted             $     0.20        $     0.56
                                                   ==========       ===========

         The Company's computation of dilutive net income per share for the
years ended September 30, 2002 and 2001 does not include options, warrants or
preferred shares which were outstanding at the respective year ends to purchase
476,652 and 2,625,087 common shares, respectively, because their exercise or
conversion price was greater than the average market price of the common shares
during the period and, therefore, the effect would be antidilutive.

(11)     Commitments

         The Company and its subsidiaries lease office facilities and equipment
under operating leases expiring through March 2009. The remaining minimum rental
commitments under the leases are as follows:

         Year ending September 30,

                   2003                             $  300,000
                   2004                                294,000
                   2005                                275,000
                   2006                                248,000
                   2007                                248,000
                   Thereafter                          371,000
                                                    ----------
                                                    $1,736,000
                                                    ==========

         Rent expense under operating leases during 2002 and 2001 was $136,000
and $51,000, respectively.


                                      F-19
<PAGE>

                       Interactive Systems Worldwide Inc.
                          Notes To Financial Statements
                           September 30, 2002 and 2001


(11)     Commitments (continued)

         The Company entered into employment agreements with two of its
employees. The agreements, one of which expires in June 2003 and the other of
which expires in December 2003, provide for an aggregate minimum compensation of
$511,000 in fiscal year 2003. Compensation expense recognized under these
agreements for the years ended September 30, 2002 and 2001 was $608,000, and
$496,000, respectively. The agreements also provide for severance payments upon
certain events, as defined.

         The Company had entered into a consulting agreement with a non-related
third party relating to the signing of the Agreements with GIG that results in
payments based on license fees received. Amounts expensed under this agreement
for the years ended September 30, 2002 and 2001 were approximately $84,000 and
$100,000, respectively. Due to the default under the Agreements and the
acquisition of GIG, the consulting agreement was terminated in August 2002.


                                      F-20