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 June 30, 2007




o
              
              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
                incorporation or organization)
            (IRS
                Employer Identification
                No.)


2
      Andrews
      Drive, West Paterson, NJ 07424


(Address
      of principal executive offices)





(973)
      256-8181


(Issuer's
      telephone number, including area code)





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
      subjectto such filing requirement for the past 90 days.  YesxNo
o





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





There
      were 12,265,715 shares of Common Stock outstanding at August 10,
      2007.





Transitional
      Small Business Disclosure Format (Check one): YesoNox







Interactive
      Systems Worldwide Inc.


June
      30,
      2007


FORM
      10-QSB




Index
            PagePart I:Financial
              InformationItem
              1.Financial
              Statements,Condensed
                Consolidated Balance Sheets at June 30, 2007 (Unaudited)and
                September 30, 2006
            2Condensed
                Consolidated Statements of Operations for the Three and NineMonths
                Ended June 30, 2007 and 2006 (Unaudited)
            3Condensed
                Consolidated Statement of Stockholders’ Equity for theNine
                Months Ended June 30, 2007 (Unaudited)
            4Condensed
                Consolidated Statements of Cash Flows for the Nine MonthsEnded
                June 30, 2007 and 2006 (Unaudited)
            5Notes
              to Condensed Consolidated Financial Statements (Unaudited)
            6-12Item
                2.Management’s
                Discussion and Analysis orPlan
                of Operations
            13-21Item
              3.Controls
              and Procedures
            22Part II:Other
              Information
            22Item
              2.Unregistered
              Sales of Equity Securities and Use of Proceeds
            22Item
              3.Defaults
              Upon Senior Securities
            22Item
              6.Exhibits
            23Signature
            24









Part
      I:
      Financial Information





Item
      1.
      Financial Statements





Interactive
      Systems Worldwide Inc.


Condensed
      Consolidated Balance Sheets





(Amounts
      in thousands except share data)


June
                      30,
                  
                  September
                      30,2007
                  
                  2006(Unaudited)
                  
                  Note
                      1Current
                      assets:Cash
                      and cash equivalents
                  
                  $
                  494
                  
                  $
                  1,207Accounts
                      receivable
                  
                  
                  157
                  
                  
                  46Investments
                      in marketable securities
                  
                  
                  --
                  
                  
                  975Other
                      receivables
                  
                  
                  51
                  
                  
                  57Prepaid
                      expenses and other current assets
                  
                  
                  74
                  
                  
                  138Total
                      current assets
                  
                  
                  776
                  
                  
                  2,423Property
                      and equipment, net
                  
                  
                  5
                  
                  
                  16Capitalized
                      software, net of accumulated
                    amortization
                      of $1,070 and $957, respectively
                  
                  
                  418
                  
                  
                  428Other
                      assets
                  
                  
                  50
                  
                  
                  305Total
                      assets
                  
                  $
                  1,249
                  
                  $
                  3,172Liabilities
                      and Stockholders' EquityCurrent
                      liabilities:Accounts
                      payable
                  
                  $
                  94
                  
                  $
                  205Dividend
                      payable on preferred stock
                  
                  
                  56
                  
                  
                  --Accrued
                      expenses and other
                  
                  
                  548
                  
                  
                  794Total
                      current liabilities
                  
                  
                  698
                  
                  
                  999Stockholders'
                      Equity:Preferred
                      stock, par value $.001 per share; 2,000,000 shares authorized,
                      60,000
                      Series A outstanding 3,742 and 4,000 Series C outstanding,
                      respectively,
                      with a liquidation preference of $3,742 and $4,000,
                      respectively
                  
                  
                  --
                  
                  
                  --Common
                      stock par value $.001 per share; 20,000,000 shares authorized;
                      12,507,715
                      and 12,296,173 issued, respectively
                  
                  
                  12
                  
                  
                  12Additional
                      paid-in capital
                  
                  
                  28,335
                  
                  
                  28,142Treasury
                      stock, at cost, 242,000 common shares
                  
                  
                  (441
                  )
                  
                  (441
                  )Accumulated
                      other comprehensive income
                  
                  
                  44
                  
                  
                  34Accumulated
                      deficit
                  
                  
                  (27,399
                  )
                  
                  (25,574
                  )Total
                      stockholders' equity
                  
                  
                  551
                  
                  
                  2,173Total
                      liabilities and stockholders' equity
                  
                  $
                  1,249
                  
                  $
                  3,172


See
      accompanying notes to condensed consolidated financial
      statements


2


Interactive
      Systems Worldwide Inc.


Condensed
      Consolidated Statements of Operations


(Unaudited)





(Amounts
      in thousands except share and per share data)


Three
                    Months Ended June 30,
                
                Nine
                    Months Ended June 30,2007
                
                2006
                
                2007
                
                2006Revenues
                
                $
                167
                
                $
                20
                
                $
                291
                
                $
                84Costs
                    and expenses:Cost
                    of revenues
                
                
                138
                
                
                144
                
                
                405
                
                
                442Research
                    and development expense
                
                
                85
                
                
                244
                
                
                329
                
                
                743General
                    and administrative expense
                
                
                250
                
                
                806
                
                
                1,718
                
                
                2,501473
                
                
                1,194
                
                
                2,452
                
                
                3,686Operating
                    loss
                
                
                (306
                )
                
                (1,174
                )
                
                (2,161
                )
                
                (3,602
                )Interest
                    income (expense), net
                
                
                2
                
                
                25
                
                
                51
                
                
                (35
                )Other
                    income
                
                
                370
                
                
                1
                
                
                460
                
                
                3Net
                    income (loss)
                
                
                66
                
                
                (1,148
                )
                
                (1,650
                )
                
                (3,634
                )Preferred
                    stock dividend
                
                
                (56
                )
                
                (59
                )
                
                (181
                )
                
                (197
                )Net
                    income (loss) applicable to common shareholders
                
                $
                10
                
                $
                (1,207
                )
                $
                (1,831
                )
                $
                (3,831
                )Net
                    income (loss) per share applicable to common
                  shareholders
                    - basic and diluted
                
                $
                0.00
                
                $
                (0.10
                )
                $
                (0.15
                )
                $
                (0.33
                )Weighted
                    average basic and diluted
                  Common
                    shares outstanding
                
                
                12,257,366
                
                
                11,904,805
                
                
                12,192,452
                
                
                11,786,768






See
      accompanying notes to condensed consolidated financial statements




3


Interactive
      Systems Worldwide Inc.


Condensed
      Consolidated Statement of Stockholders’ Equity


For
      the
      Nine Months Ended June 30, 2007


(Unaudited)





(Amounts
      in thousands except number of shares)


Preferred
                    stock
                
                Common
                    stock
                
                Additional
                  Paid-In
                
                Treasury
                
                Accumulated
                  Other
                  Comprehensive
                
                AccumulatedShares
                
                Amount
                
                Shares
                
                Amount
                
                Capital
                
                Stock
                
                Income
                
                Deficit
                
                TotalBalance
                    at
                  September
                    30, 2006
                
                
                64,000
                
                $
                --
                
                
                12,296,173
                
                $
                12
                
                $
                28,142
                
                $
                (441
                )
                $
                34
                
                $
                (25,574
                )
                $
                2,173Cumulative
                    effect of change inaccounting
                    for registrationrights
                    liability
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                27
                
                
                27Dividends
                    on Series C
                  Prefered
                    Stock
                  paid
                    in common stock
                
                
                --
                
                
                --
                
                
                131,746
                
                
                --
                
                
                202
                
                
                --
                
                
                --
                
                
                (202
                )
                
                --Dividends
                    on Series C
                  Preferred
                    Stock payable in cash
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (56
                )
                
                
                
                
                
                
                
                
                
                
                (56
                )Issuance
                    of common stock
                  through
                    conversion of
                  Series
                    C Preferred Stock
                
                
                (258
                )
                
                --
                
                
                68,800
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --Issuance
                    of common stock to
                  consultant
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                42
                
                
                --
                
                
                --
                
                
                --
                
                
                42Compensation
                    cost associated
                  with
                    stock options and warrants
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                5
                
                
                --
                
                
                --
                
                
                --
                
                
                5Net
                    share settlement on cashlessexercise
                    of stock options
                
                
                --
                
                
                --
                
                
                10,996
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --Net
                    loss
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                (1,650
                )
                
                (1,650
                )Foreign
                    currency
                  translation
                    income
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                10
                
                
                --
                
                
                10Comprehensive
                    loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (1,640
                )Balance
                    at
                  June
                    30, 2007
                
                
                63,742
                
                $
                --
                
                
                12,507,715
                
                $
                12
                
                $
                28,335
                
                $
                (441
                )
                $
                44
                
                $
                (27,399
                )
                $
                551




See
      accompanying notes to condensed consolidated financial
      statements


4


Interactive
      Systems Worldwide Inc.


Condensed
      Consolidated Statements of Cash Flows


(Unaudited)


(Amounts
      in thousands)


Nine
                Months EndedJune
                30,2007
            
            2006Cash
                flows from operating activities:Net
                loss
            
            $
            (1,650
            )
            $
            (3,634
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
                and amortization
            
            
            129
            
            
            243Non-cash
                interest expense
            
            
            --
            
            
            145Non-cash
                common stock, option and warrant charges
            
            
            47
            
            
            160Non-cash
                amortization of debt issuance costs
            
            
            --
            
            
            38Non-cash
                other income
            
            
            --
            
            
            (3
            )Changes
                in assets and liabilities:Accounts
                receivable
            
            
            (111
            )
            
            32Other
                receivables
            
            
            6
            
            
            (18
            )Prepaid
                expenses and other current assets
            
            
            64
            
            
            (40
            )Other
                assets
            
            
            255
            
            
            (3
            )Accounts
                payable
            
            
            (111
            )
            
            35Accrued
                expenses
            
            
            (246
            )
            
            (419
            )Netcash used in operating activities
            
            
            (1,617
            )
            
            (3,464
            )Cash
                flows from investing activities:Purchase
                of investments
            
            
            --
            
            
            (2,562
            )Proceeds
                from sales of investments
            
            
            975
            
            
            1,777Purchase
                of property and equipment
            
            
            (9
            )
            
            (5
            )Proceeds
                from sale of property and equipment
            
            
            2
            
            
            --Capitalized
                software
            
            
            (103
            )
            
            --Net
                cash provided by (used in) investing activities
            
            
            865
            
            
            (790
            )Cash
                flows from financing activities:Proceeds
                from issuance of common stock
            
            
            --
            
            
            44Net
                cash provided by financing activities
            
            
            --
            
            
            44Net
                decrease in cash and cash equivalents
            
            
            (752
            )
            
            (4,210
            )Effect
                of exchange rate on cash
            
            
            39
            
            
            (9
            )Cash
                and cash equivalents, beginning of period
            
            
            1,207
            
            
            5,655Cash
                and cash equivalents, end of period
            
            $
            494
            
            $
            1,436Non-cash
                investing and financing activity:Issuance
                of common stock in relation to principal payments on Debentures
            
            $
            --
            
            $
            333Issuance
                of common stock in relation to dividend payments
              on
                Series B and Series C Preferred Stock
            
            $
            202
            
            $
            188Liability
                for dividend payable in cash
            
            $
            56
            
            
            --





See
      accompanying notes to condensed consolidated financial statements





5




Interactive
      Systems Worldwide Inc.


Condensed
      Consolidated Statements of Cash Flows


(Unaudited)


(Amounts
      in thousands)


Note
      l
      - Basis of Presentation:





The
      information at June 30, 2007 and for the three and nine months ended June 30,
      2007 and 2006, 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 (“GIG”) (collectively the “Company”). All
      significant intercompany balances and transactions have been eliminated. Certain
      amounts in the prior years’ financial statements have been reclassified to
      conform to the current year presentation. These condensed consolidated financial
      statements should be read in conjunction with the audited financial statements
      for the year ended September 30, 2006 included in the Company’s Annual Report on
      Form 10-KSB filed with the SEC.




The
      Company's revenue during the three and nine months ended June 30, 2007 and
      2006
      consisted of license fees, technical assistance fees and service charges from
      agreements with companies located in the United Kingdom, Gibraltar and Mexico.
      Revenue consists primarily of license fees, technical assistance fees and
      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
      - Basis of Preparation:





The
      accompanying financial statements have been prepared assuming that the Company
      will continue as a going concern. The Company has incurred net losses and used
      cash in its operating activities during the three and nine months ended June
      30,
      2007 and the years ended September 30, 2006 and 2005. In addition, the Company
      requires additional financing to meet its forecasted cash requirements and
      continue operations beyond fiscal 2007. Management has developed and is
      attempting to implement a plan to address these issues and allow the Company
      to
      continue as a going concern beyond the fiscal year ending September 30, 2007.
      The plan includes (i) securing
      minimum monthly cash receipts from certain customers ,
      (ii) a program to reduce costs, (iii) seeking equity financing and (iv)
      pursuing other strategic transactions. There is no assurance, however, that
      the
      Company will be able to raise equity financing or execute a strategic
      transaction on commercially reasonable terms, if at all, or that the Company
      will be able to meet its future contractual obligations and continue as a going
      concern. These events and conditions raise substantial doubt about the Company’s
      ability to continue as a going concern. The financial statements do not include
      any adjustments relating to the recoverability and classification of recorded
      asset amounts or the amounts and classification of liabilities that might be
      necessary should the Company be unable to continue as a going concern.


6


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


Note
      2
      - Basis of Preparation (continued):





The
      Company’s ability to continue as a going concern is contingent upon obtaining
      adequate financing to meet its funding requirements and ultimately generating
      sufficient revenue and achieving profitability.





Note
      3
      - Private Placements:





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, including full
      ratchet antidilution protection in the event of the issuance of additional
      shares of Common Stock at a price below the conversion price. 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 (which the Company no longer satisfies because its Common
      Stock is no longer listed on NASDAQ), shares of Common Stock at the Company’s
      option. During the three months ended December 31, 2006, a holder of the Series
      C converted 258 shares of Series C into 68,800 shares of Common Stock and there
      are currently 3,742 remaining Series C outstanding. As of June 30, 2007, unpaid
      cumulative dividends on the Series C amounted to $56,000 and beginning July
      2,
      2007 are subject to a late fee at the rate of 12% per annum (which must be
      paid
      in cash). 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.






7


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


Note
      3
      - Private Placements (continued):





Under
      the
      terms of the private placement, 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 Series C for cash. Upon the occurrence of certain other
      events (including, without limitation, failure to be listed on the NASDAQ
      Capital Market for more than 10 consecutive trading days), each holder of Series
      C would have the right to require the Company to redeem the Series C (generally
      at 120% of the stated value thereof) for the Company’s Common Stock (at
      approximately 90% of the market value thereof), subject to an ownership
      limitation, or increase the dividend on the Series C to 12% per annum. On May
      18, 2007, as a result of failing to comply with NASDAQ’s shareholders’ equity
      requirement, the Company’s Common Stock was de-listed from the NASDAQ Capital
      Market. As of the date of this filing, the Company has not been notified of
      any
      election having been made by the Series C as to the exercise of either of their
      rights. If all holders of the Series C Preferred Stock elected to require the
      Company to redeem their Series C Preferred Stock for Common Stock at the
      above-described valuations, without giving consideration to the ownership
      limitation, the Company would not have sufficient authorized and unissued shares
      of Common Stock not already reserved for stock options and warrants to satisfy
      the redemption obligation. Upon failure to timely pay the redemption amount
      in
      shares of Common Stock, the Company would become obligated to pay interest
      thereon at a rate of 15% per annum, accruing daily until the redemption amount
      (plus all interest thereon) is paid in full.





As
      a
      result of the de-listing from NASDAQ, the holders of Series C currently have
      the
      right to require that, commencing with the July 2007 dividend payment, dividend
      payments be made in cash. The unpaid quarterly dividend (which accrued for
      the
      quarter ended June 30, 2007), amounting to $56,000, has been accrued as a
      liability in the accompanying balance sheet at June 30, 2007. The unpaid
      quarterly dividend has been accrued at 6% (rather than 12%) per annum because
      the holders of the Series C have not exercised either of their rights resulting
      from the NASDAQ de-listing. As of the date of this filing, the Company has
      not
      made the July dividend payment, which was due on July 2, 2007. Such dividend
      is
      subject to a 12% late fee to be paid in cash accruing from such payment date.




8


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


Note
      3
      - Private Placements (continued):





The
      Series C investor warrants and placement agent warrants are subject to certain
      anti-dilution protection similar to that applicable to the Series C. 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.





Registration
      rights agreements were entered into in connection with private placements which
      required the Company to file registration statements for the resale of the
      common shares issuable upon conversion of debentures and Series B Preferred
      Stock (all of which have been converted or repaid) and Series C Preferred Stock
      and upon the exercise of warrants issued in connection with the private
      placements 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 or 1.5%
      per
      month of the amounts invested by the investors until the failure is cured with
      no limitation on the maximum liquidated damages.





Registration
      statements were filed and declared effective within the specified periods with
      respect to the three private placements. See Note 5 - Accounting Change
      regarding a change in accounting principle associated with the liquidated
      damages provisions of these registration rights agreements.





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 3 - Private
      Placements regarding the Company’s Series C Preferred Stock.




9


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


Note
      5
      - Accounting Change:





As
      described in Note 3 - Private Placements, registration rights agreements were
      entered into in connection with three of the Company’s private placements. Prior
      to October 1, 2006, the Company accounted for the registration rights agreements
      as a separate free-standing instrument and accounted for the liquidated damages
      provision as a derivative liability subject to SFAS 133, “Accounting for
      Derivative Instruments and Hedging Activities.” Accordingly, the liability was
      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 September 30, 2006,
      the liability amounted to $27,000 and was included in accrued expenses.





In
      December 2006, FASB Staff Position EITF 00-19-2 was issued which specified
      that
      the contingent obligation to make future payments under a registration payment
      arrangement should be separately recognized and measured in accordance with
      SFAS
      5, “Accounting for Contingencies” which states that a liability is recorded if
      the obligation is probable and can be reasonably estimated. In addition, SFAS
      133 was amended to exclude registration payment arrangements from its scope.
      As
      of June 30, 2007, as the obligation was not considered probable, the Company
      has
      recorded no liability associated with these arrangements. Effective October
      1,
      2006, the Company adopted EITF 00-19-2 and reported a change in accounting
      principle through a reversal of the liability and as a decrease to the opening
      balance of accumulated deficit.




10


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


Note
      6
      - Stock Options:





Activity
      related to stock option plans for the nine months ended June 30, 2007 is as
      follows:


Options
              
              Shares
              
              Weighted
                Average
                Exercise
                  Price
              
              Weighted
                Average
                Remaining
                Contractual
                Term
              
              Aggregate
                Intrinsic
                ValueOutstanding
                  at October 1, 2006
              
              
              1,064,191
              
              $
              1.58Granted
              
              
              266,000
              
              
              0.50Exercised
              
              
              (90,691
              )
              
              0.70
              
              
              
              
              $
              9,000Forfeited
                  or expired
              
              
              (253,500
              )
              
              2.10Outstanding
                  at June 30, 2007
              
              
              986,000
              
              
              1.24
              
              
              3.5
              
              $
              --Vested
                  or expected to vest
              
              
              986,000
              
              
              1.24
              
              
              3.5
              
              $
              --Exercisable
                  at June 30, 2007
              
              
              811,000
              
              
              1.33
              
              
              2.6
              
              $
              --








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 nine months ended June 30,
      2007,
      general and administrative expense was reduced by $30,000 due to forfeited
      and
      expired employee stock options as a result of implementing SFAS 123(R). During
      the nine months ended June 30, 2006, stock-based employee compensation cost
      of
      $140,000 was charged to general and administrative expense.





As
      of
      June 30, 2007, there was $106,000 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.





The
      Company accounts for equity awards issued as compensation to non-employees
      at
      fair value as measured on the date that vesting occurs or performance is
      complete. During the nine months ended June 30, 2007 and 2006, the Company
      recognized compensation expense of $77,000 and $20,000, respectively, which
      was
      charged to general and administrative expense in relation to options, warrants
      and common stock issued to non-employees.




11




Interactive
        Systems Worldwide Inc.
 Notes
        To
        Condensed 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 and nine
      months ended June 30, 2007 and 2006 does not assume any exercise of options
      or
      warrants to purchase 2,751,825 and 2,872,337 common shares, respectively, or
      the
      conversion of debentures or preferred stock to acquire 997,867 and 1,066,667
      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 39% and 28% of revenues in the three and nine months
      ended June 30, 2007, respectively, and 63% and 78% of revenues in the three
      and
      nine months ended June 30, 2006, respectively. Revenues from Hipodromo de Agua
      Caliente S.A. de C.V., represented approximately 35% and 53% of revenues in
      the
      three and nine months ended June 30, 2007, respectively and 0% of revenues
      in
      the three and nine months ended June 30, 2006. 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
      - Other income:





Other
      income for the three and nine months ended June 30, 2007, consists of the
      following (in thousands):




3
                months
            
            9
                monthsSettlement
                of a dispute with a vendor
            
            $
            370
            
            $
            370Settlement
                of patent infringement litigation
            
            
            --
            
            
            90$
            370
            
            $
            460





12


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




**Description
      of Business**




Interactive
      Systems Worldwide Inc. (“ISWI” or the “Company”) has designed, developed and
      patented an interactive hardware and proprietary software system (the
“SportXction ® 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 ® 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 ® 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 ® 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®
System to individuals who place wagers through the System. To achieve commercial
      success, the SportXction ® System
      must be accepted by a significant number of users.





During
      the three and nine months ended June 30, 2007 (“Fiscal 2007”) and 2006 (“Fiscal
      2006”), the Company’s revenue primarily consisted of license fees, technical
      assistance fees and service charges from providing interactive gaming services
      using the SportXction ® System
      to business partners such as licensed bookmakers and others located in the
      United Kingdom, Gibraltar, and Mexico.





**Going
      Concern Considerations**





The
      accompanying financial statements have been prepared assuming that the Company
      will continue as a going concern. The Company has incurred recurring losses
      from
      operations during the nine months ended June 30, 2007 and the years ended
      September 30, 2006 and 2005 and has not generated positive net cash flows from
      operations. There can be no assurance that the Company will generate sufficient
      cash flows to meet its cash flow and working capital needs. The Company requires
      additional financing or the execution of a strategic transaction to continue
      operations, meet its operational goals and to pursue its long term strategy.
      Management has developed and is attempting to implement a plan to address these
      issues and allow the Company to continue as a going concern beyond the fiscal
      year ending September 30, 2007. The plan includes (i) securing
      minimum monthly cash receipts from certain customers ,
      (ii) a program to reduce costs, (iii) seeking equity financing and (iv) pursuing
      other strategic alternatives, including a possible merger, sale of assets or
      other business combination or restructuring transactions.




13




There
      is no assurance, however, that the Company will be able to raise equity
      financing or execute a strategic transaction on commercially reasonable terms,
      if at all, or that the Company will be able to meet its future contractual
      obligations and continue as a going concern. The failure to raise equity or
      execute a strategic transaction will negatively impact the Company and its
      growth plans and its financial condition and results of operations, and could
      force the Company to cease operations. The financial statements do not include
      any adjustments that might result from the outcome of this uncertainty.





On
      May
      18, 2007, as a result of failing to comply with NASDAQ’s shareholders’ equity
      requirement, the Company’s Common Stock was de-listed from the NASDAQ Capital
      Market. The
      Company’s Common Stock is currently quoted on
      the
      Over-the-Counter Bulletin Board maintained by the NASD and the
      Pink Sheets, an electronic quotation service for securities traded
      over-the- counter.





Critical
      Accounting Policies and Estimates





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





The
      Company accounts for software development costs in accordance with Statement
      of
      Financial Accounting Standards ("SFAS") No. 86 “Computer Software To Be
      Sold, Leased, or Otherwise Marketed”. Such costs are expensed prior to a product
      or product enhancement’s achievement of technological feasibility and thereafter
      are capitalized. The Company defines a product enhancement as an improvement
      to
      an existing product that is intended to extend the life or improve significantly
      the marketability of the original product. In order to meet the 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 2007, the Company capitalized $103,000
      of
      software development costs. Amortization expense, which has been computed on
      a
      straight-line basis and an estimated economic life of three years, amounted
      to
      $113,000 and $154,000 during the nine months ended June 30, 2007 and 2006,
      respectively.




14





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 nine months ended June 30,
      2007,
      general and administrative expense was reduced by $30,000 due to forfeited
      and
      expired employee stock options as a result of implementing SFAS 123(R). During
      the nine months ended June 30, 2006, stock-based employee compensation cost
      of
      $140,000 was charged to general and administrative expense.




See
      Note
      3 to the Company’s Form 10-KSB for the year ended September 30, 2006 for a full
      discussion of the Company’s critical accounting policies and estimates.





**Financial
      Results**





**Three
      Months Ended June 30, 2007 and 2006**





Revenues
      for the three months ended June 30, 2007 were $167,000, as compared to $20,000
      during the same period in the prior year. The increase was primarily due to
      the
      Company’s agreements with Sportingbet, Ladbrokes and Hipodromo de Agua Caliente
      S.A. de C.V. (“Caliente”) which provide certain minimum payments.




Cost
      of
      revenues for the three months ended June 30, 2007 were $138,000, as compared
      to
      $144,000 during the same period in the prior year. The decrease in Fiscal 2007
      was primarily due to lower amortization expenses associated with capitalized
      product enhancements that had become fully amortized.




Research
      and development expense for the three months ended June 30, 2007 was $85,000,
      as
      compared to $244,000 during the same period in the prior year. The decrease
      in
      Fiscal 2007 was primarily due to lower payroll costs.




General
      and administrative expense for the three months ended June 30, 2007 was
      $250,000, as compared to $806,000 during the same period in the prior year.
      The
      decrease was primarily due to lower payroll costs, lower professional fees,
      and
      lower compensation costs as a result of forfeited and expired employee stock
      options.




Interest
      income for the
      three
      months ended June 30, 2007 was
      $2,000, as compared to $25,000 during
      the same period in the prior year . The
      decrease in Fiscal 2007 was primarily due to lower cash and short term
      investments balances.




15




Other
      income for the three months ended June 30, 2007 was $370,000, as compared to
      $1,000 during the same period in the prior year. In Fiscal 2007, other income
      represents the settlement of a dispute with a vendor that yielded $160,000
      in
      cash and eliminated approximately $210,000 in accounts payable and accrued
      liabilities. In Fiscal 2006, other income represents the change in value of
      the
      Company’s liability associated with the registration rights agreements entered
      in connection with its private placements.





Net
      income applicable to common shareholders and net income per share applicable
      to
      common shareholders (basic and diluted) for the
      three
      months ended June 30, 2007 was
      $10,000 and $0.00, respectively, as compared to net loss applicable to common
      shareholders and net loss per share applicable to common shareholders (basic
      and
      diluted) of $1,207,000 and $0.10, respectively, during the same period in the
      prior year. The improvement was primarily due to lower expenses and increased
      revenue and other income.




**Nine
      Months Ended June 30, 2007 and 2006**





Revenues
      for the nine months ended June 30, 2007 were $291,000, as compared to $84,000
      during the same period in the prior year. The increase was primarily due to
      the
      Company’s agreements with Caliente, Sportingbet and Ladbrokes which provide
      certain minimum payments.




Cost
      of
      revenues for the nine months ended June 30, 2007 were $405,000, as compared
      to
      $442,000 during the same period in the prior year. The decrease in Fiscal 2007
      was primarily due to lower amortization expenses associated with capitalized
      product enhancements that had become fully amortized.




Research
      and development expense for the nine months ended June 30, 2007 was $329,000,
      as
      compared to $743,000 during the same period in the prior year. The decrease
      in
      Fiscal 2007 was primarily due to lower payroll costs and certain development
      costs which met the criteria for capitalization.




General
      and administrative expense for the nine months ended June 30, 2007 was
      $1,718,000, as compared to $2,501,000 during the same period in the prior year.
      The decrease was primarily due to lower payroll costs, lower professional fees
      and lower compensation costs as a result of forfeited and expired employee
      stock
      options, partially offset by costs associated with GIG’s terminated office
      lease.




Interest
      income for the
      nine
      months ended June 30, 2007 was
      $51,000, as compared to interest expense of $35,000 during
      the same period in the prior year .
      In
      Fiscal 2007, interest income represents interest earned from cash and short-term
      investments. In Fiscal 2006, the Company incurred non-cash
      interest expense
      from its outstanding Debentures which was satisfied through the issuance of
      shares of Common Stock.





Other
      income for the nine months ended June 30, 2007 was $460,000, as compared to
      $3,000 during the same period in the prior year. In Fiscal 2007, other income
      represents settlement of a dispute with a vendor as well as settlements from
      the
      Company’s patent infringement litigation. In Fiscal 2006, other income
      represents the change in value of the Company’s liability associated with the
      registration rights agreements associated with its private
      placements.




16




Net
      loss
      applicable to common shareholders and net loss per share applicable to common
      shareholders (basic and diluted) for the
      nine
      months ended June 30, 2007 was
      $1,831,000 and $0.15, respectively, as compared to $3,831,000 and $0.33,
      respectively, during the same period in the prior year. The decrease was
      primarily due to lower expenses and increased revenue and other income.




**Liquidity
      and Capital Resources**




As
      of
      June 30, 2007, the Company had  liquid
      resources totaling $494,000 which consisted of cash and cash equivalents.





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, 2007. The Company
      has taken a number of steps over recent months to improve cash flow by securing
      minimum cash receipts from certain customers and reducing operating costs in
      the
      areas of payroll, rent, professional fees and consultants. The Company
      anticipates that, based on its current level of revenues and costs and without
      any proceeds from an equity financing or strategic transaction, its existing
      resources will be adequate to fund its capital and operating requirements
      through September 2007. If the holders of the Series C permit the Company to
      make its July and October dividend payments in shares of Common Stock rather
      than cash, then the Company’s existing resources may be adequate to fund its
      capital and operating requirements through November 2007.





On
      March
      6, 2007, the Company announced that it had signed a Letter of Intent with
      Shantech Inc, for a strategic marketing and business development agreement
      and
      investment by Shantech or its affiliates. The Company and Shantech are working
      together in an effort to effect this transaction, the terms of which will differ
      from those previously announced. In particular, the Company is negotiating
      with
      Shantech and its affiliates to provide a cash infusion of approximately $500,000
      which Shantech is currently seeking to obtain, in order to meet its short-term
      cash needs, upon execution of the definitive agreements.





One
      of
      the preconditions required by Shantech before entering into definitive
      agreements with the Company is obtaining certain consents and waivers from
      the
      holders of the Company’s Series C Preferred Stock. The Company and Shantech have
      been negotiating with the holders of the Series C Preferred Stock to obtain
      those consents and waivers but the required consents and waivers have not yet
      been received. There can be no assurance that such consents and waivers will
      be
      obtained.




The
      Company cannot provide assurance that a definitive agreement with Shantech
      or
      its affiliates will be entered into or that the Company will be able to
      successfully consummate the proposed transaction with Shantech. If we cannot
      successfully consummate the proposed transaction with Shantech, we may not
      be
      able to obtain the required additional capital or execute an alternative
      strategic transaction, on favorable terms, or at all. If we cannot successfully
      implement our plans, our liquidity, financial condition and business prospects
      will be materially and adversely affected and we may have to cease
      operations.




17





Capital
      expenditures which primarily consist of additional computer equipment are not
      expected to be significant and are expected to be funded from existing
      resources. 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.





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. During the
      three months ended December 31, 2006, a holder of the Series C converted 258
      shares of Series C into 68,800 shares of Common Stock and there are currently
      3,742 remaining Series C shares outstanding. 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 (which the Company no longer satisfies), shares of Common
      Stock at the Company’s option. As of June 30, 2007, unpaid cumulative dividends
      on the Series C amounted to $56,000 and beginning July 2, 2007 are subject
      to a
      late fee at the rate of 12% per annum (which must be paid in cash). 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
      holders of the Series C permitted the Company to make its April 2007 dividend
      payment in shares of Common Stock rather than cash. Because the Company’s Common
      Stock is no longer listed on NASDAQ, pursuant to the terms of the Certificate
      of
      Designation of the Series C Preferred Stock the Company is not entitled to
      continue to make quarterly dividend payments in its Common Stock. Nonetheless,
      the Company is seeking permission from the holders of the Series C to be able
      to
      pay the dividend that was due on July 2, 2007 and the dividend that will be
      due
      on October 1, 2007, in shares of its Common Stock. If the Company makes these
      payments in cash rather than additional shares of Common Stock, it would reduce
      the amount of cash available to fund operations.




Under
      the
      terms of the private placement, 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 (including, without limitation, failure to be listed on the NASDAQ
      Capital Market for more than 10 consecutive trading days, which failure has
      occurred), each holder would have the right to require the Company to redeem
      the
      preferred stock (generally at 120% of stated value thereof) for the Company’s
      Common Stock (at approximately 90% of the market value of the Common Stock)
      subject to an ownership limitation or increase the dividend on the preferred
      stock to 12% per annum. The unpaid quarterly dividend has been accrued at 6%
      (rather than 12%) per annum in the accompanying statement of operations because
      the holders of the Series C have not exercised either of their rights resulting
      from the NASDAQ de-listing. In addition, the Series C and investor warrants
      are
      subject to full ratchet antidilution protection in the event of issuance of
      additional shares of Common Stock at a price below the conversion price. 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.




18




**Off
      Balance Sheet Arrangements**





None





System
      DeploymentStatus




***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 ® 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
      Company currently offers both a fully integrated and stand-alone product
      configuration. These products are provided on a white-label basis branded by
      the
      Company’s wagering partners. In the fully integrated configuration, 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 user can then place wagers from its existing account in the same
      manner as all other bets made with that partner.





On
      December 5, 2006, the Company announced that it had launched the integrated
      version of its SportXction ® System
      with Interactive Sports Limited, a wholly-owned subsidiary of Sportingbet.
      On
      January 9, 2007, the Company announced that it had launched the integrated
      version of its SportXction ® System
      with Ladbrokes eGaming Ltd. The Company is currently in discussions with other
      existing and new partners regarding this approach.





In
      addition, the Company continues to offer its stand-alone product configuration
      accessable through a link on the partner’s website, which launches a pop-up
      window, and the user is able to place play-by-play bets after entering a
      username and password and transferring funds into his or her
      account.




19




The
      stand-alone product is currently in operation with the following
      partners:


**Partner**
              **Websites**BetShop
                  Group (Europe) Ltd.
              betshop.comVictor
                  Chandler UK Ltd
              victorchandler.co.uk,
                  vcbet.co.ukVictor
                  Chandler International
              victorchandler.com,
                  vcbet.com


***Hand-held
      devices***





On
      August
      11, 2006, the Company announced that GIG had entered into an agreement with
      Caliente, one of Latin America’s largest gaming companies. Caliente owns and/or
      provides services to 160 betting shops, known as Race & Sports Books,
      throughout Mexico, Central and South America and the Caribbean.





Under
      the
      terms of this three year agreement, GIG provides software and services that
      enable Caliente to offer an enhanced play-by-play sports betting service in
      all
      of its Race & Sports Books locations. On September 7, 2006, the Company
      announced the SportXction ® System
      was successfully deployed in ten locations using hand held, touch screen
      devices. The SportXction ® system
      is expected to be rolled out throughout Caliente’s Race & Sports Books
      during 2007. The enhanced betting capabilities are also expected to be available
      on Caliente’s website in 2007.





Caliente
      is operating the play-by-play betting service using its own personnel. GIG
      has
      provided initial set-up support and some software customization and training,
      and will provide on-going technical assistance. The agreement specifies monthly
      service fees for technical assistance, as well as monthly license fees based
      on
      the handle derived from the enhanced play-by-play betting service.





***Non-wagering
      product***





The
      Company has a non-gambling version of its SportXction ® System
      which allows users to predict the outcome of events during a sporting event.
      This product was successfully introduced in the U.K. during fiscal 2004. Users
      earn points for correct predictions, bonuses for strings of successful
      predictions and for correct answers to sport’s trivia questions and compete on
      the basis of their scores for a variety of prizes. The Company is currently
      marketing the contest product to professional leagues, professional teams and
      sports rights holders in the United States, the U.K. and Europe.





***Racing
      product***





The
      Company is also developing a fixed-odds / pari-mutuel hybrid racing product
      for
      the U.S. market. The Company has filed a patent application with the intent
      of
      commercializing a product that will combine the advantages of fixed-odds
      wagering while satisfying the current US pari-mutuel rules and regulations.
      The
      Company believes that this offering will provide an improved alternative to
      traditional pari-mutuel wagering in the interstate horse racing market.


20


**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 through September 2007 or thereafter and whether the
      Company will be able to meet its cash requirements; whether the Company will
      consummate the proposed transaction or any transaction with Shantech Inc; the
      ability of the Company to raise funds or execute a strategic transaction and
      if
      it does raise additional funds, the terms on which it can be raised and the
      dilutive impact on existing shareholders; whether the Company will be permitted
      to pay dividends on the Series C Preferred Stock in shares of Common Stock
      rather than cash and the number of shares and dilutive impact to existing
      shareholders if the Company is permitted to pay such dividends in shares of
      Common Stock; whether or not any new financing would trigger the full ratchet
      anti-dilution provisions of the Series C Preferred Stock or the anti-dilution
      provisions of any outstanding warrants; whether the Company’s revenue will
      increase in future quarters; how
      long
      the Company will continue to incur significant losses and negative cash
      flow; whether
      the Company or its Internet, mobile phone and betting shop partners will gain
      a
      sufficient number of customers to generate meaningful revenue; how long the
      Company will be able to fund its capital and operating requirements; and whether
      the Company will have to cease operations. 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, 2006.
      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.


21


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 acting 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 acting Chief Financial
      Officer has 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
      April
      3, 2007, the Company issued 51,981 shares of Common Stock to the holders of
      its
      outstanding privately placed Series C Preferred Stock to satisfy the dividend
      due thereunder. This issuance was 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.





Item
      3.
      Defaults Upon Senior Securities





The
      Company failed to make the mandatory cumulative quarterly dividend payment
      on
      its Series C Preferred Stock in the amount of $56,000 (calculated at the rate
      of
      6% per annum; see Note 3 to Condensed Consolidated Financial Statements
      (Unaudited)) which was due on July 2, 2007. Because of the Company’s May 18,
      2007 de-listing from the NASDAQ Capital Market, the Company no longer has the
      option of paying the dividend in shares of Common Stock without the consent
      of
      the holders of the Series C. The unpaid dividend is subject to a late fee (which
      must be paid in cash) at the rate of 12% per annum from July 2, 2007. Because
      of
      the de-listing from NASDAQ, each holder of the Series C Preferred Stock has
      the
      right (which has not yet been exercised) to require the Company to redeem the
      Series C Preferred Stock (generally at 120% of the stated value thereof) for
      the
      Company’s Common Stock (at approximately 90% of the market value of the Common
      Stock) subject to an ownership limitation or to increase the dividend on the
      Series C Preferred Stock to 12% per annum. If all holders of the Series C
      Preferred Stock elected to require the Company to redeem their Series C
      Preferred Stock for Common Stock at the above-described valuations without
      giving consideration to the ownership limitation, the Company would not have
      sufficient authorized but unissued shares of Common Stock to satisfy the
      redemption obligation. For example, at an assumed ten day volume weighted
      average trading price of the Common Stock of $0.40 per share, a redemption
      in
      full would require approximately 12,500,000 shares of Common Stock, far in
      excess of the 997,867 shares currently reserved for conversion of the Series
      C
      Preferred Stock at the $3.75 conversion price plus the 3,455,250 shares of
      Common Stock not already reserved for other purposes. Upon failure to timely
      pay
      the redemption amount in shares of Common Stock, the Company would become
      obligated to pay interest thereon at a rate of 15% per annum, accruing daily
      until the redemption amount (plus all interest thereon) is paid in full. The
      Company’s proxy statement being mailed to stockholders for the Company’s 2007
      Annual Meeting of Stockholders scheduled to be held on September 17, 2007
      includes a proposal to amend the Certificate of Incorporation of the Company
      to
      increase the number of authorized shares of Common Stock by 60,000,000 shares,
      from 20,000,000 to 80,000,000, in order for, among other things, the Company
      to
      be able to satisfy its obligations to the holders of the Series C Preferred
      Stock.




22





Item
      6.  Exhibits





NUMBER
            
            DESCRIPTION31.01
            
            Certification
                of Bernard Albanese, Chief Executive Officer and acting 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 and acting 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).


23


SIGNATURE





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:August
              16, 2007
            By:
            /s/
              Bernard AlbaneseBernard
              AlbaneseChief
                Executive Officer
              (Principal
                Executive Officer and
              Principal
                Financial Officer)





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