<PAGE>

                     U.S. SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549
                                   Form 10-KSB

(Mark One)
|X|      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 for the fiscal year ended September 30, 2001
                                       OR

| |      TRANSITION REPORT PURSUANT TO 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.
                    f/k/a International Sports Wagering Inc.
                 (Name of small business issuer in its charter)

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


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

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

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

      Securities registered pursuant to Section 12(g) of the Exchange Act:
                          Common Stock, $.001 par value
                               Redeemable Warrants
                               -------------------
                                (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, 2001) were $4,747,000.

         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 14, 2001 was approximately
$33,294,000.

         The number of shares of Common Stock, $.001 par value, outstanding as
of December 14, 2001 was 8,897,045.

         The issuer hereby incorporates by reference into Part III of this
report, its definitive proxy statement to be filed on or prior to January 29,
2002. If the definitive proxy statement is not filed on or prior to January 29,
2002, the information called for by Part III will be filed as an amendment to
this Form 10-KSB on or prior to January 29, 2002.

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


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                                Introductory Note

         Interactive Systems Worldwide Inc. has designed and developed an
interactive, proprietary, patented software system that enables users to wager
during the course of a sporting event.

         Certain statements in this Report on Form 10-KSB ("Report") under the
captions "Item 1. Description of Business," "Item 6. Management's Discussion and
Analysis" and elsewhere, constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995, including,
without limitation, the ability of the Company to fulfill all requirements of
the License Agreements described herein; the ability of Global Interactive
Gaming LLC or Global Interactive Gaming Limited (collectively "GIG") to market
its products, including the SportXction(TM) System, developed and modified by
the Company, statements regarding potential market size, 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 and/or GIG to attract
adequate numbers of players to the SportXction(TM) System for sports wagering
and sports contests, the ability of the Company to raise additional financing if
required, the likelihood that the Company will be, or continue to be, profitable
and/or cash flow positive in the future, the length of time the Company's cash
resources will last and meeting its cash requirements, the ability of GIG to
continue to pay the fees required to be paid to the Company under the License
Agreements, whether legal or regulatory requirements will inhibit marketing of
the products as intended by GIG and the likelihood that the Company's securities
will continue to be listed on NASDAQ. 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 under the heading
"Description of Business - Important Factors Regarding Forward Looking
Statements and Other Risks." 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 not to place
undue reliance on these forward-looking statements, which speak only as of the
date hereof. The Company undertakes no obligation to publicly release the result
of any revisions to these forward-looking statements that may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.



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                                     PART I

         Item 1. Description of Business

         The Company

         Interactive Systems Worldwide Inc. (the "Company") 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 football, baseball, soccer and
basketball, among many others. The SportXction(TM) System accepts bets not only
on the outcome of a sporting event, but also on discrete parts of the event and
on specific game situations. These include such wagers as will a team make a
first down, will a batter get on base, will a penalty shot be successful, or
will a player make two foul shots. The SportXction(TM) System is unique in that
it permits betting continuously while the game is in progress, or between game
events, such as downs, pitches, changes in ball possession and similar
situations, permitting more frequent placing and cashing of wagers.

         The SportXction(TM) System software monitors and changes the odds on
the contestants in a sporting event to induce the players to wager such that the
betting pool for each betting proposition is continuously driven toward a
financial balance, to within a pre-set level. In general, a balanced pool is
achieved when the money bet on one side of a betting proposition is sufficient
to pay off the winners on the other side of that proposition, should the other
side win. Wagers may be placed simultaneously through a variety of input
devices, such as interactive television set-top boxes, personal computer
terminals, wireless Web connected PDA's, cell phones with graphic displays,
etc., linked to the SportXction(TM) System. 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.

         Recent Developments

         On March 17, 2000, the Company signed License Agreements (collectively,
the "Agreements") with Global Interactive Gaming LLC and Global Interactive
Gaming Limited (collectively "GIG"), whose majority shareholders are Prisma
iVentures Ltd., a UK company and subsidiary of The Kirch Group, a German media
conglomerate, and Multi-Games Development, Inc., a Delaware corporation. Under
the terms of the Agreements, the Company granted exclusive licenses to market,
distribute and use the Company's interactive SportXction(TM) System software,
technology and patents on the Internet and interactive television, in all
business activities in which such technology is legally usable, including for
contests and wagering on sporting events world-wide. Excluded from the licenses
are the continued use of the SportXction(TM) System in Nevada for wagering, and
the application of the Company's basic technology and patents to lotteries and
financial transactions (stock, bond, option and currency trading and the like).
The Company has several projects under consideration in those markets using its
patented and proprietary software.

         Prisma iVentures Ltd. is leading the marketing and distribution effort.
The Kirch Group is a media conglomerate and a significant participant in media
in Europe. KirchMedia represents The Kirch Group's core business in the sport's
rights trade, the production of broadcast television and film technology. It is
one of the largest international producers in movie and television entertainment
and is the majority shareholder in Germany's second largest commercial
television network, SAT1. KirchMedia also owns DSF, a 24 hour sports channel,
and owns and operates Premiere World, Germany's leading digital pay TV service.
Premiere World's sports programming package includes the top games from German
Football (Soccer) Leagues 1 and 2, plus matches from the best of international
soccer. It also offers Formula 1, boxing, tennis, ice hockey, the handball world
championships, the track and field athletics Golden League, plus NFL football,
Major League Baseball, NBA basketball, NHL hockey, PGA golf and professional
wrestling. The Kirch Group also holds the rights to the World Cup international
soccer championship for the next two tournaments and worldwide Formula 1
automobile racing.


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         Under these Agreements, the Company will be paid 25% of the gross
profit, less direct expenses (such as credit card fees, prizes and taxes), for
the use of its technology for contests and other non-wagering transactions. For
wagering, the Company will be paid the lesser of 25% of the gross profit, as
defined, or 1% of the gross handle, also less direct expenses. The Company will
bear no share of the cost of equipment, facilities or other operating expenses
at GIG, all of which will be borne by GIG. These percentage fees are 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. The total minimum license fees during the 14-year term
are approximately $250 million, after which the license is fully paid. At all
times the minimum license fee for the next four quarters is kept in a third
party escrow account. The Company is currently being paid at the minimum rates
because GIG has not yet commenced commercial use of the SportXction(TM) System
software.

         Coincident with the signing of the Agreements, GIG was granted a
warrant to purchase 4.9% (approximately 425,000 shares) of the number of shares
of the Company's common stock then outstanding, at an exercise price of $4.38
per share. The fully vested warrant became exercisable on September 18, 2001,18
months after it was issued, is non-transferable other than to affiliates of GIG
and remains exercisable for five years from the date of grant, subject to the
terms of the Warrant Agreement.

         On February 28, 2001, at the Company's annual meeting of stockholders,
an amendment to the Company's Certificate of Incorporation, to change the
Company's name to Interactive Systems Worldwide Inc., was approved. The purpose
of the name change was to reflect the changes in the business focus of the
Company that have occurred during the past year. The Company believed that the
existing name was too limiting and that the new name is more descriptive of the
Company's business and technology. The change in corporate name did not affect
the status of the Company or the rights of any stockholder in any respect, or
the validity or transferability of outstanding stock certificates. The Company
has retained the trading symbol "ISWI".

         On April 9, 2001, the Company elected to change its independent public
accountants based upon cost considerations. As of April 9, 2001 it retained
Richard A. Eisner & Company, LLP as its independent public accountants.


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         The terms of the GIG Licensing Agreements require the Company to make
certain modifications to the SportXction(TM) System software to enhance its use
on the Internet and other interactive media. In September 2001, the Company
received final acceptance of the first milestone (Milestone A), the major
deliverable under the Agreements, and is currently completing enhancements to
its SportXction(TM) System software to satisfy the remaining requirements of the
Agreements. With this formal acceptance, the Company earned a bonus of $600,000
for completing this milestone four months ahead of schedule. This bonus will be
paid in two equal installments: the first when the licensed software is used for
any commercial purpose (other than testing,) but no later than February 1, 2002,
and the second nine months later.

         This first deliverable contains a fully functional implementation of
the Company's Sportxction(TM) sports wagering system, as it was enhanced and
expanded for simultaneous use by millions of users for many thousands of
transactions per second. This deliverable includes an interface for use with
Internet browsers. It also exceeded the first deliverable loading criteria (a
transaction throughput specification of 2,000 transactions per second). In fact,
in previously conducted in-house testing, the SportXction(TM) System software
exceeded the final software deliverable specification of 5,000 transactions per
second. The results were achieved using distributed processing techniques that
minimize the capabilities required from the computer hardware.

         The Company believes that its SportXction(TM) System software can be
used with or in conjunction with interactive television and near real-time
streaming video, through the use of interfaces, such as on-line computer
terminals, set-top boxes, and hand-held, wireless devices like cell phones and
personal digital assistants, as an international application. GIG has stated
that it intends to employ the Company's technology in international wagering and
contest applications. The most significant of the modifications required under
the Agreements is to render the SportXction(TM) System software capable of
accommodating 1.5 million simultaneous users in each of 32 interconnected
regional (country) systems, with each system able to process 25,000 transactions
(wagers or contest selections) in a five second interval. Additionally, the
SportXction(TM) System software must support multiple languages and currencies,
10 different sports, and 15 concurrent sporting events. The Company believes
that its SportXction(TM) System has the potential of accommodating more than 50
million players during a major international sporting event, such as the World
Cup.

         On September 10, 2001, ISWI's licensee, GIG, announced its first two
agreements for use of the licensed software. These agreements call for the
software to be employed in the United Kingdom with interactive digital
television by Telewest Communications and ITV Digital. These two carriers, among
the largest interactive television providers in England, have approximately 5
million customers between them, in somewhat fewer than 2 million households. On
November 15, 2001, GIG signed an agreement with Italy's Freedomland Internet
Television, Europe's largest open access Interactive Internet TV provider. In an
interactive TV implementation, the player enters his wagers by using his
television remote control device, while viewing a sporting event, as he would
normally do on his television set. There is no special equipment or training
required, other than in the use of the TV remote control device, and the
customer requires no computer literacy.


                                       5
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         In early November 2001, the Company delivered an alpha test release of
a major augmentation to the software delivered for Milestone A. This software
release provides the functionality required for an interactive television (iDTV)
interface. This interface is needed on the important contracts recently signed
by GIG with Telewest, ITV Digital and Freedomland for use of the system with
interactive digital cable transmission. This will be the first implementation of
the system. The software is undergoing tests currently in England, preparatory
to its planned cutover into commercial service early in 2002. Subsequent
versions are intended for deployment in conjunction with interactive TV using
satellite, direct broadcast, and wireless use with mobile telephones and other
hand-held devices. Other broadband modalities are also possible, including near
real-time streaming video.

         There are other potential uses for the technology that the Company has
developed in other markets, such as transaction processing for financial
institutions, lotteries and on-line auctions.

         On December 4, 2001, the Company announced that it had extended its
1,750,000 Warrants to purchase Common Stock. These warrants now expire at 5:00
p.m. New York City time on February 25, 2002 and are currently exercisable at
$7.20 per share.

         History

         The Company commenced operations in May 1995 and is the successor by
merger to Systems Enterprises, Inc., which was organized in December 1992. The
Company's SportXction(TM) System was conceived by the Company's founder, Mr.
Barry Mindes, who together with Mr. Bernard Albanese, 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, the Company raised in a private transaction approximately
$1,700,000 in equity capital and, subsequently, net proceeds of approximately
$550,000 through a bridge financing. After the initial equity capital was
raised, personnel, consisting primarily of software engineers and programmers,
were recruited and hired and the Company engaged in research and development and
testing of the SportXction(TM) System. These activities included writing
software, developing required mathematical algorithms, performing statistical
modeling, selecting and configuring the hardware needed for use with the
SportXction(TM) System and determining the initial betting propositions to be
offered. The Company tested the SportXction(TM) System in a non-wagering
environment and then conducted its own live trial in a wagering environment
using play money. 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 (including over-allotments) for
gross proceeds of $10,350,000. Each Unit consisted of one share of the Company's
Common Stock, par value $.001 per share (the "Common Stock"), and one redeemable
Warrant (collectively, the "Warrants") to purchase one share of Common Stock at
an exercise price of $7.20 per share, which Warrants expire on February 25,
2002. The Common Stock and the Warrants now trade separately on the NASDAQ Small
Cap Market and no longer trade as a Unit.


                                       6
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         After completing trials of the SportXction(TM) System, it was approved
for use in January, 1997 by the Nevada Gaming Authorities. After initially using
the SportXction(TM) System in several individual casinos, subsequently in a
group of inter-linked casinos, and ultimately from remote, non-casino locations,
the Company, in April 2000, discontinued operation of the SportXction(TM) System
in Nevada. The Company concluded that although the SportXction(TM) System
functioned properly, it would not attract a sufficient number of players or
produce sufficient revenues to warrant the Company continuing to operate the
SportXction(TM) System within the Nevada market. Moreover, the signing of the
exclusive worldwide licensing Agreements with GIG in March 2000 changed the
focus of the Company. In management's judgment, the Nevada wagering operation
had become an administrative and technical distraction, and an impediment to
dealings with sports leagues in the United States concerning use of the
SportXction(TM) System for use in contests.

         Industry Overview

         As a result of the redirection of the Company's current primary
activity to enhancing and supporting its SportXction(TM) System software for use
by GIG, a detailed description of the sports wagering industry in Nevada is not
as significant as it was previously. However, the Company retains the right to
re-enter the Nevada sports wagering market at some future date, which it might
do with its newly enhanced product or a subset thereof. To that end the Company
has maintained its Nevada Gaming License and is discussing the licensing of its
SportXction(TM) System software with casinos in Nevada for such casinos to
operate on a revenue-sharing basis.

         In Nevada, the only state in the United States that currently permits
sports wagering, wagers on sporting events are placed in casinos and at
dedicated sports wagering facilities ("sports books"), and to a limited extent
by telephone by individuals who have set up accounts in sports books. Such
wagers are principally placed on the outcome of a game or event. Wagers also may
be accepted on segments of a game, such as points scored in a half; however, the
wager is accepted only before the segment begins. Since most sporting events
take several hours to complete, bettors can place bets and cash winning bets to
use on subsequent wagers, only a few times each day, thereby limiting the number
of wagers bettors may be inclined to make each day. As a result, sports wagering
facilities are frequently under-utilized for wagering, as opposed to being
locations for merely viewing multiple sporting events simultaneously.

         Sports wagering internationally takes place principally in betting
parlors, where bettors merely place bets and redeem winnings; to a lesser
degree, in betting facilities where bettors view sporting events while wagering
(in a manner similar to how wagering is conducted in Nevada casinos); and from
remote locations via the Internet, such as from bettors' homes. By far the
largest present venue for sports wagering internationally is via the Internet,
which is legal in many foreign countries. Sports wagering using interactive TV
set-top boxes is just now being proposed and developed, with anticipated
introduction into service expected imminently. The Company expects to
participate heavily in this developing market, since GIG intends to utilize the
Company's proprietary SportXction(TM) System software in its overall system to
enable players to make legal sports wagers by means of interactive TV.

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


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         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 may 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 sports book's profit depends upon the reliability of the odds and
its adjustment of the odds when necessary. On occasion, the house's initial
handicap or odds will not result in a balanced book because the players do not
agree with the house's assessment of the outcome of the event. The house will
attempt to attract bets on one side of the proposition by changing or moving the
line up or down to induce betting patterns in order to balance the book. If this
is not possible, the house may also refuse to accept wagers on one of the
contestants or limit the maximum amount of money that will be accepted on a line
to attempt to avoid the risk of taking an unacceptable number of bets on one
side of a betting proposition. When the limit is reached, the line is moved.
Currently, sports wagering establishments do not change odds or handicaps
frequently in order to balance pools. The odds or handicaps are changed usually
only after the book gets substantially out of balance, if at all. Sports books
currently are rarely perfectly balanced. To the extent that the book is not
balanced, the sports book takes risk on the outcome of the game or event.

         In the United States, gambling on the Internet is illegal both for
players and operators of Internet wagering sites. There is uncertainty
concerning whether under United States law Internet sites located in foreign
jurisdictions, where such sites are legal, that are operated by foreign
nationals, may accept wagers placed by players located in the United States.
Nevertheless, wagering on the Internet is pervasive and entrenched for wagering
by players outside of the United States at foreign wagering sites. The
Agreements between the Company and GIG precludes GIG from using the Company's
SportXction(TM) System software to accept wagers where it is illegal to do so.

         The Company is not aware of any form of wagering currently being
conducted which is similar to its patented play-by-play wagering intended to be
offered by GIG (see "Competition").

         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 is underway and cash winning bets. The period during which wagers
may be placed is thereby extended.


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         The SportXction(TM) System accepts bets on the outcome of the sporting
event, on discrete parts of the event, and on specific game situations, such as
will a team get a first down, will a batter get on base, or will a player make
two foul shots. The SportXction(TM) System also permits betting while these game
situations are in progress, such as between downs, pitches or foul shots.
Betting is therefore nearly continuous, somewhat analogous to the situation that
exists at a craps table, with each play being potentially a "new game." 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, or from cell phones or other hand held devices,
such as PDA's, as input devices. Furthermore, in addition to following the
sporting event on television, this could also be done on the radio, or even
while attending a live event, with wagers being entered via in-place terminals
or from hand held devices.

         Operation of the System

         The SportXction(TM) System operator begins by setting up a number of
pools or wagering propositions (for example, the winner of a game or the team
leading at the end of a particular period of play, over or under scoring on the
game or period, and wagers on specific events or games situations). Prior to
commencement of the sporting event, the SportXction(TM) System operator sets the
odds or handicap (point spread) on certain betting propositions, with greater
odds given to the less capable contestant. Once the sporting event begins, the
SportXction(TM) System sets the initial odds on other betting propositions. The
SportXction(TM) System changes the odds automatically as bets are made in order
to induce a betting pattern that would lead to a balanced pool. The bettor may
therefore make multiple wagers on the same betting proposition as the odds
change. As wagering continues, one side of a betting proposition may become
underfunded, that is, players have bet less money on one side of a particular
betting proposition (the underfunded side) than players have bet on the opposite
side of such betting proposition (the overfunded side). If this occurs, and if
the overfunded side of the betting proposition wins, the house would have to pay
out more money to the winning bettors on the overfunded side than the house
would have received from the bettors on the underfunded side. To limit the
house's exposure, the SportXction(TM) System is designed to automatically adjust
the odds to induce bettors to wager on the underfunded side of the betting
proposition, thereby attempting to balance the pool to within a pre-set level.

         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 during
the entire contest.


                                       9
<PAGE>

         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 the
SportXction(TM) System through the player's betting device which could be an
on-line terminal, set-top box, hand-held device, or the like ("Player's Betting
Device"). The Player's Betting Device will show his available balance, initially
equal to his deposit. As wagers are placed, this balance is reduced by the
amounts wagered. When the bettor wins, his Betting Device shows that the bettor
has won and his balance is automatically increased by the wager's payout.

         The SportXction(TM) System is a continuous action pool-balancing
system. As such, it reacts by changing the odds on open or undecided betting
propositions to reflect current bettor sentiment as expressed by their bets.
This can result in rapid changes in odds, particularly if game conditions change
abruptly as in the case of a sudden score, injury, or player ejection. Odds can
even change while the bettor is in the process of entering a wager into the
System. As betting is continuous, bets may be entered while game conditions are
changing. At times, bets will be delayed until a play is completed and the
results of the play are entered by those controlling the SportXction(TM) System,
to prevent past posting. Consequently, all bet entries are treated as "requests"
to make a bet at the odds that were displayed when the bet entry process
started. If the odds have changed after the request is made and before the bet
is accepted, the player will be informed that the wager is no longer available
at the requested odds, and the player will be shown the new odds. The player is
then given the opportunity to place the wager at the then current odds. It is
even possible that the amount may change again before the bettor's decision on
the new price is made, in which event the process will be repeated. If the
player finds an acceptable price, and the SportXction(TM) System accepts the
bet, the price on the bet stays fixed regardless of future changes in odds on
that bet, the game or betting patterns.

         As game conditions change, for example, the score changes or the time
clock advances, the odds will usually change as a result of the betting pattern.
This may result in existing pools closing if they can no longer be held to a
desired level of balance. Such pools may then be replaced with new pools
covering the same proposition. This is generally done automatically, although
the house can override the SportXction(TM) System with manual pool opening and
closing capability.

         It is not necessary that the book be perfectly balanced, but only that
the imbalances be 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 generally is able to automatically prevent the house exposure from
exceeding a specified maximum amount by changing the betting terms in the pool
to induce bettors to wager on the side that is underfunded, thereby attempting
to induce a balancing of the pool. In extreme cases, the house or the
SportXction(TM) System may automatically stop accepting bets on the underfunded
side when the exposure limit is reached while continuing to accept bets on the
other side. Under these circumstances, the pool will presumably tend to return
to balance after which the house can resume taking bets on the contestant or
proposition for which betting was suspended.


                                       10
<PAGE>

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

         System Components

         The Company's proprietary software and state-of-the-art, commonly
available hardware, is configured in an arrangement designed specifically for
use with the SportXction(TM) System. The innovative software continuously
attempts to balance wagering pools to within pre-set levels, thereby permitting
wagers to be made continuously during the course of a sporting event while
generally assuring the gaming establishment of a pre-determined minimum
commission. The software permits the operator to make available a wide variety
of betting propositions to players. By using statistical data and modeling
within the SportXction(TM) System, the SportXction(TM) System automatically sets
and adjusts odds on the betting propositions.

         The major elements of the SportXction(TM) System include the Hub
Server, Pool Processor, plus numerous input and control software modules which
run on individual computer terminals, including the Player's Betting Device,
Game Controller Module, Game Supervisor Module, Manager Module, Administrative
Module and Cashier Module, all of which are controlled by proprietary software.
There are also a variety of printers for printing receipts and reports. The
SportXction(TM) System processes secure messages exchanged between the various
elements in real time and employs sophisticated mathematical algorithms in their
functioning. These are used with event statistics and statistical modeling. The
television display is independent of the SportXction(TM) System. The television
image is provided to allow the player to follow the game. The SportXction(TM)
System can operate without the operator providing a television signal. A player
could, for example, view any television or display while betting on the
internet, or even listen to an audio commentary account of the game. The
SportXction(TM) System uses redundant hardware and re-start and recovery
software to maximize System up-time upon component failure.

         All terminals are connected to the Hub Server via a client/server
network. The Hub Server Modules are software components on a network of server
computers that maintains all pools, calculates odds, opens and closes all
wagering on all pools, controls all input and output devices (such as betting
terminals, printers and management terminals) produces 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.

         The Player's Betting Device is the instrument through which bettors are
able to enter bets into the SportXction(TM) System. It displays the wagers
available, their prices and the payoff to be gained, the status of the player's
available balance, open bet dollars, plus control buttons for signing on and
off, selecting a game, reviewing and sending bets, reviewing bet history, and
other information appropriate to interactive wagering. These devices could be
computers on a private network or over the Internet, set-top boxes on an
interactive TV network, or in the future, web-enabled cellular phones or
personal digital assistants.


                                       11
<PAGE>

         Data relating to all substantive events during the course of a sporting
event that affect the betting odds are entered into the SportXction(TM) System
through the Game Controller Module by the game controller for each event. These
events include points or runs scored, period, inning, outs, downs, team having
possession of the ball, and the like, depending upon the sport. The
SportXction(TM) System sends this information to the pool processor to open and
close betting propositions, determine unofficial proposition side winners and
set opening lines, among other things. Because the game controller is entering
data during a live sporting event, bets are delayed briefly to enable the game
controller to enter the data.

         The Game Supervisor Module is utilized by the game supervisor(s) of
each sporting event to manage the wagering on that sporting event. The Game
Supervisor Module is used to 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 terminal executing the Game Supervisor Module, is also utilized by
the game supervisor to oversee the accuracy of the information input by the game
controller.

         The Manager Module is used to oversee the entire operation of the
System at one time. This Module allows the manager to monitor the overall system
activity and volume, perform system configuration functions, and monitor system
alerts.

         The Administrative Module is the main management Module in the
SportXction(TM) System. It is used to authorize personnel to operate the
SportXction(TM) System, keep the chart of future events upon which wagers will
be accepted, together with when betting can commence and when the game (date and
time) actually begins. It also keeps the pools to be allowed in an event and the
sizes of the bets that will be accepted in each pool in each event. It is
through the terminal executing 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.

         Traditional Pre-Game Wagering

         The SportXction(TM) System also accepts 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. They are
transmitted to the Hub Server where the SportXction(TM) System processes both
the play-by-play and the pre-game wagers simultaneously, and are then stored in
an integrated database. For pre-game wagering, the Player's Betting Device has
been reorganized to make better use of the screen space to show available bets
on many games simultaneously.


                                       12
<PAGE>

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

         The Company has not yet modified its traditional pre-game wagering
software to be compatible with an interactive television game delivery mode.
This modification is not required by the GIG Agreements. However, the Company
does not consider such a modification to the software, as it exists, to be of
significant difficulty or scope. Most of the effort required for this
modification concerns the user interface screen and is the responsibility of
GIG, not the Company's.

         Marketing and Sales Strategy

         As the Company has licensed world-wide rights to its SportXction(TM)
System for wagering and contests exclusively to GIG (except for wagering in
Nevada), the Company is no longer marketing the System for those purposes, other
than in Nevada. While the Company is enhancing the System for use by GIG,
marketing activities in Nevada are only being conducted on a limited basis at
present. The Company expects to increase that marketing effort when the current
enhancements to the System for GIG are completed, with the goal of re-entering
the Nevada market with the enhanced software, either as a licensor or even
possibly, although less likely, as an operator. The Company's Nevada gaming
license has been maintained for that purpose. The Company has been in
discussions with certain casinos in Nevada to provide its enhanced
SportXction(TM) System to such casinos on a revenue-sharing basis.

         The Company has commenced preliminary marketing activities using its
patented technology in the financial transaction processing market. It is also
investigating opportunities in the auction and lottery fields.

         Intellectual Property

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

         The Company also has a patent pending to use its technology in the
trading of financial instruments. The patent covers, in particular, an
"automated specialist", which uses artificial intelligence that permits trading
a 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.


                                       13
<PAGE>

         The Company has not received any claim that it is infringing any
patents. However, there can be no assurance that third parties may not assert
infringement claims against the Company, which claims the Company would be
required to defend at considerable expense or enter into arrangements requiring
the Company to pay royalties or other damages, any of which could materially and
adversely affect the Company's business (see "Uncertainties Regarding
Intellectual Property").

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

         Governmental Regulation

         Prior to April 2000, the Company 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. The Company 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 enhanced system in Nevada in the future.
Any continued marketing efforts are aimed at licensing the Company's
SportXction(TM) System to casinos in order for them to operate a system
utilizing the Company's SportXction(TM) System software. Should the Company
license its SportXction(TM) System software to one or more casinos in Nevada, it
will need a new gaming license if it shares in any gaming revenue. The Company
has no current plans to re-enter the business of operating a sports wagering
system in Nevada or elsewhere. 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 thereunder
(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. Change
in such laws, regulations and procedures could have a material adverse effect on
the Company's operations in Nevada.


                                       14
<PAGE>

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

         The Company's SportXction(TM) System qualifies as "associated
equipment" as that term is defined in the Nevada Act. Associated equipment is
generally defined in the Nevada Act as any equipment or mechanical,
electromechanical or electronic contrivance, component or machine used remotely
or directly in connection with gaming, any game, race book or sports pool that
would not otherwise be classified as a gaming device. A "gaming device" is
generally defined as any equipment or mechanical electromechanical or electronic
contrivance, component or machine used remotely or directly in connection with
gaming, any game, race book or sports pool which affects the result of wagering
by determining win or loss. All associated equipment that is manufactured, sold
or distributed for use or play in Nevada must first be administratively approved
by the Chairman of the Nevada Board. The administrative approval process for
associated equipment includes an evaluation by the Nevada Board's audit division
(the "Audit Division") and, in some cases, by the Board's electronic services
laboratory, followed by a field trial.

         Manufacturers and distributors of associated equipment are not subject
to the mandatory licensing requirements of the Nevada Act imposed upon
manufacturers and distributors of gaming devices, but may be required by the
Nevada Commission, upon the recommendation of the Nevada Board, to file an
application for a finding of suitability to be a manufacturer and distributor of
associated equipment. It is unknown whether the Nevada Board and Nevada
Commission will require the Company to file an application for a finding of
suitability in addition to any present or future licenses that the Company may
hold.

         In order for the Company to be compensated for use of the
SportXction(TM) System in Nevada on the basis of a percentage of the revenue
received by a licensed gaming establishment or on a transaction fee basis, the
Company was required to obtain an OILS License and to be registered by the
Nevada Commission as a publicly-traded corporation (a "Registered Corporation").
In addition, because the Company qualifies as a Registered Corporation as a
result of the consummation of its initial public offering, it was required to
receive an exemption from provisions of the Nevada Act that render a Registered
Corporation ineligible to hold a gaming license. On April 23, 1998, the Nevada
Commission granted the Company an OILS License and registered it as a Registered
Corporation. The Nevada Commission further granted an exemption from the
requirements of its Regulation 16.100(1), which would have otherwise prohibited
the Company, as a Registered Corporation, from holding a Nevada OILS License.
The Company's OILS License was renewed, without time limitation, on November 18,
1999, and has a number of conditions, all of which were agreed to by the
Company, relating to the Company's operations and to the System's method of
operation and accounting. As a Registered Corporation and a gaming licensee
("Gaming Licensee") the following regulatory requirements apply to the Company:


                                       15
<PAGE>

         As a Registered Corporation and Gaming Licensee, 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.
Substantially all material loans, leases, sales of securities and similar
financing transactions are required to be reported to or approved by the Nevada
Commission.

         The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, a Registered Corporation
and Gaming Licensee in order to determine whether such individual is suitable or
should be licensed as a business associate of a Gaming Licensee. Officers,
directors and certain key employees of the Company were required to file
applications with the Nevada Gaming Authorities and may also be required to be
licensed or found suitable by the Nevada Gaming Authorities. Officers, directors
and key employees of the Company who are actively and directly involved in
gaming activities in respect of the operation of the System may be required to
be licensed or found suitable by the Nevada Gaming Authorities. The Nevada
Gaming Authorities may deny an application for licensing for any cause which
they deem reasonable. A finding of suitability is comparable to licensing, and
both require submission of detailed personal and financial information followed
by a thorough investigation. The applicant for licensing or a finding of
suitability must pay all the costs of the investigation. Determination of
suitability or of questions pertaining to licensing are not subject to judicial
review in Nevada. 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. The Nevada Gaming
Authorities may deny an application for any cause that they deem reasonable. All
of the Company's current executive officers and directors, except for its
outside directors, have been licensed.

         If the Nevada Gaming Authorities were to find an officer, director or
key employee unsuitable for licensing or unsuitable to continue having a
relationship with the Company, the Company would have to sever all relationships
with such person. In addition, the Nevada Commission may require the Company to
terminate the employment of any person who refuses to file appropriate
applications. Determination of suitability or of questions pertaining to
licensing are not subject to judicial review in Nevada.

         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. In addition, the Company and the persons involved could
be subject to substantial fines for each separate violation of the Nevada Act at
the discretion of the Nevada Commission. Furthermore, the Nevada Commission
could revoke the approval of the System and could order the termination of
existing contracts for the System. Limitation, conditioning or suspension of the
registration and OILS Licenses held by the Company could adversely affect the
Company's gaming operations in Nevada and inhibit or prohibit the Company's
attempt to license its SportXction(TM) System in Nevada on a revenue-sharing
basis.


                                       16
<PAGE>

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

         The Nevada Act requires any person who acquires beneficial ownership of
more than 5% of a Registered Corporation's voting securities to report the
acquisition to the Nevada Commission. The Nevada Act requires that beneficial
owners of more than 10% of a Registered Corporation's voting securities apply to
the Nevada Commission for a finding of suitability within thirty days after the
Nevada Board Chairman mails the written notice requiring such filing. Under
certain circumstances, an "institutional investor," as defined in the Nevada
Act, which acquires more than 10%, but not more than 15%, of the Registered
Corporation's voting securities may apply to the Nevada Commission for a waiver
of such finding of suitability if such institutional investor holds the voting
securities for investment purposes only. An institutional investor shall not be
deemed to hold voting securities for investment purposes unless the voting
securities were acquired and are held in the ordinary course of business as an
institutional investor and not for the purpose of causing, directly or
indirectly, the election of a majority of the members of the board of directors
of the Registered Corporation, any change in the Registered Corporation's
corporate charter, bylaws, management, policies or operations of the Registered
Corporation, or any of its gaming affiliates, or any other action which the
Nevada Commission finds to be inconsistent with holding the Registered
Corporation's voting securities for investment purposes only. Activities which
are not deemed to be inconsistent with holding voting securities for investment
purposes only include (i) voting on all matters voted on by stockholders; (ii)
making financial and other inquiries of management of the type normally made by
securities analysts of informational purposes and not to cause a change in its
management policies or operations; and (iii) such other activities as the Nevada
Commission may determine to be consistent with such investment intent. If the
beneficial holder of voting securities who must be found suitable is a
corporation, partnership or trust, it must submit detailed business and
financial information including a list of beneficial owners. The applicant is
required to pay all costs of investigation.

         Any person who fails or refuses to apply for a finding of suitability
or a license within thirty days after being ordered to do so by the Nevada
Commission or the Nevada Board Chairman, may be found unsuitable. The same
restrictions apply to a record owner if the record owner, after request, fails
to identify the beneficial owner. Any stockholder found unsuitable and who
holds, directly or indirectly, any beneficial ownership of the common stock
beyond such period of time as may be prescribed by the Nevada Commission may be
guilty of a criminal offense. The Company will be subject to disciplinary action
if, after it receives notice that a person is unsuitable to be a stockholder or
to have any other relationship with the Company, it (i) pays that person any
dividend or interest upon voting securities of the Company, (ii) allows that
person to exercise, directly or indirectly, any voting right conferred through
securities held by that person, (iii) pays remuneration in any form to that
person for services rendered or otherwise, or (iv) fails to pursue all lawful
efforts to require such unsuitable person to relinquish his voting securities
including, if necessary, the immediate purchase of said voting securities for
cash at fair market value.


                                       17
<PAGE>

         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, including the loss of its approvals, if without the prior
approval of the Nevada Commission, it (i) pays to the unsuitable person any
dividend, interest, or any distribution whatsoever, (ii) recognizes any voting
right by such unsuitable person in connection with such securities, (iii) pays
the unsuitable person remuneration in any form, or (iv) makes any payment to the
unsuitable person by way of principal, redemption, conversion, exchange,
liquidation, or similar transaction.

         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. The Company will also be required to render
maximum assistance in determining the identity of the beneficial owner. The
Nevada Commission has the power to require the stock certificates of the Company
to bear a legend indicating that the securities are subject to the Nevada Act.
To date, the Commission has not imposed such a requirement on the Company.

         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 therefrom are intended to be used to construct, acquire or finance
gaming facilities in Nevada, or to retire or extend obligations incurred for
such purposes. Such approval, if given, does not constitute a finding,
recommendation or approval by the Nevada Commission or the Nevada Board as to
the accuracy or adequacy of the prospectus or the investment merits of the
securities offered. Any representation to the contrary is unlawful.

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


                                       18
<PAGE>

         The Nevada legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and corporate defense
tactics affecting Nevada corporate gaming licensees, and Registered Corporations
that are affiliated with those operations, may be injurious to stable and
productive corporate gaming. The Nevada Commission has established a regulatory
scheme to ameliorate the potentially adverse effects of these business practices
upon Nevada's gaming industry and to further Nevada's policy to: (i) assure the
financial stability of corporate gaming licensees and their affiliates; (ii)
preserve the beneficial aspects of conducting business in the corporate form;
and (iii) promote a neutral environment for the orderly governance of corporate
affairs. Approvals are, in certain circumstances, required from the Nevada
Commission before the Registered Corporation can make exceptional repurchases of
voting securities above the current market price thereof and before a corporate
acquisition opposed by management can be consummated. The Nevada Act also
requires prior approval of a plan or recapitalization proposed by the Registered
Corporation's board of directors in response to a tender offer made directly to
the Registered Corporation's stockholders for the purposes of acquiring control
of the Registered Corporation.

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

         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.

         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.


                                       19
<PAGE>

         Legislation has been introduced in the United States Congress to
prohibit certain forms of betting or wagering or engaging in the business of
gambling over the Internet and to prohibit betting or wagering or engaging in
the business of gambling over "interactive computer services." Although the
SportXction(TM) System does not appear to fit within the definition of an
"interactive computer service," a contrary interpretation may be adopted by the
courts in the future. Therefore if enacted, this bill may prohibit the operation
of the SportXction(TM) System in the United States for wagering in all or
certain forms. To date, this bill has not been passed.

         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 GIG. Although the Company is not currently
aware of any such requirements, the Company has only done a limited inquiry with
respect thereto. If the Company is required to be licensed or its
SportXction(TM) System software is required to be approved in any foreign
countries, there is no assurance that such licensing or approval could be
obtained, although the Company is not aware of any reason why it could not be so
licensed or its SportXction(TM) System software would not be approved.

         Competition

         The Company is not aware of any form of wagering that is currently
being conducted that is similar to the play-by-play wagering intended to be
offered by GIG with the Company's proprietary technology. No assurance can be
given that such a system does not exist or is not under development. Sports
wagering both within the United States and in foreign countries, however,
competes with other forms of gambling available to the general public,
including, but not limited to, casino games (such as traditional slot machines,
video slot, poker and blackjack machines, roulette, card games, keno and craps),
bingo, state-sponsored lotteries, on-and-off track betting on horses and dogs,
jai alai, off-shore cruise ships, riverboats, Native American gaming operations
and wagering via the Internet.

         There are currently a large number of operators of wagering sites
available on the Internet that accept traditional wagers on sporting events.
They all operate from locations outside of the United States, as this type of
wagering is illegal in the United States. Well-financed, long established
bookmaking firms operate some of these Internet sites. Many, if not most of
these, will have substantially more experience than GIG in the wagering
business. While, to the best of the Company's knowledge, none of these sites
offer products which compete with the SportXction(TM) System, and the Company
has broad patent protection for its product in most countries in which it is
anticipated that GIG will operate, it cannot be assured that such competition
might not arise, or that the Company's patents will provide sufficient
protection against such competition. To the extent that such competition arose,
the market for the SportXction(TM) System might be diluted.

         Personnel

         The Company currently has nine full-time employees, consisting of the
Chairman of the Board, President, Vice President-Software Development, four
software engineers and programmers, an accountant, and one support services
employee. The Company considers its relations with its employees to be good.


                                       20
<PAGE>

         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, 2001 and 2000, the Company
spent approximately $995,000 and $1,020,000, respectively, on research and
development activities. These expenses included primarily, programmers' salaries
and benefits, consultants' fees, patent fees, and the depreciation expense
associated with computer equipment used in the development of the System. During
the fiscal years ended September 30, 2001 and 2000, substantially all of the
Company's research and development expense reflect direct costs of revenue
associated with the GIG Agreements. The Company intends to continue to expend
significant sums on such activities.

         The Company capitalized $121,000 of expenses related to enhancements of
its SportXction(TM) System that were not required under the GIG Agreements.
These expenses will be amortized over the remaining life of the contract after
the enhancements are put into commercial use.

         Important Factors Regarding Forward Looking Statements and Other Risks

         Certain statements in this Report under the captions "Item 1.
Description of Business," "Item 6. Management's Discussion and Analysis" and
elsewhere, constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995, including, without limitation,
the ability of the Company to fulfill all requirements of the Licensing
Agreements described herein; the ability of GIG to market its products,
including the SportXction(TM) System and GIG's other products; statements
regarding potential market size; 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 and/or GIG to attract adequate numbers of
players to the SportXction(TM) System for sports wagering and sports contests;
the ability of the Company to raise additional financing if required; the
likelihood that the Company will be, or continue to be, profitable and/or cash
flow positive in the future; the length of time the Company's cash resources
will last and meeting its cash requirements; the ability of GIG to continue to
pay the fees required to be paid to the Company under the Agreements; whether
legal or regulatory requirements will inhibit marketing of the products as
intended by GIG; and whether the Company's securities will continue to be listed
on NASDAQ. 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 factors include, among others, those
described below and those presented elsewhere by management from time to time.
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 not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release the result of any revisions to
these forward-looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.


                                       21
<PAGE>

         Single Product; Ability of GIG to Market the SportXction(TM) System;
Uncertain Market Acceptance. The Company's success will depend primarily on the
success of a single product, the SportXction(TM) System, and the ability of GIG
to market the SportXction(TM) System and develop a significant number of players
with interest in wagering or playing contests utilizing the SportXction(TM)
System. Previously, the Company pursued an aggressive marketing and advertising
campaign to introduce the SportXction(TM) System to the gaming public in Nevada.
Nonetheless, the total number of players who used the SportXction(TM) System in
Nevada was limited, and the total amount wagered through the SportXction(TM)
System in Nevada was modest, as a result of which the Company ceased its Nevada
operations. To achieve commercial success, the SportXction(TM) System, when
operated by GIG, 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.

         Modifications to Software. Pursuant to the terms of the Agreements with
GIG, the Company is required to modify its proprietary software in order for it
to meet certain new technical parameters and perform certain new functions. The
Company has already received Acceptance of the first deliverable milestone.
Although the Company is currently ahead of the schedule required of it to meet
the other milestones necessary under the Agreements, there is no assurance that
such a schedule can be maintained or that all deliverables required under the
Agreements can be produced or if they can be produced, whether they will be
produced in a timely fashion.

         Marketing of Product. GIG is a newly established entity with very
limited experience in wagering operations. GIG has never attempted to market a
product containing the Company's proprietary, patented technology. If GIG is
unable to market the SportXction(TM) System, or if it is unable to encourage a
sufficient number of players to wager through the SportXction(TM) System, GIG
may be unable to pay the Company the minimum fees required under the Agreements.
Failure of GIG to continue to make payments under the Agreements would have a
material adverse effect on the Company's operations.

         History of Losses. Until entering into the Agreements with GIG, the
Company was in the development stage and generated limited revenues from the
SportXction(TM) System. As of September 30, 2001 and September 30, 2000, the
Company had cumulative net losses since inception of approximately $4.2 and $9.3
million, respectively. Although the Company's results of operations during the
second half of the fiscal year ended September 30, 2000 and during the entire
fiscal year ended September 30, 2001 have been profitable and the Company has
been cash flow positive during that period, there can be no assurance that the
Company will continue to achieve such results. 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,
many of which may be beyond the Company's control. These include, but are not
limited to, the ability of GIG to operate its anticipated business; the ability
of GIG 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; testing; gaming regulations (both those in the United States
and in foreign countries) and taxes; the competitive and regulatory environment
in which the Company and/or GIG plan to operate; marketing problems; and
additional costs and expenses that may exceed current estimates.


                                       22
<PAGE>

         Cash Requirements; Need for Additional Financing. The Company
anticipates that its existing resources will be adequate to fund its capital and
operating requirements through at least the next 24 - 30 months based upon the
Company's current business plan (see "Management's Discussion and Analysis") and
longer, subject to continuation of the minimum payments under the Agreements
being made to the Company by GIG. The Company's cash requirements may vary
materially from those now planned due to a number of factors, including the
failure of GIG to continue to make the payments required under the Agreements,
the response of competitors to the SportXction(TM) System and the ability of the
Company and its management to satisfy applicable licensing requirements. The
Company may need to raise additional capital to fund its future operations.
There can be no assurance that additional financing will be available when
needed on terms acceptable to the Company, or at all. If additional funds are
raised by issuing equity securities, further dilution to existing stockholders
will result and future investors may be granted rights superior to those of
existing stockholders. Insufficient funds may prevent the Company from
implementing its business strategy or may require the Company to limit its
operations significantly.

         Governmental Regulation. Sports wagering is highly regulated in the
United States and worldwide. The inability of GIG and/or the Company to obtain
any gaming licenses or other approvals that may be required could have a
material adverse impact on GIG and the Company (see "Business - Governmental
Regulation").

         Competition. The Company's SportXction(TM) System and the business
intended to be operated by GIG 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 GIG and thereby
adversely affect the Company. There can be no assurance that future
technological advances will not result in improved products or services that
could adversely affect the Company's business or GIG'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.

         Uncertainties Regarding Intellectual Property. The Company regards the
SportXction(TM) System and related technology as proprietary and relies
primarily on a combination of patent, trademark, copyright and trade secret laws
and employee and third-party non-disclosure agreements to protect its
proprietary rights. The Company has two United States patents for its
proprietary wagering methods and its related computer processing system.
Corresponding applications have been or will be filed in certain foreign
countries some of which have been issued and some of which are pending. The
Company also has a patent pending to use its technology in the trading of
financial instruments. No assurance can be given that any of the Company's
pending domestic or foreign patent pending applications will issue as patents,
that any issued patents will provide the Company with significant competitive
advantages, or that challenges will not be instituted against the validity or
enforceability of any patent owned by the Company or, if instituted, that such
challenges will not be successful. Defense of intellectual property rights can
be difficult and costly, and there can be no assurance that the Company will be
able effectively to protect its technology from misappropriation by competitors.
Additionally, third party infringement claims may result in the Company being
required to enter into royalty arrangements or pay damages, any of which could
materially and adversely affect the Company's business, financial condition and
results of operations. It is the Company's policy that all employees and
consultants involved in research and development activities sign non-disclosure
agreements; however, this may not afford the Company sufficient protection for
its know-how and its proprietary information and products. Other parties may
independently develop similar or more advanced technologies or design around
aspects of the Company's technology which may be patented or duplicate the
Company's trade secrets.


                                       23
<PAGE>

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

         Dependence on Key Personnel. The Company is dependent upon the
continued efforts and abilities of its executive officers and other key
personnel such as Barry Mindes, the Company's founder and Chairman of the Board,
and Bernard Albanese, a director of the Company and the Company's President and
Treasurer. 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, 2002 and June 30, 2003, respectively. No assurance can
be given that those agreements will be extended or renewed by the Company or the
employees upon expiration of their term and if not extended or renewed, whether
individuals with similar backgrounds and experience could be hired to replace
them. The Company does not maintain and does not intend to obtain key person
life insurance on the life of either Messrs. Mindes or Albanese. The Company's
operations will also depend to a great extent on the Company's ability to
attract new key personnel and retain existing key personnel in the future.
Competition is intense for highly skilled employees and there can be no
assurance that the Company will be successful in attracting and retaining such
personnel, or that it can avoid increased costs in order to do so. The Company's
failure to attract additional qualified employees or to retain the services of
key personnel could have a material adverse effect on the Company's operating
results and financial condition.


                                       24
<PAGE>

         Possible Objections by Leagues and Broadcasters. The in-casino
SportXction(TM) System had been operated in conjunction with live broadcasts of
sporting events shown in casinos or other gaming establishments. The broadcast
of sporting events by television stations is typically covered by agreements
with players' leagues such as the National Football League or the National
Basketball Association. In addition, display by casinos or other operators
within their sports betting parlors of sporting events is typically subject to
agreement with broadcasters of sporting events. Players' leagues could attempt
to enjoin use of the SportXction(TM) System in conjunction with broadcasts of
such sporting events and sue the Company for damages, whether or not such claims
have merit. In the event either leagues or sporting event broadcasters object to
wagering on sporting events in general, or use of the SportXction(TM) System in
particular, and in the event that the Company could not eliminate such
objections by modification of the SportXction(TM) System or otherwise, the
Company's financial condition and results of operations could be materially and
adversely affected.

         Control by Management. As of December 14, 2001, Barry Mindes, Mindes
Family Limited Partnership, of which an entity controlled by Mr. Mindes is
general partner, Bernard Albanese and the Marie Albanese Trust, a trust for the
benefit of Mr. Albanese's wife, together beneficially own approximately 39% of
the outstanding shares of Common Stock (excluding any stock options held by Mr.
Albanese which could, in the future, be exercised). As a result of such
ownership, such stockholders are likely to have the ability to control the
election of the directors of the Company and the outcome of issues submitted to
a vote of the stockholders of the Company.

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

         NASDAQ Delisting; Low Stock Price; Net Tangible Assets. The trading of
the Company's Common Stock and Warrants on NASDAQ will be conditioned upon the
Company meeting certain asset, capital and surplus earnings and stock price
tests set forth by NASDAQ. To maintain eligibility for trading on NASDAQ, the
Company will be required to, among other things, maintain net tangible assets of
at least $2,000,000, 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, maintain a minimum bid
price of $1.00 per share; and adhere to certain corporate governance provisions.

         On December 20, 1999, the Company received a letter from NASDAQ stating
that the Company did not meet the net tangible assets/market capitalization/net
income requirements for continued listing on The NASDAQ Small Cap Market because
it had neither $2,000,000 of net tangible assets, a market capitalization of
$35,000,000 or net income of $500,000. Pursuant to NASDAQ's request, on December
30, 1999, the Company presented a plan for achieving compliance with such
listing requirements. On January 13, 2000, the Company supplemented its December
30, 1999 letter to NASDAQ. On March 13, 2000, NASDAQ wrote to the Company and
stated that the Company had provided a definitive plan evidencing its ability to
achieve compliance with the continued listing requirements and granted the
Company a further extension to April 11, 2000 in order to fulfill certain
requirements and to demonstrate compliance with NASDAQ's continued listing
requirements.


                                       25
<PAGE>

         In order to meet this requirement, the Company sold on April 10, 2000,
to accredited investors in a private transaction not registered under the
Securities Act of 1933, as amended (the "Act"), in reliance upon the exemption
afforded by Section 4(2) thereof, 333,333 shares of the Company's Common Stock,
for a total of $500,000, or $1.50 per share, which was approximately $0.50 per
share below the last sales price on the date that transaction was negotiated.
The Company also agreed to promptly file a registration statement with the SEC
in order to register all their shares. These shares were subsequently registered
on a registration statement on Form S-3 filed with the SEC on April 20, 2000 and
declared effective on May 5, 2000. The Company believes that it was in the best
interests of the Company and its stockholders to enter into this transaction
because the proceeds of this transaction plus the Company's existing resources
were necessary for the Company to attempt to meet the Net Tangible Asset
requirements for continued listing on NASDAQ. Prior to the sale of Common Stock
mentioned above, the Company, in January 2000, sold to accredited investors in a
private transaction not registered under the Act, in reliance upon the exemption
afforded by Section 4(2) thereof, 800,000 shares of the Company's Common Stock
for a total of $1 million, or $1.25 per share, which was approximately $.50 per
share below the last sales price on the day that transaction was negotiated.
These shares were included in the registration statement mentioned above.

         The effects of delisting include the limited release of the market
prices of the Company's securities and limited news coverage of the Company.
Delisting may restrict investors' interest in the Company's securities and
materially adversely affect the trading market and prices for such securities
and the Company's ability to issue additional securities or to secure additional
financing. On March 10, 1998, the Company received notice from NASDAQ indicating
that because the Company's shares of Common Stock failed to maintain a closing
bid price of $1.00 or more for a period of 30 days, it would be subject to
delisting. The Company was given a period of 90 days in which to regain
compliance with the minimum bid price requirement. Prior to the end of such
90-day period, the Company's shares of Common Stock met the minimum bid price
requirement and, therefore, its shares of Common Stock were not delisted. If in
the future the Company's shares of Common Stock failed to meet the minimum bid
price requirement, it might have to consider a reverse stock split or any other
means permissible to attempt to meet the minimum bid price requirement, or its
shares could be delisted. 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 or Warrants were delisted
from trading on NASDAQ and the trading price of the Common Stock was less than
$5.00 per share, the Common Stock or Warrants could be subject to Rule 15g-9
under the Securities Exchange Act of 1934, as amended (the "Exchange Act")
which, among other things, requires that broker/dealers satisfy special sales
practice requirements, including making individualized written suitability
determinations and receiving purchasers' written consent, prior to any
transaction. If the Company's securities were also deemed penny stocks under the
Securities Enforcement and Penny Stock Reform Act of 1990, this would require
additional disclosure in connection with trades in the Company's securities,
including the delivery of a disclosure schedule explaining the nature and risks
of the penny stock market. The SEC's regulations define a "penny stock" to be
any non-Nasdaq equity security that has a market price (as therein defined) of
less than $5.00 per share or with an exercise price of less than $5.00 per
share, subject to certain exceptions. Such requirements could severely limit the
liquidity of the Company's securities.


                                       26
<PAGE>

         Federal and State Registration Requirements; Possible Inability to
Exercise Warrants; Possible Redemption of Warrants. Holders of Warrants will
have the right to exercise them only if there is a current registration
statement in effect with the SEC and such shares are qualified with or approved
for sale by various state securities agencies, or if in the opinion of counsel
for the Company, there is an effective exemption from registration. There can be
no assurance that the Company will be able to keep a registration statement
covering the shares underlying the Warrants current. If a registration statement
covering such shares of Common Stock is not kept current for any reason, or if
the shares underlying the Warrants are not registered in the state in which a
holder resides, the Warrants will not be exercisable and may be deprived of any
value. The Warrants are redeemable by the Company at a price of $.05 per Warrant
if the trading price of the Common Stock is at least $12.00 (200% of the initial
Unit offering price) for a period of 15 consecutive trading days ending within
15 days of the date upon which the Warrants are called for redemption. If the
Company elects to redeem the Warrants, such redemption could force the holders
to exercise the Warrants and pay the exercise price at a time when the holders
might not otherwise wish to do so or at a time when the holders might not be
financially able to do so; to sell the Warrants at their then current market
price when they might otherwise wish to hold the Warrants; or to accept the
redemption price of $.05 per Warrant which, at the time the Warrants are called
for redemption, is likely to be substantially less than the market value of the
Warrants. The Warrants were originally scheduled to expire on December 11, 2001.
On December 4, 2001, the Company announced that the expiration date of the
Warrants was extended, and are scheduled to expire at 5:00PM New York City time
on February 25, 2002.

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

         Anti-Takeover Effects of Certain Provisions of Certificate of
Incorporation and Delaware Law. The Company's Certificate of Incorporation
authorizes the issuance of 2,000,000 shares of Preferred Stock with such
designations, rights and preferences as may be determined from time to time by
the Board of Directors. Accordingly, the Board of Directors is empowered,
without obtaining stockholder approval, to issue such Preferred Stock with
dividend, liquidation, conversion, voting or other rights that could adversely
affect the voting power or other rights of the holders of the Common Stock. In
the event of issuance, the Preferred Stock could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
the control of the Company. Certain provisions of Delaware law may also
discourage third party attempts to acquire control of the Company.


                                       27
<PAGE>

         Item 2. Description of Property

         The Company currently leases approximately 2,500 square feet of space
in West Paterson, New Jersey under a five year lease which expires on June 30,
2005. Lease payments for this facility, at which all development and
administrative functions are currently conducted, during the fiscal year ended
September 30, 2001, were approximately $36,000. For the fiscal year ending
September 30, 2002, 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.

         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, 2001.


                                       28
<PAGE>


                                     PART II

         Item 5. Market for Common Equity and Related Shareholder Matters

         Market Information

         From December 11, 1996, the effective date of the Company's
Registration Statement on Form SB-2, until April 4, 1997, Units consisting of
one share of the Company's Common Stock, par value $.001 per share, and one
redeemable Warrant to purchase one share of Common Stock at an exercise price of
$7.20 per share were traded on the NASDAQ Small Cap Market ("NASDAQ").
Commencing on April 7, 1997, Units were no longer traded and the Company's
Common Stock and Warrants began to trade separately.

         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.

    Quarter                                          High             Low
    --------                                       -------          ------
    October 1, 1999 to December 31, 1999           $2.844           $0.656
    January 1, 2000 to March 31, 2000               5.750            1.281
    April 1, 2000 to June 30, 2000                  2.313            0.875
    July 1, 2000 to September 30, 2000              1.500            0.938
    October 1, 2000 to December 31, 2000            1.250            0.594
    January 1, 2001 to March 31, 2001               1.250            0.625
    April 1, 2001 to June 30, 2001                  3.590            0.750
    July 1, 2001 to September 30, 2001              5.090            2.420

         The high and low sales prices on December 14, 2001 were $6.85 and
$6.05, respectively.

         Current Holders of Common Stock

         Based upon information supplied to the Company by its transfer agent,
there were approximately 50 stockholders of record of the Common Stock on
December 14, 2001. The Company believes there are in excess of 2,000 beneficial
owners of its Common Stock whose shares are held in "Street Name."

         Dividends

         The Company has never paid cash dividends with respect to its 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 Common Stock. Any decision as to the
future payment of dividends on 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.


                                       29
<PAGE>

         Recent Sales of Unregistered Securities

         On October 28, 1996, the Company issued 6 1/2 units in a bridge
financing (the "Bridge Units"), each Bridge Unit consisting of (i) a 10% Senior
Promissory Note (the "Bridge Notes") in the principal amount of $100,000 and
(ii) warrants to purchase 30,000 shares of the Company's Common Stock (the
"Bridge Warrants"), at an initial exercise price equal to the lesser of $3.60 or
60% of the initial Unit offering price in the Company's subsequent IPO.
Barington Capital Group, L.P. ("Barrington") acted as placement agent for the
offering of Bridge Units which were made to a limited number of accredited
investors pursuant to the exemption from the registration requirements of the
Act, afforded by Section 4(2) thereof. The aggregate offering price was
$650,000, of which net proceeds received by the Company amounted to
approximately $550,000. An aggregate of 195,000 Bridge Warrants were issued in
the bridge financing. The Bridge Warrants were exercisable at any time after
issuance and expired on October 28, 2001. The shares of Common Stock issuable
upon exercise of the Bridge Warrants were registered on a registration statement
on Form S-3 declared effective on May 5, 2001. Prior to expiration, all but one
of the Warrants were exercised, and all but one of the Warrants that were
exercised were done so on a cashless basis resulting in the issuance of 45,277
additional shares of the Company's Common Stock, of which 33,064 shares were
issued during the fiscal year ended September 30, 2001.

         On January 12, 2000, the Company sold to accredited investors in a
private transaction not registered under the Act, in reliance upon the exemption
afforded by Section 4(2) thereof, 800,000 shares of the Company's Common Stock,
for $1,000,000, or $1.25 per share, which was approximately $0.50 per share
below the last sales price on the date the transaction was negotiated. The
Company also agreed to promptly file a Registration Statement with the SEC in
order to register all the shares. These shares were subsequently registered on a
registration statement on Form S-3 filed with the SEC on April 20, 2000 and
declared effective on May 5, 2000. The Company believes that it was in the best
interest of the Company and its stockholders to enter into this transaction
because the proceeds of this transaction plus the Company's existing resources
(a) provided the Company with the funds necessary to continue its business and
its research and development activities while pursuing negotiation of several
domestic and international licensing opportunities; and (b) helped the Company
in its attempt to meet the Net Tangible Asset requirements for continued listing
on NASDAQ(SmallCap).

         On April 10, 2000, the Company sold to accredited investors in a
private transaction not registered under the Act, in reliance upon the exemption
afforded by Section 4(2) thereof, 333,333 shares of the Company's Common Stock,
for a total of $500,000, or $1.50 per share, which was approximately $0.50 per
share below the last sales price on the date that this transaction was
negotiated. The Company also agreed to promptly file a Registration Statement
with the SEC in order to register all the shares. These shares were subsequently
registered on a registration statement on Form S-3 filed with the SEC on April
20, 2000 and declared effective on May 5, 2000. The Company believes that it was
in the best interests of the Company and its stockholders to enter into this
transaction because the proceeds of this transaction plus the Company's existing
resources were necessary for the Company to attempt to meet the Net Tangible
Asset requirements for continued listing on NASDAQ(SmallCap).


                                       30
<PAGE>

         In connection with the execution of the Agreements with GIG, the
Company issued to GIG a warrant to purchase 426,087 shares of the Company's
Common Stock at an exercise price of $4.38 per share (the "GIG Warrant"). The
GIG Warrant became exercisable on September 18, 2001 (18 months after issuance)
and expires on March 16, 2005. The GIG Warrant is 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.

         Item 6. Management's Discussion and Analysis

         Financial Results

         For the year ended September 30, 2001, the Company had net income of
$5,343,000 or $0.60 per share on a basic and $0.56 per share on a fully diluted
basis, using 8,909,132 and 9,458,353 weighted average common shares outstanding,
basic and fully diluted, respectively, compared with a net loss of $844,000 or $
0.10 loss per share on a basic and fully diluted basis using 8,613,863 weighted
average common shares outstanding, for the year ended September 30, 2000. Net
revenues of $4,747,000 were reported for the year ended September 30, 2001,
compared with net revenues of $1,581,000 reported for the prior year. This large
increase in net revenues is attributable to the recognition of license fees of
$4,250,000 under the Company's agreements with Global Interactive Gaming, LLC
and Global Interactive Gaming Limited (collectively "GIG"), signed on March 17,
2000 (the "Agreements"), reduced by $103,000 deferred expense amortization
resulting from warrants granted in connection with the GIG Agreements (see
"License Agreements"), as well as the recognition of an early delivery bonus of
$600,000. A small portion of the Company's revenues for the year ended September
30, 2000, represent the net win (i.e. total amount wagered less total amount
paid out) of the System. The net win is affected by the success (or lack
thereof) of the players in making sports wagering bets.

         The Company's net income increased by $6,187,000 for the year ended
September 30, 2001. This resulted primarily from: net revenues, which increased
by $3,166,000 to $4,747,000 due to the increased minimum license fees received
under the GIG Agreements, as well the $600,000 early delivery bonus; the
reduction of the valuation allowance against its deferred tax assets of
$2,681,000 (see next paragraph); general and administrative expenses, which
decreased by $326,000 to $1,232,000, primarily as a result of the closing of the
Nevada office and reduced professional fees; and depreciation expense, which
decreased by $206,000 to $49,000. These expense reductions were partially offset
by an increase in accrued payroll expenses of $150,000 representing unpaid
programmer bonuses. These bonuses are rewards for meeting goals relating to the
Company earning the early delivery bonus under the GIG Agreements. The
programmer bonuses will be paid upon receipt of the early delivery bonus
payments from GIG.

         Prior to the fiscal year ending September 30, 2001, the Company had
pre-tax losses since inception. The total net operating loss carryforward was
approximately $8,822,000 as of September 30, 2000. This net operating loss
carryforward resulted in gross deferred tax assets of $3,722,000, which were
offset by a valuation allowance of the same amount, reducing the net deferred
tax assets to $0. During the year ended September 30, 2001, the Company realized
income before taxes of approximately $2,662,000, which utilized a portion of the
net operating loss carryforward. In addition, based on the minimum future
royalty payments to be received under the GIG Agreements, the projected income
to be realized from operations, coupled with the Company having met certain
commitments under those Agreements, the Company eliminated the entire valuation
allowance on September 30, 2001. This reduction in the valuation allowance
resulted in an increase in net deferred tax assets of $2,681,000, which the
Company recorded as an income tax benefit on its statement of operations for the
year ended September 30, 2001.


                                       31
<PAGE>

         The Company incurred approximately $995,000 in cost of revenues for the
year ended September 30, 2001, compared with approximately $1,020,000 for the
prior year. The Company capitalized $121,000 of expenses related to enhancements
of its SportXction(TM) System that were not required under the GIG Agreements.
These expenses will be amortized over the remaining life of the Agreements after
the enhancements are put into commercial use.

         As of September 30, 2001, the Company had liquid resources totaling
$5,065,000. These include cash and cash equivalents in the amount of $4,116,000,
and short term investments in the amount of $949,000. Investments are limited to
investment grade marketable securities with maturities of less than 18 months.
The Company believes that existing resources will be sufficient to satisfy its
contemplated cash requirements for at least the next 24-30 months and longer
subject to continuation of the payment by GIG of the minimum payments under the
Agreements. Capital expenditures are expected to be limited to the purchase of
additional computer equipment in connection with its research and development
activities. Existing resources will fund these requirements.

         On December 20, 2000, the Company announced that its Board of Directors
had authorized the repurchase of up to $500,000 worth of the Company's Common
Stock. As of September 30, 2001, the Company had purchased 242,000 shares of
Common Stock at an aggregate purchase price of $441,329. In June 2001, the Board
of Directors suspended the repurchase plan.

         Recent Developments

         On September 19, 2001, the Company received final acceptance of the
major deliverable, Milestone A, under the License Agreements with GIG. With this
formal acceptance, the Company earned a bonus of $600,000 for its early
completion of this Milestone. The bonus is payable in two equal installments:
the first half when the Licensed Software is used for any commercial purpose
(other than testing), but no later than February 1, 2002, and the second, nine
months later.

         This first deliverable contains a fully functional implementation of
the Company's SportXction(TM) sports wagering System, as it was enhanced and
expanded to accommodate millions of users and thousands of transactions per
second. This deliverable includes an interface for use with Internet browsers.
In early November 2001, the Company delivered an alpha test release of a major
augmentation to the software delivered for Milestone A. This software release
provides the functionality required for an interactive television (iDTV)
interface. This interface is needed on the important contracts recently signed
by GIG with Telewest, ITV Digital and Freedomland for use of the system with
interactive digital cable transmission. This will be the first implementation of
the system. The software is undergoing tests currently in England, preparatory
to its planned cutover into commercial service early in 2002. Subsequent
versions are intended for deployment in conjunction with interactive TV using
satellite, direct broadcast, and wireless use with mobile telephones and other
hand-held devices. Other broadband modalities are also possible, including near
real-time streaming video.


                                       32
<PAGE>

           The Company believes that interactive television is the ideal
delivery mode for the SportXction(TM) product in that the user can wager using
his television remote control device with minimal interference to the viewing of
the sporting event. The remaining deliverables under the Company's Agreements
with GIG, which are not required for quite some time, are largely completed.

         On September 10, 2001, GIG announced that it signed two separate
agreements with Telewest Communications and ITV Digital, two of the leading
broadband communications and media groups in the UK, to provide them with the
world's first, fully interactive, play by play betting systems, for use in
conjunction with their digital TV services. In these agreements to jointly
develop and adapt GIG's interactive gaming product, whose core technology is
licensed from the Company, the companies expect to launch service early in 2002.
On November 15, GIG signed an agreement with Italy's Freedomland Internet
Television, Europe's largest open access Interactive Internet TV provider.

         Telewest provides cable television and Internet access to approximately
1.7 million households (approximately 4 million customers). ITV Digital offers
the world's first commercial digital terrestrial TV platform, and has an
established base of over one million interactive TV and Internet customers.

         License Agreements

         On March 17, 2000, the Company signed the License Agreements with GIG,
whose majority shareholders are Prisma iVentures Ltd., a UK company and a
subsidiary of The Kirch Group, a German media conglomerate, and Multi-Games
Development, Inc., a Delaware corporation. Under the terms of the Agreements,
the Company granted exclusive licenses to market, distribute and use the
Company's interactive SportXction(TM) System software, technology and patents on
the Internet and interactive television, in all business activities in which
such technology is legally usable, including for contests and wagering on
sporting events world-wide. Excluded from the licenses are the continued use of
the SportXction(TM) System in Nevada for wagering, and the application of the
Company's basic technology and patents to lotteries and financial transactions
(stock, bond, option and currency trading and the like). The Company has several
projects under consideration in those markets using its patented and proprietary
software.

         Under these Agreements, the Company will be paid 25% of the gross
profit, less direct expenses (such as credit card fees, prizes and taxes), for
the use of its technology for contests and other non-wagering transactions. For
wagering, the Company will be paid the lesser of 25% of the gross profit, as
defined, or 1% of the gross handle, also less direct expenses. The Company will
bear no share of the cost of equipment, facilities or other operating expenses
at GIG, all of which will be borne by GIG. These percentage fees are 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. The total minimum license fees during the 14-year term
are approximately $250 million, after which the license is fully paid. At all
times the minimum license fee for the next four quarters is kept in a third
party escrow account. The Company is currently being paid at the minimum rates
because GIG has not yet commenced commercial use of the SportXction(TM) System
software. As of September 30, 2001, the Company had received an aggregate of
$6,500,000 in connection with the Agreements, and there was $5,750,000 being
held in the third party escrow account.


                                       33
<PAGE>

         The terms of the Agreements require the Company to make certain
modifications to the SportXction(TM) System to enhance its use on the Internet.
On September 19, 2001, the Company received final acceptance of the first major
deliverable, Milestone A, under the License Agreements with GIG. With this
formal acceptance, the Company earned a bonus of $600,000 for its early
completion of this Milestone. The remaining milestones are scheduled for
completion by December 31, 2002.

         Coincident with the signing of the Agreements, GIG was granted a
Warrant to purchase 426,087 shares of the Company's Common Stock, at an exercise
price of $4.38 per share. The value of the Warrant using a Black-Scholes option
pricing model was $1,450,000. Such amount is being amortized over the term of
the Agreements and is being offset against the revenue recorded from these
Agreements. The fully vested Warrant became exercisable on September 17, 2001,
18 months after issuance, is non-transferable other than to affiliates of GIG
and remains exercisable for five years from the date of issuance, subject to the
terms of the Warrant Agreement. Amortization expense related to the Warrant for
the fiscal years ended September 30, 2001 and 2000 was $103,000 and $56,000,
respectively, which has been netted against revenue generated from the
Agreements.


         Item 7. Financial Statements

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

         Reference is made to the Company's Current Report on Form 8-K filled on
April 16, 2001 for information relating to this Item 8.

         Item 13. Exhibits and Reports on Form 8-K

          (a)     Exhibits

                  (a)      The following exhibits are filed herewith:



                                       34
<PAGE>

3.1         Certificate of Incorporation of the Company (1)
3.1(a)      Amendment, filed October 24, 1996, to Certificate of Incorporation
            of the Company (1)
3.1(b)      Amendment, dated February 28, 2001, to Certificate of Incorporation
            of the Company (6)
3.2         By-Laws of the Company (1)
4.5         Warrant Agreement dated as of December 11, 1996 by and between the
            Company and American Stock Transfer & Trust Company (1)
4.5(a)      Amendment dated as of December 4, 2001, to Warrant Agreement dated
            December 11, 1996 by and between Registrant and American Stock
            Transfer & Trust Company
10.1(c)     Employment Agreement between the Company and Barry Mindes, dated as
            of March 17, 2000 (5)
10.2(b)     Employment Agreement between the Company and Bernard Albanese, dated
            as of March 17, 2000 (5)
10.3        Form of Proprietary Information, Inventions and Non-Solicitation
            Agreement (1)
10.4        Form of Subscription Agreement (1)
10.5        Rights Agreement among the Company and the investors listed on
            Schedule A therein, dated as of June 2, 1995 (1)
10.6        Stock and Warrant Purchase Agreement among the Company and the
            investors listed on Schedule A therein, dated as of June 2, 1995 (1)
10.7        Rights Agreement between the Company and Barry Mindes, dated as of
            June 20, 1996 (1)
10.8        Form of Stockholders Agreement among the Company, Barry Mindes and
            all Stockholders of the Company (other than stockholders who are
            party to the Rights Agreement referred to in 10.6 above) (1)
10.10       Form of Indemnification Agreement entered into between the Company
            and its directors and executive officers (1)
10.11       1995 Stock Option Plan, as amended January 7, 1999 (5)
10.12       1996 Stock Option Plan, as amended January 26, 2000 (5)
10.13       Form of Incentive Stock Option Agreement (2)
10.14       Form of Non-Qualified Stock Option Agreement (2)
10.15       License Agreement dated as of March 17, 2000 by and among the
            Company and Global Interactive Gaming Limited (formerly Global
            Interactive Gaming AG) (3)
10.16       License Agreement dated as of March 17, 2000 by and among the
            Company and Global Interactive Gaming LLC (formerly Global
            Interactive Gaming Inc.) (3)
10.17       Purchase and Sale Agreement dated as of April 10, 2000 by and among
            the Company and certain accredited investors (4)
10.18       Purchase and Sale Agreement dated as of January 12, 2000 by and
            among the Company and certain accredited investors (5)
10.19       Non-Transferable Warrant issued March 17, 2000 (5)
23.1(a)     Consent of KPMG LLP
23.1(b)     Consent of Richard A. Eisner & Company., LLP
24.1        Power of Attorney (Included on signature page hereto)



                                       35
<PAGE>


         (b) Reports on Form 8-K

         No reports on Form 8-K were filed during the quarter ended September
30, 2001.

         (1) 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.

         (2) Incorporated by reference to the exhibit with the corresponding
number contained in the Company's Registration Statement on Form S-8 (Reg. No.
333-41847) which was declared effective by the Securities and Exchange
Commission on December 10, 1997.

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

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

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

         (6) 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.

                                    PART III

         The information required by Part III is hereby incorporated by
reference from the Company's definitive proxy statement involving the election
of directors to be filed on or prior to January 29, 2002. If the definitive
proxy statement is not filed on or prior to January 29, 2002, the information
called for by Part III will be filed as an amendment to this Form 10-KSB on or
prior to January 29, 2002.


                                       36
<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
                              (Principal Executive Officer)



                           December 21, 2001



<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 reply to: accordance with the requirements of the Exchange Act, this
Report has been signed by the following persons in the capacities and on the
dates stated.

<TABLE>
<CAPTION>

               Signature                                       Title                               Date
               ---------                                       -----                               ----
<S>                                      <C>                                                 <C>
                                         Chairman of the Board and Director                  December 21, 2001
           /s/ Barry Mindes              (Principal Executive Officer)
----------------------------------------
             Barry Mindes


                                         President, Treasurer and Director  (Principal       December 21, 2001
         /s/ Bernard Albanese            Financial and Accounting Officer)
----------------------------------------
           Bernard Albanese


        /s/ Fredric Kupersmith           Director                                            December 21, 2001
----------------------------------------
          Fredric Kupersmith


          /s/ Janet Mandelker            Director                                            December 21, 2001
----------------------------------------
            Janet Mandelker


          /s/ Harold Rapaport            Director                                            December 21, 2001
----------------------------------------
            Harold Rapaport


</TABLE>

<PAGE>



                       Interactive Systems Worldwide Inc.
                    f/k/a International Sports Wagering Inc.

                          Index to Financial Statements


                                                                          Page
                                                                          ----

     Independent Auditors' Reports                                         F-2

     Balance Sheets as of September 30, 2001 and 2000                      F-4

     Statements of Operations for the years ended
     September 30, 2001 and 2000                                           F-5

     Statements of Stockholders' Equity for the years ended
     September 30, 2001 and 2000                                           F-6

     Statements of Cash Flows for the years ended
     September 30, 2001 and 2000                                           F-7

     Notes to Financial Statements                                         F-8




                                      F-1


<PAGE>




                          INDEPENDENT AUDITORS' REPORT


The Board of Directors and Stockholders
Interactive Systems Worldwide Inc.

     We have audited the accompanying balance sheet of Interactive Systems
Worldwide Inc. (formerly International Sports Wagering Inc.) as of September 30,
2001, and the related statements of operations, stockholders' equity and cash
flows for the year 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 audit.

     We conducted our audit 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 audit provides a
reasonable basis for our opinion.

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

                                          /s/ RICHARD A. EISNER & COMPANY, LLP

New York, New York
November 8, 2001

With respect to the last paragraph of Note 3
December 4, 2001


                                      F-2


<PAGE>



                          INDEPENDENT AUDITORS' REPORT


The Board of Directors and Stockholders
Interactive Systems Worldwide Inc.:

     We have audited the accompanying balance sheet of Interactive Systems
Worldwide Inc (formerly International Sports Wagering Inc.) as of September 30,
2000, and the related statements of operations, stockholders' equity and cash
flows for the year 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 audit.

     We conducted our audit 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 audit provides a
reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Interactive Systems
Worldwide Inc. (formerly International Sports Wagering Inc.) as of September 30,
2000, and the results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.

                                                  /s/ KPMG LLP

New York, New York
November 17, 2000

                                      F-3

<PAGE>




                       Interactive Systems Worldwide Inc.
                    f/k/a International Sports Wagering Inc.
                                 Balance Sheets
                           September 30, 2001 and 2000

             (Amounts in thousands except share and per share data)

                          ASSETS

<TABLE>
<CAPTION>

                                                             2001        2000
                                                           --------    --------
<S>                                                        <C>         <C>
Current assets:
  Cash and cash equivalents                                $  4,116    $    141
  Accounts receivable                                           300           2
  Investments in marketable securities                          949       2,714
  Deferred income taxes                                       1,791          --
  Prepaid expenses and other current
   assets                                                        32          66
                                                           --------    --------

      Total current assets                                    7,188       2,923

Property and equipment, net                                      60          79
Accounts receivable - non current portion                       300
Capitalized software                                            121          --
Deferred income taxes                                           890          --
Other assets                                                     15          15
                                                           --------    --------

      Total assets                                         $  8,574    $  3,017
                                                           ========    ========

                  LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable                                         $     40    $     16
  Deferred revenues                                             625         375
  Accrued expenses                                              304          69
                                                           --------    --------

      Total current liabilities                                 969         460
                                                           --------    --------

Commitments (Note 7)

Stockholders' Equity:
  Preferred stock, par value $.001 per
   share; 2,000,000 shares authorized,
   none issued                                                   --          --
  Common stock, par value $.001 per
   share; 20,000,000 shares authorized;
   9,102,832 shares issued
    in 2001, and 9,030,992 shares
   issued and outstanding in 2000                                 9           9
  Additional paid-in capital                                 13,326      13,283
  Treasury stock, at cost
   242,000 shares in 2001                                      (441)         --
  Deferred expense, net                                      (1,291)     (1,394)
  Accumulated deficit                                        (3,998)     (9,341)
                                                           --------    --------

      Total stockholders' equity                              7,605       2,557
                                                           --------    --------
      Total liabilities and
        stockholders' equity                               $  8,574    $  3,017
                                                           ========    ========

</TABLE>

    See accompanying notes to financial statements.

                                      F-4


<PAGE>


                       Interactive Systems Worldwide Inc.
                    f/k/a International Sports Wagering Inc.
                            Statements of Operations
                     Years ended September 30, 2001 and 2000

             (Amounts in thousands except share and per share data)

<TABLE>
<CAPTION>


                                                    Year ended      Year ended
                                                  September 30,    September 30,
                                                       2001             2000
                                                   -----------      -----------
<S>                                                <C>              <C>
Revenues, net                                      $     4,747      $     1,581
                                                   -----------      -----------
Costs and expenses:
 Cost of revenues, research
  and development expense                                  995            1,020
 General and administrative expense                      1,232            1,558
                                                   -----------      -----------
                                                         2,227            2,578
                                                   -----------      -----------

   Operating income (loss)                               2,520             (997)
                                                   -----------      -----------

Interest income                                            142              134
Gain on sale of assets                                      --               19
                                                   -----------      -----------
                                                           142              153
                                                   -----------      -----------

   Income (loss)
    before income tax benefit                            2,662             (844)

Income tax benefit                                       2,681               --
                                                   -----------      -----------

   Net income (loss)                               $     5,343      $      (844)
                                                   ===========      ===========

Net income (loss)
 per share - basic                                 $      0.60      $     (0.10)
                                                   ===========      ===========

Weighted average basic
 common shares outstanding                           8,909,132        8,613,863
                                                   ===========      ===========

Net income (loss)
 per share - diluted                               $      0.56      $     (0.10)
                                                   ===========      ===========

Weighted average diluted
 common shares outstanding                           9,458,353        8,613,863
                                                   ===========      ===========

</TABLE>


         See accompanying notes to financial statements.

                                      F-5


<PAGE>



                       Interactive Systems Worldwide Inc.
                    f/k/a International Sports Wagering Inc.
                       Statements of Stockholders' Equity
                     Years ended September 30, 2001 and 2000

                    (Amounts in thousands except share data)

<TABLE>
<CAPTION>


                               Common Stock       Additional                  Deferred
                          ---------------------     Paid-In       Treasury     Expense,   Accumulated
                          Shares       Amount       Capital        Stock         net        Deficit      Total
                          ---------------------  -------------   ----------   -----------  --------    --------
<S>                       <C>         <C>         <C>            <C>          <C>         <C>          <C>
Balance at
 September 30, 1999       7,852,993   $       8   $  10,288        $ --         $ --      $(8,497)     $ 1,799

Issuance of common
 stock through
 private placements       1,133,333           1       1,499          --           --           --        1,500

Issuance of common
 stock through
 exercise of options         44,666          --          46          --           --           --           46

Net loss                         --          --          --          --           --         (844)        (844)

Deferred expense
 associated with
 GIG warrants                    --          --       1,450          --       (1,450)          --           --

Amortization of
 warrant charges                 --          --          --          --           56           --           56
                          ---------   ---------   ---------   ---------    ---------    ---------    ---------
Balance at
 September 30, 2000       9,030,992           9      13,283          --       (1,394)      (9,341)       2,557

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

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

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

Options issued
 to third party                  --          --          16          --           --           --           16

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

Issuance of common
 stock through exercise
 of Bridge Warrants          33,064          --          --          --           --           --           --
                          ---------   ---------   ---------   ---------    ---------    ---------    ---------
Balance at
 September 30, 2001       9,102,832   $       9   $  13,326   $    (441)   $  (1,291)   $  (3,998)   $   7,605
                          =========   =========   =========   =========    =========    =========    =========

</TABLE>


See accompanying notes to financial statements.

                                     F-6
<PAGE>




                       Interactive Systems Worldwide Inc.
                    f/k/a International Sports Wagering Inc.
                            Statements of Cash Flows
                     Years ended September 30, 2001 and 2000

                             (Amounts in thousands)

<TABLE>
<CAPTION>


                                                   Year ended         Year ended
                                                  September 30,      September 30,
                                                       2001               2000
                                                 --------------      -------------
<S>                                              <C>                 <C>
Cash flows from operating activities:
 Net income (loss)                                $   5,343           $     (844)
 Adjustments to reconcile net income (loss)
  to net cash provided by
  (used in) operating activities:
  Depreciation and amortization                          49                  256
  Gain on sale of assets                                 --                  (19)
  Non-cash warrant and option charge                    119                   56
  Deferred income tax benefit                        (2,681)                  --
Changes in assets and liabilities:
  Accounts receivable                                  (598)                  10
  Prepaid expenses and other current assets              34                  (31)
  Other assets                                                               (10)
  Deposits payable                                       --                  (20)
  Accounts payable                                       24                  (83)
  Deferred revenue                                      250                  375
  Accrued expenses                                      235                  (54)
                                                    --------             --------
     Net cash provided by (used in}
      operating activities                            2,775                 (364)
                                                    --------             --------

Cash flows from investing activities:
 Purchase of investments                             (7,697)              (6,930)
 Proceeds from sales of investments                   9,462                5,652
 Purchase of property and equipment                     (30)                 (23)
 Capitalized software                                  (121)                  --
 Proceeds from sale of property and equipment            --                  138
                                                    --------             --------
    Net cash provided by (used in)
     investing activities                             1,614               (1,163)
                                                    --------             --------

Cash flows from financing activities:
 Net proceeds from issuance of common stock              27                1,546
 Purchase of treasury stock                            (441)                  --
                                                    --------            ---------
    Net cash (used in) provided by
     financing activities                              (414)               1,546
                                                   --------             ---------

 Net increase in cash
  and cash equivalents                                3,975                   19
 Cash and cash equivalents, beginning of year           141                  122
                                                    --------              -------
 Cash and cash equivalents, end of year           $   4,116              $   141
                                                    ========             ========

</TABLE>

See accompanying notes to financial statements.


                                       F-7


<PAGE>




                       Interactive Systems Worldwide Inc.
                    f/k/a International Sports Wagering Inc.
                          Notes to Financial Statements
                           September 30, 2001 and 2000

(1)       Description of Business

     Interactive Systems Worldwide Inc. (formerly known as International Sports
Wagering Inc.) (the "Company") was incorporated in the State of Delaware on May
22, 1995 to develop and market an interactive, client/server based computer
system for purposes of wagering on sporting events. The Company is the successor
by merger to Systems Enterprises, Inc., an S-corporation incorporated in the
State of New Jersey on December 17, 1992, 100% owned by the Company's founding
shareholder, which had nominal operating activities during its existence.

         The Company received a gaming licence as an operator of an inter-casino
linked system in April of 1998 from the Nevada Gaming Commission, which
permitted the Company to operate its system, in conjunction with several gaming
establishments, in the State of Nevada. The Company's system was operational in
Nevada during the entire fiscal year ended September 30, 1999, and for the
period October 1, 1999 through April 30, 2000. However, during this period,
there were no significant operating revenues generated from the Nevada
operations.

         In the early part of 2000, the fundamental character of the Company
changed by two events: the signing of License Agreements on March 17, 2000 (the
"Agreements") with Global Interactive Gaming LLC and Global Interactive Limited
(collectively "GIG"), and the discontinuation of operations in Nevada. These
events effectively transformed the Company from an operator of a Nevada gaming
system into a world-wide licensor of interactive gaming software. Prior to this
point the Company was considered a development stage company, since it had not
commenced generating significant revenue from its planned primary business
activities. Coincident with the signing of the Agreements, the Company ceased to
be a development stage company.

         Pursuant to the Agreements, the Company granted GIG exclusive licenses
to use the Company's interactive SportXction(TM) software, technology and
patents on the Internet and interactive television, in all business activities
in which such technology is legally usable, including contests and wagering on
sporting events world-wide. Excluded from the licenses are the continued use of
SportXction(TM) in Nevada for wagering, and the application of the Company's
basic technology and patents to lotteries and financial transactions (stock,
bond, option and currency trading for example).

         Under these Agreements, the Company will be paid 25% of the gross
profit, less direct expenses (such as credit card fees, prizes and taxes), for
the use of its technology for contests and other non-wagering transactions. For
wagering, the Company will be paid the lesser of 25% of the gross profit or 1%
of the gross handle, also less direct expenses. The Company will bear no share
of the cost of equipment, facilities or other operating expenses of GIG. These
percentage fees are 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 are fully paid. At all times the minimum license fee for the next four
quarters is kept in a third party escrow account. As of September 30, 2001, the
Company is being paid at the minimum rates because GIG had not commenced
commercial use of the software. Through such date the Company has received
$6,500,000 in connection with the Agreements, and $5,750,000 is being held in
the escrow account.


                                       F-8

<PAGE>


                       Interactive Systems Worldwide Inc.
                    f/k/a International Sports Wagering Inc.
                    Notes To Financial Statements (Continued)
                           September 30, 2001 and 2000

(1) Description of Business (Continued)

         The terms of the Agreements require the Company to make certain
modifications to the SportXction(TM) System to enhance its use on the Internet.
On September 19, 2001, the Company received final acceptance of the first major
deliverable, under the Agreements with GIG. With this formal acceptance, the
Company earned a bonus of $600,000 for its early completion of this deliverable.
The bonus, which is included in revenue in September 2001, is payable in two
equal installments: the first half when the software is used for any commercial
purpose (other than testing), but no later than February 1, 2002, and the
second, nine months later. The remaining enhancements are scheduled for
completion by December 31, 2002.

         Coincident with the signing of the Agreements, GIG was granted a
warrant to purchase 426,087 shares of the Company's common stock, at an exercise
price of $4.38 per share. The value of the warrant using a Black-Scholes option
pricing model was $1,450,000. Such amount is being amortized on a straight-line
basis over the term of the Agreements and as an offset against the revenue
recorded from these Agreements. The fully vested warrant became exercisable in
September 2001, is non-transferable other than to affiliates of GIG and remains
exercisable for five years from the date of issuance, subject to the terms of
the Warrant Agreement. The $1,450,000 has been accounted for as an increase in
additional paid-in capital with a corresponding offset amount recorded as
deferred expense within stockholders' equity. Amortization expense related to
the warrant for the fiscal year ended September 30, 2001 and 2000 was $103,000
and $56,000, respectively, which has been netted against $4,250,000 and
$1,625,000, respectively of revenue generated from the Agreements, during the
fiscal year ended September 30, 2001 and 2000.


(2) Summary of Significant Accounting Policies

         Cash and Cash Equivalents:

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

         Property and Equipment:

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

         Investments:

         Investments at September 30, 2001 and 2000 consist of debt securities
issued by the Federal government and corporate entities that are scheduled to
mature within twelve months of the balance sheet date. Investments at September
30, 2001, are scheduled to mature from November 2001 to February 2002. The
Company accounts for these investments pursuant to Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities".

                                      F-9

<PAGE>



                       Interactive Systems Worldwide Inc.
                    f/k/a International Sports Wagering Inc.
                    Notes To Financial Statements (Continued)
                           September 30, 2001 and 2000

(2) Summary of Significant Accounting Policies (Continued)

                  Under SFAS 115, debt securities are classified as either held
to maturity, trading or available-for-sale. Securities that an enterprise has
the positive intent and ability to hold to maturity are classified as held to
maturity. Trading securities are bought and held principally for the purpose of
selling them in the near future. All securities not classified as either held to
maturity or trading are classified as available-for-sale. Held to maturity
securities are reported at amortized cost, while trading and available-for-sale
securities are recorded at fair value pursuant to SFAS 115. Any unrealized
holding gains and losses on available-for-sale securities are recorded as a
component of other comprehensive income within stockholders' equity. For trading
securities, unrealized holding gains and losses are included in earnings. As of
September 30, 2001 and 2000, respectively, all of the Company's debt securities
are classified as available-for-sale and their fair value approximates cost.


         Software Development Costs:

         The Company accounts for software development costs in accordance with
SFAS No. 86 "Computer Software To Be Sold, Leased, or Otherwise Marketed". Such
costs are expensed prior to achievement of technological feasibility and
thereafter are capitalized. Capitalized amounts are amortized commencing with
the product's introduction on a straight-line basis over its estimated economic
life. During the year ended September 30, 2001, the Company capitalized software
development costs relating to the use of their SportXction product over enhanced
TV and will amortize such costs upon product introduction over the remaining
life of the Agreements with GIG.

         During 2001 and 2000, substantially all of the Company's research and
development expense reflect direct costs related to required enhancements under
the GIG Agreements. Cost of revenue also includes patent application and patent
maintenance costs which are expensed as incurred.

         Revenue Recognition:

         The Company recognizes revenue under its Agreements with GIG based upon
the computations stipulated in the Agreements, however not less than the
guaranteed annual minimum amounts due under the Agreements. The Company
recognizes revenue for each year's guaranteed minimum annual license fee on a
straight-line basis over the respective contract year, which during 2000
approximated the ratio that total costs incurred to date for the required
modifications have to the total estimated costs of modifications. The Company
receives payments of the minimum amounts at predetermined dates as stipulated in
the Agreements. Accordingly, collections received in advance of recognizing
revenue are recorded as deferred revenue on the balance sheet.

      Use of Estimates:

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

                                      F-10

<PAGE>




                       Interactive Systems Worldwide Inc.
                    f/k/a International Sports Wagering Inc.
                    Notes To Financial Statements (Continued)
                           September 30, 2001 and 2000

(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:

      The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." This Statement requires that
long-lived assets and certain identifiable intangibles be 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 net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. No such events and circumstances have
occurred.

         Accounting for Stock Based Compensation:

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

                                      F-11

<PAGE>


                       Interactive Systems Worldwide Inc.
                    f/k/a International Sports Wagering Inc.
                    Notes To Financial Statements (Continued)
                           September 30, 2001 and 2000

(2) Summary of Significant Accounting Policies (Continued)

         Accounting for Stock Based Compensation (Continued):

         The Company accounts for stock-based compensation issued to
non-employees in accordance with SFAS No. 123 and Emerging Issues Task Force
("EITF") No. 96-18. Under SFAS No. 123 and EITF 96-18, the Company measures the
fair value of equity awards to non-employees and records such value in its
financial statements. The measurement date is the date that the third party's
performance is complete (see Note 1).

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

         Basic and diluted net income (loss) per common share is presented in
accordance with SFAS No. 128, "Earnings per Share". Basic net income (loss) per
share is computed by dividing net income (loss) by the weighted average number
of common shares outstanding during the applicable reporting periods. Diluted
net income per share reflects the potential dilution that could occur if
outstanding options and warrants were exercised and common stock was issued
utilizing the treasury stock method. As their effect would be antidilutive, no
effect is given to the exercising of outstanding options or warrants in
computing the 2000 diluted net loss per share (see Note 9).

         Comprehensive Income (Loss):

         SFAS No. 130, "Reporting Comprehensive Income" established standards
for the reporting and presentation of comprehensive income and its components in
a full set of financial statements. Comprehensive income consists of net income
and net unrealized gains (losses) on available-for-sale securities. The
Statement requires only additional disclosures in the financial statements; it
does not affect the Company's financial position or results of operations. There
were no differences between the Company's comprehensive income (loss) and its
net income (loss) for all periods presented.


(3) Preferred and Common Stock

         In January 2000, the Company sold to accredited investors in a private
transaction 800,000 shares for $1,000,000, or $1.25 per share. In April 2000,
the Company sold to accredited investors in a private transaction 333,333 shares
for a total of $500,000, or $1.50 per share. These shares were subsequently
registered on a registration statement on Form S-3 filed with the Securities and
Exchange Commission ("SEC") on April 20, 2000 and declared effective on May 5,
2000.

         The designations, rights, and preferences of the preferred stock are to
be determined by the Board of Directors at the time of issuance.

         During the year ended September 30, 2001, holders of warrants to
purchase 170,442 shares of the Company's common stock, originally issued with a
bridge financing in 1996, exercised their warrants on a cashless basis pursuant
to which the Company issued 33,064 shares of common stock. As of September 30,
2001 warrants were outstanding to purchase 2,487,724 shares of the Company's
common stock at exercise prices ranging from $3.39 to $11.88 per share (weighted
average exercise price of $7.09). All warrants are exercisable and expire from
October 2001 to March 2005 (weighted average range of 11 months).

                                      F-12

<PAGE>




                       Interactive Systems Worldwide Inc.
                    f/k/a International Sports Wagering Inc.
                    Notes To Financial Statements (Continued)
                           September 30, 2001 and 2000

(3) Preferred and Common Stock (Continued):

         On December 4, 2001, the Board of Directors of the Company extended the
expiration date of the 1,725,000 warrants issued in conjunction with the initial
public offering in December 1996 to February 25, 2002. The warrants, which are
exercisable at $7.20 per share, were scheduled to expire on December 11, 2001.
These warrants are redeemable by the Company at $.05 per warrant if the trading
price of the common stock is at least $12 for a period of 15 consecutive trading
days ending within 15 days of the date upon which the warrants are called for
redemption.

(4) 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. 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 1995
Plan provides that the administrator must establish an exercise price for ISOs
that is 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 1995 Plan 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 Plan is as follows:

                                                        Weighted
                                            Shares    Average Price
                                            ------    -------------
Outstanding, September 30, 1999            466,195    $   0.70
   Granted                                  25,000        0.69
   Exercised                                (6,000)       0.70
   Cancelled                                    --
                                           -------
Outstanding September 30,2000              485,195        0.70
   Granted                                      --
   Exercised                               (27,776)       0.69
   Cancelled                                    --
                                           -------
Outstanding September 30,2001              457,419        0.70
                                           =======

Exercisable at September 30, 2001          457,419

Options available at September 30, 2001     80,805

         In October 1996, the Board of Directors adopted and the stockholders
approved the 1996 Stock Option Plan (the "1996 Plan"). The 1996 Plan as amended
is substantially similar to the 1995 Plan, except that there are 1,175,000
shares of Common Stock authorized and available for issuance pursuant to options
that may be granted thereunder. The 1996 Plan is administered by the Stock
Option Committee.

                                      F-13




<PAGE>



                       Interactive Systems Worldwide Inc.
                    f/k/a International Sports Wagering Inc.
                    Notes To Financial Statements (Continued)
                           September 30, 2001 and 2000


(4) Stock Option's (Continued):

         On October 1, 2000 the Company issued options to purchase 40,000 shares
of its Common Stock at exercise prices ranging from $1.75 per share to $2.75 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 commencing October 1, 2000. Options for 10,000
shares vested on each of October 1, 2000, January 1, 2001, April 1, 2001 and
July 1, 2001. The options remain exercisable until one year after termination of
the agreement. The Company valued the options at $16,000 using a Black-Scholes
pricing model at each vesting date and charged the cost to general and
administrative expense.

     Activity related to the 1996 Plan is as follows:

                                                                   Weighted
                                                      Shares     Average Price
                                                      ------     -------------
     Outstanding September 30, 1999                   519,000         $1.12
        Granted                                       269,000          0.79
        Exercised                                     (38,666)         1.09
        Cancelled                                     (81,334)         0.93
                                                      --------
     Outstanding September 30, 2000                   668,000          1.12
        Granted                                       124,000          1.27
        Exercised                                     (11,000)         0.69
        Cancelled                                     (12,000)         0.97
                                                      --------
     Outstanding September 30, 2001                   769,000          1.03
                                                      =======

     Exercisable at September 30, 2001                530,500

     Options available at September 30, 2001          323,001


         The following table summarizes information about stock options
outstanding at September 30, 2001.

                      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
------------- -----------  -----------   --------        -----------  ---------
$0.67  - 0.77    902,419        6          $0.71           735,419      $0.71
 1.06  - 1.75    277,000        8           1.34           210,000       1.35
 2.08  - 2.75     47,000        8           2.30            42,500       2.33
               ---------                                   -------
               1,226,419        7           0.91           987,919      0.91
               =========                    ====           =======      ====


                                      F-14


<PAGE>



                       Interactive Systems Worldwide Inc.
                    f/k/a International Sports Wagering Inc.
                    Notes To Financial Statements (Continued)
                           September 30, 2001 and 2000

(4) Stock Option's (Continued):

   The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-based Compensation" and applies APB Opinion 25 in
accounting for its plans in its financial statements. Had the Company determined
compensation cost based on the fair value at the grant date consistent with the
provisions of SFAS NO. 123, the Company's net income (loss) would have been
increased to the pro forma amounts indicated below:

(Amounts in thousands except per share data)

                                                           2001        2000
                                                           ----        ----
Net income (loss) - as reported                          $ 5,343    $  (844)
Net income (loss) - pro forma                              5,187       (944)

Net income (loss) per share basic - as reported          $  0.60    $ (0.10)
Net income (loss) per share basic - pro forma               0.58      (0.11)

Net income (loss) per share diluted - as reported        $  0.56    $ (0.10)
Net income (loss) per share diluted - pro forma             0.55      (0.11)

     The pro forma amounts as noted above may not be representative of the
effects on reported income or loss for future years.

              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 rate of 4.37% and 6.25% in 2001 and 2000, respectively, expected
volatility of 123% and 143% in 2001 and 2000, respectively, and an expected life
of 7 years (for both periods). The weighted average grant date fair value of
options granted in 2001 and 2000 was $0.70 and $0.81, respectively.


(5)  Property and Equipment

Property and equipment at September 30, 2001 and 2000 consist of the following:

                                          2001           2000
                                          ----           ----

     Furniture and fixtures          $   31,000     $   31,000
     Building and improvements            9,000          4,000
     Computer equipment               1,374,000      1,349,000
                                     ----------      ---------
                                      1,414,000      1,384,000

    Less accumulated depreciation
         and amortization            (1,354,000)    (1,305,000)
                                    -----------    -----------
                                     $   60,000     $   79,000
                                     ===========    ==========

                                      F-15

<PAGE>


                       Interactive Systems Worldwide Inc.
                    f/k/a International Sports Wagering Inc.
                    Notes To Financial Statements (Continued)
                           September 30, 2001 and 2000


(6)  Accrued Expenses

     Accrued expenses at September 30, 2001 and 2000 consist of the following:

                                       2001               2000
                                       ----               ----

     Professional fees               $20,000          $ 38,000
     Payroll and related costs       184,000            25,000
     Other                           100,000             6,000
                                    --------          --------
                                    $304,000          $ 69,000
                                    ========          ========



(7) Commitments and Other:

     The Company leases office facilities and equipment under operating leases.
The Company's remaining minimum rental commitments under the leases are as
follows:

         Year ending September 30,
         -------------------------
            2002                                   $ 53,000
            2003                                     53,000
            2004                                     45,000
            2005                                     27,000

     Rent expense under operating leases during 2001 and 2000 was $51,000 and
$61,000, respectively.

     The Company entered into employment agreements with two of its employees.
The agreements, one of which expires in December 2002 and the other of which
expires in June 2003, provide for an aggregate minimum compensation of $550,000
in fiscal year 2002, and $263,000 thereafter. Compensation expense recognized
under these agreements for the years ended September 30, 2001 and 2000 was
$496,000, and $392,000, respectively. The agreements also provide for severance
payments upon certain events, as defined.

     The Company has entered into a consulting agreement with a non-related
third party relating to the signing of the license agreements with GIG that
results in payments based on license fees received under the GIG Agreements.
Under the terms of this consulting agreement, as of September 30, 2001, the
Company is obligated to pay 1.5% of the next $1.5 million of license fees
received, and 1.0% of all additional license fees received thereafter. Amounts
expensed under this agreement for the years ended September 30, 2001 and 2000
were approximately $100,000 and $60,000, respectively.

     The Company recognized $158,000 and $333,000 in expenses relating to their
attorney who is also a stockholder of the Company in 2001 and 2000,
respectively.


                                      F-16

<PAGE>




                       Interactive Systems Worldwide Inc.
                    f/k/a International Sports Wagering Inc.
                    Notes To Financial Statements (Continued)
                           September 30, 2001 and 2000


(8)   Income Taxes

     The income tax benefit for the years ended September 30, 2001 and 2000
differed from the amounts computed by applying the U.S. Federal income tax rate
of 34% to pre-tax income (loss) as a result of the following:

                                                   Years ended
                                                  September 30,
                                           ----------------------------
                                                2001       2000
                                           ------------ ---------------
     Computed tax expense (benefit)
       at 34%                              $   905,000  $(287,000)
     50% of meals and
       entertainment expense                     4,000      1,000
     State tax expense (benefit)
       net of Federal effect and
          other                                133,000    (49,000)
     (Decrease) Increase in
       valuation allowance for
       deferred tax assets                  (3,723,000)   335,000
                                           -----------  ---------
     Income tax benefit                    $(2,681,000)  $   --
                                           ============ =========

     The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at September
30, 2001 and 2000 are presented below:

     Deferred tax assets:                         2001        2000
                                                  ----        ----
     Federal and state net
       operating loss carryforward           $2,210,000   $ 3,524,000
     Depreciation and amortization              153,000       189,000
     Employee compensation and
       benefits                                  74,000        10,000
     Deferred revenue and other                 244,000
                                             ----------    -------------
     Total gross deferred tax
       assets                                 2,681,000     3,723,000
     Less valuation allowance                        --    (3,723,000)
                                             ----------   -----------

          Net deferred tax assets            $2,681,000    $     --
                                            ===========   ===========

         As of September 30, 2001, the Company had a net operating loss
carryforward of approximately $5,526,000 for Federal and state income tax
reporting purposes available to offset future Federal taxable income through the
year 2020 and future state taxable income through the year 2007, which may be
subject to an annual limitation on its utilization under Section 382 of the
Internal Revenue Code. The Company had provided a valuation allowance of
$3,723,000 at September 30, 2000 against its deferred tax assets since it was
previously determined that it was more likely than not that the Company would
not realize such assets due to the pre-tax losses since inception. However,
based upon the minimum future royalty income being held in an escrow account, as
more fully described in note 1, in management's judgment, it is more likely than
not that as of September 30, 2001, the Company will realize future tax benefits
related to its carryforward and other temporary differences and, accordingly,
the valuation allowance has been reduced by such amount resulting in a
corresponding deferred tax benefit during the year ended September 30, 2001.


                                      F-17

<PAGE>

                       Interactive Systems Worldwide Inc.
                    f/k/a International Sports Wagering Inc.
                    Notes To Financial Statements (Continued)
                           September 30, 2001 and 2000



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

         The following represents the calculations of the basic and diluted net
income (loss) per common share for the years ended September 30, 2001 and 2000.

(All $ amounts in 000's except per share data)

                                                           Year Ended
                                                          September 30,
                                                         2001        2000
                                                      ---------   ---------

         Net income (loss)                            $   5,343   $   (844)
                                                      =========   =========

         Weighted average basic
          common shares outstanding                   8,909,132   8,613,863

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

         Weighted average diluted
          common shares outstanding                   9,458,353   8,613,863
                                                     ==========   =========

         Net income (loss) per share- basic           $    0.60   $  (0.10)
                                                      =========   =========

         Net income (loss) per share- diluted         $    0.56   $  (0.10)
                                                      =========   =========


         Warrants to purchase 2,451,087 shares of common stock at prices ranging
from $4.38 to $11.88 were outstanding at September 30, 2001 but were not
included in the computation of net income per share- diluted because the
exercise prices were greater than the average market price of the common shares
during the year. The Company's computation of dilutive net loss per share for
the twelve months ended September 30, 2000 does not assume any exercise of
options or warrants to purchase 3,568,149 common shares as their effect is
antidilutive.

                                      F-18