UNITED
        STATES
 SECURITIES
        AND EXCHANGE COMMISSION
 WASHINGTON,
        D.C. 20549
 
 FORM
        10-QSB
 
 x
              QUARTERLY
                  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                  OF
                  1934
  For
                    the quarterly period ended December 31,
                    2007
  o
              TRANSITION
                  REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
 
 For
                    the transition period from______________to
                    ______________Commission
                    file number0-21831
  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 subject
      to such filing requirement for the past 90 days.


Yes
xNo
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 February 11,
      2008.





Transitional
      Small Business Disclosure Format (Check one): Yes
o No
x










Interactive
      Systems Worldwide Inc.


December
      31, 2007


FORM
      10-QSB


IndexPagePart
                  I:
              
              Financial
                  Information
              2Item
                  1.
              
              Financial
                  Statements,
              2Condensed
                  Consolidated Balance Sheets at December 31, 2007 (Unaudited)
                  and September 30, 2007
              2Condensed
                  Consolidated Statements of Operations for the Three Months Ended
                  December
                  31, 2007 and 2006 (Unaudited)
              3Condensed
                  Consolidated Statement of Stockholders’ Equity (Deficiency) for the Three
                  Months Ended December 31, 2007 (Unaudited)
              4Condensed
                  Consolidated Statements of Cash Flows for the Three Months Ended
                  December
                  31, 2007 and 2006 (Unaudited)
              5Notes
                  to Condensed Consolidated Financial Statements (Unaudited)
              6-12Item
                  2.
              
              Management’s
                  Discussion and Analysis or Plan of Operations
              13-21Item
                  3.
              
              Controls
                  and Procedures
              22Part
                  II:
              
              Other
                  Information
              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)




December
                31,
            
            September
                30,2007
            
            2007(Unaudited)
            
            Note
                1Current
                assets:Cash
                and cash equivalents
            
            $
            193
            
            $
            284Accounts
                receivable
            
            
            96
            
            
            121Other
                receivables
            
            
            51
            
            
            17Prepaid
                expenses and other current assets
            
            
            36
            
            
            51Total
                current assets
            
            
            376
            
            
            473Property
                and equipment, net
            
            
            3
            
            
            4Capitalized
                  software, net of accumulated amortization of $1,154 and $1,112,
                  respectively
            
            
            334
            
            
            376Other
                assets
            
            
            48
            
            
            48Total
                assets
            
            $
            761
            
            $
            901


Liabilities
                and Stockholders’ (Deficiency)
                Equity


Current
                liabilities:Accounts
                payable
            
            $
            254
            
            $
            87Dividend
                payable on preferred stock
            
            
            173
            
            
            114Accrued
                expenses and other
            
            
            555
            
            
            634Total
                current liabilities
            
            
            982
            
            
            835Stockholders’
                (Deficiency) Equity:Preferred
                  stock, par value $.001 per share; 2,000,000 shares authorized,
                  60,000
                  Series A outstanding 3,742 Series C outstanding with a liquidation
                  preference of $3,742
            
            
            –
            
            
            –Common
                    stock par value $.001 per share; 80,000,000 shares authorized;
                    12,507,715
                    issued
            
            
            12
            
            
            12Additional
                paid-in capital
            
            
            28,329
            
            
            28,371Treasury
                stock, at cost, 242,000 common shares
            
            
            (441
            )
            
            (441
            )Accumulated
                other comprehensive income
            
            
            51
            
            
            55Accumulated
                deficit
            
            
            (28,172
            )
            
            (27,931
            )Total
                stockholders’ (deficiency) equity
            
            
            (221
            )
            
            66Total
                liabilities and stockholders’ (deficiency) equity
            
            $
            761
            
            $
            901





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 December 31,2007
            
            2006Revenues
            
            $
            241
            
            $
            55Costs
                and expenses:Cost
                of revenues
            
            
            181
            
            
            126Research
                and development expense
            
            
            4
            
            
            111General
                and administrative expense
            
            
            297
            
            
            860482
            
            
            1,097Operating
                loss
            
            
            (241
            )
            
            (1,042
            )Interest
                income, net
            
            
            –
            
            
            21Net
                loss
            
            
            (241
            )
            
            (1,021
            )Preferred
                stock dividend
            
            
            (59
            )
            
            (67
            )Net
                loss applicable to common shareholders
            
            $
            (300
            )
            $
            (1,088
            )Net
                  loss per share applicable to commonshareholders - basic and
                  diluted
            
            $
            (0.02
            )
            $
            (0.09
            )Weighted
                  average basic and dilutedcommon shares outstanding
            
            
            12,265,715
            
            
            12,119,290




See
      accompanying notes to condensed consolidated financial statements




3




Interactive
      Systems Worldwide Inc.


Condensed
      Consolidated Statement of Stockholders’ Equity (Deficiency)


For
      the
      Three Months Ended December 31, 2007


(Unaudited)





(Amounts
      in thousands except number of shares)





AccumulatedAdditional
            
            
            
            
            OtherPreferred
                stock
            
            Common
                stock
            
            Paid-In
            
            Treasury
            
            
            Comprehensive
            
            AccumulatedShares
            
            Amount
            
            Shares
            
            Amount
            
            Capital
            
            Stock
            
            
            Income
            
            Deficit
            
            TotalBalance
                  at September 30, 2007
            
            
            63,742
            
            $
            –
            
            
            12,507,715
            
            $
            12
            
            $
            28,371
            
            $
            (441
            )
            
            $
            55
            
            $
            (27,931
            )
            $
            66Dividends
                  and fees on Series C Preferred Stock payable in cash
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (59
            )
            
            
            
            
            
            
            
            
            
            
            
            (59
            )Compensation
                  cost associated with stock options
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            17
            
            
            –
            
            
            
            –
            
            
            –
            
            
            17Net
                loss
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            
            –
            
            
            (241
            )
            
            (241
            )Foreign
                  currency translation loss
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            
            (4
            )
            
            –
            
            
            (4
            )Comprehensive
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (245
            )Balance
                          at December 31, 2007
            
            
            63,742
            
            $
            –
            
            
            12,507,715
            
            $
            12
            
            $
            28,329
            
            $
            (441
            )
            
            $
            51
            
            $
            (28,172
            )
            $
            (221
            )





See
      accompanying notes to condensed consolidated financial statements




4




Interactive
      Systems Worldwide Inc.


Condensed
      Consolidated Statements of Cash Flows


(Unaudited)




(Amounts
      in thousands)




Three
                Months EndedDecember
                31,2007
            
            2006Cash
                flows from operating activities:Net
                loss
            
            $
            (241
            )
            $
            (1,021
            )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Depreciation
                and amortization
            
            
            46
            
            
            35Non-cash
                compensation
            
            
            17
            
            
            106Changes
                in assets and liabilities:Accounts
                receivable
            
            
            25
            
            
            20Other
                receivables
            
            
            (34
            )
            
            13Prepaid
                expenses and other current assets
            
            
            15
            
            
            (77
            )Other
                assets
            
            
            –
            
            
            (15
            )Accounts
                payable
            
            
            167
            
            
            177Accrued
                expenses
            
            
            (79
            )
            
            (29
            )Netcash used in operating activities
            
            
            (84
            )
            
            (791
            )Cash
                flows from investing activities:Proceeds
                from sales of investments
            
            
            –
            
            
            475Purchase
                of property and equipment
            
            
            –
            
            
            (9
            )Capitalized
                software
            
            
            –
            
            
            (89
            )Net
                cash provided by investing activities
            
            
            –
            
            
            377Cash
                flows from financing activities:Net
                cash provided by financing activities
            
            
            –
            
            
            –Net
                decrease in cash and cash equivalents
            
            
            (84
            )
            
            (414
            )Effect
                of exchange rate on cash
            
            
            (7
            )
            
            (54
            )Cash
                and cash equivalents, beginning of period
            
            
            284
            
            
            1,207Cash
                and cash equivalents, end of period
            
            $
            193
            
            $
            739Non-cash
                investing and financing activity:Issuance
                of common stock in relation to dividend paymentson
                Series C Preferred Stock
            
            $
            –
            
            $
            77Liability
                for dividend payable in cash
            
            $
            59
            
            
            –





See
      accompanying notes to condensed consolidated financial statements




5


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




Note
      l
      - Basis of Presentation:





The
      information at December 31, 2007 and for the three months ended December 31,
      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. These
      condensed consolidated financial statements should be read in conjunction with
      the audited financial statements for the year ended September 30, 2007 included
      in the Company’s Annual Report on Form 10-KSB filed with the SEC.




The
      Company’s revenue during the three months ended December 31, 2007 and 2006
      consisted of license fees, technical assistance fees, development fees and
      service charges from agreements with companies located in the United Kingdom,
      Mexico, Canada, Gibraltar and the United States. During the three months ended
      December 31, 2006, revenue consisted primarily of license fees and service
      charges calculated based on a percentage share of net wagering revenue after
      payment of winnings and taxes. During the three months ended December 31, 2007,
      the Company’s revenue primarily consists of minimum monthly service charges for
      furnishing the technology as well as license and development fees. In addition,
      after achieving certain thresholds, the Company may be entitled to a share
      of
      the net wagering revenue generated by its SportXction ® System.
      This component of 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 months ended December 31,
      2007
      and the years ended September 30, 2007 and 2006. In
      addition, the Company had a working capital deficiency at December 31, 2007
      and
      requires additional financing to meet its forecasted cash requirements and
      continue operations during fiscal 2008. These
      events and conditions raise substantial doubt about the Company’s ability to
      continue as a going concern. Management has developed and is attempting to
      implement a plan to address




6
 
 Interactive
          Systems Worldwide Inc.
 Notes
          To
          Condensed Consolidated Financial Statements
 (Unaudited)


Note
      2
      - Basis of Preparation (continued):





these
      issues and allow the Company to continue as a going concern through at least
      the
      fiscal year ending September 30, 2008. The plan includes (i) securing
      minimum monthly cash receipts from existing customers and new
      licensees ,
      (ii) a
      program to reduce costs, (iii) seeking debt and/or equity financing and
      (iv) pursuing other strategic transactions. On January 22, 2008, the Company
      sold notes to existing shareholders in a private placement to temporarily
      address its liquidity crises (see Note 9), however, there is no assurance that
      the Company will be able to raise sufficient 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
      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. The financial statements do
      not
      include any adjustments that relate to the outcome of this uncertainty.





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. 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. 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. A placement agent in this transaction received warrants
      to
      purchase 65,753 shares of the Company’s Common Stock expiring in August 2010,
      which are exercisable at $4.38 per share.




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 holders as to the exercise of either
      of their rights. If the Series C holders elected to require the Company to
      redeem their shares, absent the holders’ limitations, the Company would be
      required to issue approximately 7,231,000 common shares based on the
      quoted market price for its common stock on December 31, 2007.





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 dividends (which accrued for
      the
      quarters ended June 30, 2007, September 30, 2007 and December 31, 2007),
      amounting to $168,000, have been accrued as a liability in the accompanying
      balance sheet at December 31, 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 dividend payments
      which were due on July 2, 2007, October 1, 2007 and January 2, 2008. These
      unpaid dividends are subject to a late fee at the rate of 12% per annum (which
      must be paid in cash). Unpaid late fees amounting to $5,000 have been accrued
      as
      a liability in the accompanying balance sheet at December 31, 2007.





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.




8


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


Note
      3
      - Private Placements (continued):





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 and 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 (former) 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
      private placements. As of January 31, 2008 common shares are no longer saleable
      pursuant to the registration statements because the financial information
      included in the prospectus thereunder is no longer current. As a result warrants
      become exercisable on a cashless basis. The Company believes that any common
      shares which were issued on conversion of debentures and Series B Preferred
      Stock and which are issuable upon conversion of the Series C Preferred Stock
      and
      upon the cashless exercise of warrants issued in connection with the private
      placements are immediately saleable without volume restrictions pursuant to
      (current) Rule 144(b) and accordingly, no liquidated damages will be required
      to
      be paid by the Company.





Note
      4
      - Income Taxes:





We
      adopted the provisions of Financial Standards Accounting Board Interpretation
      No. 48 Accounting for Uncertainty in Income Taxes (“FIN 48”) an interpretation
      of FASB Statement No. 109 (“SFAS 109”) on October 1, 2007. FIN 48
      prescribes a recognition threshold and measurement of tax positions taken or
      expected to be taken in a tax return, among other items. In addition, FIN 48
      provides guidance on derecognition, classification, interest and penalties,
      accounting in interim periods, disclosure, and transition with respect to
      uncertainty in income taxes. The implementation of FIN 48, did not have any
      effect on the financial statements. The tax years 2003- 2006 remain open to
      examination by the major taxing jurisdictions to which we are subject. In the
      event that the Company is assessed interest or penalties at some point in the
      future, they will be classified in the financial statements as general and
      administrative expense.





9


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


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, 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
      Placement regarding the Company’s Series C Preferred Stock.




Note
      6
      - Stock Options:





Activity
      related to stock option plans for the three months ended December 31, 2007
      is as
      follows:




WeightedWeighted
            
            AverageAverage
            
            Remaining
            
            AggregateExercise
            
            Contractual
            
            IntrinsicOptions
            
            Shares
            
            Price
            
            Term
            
            ValueOutstanding
                at October 1, 2007
            
            
            638,000
            
            $
            1.22Granted
            
            
            
            
            
            –Exercised
            
            
            
            
            
            –Forfeited
                or expiredOutstanding
                at December 31, 2007
            
            
            638,000
            
            
            1.22
            
            
            3.9
            
            $
            34,000Vested
                or expected to vest
            
            
            638,000
            
            
            1.22
            
            
            3.9
            
            $
            34,000Exercisable
                at December 31, 2007
            
            
            533,000
            
            
            1.24
            
            
            3.3
            
            $
            26,000





The
      Company follows SFAS 123(R) and recognizes 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. During the three months ended December
      31,
      2007 and 2006, the Company recognized compensation cost relating to stock
      options of $17,000 and $21,000, respectively, which was charged to general
      and
      administrative expense.





As
      of
      December 31, 2007, there was $49,000 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.




10


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


Note
      6
      - Stock Options (continued):





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 three months ended December 31, 2007 and 2006, the Company
      recognized compensation expense of $0 and $84,000, respectively, which was
      charged to general and administrative expense in relation to warrants and common
      stock issued to non-employees.




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 preferred stock were converted and outstanding options and warrants
      were exercised and Common Stock was issued utilizing the treasury stock method.





The
      Company’s computation of dilutive net loss per share for the three months ended
      December 31, 2007 and 2006 does not assume any exercise of options or warrants
      to purchase 2,403,825 and 2,802,016 common shares, respectively, or the
      conversion of preferred stock to acquire 997,867 common shares, as their effect
      is antidilutive.





Note
      8
      - Concentration of revenues:





Revenues
      from Sportingbet (33%), Ladbrokes (25%) and Caliente (19%), represent over
      78%
      of the revenues during the three months ended December 31, 2007. Revenue from
      Caliente represented 86% of revenues for the three months ended December 31,
      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.




11
 
 Interactive
          Systems Worldwide Inc.
 Notes
          To
          Condensed Consolidated Financial Statements
 (Unaudited)


Note
      9
      - Subsequent event:





On
      January 22, 2008, pursuant to note purchase agreements, dated as of January
      14,
      2008, the Company sold $269,000 aggregate principal amount of 14% Non-Negotiable
      Promissory Notes due July 31, 2008 (the “Notes”) in a private placement
      exclusively to accredited investors, all of whom are existing stockholders
      (including Bernard Albanese, the Company’s Chairman and Chief Executive Officer,
      and Philip Rule, a Director of the Company, who each purchased $50,000 principal
      amount of the Notes). The aggregate principle amount of the Notes issuable
      pursuant to the note purchase agreements cannot exceed $500,000. The purpose
      of
      the financing was to (i) temporarily address the Company’s liquidity crisis by
      providing working capital to enable the Company to continue its operations
      beyond January 2008 and (ii) pay past due and current accounts payable of the
      Company. The note purchase agreements provide that until the earlier of (a)
      payment of all principal and accrued interest on the Notes, or (b) August 1,
      2008, the Company may not (i) declare or pay any cash dividends or make any
      cash
      distributions on its common stock or preferred stock or purchase or otherwise
      acquire for value, directly or indirectly, any of its outstanding common stock
      or preferred stock; or (ii) increase the salary of any Company officer above
      the
      salary which such officer was being paid as of the date of the
      Notes.




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 months ended December 31, 2006 (“Fiscal 2007”), revenue consisted
      primarily of license fees and service charges calculated based on a percentage
      share of net wagering revenue after payment of winnings and taxes. During the
      three months ended December 31, 2007 (“Fiscal 2008”), the Company’s revenue
      primarily consists of minimum monthly service charges for furnishing the
      technology as well as license and development fees. In addition, after achieving
      certain thresholds, the Company may be entitled to a share of the net wagering
      revenue generated by its SportXction ® System.
      This component of 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.





**Going
      Concern Considerations**





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 months ended December 31,
      2007
      and the years ended September 30, 2007 and 2006. In addition. The Company had
      a
      working capital deficiency at December 31, 2007 and requires additional
      financing to meet its forecasted cash requirements and continue operations
      during fiscal 2008. 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, 2008. The plan includes
      (i) securing
      minimum monthly cash receipts from existing customers and new
      licensees ,
      (ii) a
      program to reduce costs, (iii) seeking debt and/or 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.




14





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 months ended December 31, 2007 and
      2006, the Company capitalized $0 and $89,000 respectively 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
      $42,000 and $28,000 during the three months ended December 31, 2007 and 2006,
      respectively.





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





The
      Company follows SFAS 123(R) and recognizes 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. During the three months ended December
      31,
      2007 and 2006, the Company recognized compensation cost relating to stock
      options of $17,000 and $21,000, respectively, which was charged to general
      and
      administrative expense.





We
      account for uncertain tax positions in accordance with FASB Interpretation
      No.
      48 Accounting for Uncertainty in Income Taxes (“FIN 48”) an interpretation of
      FASB Statement No. 109 (“SFAS 109”). The application of income tax law is
      inherently complex. Laws and regulations in this area are voluminous and are
      often ambiguous. As such, we are required to make many subjective assumptions
      and judgments regarding our income tax exposures. Interpretations of and
      guidance surrounding income tax laws and regulations change over time. As such,
      changes in our subjective assumptions and judgments can materially affect
      amounts recognized in the consolidated balance sheets and statements of
      operations. See Note 4 to the unaudited condensed consolidated financial
      statements.





See
      Note
      3 to the Company’s Form 10-KSB for the year ended September 30, 2007 for a full
      discussion of the Company’s critical accounting policies and estimates.




15





**Financial
      Results**





**Three
      Months Ended December 31, 2007 and 2006**





Revenues
      for the three months ended December 31, 2007 were $241,000, as compared to
      $55,000 during the same period in the prior year. The increase was primarily
      due
      to the Company’s agreements with Sportingbet and Ladbrokes which provide certain
      minimum payments as well as an agreement to develop software for the Ontario
      Lottery & Gaming Corporation (“OLG”).




Cost
      of
      revenues for the three months ended December 31, 2007 were $181,000, as compared
      to $126,000 during the same period in the prior year. The increase was due
      to
      costs related to software development for the OLG and higher amortization
      expenses associated with capitalized product enhancements.




Research
      and development expense for the three months ended December 31, 2007 was $4,000,
      as compared to $111,000 during the same period in the prior year. The decrease
      was primarily due to lower payroll costs.




General
      and administrative expense for the three months ended December 31, 2007 was
      $297,000, as compared to $860,000 during the same period in the prior year.
      The
      decrease was primarily due to lower payroll costs and professional fees in
      Fiscal 2008, a provision for anticipated costs in Fiscal 2007 associated with
      GIG’s terminated office lease and non-cash compensation expense incurred in
      Fiscal 2007 associated with warrants and common stock which were issued to
      consultants.




Interest
      income for the
      three
      months ended December 31, 2007 was
      $0,
      as compared to $21,000 during
      the same period in the prior year . The
      decrease was primarily due to lower cash and short term investments balances.





Net
      loss
      applicable to common shareholders and net loss per share applicable to common
      shareholders (basic and diluted) for the
      three
      months ended December 31, 2007 was
      $300,000 and $0.02, respectively, as compared to $1,088,000 and $0.09,
      respectively, during the same period in the prior year. The improvement was
      primarily due to lower expenses and increased revenues.




**Liquidity
      and Capital Resources**




As
      of
      December 31, 2007, the Company had  liquid
      resources totaling $193,000 which consisted of cash and cash equivalents.





The
      Company’s operations currently do not generate positive cash flow. The Company
      has taken a number of steps to improve cash flow by securing minimum monthly
      cash receipts from existing customers and new licensees and by reducing
      operating costs in the areas of payroll, rent, professional fees and
      consultants. On January 22, 2008, pursuant to note purchase agreements, dated
      as
      of January 14, 2008, the Company sold $269,000 aggregate principal amount of
      14%
      Non-Negotiable Promissory Notes due July 31, 2008 (the “Notes”) in a private
      placement exclusively to accredited investors who are existing stockholders
      (including Bernard Albanese, the Company’s Chairman and Chief Executive Officer,
      and Philip Rule, a Director of the Company). The purpose of the financing was
      to
      (i) temporarily address the Company’s liquidity crisis by providing working
      capital to enable the Company to continue its operations beyond January 2008
      and
      (ii) pay past due and current accounts payable of the Company. The note purchase
      agreements provide that until the earlier of (a) payment of all principal and
      accrued interest on the Notes, or (b) August 1, 2008, the Company may not (i)
      declare or pay any cash dividends or make any cash distributions on its common
      stock or preferred stock or purchase or otherwise acquire for value, directly
      or
      indirectly, any of its outstanding common stock or preferred stock; or (ii)
      increase the salary of any Company officer above the salary which such officer
      is being paid as of the date of the Notes.




16





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 March 2008.





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. 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. A
      placement agent in this transaction received warrants to purchase 65,753 shares
      of the Company’s Common Stock expiring in August 2010 which are exercisable at
      $4.38 per share.





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 dividends (which accrued for
      the
      quarters ended June 30, 2007, September 30, 2007 and December 31, 2007),
      amounting to $168,000, have been accrued as a liability in the balance sheet
      at
      December 31, 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 dividend payments which were due
      on
      July 2, 2007, October 1, 2007 and January 2, 2008. These unpaid dividends are
      subject to a late fee at the rate of 12% per annum (which must be paid in cash).
      Unpaid late fees amounting to $5,000 have been accrued as a liability in the
      balance sheet at December 31, 2007.




17





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. 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 and 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 (former) 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
      private placements. As
      of
      January 31, 2008 common shares are no longer saleable pursuant to the
      registration statements because the financial information included in the
      prospectus thereunder is no longer current. As a result warrants become
      exercisable on a cashless basis. The Company believes that any common shares
      which were issued on conversion of debentures and Series B Preferred Stock
      and
      which are issuable upon conversion of the Series C Preferred Stock and upon
      the
      cashless exercise of warrants issued in connection with the private placements
      are immediately saleable without volume restrictions pursuant to (current)
      Rule
      144(b) and accordingly, no liquidated damages will be required to be paid by
      the
      Company.





**Off
      Balance Sheet Arrangements**





None





System
      DeploymentStatus




***Internet***





The
      Company has two non-exclusive agreements with bookmakers in the UK. 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 a fully integrated product configuration and
      operational services package, which is provided to the Company’s wagering
      partners. By providing a real-time, interactive data stream, the Company’s
      play-by-play betting propositions are placed seamlessly within our business
      partners’ betting offerings, maintaining a consistent “look and feel” with the
      partner’s other betting offerings. The user can then place wagers from its
      existing account in the same manner as all other bets made with that partner.
      The betting offerings managed by GIG’s staff, utilizing the SportXction® System,
      are indistinguishable from the betting offerings managed by our business
      partner’s employees.




18





On
      December 5, 2006, the Company announced that it had launched this 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 this integrated
      version of its SportXction ® System
      with Ladbrokes eGaming Ltd.





As
      of
      September 1, 2007, the Company had discontinued its stand-alone product
      configuration with BetShop Group (Europe) Ltd., Victor Chandler UK Ltd., and
      Victor Chandler International. The Company is currently in discussions with
      some
      of our former stand-alone business partners and with potential new partners
      regarding the integrated product.





***Hand-held
      devices***





Under
      a
      three year agreement entered into in August 2006, GIG provides software and
      services that enable Caliente, one of Latin America’s largest gaming companies,
      to offer an enhanced play-by-play sports betting service in all of its Race
      & Sports Books locations. Caliente owns and/or provides services to 160
      betting shops, known as Race & Sports Books, throughout Mexico, Central and
      South America and the Caribbean. Since September 2006, the Company’s
      SportXction ® System
      has been deployed in ten locations using hand held, touch screen devices. The
      SportXction ® System
      is also expected to be offered on Caliente’s website in 2008.





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.





***Anticipated
      deployments***





On
      September 17, 2007, the Company announced that it had received a purchase order
      from the Ontario Lottery and Gaming Corporation (“OLG”), which authorizes the
      spending of up to $175,000 for software development and other services. This
      software development is required for the modification of the Company’s
      SportXction ® System
      to add certain features, including the offering of parlay wagering, required
      by
      OLG. OLG is authorized under Canadian and provincial law to operate gaming
      and
      wagering businesses within the Province of Ontario.




The
      Company and OLG are currently negotiating a development/licensing agreement,
      which would allow OLG to conduct a six-month field trial of the modified
      SportXction ® System,
      after its completion, for use in up to two casinos. The purchase order allowed
      the commencement of software development while the definitive licensing
      agreement is being negotiated. Actual delivery of the modified software will
      not
      occur until after signing the licensing agreement. The Company is optimistic
      that this field trial will lead to a broader implementation in multiple casinos
      and other on-site gaming venues throughout Ontario, Canada. If successful,
      the
      system will have applicability in other Canadian provinces, as
      well.




19




On
      December 5, 2007, the Company announced that it has signed an Agreement in
      Principle with Neptune Race and Sports Book, Inc. (“Neptune”). This non-binding
      agreement provides the commercial framework for an anticipated licensing
      agreement to be negotiated between the two parties for the use of the Company’s
      SportXction ® System .






Neptune
      currently provides turnkey race and sports wagering systems and services for
      use
      on cruise ships and in resort casinos. The intention of this agreement is for
      Neptune to license the Company’s SportXction ® System in order
      to add play-by-play wagering to its existing capabilities for use in its current
      and future casino venues. It is anticipated that Neptune’s personnel will
      operate the SportXction ® System from its
      operations hub located in Nevada. The Company anticipates receiving initial
      upfront service fees as well as a share of the revenue.





***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 March 2008 or thereafter and whether the
      Company will be able to meet its cash requirements; 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 there is a significant potential market for the Company’s
      horseracing product under development, whether the Company will be able to
      enter
      into additional agreements for the fully integrated system implementation,
      whether the Company will enter into definitive agreements with the Ontario
      Lottery Board or the Neptune Race and Sports Book, Inc., how
      long
      the Company will continue to incur significant losses and negative cash
      flow; whether
      the Company or its partners will attract adequate players to the
      SportXction ® System
      for sports wagering and sports contests; 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, 2007. 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
      3.
      Defaults Upon Senior Securities





The
      Company failed to make the mandatory cumulative quarterly dividend payments
      on
      its Series C Preferred Stock in the amount of $168,000 (calculated at the rate
      of 6% per annum; see Note 3 to Condensed Consolidated Financial Statements
      (Unaudited)) which were due on July 2, 2007, October 1, 2007 and January 2,
      2008. 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 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. As of the date of
      this filing, the Company has not been notified of any election having been
      made
      by the Series C holders as to the exercise of either of their rights. If the
      Series C holders elected to require the Company to redeem their shares, absent
      the holders’ limitations, the Company would be required to
      issue approximately 7,231,000 common shares based on the quoted market
      price for its common stock on December 31, 2007.




Registration
      rights agreements were entered into in connection with the
      Company’s private placements which required the Company to file a
      registration statement for the resale of the common shares issuable upon
      conversion of debentures and 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 (former) 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. As of January 31, 2008 common shares are no longer
      saleable pursuant to the registration statements because the financial
      information included in the prospectus thereunder is no longer current. As
      a
      result warrants become exercisable on a cashless basis. The Company believes
      that any common shares which were issued on conversion of debentures and Series
      B Preferred Stock and which are issuable upon conversion of the Series C
      Preferred Stock and upon the cashless exercise of warrants issued in connection
      with the private placements are immediately saleable without volume restrictions
      pursuant to (current) Rule 144(b) and, accordingly, no liquidated damages will
      be required to be paid by the Company.




22





Item
      6.  Exhibits





NUMBER
            
            DESCRIPTION4.1
            
            Form
                of Note Purchase Agreement dated as of January 14,
                2008.4.2
            
            Form
                of 14% Non-Negotiable Promissory Notes due July 31,
                2008.31.01
            
            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:
                  February 19, 2008
              By:
              /s/
                  Bernard AlbaneseBernard
                  AlbaneseChief
                  Executive Officer(Principal
                  Executive Officer andPrincipal Financial Officer)
 
 24