<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549
                                   Form 10-KSB
(Mark One)

|X|      ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
         OF 1934 for the fiscal year ended September 30, 2003

                                       OR

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

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

                         Commission file number 0-21831

                       INTERACTIVE SYSTEMS WORLDWIDE INC.
                 (Name of small business issuer in its charter)

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

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

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

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

      Securities registered pursuant to Section 12(g) of the Exchange Act:
                         Common Stock, $.001 par value
                                (Title of class)

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

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

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

         The issuer's revenues for its most recent fiscal year (ended September
30, 2003) were $14,000.

         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 15, 2003 was approximately
$20,740,000.

         The number of shares of Common Stock, $.001 par value, outstanding as
of December 15, 2003 was 9,325,935.

         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,
2004. If the definitive proxy statement is not filed on or prior to January 28,
2004, the information called for by Part III will be filed as an amendment to
this Form 10-KSB on or prior to January 28, 2004.

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

<PAGE>

                                     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 and cricket, among many others. The SportXction(TM) System
accepts bets not only on the outcome of a sporting event, but also on discrete
parts of the event and on specific game situations. These include such wagers as
will a team make a first down, 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 transaction. 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 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 that markets its services to
interactive television carriers which employ satellite, cable and terrestrial
programming, mobile telephone operators, licensed bookmakers and casinos. GIG is
located in London, England. GIG 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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<PAGE>

         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 24, 2003, ISWI 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 (the "Debentures") and $1.3 million
of ISWI's common stock, par value $.001 per share ("Common Stock"). The
investors also received warrants to purchase 281,250 shares of the Common Stock
(the "Investor Warrants"). Net proceeds from the financing after estimated costs
and expenses were approximately $3.5 million.

         The Debentures are due April 1, 2006 and are convertible into shares of
Common Stock at $4.58 per share, a 10% premium over the market price shortly
before the closing (the "Closing Price"). The Debentures are repayable in 24
equal monthly installments beginning in May 2004 with interest payable
quarterly. Under the terms of the transaction, and subject to certain
conditions, ISWI has the right to repay the interest and the principal in cash
or stock and force conversion of all or a portion of the Debentures into Common
Stock. ISWI also issued to the investors, 390,390 shares of Common Stock at
$3.33 per share, a 20% discount from the Closing Price. The Investor Warrants
issued to the investors have a term of five years and are exercisable at $4.58
per share, a 10% premium over the Closing Price.

         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.


                                       3
<PAGE>

         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 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. The
License Agreements also provided for an escrow account into which GIG deposited
and maintained at all times, the minimum royalties due to ISWI for the ensuing
12 months (the "Escrow Account"). ISWI's efforts between early 2000 and 2002
focused on enhancing the SportXction(TM) System for use by GIG. GIG's majority
shareholders were Prisma iVentures Ltd., a U.K. company and subsidiary of The
Kirch Group, a German media conglomerate, and MultiSport Games Development,
Inc., a Delaware corporation ("MultiSport"). As a result of Kirch Media's
insolvency filing in Germany in April 2002, an event unrelated to ISWI, The
Kirch Group 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
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 a previously
placed bet remain the same. Thus, bettors who place several bets on the same
team or contestant over a period of time could have different odds or point
spreads on each wager depending upon when the bet was placed.

         The profits of dedicated sports wagering facilities ("Sports books")
depend upon the reliability of the odds and its adjustment of the odds when
necessary. On occasion, the house's initial handicap or odds will not result in
a balanced book because the players do not agree with the house's assessment of
the 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



                                       4
<PAGE>

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 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 gambling industry research firm, Internet
gambling has surged well ahead of most e-commerce categories, reaching more than
$6 billion in global sales this year. 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. Datamonitor, a
global research firm, predicts that iTV gambling revenues in the U.K. alone will
grow from $116 million in 2003 to $633 million by 2006, representing an annual
growth rate of more than 53%. Wagering using a mobile phone is also a developing
market. Jupiter Research, a UK 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 from gambling
Internet sites. iTV and mobile phone wagering is also illegal in the United
States. 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" ("OILS License") and is
registered with the Nevada Gaming Commission as a publicly-traded corporation.
The Company retains the right to re-enter the Nevada sports wagering market at
some future date, which it might do with its newly enhanced SportXction(TM)
System or a subset thereof.



                                       5
<PAGE>

         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,
GIG will operate the SportXction(TM) System and Sky Bet will be responsible for
comprehensive marketing program. BSkyB is the UK's largest supplier of digital
TV services with approximately seven million active households throughout the UK
and Ireland. BSkyB is also one of the UK's leading sports rights holders and is
at the forefront of developing innovative interactive applications. The launch
of services under this agreement is now scheduled during the first quarter of
calendar 2004.

         Internet

         On September 18, 2002, the Company announced that GIG had signed an
agreement with ukbetting plc ("ukbetting") for the incorporation of the
SportXction(TM) 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 SportXction(TM) System on a second
on-line wagering website in late 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 SportXction(TM) System into Sportingbet's UK
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
SportXction(TM) System was launched on Sportingbet.com in late August 2003. 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 UK and the fourth largest
operator of betting shops, with a portfolio of over 600 stores. The launch of
services under this agreement is scheduled during the first quarter of calendar
2004.

         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 consists of license fees calculated based on gross wagering
revenue as well as service charges calculated based on net wagering revenue or
loss after payment of winnings and taxes. Thus, ISWI 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 and tennis. It has also
developed football, baseball and basketball versions of the SportXction(TM)
System. Development is underway to add snooker and darts to the



                                       6
<PAGE>

range of sports for which the SportXction(TM) System may be used. Additional
sports, such as automobile racing and fixed price horse racing are currently in
the planning stage. GIG offered live play-by-play wagering on approximately 300
events during the year ending September 30, 2003. GIG intends to offer wagering
on approximately 800 events during fiscal year 2004.

         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 UK mobile
phone market. ukbetting currently supplies a range of betting services to the
UK'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 with over 13 million UK
customers.

         System enhancements

         The Company is well advanced in the development of major enhancements
to the System which will allow wagering using multiple currencies and will
provide players with a choice of multiple languages. The Company believes that
these enhancements will greatly expand the potential of the SportXction(TM)
System by increasing the number of markets in which the product can be made
available and by making the product more appealing to global gaming operators.
It is expected that the multiple currency enhancement will be available in the
first quarter of calendar 2004 and the multiple language enhancement will be
available in the second quarter of calendar 2004.

         The Company intends to expand distribution of the SportXction(TM)
System in the UK to dedicated betting shops through touch-screen FOBTs and
potentially using local area network wireless or Wi-Fi technology. The Company
has also started planning and designing product extensions to the
SportXction(TM) System, such as a fixed-odds horseracing product and a
non-wagering (i.e. contest) version of the SportXction(TM) System. We believe
that there are also potential uses for the Company's technology in other markets
such as transaction processing for financial institutions for which a patent is
pending.

         Marketing and Sales Strategy

         The Company is in discussions with several companies in the U.K.,
Europe and elsewhere in the world for the incorporation of the SportXction(TM)
System into licensed sports wagering Internet web sites and the inclusion of the
SportXction(TM) 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
SportXction(TM) System. The Company may also



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re-enter the Nevada market following the launch of products in the U.K. and its
Nevada gaming license has been maintained for that purpose.

         The SportXction(TM) System is also useable for contests, rather than
wagering, on sporting events. The Company has engaged a sales consultant who has
recently begun marketing the System for such use. The Company has also commenced
preliminary marketing activities using its patented technology in the financial
transaction processing market.

         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 are pending in several countries and have been
approved in 14 and 18 foreign countries, respectively.

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

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

         The Company has not received any claim that it is infringing any
patents 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



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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 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 eleven full-time employees in England. The Company considers its relations
with its employees to be good. The Company also utilizes outside consultants on
specific assignments or projects. The Company may seek to hire additional
programmers, technicians and administrative personnel.

         Research and Development

         During the fiscal years ended September 30, 2003 and 2002, the Company
spent approximately $1,303,000 and $735,000, 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, 2003 and 2002, 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, 2003, 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.




                                       9
<PAGE>

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

         Operation of the System

         The SportXction(TM) System operator begins by setting up a number of
pools or wagering propositions (for example, the 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 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 Betting Device shows that he has won and his balance is automatically
increased by the wager's payout.

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

         System Components

         The Company's proprietary software and state-of-the-art, commonly
available hardware, is configured in an arrangement designed specifically for
use with the SportXction(TM) System. The software permits the operator to make
available a wide variety of betting propositions to players. The SportXction(TM)
System has been designed to work with a variety of Player Betting Devices (e.g.
PC's running a browser, television set-top boxes, mobile phones and similar


                                       11
<PAGE>

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 System utilizing several types of networks (e.g. Internet,
dedicated private network or wireless networks). As a result of this
flexibility, the System has a variety of different client interface and
interconnection modules that may be used as determined by the configuration of a
particular instance of the System. The Player Betting Device enables bettors to
enter bets into the SportXction(TM) System. The System displays the wagers
available, the prices, the payoff to be received, the status of the player's
available balance and open bet amounts. It also allows for signing on and off,
selecting a game, reviewing and sending bets, reviewing bet history and other
information appropriate to interactive wagering.

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

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

         Other server modules include the following:

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

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

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

         The Administrative Module is the main management Module in the
SportXction(TM) System. It is used to control security, maintain the schedule
of future events and maintain the


                                       12
<PAGE>

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.

         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



                                       13
<PAGE>

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 and 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.

         Both bookmakers' permits and betting office licenses remain valid
during the applicable licensing period (a maximum of three years) and all
permits and licenses expire by elapse of time. Bookmakers and/or bookmakers'
agents must make applications for the renewal of their permits and/or betting
office licenses.

         The U.K. government has proposed far-reaching deregulation of the U.K.
betting and gaming industry and has recently published the substantive clauses
of a draft gambling bill (the "Draft Gambling Bill"). The Draft Gambling Bill in
not yet law and not all clauses have been published but they are expected to be
published and enacted within the next few years. The Draft Gambling Bill
establishes a new body called the Gambling Commission to regulate all forms of
gambling in the U.K. The Draft Gambling Bill also provides for new licensing
regimes for remote gambling (Internet, interactive television, radio, mobile
phone and other remote forms). Assuming the new legislation is enacted,
Brightform and GIG Operations may be required to re-apply for new or varied
operating licences. None of the activities for which Brightform or GIG
Operations are currently licensed are expected to be adversely affected by this
proposed legislation.



                                       14
<PAGE>

         Nevada

         Prior to April 2000, ISWI conducted business in the State of Nevada. As
such, it was required to obtain a gaming license as an operator of an
"inter-casino linked system" ("OILS License") and to register with the Nevada
Gaming Commission as a publicly traded corporation. ISWI is not currently
operating in Nevada, although it continues to hold its OILS License and is still
registered. It is marketing its current System to casinos in Nevada on a limited
basis. It may also elect to market its System in Nevada in the future. Any
continued marketing efforts are 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.")

         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



                                       15
<PAGE>

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.

         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



                                       16
<PAGE>

                  in the Nevada Act, which acquires more than 10%, but not more
                  than 15%, of the Registered Corporation's voting securities
                  may apply to the Nevada Commission for a waiver of such
                  finding of suitability if such institutional investor holds
                  the voting securities for investment purposes only. The
                  applicant is required to pay all costs of investigation.

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

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

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

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

         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 shareholders, 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



                                       17
<PAGE>

                  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
                  shareholders for the purposes of acquiring control of the
                  Registered Corporation.

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

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

         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



                                       18
<PAGE>

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, whether the
multi-currency enhancement will be made available in the first quarter of
calendar 2004 and whether the multi-language enhancement will be made available
in the second quarter of calendar 2004, potential market size for interactive
wagering in conjunction with television broadcast and using mobile telephones
and the SportXction(TM) System, whether the launch of the agreement with Sky Bet
will take place during the first quarter of calendar 2004, whether the launch of
the agreement with Stanley Interactive will take place during the first quarter
of calendar 2004, whether the Company will add snooker 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 800 events during fiscal year 2004, 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, and 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 such as a fixed-odds
horseracing product and a non-wagering version and the ultimate dilutionary
effect that the recent issuance of Debentures and Investor Warrants will have on
existing shareholders. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors which may cause the actual results,
performance or achievements of the Company, or industry results, to be
materially different from any future results, performance, or achievements,
expressed or implied, by such forward-looking statements. Such risks and factors
include, among others, those listed below. When used in this Report, statements
that are not statements of current or historical fact may be deemed to be
forward-looking statements. Without limiting the foregoing, the words
"anticipates," "plans," "intends," "expects," "believes" and similar expressions
are intended to identify such forward-looking statements. Readers are cautioned
that these forward-looking statements are inherently uncertain and are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof. The Company undertakes no obligation to publicly
release the result of any revisions to these



                                       19
<PAGE>

forward-looking statements that may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.

                                  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, ISWI pursued an aggressive marketing and advertising campaign to
introduce the SportXction(TM) System to the gaming public in Nevada.
Nonetheless, the total number of players who used the SportXction(TM) System in
Nevada was limited, and the total amount wagered through the SportXction(TM)
System in Nevada was modest, as a result of which ISWI ceased its Nevada
operations. To achieve commercial success, the SportXction(TM) System, must be
accepted by a significant number of gaming patrons. There can be no assurance
that the SportXction(TM) System will be accepted by its intended market. If the
SportXction(TM) System does not achieve sufficient market acceptance, the
Company's business, financial condition and results of operations would be
materially and adversely affected.

         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, ISWI was in the development stage and generated
limited revenues from the SportXction(TM) System. As of September 30, 2003 and
September 30, 2002, the Company had cumulative net losses since inception of
approximately $7.6 million and $2.0 million, respectively. The Company incurred
a net loss of $5.5 million during the year ended September 30, 2003. The
$3,350,000 gain on default under the License Agreements during the year ending
September 30, 2002 will not recur. As a result of the acquisition of GIG on July
31, 2002, ISWI no longer receives the minimum payments under the License
Agreements. Instead, the Company's revenue is now based upon the ability of the
Company and its business partners to generate revenue through the
SportXction(TM) System. The likelihood of the Company's success must be
considered in light of the problems, delays, expenses and difficulties
encountered by an enterprise in the Company's stage of development, some of
which may be beyond the Company's control. These include, but are not limited
to, the ability of the Company to operate its anticipated business; 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, 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


                                       20
<PAGE>

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, 2004.

         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 18 months based upon the
Company's current business plan (see "Management's Discussion and Analysis") and
longer, subject to the revenues generated by the SportXction(TM) System. The
Company's cash requirements may vary materially from those now planned due to a
number of factors, including the extent to which the Company develops the
SportXction(TM) System under its own brand, 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 shareholders will result and future investors may
be granted rights superior to those of existing shareholders. Moreover, raising
additional funds in the future may trigger the anti-dilution provisions in the
Debentures or Investor Warrants issued in the Company's recent financing,
resulting in further dilution to existing shareholders. 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 24 equal
monthly installments beginning in May 2004 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
Investor Warrants may limit the Company's ability to obtain additional financing
on favorable terms, or at all.

            If the investors in our recent financing convert their Debentures or
exercise their Investors Warrants, or if we elect to pay principal and interest
on the Debentures with shares of our Common Stock, our existing shareholders
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 are converted and/or the Investor Warrants are



                                       21
<PAGE>

exercised, a significantly greater number of shares of our Common Stock will be
outstanding and the interests of our existing shareholders 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 in
shares of our Common Stock, which could result in increased downward pressure on
our stock price and further dilution to our existing shareholders.

         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.

         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



                                       22
<PAGE>

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 the trading of financial instruments. No
assurance can be given that any of the Company's pending domestic or foreign
patent pending applications will issue as patents, that any issued patents will
provide the Company with significant competitive advantages, or that challenges
will not be instituted against the validity or enforceability of any patent
owned by the Company or, if instituted, that such challenges will not be
successful. Defense of intellectual property rights can be difficult and costly,
and there can be no assurance that the Company will be able effectively to
protect its technology from misappropriation by competitors. Additionally, third
party infringement claims may result in the Company being required to enter into
royalty arrangements or pay damages, any of which could materially and adversely
affect the Company's business, financial condition and results of operations.

         As the number of software products in the industry increases and the
functionality of these products further overlap, software developers and
publishers may increasingly become subject to infringement claims. Although the
Company has not received any claim that it is infringing any patent or trade
secrets and is not currently aware of any claim that it is infringing any such
rights of others, there can be no assurance that the Company will not face such
claims, with or without merit, in the future. Any such claims or litigation
could be costly and could result in a diversion of management's attention, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. Any settlement of such claims or adverse
determinations in such litigation could also have a material adverse effect on
the Company's business, financial condition and results of operations.

         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, 2003 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



                                       23
<PAGE>

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. As of December 15, 2003, 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 37% 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 shareholders 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 shareholders 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 and cause an event of
default under our Debentures. 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 shareholders' 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



                                       24
<PAGE>

may reduce investors' interest in the Company's securities and materially
adversely affect the trading market and prices for such securities and the
Company's ability to issue additional securities or to secure additional
financing.

         In 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 disclosure in connection with trades in the Company's
securities, including the delivery of a disclosure schedule explaining the
nature and risks of the penny stock market 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 outstanding Preferred Stock or Common
Stock since its inception and does not intend to pay any dividends to its
shareholders in the foreseeable future. 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 shareholders may consider favorable. The Company's Certificate of
Incorporation authorizes the issuance of 2,000,000 shares of Preferred Stock (of
which 60,000 have been designated as Series A Preferred Stock and are
outstanding) with such designations, rights and preferences as may be determined
from time to time by the Board of Directors (See Item 5. "Recent Sales of
Unregistered Securities"). Accordingly, the Board of Directors is empowered,
without obtaining stockholder approval, to issue such Preferred Stock with
dividend, liquidation, conversion, voting or other rights that could adversely
affect the voting power or other rights of the holders of the Common Stock. In
the event of issuance, the Preferred Stock could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
the control of the Company. Certain provisions of Delaware law may also
discourage third party attempts to acquire control of the Company.


         Item 2.   Description of Property

         The Company currently leases approximately 2,500 square feet of space
in West Paterson, New Jersey under a five year lease which expires on June 30,
2005. Lease payments for this facility, at which all development and
administrative functions in the United States are currently conducted, during
the fiscal year ended September 30, 2003, were approximately



                                       25
<PAGE>

$36,000. For the fiscal year ending September 30, 2004, lease payments for this
facility are expected to also be approximately $36,000. The Company also leases
off-site facilities in Nevada for the storage of equipment.

         The Company currently leases approximately 4,400 square feet, in
London, England under a seven year lease which expires in March 2009. Lease
payments for this facility, at which all development and administrative
functions in England are currently conducted, during the year ended September
30, 2003, were approximately $251,000. For the fiscal year ending September 30,
2004, lease payments for this facility are expected to be approximately
$244,000. 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 is expected to be approximately
$78,000.

         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, 2003.




                                       26
<PAGE>


                                     PART II

         Item 5. Market for Common Equity and Related Shareholder Matters

         Market Information

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

    Quarter                                      High            Low
    -------                                      -----          ------
    October 1, 2001 to December 31, 2001         $8.24          $3.96
    January 1, 2002 to March 31, 2002             8.20           4.12
    April 1, 2002 to June 30, 2002                5.21           1.25
    July 1, 2002 to September 30, 2002            2.19           1.05
    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

         The high and low sales prices on December 15, 2003 were $3.56 and
$3.65, respectively.

         Current Holders of Common Stock

         Based upon information supplied to the Company by its transfer agent,
there were approximately 50 shareholders of record of the Common Stock on
December 15, 2003. The Company believes there are in excess of 1,400 beneficial
owners of its Common Stock whose shares are held in "Street Name."

         Dividends

         The Company has never paid cash dividends with respect to its Preferred
Stock or its Common Stock. The Company intends to retain future earnings, if
any, that may be generated from the Company's operations to help finance the
operations and expansion of the Company and accordingly does not plan, for the
foreseeable future, to pay dividends to holders of Preferred Stock or Common
Stock. Any decision as to the future payment of dividends on Preferred Stock or
Common Stock will depend on the results of operations and financial position of
the Company and such other factors as the Company's Board of Directors, in its
discretion, deems relevant.

         Recent Sales of Unregistered Securities

         On November 24, 2003, ISWI entered into a Securities Purchase Agreement
with certain institutional investors (the "Investors"), under which ISWI issued
and sold to the Investors in a private placement (i) $2.6 million of aggregate
principal amount of 7.5% convertible Debentures



                                       27
<PAGE>

due April 1, 2006, (ii) 390,390 shares of Common Stock priced at $3.33 per
share, which share price is equal to 80% of the daily volume weighted average
price of the Common Stock on the NASDAQ SmallCap Market as reported by Bloomberg
Financial L.P. (the "VWAP") during the ten day period prior to November 21, 2003
(the "Closing Price"), and (iii) the Investor Warrants to purchase 281,250
shares of Common Stock at an exercise price of $4.58 per share, which share
price is equal to 110% of the Closing Price and which are exercisable until
November 24, 2008. Net proceeds from the private placement, after estimated
costs and expenses, were approximately $3.5 million and will provide additional
working capital to the Company.

         The Debentures are initially convertible into shares of Common Stock at
a price of $4.58 per share, which share price is equal to 110% of the Closing
Price. ISWI may require that the holders of the Debentures convert their
outstanding Debentures into Common Stock under specified circumstances. The
principal amount of the Debentures is repayable at the rate of $108,333 per
month, commencing on May 1, 2004 and may be paid, at the Company's option, in
cash or, subject to certain conditions, additional shares of Common Stock,
valued at 90% of the VWAP during the 20 day period prior to the applicable
payment. Interest on the Debentures is payable quarterly on January 1, April 1,
July 1, and October 1 and may be paid, at the Company's option, in cash or,
subject to certain conditions, additional shares of Common Stock, valued at 90%
of the VWAP during the 20 day period prior to the applicable payment (except for
the interest payments due on January 1, 2004 and April 1, 2004, which are valued
at 80% the VWAP during the 20-day period prior to the applicable payment). The
conversion price of the Debentures and the exercise price of the Investor
Warrants are subject to adjustment under certain circumstances.

         The total number of shares of Common Stock that may be issued by the
Company in connection with this financing is dependent upon, among other things,
whether the Debentures are converted or the Investor Warrants are exercised,
whether the principal and/or interest on the Debentures is paid in cash or
Common Stock and the market price of the Common Stock used in calculating any
such payments, and whether or not the adjustment (anti-dilution) provisions of
the Debentures and/or Investor Warrants come into effect.

         In connection with the private placement, the Company also entered into
a Registration Rights Agreement with the Investors pursuant to which the Company
agreed to prepare and file with the Securities and Exchange Commission by
January 6, 2004 a registration statement covering the resale of the Common Stock
issued to the Investors, Common Stock that is issuable upon conversion of the
Debentures and/or exercise of the Investor Warrants, and/or issuable in payment
of principal and interest on the Debentures.

         A finder in connection with the private placement received a cash fee
and warrants to purchase an aggregate of 95,808 shares of Common Stock at an
exercise price of $5.06 per share. The finder is also entitled to additional
cash compensation and warrants under certain circumstances.

         In August, 2003, the Company issued a warrant to purchase 100,000
shares of its Common Stock to a consultant. The warrant is exercisable at a
price of $4.00 per share commencing on March 1, 2004 and expires on August 20,
2008.

         The ISWI securities issued to the Investors, the finder and the
consultant were issued in reliance upon an exemption provided by Section 4(2) of
the Securities Act of 1933, as amended (the "Act") and the regulations issued
thereunder. All Investors and the finder represented to ISWI that they were
"accredited investors" within the meaning of the Act.


                                       28
<PAGE>

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

         The Company's Certificate of Incorporation authorizes the issuance of
2,000,000 shares of Preferred Stock with such designations, rights and
preferences as may be determined from time to time by the Board of Directors.
Accordingly, the Board of Directors is empowered, without obtaining stockholder
approval, to issue such preferred stock with dividend, liquidation, conversion,
voting or other rights that could adversely affect the voting power or other
rights of the holders of the Common Stock. In connection with the acquisition of
GIG, the Company issued 60,000 shares of a new class of Series A Preferred Stock
to MultiSport. Each share of Preferred Stock has one vote, no liquidation
preferences, is entitled to a 6% non-cumulative dividend, if and when declared
by the Board of Directors, is convertible into 10 shares of the Company's Common
Stock at $15 per common share on a cashless basis and is redeemable by the
Company seven years after issuance for nominal consideration if not previously
converted into Common Stock. The Company issued the Series A Preferred Stock and
consented to the transfers of the GIG Warrants to the two former GIG
shareholders in reliance upon an exemption under the Act provided by Section
4(2) thereof and regulations thereunder. Both Mr. Sprogis and MultiSport
represented to the Company, among other things, that they were "accredited
investors" within the meaning of the Act.



                                       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

         In March 2000, ISWI became a licensor of interactive gaming software
through the signing of License Agreements (the "License Agreements") with Global
Interactive Gaming ("GIG"). The License Agreements provided, among other things,
for the payment of minimum royalties on a quarterly basis and provided that the
minimum due to ISWI for the forthcoming 12 month period would be held in a third
party escrow account ("Escrow Account"). During the year ended September 30,
2002 ("Fiscal 2002"), ISWI's revenues solely represented minimum fees received
pursuant to the terms of the License Agreements. ISWI's efforts between early
2000 and 2002 focused on enhancing the SportXction(TM) System for use by GIG.
GIG's majority shareholder was Prisma iVentures Ltd., a subsidiary of The Kirch
Group, a German media conglomerate. As a result of Kirch Media's insolvency
filing in Germany in April 2002, an event unrelated to ISWI, The Kirch Group,
ceased providing funding for GIG. Subsequent to the acquisition, the License
Agreement was modified and no longer provides an exclusive license to GIG or
guaranteed annual minimums. On July 31, 2002, ISWI acquired all of the
outstanding share capital of GIG (see "Acquisition of GIG"). As a result of the
acquisition of GIG, ISWI ceased receiving any further minimum royalties and
began generating revenues based upon use of the SportXction(TM) System, from
service charges from existing agreements and by entering into additional
agreements. GIG's results of operations from the date of acquisition of July 31,
2002 are included in ISWI's consolidated statements of operations for Fiscal
2002 and for the year ended September 30, 2003 ("Fiscal 2003"), respectively.

         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, amortization of long-lived assets, including
intangible assets; and deferred income taxes require that the Company apply
significant judgment in defining the appropriate assumptions for calculating
financial estimates. These estimates and judgments are subject to an inherent
degree of uncertainty and are evaluated by the Company on an ongoing basis. The
Company bases its estimates and judgments on its historical experience and other
relevant factors, the results of which form the basis in making judgments about
the carrying values of assets and liabilities that are not readily apparent from
others sources.

         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


                                       30
<PAGE>

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 years ended
September 30, 2003 and 2002, the Company capitalized software development costs
of $427,000 and $423,000, respectively, relating to certain enhancements to its
SportXction(TM) product. Amortization of capitalized amounts commenced during
the quarter ending 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 three years,
amounted to $161,000 for the year ended September 30, 2003.

         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 the fourth quarter of fiscal
2003, the Company wrote-off $566,000 representing the purchase price allocated
to this software in connection with the acquisition of GIG.

         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 2003 were $14,000, as compared to $4,314,000
during Fiscal 2002. The decrease in Fiscal 2003 is attributable to the
discontinuation of the minimum royalties due to GIG's default under the License
Agreements and the eventual acquisition of GIG on July 31, 2002. Currently, the
Company's SportXction(TM) system is in "live" operation with its business
partners, ukbetting plc ("ukbetting") and Sportingbet plc ("Sportingbet"). The
revenues generated during Fiscal 2003 were limited by a number of factors,
including the number of events covered, the introduction of new sports and the
level of promotion by our partners. The Company expects an insignificant level
of revenues during the quarter ending December 31, 2003, with increasing amounts
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 2003 were
$1,303,000, as compared to $735,000 during Fiscal 2002. The increase in Fiscal
2003 was primarily due to higher programming and development costs as a result
of the acquisition of GIG, costs incurred to operate betting events and
amortization of capitalized development costs.

         General and administrative expenses during Fiscal 2003 were $3,868,000,
as compared to $2,355,000 during Fiscal 2002. The increase in Fiscal 2003 was
primarily due to an increased cost base as a result of the acquisition of GIG,
increased employee salary and benefit expenses and a non-cash charge associated
with the granting of a warrant for consulting services partially offset by lower
professional fees.



                                       31
<PAGE>

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

         As described above in Critical Accounting Policies and Estimates,
during the fourth quarter of 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.

          Interest income during Fiscal 2003 was $146,000, as compared to
$117,000 during Fiscal 2002. The increase in Fiscal 2003 was due to a higher
cash balance.

         Income tax expense of $2,737,000 during Fiscal 2002 principally
represented the utilization of a portion of the Company's net operating loss
carryforwards and deductible temporary differences for which the tax benefit had
been previously recognized.

         Net loss and net loss per share (basic) for Fiscal 2003 were $5,577,000
and $0.63, respectively, as compared to net income and net income per share
(basic) of $1,954,000 and $0.22, respectively, during Fiscal 2002. The decrease
is the result of lower revenues and higher costs (as described above).

         Liquidity and Capital Resources

         As of September 30, 2003, the Company had liquid resources totaling
$4,317,000. These include cash and cash equivalents in the amount of $4,127,000
and investments in the amount of $190,000. 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, 2004.
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 18 months based
upon the Company's current business plan, and longer, subject to the revenues
generated by the SportXction(TM) System. The Company believes that this is a
sufficient period of time to allow the Company to establish a successful
enterprise in the intended market.

         The Company expects the agreements with its current business partners
to produce revenues in the year ending September 30, 2004. 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 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.

                                       32
<PAGE>

         Capital expenditures are expected to be incurred in relation to system
rollout for existing contracts as well as the purchase of additional computer
equipment. Existing resources are expected to be able to fund these
requirements. The Company's capital requirements may vary materially from those
now planned due to a number of factors, including the rate at which the Company
can introduce the product, the market acceptance and competitive position of the
product and the response of competitors to the product.

         Acquisition of GIG

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

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

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

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

         GIG's results of operations from August 1, 2002 to September 30, 2002
and from October 1, 2002 to September 2003 are included in ISWI's statement of
operations for Fiscal 2002 and Fiscal 2003, respectively.

         Recent Developments

         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



                                       33
<PAGE>

Debentures and $1.3 million of Common Stock. The investors also received
Investor Warrants to purchase 281,250 shares of the Common Stock. Net proceeds
from the financing after estimated costs and expenses were approximately $3.5
million.

         The 7.5% convertible Debentures are due April 2006 and are convertible
into shares of Common Stock at $4.58 per share, a 10% premium over the recent
market price (the "Closing Price"). The Debentures are repayable in 24 equal
monthly installments beginning in May 2004 with interest payable quarterly.
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 Debentures into Common
Stock. The Company also issued to the investors, 390,390 shares of Common Stock
at $3.33 per share, a 20% discount from the Closing Price. The Investor Warrants
have a term of five years and are exercisable at $4.58 per share, a 10% premium
over the Closing Price (see "Recent Sales of Unregistered Securities" for a more
detailed description of the financing).

         Outlook

         The Company believes that its long term business outlook is optimistic.
By recovering its software license through the acquisition of GIG, the Company
is currently the primary operator of its SportXction(TM) System and is entitled
to all of the revenues generated by its technology, net of any revenue sharing
arrangements with the distributor of the technology to the end users, versus the
fractional share it would have received as licensor. However, without the
financial stability of the minimum license payments, and the greater costs
associated with the GIG acquisition, it is imperative that the Company launches
its agreements which are not yet "live" as well as form additional strategic
partnerships which generate meaningful revenue. The Company expects its signed
agreements will generate an insignificant amount of revenue during the quarter
ending December 31, 2003, 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 ended
September 30, 2004.

         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.

                                       34
<PAGE>

         (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, 2003 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, 2004. If the
definitive proxy statement is not filed on or before January 28, 2004, the
information called for by this Part III will be filed as an amendment to this
Report on or prior to January 28, 2004.

Item 13.  Exhibits and Reports on Form 8-K

(a)           Exhibits

         The following exhibits are filed herewith:

         2.1      Stock Purchase Agreement, dated as of July 3, 2002, between
                  Prisma iVentures Ltd. and ISW Acquisition Co., LLC. (1)

         2.2      Stock Purchase Agreement, dated as of July 30, 2002, between
                  Global Interactive Gaming Ltd., MultiSport Games Development
                  Inc., Peter G. Sprogis, ISW Acquisition Co., LLC and
                  Interactive Systems Worldwide Inc. (with respect only to
                  certain Sections). (1)

         3.1      Certificate of Incorporation of the Company. (2)

         3.1(a)   Amendment, filed October 24, 1996, to Certificate of
                  Incorporation of the Company. (2)

         3.1(b)   Amendment, dated February 28, 2001, to Certificate of
                  Incorporation of the Company. (3)

         3.2      By-Laws of the Company. (2)

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

         4.2      Warrant to Purchase of 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 issued to
                  the Investors. (6)

         4.7      Form of Common Stock Purchase Warrant issued to the Investors.
                  (7)

         4.8      Form of Warrant issued to the finder. (8)

         10.1     Letter to Citibank, N.A., dated as of July 31, 2002
                  terminating Escrow Agreement and Directing Release of Funds
                  from Escrow. (9)

                                       35
<PAGE>

         10.2     Letter Agreement, dated as of July 29, 2002, between Global
                  Interactive Gaming Ltd. and KirchSport Limited. (9)

         10.3(a)  Employment Agreement between the Company and Barry Mindes,
                  dated as of March 17, 2000. (10)

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

         10.4(a)  Employment Agreement between the Company and Bernard Albanese,
                  dated as of March 17, 2000. (11)

         10.4(b)  Amendment No. 1 to Employment Agreement between the Company
                  and Bernard Albanese, dated as of May 1, 2003. (12)

         10.5     Form of Proprietary Information, Inventions and
                  Non-Solicitation Agreement. (13)

         10.6     Form of Indemnification Agreement entered into between the
                  Company and its directors and executive officers. (14)

         10.7     1995 Stock Option Plan, as amended January 7, 1999. (15)

         10.8     1996 Stock Option Plan, as amended January 2, 2003.*

         10.9     Form of Incentive Stock Option Agreement. (16)

         10.10    Form of Non-Qualified Stock Option Agreement. (17)

         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). (18)

         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).*

         10.12    Securities Purchase Agreement dated as of November 24, 2003.
                  (19)

         10.13    Registration Rights Agreement dated as of November 24, 2003.
                  (20)

         10.14    Agreement, dated as of September 5, 2003, by and between the
                  Company and Brandon Ross.*

         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).*

                                       36
<PAGE>

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

(1)      Incorporated by reference to the Exhibit with the corresponding number
         contained in the Company's Current Report on Form 8-K dated August 15,
         2002.

(2)      Incorporated by reference to the Exhibit with the corresponding number
         contained in the Company's Registration Statement on Form SB-2 (Reg.
         No. 333-15005) which was declared effective by the Securities and
         Exchange Commission on December 11, 1996.

(3)      Incorporated by reference to the Exhibit with the corresponding number
         contained in the Company's Current Report on Form 8-K dated February
         28, 2001

(4)      Incorporated by reference to 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 the Exhibit with the corresponding number
         contained in the Company's Current Report on Form 8-K dated August 15,
         2002.

(10)     Incorporated by reference to Exhibit 10.1(c) contained in the Company's
         Annual Report on Form 10-KSB dated December 22, 2000

(11)     Incorporated by reference to Exhibit 10.2(b) contained in the Company's
         Annual Report on Form 10-KSB dated December 22, 2000

(12)     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

(13)     Incorporated by reference to Exhibit 10.3 contained in the Company's
         Registration Statement on Form SB-2 (Reg. No. 333-15005) which was



                                       37
<PAGE>

         declared effective by the Securities and Exchange Commission on
         December 11, 1996.

(14)     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.

(15)     Incorporated by reference to Exhibit 10.11 contained in the Company's
         Annual Report on Form 10-KSB dated December 22, 2000

(16)     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.

(17)     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.

(18)     Incorporated by reference to Exhibit 10.15 contained in the Company's
         Current Report on Form 8-K dated March 23, 2000

(19)     Incorporated by reference to Exhibit 10.1 contained in the Company's
         Current Report on Form 8-K dated November 24, 2003

(20)     Incorporated by reference to Exhibit 10.2 contained in the Company's
         Current Report on Form 8-K dated November 24, 2003

*        Filed herewith



(b)      Reports on Form 8-K


The Company filed the following Current Reports on Form 8-K during the quarter
ended September 30, 2003:

         Current Report on Form 8-K filed on August 18, 2002


                                       38
<PAGE>

                                   SIGNATURES

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

                                      INTERACTIVE SYSTEMS WORLDWIDE INC.


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

                                      (Principal Executive Officer)


                                      December 24, 2003




                                       39
<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
-----------------------------   (Principal Executive Officer)          December 24, 2003
        Barry Mindes


    /s/ Bernard Albanese        President and Director                 December 24, 2003
-----------------------------
      Bernard Albanese


      /s/ James McDade          Chief Financial Officer
-----------------------------   (Principal Financial and               December 24, 2003
        James McDade            Accounting Officer)


   /s/ Fredric Kupersmith       Director                               December 24, 2003
-----------------------------
     Fredric Kupersmith


     /s/ Janet Mandelker        Director                               December 24, 2003
-----------------------------
       Janet Mandelker


     /s/ Harold Rapaport        Director                               December 24, 2003
-----------------------------
       Harold Rapaport

</TABLE>



                                       40

<PAGE>

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

                                                                           Page

     Independent Auditors' Report                                          F-2

     Consolidated Balance Sheets as of September 30, 2003 and 2002         F-3

     Consolidated Statements of Operations for the years ended
     September 30, 2003 and 2002                                           F-4

     Consolidated Statements of Stockholders' Equity for the years
     ended September 30, 2003 and 2002                                     F-5

     Consolidated Statements of Cash Flows for the years ended
     September 30, 2003 and 2002                                           F-6

     Notes to Consolidated Financial Statements                            F-7






                                      F-1
<PAGE>



                          INDEPENDENT AUDITORS' REPORT


The Board of Directors and Stockholders
Interactive Systems Worldwide Inc.

We have audited the accompanying consolidated balance sheets of Interactive
Systems Worldwide Inc. and subsidiaries as of September 30, 2003 and 2002, 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Interactive
Systems Worldwide Inc. and subsidiaries as of September 30, 2003 and 2002, 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 7, 2003




                                      F-2
<PAGE>


      Part I:  Financial Information

Item 1.  Financial Statements

               Interactive Systems Worldwide Inc. and Subsidiaries
                           Consolidated Balance Sheets
                           September 30, 2003 and 2002

                    (Amounts in thousands except share data)


<TABLE>
<CAPTION>
                                                                    2003        2002
                                                                  --------    --------

<S>                                                               <C>         <C>
Current assets:
   Cash and cash equivalents                                      $  4,127    $  4,753
   Accounts receivable                                                   9          --
   Investments in marketable securities                                190       3,183
   Other receivables                                                    19       1,108
   Prepaid expenses and other current assets                           153         136
                                                                  --------    --------
       Total current assets                                          4,498       9,180

   Property and equipment, net                                         233         314
   Investments in marketable securities, non current portion            --         190
   Capitalized software, net of accumulated
     amortization of $161,000 in 2003                                  807       1,110
   Other assets                                                        306         302
                                                                  --------    --------
                 Total assets                                     $  5,844    $ 11,096
                                                                  ========    ========

                      Liabilities and Stockholders' Equity
Current liabilities:
   Accounts payable                                               $    308    $    387
   Accrued expenses                                                    555         439
                                                                  --------    --------
       Total current liabilities                                       863         826
                                                                  --------    --------

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;
       9,177,545 and 9,143,545 issued, respectively                      9           9
   Additional paid-in capital                                       13,036      12,749
   Treasury stock, at cost, 242,000 common shares                     (441)       (441)
   Accumulated other comprehensive loss                                 (2)         (3)
   Accumulated deficit                                              (7,621)     (2,044)
                                                                  --------    --------
             Total stockholders' equity                              4,981      10,270
                                                                  --------    --------
                 Total liabilities and
                     stockholders' equity                         $  5,844    $ 11,096
                                                                  ========    ========
</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,
                                                    --------------------------
                                                        2003           2002
                                                    -----------    -----------

Revenues, net                                       $        14    $     4,314
                                                    -----------    -----------

Costs and expenses:
   Cost of revenues, research
     and development expense                              1,303            735

   General and
     administrative expense                               3,868          2,355
                                                    -----------    -----------
                                                          5,171          3,090
                                                    -----------    -----------

        Operating (loss) income                          (5,157)         1,224

Gain related to licensee default under agreements            --          3,350
Loss due to impairment of software                         (566)            --
Interest income                                             146            117
                                                    -----------    -----------

        (Loss) income before income taxes                (5,577)         4,691

Provision for income taxes                                   --          2,737
                                                    -----------    -----------

        Net (loss) income                           $    (5,577)   $     1,954
                                                    ===========    ===========

Net (loss) income per
   common share- basic                              $     (0.63)   $      0.22
                                                    ===========    ===========

Weighted average basic
  common shares outstanding                           8,914,718      8,897,297
                                                    ===========    ===========

Net (loss) income per
   common share- diluted                            $     (0.63)   $      0.20
                                                    ===========    ===========

Weighted average diluted
   common shares outstanding                          8,914,718      9,771,161
                                                    ===========    ===========



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, 2003 and 2002

                    (Amounts in thousands except share data)

<TABLE>
<CAPTION>
                                                                                            Accumulated
                                    Common Stock         Additional              Deferred      Other
                                  ---------------------   Paid-In     Treasury   Expense,  Comprehensive  Accumulated
                                   Shares     Amount      Capital      Stock       net         Loss        Deficit    Total
                                  ---------------------------------------------------------------------------------------------
<S>                              <C>          <C>       <C>           <C>       <C>        <C>           <C>          <C>
Balance at
   September 30, 2001              9,102,832        9     13,326        (441)     (1,291)        --       (3,998)         7,605
                                                                                                                      ---------

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

Foreign currency
     translation loss                     --       --         --          --          --         (3)          --             (3)
                                                                                                                      ---------
Comprehensive income                                                                                                      1,951
                                                                                                                      ---------

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

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

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

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

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

Balance at
  September 30, 2002               9,143,545        9     12,749        (441)         --         (3)      (2,044)        10,270

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

Foreign currency
     translation gain                     --       --         --          --          --          1           --              1
                                                                                                                      ---------
Comprehensive loss                                                                                                       (5,576)
                                                                                                                      ---------

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


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

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

                                  ---------------------------------------------------------------------------------------------
Balance at
   September 30, 2003              9,177,545  $     9  $  13,036   $    (441)       $ --   $     (2)   $  (7,621)     $   4,981
                                  =============================================================================================

</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,
                                                                                 ------------------
                                                                                  2003        2002
                                                                                 -------    -------
<S>                                                                              <C>        <C>
Cash flows from operating activities:
  Net (loss) income                                                              $(5,577)   $ 1,954
Adjustments to reconcile net (loss) income
    to net cash (used in) provided by
    operating activities:
    Depreciation and amortization                                                    260         48
    Non-cash warrant and option charge                                               252        416
    Loss due to impairment of software                                               566         --
    Provision for doubtful accounts                                                   --        300
    Deferred income tax provision                                                     --      2,737
Changes in assets and liabilities, net of effects of GIG acquisition:
  Accounts receivable                                                                 (9)       300
  Other receivables                                                                1,089        (26)
  Prepaid expenses and other current assets                                          (17)        32
  Other assets                                                                        (4)        (4)
  Accounts payable                                                                   (79)      (433)
  Deferred revenue                                                                    --       (625)
  Accrued expenses                                                                   116       (361)
                                                                                 -------    -------
         Net cash (used in) provided by operating activities                      (3,403)     4,338
                                                                                 -------    -------

Cash flows from investing activities:
  Purchase of investments                                                             --     (6,038)
  Proceeds from sales of investments                                               3,183      3,614
  Net cash paid in connection with acquisition of GIG, including related costs        --       (857)
  Purchase of property and equipment                                                 (19)       (45)
  Capitalized software                                                              (427)      (423)
                                                                                 -------    -------
         Net cash provided by (used in) investing activities                       2,737     (3,749)
                                                                                 -------    -------

Cash flows from financing activities:
  Net proceeds from issuance of common stock                                          35         51
                                                                                 -------    -------
         Net cash provided by financing activities                                    35         51
                                                                                 -------    -------

Net (decrease) increase in cash and cash equivalents                                (631)       640
Effect of exchange rate on cash                                                        5         (3)
Cash and cash equivalents, beginning of year                                       4,753      4,116
                                                                                 -------    -------
Cash and cash equivalents, end of year                                           $ 4,127    $ 4,753
                                                                                 =======    =======

Non-cash investing and financing activity:
     Issuance of preferred stock and warrants                                    $    --    $   191
     Assumption of liabilities                                                   $    --    $ 1,276

</TABLE>

See accompanying notes to consolidated financial statements



                                      F-6
<PAGE>


               Interactive Systems Worldwide Inc. and Subsidiaries
                   Notes To Consolidated Financial Statements
                           September 30, 2003 and 2002

(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 March 17, 2000, ISWI entered into License Agreements (the "Agreements") with
a United Kingdom company, Global Interactive Gaming Limited, and its subsidiary
(collectively "GIG"). Pursuant to the Agreements, ISWI granted GIG exclusive
licenses to use ISWI's interactive SportXction(TM) software, technology and
patents on the Internet and interactive television, in all business activities
in which such technology is legally usable, including contests and wagering on
sporting events world-wide.

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

         GIG's majority shareholder was Prisma iVentures Ltd., a United Kingdom
company and subsidiary of The Kirch Group, a German media conglomerate. As a
result of Kirch Media's insolvency filing in Germany in April 2002, The Kirch
Group ceased providing funding for GIG. On May 15, 2002, GIG failed to make the
required payment into the escrow account thus defaulting under the Agreements.
In order to enable GIG to continue its operations following the cessation of
funding from The Kirch Group, in May and July 2002, ISWI relinquished a total of
$1.6 million to GIG from the escrow account that had been set up under the
Agreements. On July 31, 2002, ISWI acquired all of the outstanding share capital
of GIG which was a development stage company (see Note 3). Subsequent thereto,
ISWI's activities through GIG consist of generating revenue by providing
interactive gaming services using the SportXction(TM) System to business
partners such as licensed bookmakers and others located in the United Kingdom.


         Consolidated Financial Statements:

         The consolidated financial statements include the accounts of
Interactive Systems Worldwide Inc., and, from the date of acquisition of July
31, 2002, 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.


                                      F-7
<PAGE>


               Interactive Systems Worldwide Inc. and Subsidiaries
                   Notes To Consolidated Financial Statements
                           September 30, 2003 and 2002


(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.

         Investments:

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


         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. During
the years ended September 30, 2003 and 2002, the Company capitalized software
development costs relating to certain enhancements to its SportXction(TM)
product. Amortization of capitalized amounts commenced during the quarter ending
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
$161,000 for the year ended September 30, 2003.


                                      F-8
<PAGE>

               Interactive Systems Worldwide Inc. and Subsidiaries
                   Notes To Consolidated Financial Statements
                           September 30, 2003 and 2002

(2) Summary of Significant Accounting Policies (continued)

         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 the fourth quarter of fiscal 2003, the Company wrote-off $566,000
representing the purchase price allocated to this software in connection with
the acquisition of GIG.

         Revenue Recognition:

         The Company's revenue during the year ended September 30, 2002
consisted of license fees received under its Agreements with GIG which are no
longer being received as a result of the insolvency filing of GIG's major
shareholder and the resultant discontinuance of funding provided to GIG (see
Note 1). The Company's revenue during the year ended September 30, 2003
consisted of license fees and service charges from service agreements with
bookmakers located in the United Kingdom.

         The Company recognized revenue under its Agreements with GIG based upon
the guaranteed annual minimum amounts due under the Agreements as GIG had not
commenced commercial use of the software. The Company recognized revenue for
each year's guaranteed minimum annual license fee, as reduced in 2002 for escrow
funds returned to GIG (see Note 1), on a straight-line basis over the respective
contract year. The Company received payments of the minimum amounts at
predetermined dates as stipulated in the Agreements. Accordingly, collections
received in advance of recognizing revenue were recorded as deferred revenue on
the balance sheet. The Company recognizes revenue from its current service
agreements as it is earned based on a percentage share of the wagering revenue.

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

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




                                      F-9
<PAGE>

               Interactive Systems Worldwide Inc. and Subsidiaries
                   Notes To Consolidated Financial Statements
                           September 30, 2003 and 2002

(2) Summary of Significant Accounting Policies (continued)

         Fair Value of Financial Instruments:

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

         Income Taxes:

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

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

         Long-lived assets and 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 of an employee stock option in 2003, no stock-based employee
compensation cost was reflected in 2003 and 2002 net (loss) income, 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-10
<PAGE>


               Interactive Systems Worldwide Inc. and Subsidiaries
                   Notes To Consolidated Financial Statements
                           September 30, 2003 and 2002

(2) Summary of Significant Accounting Policies (continued)

         The following tabulation illustrates such pro forma effects:

(Amounts in thousands except per share data)

                                                           2003          2002
                                                         ---------      ------

Net (loss) income - as reported                            ($5,577)     $1,954
Total stock-based employee compensation expense
   determined under fair value based method,
    net of related tax effects                                 206         164
                                                         ---------      ------
Net (loss) income - pro forma                              ($5,783)     $1,790
                                                         =========      ======

Net (loss) income per share basic - as reported             ($0.63)     $ 0.22
Net (loss) income per share basic - pro forma                (0.65)       0.20

Net (loss) income per share diluted - as reported            (0.63)       0.20
Net (loss) income per share diluted - pro forma              (0.65)       0.18

         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 3.71% and 4.17% in 2003 and 2002, respectively, expected volatility of
89% and 100% in 2003 and 2002, respectively, and an expected life of 7 years
(for both periods). The weighted average fair value of options granted in 2003
and 2002 was $1.82 and $1.71, 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.

         Basic and Diluted Net (Loss) Income per Common Share:

         Basic net (loss) income per share is computed by dividing net (loss)
income by the weighted average number of common shares outstanding during the
period. Diluted net income per share for fiscal 2002 is computed by adjusting
weighted average outstanding shares for the dilutive effect of the assumed
exercise of outstanding options and warrants utilizing the treasury stock method
and the assumed conversion of preferred stock. In computing diluted net loss per
share for fiscal 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 is anti-dilutive (see
Note 10).

         Comprehensive Income (Loss):

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


                                      F-11
<PAGE>

               Interactive Systems Worldwide Inc. and Subsidiaries
                          Notes To Financial Statements
                           September 30, 2003 and 2002

(2) Summary of Significant Accounting Policies (continued)

         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 income (loss)
section of stockholders' equity.

(3)      Acquisition of Global Interactive Gaming Limited

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

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

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

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

         GIG's results of operations are included in the consolidated statement
of operations for the year ended September 30, 2002 from its date of
acquisition.



                                      F-12
<PAGE>

               Interactive Systems Worldwide Inc. and Subsidiaries
                   Notes To Consolidated Financial Statements
                           September 30, 2003 and 2002

(4)      Preferred Stock

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

(5) Warrants:

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

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

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

         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 becomes 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.


                                      F-13
<PAGE>


               Interactive Systems Worldwide Inc. and Subsidiaries
                   Notes To Consolidated Financial Statements
                           September 30, 2003 and 2002

(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.

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

                                                                   Weighted
                                                                   Average
                                                   Shares       Exercise Price
                                                 ----------     --------------

Outstanding, October 1, 2001                      1,226,419         $  0.91
Granted                                             285,000            2.13
Exercised                                           (28,500)           0.84
Cancelled                                           (57,000)           1.25
                                                 ----------
Outstanding September 30, 2002                    1,425,919            1.14
Granted                                               6,000            2.31
Exercised                                           (34,000)           1.01
Cancelled                                           (46,000)           1.87
                                                 ----------
Outstanding September 30, 2003                    1,351,919         $  1.13
                                                 ==========         =======

Exercisable at September 30, 2003                 1,218,919
                                                 ==========

Available for grant at September 30, 2003           540,805
                                                 ==========

         On October 1, 2001, the Company issued options to purchase 10,000
shares of its common stock at an exercise price of $5.75 per share to a third
party consultant in connection with an agreement between the Company and the
consultant to provide investor relations and other services to the Company for a
one-year period. The options vested on October 1, 2002 and remain exercisable
until one year after termination of the agreement. The Company valued the
options at $4,000, using a Black-Scholes pricing model and charged the cost to
general and administrative expense during the year ended September 30, 2002.




                                      F-14
<PAGE>


               Interactive Systems Worldwide Inc. and Subsidiaries
                   Notes To Consolidated Financial Statements
                           September 30, 2003 and 2002

(6) Stock options (continued)

         The following table summarizes information about stock options
outstanding at September 30, 2003:

<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               832,919              4                 $0.71                803,919            $0.71
     1.06 - 1.87               446,000              7                  1.54                363,000             1.50
     2.08 - 2.75                43,000              7                  2.35                 37,000             2.35
            4.53                20,000              8                  4.53                  5,000             4.53
            5.75                10,000              8                  5.75                 10,000             5.75
                           -----------                                                   ---------
                             1,351,919              5                  1.13              1,218,919             1.05
                             =========                                                   =========

</TABLE>

(7) Property and Equipment

         Property and equipment at September 30, 2003 and 2002 consist of the
following:

<TABLE>
<CAPTION>
                                                          2003                2002
                                                      -----------         -----------

<S>                                                   <C>                 <C>
Furniture and fixtures                                $    62,000         $    62,000
Building and improvements                                 118,000             118,000
Computer equipment                                      1,551,000           1,536,000
                                                      -----------         -----------
                                                        1,731,000           1,716,000

Less accumulated depreciation and amortization         (1,498,000)         (1,402,000)
                                                      -----------         -----------
                                                      $   233,000         $   314,000
                                                      ===========         ===========
</TABLE>



                                      F-15
<PAGE>


               Interactive Systems Worldwide Inc. and Subsidiaries
                   Notes To Consolidated Financial Statements
                           September 30, 2003 and 2002

(8)      Accrued Expenses

         Accrued expenses at September 30, 2003 and 2002 consist of the
following:

                                           2003            2002
                                       --------        --------

Professional fees                      $ 73,000        $ 73,000
Payroll and related costs               426,000         296,000
Other                                    56,000          70,000
                                       --------        --------
                                       $555,000        $439,000
                                       ========        ========

(9)      Income Taxes

         The sources of income (loss) before income taxes for the years ended
September 30, 2003 and 2002 consist of the following:

                                          2003                2002
                                     -----------         -----------

United States                        ($2,604,000)        $ 5,245,000
United Kingdom                        (2,973,000)           (554,000)
                                     -----------         -----------
                                     ($5,577,000)        $ 4,691,000
                                     ===========         ===========

         The income tax expense for the years ended September 30, 2003 and 2002
consist of the following:

                                         2003                    2002
                                      ----------        ----------------

Deferred:
   Federal                            $       --        $      2,327,000
   State                                      --                 410,000
                                      ----------        ----------------

                                      $       --        $      2,737,000
                                      ==========        ================



                                      F-16
<PAGE>


               Interactive Systems Worldwide Inc. and Subsidiaries
                   Notes To Consolidated Financial Statements
                           September 30, 2003 and 2002

(9) Income Taxes (continued)

         The income tax expense (benefit) for the years ended September 30, 2003
and 2002 differed from the amounts computed by applying the federal income tax
rate of 34% to pre-tax (loss) income as a result of the following:

                                                         2003           2002
                                                    -----------    -----------

Computed tax (benefit) expense at 34%               ($1,896,000)   $ 1,595,000
State tax (benefit) expense net of federal effect      (335,000)       281,000
Potential benefits from net operating loss
   carryforward in United States and United
   Kingdom which are not being recognized             2,217,000        222,000
Tax benefit related to exercise of non qualified
  stock options credited to additional paid-in
  capital                                                    --         56,000
Provision of valuation allowance to offset
  deferred United States tax assets                          --        621,000
Other                                                    14,000        (38,000)
                                                    -----------    -----------
Income tax expense (benefit)                        $        --    $ 2,737,000
                                                    ===========    ===========

         Following the default under the Agreements by GIG, the Company was
unable to conclude that it was more likely than not that its deferred tax asset
would be realized and provided a valuation allowance of $621,000 to offset the
deferred tax asset at September 30, 2002 which increased income tax expense for
the year then ended. In addition, income tax expense for 2002 includes
approximately $2,060,000 representing the utilization during the year of a
portion of the Company's net operating loss carryforward and deductible
temporary differences for which the tax benefit had previously been recognized.



                                      F-17
<PAGE>


               Interactive Systems Worldwide Inc. and Subsidiaries
                   Notes To Consolidated Financial Statements
                           September 30, 2003 and 2002

(9) Income Taxes (continued)

         The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at September 30, 2003 and 2002 are presented
below:

                                                           2003          2002
                                                      -----------   -----------

Deferred tax assets:
Federal and state net operating loss
  carryforward                                        $ 1,699,000   $   638,000
United Kingdom net operating loss carryforward          4,768,000     2,941,000
Tax basis for capitalized license fees paid to
  the Company by GIG prior to acquisition               4,532,000     4,662,000
Property and equipment                                    281,000       234,000
Employee compensation and benefits                        144,000        80,000
                                                      -----------   -----------
Total gross deferred tax assets                        11,424,000     8,555,000
Deferred tax liabilities:
  Capitalized software                                    315,000       208,000
                                                      -----------   -----------
Net deferred tax asset                                 11,109,000     8,347,000
Less valuation allowance                          (a)  11,109,000     8,347,000
                                                      -----------   -----------
    Net deferred tax asset                            $         0   $         0
                                                      ===========   ===========

(a)           Includes $9,470,000 and $7,736,000 in 2003 and 2002, respectively,
              applicable to subsidiary in United Kingdom (see Note 3).

         As of September 30, 2003, the Company had a net operating loss
carryforward of approximately $4,000,000 for Federal and state income tax
reporting purposes available to offset future Federal taxable income through the
year 2023 and future state taxable income through the year 2010, 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 $15,892,000 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.



                                      F-18
<PAGE>


               Interactive Systems Worldwide Inc. and Subsidiaries
                   Notes To Consolidated Financial Statements
                           September 30, 2003 and 2002

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

         The following represents the calculations of the basic and diluted net
(loss) income per common share for the years ended September 30, 2003 and 2002.


                                                   2003              2002
                                             --------------    --------------

Net (loss) income                            $   (5,577,000)   $    1,954,000
                                             ==============    ==============

Weighted average basic
  common shares outstanding                       8,914,718         8,897,297

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

Weighted average diluted
  common shares outstanding                       8,914,718         9,771,161
                                             ==============    ==============

Net (loss) income per share - basic          $        (0.63)   $         0.22
                                             ==============    ==============

Net (loss) income per share - diluted        $        (0.63)   $         0.20
                                             ==============    ==============

         The Company's computation of dilutive net loss per share for the year
ended September 30, 2003 does not include options or warrants to purchase
1,609,571 common shares or the assumed conversion of preferred stock, as their
effect would be antidilutive. The Company's computation of dilutive net income
per share for the year ended September 30, 2002 does not include options or
warrants which were outstanding to purchase 476,652 common shares or the assumed
conversion of preferred stock, because their exercise or conversion price was
greater than the average market price of the common shares during the period
and, therefore, the effect would be antidilutive.

(11)     Commitments

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

         Year ending September 30,
         -------------------------
                   2004                                    $    312,000
                   2005                                         291,000
                   2006                                         262,000
                   2007                                         257,000
                   2008                                         253,000
                   Thereafter                                   127,000
                                                           ------------
                                                             $1,502,000
                                                           ============


                                      F-19
<PAGE>

               Interactive Systems Worldwide Inc. and Subsidiaries
                   Notes To Consolidated Financial Statements
                           September 30, 2003 and 2002

(11) Commitments (continued)

         Rent expense under operating leases during 2003 and 2002 was $304,000
and $136,000, respectively. 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 is expected to
be approximately $78,000.

         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 2003, provide for minimum compensation and
certain benefits. Compensation expense recognized under these agreements for the
years ended September 30, 2003 and 2002 was $650,000, and $608,000,
respectively. The agreements also provide for severance payments upon certain
events, as defined.

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

(12) Subsequent event

         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 and $1.3 million for
390,390 shares of the Company's Common Stock ($3.33 per share). The investors
also received 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 $3.5 million.

         The debentures which are due April 1, 2006 are convertible into shares
of common stock at $4.58 per share subject to adjustment, and are repayable in
24 equal monthly installments 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 Common Stock valued at a discount from the weighted average market
price prior to such payments and has the right to force conversion of all or a
portion of the Debentures into Common Stock.





                                      F-20