<PAGE>

                       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, 2004

                                       OR

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

         For the transition period from              to
                                         -----------     ------------

                         Commission file number 0-21831

                       Interactive Systems Worldwide Inc.

       (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                   (Zip Code)
                offices)

Issuer's telephone number, including area code:  (973) 256-8181

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
   -----      -----

There were 9,516,479 shares of Common Stock outstanding at August 10, 2004.

Transitional Small Business Disclosure Format (check one):
Yes          No  X
   -----       -----


<PAGE>

Interactive Systems Worldwide Inc.
June 30, 2004
FORM 10-QSB

Index

<TABLE>
<CAPTION>
                                                                                                 Page
                                                                                                 ----

<S>              <C>                                                                          <C>
Part I:           Financial Information

Item 1. Financial Statements,

                  Consolidated Balance Sheets at June 30, 2004 (Unaudited)
                  and September 30, 2003                                                            2

                  Consolidated Statements of Operations for the Three and Nine
                  Months Ended June 30, 2004 and 2003 (Unaudited)                                   3

                  Consolidated Statement of Stockholders' Equity for the
                  Nine Months Ended June 30, 2004 (Unaudited)                                       4

                  Consolidated Statements of Cash Flows for the Nine Months
                  Ended June 30, 2004 and 2003 (Unaudited)                                           5

Notes to Consolidated Financial Statements (Unaudited)                                            6-10

Item 2.           Management's Discussion and Analysis of Financial
                  Condition and Results of Operations                                            11-18

Item 3.           Controls and Procedures                                                           19

Part II:          Other Information

Item 2. Changes in Securities and Small Business Issuer
                  Purchases of Equity Securities                                                 19-20

Item 6.           Exhibits and Reports on Form 8-K                                                  21

Signatures                                                                                          22

</TABLE>


<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>
                                                                 June 30,    September 30,
                                                                  2004           2003
                                                               (Unaudited)      Note 1
                                                                --------       --------
<S>                                                            <C>            <C>
Current assets:
  Cash and cash equivalents                                     $  4,265       $  4,127
  Accounts receivable                                                 29              9
  Investments in marketable securities                                --            190
  Other receivables                                                   10             19
  Prepaid expenses and other current assets                          213            153
                                                                --------       --------
      Total current assets                                         4,517          4,498

  Property and equipment, net                                        160            233
  Capitalized software, net                                          571            807
  Other assets                                                       596            306
                                                                --------       --------
      Total assets                                              $  5,844       $  5,844
                                                                ========       ========

                   Liabilities and Stockholders' Equity
Current liabilities:
  Accounts payable                                              $    343       $    308
  Accrued expenses                                                   843            555
                                                                --------       --------
      Total current liabilities                                    1,186            863
                                                                --------       --------

Long-term debt:
  Debentures, net of discount of $724 and $0, respectively         1,768             --
                                                                --------       --------
      Total long-term debt                                         1,768             --
                                                                --------       --------
        Total liabilities                                          2,954            863
                                                                --------       --------

Stockholders' Equity:
  Preferred stock, par value $.001 per share;
    2,000,000 shares authorized, 60,000 Series A
    issued and outstanding                                            --             --
  Common stock par value $.001 per share;
    20,000,000 shares authorized;
    9,597,665 and 9,177,545 issued, respectively                      10              9
  Additional paid-in capital                                      15,447         13,036
  Treasury stock, at cost, 242,000 shares                           (441)          (441)
  Accumulated  other  comprehensive loss                             (28)            (2)
  Accumulated deficit                                            (12,098)        (7,621)
                                                                --------       --------
    Total stockholders' equity                                     2,890          4,981
                                                                --------       --------
    Total  liabilities and stockholders' equity                 $  5,844       $  5,844
                                                                ========       ========

</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)


<TABLE>
<CAPTION>
                                                Three Months Ended                 Nine Months Ended
                                                    June 30,                            June 30,
                                               2004              2003              2004              2003
                                          -----------       -----------       -----------       -----------

<S>                                       <C>               <C>               <C>               <C>
Revenues                                  $        15       $         3       $        27       $        11
                                          -----------       -----------       -----------       -----------

Costs and expenses:
  Cost of revenues, research
    and development expense                       502               388             1,428             1,086

  General and administrative expense            1,056               712             2,791             2,620
                                          -----------       -----------       -----------       -----------
                                                1,558             1,100             4,219             3,706
                                          -----------       -----------       -----------       -----------

  Operating loss                               (1,543)           (1,097)           (4,192)           (3,695)

Other income                                      (52)              (32)             (165)             (135)
Interest expense                                  210                --               449                --
                                          -----------       -----------       -----------       -----------




   Net loss                               $    (1,701)      $    (1,065)      $    (4,477)      $    (3,560)
                                          ===========       ===========       ===========       ===========

Net loss per common share-
  basic and diluted                       $     (0.18)      $     (0.12)      $     (0.48)      $     (0.40)
                                          ===========       ===========       ===========       ===========

Weighted average basic and diluted
  common shares outstanding                 9,354,940         8,926,248         9,260,274         8,909,779
                                          ===========       ===========       ===========       ===========

</TABLE>






See accompanying notes to consolidated financial statements



                                       3
<PAGE>


                       Interactive Systems Worldwide Inc.
                 Consolidated Statement of Stockholders' Equity
                     For the Nine Months Ended June 30, 2004
                                   (Unaudited)

                    (Amounts in thousands except share data)


<TABLE>
<CAPTION>
                                                                                             Accumulated
                                                        Additional                              Other
                                    Common Stock          Paid-In       Treasury Stock      Comprehensive  Accumulated
                                 Shares       Amount     Capital       Shares     Amount        Loss         Deficit       Total
                               ----------   ----------  ----------   ----------  ----------  ------------   ----------   ----------
<S>                            <C>         <C>         <C>             <C>      <C>          <C>          <C>          <C>
Balance at
 September 30, 2003             9,177,545   $        9  $   13,036      242,000  $     (441)  $       (2)  $   (7,621)  $    4,981

Issuance of common stock
 through private placement        390,390            1       1,254           --          --           --           --        1,255

Issuance of warrants
  to investors                         --           --         636           --          --           --           --          636

Beneficial conversion
  feature of debentures                --           --         353           --          --           --           --          353

Issuance of warrants to
  finder in connection
  with private placement               --           --         274           --          --           --           --          274

Financing costs
 allocated to equity as
 part of private placement             --           --        (358)          --          --           --           --         (358)

Issuance of common stock
 in relation to Debentures         26,730           --          87           --          --           --           --           87

Issuance of common stock
  through exercise of options       3,000           --           2           --          --           --           --            2

Modification of
  stock option                         --           --         163           --          --           --           --          163

Net loss                               --           --          --           --          --           --       (4,477)      (4,477)

Foreign currency
  translation loss                     --           --          --           --          --          (26)          --          (26)
                                                                                                                        ----------
Comprehensive loss                                                                                                          (4,503)

                               ----------   ----------  ----------   ----------  ----------   ----------   ----------   ----------
Balance at
     June 30, 2004              9,597,665   $       10  $   15,447      242,000  $     (441)  $      (28)  $  (12,098)  $    2,890
                               ==========   ==========  ==========   ==========  ==========   ==========   ==========   ==========
</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>
                                                                     Nine Months Ended
                                                                        June 30,

                                                                    2004          2003
                                                                 -------       -------
<S>                                                              <C>           <C>
Cash flows from operating activities:
    Net loss                                                     $(4,477)      $(3,560)
Adjustments to reconcile net loss
         to net cash used in operating activities:
         Depreciation and amortization                               312           158
         Non-cash option charge                                      163            23
      Non-cash interest expense                                      360            --
      Non-cash amortization of debt issuance costs                    89            --
Changes in assets and liabilities:
    Accounts receivable                                              (20)           (5)
    Other receivables                                                  9         1,092
    Prepaid expenses and other current assets                        (60)          (63)
    Other assets                                                       2           (56)
    Accounts payable                                                  35           (86)
    Accrued expenses                                                 235           119
                                                                 -------       -------
                 Net cash used in
                       operating activities                       (3,352)       (2,379)
                                                                 -------       -------

Cash flows from investing activities:
    Proceeds from sales of investments                               190         2,616
    Purchase of property and equipment                                (3)          (19)
    Capitalized software                                              --          (399)
                                                                 -------       -------
                 Net cash provided by
                       investing activities                          187         2,200
                                                                 -------       -------

Cash flows from financing activities:
    Proceeds from issuance of convertible debt                     2,600            20
    Repayment of convertible debt                                   (108)           --
    Proceeds from issuance of common stock                         1,302            --
    Costs associated with private placement                         (465)           --
                                                                 -------       -------
                 Net cash provided by
                       financing activities                        3,329            20
                                                                 -------       -------

Net increase (decrease) in cash and cash equivalents                 164          (159)
Effect of exchange rate on cash                                      (26)           16
Cash and cash equivalents, beginning of period                     4,127         4,753
                                                                 -------       -------
Cash and cash equivalents, end of period                         $ 4,265       $ 4,610
                                                                 =======       =======

Non-cash investing and financing activity:
Issuance of warrants to investors                                $   636       $    --
Issuance of warrants to finder                                   $   274       $    --
Beneficial conversion feature of Debentures                      $   353       $    --
</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 June 30, 2004 and for the three and nine months
         ended June 30, 2004 and 2003, 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 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. Certain amounts in the prior years'
         financial statements have been reclassified to conform to the current
         year presentation. These consolidated financial statements should be
         read in conjunction with the audited financial statements for the year
         ended September 30, 2003 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,
         2004 and 2003 consisted of license fees and service charges from
         agreements with companies located in the United Kingdom. The Company
         recognizes revenue from its agreements with bookmakers as it is earned
         based on a percentage share of the wagering revenue and with other
         non-wagering companies based on agreed service charges.


Note 2 - Private Placement:


         On November 24, 2003, the Company entered into a financing agreement
         relating to a $3.9 million Private Placement with institutional
         investors consisting of $2.6 million of 7.5% Convertible Debentures
         ("Debentures") and $1.3 million for 390,390 shares of the Company's
         Common Stock ($3.33 per share). The investors also received warrants
         ("Investor Warrants") that expire in November 2008 to purchase 281,250
         shares of Common Stock at $4.58 per share, subject to adjustment. Net
         proceeds from the financing after costs and expenses were approximately
         $3,435,000. In addition, a finder in connection with the Private
         Placement received warrants to purchase an aggregate of 95,808 shares
         of Common Stock at $5.06 per share, which were valued at $274,000 using
         the Black Scholes option pricing model. The proceeds as well as the
         costs and expenses of the



                                       6
<PAGE>


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

Note 2 - Private Placement (continued):

         transaction were allocated to debt and equity based on their relative
         fair values. The expense amount allocated to equity was recorded as a
         reduction of additional paid in capital and the amount allocated to
         debt is being amortized over the life of the Debentures.

         The Debentures are convertible into shares of Common Stock at $4.58 per
         share subject to adjustment (initially 567,686 shares), and are
         repayable in 24 equal monthly installments ($108,333) beginning in May
         2004 with interest payable quarterly. Under the terms of the
         transaction, and subject to certain conditions, the Company may make
         periodic interest and principal payments in shares of the Company's
         Common Stock valued at a discount from the weighted average market
         price prior to such payments. The Company also under certain conditions
         has the right to force conversion of all or a portion of the Debentures
         into Common Stock. The conversion price of the Debentures and the
         exercise price of the Investor Warrants are subject to adjustment under
         certain circumstances. While at least 50% of the $2.6 million in
         Debentures are outstanding, the Debentures contain covenants that
         restrict the ability of the Company to incur indebtedness that is pari
         passu with or senior to the Debentures, except for certain specified
         types of indebtedness not to exceed $625,000 or except for indebtedness
         incurred in connection with a business combination transaction.

         The fair value assigned to the warrants ($636,000) was determined using
         the Black Scholes option pricing model. A beneficial conversion feature
         of $353,000 representing the intrinsic value of the conversion price
         after the allocation of the proceeds based on their relative fair
         values was recorded as a reduction in the value of the Debentures.
         These discounts to the Debentures will be accreted as additional
         non-cash interest expense over the life of the debt using the effective
         interest method. The following table summarizes the valuation of the
         debentures at June 30, 2004:

                                                                  $  (000s)
         7.5% convertible debentures, principal                      $2,600
         Less:
         Discount due to allocation of proceeds                        (590)
         Beneficial conversion feature                                 (353)
                                                                   --------
                                                                      1,657
         Repayment of principal                                        (108)
         Amortization of discount                                       219
                                                                    -------
         7.5% convertible debentures, net balance
         at June 30, 2004                                           $ 1,768
                                                                    =======



                                       7
<PAGE>


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


   Note 3 - Stock Options:


         The Company has adopted the disclosure-only provisions of SFAS No. 148,
         "Accounting for Stock-based Compensation" and applies APB Opinion 25 in
         accounting for its plans in its consolidated financial statements. Had
         the Company determined compensation cost based on the fair value at the
         grant date consistent with the provisions of SFAS No. 148, the
         Company's net loss would have been increased to the pro forma amounts
         indicated below (amounts in thousands):


<TABLE>
<CAPTION>
                                        Three Months Ended         Nine Months Ended
                                             June 30,                   June 30,
                                       -------       -------       -------       -------
                                         2004          2003          2004          2003
                                       -------       -------       -------       -------

<S>                                    <C>           <C>           <C>           <C>
Net loss, as reported                  $(1,701)      $(1,065)      $(4,477)      $(3,560)
Deduct: Total stock-based
  employee compensation
  expense determined under
  fair value based method                  (27)          (46)          (77)         (177)
                                       -------       -------       -------       -------

Pro forma net loss                     $(1,728)      $(1,111)      $(4,554)      $(3,737)
                                       =======       =======       =======       =======

Net loss per
 common share- basic and diluted,
 as reported                           $ (0.18)      $ (0.12)      $ (0.48)      $ (0.40)
                                       =======       =======       =======       =======

Net loss per
 common share- basic and diluted,
 pro forma                             $ (0.18)      $ (0.12)      $ (0.49)      $ (0.42)
                                       =======       =======       =======       =======
</TABLE>


         The fair value of the stock options granted is estimated at grant date
         using the Black-Scholes option pricing model with the following
         weighted average assumptions: expected dividend yield 0.0% (for all
         periods), risk free interest rates of 3.23% and 3.71% in Fiscal 2004
         and 2003, respectively, expected volatility of 83% and 89% in 2004 and
         2003, respectively, and an expected life of 7 years (for all periods).
         The weighted average fair value of options granted in Fiscal 2004 and
         2003 was $2.44 and $1.82, respectively.



                                       8
<PAGE>

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

   Note 4 - 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 share is
         computed by dividing net loss 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
         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, 2004 and 2003 does not assume any
         exercise of options or warrants to purchase 2,363,629 and 1,517,571
         common shares, respectively, as their effect is antidilutive.

         In April 2004 and April 2003, the Company modified certain conditions
         associated with previously issued options to purchase 94,661 and 8,000
         shares, respectively. Based upon such modification, the Company has
         recorded these modifications as new grants and has recognized
         compensation expense (included in general & administrative expense) in
         the consolidated statement of operations of $163,000 during the three
         months and nine months ended June 30, 2004 and $23,000 during the three
         months and nine months ended June 30, 2003.

Note 5 - 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 on July 31, 2002,
         the Company issued 60,000 shares of a new class of Series A Preferred
         Stock ("Series A"). Each share of Series A has one vote, is convertible
         through July 31, 2009 into 10 shares of the Company's Common Stock at
         $15 per common share on a cashless basis and is redeemable by the
         Company seven years after issuance for nominal consideration if not
         previously converted into Common Stock. The holder of Series A is
         entitled to a dividend of 6% per annum if and when declared by the
         Board of Directors. As of June 30, 2004, no such dividend has been
         declared. Series A has no liquidation preference.




                                       9
<PAGE>


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

Note 6 - Consulting Agreement:

         In February 2004, the Company entered into a consulting agreement with
         a non-related third party to provide business development, product
         positioning and other strategic advice. Under the terms of this
         agreement, the Company granted non-qualified options to purchase
         300,000 shares of the Company's Common Stock at an exercise price of
         $3.46 per share, of which 50,000 options vested on August 1, 2004. The
         Company terminated the consulting agreement effective August 1, 2004
         and, as a result, the remaining options were cancelled. The Company
         will recognize compensation expense of $13,000 at August 1, 2004 and
         charge the cost to general and administrative expense.





                                       10
<PAGE>


Item 2. Management`s Discussion and Analysis of Financial
        Condition and Results of Operations

DESCRIPTION OF BUSINESS

         ISWI has designed, developed and patented an interactive hardware and
proprietary software system, the SportXction(TM) System, which enables
play-by-play wagering and contests in the emerging interactive sports gaming
market. ISWI, through its wholly owned subsidiary, Global Interactive Gaming
Limited ("GIG"), operates the SportXction(TM) System, in conjunction with
established wagering and content partners. The Company's revenue consists of
license fees and service charges from agreements with companies located in the
United Kingdom. The agreements between the Company and its partners precludes
the partners from using the Company's SportXction(TM) System software to accept
wagers from the United States and any other location where it is illegal to do
so. The Company has also implemented controls which prevent potential users from
the United States from being able to use the Company's SportXction(TM) System.

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 the three and nine months ended June 30, 2004, the Company did
not capitalize any software development costs. During the three and nine months
ended June 30, 2003, the Company capitalized software development costs of
$101,000 and $399,000, respectively, relating to certain enhancements to its
SportXction(TM) product. Amortization expense, which has been computed on a
straight-line basis and an estimated economic life of three years, amounted to
$79,000 and $237,000 during the three and nine months ended June 30, 2004,
respectively, and $36,000 and $82,000 for the three and nine months ended June
30, 2003, respectively.

                                       11
<PAGE>

         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.

         See Note 2 to the Company's Form 10-KSB for the year ended September
30, 2003 for a full discussion of the Company's critical accounting policies and
estimates.

FINANCIAL RESULTS

THREE MONTHS ENDED JUNE 30, 2004 AND 2003

         Revenues for the three months ended June 30, 2004 ("Fiscal 2004") were
$15,000, as compared to $3,000 during the same period in 2003 ("Fiscal 2003").
The increase in Fiscal 2004 is due to the addition of a non-wagering prediction
game, new partners and an increase in the number of events covered. In June and
July 2004, the Company successfully launched a contest version (i.e.
non-wagering) of its SportXction(TM) System during the Tri-Nations cricket
tournament for sportinglife.com. Revenues for Fiscal 2004 also include service
charges from the Company's agreements with Sportingbet plc (launched in August
2003) and totesport.com (launched in early June 2004), which were not in "live"
operation in Fiscal 2003. The Company expects a comparable level of revenues
during the quarter ending September 30, 2004, with increasing amounts projected
in future quarters as it launches the SportXction(TM) System on BSkyB's digital
television platform and gains new partners.

         Cost of revenues, research and development expense for the three months
ended June 30, 2004 were $502,000, as compared to $388,000 during the same
period in the prior year. The increase was primarily due to higher programming
costs as no software development costs were capitalized in Fiscal 2004 as well
as an increase in the amortization of capitalized development costs.

         General and administrative expenses during the three months ended June
30, 2004 were $1,056,000, as compared to $712,000 during the same period in the
prior year. The increase in Fiscal 2004 was primarily due to non-cash charges
associated with the modification of options, higher business development and
consulting fees and higher costs incurred at GIG as a result of a decline in the
value of the US dollar.

         Other income during the three months ended June 30, 2004 was $52,000,
as compared to $32,000 during the same period in the prior year. The increase in
Fiscal 2004 was due to rental income as the Company began subleasing space at
GIG partially offset by lower interest income.

         Interest expense during the three months ended June 30, 2004 was
$210,000. This non-cash expense represents interest on the Debentures which was
satisfied in shares of Common Stock, an amount to reflect a reduction in the
debt discount which is being accreted over the life of the debt using the
effective interest method as well as an amount for amortization of debt issuance
costs.

                                       12
<PAGE>

         Net loss and net loss per share (basic and diluted) for the three
months ended June 30, 2004 was $1,701,000 and $0.18, respectively, as compared
to $1,065,000 and $0.12, respectively, during the same period in Fiscal 2003.
The change is primarily the result of higher costs and interest expense in
Fiscal 2004 (as described above).


NINE MONTHS ENDED JUNE 30, 2004 AND 2003

         Revenues for the nine months ended June 30, 2004 were $27,000, as
compared to $11,000 during Fiscal 2003. The increase is the result of the
addition of a non-wagering prediction game, new partners and an increase in the
number of events covered. In June and July 2004, the Company successfully
launched a contest version (i.e. non-wagering) of its SportXction(TM) System
during the Tri-Nations cricket tournament for sportinglife.com. The revenues for
Fiscal 2004 also include service charges from the Company's agreements with
Sportingbet plc (launched in August 2003) and totesport.com (launched in early
June 2004), which were not in "live" operation in Fiscal 2003.

         Cost of revenues, research and development expense for the nine months
ended June 30, 2004 were $1,428,000, as compared to $1,086,000 during the same
period in the prior year. The increase was primarily due to higher programming
costs as no software development costs were capitalized in Fiscal 2004 as well
as an increase in the amortization of capitalized development costs partially
offset by lower costs at GIG.

         General and administrative expenses during the nine months ended June
30, 2004 were $2,791,000, as compared to $2,620,000 during the same period in
the prior year. The increase in Fiscal 2004 was primarily due to higher business
development and consulting fees, non-cash charges associated with the
modification of options, partially offset by lower salary and benefit expenses
at GIG.

         Other income during the nine months ended June 30, 2004 was $165,000,
as compared to $135,000 during the same period in the prior year. The increase
in Fiscal 2004 was due to rental income as the Company began subleasing space at
GIG partially offset by lower interest income.

         Interest expense during the nine months ended June 30, 2004 was
$449,000. This non-cash expense represents interest on the Debentures which was
satisfied in shares of Common Stock, an amount to reflect a reduction in the
debt discount which is being accreted over the life of the debt using the
effective interest method as well as an amount for amortization of debt issuance
costs.

         Net loss and net loss per share (basic and diluted) for the nine months
ended June 30, 2004 was $4,477,000 and $0.48, respectively, as compared to
$3,560,000 and $0.40, respectively, during the same period in Fiscal 2003. The
change is primarily the result of higher costs and interest expense in Fiscal
2004 (as described above).


                                       13
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

         As of June 30, 2004, the Company had cash and cash equivalents totaling
$4,265,000. Cash and cash equivalents consist of funds held on deposit with
banking institutions with original maturities of less than 90 days.

         On November 24, 2003, the Company entered into a $3.9 million private
placement financing with institutional investors consisting of $2.6 million of
7.5% Convertible Debentures (the "Debentures") and $1.3 million of Common Stock.
The investors also received warrants to purchase 281,250 shares of Common Stock.
Net proceeds from the financing after estimated costs and expenses were
approximately $3.4 million.

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

         The Company's operations currently do not generate positive cash flow
and are not expected to do so during the fiscal year ending September 30, 2004.
The Company anticipates that its existing resources 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(TM) System. The Company may be required to seek additional
funding to prosecute its international development and growth plans, as well as
provide additional liquid resources in the event that the growth in revenues is
slower than anticipated. If such funding were in the form of an equity
financing, such additional funding would be dilutive to existing shareholders of
the Company. If the Company is unable to raise additional funding on terms
deemed reasonable or at all, then the Company may be required to curtail certain
operations in order to reduce its expenses.


         The Company expects that its signed agreements not yet in "live"
operation (see System Deployment Status) will produce meaningful revenues. The
Company is also in discussions with other interactive television, legal Internet
wagering, media and mobile phone operators to utilize the SportXction(TM)
System. There is no assurance however, that these negotiations will result in
signed agreements, or that the system will be accepted by potential users.


                                       14
<PAGE>

         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.

SYSTEM DEPLOYMENT STATUS

         INTERACTIVE TELEVISION

         On April 10, 2003, the Company announced that GIG had signed an
agreement with Sky Bet, a wholly-owned subsidiary of British Sky Broadcasting
Limited ("BSkyB"). Under a twelve month trial revenue sharing arrangement
commencing upon product launch, GIG will operate the SportXction(TM) System and
Sky Bet will be responsible for providing the players, receiving and managing
the customer's accounts, first level customer support and a comprehensive
marketing program. BSkyB is the UK's largest supplier of digital TV services
with approximately seven million active households throughout the UK and
Ireland. BSkyB is also one of the UK's leading sports rights holders and is at
the forefront of developing innovative interactive applications. The Company has
received design approval and is finalizing the necessary software interface to
provide compatibility between the SportXction(TM) System and the BSkyB
interactive television platform. The project is scheduled for completion late
this summer, followed by a subsequent delivery to BSkyB to undergo their
rigorous testing regimen.

         INTERNET

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

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

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


                                       15
<PAGE>

         On December 30, 2003, the Company announced that GIG had signed an
agreement with Tote Credit Limited, a subsidiary of the Horserace Totalisator
Board which holds the internet bookmaking license for totesport.com. As part of
Tote Credit's marketing undertakings the SportXction(TM) System will be promoted
through its on-line website, specialist publications and through dedicated
direct marketing and promotions. The Company launched the SportXction(TM) System
on the totesport.com website in early June 2004.

         On June 17, 2004, the Company announced that GIG had signed an
agreement with Victor Chandler UK Limited, the UK based operating arm of the
Victor Chandler Group, one of the world's leading independent betting and gaming
companies. On July 15, 2004, the Company announced that GIG had also signed an
agreement with Victor Chandler International, the Gibraltar based operating arm
of the Victor Chandler Group. The agreements are for the incorporation of the
Company's SportXction(TM) System into Victor Chandler's UK and international
websites with launches scheduled during August and September 2004.

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

         GIG currently offers live play-by-play wagering for soccer, cricket
(both one day and test matches), golf, rugby union and tennis. It has also
developed football, baseball and basketball versions of the SportXction(TM)
System. Development is underway to add fixed price horse racing, snooker and
darts to the range of sports for which the SportXction(TM) System may be used.
Additional sports, such as automobile racing are currently in the planning
stage.

         MOBILE PHONE

         On May 12, 2003, the Company announced that it had reached an
additional agreement with ukbetting, to incorporate the SportXction(TM) System
into a suite of betting services being marketed to key players in the UK mobile
phone market. ukbetting currently supplies a range of betting services to the
UK's major mobile networks including Orange, Vodafone, O2, T-Mobile and 3. On
October 15, 2003, the Company announced that the SportXction(TM) System had been
launched to ukbetting's wireless application protocol ("WAP") enabled users
through one of the world's largest mobile operators with over 13 million UK
customers. This non-marketed launch which was performed in order to gauge
usability was deemed a success. To date, this product has not been promoted and,
as a result, has generated an insignificant amount of wagering revenues. The
Company intends to deploy this product, in conjunction with ukbetting, to other
networks in the UK.


                                       16
<PAGE>

         BETTING SHOPS

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

         NON-WAGERING PRODUCT

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

         SYSTEM ENHANCEMENTS

         In July 2004, the Company announced the launch of its new
multi-language and multi-currency version of its SportXction(TM) System which
allows wagering using multiple currencies and provides players with a choice of
languages. The initial launch targeted the Greek speaking market with a Turkish
version scheduled to launch in September 2004. The Company expects additional
foreign language launches throughout the world.

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




                                       17
<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 dilutive
impact to existing shareholders; whether the Company's revenue will increase in
future quarters; whether the Company will have the interface needed to provide
compatibility between the SportXction(TM) System and BSkyB's digital television
platform available late this summer and whether the Company will launch the
SportXction(TM) System on BSkyB's digital television platform; how long the
Company will continue to incur significant losses and negative cash flow;
whether the Company will enter into agreements with new partners; 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; whether wagering using fixed odds betting terminals will be introduced;
whether a Turkish version of the SportXction(TM) System will be made available
in September 2004 and whether additional foreign language launches in Europe,
Asia, Africa and South America will take place; whether the SportXction(TM)
System will be migrated onto Sportingbet's next generation back end software;
whether the Company will launch the SportXction(TM) System on Stanley Leisure's
on-line betting business; whether the Company will launch the SportXction(TM)
System on Victor Chandler's websites in August and September 2004; and whether
the Company will deploy its mobile phone product on additional networks in the
UK. 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, 2003. 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.



                                       18
<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 in alerting them in a timely manner to material
information relating to the Company (including its consolidated subsidiaries)
required to be included in the Company's periodic SEC filings.

         (b) Internal Control Over Financial Reporting. There have not been any
changes in the Company's internal control over financial reporting (as such term
is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
fiscal quarter 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. Changes in Securities and Small Business Issuer Purchases of Equity
Securities

         On November 24, 2003, the Company entered into a Securities Purchase
Agreement with certain institutional investors (the "Investors"), under which
the Company issued and sold to the Investors in a private placement (i) $2.6
million of aggregate principal amount of 7.5% convertible Debentures due April
1, 2006, (ii) 390,390 shares of Common Stock priced at $3.33 per share, which
share price is equal to 80% of the daily volume weighted average price of the
Common Stock on the NASDAQ SmallCap Market as reported by Bloomberg Financial
L.P. (the "VWAP") during the ten day period prior to November 21, 2003 (the
"Closing Price"), and (iii) Investor Warrants to purchase 281,250 shares of
Common Stock at an exercise price of $4.58 per share, which share price is equal
to 110% of the Closing Price and which are exercisable until November 24, 2008.
Net proceeds from the private placement, after estimated costs and expenses,
were approximately $3.4 million and will provide additional working capital to
the Company.

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


                                       19
<PAGE>

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

         In connection with the private placement, the Company also entered into
a Registration Rights Agreement with the Investors pursuant to which the Company
agreed to prepare and file with the Securities and Exchange Commission a
registration statement covering the resale of the Common Stock issued to the
Investors, Common Stock that is issuable upon conversion of the Debentures
and/or exercise of the Investor Warrants, and/or issuable in payment of
principal and interest on the Debentures. The registration statement was filed
on January 6, 2004 and declared effective on March 18, 2004.

         On March 15, 2004, at the Company's Annual Meeting of Stockholders, the
stockholders approved the possible issuance of Common Stock in connection with
the Private Placement of more than 20% of the Company's total shares outstanding
immediately prior to the Private Placement.

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

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

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


                                       20
<PAGE>

Item 6. Exhibits and Reports on Form 8-K

         (a) Exhibits

         NUMBER                    DESCRIPTION
         ------                    -----------

         31.01    Certification of Barry Mindes, Chairman and Chief Executive
                  Officer of Interactive Systems Worldwide Inc., pursuant to
                  Section 302 of the Sarbanes-Oxley Act of 2002.

         31.02    Certification of James McDade, Chief Financial Officer of
                  Interactive Systems Worldwide Inc., pursuant to Section 302 of
                  the Sarbanes-Oxley Act of 2002.

         32.01    Certification of Barry Mindes, Chairman and Chief Executive
                  Officer of Interactive Systems Worldwide Inc., pursuant to
                  Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a)
                  and (b) of Section 1350, Chapter 63 of Title 18, United States
                  Code).

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

         (b) Reports on Form 8-K

             None.




                                       21
<PAGE>


                                   SIGNATURES

                  In accordance with the requirements of the Securities Exchange
Act of 1934, the registrant caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                        Interactive Systems Worldwide Inc.


Dated: August 16, 2004                  By:  /s/ Barry Mindes
                                             ----------------------------------
                                             Barry Mindes, Chairman and
                                             Chief Executive Officer
                                             (Principal Executive Officer)



Dated: August 16, 2004                  By:  /s/ James McDade
                                             --------------------
                                             James McDade, Chief Financial
                                             Officer
                                             (Principal Financial Officer)



                                       22