<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 December 31, 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
              offices)                                        (Zip Code)

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 10,119,987 shares of Common Stock outstanding at February 10, 2005.

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


<PAGE>

Interactive Systems Worldwide Inc.
December 31, 2004
FORM 10-QSB

Index
                                                                            Page
                                                                            ----

Part I:  Financial Information

Item 1.  Financial Statements,

         Consolidated Balance Sheets at December 31, 2004 (Unaudited)
         and September 30, 2004                                                2

         Consolidated Statements of Operations for the Three
         Months Ended December 31, 2004 and 2003 (Unaudited)                   3

         Consolidated Statement of Stockholders' Equity for the
         Three Months Ended December 31, 2004 (Unaudited)                      4

         Consolidated Statements of Cash Flows for the Three Months
         Ended December 31, 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                               11-17

Item 3.  Controls and Procedures                                              18

Part II: Other Information

Item 6.  Exhibits                                                             18

Signatures                                                                    19

<PAGE>


                  Part I: Financial Information

Item 1. Financial Statements

                       Interactive Systems Worldwide Inc.
                           Consolidated Balance Sheets

             (Amounts in thousands except share and per share data)


<TABLE>
<CAPTION>
                                                                                     December 31,  September 30,
                                                                                        2004          2004
                                                                                    ------------    -----------
                                                                                    (Unaudited)       Note 1
<S>                                                                                   <C>            <C>
Current assets:
      Cash and cash equivalents                                                       $  3,994       $  2,832
      Accounts receivable                                                                   18              7
      Investments in marketable securities                                                 585            285
      Other receivables                                                                     38             31
      Prepaid expenses and other current assets                                            244            158
                                                                                      --------       --------
              Total current assets                                                       4,879          3,313

      Property and equipment, net                                                          116            144
      Capitalized software, net of
        accumulation amortization of $555 and $476, respectively                           413            492
      Other assets                                                                         518            556
                                                                                      --------       --------
                  Total assets                                                        $  5,926       $  4,505
                                                                                      ========       ========

                         Liabilities and Stockholders' Equity
Current liabilities:
      Accounts payable                                                                $    238       $    153
      Accrued expenses                                                                     914            922
                                                                                      --------       --------
              Total current liabilities                                                  1,152          1,075

Long-term debt:
      Debentures, net of discount of $535 and $912, respectively                         1,307          1,538
                                                                                      --------       --------
                                  Total liabilities                                      2,459          2,613
                                                                                      --------       --------


Stockholders' Equity:
      Preferred stock, par value $.001 per share; 2,000 shares authorized 60,000
              Series A issued and outstanding, 3,000 Series B issued
              and outstanding with a liquidation preference of $3 million                   --             --
      Common stock par value $.001 per share;
              20,000,000 shares authorized;
              9,985,420 and 9,799,418 issued, respectively                                  10             10
      Additional paid-in capital                                                        19,285         15,958
Treasury stock, at cost, 242,000 shares                                                   (441)          (441)
Accumulated other comprehensive loss                                                       (42)           (26)
Accumulated deficit                                                                    (15,345)       (13,609)
                                                                                      --------       --------
                    Total stockholders' equity                                           3,467          1,892
                                                                                      --------       --------
                  Total liabilities and stockholders' equity                          $  5,926       $  4,505
                                                                                      ========       ========
</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
                                                                        December 31,
                                                                    2004             2003
                                                                 -----------       -----------

<S>                                                              <C>               <C>
Revenue                                                          $        23       $         8
                                                                 -----------       -----------

Costs and expenses:
     Cost of revenue, research
         and development expense                                         530               457

     General and
         Administrative expense                                          791               730
                                                                 -----------       -----------
                                                                       1,321             1,187
                                                                 -----------       -----------

            Operating loss                                            (1,298)           (1,179)

Interest expense                                                         213                46
                                                                 -----------       -----------
            Net loss                                                  (1,511)           (1,225)
Preferred stock dividend
  (beneficial conversion feature)                                       (225)               --
                                                                 -----------       -----------

            Net loss applicable to common shareholders           $    (1,736)      $    (1,225)
                                                                 ===========       ===========

Net loss per share applicable to
  common shareholders - basic and diluted                        $     (0.18)      $     (0.13)
                                                                 ===========       ===========

Weighted average basic and diluted
  common shares outstanding                                        9,651,078         9,096,793
                                                                 ===========       ===========

</TABLE>

See accompanying notes to consolidated financial statements

                                       3
<PAGE>

                       Interactive Systems Worldwide Inc.
                 Consolidated Statement of Stockholders' Equity
                  For the Three Months Ended December 31, 2004
                                  (Unaudited)

                 (Amounts in thousands except number of shares)



<TABLE>
<CAPTION>

                                                                                                 Accumulated
                                   Preferred stock     Common stock       Additional               Other
                                -------------------  --------------------  Paid-In   Treasury   Comprehensive  Accumulated
                                 Shares      Amount   Shares     Amount    Capital    Stock         Loss         Deficit      Total
                                ---------   -------  ---------  ---------  --------  ---------   -----------   -----------   ------
<S>                                <C>      <C>      <C>        <C>        <C>        <C>         <C>         <C>         <C>
Balance at
  September 30, 2004               60,000   $    --  9,799,418  $      10  $  15,958  $  (441)    $     (26)  $ (13,609)  $   1,892

Issuance of 3,000 shares
  of Series B Preferred Stock
  including warrants to
  purchase common stock
  through private placement,
  net of expenses of $374           3,000        --         --         --      2,626       --            --          --       2,626

Dividend on Series B Preferred
  Stock (beneficial conversion
  feature)                             --        --         --         --        225       --            --        (225)         --

Issuance of common stock
  in relation to Debentures            --        --    135,002         --        421       --            --          --         421

Issuance of common stock
  through exercise of options          --        --     51,000         --         55       --            --          --          55

Net loss                               --        --         --         --         --       --            --      (1,511)     (1,511)

Foreign currency
  translation loss                     --        --         --         --         --       --           (16)         --         (16)
                                                                                                                          ---------
Comprehensive loss                                                                                                           (1,527)
                                ---------   -------  ---------  ---------  ---------  -------     ---------   ---------   ---------
Balance at
  December 31, 2004                63,000   $    --  9,985,420  $      10  $  19,285  $  (441)    $     (42)  $ (15,345)  $   3,467
                                =========   =======  =========  =========  =========  =======     =========   =========   =========
</TABLE>


See accompanying notes to consolidated financial statements

                                       4
<PAGE>

                       Interactive Systems Worldwide Inc.
                     Consolidated Statements of Cash Flows

                                  (Unaudited)
                             (Amounts in thousands)



<TABLE>
<CAPTION>
                                                                         Three Months Ended
                                                                            December 31,
                                                                         2004         2003
                                                                       -------       -------
<S>                                                                    <C>           <C>
Cash flows from operating activities:
    Net loss                                                           $(1,511)      $(1,225)
Adjustments to reconcile net loss
         to net cash used in operating activities:
         Depreciation and amortization                                     104           101
      Non-cash interest expense                                            187            57
      Non-cash amortization of debt issuance costs                          38            13
Changes in assets and liabilities:
    Accounts receivable and other receivables                              (18)          (34)
    Prepaid expenses and other current assets                              (86)          (84)
    Other assets                                                            38            --
    Accounts payable                                                        85            82
    Accrued expenses                                                       (50)          119
                                                                       -------       -------
                 Net cash used in operating activities                  (1,213)         (971)
                                                                       -------       -------

Cash flows from investing activities:
    Purchase of investments                                               (300)           --
    Proceeds from sales of investments                                      --           190
    Purchase of property and equipment                                      (5)           (3)
                                                                       -------       -------
                 Net cash (used) provided by investing activities         (305)          187
                                                                       -------       -------

Cash flows from financing activities:
    Proceeds from issuance of convertible debt                              --         2,600
    Proceeds from issuance of preferred stock                            3,000            --
    Proceeds from issuance of common stock                                  55         1,300
    Costs associated with private placement                               (374)         (465)
                                                                       -------       -------
                 Net cash provided by financing activities               2,681         3,435
                                                                       -------       -------

Net increase in cash and cash equivalents                                1,163         2,651
Effect of exchange rate on cash                                             (1)           (9)
Cash and cash equivalents, beginning of period                           2,832         4,127
                                                                       -------       -------
Cash and cash equivalents, end of period                               $ 3,994       $ 6,769
                                                                       =======       =======

Non-cash investing and financing activity:
Issuance of warrants to investors                                      $   368       $   636
Issuance of warrants to finder                                         $    75       $   274
Beneficial conversion feature of Debentures                            $    --       $   353
Beneficial conversion feature of Series B Preferred Stock              $   225       $    --

</TABLE>

See accompanying notes to consolidated financial statements

                                       5
<PAGE>

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


Note l - Basis of Presentation:

         The information at December 31, 2004 and for the three months ended
         December 31, 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, 2004 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, 2004
         and 2003 consisted of license fees and service charges from agreements
         with companies located in the United Kingdom and Gibraltar. The Company
         recognizes revenue from its agreements with bookmakers as it is earned
         based on a percentage share of the net wagering revenue and with other
         non-wagering companies based on agreed service charges.


Note 2 - Private Placement:

         On November 12, 2004, the Company entered into a financing agreement
         relating to a $3.0 million private placement with institutional
         investors consisting of 3,000 shares of the Company's newly issued
         Series B Convertible Preferred Stock ("Series B"). Series B is
         initially convertible into the Company's Common Stock at $3.07 per
         share. The investors also received warrants that expire in November
         2009 to purchase 513,172 shares of Common Stock at $3.36 per share,
         subject to adjustment which were valued at $368,000 using the Black
         Scholes option pricing model. Net proceeds from the financing after
         costs and expenses were approximately $2.6 million.


                                       6
<PAGE>

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


Note 2 - Private Placement (continued):

         The Series B is initially convertible into an aggregate of 977,470
         shares of Common Stock. In connection with the issuance of the Series
         B, the Company recorded a dividend to Series B shareholders of $225,000
         representing the beneficial conversion feature resulting from the
         difference between the effective conversion price and the quoted market
         price of the Company's common stock at the date of issuance. In
         addition, holders of Series B are entitled to receive a 6% annual
         dividend, payable quarterly in cash or, subject to certain conditions,
         shares of Common Stock at the Company's option. During the quarter
         ending March 2005, the Company declared the January 2005 dividend of
         $24,000 which was satisfied in cash. Under the terms of the
         transaction, and subject to certain conditions, the Company has the
         right to force conversion of all or a portion of the Series B into
         Common Stock. The Series B 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 B for cash.
         For certain other events, each holder would have the right to require
         the Company to redeem the Series B for the Company's Common Stock or
         increase the dividend of the Series B to 12% per annum. In addition,
         the Series B and investor warrants are subject to certain anti-dilution
         protection. A placement agent in this transaction received a cash fee
         of $180,000 and warrants to purchase 102,740 shares of the Company's
         Common Stock expiring in November 2009 and are exercisable at $3.50 per
         share.

Note 3 - Debt:

         In November 2003, the Company issued $2.6 million of 7.5% Convertible
         Debentures ("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) which began in May 2004 with interest payable quarterly.
         Under the terms of the transaction, and subject to certain conditions,
         the Company may make periodic interest and principal payments in shares
         of the Company's Common Stock valued at a discount from the weighted
         average market price prior to such payments. During the three months
         ended December 31, 2004, 135,002 common shares were issued in
         satisfaction of the principal and interest payment. Such shares were
         accounted for based on their quoted market price at the date of
         issuance. As the Company currently intends to pay the remaining
         principal by issuing common shares, none of the Debentures been
         classified as a current liability in the accompanying balance sheet at
         December 31, 2004. The Company also under certain conditions has the
         right to force conversion of all or a portion of the Debentures into
         Common Stock. The conversion price of the Debentures is subject to
         adjustment under certain circumstances. The Debentures contain certain
         provisions and restrictions, which if violated, could result in the

                                       7
<PAGE>
=
                       Interactive Systems Worldwide Inc.
                   Notes To Consolidated Financial Statements
                                   (Unaudited)


Note 3 - Debt (continued):

         full principal amount together with interest and other amounts becoming
         immediately due and payable in cash.

         The following table summarizes the carrying value of the Debentures at
         December 31, 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                                            (758)
         Amortization of discount                                           408
                                                                        -------
         7.5% convertible debentures, net balance
         at December 31, 2004                                           $ 1,307
                                                                        =======

         In January and February 2005, investors converted $983,000 of their
         remaining outstanding Debentures into 214,701 shares of the Company's
         Common Stock. In connection with these conversions, the Company
         accelerated the amortization of $285,000 of the related discount
         recorded upon issuance of the Debentures.


                                       8
<PAGE>

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


Note 4 - 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):
                                                          Three Months Ended
                                                           December 31,
                                                          2004          2003
                                                          ----          ----

         Net loss applicable to
           common shareholders, as reported              $(1,736)     $(1,225)
         Deduct: Total stock-based
           employee compensation
           expense determined under
           fair value based method                           (23)         (25)
                                                         -------     --------

         Pro forma net loss applicable
            to common shareholders                       $(1,759)     $(1,250)
                                                         =======     ========

         Net loss per share applicable to
          common shareholders - basic
           and diluted, as reported                      $ (0.18)    $  (0.14)
                                                        ========    =========

         Net loss per share applicable to
          common shareholders - basic
           and diluted, pro forma                        $ (0.18)    $  (0.15)
                                                        ========     ========


         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 3.93% and 3.79% in 2005 and 2004,
         respectively, expected volatility of 29% and 85% in 2005 and 2004,
         respectively, and an expected life of 7 years (for all periods). The
         weighted average fair value of options granted in Fiscal 2005 and 2004
         was $1.21 and $2.89, respectively.

                                       9
<PAGE>

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

Note 5 - 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
         months ended December 31, 2004 and 2003 does not assume any exercise of
         options or warrants to purchase 2,625,878 and 1,739,571 common shares,
         respectively, as their effect is antidilutive.

Note 6 - 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 December 31, 2004, no such dividend has been
         declared. Series A has no liquidation preference. On November 12, 2004,
         the Company entered into a financing agreement relating to a $3.0
         million private placement with institutional investors consisting of
         3,000 shares of the Company's newly issued Series B Preferred Stock
         (described in Note 2).



                                       10
<PAGE>



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

DESCRIPTION OF BUSINESS

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

         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(TM) 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(TM) System. To achieve commercial success,
the SportXction(TM) System must be accepted by a significant number of users.

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

                                       11
<PAGE>

         The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86 "Computer Software
To Be Sold, Leased, or Otherwise Marketed". Such costs are expensed prior to a
product or product enhancement's achievement of technological feasibility and
thereafter are capitalized. The Company defines a product enhancement as an
improvement to an existing product that is intended to extend the life or
improve significantly the marketability of the original product. In order to
meet the requirements for capitalization, a product enhancement should involve
considerable development resources, requires a product design and may require a
redesign of all or part of the existing product. During the three months ended
December 31, 2004 and 2003, the Company did not capitalize any software
development costs. Amortization expense, which has been computed on a
straight-line basis and an estimated economic life of three years, amounted to
$79,000 and $77,000 during the three months ended December 31, 2004 and 2003,
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.

         See Note 2 to the Company's Form 10-KSB for the year ended September
30, 2004 for a full discussion of the Company's critical accounting policies and
estimates.

FINANCIAL RESULTS

THREE MONTHS ENDED DECEMBER 31, 2004 AND 2003

         Revenue for the three months ended December 31, 2004 was $23,000, as
compared to $8,000 during the same period in 2003. The increase in Fiscal 2005
is due to new wagering partners and an increase in the number of events covered.
Revenues for Fiscal 2005 include service charges from the Company's agreements
with the Spanish and Greek affiliates of Sportingbet plc, Victor Chandler and
the Tote, none of which were in "live" operation in Fiscal 2004.

         The Company has been very encouraged by the recent results from the
Spanish and Turkish (launched in January 2005) markets. The "handle" (total
amount wagered through the system) and the "hold" (amount wagered less the
payouts made to the winning players) for January 2005 exceeded the results for
the three months ended December 31, 2004 (refer to "Recent Operating Data"). The
Company expects a significant increase in revenues during the quarter ending
March 31, 2005 from these foreign markets as well as the anticipated launch of
the SportXction(TM) System on BSkyB's digital television platform in the U.K.
and Ireland.

         Cost of revenue, research and development expense for the three months
ended December 31, 2004 was $530,000, as compared to $457,000 during the same
period in the prior year. The increase was primarily due to higher consulting
costs and software development salaries and benefits.

                                       12
<PAGE>

         General and administrative expenses during the three months ended
December 31, 2004 were $791,000, as compared to $730,000 during the same period
in the prior year. The increase in Fiscal 2005 was primarily due to higher
business development costs and travel expenses.

         Interest expense during the three months ended December 31, 2004 was
$213,000, as compared to $46,000 during the same period in the prior year. This
non-cash expense represents interest on the Company's outstanding Debentures
which was satisfied in shares of the Company's 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.

         In connection with the issuance of the Series B Preferred Stock in
November 2004, the Company recorded a dividend to Series B shareholders of
$225,000 representing the beneficial conversion feature resulting from the
difference between the effective conversion price and the quoted market price of
the Company's Common Stock at the date of issuance. This preferred stock
dividend did not require the payment of cash or the issuance of additional
shares of Common Stock.

         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, 2004 was $1,736,000 and $0.18, respectively, as compared to
$1,225,000 and $0.13, respectively, during the same period in Fiscal 2004. The
increase in Fiscal 2005 is primarily the result of higher costs, interest
expense and the beneficial conversion feature associated with the Series B
Preferred Stock (as described above).

LIQUIDITY AND CAPITAL RESOURCES

         As of December 31, 2004, the Company had liquid resources totaling
$4,579,000. These include cash and cash equivalents in the amount of $3,994,000
and investments in the amount of $585,000. Investments are limited to investment
grade marketable securities with maturities of less than 12 months.

         The Company's operations currently do not generate positive cash flow
and are not expected to do so during the fiscal year ending September 30, 2005.
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 agreement with SkyBet (refer to "System
Deployment Status Update") 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.

                                       13
<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.

         In November 2003, the Company issued $2.6 million of 7.5% Convertible
Debentures (the "Debentures"). The Debentures are repayable in 24 equal monthly
installments of $108,333 which began in May 2004 with interest payable
quarterly. 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. The
Debentures contain certain provisions and restrictions, which if violated, could
result in the full principal amount together with interest and other amounts
becoming immediately due and payable in cash. To date, the Company has made all
interest payments with respect of the Debentures in shares of the Company's
Common Stock. The Company made its principal repayment in May 2004 in cash,
elected to defer its monthly repayment in June 2004 as permitted under the
Debenture and made the remainder of its principal repayments to date in shares
of the Company's Common Stock. In January and February 2005, two of the
investors converted $983,000 of their remaining outstanding Debentures into
214,701 shares of the Company's Common Stock.

         On November 12, 2004, the Company entered into a financing agreement
relating to a $3.0 million private placement with institutional investors
consisting of shares of Series B Convertible Preferred Stock ("Series B")
convertible into an aggregate of 977,470 shares of Common Stock at $3.07 per
share. The investors also received warrants that expire in November 2009 to
purchase 513,172 shares of Common Stock at $3.36 per share, subject to
adjustment. Net proceeds from the financing after costs and expenses were
approximately $2.6 million.

         Holders of Series B are entitled to receive a 6% annual dividend,
payable quarterly in cash or, subject to certain conditions, shares of Common
Stock at the Company's option. The Company made its dividend payment in January
2005 in cash. Under the terms of the transaction, and subject to certain
conditions, the Company has the right to force conversion of all or a portion of
the Series B into Common Stock. The Series B 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 B for cash. For
certain other events, each holder would have the right to require the Company to
redeem the Series B for the Company's Common Stock or increase the dividend of
Series B to 12%.


                                       14
<PAGE>

SYSTEM DEPLOYMENT STATUS UPDATE

         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 (with either party having the right to terminate
the agreement after six months), GIG will receive a share of the wagering
revenue for operating 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 over 7.6 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. On October 14, 2004, the Company announced that it had completed
the development of its iTV version of the SportXction(TM) System. On January 25,
2005, the Company announced that BSkyB had successfully completed their rigorous
testing regime of the SportXction(TM) System. It is currently expected that the
launch of services under this agreement will occur early in calendar 2005.

         INTERNET

         In October 2004, the Company launched its' SportXction(TM) System with
Victor Chandler International, Victor Chandler's Gibraltar based operating arm
on its websites www.victorchandler.com and www.vcbet.com. In addition, during
the quarter ended December 31, 2004, the Company expanded its agreement with
SportingBet to its Spanish and Turkish wagering websites. The Company launched
its SportXction(TM) System on www.miapuesta.com in November 2004 and
www.superbahis.com on December 21, 2004.

         The Company continues to expand the number of events which it covers.
GIG offered live play-by-play wagering on approximately 265 events during the
three months ending December 31, 2004. GIG intends to offer wagering on well
over 1,000 events during fiscal year 2005.

RECENT OPERATING DATA

         The Company monitors the following key operating data in relation to
the SportXction(TM) System: player-game sessions (a player placing at least one
wager in a sporting event), new players, the handle (total amount wagered
through the system) and the hold (the total amount wagered less the payouts made
to the winning players).


                                       15
<PAGE>

         The Company experienced a dramatic increase in the number of new
players for the three-month period ended December 31, 2004 who utilized its
SportXction(TM) System. In January 2005, the "handle" and the "hold" exceeded
the results for the three months ended December 31, 2004. Currently, the
Company's revenue consists of the "hold" less taxes (UK gaming duty at 15%) and
amounts relating to the Company's revenue share agreements with its wagering
partners. We expect continued increases in these key metrics in future months. A
table summarizing the recent operating data is shown below:


                            JULY 1 TO     OCTOBER 1 TO      JANUARY 1 TO
                        SEPTEMBER 30,     DECEMBER 31,       JANUARY 31,
                                 2004             2004              2005
   Player sessions              3,397           11,188            11,065
   New players                    893            3,098             2,128
   Handle ($ in 000)              259              758               828
   Hold ($ in 000)                 21               64                64
   Hold (%)                       8.1              8.4               7.7


                                       16
<PAGE>

SAFE HARBOR STATEMENT

         Except for the historical information contained herein, this Quarterly
Report on Form 10-QSB contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Such forward-looking statements
include, but are not limited to: whether the Company's available resources will
be adequate to fund its requirements for the next 12 months and whether the
Company will be able to meet its cash requirements; whether the Company will
need to raise additional financing, and if so the terms on which it can be
raised and the dilutive impact on existing shareholders; whether the outstanding
Debentures will be repaid in cash or stock, the number of shares of stock that
will be required to repay principal and interest on such Debentures and
dividends on the Series B Preferred Stock and dilutive impact to existing
shareholders; whether the Company's revenue will increase significantly in the
three months ending March 31, 2005 and in future quarters; whether the Company
will launch the SportXction(TM) System on BSkyB's digital television platform in
early calendar 2005 or at all; 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 the Company will continue
to experience increases in player sessions, new players, handle and hold in
future months; and whether the Company will offer wagering on well over 1,000
events during fiscal year 2005, as anticipated. 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, 2004. 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.


                                       17
<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 design and operation 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 in
accordance with Rules 13a-15(b) and 15d-15(b) under the Exchange Act. 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 6.  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).

                                       18
<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:   February 14, 2005          By:  /s/ Barry Mindes
                                         ---------------------------------
                                         Barry Mindes, Chairman and
                                         Chief Executive Officer
                                         (Principal Executive Officer)



Dated:   February 14, 2005          By:  /s/ James McDade
                                        --------------------
                                         James McDade, Chief Financial Officer
                                         (Principal Financial Officer)



                                       19