<PAGE>


                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-QSB

(X)      QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
         ACT OF 1934

                For the quarterly period ended December 31, 2005

( )      TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

                For the transition period from _____________ to _______________
                Commission file number   0-21831
                                         -------

                       Interactive Systems Worldwide Inc.
        (Exact name of Small Business Issuer as specified in its charter)


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

                    2 Andrews Drive, West Paterson, NJ 07424
                    (Address of principal executive offices)

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

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 requirement for the past 90 days. Yes |X| No |_|

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act) Yes |_|  No |X|

There were 11,807,205 shares of Common Stock outstanding at February 8, 2006.

Transitional Small Business Disclosure Format (Check one):  Yes |_|  No |X|


<PAGE>

Interactive Systems Worldwide Inc.
December 31, 2005
FORM 10-QSB

Index
                                                                           Page
                                                                           ----

Part I:    Financial Information

Item 1.    Financial Statements,

  Consolidated Balance Sheets at December 31, 2005 (Unaudited)
  and September 30, 2005                                                      2

  Consolidated Statements of Operations for the Three
  Months Ended December 31, 2005 and 2004 (Unaudited)                         3

  Consolidated Statement of Stockholders' Equity for the
  Three Months Ended December 31, 2005 (Unaudited)                            4

  Consolidated Statements of Cash Flows for the Three Months
  Ended December 31, 2005 and 2004 (Unaudited)                                5

Notes to Consolidated Financial Statements (Unaudited)                     6-15

Item 2.    Management's Discussion and Analysis or
           Plan of Operations                                             16-23

Item 3.    Controls and Procedures                                           24

Part II:   Other Information                                                 24

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds       24

Item 6.    Exhibits                                                          25

Signatures                                                                   26



<PAGE>


Part I: Financial Information

Item 1. Financial Statements

                       Interactive Systems Worldwide Inc.
                           Consolidated Balance Sheets

             (Amounts in thousands except share and per share data)

<TABLE>
<CAPTION>

                                                                                 December 31,     September 30,
                                                                                    2005             2005
                                                                                 (Unaudited)         Note 1
                                                                                 ----------       -------------
<S>                                                                                <C>              <C>
Current assets:
   Cash and cash equivalents                                                       $  4,363         $  5,655
   Accounts receivable                                                                    4               41
   Investments in marketable securities                                               1,195              980
   Other receivables                                                                     37               14
   Prepaid expenses and other current assets                                            224              139
                                                                                   --------         --------
     Total current assets                                                             5,823            6,829
   Property and equipment, net                                                           53               91
   Capitalized software, net of accumulated
            amortization of $861 and $791, respectively                                  85              154
   Other assets                                                                         318              339
                                                                                   --------         --------
               Total assets                                                        $  6,279         $  7,413
                                                                                   ========         ========

                      Liabilities and Stockholders' Equity
Current liabilities:
   Accounts payable                                                                $    206         $    201
   Accrued expenses                                                                   1,095            1,126
                                                                                   --------         --------
     Total current liabilities                                                        1,301            1,327
                                                                                   --------         --------
Long-term debt:
   Debentures, net of unamortized discount of $41 and $94, respectively                 105              239
                                                                                   --------         --------
               Total liabilities                                                      1,406            1,566
                                                                                   --------         --------

Contingency (Note 9)

Stockholders' Equity:
   Preferred stock, par value $.001 per share;
     2,000,000 shares authorized,
     60,000 Series A outstanding,
     164 Series B outstanding at September 30, 2005,
     4,000 Series C outstanding with a liquidation preference of $4,000                  --               --
   Common stock par value $.001 per share;
     20,000,000 shares authorized;
     11,947,922 and 11,792,702 issued, respectively                                      12               12
   Additional paid-in capital                                                        27,519           27,200
   Treasury stock, at cost 242,000 shares                                              (441)            (441)
   Accumulated other comprehensive loss                                                 (57)             (50)
   Accumulated deficit                                                              (22,160)         (20,874)
                                                                                   --------         --------
           Total stockholders' equity                                                 4,873            5,847
                                                                                   --------         --------
                  Total liabilities and stockholders' equity                       $  6,279         $  7,413
                                                                                   ========         ========

</TABLE>

See accompanying notes to consolidated financial statements

                                       2

<PAGE>


                       Interactive Systems Worldwide Inc.
                      Consolidated Statements of Operations
                                   (Unaudited)

             (Amounts in thousands except share and per share data)

                                                       Three Months Ended
                                                          December 31,
                                                      2005            2004
                                                  ------------    ------------

Revenue                                           $         30    $         23
                                                  ------------    ------------
Costs and expenses:
   Cost of revenue, research
     and development expense                               437             530

   General and
     administrative expense                                781             791
                                                  ------------    ------------
                                                         1,218           1,321
                                                  ------------    ------------

     Operating loss                                     (1,188)         (1,298)

Interest expense, net                                       49             213
Other income                                                (1)             --
                                                  ------------    ------------
            Net loss                                    (1,236)         (1,511)

Preferred stock dividend                                   (67)           (552)
                                                  ------------    ------------


     Net loss applicable to common shareholders   $     (1,303)   $     (2,063)
                                                  ============    ============

Net loss per share applicable to
   common shareholders - basic and diluted        $      (0.11)   $      (0.21)
                                                  ============    ============

Weighted average basic and diluted
  common shares outstanding                         11,658,479       9,651,078
                                                  ============    ============


See accompanying notes to consolidated financial statements


                                       3

<PAGE>


                       Interactive Systems Worldwide Inc.
                 Consolidated Statement of Stockholders' Equity
                  For the Three Months Ended December 31, 2005
                                   (Unaudited)

                 (Amounts in thousands except number of shares)

<TABLE>
<CAPTION>

                                                                                                Accumulated
                                     Preferred stock     Common stock    Additional                Other
                                    -----------------  ----------------   Paid-In    Treasury  Comprehensive  Accumulated
                                     Shares  Amount    Shares   Amount    Capital      Stock        Loss        Deficit     Total
                                     ------  ------    ------   -------  ----------  --------- -------------  -----------   -----
<S>                                 <C>      <C>    <C>          <C>     <C>          <C>         <C>        <C>           <C>
Balance at
  September 30, 2005                64,164   $ --   11,792,702   $  12   $ 27,200     $ (441)     $ (50)     $  (20,874)   $  5,847

Dividends on Series B and
   Series C Preferred Stock             --     --       19,935      --         50         --         --             (50)         --

Issuance of common stock
   in payment of Debenture
   principal and interest               --     --       81,865      --        222         --         --              --         222

Issuance of common stock
  through conversion of
  Series B Preferred Stock            (164)    --       53,420      --         --         --         --              --          --

Compensation cost associated
   with stock options                   --     --           --      --         47         --         --              --          47

Net loss                                --     --           --      --         --         --         --          (1,236)     (1,236)

Foreign currency
   translation loss                     --     --           --      --         --         --         (7)             --          (7)
                                                                                                                           --------

Comprehensive loss                                                                                                           (1,243)
                                ----------   ----   ----------   -----   --------     ------      -----      ----------    --------
Balance at
   December 31, 2005                64,000   $ --   11,947,922   $  12   $ 27,519     $ (441)     $ (57)     $  (22,160)   $  4,873
                                ==========   ====   ==========   =====   ========     ======      =====      ==========    ========

</TABLE>

See accompanying notes to consolidated financial statements

                                       4
<PAGE>


                       Interactive Systems Worldwide Inc.
                      Consolidated Statements of Cash Flows
                                   (Unaudited)
                             (Amounts in thousands)
<TABLE>
<CAPTION>

                                                                          Three Months Ended
                                                                             December 31,
                                                                           2005       2004
                                                                           ----       ----
<S>                                                                      <C>        <C>
Cash flows from operating activities:
  Net loss                                                               $(1,236)   $(1,511)
Adjustments to reconcile net loss
    to net cash used in operating activities:
    Depreciation and amortization                                            110        104
      Non-cash interest expense                                               84        187
      Non-cash option charge                                                  47         --
      Non-cash amortization of debt issuance costs                            21         38
      Non-cash other income                                                   (1)        --
Changes in assets and liabilities:
  Accounts receivable                                                         37        (11)
  Other receivables                                                          (23)        (7)
  Prepaid expenses and other current assets                                  (85)       (86)
  Other assets                                                                --         38
  Accounts payable                                                             5         85
  Accrued expenses                                                           (27)       (50)
                                                                         -------    -------
         Net cash used in operating activities                            (1,068)    (1,213)
                                                                         -------    -------

Cash flows from investing activities:
  Purchase of investments                                                   (500)      (300)
  Proceeds from sales of investments                                         285         --
  Purchase of property and equipment                                          (1)        (5)
                                                                         -------    -------
            Net cash used by investing activities                           (216)      (305)
                                                                         -------    -------

Cash flows from financing activities:
  Proceeds from issuance of preferred stock and warrants                      --      3,000
  Proceeds from issuance of common stock and warrants                         --         55
  Costs associated with private placement
                                                                              --       (374)
                                                                         -------    -------
         Net cash provided by financing activities                            --      2,681
                                                                         -------    -------

Net (decrease) increase in cash and cash equivalents                      (1,284)     1,163
Effect of exchange rate on cash                                               (8)        (1)
Cash and cash equivalents, beginning of period                             5,655      2,832
                                                                         -------    -------
Cash and cash equivalents, end of period                                 $ 4,363    $ 3,994
                                                                         =======    =======

Non-cash investing and financing activity:
   Issuance of warrants to investors and private placement agent         $    --    $   847
   Beneficial conversion feature of Series B Preferred Stock             $    --    $   552
   Issuance of common stock in relation to principal payments
            on Debentures                                                $   188    $   325
   Issuance of common stock in relation to dividend payments
            on Series B and Series C Preferred Stock                     $    43    $    --

</TABLE>

See accompanying notes to consolidated financial statements

                                       5

<PAGE>


                       Interactive Systems Worldwide Inc.
                   Notes To Consolidated Financial Statements
                                   (Unaudited)

Note l - Basis of Presentation:

         The information at December 31, 2005 and for the three months ended
         December 31, 2005 and 2004, is unaudited, but includes all adjustments
         (consisting only of normal recurring adjustments) which in the opinion
         of management, are necessary to present fairly the financial
         information set forth therein in accordance with accounting principles
         generally accepted in the United States of America. The interim results
         are not necessarily indicative of results to be expected for the full
         fiscal year period. Certain information and footnote disclosures have
         been omitted pursuant to rules and regulations published by the
         Securities and Exchange Commission ("SEC"), although the Company
         believes that the disclosures that are made are adequate to make the
         information presented not misleading. The consolidated financial
         statements include the accounts of Interactive Systems Worldwide Inc.,
         and its wholly owned subsidiaries, ISW Acquisition Co., LLC and Global
         Interactive Gaming Limited (collectively the "Company"). All
         significant intercompany balances and transactions have been
         eliminated. Net loss applicable to common stock and net loss per share
         applicable to common stock (basic and diluted) for the quarter ended
         December 31, 2004 were increased by $327,000 and $0.03 from amounts
         originally reported in the Company's Form 10QSB to reflect a change
         (recorded in the fourth quarter of fiscal 2005) in the value of the
         beneficial conversion feature associated with the Series B Preferred
         Stock. These consolidated financial statements should be read in
         conjunction with the audited financial statements for the year ended
         September 30, 2005 included in the Company's Annual Report on Form
         10-KSB filed with the SEC.

         The Company's revenue during the three months ended December 31, 2005
         and 2004 consisted of license fees and service charges from agreements
         with companies located in the United Kingdom and Gibraltar. Revenue
         consists primarily of service charges calculated based on a percentage
         share of the net wagering revenue after payment of winnings and taxes.
         Revenue may be reduced for certain pool imbalance risks that arise from
         being a part of the house. The Company recognizes revenue as it is
         earned according to the terms of the related agreement.

Note 2 - Private Placements:

         On November 24, 2003, the Company entered into a financing agreement
         relating to a $3.9 million private placement with institutional
         investors consisting of $2.6 million of 7.5% Convertible Debentures
         ("Debentures") and $1.3 million for 390,390 shares of the Company's
         Common Stock ($3.33 per share). The investors also received warrants
         ("Investor Warrants") that expire in November 2008 to purchase 281,250
         shares of Common Stock at $4.58 per share, subject to adjustment. Net
         proceeds from the financing after costs and expenses were approximately
         $3,435,000. In addition, a finder in



                                       6
<PAGE>

                       Interactive Systems Worldwide Inc.
                   Notes To Consolidated Financial Statements
                                   (Unaudited)

Note 2 - Private Placements (continued):

         connection with the private placement received warrants to purchase an
         aggregate of 95,808 shares of Common Stock at $5.06 per share, which
         were valued at $274,000 using the Black Scholes option pricing model on
         the date of issuance. The proceeds as well as the costs and expenses of
         the transaction were allocated to debt and equity based on their
         relative fair values. The expense amount allocated to equity was
         recorded as a reduction of additional paid in capital and the amount
         allocated to debt is being amortized over the life of the Debentures.

         On November 12, 2004, the Company entered into a financing agreement
         relating to a $3.0 million private placement with institutional
         investors consisting of 3,000 shares of the Company's newly issued
         Series B Convertible Preferred Stock ("Series B"). Series B has a
         stated value of $1,000 per share, is non-voting and is initially
         convertible into the Company's Common Stock at $3.07 per share, subject
         to adjustment. The investors also received warrants that expire in
         November 2009 to purchase 513,172 shares of Common Stock at $3.36 per
         share, subject to adjustment which were valued at $681,000 using the
         Black Scholes option pricing model. Net proceeds from the financing
         after costs and expenses were approximately $2.6 million.

         The Series B was initially convertible into an aggregate of 977,470
         shares of Common Stock. In connection with the issuance of the Series
         B, the Company recorded a dividend to Series B shareholders of $552,000
         representing the beneficial conversion feature resulting from the
         difference between the effective conversion price and the quoted market
         price of the Company's Common Stock at the date of issuance. In
         addition, holders of Series B are entitled to receive a cumulative 6%
         annual dividend, payable quarterly in cash or, subject to certain
         conditions, shares of Common Stock at the Company's option. During the
         three months ended December 31, 2005, holders of the Series B converted
         their remaining 164 shares of Series B into shares of Common Stock and
         there are currently no remaining Series B outstanding. A placement
         agent in this transaction received a cash fee of $180,000 and warrants
         to purchase 102,740 shares of the Company's Common Stock expiring in
         May 2010 which are exercisable at $3.50 per share. The warrants were
         valued at $166,000 using the Black Scholes option pricing model.



                                       7
<PAGE>

                       Interactive Systems Worldwide Inc.
                   Notes To Consolidated Financial Statements
                                   (Unaudited)

Note 2 - Private Placements (continued):

         On August 3, 2005, the Company entered into a financing agreement
         relating to a $4.0 million private placement with institutional
         investors consisting of 4,000 shares of the Company's newly issued
         Series C Convertible Preferred Stock ("Series C"). Series C has a
         stated value of $1,000 per share, is non-voting and is initially
         convertible into the Company's Common Stock at $3.75 per share, subject
         to adjustment. The investors also received warrants that expire in
         August 2010 to purchase 557,103 shares of Common Stock at $3.95 per
         share, subject to adjustment which were valued at $929,000 using the
         Black Scholes option pricing model. Net proceeds from the financing
         after costs and expenses were approximately $3.7 million.

         The Series C is initially convertible into an aggregate of 1,066,667
         shares of Common Stock. In connection with the issuance of the Series
         C, the Company recorded a dividend to Series C shareholders of $777,000
         representing the beneficial conversion feature resulting from the
         difference between the effective conversion price and the quoted market
         price of the Company's Common Stock at the date of issuance. In
         addition, holders of Series C are entitled to receive a cumulative 6%
         annual dividend, payable quarterly in cash or, subject to certain
         conditions, shares of Common Stock at the Company's option. As of
         December 31, 2005, unpaid cumulative dividends on the Series C amounted
         to $67,000. A placement agent in this transaction received a cash fee
         of $120,000 and warrants to purchase 65,753 shares of the Company's
         Common Stock expiring in August 2010 which are exercisable at $4.38 per
         share. The warrants were valued at $132,000 using the Black Scholes
         option pricing model.

         Under the terms of the private placements, and subject to certain
         conditions, the Company has the right to force conversion of all or a
         portion of the Series C into Common Stock. The Series C also provides
         that if certain events (all of which are within the control of the
         Company) occur such holder would have the right to require the Company
         to redeem the preferred stock for cash. For certain other events, each
         holder would have the right to require the Company to redeem the
         preferred stock for the Company's Common Stock or increase the dividend
         of the preferred stock to 12% per annum. In addition, the Series C and
         investor warrants are subject to certain anti-dilution protection. The
         Series C contains certain negative covenants including limitations with
         respect to borrowings and prohibition on payment by the Company of
         dividends and distributions on Common Stock.



                                       8
<PAGE>


                       Interactive Systems Worldwide Inc.
                   Notes To Consolidated Financial Statements
                                   (Unaudited)


Note 2 - Private Placements (continued):

         Registration rights agreements were entered into in connection with the
         private placements which required the Company to file registration
         statements for the resale of the common shares issuable upon conversion
         of the Debentures and the Series B and Series C and upon the exercise
         of the warrants and to use commercially reasonable efforts to have the
         registration statements declared effective by the end of a specified
         grace period. In addition, the Company is required to use commercially
         reasonable efforts to maintain the effectiveness of the registration
         statements until all such common shares have been sold or may be sold
         without volume restrictions pursuant to Rule 144(k) of the Securities
         Act. If the Company fails to have the registration statement declared
         effective within the grace period or if effectiveness is not
         maintained, the agreements require cash payments of liquidated damages
         by the Company to the investors of 2.0% per month with respect to the
         November 2003 private placement and 1.5% per month with respect to the
         November 2004 and August 2005 private placements of the amounts
         invested by the investors until the failure is cured. As of September
         30, 2005, registration statements were filed and declared effective
         within the specified grace periods with respect to the three private
         placements.

         The Company accounts for the registration rights agreements as a
         separate free-standing instrument and accounts for the liquidated
         damages provision as a derivative liability subject to SFAS 133.
         Accordingly, the liability is recorded at estimated fair value based on
         an estimate of the probability and costs of cash penalties being
         incurred and is revalued at each balance sheet date with changes in
         value recorded in other income. As of December 31, 2005, the liability
         amounted to $29,000 and is included in accrued expenses.

Note 3 - Debt:

         The 7.5% Debentures are convertible into shares of Common Stock at
         $4.58 per share subject to adjustment (initially 567,686 shares), and
         are repayable in 24 equal monthly installments ($108,333) which began
         in May 2004 with interest payable quarterly. Under the terms of the
         transaction, and subject to certain conditions, the Company may make
         periodic interest and principal payments in shares of the Company's
         Common Stock valued at a discount from the weighted average market
         price prior to such payments. During the year ended September 30, 2005,
         investors converted certain outstanding Debentures into shares of the
         Company's Common Stock. Subsequent to these conversions, the monthly
         principal repayments were reduced to $62,500. During the three months
         ended December 31, 2005, 81,865 shares of Common Stock were issued in
         satisfaction of principal and interest payments on the Debentures. Such
         shares were accounted for based on their quoted market price at the
         date of issuance. As the


                                       9
<PAGE>

                       Interactive Systems Worldwide Inc.
                   Notes To Consolidated Financial Statements
                                   (Unaudited)

Note 3 - Debt (continued):

         Company intends to pay the remaining principal payments amounting to
         $146,000 by issuing common shares, such amount has not been classified
         as a current liability in the accompanying balance sheet at December
         31, 2005. As the Company intended to pay the required principal
         payments during the year ending September 30, 2006 amounting to
         $333,000, such amount has not been classified as a current liability in
         the accompanying balance sheet at September 30, 2005. The Company also
         under certain conditions has the right to force conversion of all or a
         portion of the Debentures into Common Stock. The conversion price of
         the Debentures is subject to adjustment under certain circumstances.
         The Debentures contain certain provisions and restrictions, which if
         violated, could result in the full principal amount together with
         interest and other amounts becoming immediately due and payable in
         cash.

Note 4 - Preferred Stock:

         The designations, rights, and preferences of the Company's Preferred
         Stock are to be determined by the Board of Directors at the time of
         issuance. In connection with the acquisition of GIG, the Company issued
         60,000 shares of a new class of Series A Preferred Stock ("Series A").
         Each share of Series A has one vote, is convertible through July 31,
         2009 into 10 shares of the Company's Common Stock at $15 per common
         share on a cashless basis and is redeemable by the Company on such date
         for nominal consideration if not previously converted into Common
         Stock. The holder of Series A is entitled to a non-cumulative dividend
         of 6% per annum if and when declared by the Board of Directors. Series
         A has no liquidation preference. See Note (2) - Private Placements
         regarding the Company's Series B and Series C Preferred Stock.

Note 5 - Accounting Change:

         At December 31, 2005, the Company has two stock-based employee
         compensation plans, which are described more fully in Note 6. Prior to
         October 1, 2005, the Company accounted for those plans under the
         recognition and measurement provisions of APB Opinion No. 25,
         Accounting for Stock Issued to Employees, and related Interpretations,
         as permitted by FASB Statement No. 123, Accounting for Stock-Based
         Compensation. No stock-based employee compensation cost was recognized
         in the Statement of Operations for the year ended September 30, 2005,
         as all options granted under those plans had an exercise price equal to
         the market value of the underlying common stock on the date of grant.
         Effective October 1, 2005, the Company adopted the fair value
         recognition provisions of FASB Statement No. 123(R), Share-Based
         Payment, using the modified-prospective-transition method. Under that
         transition method, compensation cost recognized after the effective
         date includes: (a) compensation cost for all share-based



                                       10
<PAGE>


                       Interactive Systems Worldwide Inc.
                   Notes To Consolidated Financial Statements
                                   (Unaudited)


Note 5 - Accounting Change (continued):

         payments granted prior to, but not yet vested as of October 1, 2005,
         based on the grant date fair value estimated in accordance with
         original provisions of Statement 123, and (b) compensation cost for all
         share-based payments granted subsequent to October 1, 2005, based on
         the grant date fair value estimated in accordance with the provisions
         of Statement 123(R) and (c) compensation costs for share-based awards
         modified, repurchased or cancelled after such date. Results for prior
         periods have not been restated. Stock-based employee compensation costs
         charged to operations during the quarter ended December 31, 2005
         amounted to $44,000.

         As a result of adopting Statement 123(R) on October 1, 2005, the
         Company's net loss and basic and diluted net loss per share for the
         quarter ended December 31, 2005, is $131,000 and $0.01 lower than if it
         had continued to account for share-based compensation under Opinion 25.
         This results from a change in the method of measurement of compensation
         cost under Statement 123(R) arising from a modification which extended
         the life of options held by an officer (see Note 6).

         Had the Company determined compensation cost based on the fair value at
         the grant date consistent with the provisions of SFAS No. 123, the
         Company's net loss and net loss per share for the three months ended
         December 31, 2004 would have been increased to the pro forma amounts
         indicated below (amounts in thousands):

                                                                        2004
                                                                      ---------
         Net loss applicable to common
           shareholders, as reported                                  $  (2,063)

         Deduct: Total stock-based employee compensation
           expense determined under fair value based method                 (28)
                                                                      ----------

         Pro forma net loss applicable
           to common shareholders                                     $  (2,091)
                                                                      ==========

         Net loss per share applicable to
           common shareholders - basic
           and diluted, as reported                                   $   (0.21)
                                                                      ==========

         Net loss per share applicable to
          common shareholders - basic
          and diluted, pro forma                                      $   (0.22)
                                                                      ==========



                                       11
<PAGE>

                       Interactive Systems Worldwide Inc.
                   Notes To Consolidated Financial Statements
                                   (Unaudited)

Note 5 - Accounting Change (continued):

         The fair value of the stock options granted is estimated at grant date
         using the Black-Scholes option pricing model with the following
         weighted average assumptions for Fiscal 2006 and 2005, respectively:
         expected dividend yield 0.0% and 0.0%, risk free interest rate of 4.14%
         and 3.91%, expected volatility of 69% and 69% and an expected life of
         1.5 years (see Note 6 relating to modification) and 7 years. The
         weighted average fair value of options granted in Fiscal 2006 and 2005
         was $1.99 and $2.23, respectively. Expected volatilities are based on
         historical volatility of the Company's stock price. The Company uses
         historical data to estimate option exercise and employee termination
         within the valuation model. The risk-free rate for periods within the
         contractual life of the option is based on the U.S. Treasury yield
         curve in effect at the time of grant.

         The Company accounts for equity awards issued as compensation to
         non-employees at fair value as measured on the date that performance is
         complete. During the quarter ended December 31, 2005, the Company
         recognized compensation expense of $3,000 which was charged to general
         and administrative expense in relation to certain options which were
         granted to a consultant.

Note 6 -Stock Options:

         In May 1995, the Board of Directors adopted and the stockholders
         approved the 1995 Stock Option Plan (the "1995 Plan"). The 1995 Plan
         provides for the grant of incentive stock options ("ISOs") and
         nonqualified stock options ("NQSOs"). On May 24, 2005, the term of the
         1995 Plan expired and thus, no additional options may be granted under
         this plan. In October 1996, the Board of Directors adopted and the
         stockholders approved the 1996 Stock Option Plan (the "1996 Plan"). The
         1996 Plan, as amended, is substantially similar to the 1995 Plan,
         except that there are 1,500,000 shares of Common Stock authorized and
         available for issuance pursuant to options that may be granted
         thereunder. The 1996 Plan is administered by the Stock Option
         Committee.

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



                                       12
<PAGE>

                       Interactive Systems Worldwide Inc.
                   Notes To Consolidated Financial Statements
                                   (Unaudited)

Note 6 - Stock Options (continued):

         Activity related to the 1995 and 1996 Plans for the quarter ended
December 31, 2005 is as follows:

<TABLE>
<CAPTION>


                                                                        Weighted
                                                         Weighted       Average
                                                         Average        Remaining      Aggregate
                                                         Exercise      Contractual     Intrinsic
Options                                     Shares         Price           Term          Value
-------                                   ---------      --------      -----------     ---------
<S>                                       <C>            <C>            <C>            <C>
Outstanding at October 1, 2005            1,166,480       $1.45
Granted                                      90,691        0.70
Exercised                                        --
Forfeited or expired                       (156,691)       1.67
                                          ---------
Outstanding at December 31, 2005          1,100,480        1.36           3.8          $175,000
                                          =========        ====           ===          ========
Vested or expected to vest                1,100,480        1.36           3.8          $175,000
                                          =========        ====           ===          ========
Exercisable at December 31, 2005            878,789        1.17           3.3          $     --
                                            =======        ====           ===          ========

</TABLE>

         As of December 31, 2005, there was $176,000 of total unrecognized
         compensation cost related to nonvested options granted under the Plans.
         That cost is expected to be recognized over a weighted-average period
         of 2 years. During the quarter ended December 31, 2005, the Company
         effectively extended the contractual life of 90,691 fully vested share
         options held by an officer by canceling existing options and replacing
         them with new options. As a result of that modification, the Company
         recognized additional compensation expense of $4,000 for the quarter
         ended December 31, 2005, measured as the excess of the fair value of
         the new options over the fair value of the cancelled options as of the
         cancellation date.



                                       13
<PAGE>

                       Interactive Systems Worldwide Inc.
                   Notes To Consolidated Financial Statements
                                   (Unaudited)

Note 7 - Basic and Diluted Net Loss per Share:

         Basic and diluted net loss per common share is presented in accordance
         with SFAS 128, "Earnings Per Share". Basic net loss per common share is
         computed by dividing net loss increased by preferred stock dividends by
         the weighted average number of common shares outstanding during the
         applicable reporting periods. Diluted net loss per share reflects the
         potential dilution that would occur if convertible debentures and
         preferred stock were converted and outstanding options and warrants
         were exercised and Common Stock was issued utilizing the treasury stock
         method.

         The Company's computation of dilutive net loss per share for the three
         months ended December 31, 2005 and 2004 does not assume any exercise of
         options or warrants to purchase 2,716,304 and 2,625,878 common shares,
         respectively, or the conversion of debentures or preferred stock to
         acquire 1,098,508 and 1,379,309 common shares, respectively, as their
         effect is antidilutive.

Note 8 - Concentration of revenues:

         Revenues from Interactive Sports Limited, a wholly-owned subsidiary of
         Sportingbet Plc, represented approximately 83% of revenues in each of
         the three months ended December 31, 2005 and 2004, respectively. The
         Company has been operating under an interim agreement with Interactive
         Sports Limited, a wholly-owned subsidiary of Sportingbet Plc since
         August 2003. The Company is currently in discussions with Sportingbet
         regarding providing an integrated betting solution to be offered on
         Sportingbet's next generation back end software. The interim agreement
         may be terminated and there can be no assurance that the current
         discussions will lead to a new agreement. The Company expects a
         significant portion of its future revenues to continue to be generated
         by a limited number of bookmakers. The loss of any of these bookmakers
         or any substantial reduction in betting activity by any of their
         customers could materially and adversely affect the Company's operating
         results.

Note 9 - Contingency:

         In October 2002, GIG was issued a Certificate of Registration for value
         added tax ("VAT") by HM Customs and Excise ("Customs"), with an
         effective date of May 2001, which required it to charge VAT on its
         sales and allowed it to recover VAT on its eligible business costs. In
         November 2002, GIG filed a tax return for a refund of $1,073,000 due to
         the overpayment of VAT taxes which refund was received in January 2003.
         Customs is currently making inquiries regarding the VAT status of GIG.
         In November 2005, Customs issued a "protective" VAT assessment against
         GIG for the VAT refunded to



                                       14
<PAGE>

                       Interactive Systems Worldwide Inc.
                   Notes To Consolidated Financial Statements
                                   (Unaudited)


Note 9 - Contingency (continued):

         GIG plus interest. If Customs had not taken any action, the return
         would have moved outside the three-year period which Customs could
         issue an assessment. Customs has not reached a decision on the matter.
         The Company believes that GIG is entitled to be registered for VAT.
         However, Customs may determine that GIG is not entitled to be
         registered for VAT, and if so, GIG may be required to repay amounts
         reclaimed on GIG's VAT returns plus interest.





                                       15
<PAGE>

Item 2. Management`s Discussion and Analysis or Plan of Operations

DESCRIPTION OF BUSINESS

          Interactive Systems Worldwide Inc. ("ISWI") has designed, developed
and patented an interactive hardware and proprietary software system (the
"SportXction(R) System") that enables users to wager at fixed prices during the
course of a sporting event, such as soccer, football, baseball, basketball,
golf, tennis, rugby, cricket and snooker, among many others. The SportXction(R)
System accepts bets not only on the outcome of a sporting event, but also on
discrete parts of the event and on specific game situations. These include such
wagers as will a team make a first down, which player will score next, will a
batter get on base or will a penalty shot be successful. The SportXction(R)
System is unique in that it permits betting continuously while the game is in
progress, or between game events, such as downs, pitches, changes in ball
possession and similar situations, permitting more frequent placing and cashing
of wagers.

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

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

         During the three months ended December 31, 2005 ("Fiscal 2006") and
2004 ("Fiscal 2005"), the Company's revenue consisted of license fees and
service charges from providing interactive gaming services using the
SportXction(R) System to business partners such as licensed bookmakers and
others located in the United Kingdom and Gibraltar.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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


                                       16
<PAGE>

         The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86 "Computer Software
To Be Sold, Leased, or Otherwise Marketed". Such costs are expensed prior to a
product or product enhancement's achievement of technological feasibility and
thereafter are capitalized. The Company defines a product enhancement as an
improvement to an existing product that is intended to extend the life or
improve significantly the marketability of the original product. In order to
meet the requirements for capitalization, a product enhancement should involve
considerable development resources, requires a product design and may require a
redesign of all or part of the existing product. During Fiscal 2006 and 2005,
the Company did not capitalize any software development costs. Amortization
expense, which has been computed on a straight-line basis and an estimated
economic life of three years, amounted to $69,000 and $79,000 during the three
months ended December 31, 2005 and 2004, respectively.

         At each balance sheet date, the Company compares unamortized
capitalized software costs to net realizable value on a project-by-project basis
and writes off any excess of the unamortized cost over the net realizable value.
The net realizable value is the estimated future gross revenues for that product
or product enhancement reduced by the estimated future costs of completing and
disposing of that product or product enhancement, including the costs of
performing maintenance and support.

            On October 1, 2005, the Company adopted SFAS 123(R) and began
recognizing compensation expense for the fair value of employee stock options
over the applicable vesting period. The fair value of the stock options granted
is estimated at grant date using the Black-Scholes option pricing model. SFAS
123(R) applies to new awards and to awards modified, repurchased, or cancelled
after the required effective date, as well as to the unvested portion of awards
outstanding as of the adoption date. During the three months ended December 31,
2005, the Company recognized compensation expense of $42,000 which was charged
to general and administrative expense as a result of implementing SFAS 123(R).

         See Note 2 to the Company's Form 10-KSB for the year ended September
30, 2005 for a full discussion of the Company's critical accounting policies and
estimates.

FINANCIAL RESULTS

THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004

         Revenue for the three months ended December 31, 2005 was $30,000, as
compared to $23,000 during the same period in the prior year. The increase was
primarily because Fiscal 2006 included a full quarter's wagering activity from
the Spanish affiliate of Sportingbet, which was launched in November 2004. The
Company believes that its limited revenue growth has largely been attributable
to the current system configuration as a stand-alone product. The Company is
currently in advanced discussions with existing and new partners regarding
implementing a new system methodology (see "Integrated Offering" below). The
Company expects to enter into new or revised agreements with bookmakers and is
optimistic that this improved approach will result in increased revenues
following launch.



                                       17
<PAGE>

         Cost of revenue, research and development expense for the three months
ended December 31, 2005 was $437,000, as compared to $530,000 during the same
period in the prior year. The decrease in Fiscal 2006 was primarily due to lower
technical consulting costs.

         General and administrative expenses during the three months ended
December 31, 2005 were $781,000, as compared to $791,000 during the same period
in the prior year. The decrease was primarily due to lower travel expenses and a
severance accrual in Fiscal 2005, which did not recur, partially offset by
increased compensation expense of employee stock options due to the adoption of
Statement of Financial Accounting Standards No. 123(R).

         Interest expense during the three months ended December 31, 2005 was
$49,000, as compared to $213,000 during the same period in the prior year. This
non-cash expense has declined due to a decrease in the Company's outstanding
Debentures, which have been satisfied primarily through the issuance of shares
of Common Stock.

         In connection with the issuance of the Series B Preferred Stock in
November 2004, the Company recorded a dividend to Series B shareholders, which
was restated in the fourth quarter of Fiscal 2005 to $552,000, representing the
beneficial conversion feature resulting from the difference between the
effective conversion price and the quoted market price of the Company's Common
Stock at the date of issuance. This preferred stock dividend did not require the
payment of cash or the issuance of additional shares of Common Stock. Preferred
stock dividend in Fiscal 2006 represents dividends on the Series C Preferred
Stock due on January 1, 2006 which were satisfied through the issuance of shares
of Common Stock.

         Other income in Fiscal 2006 represents the change in value of the
Company's liability associated with the registration rights agreements entered
in connection with its private placements.

         Net loss applicable to common shareholders and net loss per share
applicable to common shareholders (basic and diluted) for the three months ended
December 31, 2005 was $1,303,000 and $0.11, respectively, as compared to
$2,063,000 and $0.21, respectively, during the same period in Fiscal 2005. The
decrease in the loss in Fiscal 2006 is primarily the result of lower preferred
stock dividend and interest expense (as described above).

LIQUIDITY AND CAPITAL RESOURCES

         As of December 31, 2005, the Company had liquid resources totaling
$5,558,000. These include cash and cash equivalents in the amount of $4,363,000
and investments in the amount of $1,195,000. Investments are limited to
investment grade marketable securities with maturities of less than 12 months.

         The Company's operations currently do not generate positive cash flow
and are not expected to do so during the fiscal year ending September 30, 2006.
The Company anticipates that its existing resources will be adequate to fund its
capital and operating requirements for the next 12 months based upon the
Company's current business plan and longer, subject to the revenues generated by
the SportXction(R) System.



                                       18
<PAGE>

         The Company is currently in discussions with several additional
bookmakers and other companies to provide services. There is no assurance
however, that these negotiations will result in signed agreements, or that the
System will be accepted by potential users. If these agreements do not produce
revenue as planned, it may be necessary for the Company to seek additional
funding, or reduce its expenses, or both.

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

         In November 2003, the Company issued $2.6 million of 7.5% Convertible
Debentures (the "Debentures"). The Debentures are repayable in 24 equal monthly
installments of $108,333 which began in May 2004 with interest payable
quarterly. The Company has the right to repay the interest and the principal in
cash or, under certain circumstances, shares of its Common Stock. The Company
also has the right, under certain circumstances, to force conversion of all or a
portion of the Debentures into Common Stock. The Debentures contain certain
provisions and restrictions, which if violated, could result in the full
principal amount together with interest and other amounts becoming immediately
due and payable in cash. To date, the Company has made all interest payments
with respect of the Debentures in shares of the Company's Common Stock. The
Company made its principal repayment in May 2004 in cash, elected to defer its
monthly repayment in June 2004 as permitted under the Debentures and made the
remainder of its principal repayments to date in shares of the Company's Common
Stock. During the year ended September 30, 2005, investors converted certain
Debentures into shares of the Company's Common Stock. Subsequent to these
conversions, the monthly principal repayments were reduced to $62,500.

         On November 12, 2004, the Company entered into a financing agreement
relating to a $3.0 million private placement with institutional investors
consisting of 3,000 shares of the Company's newly issued Series B Convertible
Preferred Stock ("Series B"). Series B has a stated value of $1,000 per share,
is non-voting and is initially convertible into the Company's Common Stock at
$3.07 per share, subject to adjustment. The investors also received warrants
that expire in November 2009 to purchase 513,172 shares of Common Stock at $3.36
per share, subject to adjustment. Net proceeds from the financing after costs
and expenses were approximately $2.6 million.

         The Series B was initially convertible into an aggregate of 977,470
shares of Common Stock. Holders of Series B are entitled to receive a cumulative
6% annual dividend, payable quarterly in cash or, subject to certain conditions,
shares of Common Stock at the Company's option. During the three months ended
December 31, 2005, holders of the Series B converted their remaining 164 shares
of Series B into 53,420 shares of Common Stock and there are currently no
remaining Series B outstanding. A placement agent in this transaction received a
cash fee of $180,000 and warrants to purchase 102,740 shares of the Company's
Common Stock expiring in May 2010 which are exercisable at $3.50 per share.



                                       19
<PAGE>

         On August 3, 2005, the Company entered into a financing agreement
relating to a $4.0 million private placement with institutional investors
consisting of 4,000 shares of the Company's newly issued Series C Convertible
Preferred Stock ("Series C"). Series C has a stated value of $1,000 per share is
non-voting and is initially convertible into the Company's Common Stock at $3.75
per share subject to adjustment. The investors also received warrants that
expire in August 2010 to purchase 557,103 shares of Common Stock at $3.95 per
share, subject to adjustment. Net proceeds from the financing after costs and
expenses were approximately $3.7 million.

         The Series C is initially convertible into an aggregate of 1,066,667
shares of Common Stock. In connection with the issuance of the Series C, the
Company recorded a dividend to Series C shareholders of $777,000 representing
the beneficial conversion feature resulting from the difference between the
effective conversion price and the quoted market price of the Company's Common
Stock at the date of issuance. In addition, holders of Series C are entitled to
receive a cumulative 6% annual dividend, payable quarterly in cash or, subject
to certain conditions, shares of Common Stock at the Company's option. As of
December 31, 2005, unpaid cumulative dividends on the Series C amounted to
$60,000. A placement agent in this transaction received a cash fee of $120,000
and warrants to purchase 65,753 shares of the Company's Common Stock expiring in
August 2010 which are exercisable at $4.38 per share.

         Under the terms of the private placements, and subject to certain
conditions, the Company has the right to force conversion of all or a portion of
the Series C into Common Stock. The Series C also provides that if certain
events (all of which are within the control of the Company) occur such holder
would have the right to require the Company to redeem the preferred stock for
cash. For certain other events, each holder would have the right to require the
Company to redeem the preferred stock for the Company's Common Stock or increase
the dividend of the preferred stock to 12% per annum. In addition, the Series C
and investor warrants are subject to certain anti-dilution protection. The
Series C contains certain negative covenants including limitations with respect
to borrowings and prohibition on payment by the Company of dividends and
distributions on Common Stock.

OFF BALANCE SHEET ARRANGEMENTS

         None

SYSTEM DEPLOYMENT STATUS

         INTERACTIVE TELEVISION

         On November 28, 2005, the Company announced that GIG had signed an
agreement with SkyBet, a wholly owned subsidiary of British Sky Broadcasting
Limited ("Sky"). Sky is the U.K.'s largest supplier of digital TV services with
approximately 8.0 million active households throughout the U.K. and Ireland. Sky
is also one of the U.K.'s leading sports rights holders and is at the forefront
of developing innovative interactive applications. The agreement calls for a
feasibility study, in order to evaluate the proposed integrated solution, to
estimate the integration costs, to determine the resources required for
implementation, as well as to review other aspects of the proposed new service.
The proposed solution envisions GIG managing certain in-run (i.e.
"play-by-play") wagering markets that would be offered along with other more
traditional sports wagering markets that are already currently managed by SkyBet
across all SkyBet's delivery platforms, including interactive television
("iTV"), Internet and telephone/mobile. The feasibility study does not obligate
either party to implement the proposed integrated solution.


                                       20
<PAGE>

         The Company had previously announced agreements between GIG and SkyBet
to conduct a one-year trial of the iTV version of the SportXction(R) System,
with either party having the right to terminate that agreement six months after
launch. The product, branded "Winplay", was launched on February 23, 2005. The
stand-alone Winplay product was discontinued in November 2005 and the trial
agreement terminated on January 1, 2006. If the feasibility study leads to a
positive conclusion, the Company expects to enter into a new agreement to
facilitate the envisioned integrated implementation and operation.

         INTERNET

         The Company has several non-exclusive agreements with bookmakers in the
UK and Gibraltar, which provide the Company with a share of the wagering revenue
generated by its SportXction(R) System. Under these agreements, GIG furnishes
the technology and operates the system, and the partner is responsible for
marketing the product, first level customer support and for processing customer
financial transactions. The SportXction(R) System is currently in operation with
the following partners:

<TABLE>

         <S>                                <C>
         PARTNER                            WEBSITES
         Interactive Sports Limited,        miapuesta.com,
         (subsidiary of Sportingbet plc)    bg.sportingbet.com, hr.sportingbet.com,
                                            sl.sportingbet.com, deltasportbet

         Littlewoods BetDirect              betdirect.net
         Victor Chandler UK Ltd             victorchandler.co.uk, vcbet.co.uk
         Victor Chandler International      victorchandler.com, vcbet.com
         Ukbetting plc                      ukbetting.com, totalbet.com
         ToteCredit Limited                 totesport.com

</TABLE>

         Revenues from Interactive Sports Limited, a wholly-owned subsidiary of
Sportingbet Plc, represented approximately 83% of revenues in each of the three
months ended December 31, 2005 and 2004, respectively. The Company has been
operating under an interim agreement with Interactive Sports Limited, a
wholly-owned subsidiary of Sportingbet Plc since August 2003. The Company is
currently in discussions with Sportingbet regarding providing an integrated
betting solution to be offered on Sportingbet's next generation back end
software. The interim agreement may be terminated and there can be no assurance
that the current discussions will lead to a new agreement.



                                       21
<PAGE>

         INTEGRATED OFFERING

         The current system configuration is a stand-alone product. The Company
has a technological solution in which its enhanced product is fully integrated
into our partner's existing betting system. This solution will provide the user
with a significantly improved and expanded offering of betting propositions to
keep him engaged in the sporting event. The Company's play-by-play betting
propositions are placed seamlessly within our business partners' betting
offerings, thus maintaining a consistent "look and feel". The customer can then
place wagers from its existing account in the same manner as all other bets made
with that partner. Because of the integrated nature of this new offering, the
Company expects to benefit from the partner's advertising, marketing and
promotion campaigns, while the partner need not commit special resources to
marketing the Company's product alone. The Company is in discussions with
existing and new partners regarding implementing this new system methodology.

         MOBILE PHONE

         The Company currently operates the SportXction(R) System to ukbetting's
wireless application protocol ("WAP") enabled users through one of the world's
largest mobile operators. To date, this product has not been promoted and, as a
result, has generated an insignificant amount of wagering revenues.

         On November 1, 2005, the Company announced that it is has extended its
agreement with Littlewoods Betdirect. Under the agreement addendum, the
SportXction(R) System will be offered over mobile phones and personal digital
assistant devices using WAP and Java technologies. The Company expects to launch
this product during 2006.

         NEW PRODUCTS

         The Company is also designing, developing and marketing several new
products. These include a fixed-odds/pari-mutuel hybrid racing product, a
fantasy version of the Company's play-by-play prediction product and a poker
product for betting on poker players continually during live play. The Company
is in discussions with potential partners regarding these initiatives.




                                       22
<PAGE>


SAFE HARBOR STATEMENT

         Except for the historical information contained herein, this Quarterly
Report on Form 10-QSB contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Such forward-looking statements
include, but are not limited to: whether the Company's available resources will
be adequate to fund its requirements for the next 12 months and whether the
Company will be able to meet its cash requirements; whether the Company will
need to raise additional financing, and if so the terms on which it can be
raised and the dilutive impact on existing shareholders; whether the outstanding
Debentures will be repaid in cash or stock, the number of shares of stock that
will be required to repay principal and interest on such Debentures and
dividends on the Series C Preferred Stock and dilutive impact to existing
shareholders; whether the Company's revenue will increase in future quarters;
whether the existing interim agreement with Sportingbet will be cancelled, and
whether the Company will enter into a new agreement with Sportingbet; whether
the feasibility study with Skybet leads to a positive conclusion and whether the
Company will enter into a new agreement with SkyBet; whether the Company will be
able to enter into agreements regarding an integrated offering with new or
existing partners, and if so whether it can be launched in a timely manner or at
all, and whether the integrated offering will result in increased revenues; how
long the Company will continue to incur significant losses and negative cash
flow; whether the Company or its Internet, interactive television, mobile phone
and betting shop partners will gain a sufficient number of customers to generate
meaningful revenue; and whether the Company will launch a mobile phone product
with Littlewoods Betdirect during 2006. Investors are cautioned that
forward-looking statements are inherently uncertain. Actual performance and
results of operations may differ materially from those projected or suggested in
the forward-looking statements due to certain risks and uncertainties,
including, without limitation, the ability of the Company and its partners to
attract adequate numbers of players to its wagering system and the ability of
the Company to develop and market other opportunities for its products.
Additional information concerning certain risks or uncertainties that would
cause actual results to differ materially from those projected or suggested in
the forward-looking statements is contained in the Company's filings with the
Securities and Exchange Commission, including those risks and uncertainties
discussed in its Form 10-KSB for the fiscal year ended September 30, 2005. The
forward-looking statements contained herein represent the Company's judgment as
of the date of this report, and the Company cautions the reader not to place
undue reliance on such matters.



                                       23
<PAGE>


Item 3.  Controls and Procedures

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

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

PART II - OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

         On October 4, 2005, the Company issued 3,341 shares of Common Stock to
the holders of its outstanding privately placed Debentures to satisfy the
interest due thereunder. On October 4 and October 25, 2005, the Company issued
2,201 and 200 shares of Common Stock, respectively, to the holder of its then
outstanding privately placed Series B Preferred Stock to satisfy the dividend
due thereunder. On October 4, 2005, the Company issued 17,534 shares of Common
Stock to the holders of its outstanding privately placed Series C Preferred
Stock to satisfy the dividend due thereunder. Each of these issuances were made
in reliance on the exemption provided by Section 4(2) of the Securities Act of
1933, as amended (the "Act"), for transactions by an issuer not involving any
public offering.

         On October 4, November 3 and December 1, 2005, the Company issued
28,838, 25,821 and 23,865 shares of Common Stock, respectively, to the holders
of its outstanding privately placed Debentures to satisfy the principal payments
due thereunder. On October 27, 2005, the Company issued 53,420 shares of Common
Stock upon conversion of the Series B Preferred Stock by the holder thereof.
Each of these issuances were made in reliance on the exemption provided by
Section 3(a)(9) of the Act for securities exchanged by the issuer with its
existing security holders exclusively.



                                       24
<PAGE>



Item 6.  Exhibits

  NUMBER        DESCRIPTION
  ------        -----------
  31.01         Certification of Bernard Albanese, Chief Executive Officer of
                Interactive Systems Worldwide Inc., pursuant to Section 302 of
                the Sarbanes-Oxley Act of 2002.
  31.02         Certification of James McDade, Chief Financial Officer of
                Interactive Systems Worldwide Inc., pursuant to Section 302 of
                the Sarbanes-Oxley Act of 2002.
  32.01         Certification of Bernard Albanese, Chief Executive Officer of
                Interactive Systems Worldwide Inc., pursuant to Section 906 of
                the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of
                Section 1350, Chapter 63 of Title 18, United States Code).
  32.02         Certification of James McDade, Chief Financial Officer of
                Interactive Systems Worldwide Inc., pursuant to Section 906
                of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b)
                of Section 1350, Chapter 63 of Title 18, United States Code).



                                       25
<PAGE>

                                   SIGNATURES

         In accordance with the requirements 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.


Dated: February 14, 2006                    By: /s/ Bernard Albanese
                                                ------------------------------
                                                Bernard Albanese
                                                Chief Executive Officer
                                                (Principal Executive Officer)



Dated: February 14, 2006                    By: /s/ James McDade
                                                ----------------
                                                James McDade, Chief Financial
                                                Officer
                                                (Principal Financial Officer)




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