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                                  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, 2004

                                       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 of incorporation or              (I.R.S. Employer
                 organization)                               Identification No.)

          2 ANDREWS DRIVE, 2ND FLOOR,                             07424-2672
           WEST PATERSON, NEW JERSEY                              (Zip Code)
    (Address of principal executive offices)

                    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, 2004) were $45,000.
         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 13, 2004 was approximately
$21,850,000.
         The number of shares of Common Stock, $.001 par value, outstanding as
of December 13, 2004 was 9,692,420.
         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,
2005. If the definitive proxy statement is not filed on or prior to January 28,
2005, the information called for by Part III will be filed as an amendment to
this Form 10-KSB on or prior to January 28, 2005.
         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, rugby, cricket and snooker, 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, which player will score next, will a
batter get on base or will a penalty shot be successful. 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 the losing outcomes of a betting proposition is
sufficient to pay off the winning outcomes of that proposition plus provide the
operator with a commission for brokering the transactions. The SportXction(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. The
SportXction(TM) System has been developed to allow wagers to be placed
simultaneously through a variety of input devices, all interconnected to our
central system, such as interactive television set-top boxes, personal computers
communicating via the Internet and mobile telephones. The Company has also
developed a non-wagering (i.e. contest) version of the SportXction(TM) System.
The SportXction(TM) System is also being readied for use in conjunction with
fixed odds betting terminals ("FOBTs"), a service which was previously available
with an earlier version of the SportXction(TM) System.

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

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

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         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 November 12, 2004, ISWI entered into a financing agreement relating
to a $3.0 million private placement with two institutional investors of the
Company's Series B Convertible Preferred Stock (the "Series B Preferred Stock"),
which is initially convertible into an aggregate of 977,470 shares of ISWI's
common stock, par value $.001 per share ("Common Stock") at a conversion price
of $3.07 per share, a 5% premium to the closing price on that date. The
investors also received warrants to purchase 513,172 shares of Common Stock
which have a five year term and are exercisable at $3.36 per share, a 15%
premium to the closing price on that date (the "Investor Warrants"). Net
proceeds from the private placement, after estimated costs and expenses were
approximately $2.6 million and will provide additional working capital to the
Company.

         Holders of the Series B Preferred Stock are entitled to receive a 6%
annual dividend, payable in cash or, subject to certain conditions, shares of
Common Stock at the Company's option. Under the terms of the transaction, and
subject to certain conditions, ISWI has the right to force conversion of all or
a portion of the Series B Preferred Stock into Common Stock. In addition, the
Series B Preferred Stock and Investor Warrants are subject to certain
anti-dilution protection. A placement agent in this transaction received a cash
fee and warrants to purchase 102,740 shares of Common Stock which have a term of
five years and are exercisable at $3.50 per share.

         HISTORY

         ISWI's SportXction(TM) System was conceived by its 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 Common Stock, and one redeemable Warrant
(collectively, the "Redeemable Warrants") to purchase one share of Common Stock
at an exercise price of $7.20 per share. The Redeemable Warrants expired on
February 25, 2002 without any having been exercised. The Common Stock currently
trades on the NASDAQ 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 License Agreements (collectively, the "License Agreements") with GIG
in March 2000. Under the terms of the License Agreements, ISWI granted to GIG
exclusive licenses to market, distribute and use ISWI's interactive
SportXction(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 License Agreements provided
that ISWI would be paid the lesser of 25% of the gross profit or 1% of the gross
handle, subject to guaranteed annual minimums during the term of the License
Agreements. ISWI's efforts between early 2000 and 2002 focused on enhancing the
SportXction(TM) System for use by GIG. GIG's majority stockholders were Prisma
iVentures Ltd., a U.K. company and subsidiary of The Kirch Group, a German media
conglomerate, and MultiSport Games Development, Inc., a Delaware corporation
("MultiSport"). As a result of Kirch Media's insolvency filing in Germany in
April 2002, an event unrelated to ISWI, The Kirch Group ceased providing funding
for GIG. On July 31, 2002, ISWI acquired GIG, and as a result, the Company,
through GIG, is now in the business of providing interactive gaming services
using the SportXction(TM) System to business partners such as licensed
bookmakers, mobile telephone companies, cable and satellite television companies
and operators of Internet wagering sites, in locations where legally permitted.
Subsequent to the acquisition, the License Agreements were modified and no
longer provide an exclusive license to GIG or guaranteed annual minimums.

         INDUSTRY OVERVIEW

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

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

                                       4
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         The profits of dedicated sports wagering facilities ("Sports books")
depend upon the reliability of the odds and its adjustment of the odds when
necessary. On occasion, the house's initial handicap or odds will not result in
a balanced book because the players do not agree with the house's assessment of
the expected outcome of the contest or an event that takes place during the
contest for which a betting proposition is being offered. The house will attempt
to attract bets on one potential outcome of the proposition by changing or
moving the line up or down to induce a betting pattern which will lead toward a
balanced book. If this is not possible, the house may only accept bets which are
matched in payout so that no further imbalance will be created, refuse to accept
wagers on one of the contestants or limit the maximum amount of money that will
be accepted on a betting line to attempt to avoid the risk of taking an
unacceptable number of bets on one potential outcome of a betting proposition.
When the limit is reached, the line is moved. Currently, sports wagering
establishments do not change odds or handicaps frequently in order to balance
pools. The odds or handicaps are changed usually only after the book gets
substantially out of balance, if at all. Sports books currently are rarely
perfectly balanced. To the extent that the book is not balanced, the sports book
takes risk on the outcome of the game or event which varies directly with the
level of imbalance. As a result, although the operator can gain extraordinary
profits if the outcome of the proposition favors the side which has too little
payout associated with it, the operator is gambling on a given outcome, instead
of brokering a transaction for a fee.

         The Internet is the largest present venue for sports wagering worldwide
as it is legal in many countries outside of the United States. According to
Christiansen Capital Advisors, a market-research firm, revenues from online
gambling totaled $5.7 billion in 2003. A significant amount of sports wagering
internationally also takes place in betting parlors, where bettors place bets
and redeem winnings; and to a lesser degree, in betting facilities where bettors
view sporting events while wagering. Interactive wagering using interactive
television ("iTV") set-top boxes is a rapidly growing market. Market research
from KPMG and Screen Digest both estimate that by 2007 iTV will generate
approximately $5 billion in gross revenues. Wagering using a mobile phone is
also a developing market. Jupiter Research, a U.K. based research firm,
forecasts that global mobile gambling revenues will reach $2 billion by 2006
assuming that the right operating conditions are set by the industry, its
regulators and partners.

         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 and most media
companies have ceased accepting advertisements from gambling Internet sites. iTV
and mobile phone wagering is also illegal in the United States except for in
Nevada. The agreements between the Company and its partners precludes the
partners 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. The Company has also implemented controls which prevent potential users from
the United States from being able to use the Company's SportXction(TM) System.

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

                                       5
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         SYSTEM DEPLOYMENT STATUS

         INTERACTIVE TELEVISION

         On April 10, 2003, the Company announced that GIG had signed an
agreement with Sky Bet, a wholly-owned subsidiary of British Sky Broadcasting
Limited ("BSkyB"). Under this twelve month trial revenue sharing arrangement
which commences upon product launch, GIG will operate the SportXction(TM) System
and Sky Bet will be responsible for comprehensive marketing program. BSkyB is
the U.K.'s largest supplier of digital TV services with approximately 7.4
million active households throughout the U.K. and Ireland. BSkyB is also one of
the U.K.'s leading sports rights holders and is at the forefront of developing
innovative interactive applications. On October 14, 2004, the Company announced
that it had completed the development of its iTV wagering product. The product
has been delivered to BSkyB and is currently undergoing testing. The launch of
services under this agreement is now scheduled early in calendar 2005.

         INTERNET

         On September 18, 2002, the Company announced that GIG had signed an
agreement with ukbetting plc ("ukbetting") for the incorporation of the
SportXctionTM System into ukbetting's sports wagering web sites. In November
2002, the System was successfully launched on the totalbet.co.uk website during
a series of games. ukbetting introduced the SportXctionTM System on a second
on-line wagering website in January 2003, ukbetting.com.

         On August 21, 2003, the Company announced GIG had signed an interim
agreement with Interactive Sports Limited, a wholly-owned subsidiary of
Sportingbet Plc, to incorporate the SportXctionTM System into Sportingbet's U.K.
and European sports wagering web sites, for use in those venues. Sportingbet Plc
is one of the world's largest Internet sports wagering service providers. The
SportXctionTM System was launched on Sportingbet.com in August 2003,
Sportingbet.gr (Greece) in July 2004 and miapuesta.com (Spain) in November 2004.
This interim agreement is still in effect as Sportingbet completes work on its
next generation back end software and the parties discuss the possible migration
of the SportXction(TM) System into this new environment.

         On September 22, 2003, the Company announced GIG had signed an
agreement with Stanley Interactive Limited, a wholly-owned subsidiary of Stanley
Leisure Plc, operating Stanley Leisure's on-line betting business. Stanley
Leisure Plc is the largest casino operator in the U.K. and the fourth largest
operator of betting shops, with a portfolio of over 600 stores. The launch of
services under this agreement has been delayed as a result of integration issues
between the SportXction(TM) System and Stanley Leisure's on-line back end
software. Currently, there is no scheduled launch date.

         On December 30, 2003, the Company announced that GIG had signed an
agreement with Tote Credit Limited, a subsidiary of the Horserace Totalisator
Board which holds the internet bookmaking license for totesport.com. The Company
launched the SportXction(TM) System on the totesport.com website in June 2004.

                                       6
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         On June 17, 2004, the Company announced that GIG had signed an
agreement with Victor Chandler U.K. Limited, the U.K. based operating arm of the
Victor Chandler Group, one of the world's leading independent betting and gaming
companies. On July 15, 2004, the Company announced that GIG had also signed an
agreement with Victor Chandler International, the Gibraltar based operating arm
of the Victor Chandler Group. The Company launched the SportXction(TM) System on
the Victor Chandler's U.K. and international websites in August and October
2004, respectively.

         Under these non-exclusive agreements, which provide the Company with a
share of the wagering revenue, GIG furnishes the technology and operates the
system, and the partner is responsible for marketing the product, first level
customer support and for processing customer financial transactions. The
Company's revenue primarily consists of service charges calculated based on net
wagering revenue or loss after payment of winnings and taxes. Thus, the Company
may have financial exposure and assumes certain pool imbalance risks associated
with being a part of the house.

         GIG currently offers live play-by-play wagering for soccer, cricket
(both one day and test matches), golf, rugby union, tennis and snooker. It has
also developed football, baseball and basketball versions of the SportXction(TM)
System. Development is underway to add fixed-odds horse racing and darts to the
range of sports for which the SportXction(TM) System may be used. Additional
sports, such as automobile racing are currently in the planning stage. GIG
offered live play-by-play wagering on approximately 800 events during the year
ending September 30, 2004. GIG intends to offer wagering on approximately 1,000
events during fiscal year 2005.

         MOBILE PHONE

         On May 12, 2003, the Company announced that it had reached an
additional agreement with ukbetting, to incorporate the SportXction(TM) System
into a suite of betting services being marketed to key players in the U.K.
mobile phone market. ukbetting currently supplies a range of betting services to
the U.K.'s major mobile networks including Orange, Vodafone, O2, T-Mobile and 3.
On October 15, 2003, the Company announced that the SportXction(TM) System had
been launched to ukbetting's wireless application protocol ("WAP") enabled users
through one of the world's largest mobile operators. This non-marketed launch
which was performed in order to gauge usability was deemed a success. To date,
this product has not been promoted and, as a result, has generated an
insignificant amount of wagering revenues. The Company intends to deploy this
product, in conjunction with ukbetting, to other networks in the U.K.

         BETTING SHOPS

         On March 15, 2004, the Company announced that it had entered into an
agreement with Cyberview Technology Limited ("Cyberview") to market and
distribute the SportXction(TM) System to bookmakers in the U.K. and Europe for
use in betting shops. Cyberview provides U.K. bookmakers with a total Fixed Odds
Betting Terminal ("FOBT") solution including full Central Server Processing, a
suite of events for the player to bet on and a range of touch-screen terminals.
Cyberview provides and services over 8,000 such terminals in the U.K. The
Company and Cyberview are currently working to develop a prototype and are in
discussions with U.K. bookmakers to provide services.

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         NON-WAGERING PRODUCT

         During June and July, 2004, the Company successfully launched a contest
version (i.e. non-wagering) of its SportXction(TM) System with Sportinglife.com
during the Tri-Nations international one-day cricket series. Sportinglife.com is
the U.K.'s most popular multi-sports Internet content destination. The Company
has engaged a sales consultant and is currently marketing the contest product to
professional leagues, professional teams and sports rights holders in the United
States, the U.K. and Europe.

         SYSTEM ENHANCEMENTS

          In July 2004, the Company announced the launch of its new
multi-language and multi-currency version of its SportXction(TM) System which
allows wagering using multiple currencies and provides players with a choice of
languages. To date, the Company has launched the SportXction(TM) System in the
U.K., Ireland, Greece and Spain. The Company expects additional launches in
other countries throughout the world.

         The Company is in the advanced stages of design of a fixed-odds
horseracing product for use in foreign markets. The Company believes that there
are also potential uses for the Company's technology in other markets such as
transaction processing for financial institutions.

         MARKETING AND SALES STRATEGY

         The Company is in discussions with several companies in the U.K.,
Europe and elsewhere in the world for the incorporation of the SportXctionTM
System into licensed sports wagering Internet web sites and the inclusion of the
SportXctionTM System into the interactive television, mobile phone, and betting
shop product offering of bookmakers. In this regard, the Company is pursuing a
"business to business" strategy, partnering with companies who possess an
existing betting customer base. This strategy offers the benefits of potentially
more immediate revenues as well as a lower marketing investment to gain players.

         The focus of the Company's initial marketing efforts is in the U.K. and
Europe although opportunities elsewhere in the world are also being pursued. The
Company may enter certain foreign markets acting solely as a licensor of the
SportXctionTM System. The Company may also re-enter the Nevada market following
the launch of products in the U.K. and its Nevada gaming license has been
maintained for that purpose.

         INTELLECTUAL PROPERTY

         The Company regards the SportXction(TM) System as proprietary. The
Company has two U.S. patents covering its proprietary wagering methods and its
related computer processing system. Corresponding applications for the two
patents have been filed and have been approved in 15 and 18 foreign countries,
respectively. The Company also has a patent pending to use its technology in a
fixed-odds/pari-mutuel hybrid for use in horse racing wagering. In addition, the
Company has a patent pending for a reverse lottery, whereby the winning number
(or ticket) is chosen before numbers (or tickets) are sold.

                                       8
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         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 SportXction(TM) 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 of others. However, there can be no assurance that third parties will
not assert infringement claims against the Company, which claims the Company
would be required to defend at considerable expense or enter into arrangements
requiring the Company to pay royalties or other damages, any of which could
materially and adversely affect the Company's business.

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

         COMPETITION

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

         There are currently a large number of operators of wagering sites
available on the Internet that accept traditional pre-game wagers as well as
wagers placed during the course of an event on sporting events. They operate
from locations outside of the United States, as this type of wagering is illegal
in the United States. Well-financed, long established bookmaking firms with
significantly more financial resources than the Company operate some of these
Internet sites. Many of these have substantially more experience than the
Company in the wagering business. While, to the best of the Company's knowledge,
none of these sites offer products which are similar to the SportXction(TM)
System in any significant degree, and the Company believes it has broad patent
protection for its SportXction(TM) 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.
In addition, no assurance can be given that other competing systems do not exist
or are not under development.

         PERSONNEL

         The Company currently has nine full-time employees in the United States
and ten 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.

                                       9
<PAGE>

         RESEARCH AND DEVELOPMENT

         During the fiscal years ended September 30, 2004 and 2003, the Company
spent approximately $1,935,000 and $1,491,000, respectively, on research and
development activities. These expenses included primarily, programmers' salaries
and benefits, consultants' fees, amortization expense associated with
capitalized development costs and the depreciation expense associated with
computer equipment used in the development of the SportXction(TM) System. During
the fiscal years ended September 30, 2004 and 2003, all of the Company's
research and development expense reflect costs associated with supporting the
SportXction(TM) System. The Company intends to continue to expend significant
sums on such activities.

         As at September 30, 2004, the Company had capitalized $947,000 of
expenses related to enhancements of its SportXction(TM) System. These amounts
are being amortized over their estimated useful life (generally three years)
after they are put into commercial use.


         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, which player will score
next, 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.

         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 or using a television card or video streaming technology with a
personal computer, a player could follow the game on the radio, in a sports bar
or betting shop, or even while attending a live event, with wagers being entered
via in-place terminals or from hand held devices.

         OPERATION OF THE SYSTEM

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

                                       10
<PAGE>

         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 potential
outcomes that are overfunded. In extreme cases, the house or the SportXction(TM)
System may automatically stop accepting bets on an underfunded potential outcome
when the exposure limit is reached while continuing to accept bets on the other
potential outcomes. Under these circumstances, the pool will presumably tend to
return to balance after which the house can resume taking bets on the side of
the proposition for which betting was suspended.

         The SportXction(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 screen or monitor on the Player Betting Device will show the
bettor's available balance, initially equal to his deposit. As wagers are
placed, this balance is reduced by the amounts wagered. When the bettor wins,
his Player Betting Device shows that he has won and his balance is automatically
increased by the wager's payout.

                                       11
<PAGE>

         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 with a variety of Player Betting Devices (e.g.
PC's running a browser, television set-top boxes, mobile phones, PDAs, and
similar devices) each of which has different inherent capabilities and
limitations, some of which are more "intelligent" than others. These Player
Betting Devices are connected to the SportXction(TM) System utilizing several
types of networks (e.g. Internet, dedicated private network or wireless
networks). As a result of this flexibility, the SportXction(TM) System has a
variety of different client interface and interconnection modules that may be
used as determined by the configuration of a particular instance of the
SportXction(TM) 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
SportXction(TM) System up-time in the event of component failure.

         All Player Betting Devices are connected to the Hub Server via a
client/server network. The Hub Server Modules are software components on a
network of server computers. The transmission of data between the various
elements of the Hub Server operates in real time utilizing sophisticated
mathematical algorithms for high speed. As a result, the SportXction(TM) 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.

                                       12
<PAGE>

         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 SportXction(TM)
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 SportXction(TM) System tables which control the
propositions being offered and the business rules to be followed by the
SportXction(TM) 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.

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

                                       13
<PAGE>

         GOVERNMENT REGULATION

         UNITED KINGDOM

         The Company's indirect, wholly-owned subsidiaries, Brightform Limited
("Brightform") and GIG Operations Limited ("GIG Operations") provide betting
services within the United Kingdom and must comply with betting legislation in
the United Kingdom. Betting is regulated in the United Kingdom under the Betting
Gaming and Lotteries Act 1963 ("the Betting Act") and the Betting and Gaming
Duties Act 1981 ("the Duties Act") and associated regulations (all collectively
referred to as the "Acts").

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

         The Betting Act provides, 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 Scotland. The essential tests applied by the
licensing justices when considering an application are whether or not the
applicant is a fit and proper person to hold a bookmakers' permit, whether they
are competent to operate a bookmaking business and whether they have sufficient
financial resources to meet the potential liabilities that may arise. Brightform
applied for and acquired a bookmakers' permit on April 28, 2003. This permit
expires on April 28, 2006 when Brightform will be required to apply to renew
this permit. Separately, GIG Operations applied for and acquired a betting
agency permit in respect of its customer, ukbetting, on January 20, 2003 and in
respect of its customer, Sportingbet, on October 20, 2003, both of which expire
on May 31, 2006.

         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.

                                       14
<PAGE>

         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.

         A draft of the U.K. Gambling Bill was laid before Parliament on October
18, 2004 and is currently being considered in the legislative process. The
proposed Bill seeks to modernize the current gaming legislation and importantly
to regulate Internet, interactive television, and other remote forms through a
new licensing regime. A new body, the Gambling Commission, is to be created to
regulate the industry. Assuming the new legislation is enacted, which is
expected by April 2005, Brightform and GIG Operations will be required to apply
for new operating licenses. None of the activities for which Brightform or GIG
Operations are currently licensed is expected to be adversely affected by this
proposed legislation.

         NEVADA

         Prior to April 2000, ISWI conducted business in the State of Nevada as
the operator of a sports wagering system. As such, it was required to obtain a
gaming license as an operator of an "inter-casino linked system" ("OILS
License") and to register with the Nevada Gaming Commission as a publicly traded
corporation (a "Registered Corporation"). ISWI is not currently operating in
Nevada, although it continues to hold its OILS License and is still a Registered
Corporation. ISWI is 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 likely to be 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.")

                                       15
<PAGE>
         The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are concerned
with, among other things: (i) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming, or manufacturing or
distribution of gaming devices at any time or in any capacity; (ii) the strict
regulation of all persons, locations, practices, associations and activities
related to the operation of licensed gaming establishments and the manufacture
or distribution of gaming devices and equipment; (iii) the establishment and
maintenance of responsible accounting practices and procedures; (iv) the
maintenance of effective controls over the financial practices of licensees,
including the establishment of minimum procedures for internal fiscal affairs
and the safeguarding of assets and revenues, providing reliable record keeping
and requiring the filing of periodic reports with the Nevada Gaming Authorities;
(v) the prevention of cheating and fraudulent practices; and (vi) providing a
source of state and local revenues through taxation and licensing fees.

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

         On April 23, 1998, the Nevada Commission granted ISWI an OILS License
and registered it as a Registered Corporation. The Nevada Commission further
granted an exemption from the requirements of its Regulation 16.100(1), which
would have otherwise prohibited ISWI, as a Registered Corporation, from holding
a Nevada OILS License. ISWI's OILS License has a number of conditions, all of
which were agreed to by the Company, relating to the Company's operations and to
the SportXction(TM) 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), Bernard Albanese (President) and James McDade (Chief
         Financial Officer) have been approved for licensure.

                                       16
<PAGE>

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.

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. In certain
         circumstances, an institutional investor may hold up to 19% of a
         Registered Corporation's voting securities for a limited period of time
         and maintain such a waiver. The applicant is required to pay all costs
         of investigation.

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

                                       17
<PAGE>

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

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.

                                       18
<PAGE>

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. The Company continues to
         comply with ongoing foreign gaming reporting requirements regarding
         GIG.

         The Company may also be required to make annual filings with the
Attorney General of the United States in connection with the operation of the
SportXction(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 wagering
using fixed odds betting terminals will be introduced, potential market size for
interactive wagering in conjunction with television broadcasts and using mobile
telephones and the SportXction(TM) System, whether the launch of the agreement
with SkyBet will take place in early calendar 2005, whether the Company will add
horseracing and darts to the range of sports for which the SportXction(TM)
System may be used, whether GIG will offer live play-by-play wagering on 1,000
events during fiscal year 2005, as anticipated, 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 the Company
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 Company will complete product
extensions to the SportXction(TM) System and the ultimate dilutionary effect
that the Debentures, preferred stock, warrants and options will have on existing
stockholders. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company, or industry results, to be materially different
from any future results, performance, or achievements, expressed or implied, by
such forward-looking statements. Such risks and factors include, among others,
those listed below. When used in this Report, statements that are not statements
of current or historical fact may be deemed to be forward-looking statements.

                                       19
<PAGE>

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.


                                       20
<PAGE>

                                  RISK FACTORS

OUR SUCCESS IS DEPENDANT ON OUR ABILITY TO MARKET, AND THE MARKET'S ACCEPTANCE
OF, A SINGLE PRODUCT.

         The Company's success will depend primarily on the success of a single
product, the SportXction(TM) System, and the ability of the Company and its
business partners and customers 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, the Company 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 the Company 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.

WE HAVE A HISTORY OF LOSSES AND THE LIKELIHOOD OF OUR SUCCESS DEPENDS ON MANY
FACTORS, INCLUDING SOME THAT ARE OUT OF OUR CONTROL.

         Until entering into the License Agreements with GIG in 2000, the
Company was in the development stage and generated limited revenues from the
SportXction(TM) System. As of September 30, 2004 and September 30, 2003, the
Company had cumulative net losses since inception of approximately $13.6 million
and $7.6 million, respectively. The Company incurred a net loss of $6.0 million
during the year ended September 30, 2004. The likelihood of the Company's
success must be considered in light of the problems, delays, expenses and
difficulties encountered by an enterprise in the Company's stage of development,
some of which may be beyond the Company's control. These include, but are not
limited to, the ability of the Company to operate its anticipated business;
delays in commencement of operation of the SportXction(TM) System by the
Company's business partners; the ability of the Company and its business
partners to attract a sufficient number of players desirous of utilizing the
SportXction(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.

WE ANTICIPATE CONTINUED LOSSES AND NEGATIVE CASH FLOW, AND WE CAN NOT PREDICT
WHETHER OR WHEN WE WILL AGAIN BECOME PROFITABLE.

         Following the acquisition of GIG in 2002, the Company's revenue,
expenses and overall profitability have been adversely impacted. By recovering
its software license, the Company now acts as the primary operator of the
SportXction(TM) System and is 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 does and will continue to, however,
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, 2005.

                                       21
<PAGE>

A CHANGE IN OUR BUSINESS PLAN MAY RESULT IN THE NEED TO RAISE ADDITIONAL
FINANCING, WHICH MAY NOT BE AVAILABLE ON TERMS ACCEPTABLE TO US, IF AT ALL.

         The Company anticipates that its existing resources, including the
proceeds of the Company's recent financing, will be adequate to fund its capital
and operating requirements through at least the next 15 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, 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. Moreover, raising
additional funds in the future may trigger the anti-dilution provisions in our
outstanding Debentures, Series B Preferred Stock and warrants, resulting in
further dilution to existing stockholders. Insufficient funds may prevent the
Company from implementing its business strategy or may require the Company to
limit its operations significantly.

IF WE ARE FORCED TO REPAY THE DEBENTURES IN CASH, WE MAY NOT HAVE ENOUGH CASH TO
FUND OUR OPERATIONS AND MAY NOT BE ABLE TO OBTAIN ADDITIONAL FINANCING.

         The Company's Debentures issued in November 2003 contain certain
provisions and restrictions, which if violated, could result in the full
principal amount together with interest and other amounts becoming immediately
due and payable in cash. If such an event occurred, and if a holder of the
Debentures demanded repayment, the Company might not have the cash resources to
repay such indebtedness when due. The Debentures are repayable in monthly
installments through May 2006 with interest payable quarterly. Subject to
certain conditions, the monthly principal payments and the quarterly interest
payments on the Debentures may be paid, at the Company's option, in cash or
additional shares of Common Stock. If the Company makes these payments in cash
rather than additional shares of Common Stock, it would reduce the amount of
cash available to fund operations. The Debentures contain restrictions upon
incurring additional indebtedness. The existence of debt service obligations and
the terms and anti-dilution provisions of the Debentures and warrants may limit
the Company's ability to obtain additional financing on favorable terms, or at
all.

                                       22
<PAGE>

IF WE VIOLATE CERTAIN PROVISIONS OF THE COMPANY'S SERIES B PREFERRED STOCK AND
ARE FORCED TO REDEEM THE PREFERRED STOCK FOR CASH, WE MAY NOT HAVE ENOUGH CASH
TO FUND OUR OPERATIONS AND MAY NOT BE ABLE TO OBTAIN ADDITIONAL FINANCING.

         The Company's Series B Preferred Stock issued in November 2004 contain
certain provisions and restrictions under the Company's control, which if
violated, could give the holders of the Series B Preferred Stock the right to
require the Company to redeem their shares of Series B Preferred Stock for cash.
If such an event occurred and a holder of the Preferred Stock exercised its
right to require the Company to redeem its shares, the Company might not have
the cash resources to redeem such shares. Subject to certain conditions, the
quarterly dividend payments on the Preferred Stock may be paid, at the Company's
option, in cash or additional shares of Common Stock. If the Company makes these
payments in cash rather than additional shares of Common Stock, it would reduce
the amount of cash available to fund operations. The Series B Preferred Stock
also contains anti-dilution provisions which may limit the Company's ability to
obtain additional financing on favorable terms, or at all.

IF THE HOLDERS OF OUR OUTSTANDING DEBENTURES, SERIES B PREFERRED STOCK, OPTIONS
AND WARRANTS CONVERT OR EXERCISE THOSE SECURITIES, OR IF WE ELECT TO PAY
PRINCIPAL AND INTEREST ON THE DEBENTURES OR DIVIDENDS ON THE SERIES B PREFERRED
STOCK WITH SHARES OF OUR COMMON STOCK, OUR EXISTING STOCKHOLDERS WILL BE
SIGNIFICANTLY DILUTED. IN ADDITION, SALES OF SUBSTANTIAL AMOUNTS OF OUR COMMON
STOCK COULD CAUSE THE MARKET PRICE TO GO DOWN.

            To the extent that the Debentures or shares of Series B Preferred
Stock are converted and/or the options or warrants are exercised, a
significantly greater number of shares of our Common Stock will be outstanding
and the interests of our existing stockholders will be substantially diluted. If
these additional shares are sold into the market, it could decrease the market
price of our Common Stock and encourage short sales. Short sales and other
hedging transactions could place further downward pressure on the price of our
Common Stock. We cannot predict whether or how many additional shares of our
Common Stock will become issuable as a result of these provisions. Additionally,
we may elect to make payments of principal of and interest on the Debentures and
dividends on the Series B Preferred Stock in shares of our Common Stock, which
could result in increased downward pressure on our stock price and further
dilution to our existing stockholders.

OUR SALES AND INTEGRATION CYCLES WITH POTENTIAL BUSINESS PARTNERS ARE LONG AND
UNPREDICTABLE, AND MAY ENCOUNTER UNANTICIPATED PROBLEMS.

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

                                       23
<PAGE>

OUR INTERNATIONAL OPERATIONS SUBJECT US TO CURRENCY EXCHANGE RISKS.

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

OUR BUSINESS IS RELIANT ON OBTAINING AND RETAINING CERTAIN GAMING LICENSES.

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

WE FACE SUBSTANTIAL COMPETITION IN THE GAMING INDUSTRY AND MAY NOT BE ABLE KEEP
UP WITH FUTURE TECHNOLOGICAL CHANGES.

         The Company's SportXction(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.

OUR SUCCESS DEPENDS SIGNIFICANTLY UPON OUR ABILITY TO PROTECT OUR INTELLECTUAL
PROPERTY AND TO AVOID INFRINGING THE INTELLECTUAL PROPERTY OF THIRD PARTIES,
WHICH COULD RESULT IN COSTLY AND TIME-CONSUMING LITIGATION.

         The Company regards the SportXction(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 filed in certain foreign countries
some of which have been issued and some of which are pending. The Company also
has a patent pending to use its technology in a fixed-odds/pari-mutuel hybrid
for horse race wagering and for a reverse lottery. No assurance can be given
that any of the Company's pending domestic or foreign patent applications will
issue as patents, that any issued patents will provide the Company with
significant competitive advantages, or that challenges will not be instituted
against the validity or enforceability of any patent owned by the Company or, if
instituted, that such challenges will not be successful. Defense of intellectual
property rights can be difficult and costly, and there can be no assurance that
the Company will be able effectively to protect our technology from
misappropriation by competitors. Additionally, third party infringement claims
may result in the Company being required to enter into royalty arrangements or
pay damages, any of which could materially and adversely affect the Company's
business, financial condition and results of operations.

                                       24
<PAGE>

         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.

OUR SUCCESS DEPENDS ON OUR ABILITY TO ATTRACT AND RETAIN KEY PERSONNEL.

         The Company is dependent upon the continued efforts and abilities of
its executive officers and other key personnel 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, 2005
and June 30, 2005, 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 business, financial condition and results of operations.

CERTAIN OF OUR EXECUTIVE OFFICERS AND DIRECTORS ARE LIKELY TO HAVE THE ABILITY
TO EXERCISE EFFECTIVE CONTROL OF OUR COMPANY AS THEY AND THEIR AFFILIATES OWN
AND CONTROL A SIGNIFICANT PERCENTAGE OF OUR OUTSTANDING COMMON STOCK.

                                       25
<PAGE>

         As of December 15, 2004, 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 36% 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.

THE MARKET PRICE OF OUR COMMON STOCK MAY BE HIGHLY VOLATILE.

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

IF WE FAIL TO MEET NASDAQ SMALLCAP MARKET'S CONTINUED LISTING REQUIREMENTS, OUR
SHARES MAY BE DELISTED, WHICH COULD REDUCE THE LIQUIDITY OF OUR COMMON STOCK,
MAKE IT MORE DIFFICULT TO RAISE CAPITAL, CAUSE AN EVENT OF DEFAULT UNDER OUR
DEBENTURES AND WILL RESULT IN CERTAIN PENALTIES UNDER OUR SERIES B PREFERRED
STOCK.

         The trading of the Company's Common Stock on NASDAQ is conditioned upon
the Company meeting certain asset, capital and surplus earnings and stock price
tests set forth by NASDAQ. To maintain eligibility for trading on the NASDAQ
SmallCap Market, the Company will be required to, among other things, (i)
maintain stockholders' equity of at least $2,500,000, have a market
capitalization of $35 million, or have net income 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 the NASDAQ SmallCap Market. In each of those instances, the Company
was able to overcome these problems, achieve compliance with the requirements
for continued listing and was able to have its Common Stock continue to be
listed on the NASDAQ SmallCap Market.

         The effects of delisting include the limited publication of the market
prices of the Company's securities and limited news coverage of the Company.
Delisting will result in an event of default under the Company's Debentures and
the full principal amount together with interest and other amounts owing will
immediately become due and payable in cash. Delisting may reduce investors'
interest in the Company's securities and materially adversely affect the trading
market and prices for such securities and the Company's ability to issue
additional securities or to secure additional financing.

                                       26
<PAGE>

         In the event that the Company's shares are delisted and the Company
does not promptly have its Common Stock quoted on the OTC Bulletin Board or does
not use commercially reasonable efforts to have its Common Stock re-listed or
re-quoted on the NASDAQ SmallCap Market or listed or quoted on another principal
market as soon as reasonably practicable, the holders of the Series B Preferred
Stock may redeem all of their Series B Preferred Stock which will immediately
become payable in cash.

         In addition to the risk of volatile stock prices and possible
delisting, low price stocks are subject to the additional risks of federal and
state regulatory requirements and the potential loss of effective trading
markets. In particular, if the Common Stock was delisted from trading on NASDAQ
and the trading price of the Common Stock was less than $5.00 per share, the
Common Stock could be subject to Rule 15g-9 under the Securities Exchange Act of
1934, as amended (the "Exchange Act") which, among other things, requires that
broker/dealers satisfy special sales practice requirements, including making
individualized written suitability determinations and receiving purchasers'
written consent, prior to any transaction. If the Company's securities were also
deemed penny stocks under the Securities Enforcement and Penny Stock Reform Act
of 1990, additional disclosures in connection with trades in the Company's
securities, including the delivery of a disclosure schedule explaining the
nature and risks of the penny stock market would be required. The SEC's
regulations define a "penny stock" to be any non-NASDAQ equity security that has
a market price (as therein defined) of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. Such
requirements could severely limit the liquidity of the Company's securities.

WE DO NOT INTEND TO PAY CASH DIVIDENDS FOR THE FORESEEABLE FUTURE.

         The Company has not paid any dividends on its Common Stock since its
inception and does not intend to pay any dividends on our Common Stock in the
foreseeable future. Although holders of our Series B Preferred Stock are
entitled to receive dividends, we may elect to pay such dividends in cash or
shares of Common Stock, subject to certain conditions, at our option. The
Company currently intends to reinvest earnings, if any, in the development and
expansion of its business.

CERTAIN PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND DELAWARE LAW MAY HAVE
THE EFFECT OF DISCOURAGING, DELAYING OR PREVENTING A CHANGE OF CONTROL THAT OUR
STOCKHOLDERS MAY CONSIDER FAVORABLE.

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

                                       27
<PAGE>

         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, 2004, were approximately $36,000. For the
fiscal year ending September 30, 2005, lease payments for this facility are
expected to be approximately $18,000. 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 year ended September
30, 2004, were approximately $275,000. For the fiscal year ending September 30,
2005, lease payments for this facility are expected to be approximately
$275,000. In October, 2003, the Company began subleasing approximately 1,500
square feet of this space to a third party. For the fiscal year ending September
30, 2004, rental income from this sublease was approximately $106,000. For the
fiscal year ending September 30, 2005, rental income from this sublease is
expected to be approximately $106,000.


         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, 2004.


                                       28
<PAGE>

                                     PART II

         ITEM 5. MARKET FOR COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND SMALL
         BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES

         MARKET INFORMATION

         The following table sets forth, for the periods indicated and as
reported by NASDAQ, the high and low sales prices for shares of the Company's
Common Stock. The quotations reflect inter-dealer prices without retail mark-up
or commission and may not represent actual transactions. The Company's Common
Stock is traded on the NASDAQ SmallCap Market:

    Quarter                                   High       Low
    -------                                   ----       ---
    October 1, 2002 to December 31, 2002      $3.00     $1.43
    January 1, 2003 to March 31, 2003          4.90      2.11
    April 1, 2003 to June 30, 2003             5.25      3.01
    July 1, 2003 to September 30, 2003         4.54      2.95
    October 1, 2003 to December 31, 2003       4.50      3.05
    January 1, 2004 to March 31, 2004          3.68      2.77
    April 1, 2004 to June 30, 2004             3.38      2.35
    July 1, 2004 to September 30, 2004         3.75      2.72

         The high and low sales prices on December 13, 2004 were $3.75 and
$3.42, 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 13, 2004. The Company believes there are in excess of 1,100 beneficial
owners of its Common Stock whose shares are held in "Street Name."

         DIVIDENDS

         The Company has never paid cash dividends with respect to its Series A
Preferred Stock, Series B Preferred Stock or its Common Stock. Although holders
of our Series B Preferred Stock are entitled to receive dividends, we may elect
to pay such dividends in cash or shares of our Common Stock, subject to certain
conditions, at our option. The Company intends to retain future earnings, if
any, which may be generated from the Company's operations to help finance the
operations and expansion of the Company and accordingly does not plan, for the
foreseeable future, to pay cash dividends to holders of preferred stock or
Common Stock. Any decision as to the future payment of dividends on preferred
stock or Common Stock (other than that required in respect of the Series B
Preferred Stock) will depend on the results of operations and financial position
of the Company and such other factors as the Company's Board of Directors, in
its discretion, deems relevant.

                                       29
<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.

         OVERVIEW

         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, rugby, cricket and snooker, 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, which player will score next, will a
batter get on base or will a penalty shot be successful. 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.

         On July 31, 2002, ISWI, through a wholly-owned subsidiary, acquired all
of the outstanding share capital of Global Interactive Gaming Limited ("GIG"), a
British interactive gaming service provider which was previously ISWI's
exclusive licensee. GIG markets its services to interactive television carriers
which employ satellite, cable and terrestrial programming, mobile telephone
operators, licensed bookmakers and casinos and is located in London, England.

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

         During the years ended September 30, 2004 ("Fiscal 2004") and 2003
("Fiscal 2003"), the Company's revenue consisted of license fees and service
charges from providing interactive gaming services using the SportXctionTM
System to business partners such as licensed bookmakers and others located in
the United Kingdom.

                                       30
<PAGE>

         CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

         The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86 "Computer Software
To Be Sold, Leased, or Otherwise Marketed". Such costs are expensed prior to a
product or product enhancement's achievement of technological feasibility and
thereafter are capitalized. The Company defines a product enhancement as an
improvement to an existing product that is intended to extend the life or
improve significantly the marketability of the original product. In order to
meet the requirements for capitalization, a product enhancement should involve
considerable development resources, requires a product design and may require a
redesign of all or part of the existing product. During the year ended September
30, 2003, the Company capitalized software development costs of $427,000
relating to certain enhancements to its SportXction(TM) product. The Company
stops capitalizing software costs relating to a particular enhancement when the
enhanced product is available for general release to its customers. Amortization
of all previously capitalized amounts commenced during the year ended September
30, 2003 with the enhanced product's availability for general release to its
first customer. Amortization expense, which has been computed on a straight-line
basis and an estimated economic life of three years, amounted to $315,000 and
$161,000 for the years ended September 30, 2004 and 2003, respectively.

         At each balance sheet date, the Company compares unamortized
capitalized software costs to net realizable value on a project-by-project basis
and writes off any excess of the unamortized cost over the net realizable value.
The net realizable value is the estimated future gross revenues for that product
or product enhancement reduced by the estimated future costs of completing and
disposing of that product or product enhancement, including the costs of
performing maintenance and support. Certain software purchased by GIG prior to
its acquisition by ISWI has not been put into commercial use and based upon the
Company's current and anticipated customer base, it appears unlikely that it
will be put into such use. As a result, during fiscal 2003, the Company
wrote-off $566,000 representing the purchase price allocated to this software in
connection with the acquisition of GIG. The purchase price included certain
invoices amounting to $138,000 billed to GIG by a third party software developer
which were in dispute. During fiscal 2004, the Company determined that these
invoices would not be paid and, accordingly, classified the write-off of the
related invoices as an adjustment to the impairment loss. The Fiscal 2003
Statement of Operations has been reclassified to include the write-off as part
of operating loss.

                                       31
<PAGE>

         See Note 2 to the Company's Financial Statements for a full discussion
of the Company's critical accounting policies and estimates.

         RESULTS OF OPERATIONS

         Net revenues for Fiscal 2004 were $45,000, as compared to $14,000
during Fiscal 2003. The increase in Fiscal 2004 is due to the addition of a
non-wagering prediction game, new partners and an increase in the number of
events covered. In June and July 2004, the Company successfully launched a
contest version (i.e. non-wagering) of its SportXction(TM) System during the
Tri-Nations cricket tournament for sportinglife.com. Revenues for Fiscal 2004
also include service charges from the Company's agreements with Sportingbet plc
(launched in August 2003), totesport.com (launched in June 2004) and the U.K.
operating arm of Victor Chandler (launched in August 2004), which were not in
"live" operation in Fiscal 2003. For the quarter ending December 31, 2004, the
Company expects a moderate increase in revenues as compared to the quarter ended
September 30, 2004, with more significant increases projected in future quarters
as it launches the SportXction(TM) System on BSkyB's digital television platform
and gains new partners.

         Cost of revenues, research and development expense for Fiscal 2004 were
$1,935,000, as compared to $1,491,000 during Fiscal 2003. The increase in Fiscal
2004 was primarily due to higher programming costs as no software development
costs were capitalized in Fiscal 2004 as well as an increase in the amortization
of previously capitalized development costs.

         General and administrative expenses during Fiscal 2004 were $3,630,000,
as compared to $3,680,000 during Fiscal 2003. The decrease in Fiscal 2004 was
primarily due to lower payroll and benefit costs resulting from a reduced
headcount and sublease income partially offset by higher business development
and consulting fees.

         As described above in Critical Accounting Policies and Estimates,
during Fiscal 2003, the Company wrote-off $566,000 related to certain software
purchased by GIG prior to its acquisition by ISWI which represented the purchase
price allocated to this software in connection with the acquisition of GIG.
During Fiscal 2004, the Company reversed $138,000 of this write-off.

         Interest expense (income) during Fiscal 2004 was $606,000, as compared
to ($146,000) during Fiscal 2003. In Fiscal 2004, this non-cash expense
represents interest on the Debentures which was satisfied in shares of Common
Stock, amortization of debt discount which is being accreted over the life of
the debt using the effective interest method as well as an amount for
amortization of debt issuance costs, net of interest income of $70,000. The
amount in Fiscal 2003 represents interest income from cash and short term
investments.

         Net loss and net loss per share (basic and diluted) for Fiscal 2004
were $5,988,000 and $0.64, respectively, as compared to $5,577,000 and $0.63,
respectively, during Fiscal 2003. The increase is primarily the result of
interest expense associated with the Debentures (as described above).

                                       32
<PAGE>

         LIQUIDITY AND CAPITAL RESOURCES

         As of September 30, 2004, the Company had liquid resources totaling
$3,117,000. These include cash and cash equivalents in the amount of $2,832,000
and investments in the amount of $285,000. Investments are limited to investment
grade marketable securities with maturities of less than 12 months.

         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, 2005.
The Company anticipates that its existing resources including those generated by
its recent financing (see "Recent Developments" below) will be adequate to fund
its capital and operating requirements through at least the next 15 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.

         The Company expects the agreements with its current business partners
to produce meaningful revenues in the year ending September 30, 2005. The
Company is currently in discussions with several additional bookmakers,
interactive television and mobile phone companies to provide services. There is
no assurance however, that the SportXction(TM) System will be launched as
planned with additional business partners or accepted by potential users. In
addition, there is no assurance that any additional agreements will be signed.
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.

                                       33
<PAGE>

         In November 2003, the Company issued $2.6 million of 7.5% Convertible
Debentures (the "Debentures"). The Debentures are repayable in 24 equal monthly
installments of $108,333 which began in May 2004 with interest payable
quarterly. Subject to certain conditions, the Company has the right to repay the
interest and the principal in cash or shares of its Common Stock and force
conversion of all or a portion of the Debentures into Common Stock. To date, the
Company has made all interest payments with respect of the Debentures in shares
of the Company's Common Stock. The Company made its principal repayment in May
2004 in cash, elected to defer its monthly repayment in June 2004 as permitted
under the Debenture and made the remainder of its principal repayments to date
in shares of the Company's Common Stock. While at least 50% of the $2.6 million
in Debentures are outstanding, the Debentures contain covenants that restrict
the ability of the Company to incur indebtedness that is pari passu with or
senior to the Debentures, except for certain specified types of indebtedness not
to exceed $625,000 or except for indebtedness incurred in connection with a
business combination transaction.

         RECENT DEVELOPMENTS

         On November 12, 2004, ISWI entered into a financing agreement relating
to a $3.0 million private placement with two institutional investors of the
Company's Series B Preferred Stock, convertible into an aggregate of 977,470
shares of Common Stock at a conversion price of $3.07 per share, a 5% premium to
the closing price on that date. The investors also received warrants to purchase
513,172 shares of Common Stock which have a term of five years and are
exercisable at $3.36 per share, a 15% premium to the closing price on that date.
Net proceeds from the private placement, after estimated costs and expenses,
were approximately $2.6 million and will provide additional working capital to
the Company.

         Holders of the Series B Preferred Stock are entitled to receive a 6%
annual dividend, payable in cash or, subject to certain conditions, shares of
Common Stock at the Company's option. Under the terms of the transaction, and
subject to certain conditions, ISWI has the right to force conversion of all or
a portion of the Series B Preferred Stock into Common Stock. In addition, the
Series B Preferred Stock and warrants are subject to certain anti-dilution
protection. A placement agent in this transaction received a cash fee and
warrants to purchase 102,740 shares of Common Stock which have a term of five
years and are exercisable at $3.50 per share.

         OUTLOOK

         The Company believes that its long term business outlook is optimistic.
However, it is imperative that the Company launches its agreements which are not
yet "live" as well as form additional strategic partnerships which generate
meaningful revenue. During the quarter ending December 31, 2004, the Company
expects its signed agreements will generate a moderate increase in revenues to
that earned during the quarter ending September 30, 2004, with increasing
amounts in future quarters as the SportXction(TM) System is launched with BSkyB
and the number of users grow. The Company expects to incur losses and negative
cash flow for the year ending September 30, 2005.

                                       34
<PAGE>

         ITEM 7.   FINANCIAL STATEMENTS

         See Page F-1

         ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
                 FINANCIAL DISCLOSURE

         NONE

         ITEM 8A. CONTROLS AND PROCEDURES

         (a) Disclosure Controls and Procedures. The Company's management, with
the participation of the Company's Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the Company's disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the
end of the period covered by this report. Based on such evaluation, the
Company's Chief Executive Officer and Chief Financial Officer have concluded
that, as of the end of such period, the Company's disclosure controls and
procedures are effective in timely manner to alert them to material information
relating to the Company (including its consolidated subsidiaries) required to be
included in the Company's periodic SEC filings.

         (b) Internal Control Over Financial Reporting. There have not been any
changes in the Company's internal control over financial reporting (as such term
is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
fiscal quarter ended September 30, 2004 that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.

                                    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, 2005. If the
definitive proxy statement is not filed on or before January 28, 2005, the
information called for by this Part III will be filed as an amendment to this
Report on or prior to January 28, 2005.


         Item 13.  Exhibits

         The following exhibits are filed herewith:

<TABLE>
<CAPTION>
<S>               <C>
2.1               Stock Purchase Agreement, dated as of July 3, 2002, between Prisma iVentures Ltd. and
                  ISW Acquisition Co., LLC.  (1)
2.2               Stock Purchase Agreement, dated as of July 30, 2002, between Global Interactive Gaming
                  Ltd., MultiSport Games Development Inc., Peter G. Sprogis, ISW Acquisition Co., LLC and
                  Interactive Systems Worldwide Inc. (with respect only to certain Sections). (1)
3.1               Certificate of Incorporation of the Company. (2)
3.1(a)            Amendment, filed October 24, 1996, to Certificate of Incorporation of the Company. (2)
</TABLE>

                                       35
<PAGE>

<TABLE>
<CAPTION>
<S>               <C>
3.1(b)            Amendment, dated February 28, 2001, to Certificate of Incorporation of the Company. (3)
3.2               By-Laws of the Company. (2)
4.1               Certificate of Designation relating to the Series A Preferred Stock dated July 31, 2002. (1)
4.2               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. (4)
4.3               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.
                  (5)
4.6               Form of 7.5% Convertible Debenture due April 1, 2006 (6)
4.7               Form of Common Stock Purchase Warrant issued to certain investors dated November 24,
                  2003. (7)
4.8               Form of Common Stock Purchase Warrant issued to Brandon Ross dated November 24, 2003.
                  (8)
4.9               Form of Certificate of Designations relating to the Series B Convertible Preferred
                  Stock dated November 12, 2004. (9)
4.10              Form of Common Stock Purchase Warrant issued to certain investors dated November 12,
                  2004. (10)
4.11              Form of Common Stock Purchase Warrant issued to Maxim Group LLC dated November 12,
                  2004. (11)
10.1              Letter to Citibank, N.A., dated as of July 31, 2002 terminating Escrow Agreement and
                  Directing Release of Funds from Escrow. (12)
10.2              Letter Agreement, dated as of July 29, 2002, between Global Interactive Gaming Ltd. and
                  KirchSport Limited. (12)
10.3              Employment Agreement between the Company and Barry Mindes, dated as of December 30,
                  2003.*

10.4(a)           Employment Agreement between the Company and Bernard Albanese, dated as of March 17,
                  2000. (15)
10.4(b)           Amendment No. 1 to Employment Agreement between the Company and Bernard Albanese, dated
                  as of May 1, 2003. (16)
10.5              Form of Proprietary Information, Inventions and Non-Solicitation Agreement. (17)
10.6              Form of Indemnification Agreement entered into between the Company and its directors
                  and executive officers. (18)
10.7              1995 Stock Option Plan, as amended January 7, 1999. (19)
10.8              1996 Stock Option Plan, as amended January 2, 2003.(14)
10.9              Form of Incentive Stock Option Agreement. (20)
10.10             Form of Non-Qualified Stock Option Agreement. (21)
10.11(a)          License Agreement dated as of March 17, 2000 by and among the
                  Company and Global Interactive Gaming Limited (formerly Global
                  Interactive Gaming AG). (22)
</TABLE>

                                       36
<PAGE>

<TABLE>
<CAPTION>
<S>               <C>
10.11(b)          First Amendment to the License Agreement, dated as of July 1, 2003, by and among the
                  Company and Global Interactive Gaming Limited (formerly known as Global Interactive
                  Gaming AG).(14)
10.12             Securities Purchase Agreement dated as of November 24, 2003. (23)
10.13             Registration Rights Agreement dated as of November 24, 2003. (24)
10.14             Agreement, dated as of September 5, 2003, by and between the Company and Brandon
                  Ross.(14)
10.15             Securities Purchase Agreement dated as of November 12, 2004. (25)
10.16             Registration Rights Agreement dated as of November 12, 2004. (26)
10.17             Letter Agreement, dated as of November 2, 2004, between the Company and Maxim Group
                  LLC.(27)
10.18             Letter Agreement, dated April 27, 2004, between the Company and James McDade. (28)
10.19             Voting Agreement, dated November 12, 2004, between the Company and certain directors
                  and officers of the Company.*
23.1              Consent of Eisner LLP.*
24.1              Power of Attorney (Included on signature page hereto).
31.01             Certification of Barry Mindes, Chairman and Chief Executive Officer of Interactive
                  Systems Worldwide Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.02             Certification of James McDade, Chief Financial Officer of Interactive Systems Worldwide
                  Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.01             Certification of Barry Mindes, Chairman and Chief Executive Officer of Interactive
                  Systems Worldwide Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
                  (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code).*
32.02             Certification of James McDade, Chief Financial Officer of Interactive Systems Worldwide
                  Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and
                  (b) of Section 1350, Chapter 63 of Title 18, United States Code).*
-----------------

(1)               Incorporated by reference to the Exhibit with the corresponding number contained in the
                  Company's Current Report on Form 8-K dated August 15, 2002.
(2)               Incorporated by reference to the Exhibit with the corresponding number contained in the
                  Company's Registration Statement on Form SB-2 (Reg. No. 333-15005) which was declared
                  effective by the Securities and Exchange Commission on December 11, 1996.
(3)               Incorporated by reference to the Exhibit with the corresponding number contained in the
                  Company's Current Report on Form 8-K dated February 28, 2001.
</TABLE>


                                       37
<PAGE>

<TABLE>
<CAPTION>
<S>             <C>
(4)             Incorporated by reference to Exhibit 4.3 contained in the Company's Current Report on
                Form 8-K dated August 15, 2002.
(5)             Incorporated by reference to Exhibit 4.4 contained in the Company's Current Report on
                Form 8-K dated August 15, 2002.
(6)             Incorporated by reference to Exhibit 4.1 contained in the Company's Current Report on Form
                8-K dated November 24, 2003.
(7)             Incorporated by reference to Exhibit 4.2 contained in the Company's Current Report on Form
                8-K dated November 24, 2003.
(8)             Incorporated by reference to Exhibit 4.3 contained in the Company's Current Report on Form
                8-K dated November 24, 2003.
(9)             Incorporated by reference to Exhibit 4.1 contained in the Company's Current Report on Form
                8-K dated November 18, 2004.
(10)            Incorporated by reference to Exhibit 4.2 contained in the Company's Current Report on Form
                8-K dated November 18, 2004.
(11)            Incorporated by reference to Exhibit 4.3 contained in the Company's Current Report on Form
                8-K dated November 18, 2004.
(12)            Incorporated by reference to the Exhibit with the corresponding number contained in the
                Company's Current Report on Form 8-K dated August 15, 2002.
(13)            [Intentionally omitted].
(14)            Incorporated by reference to the Exhibit with the corresponding
                number contained in the Company's Annual Report on Form 10-KSB
                dated December 24, 2003.
(15)            Incorporated by reference to Exhibit 10.2(b) contained in the Company's Annual Report on
                Form 10-KSB dated December 22, 2000.
(16)            Incorporated by reference to Exhibit 10.01 contained in the
                Company's Quarterly Report on Form 10-QSB for the quarter ended
                June 30, 2003 dated August 14, 2003.
(17)            Incorporated by reference to Exhibit 10.3 contained in the
                Company's Registration Statement on Form SB-2 (Reg. No.
                333-15005) which was declared effective by the Securities and
                Exchange Commission on December 11, 1996.
</TABLE>
                                       38
<PAGE>

<TABLE>
<CAPTION>
<S>             <C>
(18)            Incorporated by reference to Exhibit 10.10 contained in the Company's Registration
                Statement on Form SB-2 (Reg. No. 333-15005) which was declared effective by the Securities
                and Exchange Commission on December 11, 1996.
(19)            Incorporated by reference to Exhibit 10.11 contained in the Company's Annual Report on Form
                10-KSB dated December 22, 2000.
(20)            Incorporated by reference to Exhibit 4.3 contained in the
                Company's Registration Statement on Form S-8 (Reg. No.
                333-41847) which was declared effective by the Securities and
                Exchange Commission on December 10, 1997.
(21)            Incorporated by reference to Exhibit 4.4 contained in the
                Company's Registration Statement on Form S-8 (Reg. No.
                333-41847) which was declared effective by the Securities and
                Exchange Commission on December 10, 1997.
(22)            Incorporated by reference to Exhibit 10.15 contained in the Company's Current Report on
                Form 8-K dated March 23, 2000.
(23)            Incorporated by reference to Exhibit 10.1 contained in the Company's Current Report on Form
                8-K dated November 24, 2003.
(24)            Incorporated by reference to Exhibit 10.2 contained in the Company's Current Report on Form
                8-K dated November 24, 2003.
(25)            Incorporated by reference to Exhibit 10.1 contained in the Company's Current Report on Form
                8-K dated November 18, 2004.
(26)            Incorporated by reference to Exhibit 10.2 contained in the Company's Current Report on Form
                8-K dated November 18, 2004.
(27)            Incorporated by reference to Exhibit 10.3 contained in the Company's Current Report on Form
                8-K dated November 18, 2004.
(28)            Incorporated by reference to Exhibit 10.1 contained in the Company's Quarterly Report on
                Form 10-QSB for the quarter ended March 31, 2004 dated May 17, 2004.
</TABLE>

*          Filed herewith

                                       39
<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 21, 2004



<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>



           /s/ Barry Mindes                   Chairman of the Board and Director                  December 21, 2004
----------------------------------------      (Principal Executive Officer)
             Barry Mindes


         /s/ Bernard Albanese                 President and Director                              December 21, 2004
----------------------------------------
           Bernard Albanese


           /s/ James McDade                   Chief Financial Officer                             December 21, 2004
----------------------------------------      (Principal Financial and Accounting Officer)
             James McDade


        /s/ Fredric Kupersmith                Director                                            December 21, 2004
----------------------------------------
          Fredric Kupersmith


           /s/ Bruce Feldman                  Director                                            December 21, 2004
----------------------------------------
             Bruce Feldman


          /s/ Harold Rapaport                 Director                                            December 21, 2004
----------------------------------------
            Harold Rapaport

</TABLE>


<PAGE>

               Interactive Systems Worldwide Inc. and Subsidiaries
                   Index to Consolidated Financial Statements

                                                                            Page
                                                                            ----
Report of Independent Registered Public Accounting Firm                      F-2

Consolidated Balance Sheets as of September 30, 2004 and 2003                F-3

Consolidated Statements of Operations for the years ended
September 30, 2004 and 2003                                                  F-4

Consolidated Statements of Stockholders' Equity for the years ended
September 30, 2004 and 2003                                                  F-5

Consolidated Statements of Cash Flows for the years ended
September 30, 2004 and 2003                                                  F-6

Notes to Consolidated Financial Statements                                   F-7





                                      F-1
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


Board of Directors and Stockholders
Interactive Systems Worldwide Inc.

We have audited the accompanying consolidated balance sheets of Interactive
Systems Worldwide Inc. and subsidiaries as of September 30, 2004 and 2003, and
the related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Interactive
Systems Worldwide Inc. and subsidiaries as of September 30, 2004 and 2003, and
the consolidated results of their operations and their cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States of America.



/s/ EISNER LLP

New York, New York
November 19, 2004




                                      F-2
<PAGE>

      Part I:  Financial Information

Item 1.  Financial Statements

               Interactive Systems Worldwide Inc. and Subsidiaries
                           Consolidated Balance Sheets
                           September 30, 2004 and 2003

                    (Amounts in thousands except share data)

<TABLE>
<CAPTION>
                                                                                   2004                 2003
                                                                                   ----                 ----

Current assets:
<S>                                                                                <C>                 <C>
   Cash and cash equivalents                                                       $2,832              $4,127
   Accounts receivable                                                                  7                   9
   Investments in marketable securities                                               285                 190
   Other receivables                                                                   31                  19
   Prepaid expenses and other current assets                                          158                 153
                                                                                   ------              ------
       Total current assets                                                         3,313               4,498

   Property and equipment, net                                                        144                 233
   Capitalized software, net of accumulated
     amortization of $476,000 and $161,000, respectively                              492                 807
   Other assets                                                                       556                 306
                                                                                   ------              ------
                 Total assets                                                      $4,505              $5,844
                                                                                   ======              ======
</TABLE>

                      Liabilities and Stockholders' Equity
<TABLE>

<S>                                                                                <C>                 <C>
Current liabilities:
    Accounts payable                                                               $    153            $    308
    Accrued expenses                                                                    922                 555
                                                                                   --------            --------
       Total current liabilities                                                      1,075                 863

Long-term debt:
   Debentures, net of unamortized discount of $629,000                                1,538                  --
                                                                                   --------            --------
                 Total liabilities                                                    2,613                 863
                                                                                   --------            --------


Commitments

Stockholders' Equity:
   Preferred stock, par value $.001 per share;
       2,000,000 shares authorized, 60,000 Series A outstanding                          --                  --
   Common stock par value $.001 per share;
       20,000,000 shares authorized;
       9,799,418 and 9,177,545 issued, respectively                                      10                   9
   Additional paid-in capital                                                        15,958              13,036
   Treasury stock, at cost, 242,000 common shares                                      (441)               (441)
   Accumulated other comprehensive loss                                                 (26)                 (2)
   Accumulated deficit                                                              (13,609)             (7,621)
                                                                                   --------            --------
             Total stockholders' equity                                               1,892               4,981
                                                                                   --------            --------
                 Total liabilities and
                     stockholders' equity                                          $  4,505            $  5,844
                                                                                   ========            ========
</TABLE>
See accompanying notes to consolidated financial statements

                                      F-3
<PAGE>

               Interactive Systems Worldwide Inc. and Subsidiaries
                      Consolidated Statements of Operations

             (Amounts in thousands except share and per share data)

                                                       Years Ended
                                                      September 30,
                                                      -------------
                                                 2004                2003
                                                 ----                ----

Revenues, net                                 $        45         $        14
                                              -----------         -----------

Costs and expenses:
   Cost of revenues, research
     and development expense                        1,935               1,491

   General and administrative expense               3,630               3,680
   Loss (income) related to
      impairment of software                         (138)                566
                                              -----------         -----------
                                                    5,427               5,737
                                              -----------         -----------

        Operating loss                             (5,382)             (5,723)

Interest expense (income), net                        606                (146)
                                              -----------         -----------

        Net loss                              $    (5,988)        $    (5,577)
                                              ===========         ===========

Net loss per
   common share- basic and diluted            $     (0.64)        $     (0.63)
                                              ===========         ===========

Weighted average basic and diluted
  common shares outstanding                     9,322,906           8,914,718
                                              ===========         ===========












See accompanying notes to consolidated financial statements



                                      F-4
<PAGE>

               Interactive Systems Worldwide Inc. and Subsidiaries
                 Consolidated Statements of Stockholders' Equity
                     Years Ended September 30, 2004 and 2003

                    (Amounts in thousands except share data)


<TABLE>
<CAPTION>
                                                                               Accumulated
                                    Common Stock        Additional                Other
                               ----------------------    Paid-In     Treasury Comprehensive Accumulated
                                   Shares     Amount     Capital      Stock       Loss        Deficit       Total
                               --------------------------------------------------------------------------------------
<S>                             <C>           <C>        <C>          <C>       <C>          <C>          <C>
Balance at
    September 30, 2002          9,143,545     $     9    $ 12,749     $(441)    $     (3)    $ (2,044)    $ 10,270

Issuance of common
   stock through
   exercise of options             34,000          --          35        --           --           --           35

Modification of stock option           --          --          23        --           --           --           23

Issuance of warrant to
   purchase common stock               --          --         229        --           --           --          229

Net loss                               --          --          --        --           --       (5,577)      (5,577)

Foreign currency
   translation income                  --          --          --        --            1           --            1
                                                                                                          --------
       Comprehensive loss                                                                                   (5,576)
                                                                                                          --------
                                ----------------------------------------------------------------------------------
Balance at
  September 30, 2003            9,177,545     $     9    $ 13,036     $(441)          (2)    $ (7,621)       4,981

Issuance of common stock
  through private placement,
  net of fees and expenses
  of $358                         390,390           1         896        --           --           --          897

Issuance of warrants in
connection with private
placement                              --          --         910        --           --           --          910

Beneficial conversion feature
  of Debentures                        --          --         353        --           --           --          353

Issuance of common stock in
  payment of Debenture
  principal and interest          157,724          --         514        --           --           --          514

Issuance of common stock
  through exercise of
  options                          12,069          --           8        --           --           --            8

Modification of stock options          --          --         163        --           --           --          163

Net share settlement on
  cashless exercise of
  stock options                    61,690          --          65        --           --           --           65

Issuance of stock options to
consultant                             --          --          13        --           --           --           13

Net loss                               --          --          --        --           --       (5,988)      (5,988)

Foreign currency
  translation loss                     --          --          --        --          (24)          --          (24)
                                                                                                          --------
      Comprehensive loss               --          --          --        --           --           --       (6,012)
                                                                                                          --------
                                ----------------------------------------------------------------------------------
Balance at September 30, 2004   9,799,418     $    10    $ 15,958     $(441)    $    (26)    $(13,609)    $  1,892
                                ==================================================================================
</TABLE>
See accompanying notes to consolidated financial statements


                                      F-5
<PAGE>

               Interactive Systems Worldwide Inc. and Subsidiaries
                      Consolidated Statements of Cash Flows

                             (Amounts in thousands)

<TABLE>
<CAPTION>
                                                                                                     Years Ended
                                                                                                    September 30,
                                                                                                    -------------
                                                                                                2004              2003
                                                                                                ----              ----
<S>                                                                                          <C>                 <C>
Cash flows from operating activities:
  Net loss                                                                                   $(5,988)            $(5,577)
Adjustments to reconcile net loss
    to net cash used in operating activities:
    Depreciation and amortization                                                                416                 260
    Non-cash warrant and option charge                                                           241                 252
    Loss due to impairment of software                                                            --                 566
    Non-cash interest expense                                                                    549                  --
    Non-cash amortization of debt issuance costs                                                 127                  --
Changes in assets and liabilities
  Accounts receivable                                                                              2                  (9)
  Other receivables                                                                              (12)              1,089
  Prepaid expenses and other current assets                                                       (5)                (17)
  Other assets                                                                                     4                  (4)
  Accounts payable                                                                              (155)                (79)
  Accrued expenses                                                                               321                 116
                                                                                             -------             -------
         Net cash used in operating activities                                                (4,500)             (3,403)
                                                                                             -------             -------

Cash flows from investing activities:
  Purchase of investments                                                                       (285)                 --
  Proceeds from sales of investments                                                             190               3,183
  Purchase of property and equipment                                                             (17)                (19)
  Capitalized software                                                                            --                (427)
                                                                                             -------             -------
         Net cash (used in) provided by investing activities                                    (112)              2,737
                                                                                             -------             -------

Cash flows from financing activities:
  Proceeds from issuance of Debentures                                                         2,600                  --
  Repayment of Debentures                                                                       (108)                 --
  Proceeds from issuance of common stock and warrants                                          1,302                  35
  Costs associated with private placement                                                       (465)                 --
                                                                                             -------             -------
         Net cash provided by financing activities                                             3,329                  35
                                                                                             -------             -------

Net decrease in cash and cash equivalents                                                     (1,283)               (631)
Effect of exchange rate on cash                                                                  (12)                  5
Cash and cash equivalents, beginning of year                                                   4,127               4,753
                                                                                             -------             -------
Cash and cash equivalents, end of year                                                       $ 2,832             $ 4,127
                                                                                             =======             =======

Non-cash financing activity:
     Issuance of warrants in connection with private placement                               $   910             $    --
     Beneficial conversion feature of Debentures                                             $   353             $    --
     Issuance of common stock for repayment of Debentures                                    $   325             $    --

</TABLE>

See accompanying notes to consolidated financial statements



                                      F-6
<PAGE>

               Interactive Systems Worldwide Inc. and Subsidiaries
                   Notes To Consolidated Financial Statements
                           September 30, 2004 and 2003

(1)      Description of Business

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

         The consolidated financial statements include the accounts of
Interactive Systems Worldwide Inc., its wholly owned subsidiaries, ISW
Acquisition Co., LLC, and Global Interactive Gaming Limited and its subsidiaries
(collectively the "Company"). All significant intercompany balances and
transactions have been eliminated. Certain amounts in the prior years' financial
statements have been reclassified to conform to the current year presentation.

(2)      Summary of Significant Accounting Policies

         Use of Estimates:

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

         Cash and Cash Equivalents:

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

         Property and Equipment:

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




                                      F-7
<PAGE>

               Interactive Systems Worldwide Inc. and Subsidiaries
                   Notes To Consolidated Financial Statements
                           September 30, 2004 and 2003

(2)      Summary of Significant Accounting Policies (continued)

         Investments:

         Investments at September 30, 2004 and 2003 consist of debt securities
issued by the Federal government and corporate entities and certificates of
deposit. Investments at September 30, 2004, are scheduled to mature in March
2005. 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.

         Software Development Costs:

         The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86 "Computer Software
To Be Sold, Leased, or Otherwise Marketed". Such costs are expensed prior to
achievement of technological feasibility and thereafter are capitalized. The
Company defines a product enhancement as an improvement to an existing product
that is intended to extend the life or improve significantly the marketability
of the original product. In order to meet the requirements for capitalization, a
product enhancement should involve considerable development resources, requires
a product design and may require a redesign of all or part of the existing
product. During the year ended September 30, 2003, the Company capitalized
software development costs relating to three separate enhancements to its
SportXction(TM) product which had achieved technological feasability. The
Company stops capitalizing software costs relating to a particular enhancement
when the enhanced product is available for general release to its customers.
Amortization of capitalized amounts commenced during the quarter ended December,
2002 with the enhanced product's availability for general release to its first
customer. Amortization expense, which has been computed on a straight-line basis
and an estimated economic life of 3 years, amounted to $315,000 and $161,000 for
the years ended September 30, 2004 and 2003, respectively.

         At each balance sheet date, the Company compares unamortized
capitalized software costs to net realizable value on a project-by-project basis
and writes off any excess of the unamortized cost over the net realizable value.
Certain software purchased by GIG prior to its acquisition by ISWI has not been
put into commercial use and based upon the Company's current and anticipated
customer base, it appears unlikely that it will be put into such use. As a
result, during fiscal 2003, the Company wrote-off $566,000 representing the
purchase price allocated to this software in connection with the acquisition of
GIG. The purchase price included certain invoices amounting to $138,000 billed
to GIG by a third party software developer which were in dispute. During fiscal
2004, the Company determined that these invoices would not be paid and,
accordingly, classified the write-off of the related invoices as an adjustment
of the impairment loss. The Fiscal 2003 Statement of Operations has been
reclassified to include the write-off as part of operating loss.

         Revenue Recognition:

         The Company's revenue during the years ended September 30, 2004 and
2003 consisted of license fees and service charges for the use of the
SportXction(TM) product from service agreements with bookmakers and Internet
content providers located in the United Kingdom. Revenue consists primarily of
service charges calculated based on a percentage share of net wagering revenue.
The Company recognizes revenue as it is earned according to the terms of the
related agreement.



                                      F-8
<PAGE>

               Interactive Systems Worldwide Inc. and Subsidiaries
                   Notes To Consolidated Financial Statements
                           September 30, 2004 and 2003

(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, or with respect to the Debentures, as
compared to the current borrowing rates available to the Company.

         Income Taxes:

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

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

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

         Accounting for Stock Based Compensation:

         The Company accounts for its stock-based compensation to employees in
accordance with the recognition and measurement provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related Interpretations. Except for compensation expense related to the
modification and cashless exercise of stock options, no stock-based compensation
cost was reflected in 2004 and 2003 net loss, as all options granted under the
Company's stock option plans described in Note 6 had an exercise price equal to
the market value of the underlying common stock on the date of grant. 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.



                                      F-9
<PAGE>

               Interactive Systems Worldwide Inc. and Subsidiaries
                   Notes To Consolidated Financial Statements
                           September 30, 2004 and 2003

(2)      Summary of Significant Accounting Policies (continued)



The following tabulation illustrates such pro forma effects:

(Amounts in thousands except per share data)

<TABLE>
<CAPTION>
                                                                        2004                      2003
                                                                        ----                      ----

<S>                                                                   <C>                       <C>
Net loss - as reported                                                ($5,988)                  ($5,577)
Total stock-based employee compensation expense
   determined under fair value based method,
    net of related tax effects                                            100                       206
                                                                       ------                    ------
Net loss - pro forma                                                  ($6,088)                  ($5,783)
                                                                       ======                    ======

Net loss per share basic and diluted - as reported                     ($0.64)                  ($0.63)
Net loss per share basic and diluted - pro forma                       ($0.65)                  ($0.65)

</TABLE>

         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 3.82% and 3.71% in 2004 and 2003, respectively, expected volatility of
52% and 89% in 2004 and 2003, respectively, and an expected life of 7 years (for
both periods). The weighted average fair value of options granted in 2003 and
2002 was $1.88 and $1.82, respectively.

         The Company accounts for equity awards issued as compensation to
non-employees at fair value as measured on the date that performance is
complete. During the quarter ending September 30, 2004, the Company recognized
compensation expense of $13,000 which was charged to general and administrative
expense in relation to certain options which were granted to a consultant.

         Basic and Diluted Net Loss per Common Share:

         Basic net loss per common share is computed by dividing net loss by the
weighted average number of common shares outstanding during the period. In
computing diluted net loss per share for fiscal 2004 and 2003, no adjustment has
been made to the weighted average outstanding common shares as the assumed
exercise of outstanding options and warrants and the assumed conversion of
preferred stock and Debentures is anti-dilutive.



                                      F-10
<PAGE>
               Interactive Systems Worldwide Inc. and Subsidiaries
                          Notes To Financial Statements
                           September 30, 2004 and 2003

(2)      Summary of Significant Accounting Policies (continued)

Potential common shares not included in calculating diluted net loss per share
are as follows:
                                                    2004               2003
                                                    ----               ----
Stock options                                    1,416,258          1,351,919
Stock warrants                                     634,710            257,652
Convertible Debentures                             473,071
Convertible Preferred Stock (a)                         --                 --
                                                 ---------          ---------
   Total                                         2,524,039          1,609,571
                                                 =========          =========

(a) convertible on a cashless basis, accordingly, number of common shares
    obtainable upon conversion is based upon market price of common stock
    and no shares are obtainable until the common stock exceeds $15.00 per
    share (see Notes 4 and 11).

         Comprehensive Loss:

         Comprehensive loss consists of net loss adjusted for the results of
certain stockholders' equity changes not reflected in net loss 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, ISWI's United Kingdom subsidiary, is
the pound sterling. GIG's assets and liabilities are translated at the exchange
rate at the balance sheet date and its revenue and expenses are translated at
the weighted average rate for the period. Gains or losses from translation
adjustments are recorded in the accumulated other comprehensive loss section of
stockholders' equity.

(3)      Private Placement

         On November 24, 2003, the Company entered into a financing agreement
relating to a $3.9 million private placement with institutional investors
consisting of $2.6 million of 7.5% Convertible Debentures ("Debentures") and
$1.3 million for 390,390 shares of the Company's Common Stock ($3.33 per share).
The investors also received warrants ("Investor Warrants") that expire in
November 2008 to purchase 281,250 shares of Common Stock at $4.58 per share,
subject to adjustment. Net proceeds from the financing after costs and expenses
were approximately $3,435,000. In addition, a finder in connection with the
private placement received warrants to purchase an aggregate of 95,808 shares of
Common Stock at $5.06 per share, which were valued at $274,000 using the Black
Scholes option pricing model on the date of issuance. The proceeds as well as
the costs and expenses of the transaction were allocated to debt and equity
based on their relative fair values. The expense amount allocated to equity was
recorded as a reduction of additional paid in capital and the amount allocated
to debt is being amortized over the life of the Debentures.

         The Debentures are convertible into shares of Common Stock at $4.58 per
share subject to adjustment (initially 567,686 shares), and are repayable in 24
equal monthly installments ($108,333) beginning in May 2004 with interest
payable quarterly. Under the terms of the transaction, and subject to certain
conditions, the Company may make periodic interest and principal payments in
shares of the Company's Common Stock valued at a discount from the weighted
average market price prior to such payments. During the year ended September 30,
2004, 157,724 common shares were issued for all of the payments of interest and
all except for one repayment of principal. Such shares were accounted for based
on their quoted market price at the date of issuance. As the Company intends to
pay the required principal payments during the year ending September 30, 2005
amounting to $1.3 million by issuing common shares, such amount has not been
classified as a current liability in the accompanying balance sheet at September
30, 2004. The Company also under certain conditions has the right to force
conversion of all or a portion of the Debentures into Common Stock. The
conversion price of the Debentures and the exercise price of the Investor
Warrants are subject to adjustment under certain circumstances. While at least
50% of the Debentures are outstanding, the Debentures contain covenants that
restrict the ability of the Company to incur indebtedness that is pari passu
with or senior to the Debentures, except for certain specified types of
indebtedness not to exceed $625,000 or except for indebtedness incurred in
connection with a business combination transaction. The Debentures contain
certain provisions and restrictions, which if violated, could result in the full
principal amount together with interest and other amounts becoming immediately
due and payable in cash.

                                      F-11
<PAGE>


               Interactive Systems Worldwide Inc. and Subsidiaries
                   Notes To Consolidated Financial Statements
                           September 30, 2004 and 2003

(3)      Private Placement (continued)



         The fair value assigned to the warrants ($636,000) issued to investors
was determined using the Black Scholes option pricing model on the date of
issuance. A beneficial conversion feature of $353,000 representing the intrinsic
value of the conversion price after the allocation of the proceeds based on
their relative fair values was recorded as a reduction in the value of the
Debentures. These discounts to the Debentures are being accreted as additional
non-cash interest expense over the life of the debt using the effective interest
method. Additional interest expense recorded during the year ended September 30,
2004 aggregated $127,000.

         The following table summarizes the carrying value of the Debentures at
September 30, 2004:

                                                                $ (000s)
                                                                -------
         Principal issued                                       $2,600
         Less discounts related to:
         Beneficial conversion feature                            (353)
         Allocation of proceeds to warrants                       (590)
                                                                -------
            Carrying amount at date issued                       1,657
         Repayment of principal                                   (433)
         Amortization of discount                                  314
                                                                -------
         Balance at September 30, 2004                          $1,538
                                                                =======




                                      F-12
<PAGE>

               Interactive Systems Worldwide Inc. and Subsidiaries
                   Notes To Consolidated Financial Statements
                           September 30, 2004 and 2003

(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 on such date for nominal consideration if not previously converted
into Common Stock. The holder of Series A is entitled to a non-cumulative
dividend of 6% per annum if and when declared by the Board of Directors.
Series A has no liquidation preference.

 (5)     Warrants:

         In connection with the acquisition of GIG, certain GIG shareholders
received warrants to purchase 157,652 shares of ISWI's Common Stock originally
issued to GIG. The warrants have an exercise price of $4.38 per share and expire
in March 2005.

         In August 2003, in connection with his consulting efforts, the Company
issued a warrant to an individual, who is a stockholder of the Company, to
purchase 100,000 shares of the Company's Common Stock, at an exercise price of
$4.00 per share. The fully vested warrant became exercisable in March 2004 and
remains exercisable through August 2008, subject to the terms of the warrant
agreement. The warrant was valued at $229,000 using a Black-Scholes option
pricing model and recorded as a general and administrative expense during the
year ended September 30, 2003.

(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 1,500,000 shares of Common Stock authorized
and available for issuance pursuant to options that may be granted thereunder.
The 1996 Plan is administered by the Stock Option Committee.

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




                                      F-13
<PAGE>

               Interactive Systems Worldwide Inc. and Subsidiaries
                   Notes To Consolidated Financial Statements
                           September 30, 2004 and 2003

(6)      Stock options (continued)

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

                                                               Weighted Average
                                                   Shares       Exercise Price
                                                   ------      ----------------
Outstanding, October 1, 2002                     1,425,919          $1.14
Granted                                              6,000           2.31
Exercised                                          (34,000)          1.01
Cancelled                                          (46,000)          1.87
                                                 ---------
Outstanding September 30, 2003                   1,351,919           1.13
Granted                                            412,000 (a)       3.49
Exercised                                          (97,661)          0.97
Cancelled                                         (250,000)          3.46
                                                 ---------
Outstanding September 30, 2004                   1,416,258          $1.41
                                                 =========        =======

Exercisable at September 30, 2004                1,261,258
                                                 =========

Available for grant at September 30, 2004          378,805
                                                 =========

(a) Includes 300,000 granted to a consultant of which 50,000 vested and 250,000
were cancelled upon termination of services.

The following table summarizes information about stock options outstanding at
September 30, 2004:

<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               771,258              2                 $0.70                771,258            $0.70
     1.06 - 1.87               410,000              6                  1.55                380,000            1.55
     2.08 - 2.75                43,000              6                  2.35                 40,000            2.35
     3.22 - 3.74               162,000              9                  3.54                 50,000            3.46
            4.53                20,000              7                  4.53                 10,000            4.53
            5.75                10,000              7                  5.75                 10,000            5.75
                             ---------                                                   ---------
                             1,416,258              4                  1.41              1,261,258            1.19
                             =========                                                   ==========
</TABLE>




                                      F-14
<PAGE>

               Interactive Systems Worldwide Inc. and Subsidiaries
                   Notes To Consolidated Financial Statements
                           September 30, 2004 and 2003

(7)      Property and Equipment

         Property and equipment at September 30, 2004 and 2003 consist of the
following:

<TABLE>
<CAPTION>
                                                                            2004                  2003
                                                                            ----                  ----

<S>                                                                   <C>                   <C>
Furniture and fixtures                                                $    62,000           $    62,000
Building and improvements                                                 118,000               118,000
Computer equipment                                                      1,571,000             1,551,000
                                                                      -----------           -----------
                                                                        1,751,000             1,731,000

Less accumulated depreciation and amortization                         (1,607,000)           (1,498,000)
                                                                      -----------           -----------
                                                                      $   144,000           $   233,000
                                                                      ===========           ===========
</TABLE>

 (8)     Accrued Expenses

         Accrued expenses at September 30, 2004 and 2003 consist of the
following:

<TABLE>
<CAPTION>
                                                                            2004                  2003
                                                                            ----                  ----

<S>                                                                   <C>                   <C>
Professional fees                                                     $   76,000            $  73,000
Payroll and related costs                                                706,000              426,000
Other                                                                    140,000               56,000
                                                                      ----------            ---------
                                                                      $  922,000            $ 555,000
                                                                      ==========            =========
</TABLE>

(9)      Income Taxes

         The sources of loss for the years ended September 30, 2004 and 2003
consist of the following:

<TABLE>
<CAPTION>
                                                                         2004                  2003
                                                                         ----                  ----

<S>                                                                   <C>                   <C>
United States                                                         ($4,277,000)          ($2,604,000)
United Kingdom                                                         (1,711,000)           (2,973,000)
                                                                      -----------           -----------

                                                                      ($5,988,000)          ($5,577,000)
                                                                      ===========           ===========
</TABLE>




                                      F-15
<PAGE>

               Interactive Systems Worldwide Inc. and Subsidiaries
                   Notes To Consolidated Financial Statements
                           September 30, 2004 and 2003

(9)      Income taxes (continued)

         The income tax benefit for the years ended September 30, 2004 and 2003
differed from the amounts computed by applying the federal income tax rate of
34% to pre-tax loss as a result of the following:

<TABLE>
<CAPTION>
                                                                             2004                  2003
                                                                             ----                  ----

<S>                                                                  <C>                        <C>
    Computed benefit at 34%                                          ($2,036,000)               ($1,896,000)
    State tax benefit net of federal effect                             (257,000)                  (335,000)
    Potential benefits from net operating loss
       carryforward in United States and United
       Kingdom which are not being recognized                          2,320,000                  2,217,000
    Other                                                                (27,000)                    14,000
                                                                     -----------                -----------
    Income tax benefit                                               $        --                $        --
                                                                     ===========                ============
</TABLE>

The tax effects of temporary differences that give rise to deferred tax assets
and deferred tax liabilities at September 30, 2004 and 2003 are presented below:

<TABLE>
<CAPTION>
                                                                                       2004                  2003
                                                                                       ----                  ----
<S>                                                                                 <C>                  <C>
    Deferred tax assets:
    Federal and state net operating loss
      carryforward                                                                  $ 3,106,000          $  1,699,000
    United Kingdom net operating loss carryforward                                    6,136,000             4,768,000
    Tax basis for capitalized license fees paid to
      the Company by GIG prior to acquisition                                         4,446,000             4,532,000
    Property and equipment                                                              248,000               281,000
    Employee compensation and benefits                                                  250,000               144,000
                                                                                    -----------          ------------
    Total gross deferred tax assets                                                  14,186,000            11,424,000
    Deferred tax liabilities:
      Capitalized software                                                              188,000               315,000
                                                                                    -----------          ------------
    Net deferred tax asset                                                           13,998,000            11,109,000
    Less valuation allowance                                                   (a)   13,998,000            11,109,000
                                                                                    -----------          ------------
        Net deferred tax asset                                                      $         0          $          0
                                                                                    ===========          ============
</TABLE>

(a) Includes $10,723,000 and $9,470,000 in 2004 and 2003, respectively,
applicable to subsidiary in United Kingdom.

         As of September 30, 2004, the Company had a net operating loss
carryforward of approximately $7,765,000 for Federal and state income tax
reporting purposes available to offset future Federal taxable income through the
year 2024 and future state taxable income through the year 2011, 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 $20,454,000 which is available to offset future taxable income in
the United Kingdom. As the Company is unable to conclude that it is more likely
than not that the benefits of the carryforwards and deductible temporary
differences will be realized it has provided a valuation allowance to offset the
related deferred tax asset. Interactive Systems Worldwide Inc. and Subsidiaries
Notes To Consolidated Financial Statements September 30, 2004 and 2003



                                      F-16
<PAGE>

(10)     Commitments

         The Company leases office facilities and equipment under operating
leases expiring through March 2009. The remaining minimum rental commitments
under the leases and a related sublease are as follows:

<TABLE>
<CAPTION>
                                                                              Less:
          Year ending September 30,                  Gross amount          Rental Income         Net amount
          -------------------------                  ------------          -------------       ------------

<S>                                                   <C>                     <C>               <C>
                   2005                               $   320,000            $(106,000)         $   214,000
                   2006                                   292,000             (106,000)             186,000
                   2007                                   286,000             (106,000)             180,000
                   2008                                   286,000             (106,000)             180,000
                   2009                                   137,000              (53,000)              84,000
                                                      -----------            ---------          -----------
                                                      $ 1,321,000            $(477,000)         $   844,000
                                                      ===========            =========          ===========
</TABLE>

         Rent expense under operating leases during 2004 and 2003 was $328,000
and $304,000, respectively. In October, 2003, the Company began subleasing
approximately 1,500 square feet of this space to a third party pursuant to a
sublease that expires in March 2009. The rental income for this sublease exceeds
the rent paid by the Company under the lease for this space. For the fiscal year
ended September 30, 2004, rental income from this sublease was approximately
$106,000.

         The Company entered into employment agreements with two of its
employees. The agreements as amended, one of which expires in June 2005 and the
other of which expires in December 2005, provide for minimum compensation and
certain benefits. Compensation expense recognized under these agreements during
both of the years ended September 30, 2004 and 2003 was $650,000. The agreements
also provide for severance payments upon certain events, as defined.

(11)     Subsequent event

         On November 12, 2004, the Company entered into a financing agreement
relating to a $3.0 million private placement with institutional investors
consisting of 3,000 shares of the Company's newly issued Series B Convertible
Preferred Stock ("Series B"). Series B is initially convertible into the
Company's Common Stock at $3.07 per share. The investors also received warrants
that expire in November 2009 to purchase 513,172 shares of Common Stock at $3.36
per share, subject to adjustment. Net proceeds from the financing after costs
and expenses were approximately $2.6 million.

         The Series B are initially convertible into an aggregate of 977,470
shares of Common Stock. Holders of Series B are entitled to receive a 6% annual
dividend, payable quarterly in cash or, subject to certain conditions, shares of
Common Stock at the Company's option. Under the terms of the transaction, and
subject to certain conditions, the Company has the right to force conversion of
all or a portion of the Series B into Common Stock. The Series B also provides
that if certain events (all of which are within the control of the Company)
occur such holder would have the right to require the Company to redeem the
Series B for cash. For certain other events, each holder would have the right to
require the Company to redeem the Series B for the Company's Common Stock or
increase the dividend of Series B to 12%. In addition, the Series B and investor
warrants are subject to certain anti-dilution protection. A placement agent in
this transaction received a cash fee of $180,000 and warrants to purchase
102,740 shares of the Company's Common Stock which have a term of five years and
are exercisable at $3.50 per share.



                                      F-17