<PAGE>


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

                                   FORM 10-QSB

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

                  For the quarterly period ended June 30, 2006


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

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


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


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

                    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  X    No
                                                             ---      ---

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

There were 12,032,651 shares of Common Stock outstanding at August 7, 2006.

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

<PAGE>

       Interactive Systems Worldwide Inc.
       June 30, 2006
       FORM 10-QSB

<TABLE>
<CAPTION>
       Index
                                                                                           Page

<S>                                                                                        <C>
 Part I:    Financial Information

 Item 1.    Financial Statements,

   Condensed Consolidated Balance Sheets at June 30, 2006 (Unaudited)
   and September 30, 2005                                                                  2

   Condensed Consolidated Statements of Operations for the Three and Nine
   Months Ended June 30, 2006 and 2005 (Unaudited)                                         3

   Condensed Consolidated Statement of Stockholders' Equity for the
   Nine Months Ended June 30, 2006 (Unaudited)                                             4

   Condensed Consolidated Statements of Cash Flows for the Nine Months
   Ended June 30, 2006 and 2005 (Unaudited)                                                5

 Notes to Condensed Consolidated Financial Statements (Unaudited)                          6-14

 Item 2.    Management's Discussion and Analysis or
   Plan of Operations                                                                      15-23

 Item 3.    Controls and Procedures                                                        24

 Part II:   Other Information                                                              24

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

 Item 6.    Exhibits                                                                       25

 Signatures                                                                                26
</TABLE>



<PAGE>


       Part I: Financial Information

Item 1. Financial Statements

                       Interactive Systems Worldwide Inc.
                      Condensed Consolidated Balance Sheets

             (Amounts in thousands except share and per share data)

<TABLE>
<CAPTION>
                                                                              June 30,     September 30,
                                                                                2006            2005
                                                                             (Unaudited)       Note 1
                                                                             -----------       ------
<S>                                                                          <C>            <C>
Current assets:
   Cash and cash equivalents                                                 $  1,436       $  5,655
   Accounts receivable                                                              9             41
   Investments in marketable securities                                         1,765            980
   Other receivables                                                               32             14
   Prepaid expenses and other current assets                                      179            139
                                                                             --------       --------
     Total current assets                                                       3,421          6,829
   Property and equipment, net                                                     19             91
   Capitalized software, net of accumulated
        amortization of $945 and $791, respectively                                --            154
   Other assets                                                                   304            339
                                                                             --------       --------
               Total assets                                                  $  3,744       $  7,413
                                                                             ========       ========

                      Liabilities and Stockholders' Equity
Current liabilities:
   Accounts payable                                                          $    236       $    201
   Accrued expenses                                                               699          1,126
                                                                             --------       --------
     Total current liabilities                                                    935          1,327
                                                                             --------       --------
Long-term debt:
   Debentures, net of unamortized discount of $94                                --              239
                                                                             --------       --------
                Total liabilities                                                 935          1,566
                                                                             --------       --------

Stockholders' Equity:
    Preferred stock, par value $.001 per share;
     2,000,000 shares authorized,
     60,000 Series A outstanding,
     164 Series B outstanding at September 30, 2005,
     4,000 Series C outstanding with a liquidation preference of $4,000          --             --
   Common stock par value $.001 per share;
     20,000,000 shares authorized;
     12,190,230 and 11,792,702 issued, respectively                                12             12
   Additional paid-in capital                                                  27,984         27,200
   Treasury stock,  at cost, 242,000 shares                                      (441)          (441)
   Accumulated other comprehensiveb loss                                          (50)           (50)
   Accumulated deficit                                                        (24,696)       (20,874)
                                                                             --------       --------
           Total stockholders' equity                                           2,809          5,847
                                                                             --------       --------

           Total liabilities and stockholders' equity                        $  3,744       $  7,413
                                                                             ========       ========
</TABLE>

See accompanying notes to condensed consolidated financial statements

                                       2
<PAGE>


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

             (Amounts in thousands except share and per share data)


<TABLE>
<CAPTION>
                                                               Three Months Ended                        Nine Months Ended
                                                                     June 30,                                 June 30,
                                                            2006                2005               2006                 2005
                                                            ----                ----               ----                 ----

<S>                                                     <C>                <C>                <C>                <C>
Revenues                                                $         20       $         62       $         84       $        131
                                                        ------------       ------------       ------------       ------------

Costs and expenses:
   Cost of revenues, research
     and development expense                                     388                468              1,185              1,496

   General and
     administrative expense                                      806                797              2,501              2,437
                                                        ------------       ------------       ------------       ------------
                                                               1,194              1,265              3,686              3,933
                                                        ------------       ------------       ------------       ------------

        Operating loss                                        (1,174)            (1,203)            (3,602)            (3,802)

Interest (income) expense, net                                   (25)                66                 35                802
Other income                                                      (1)              --                   (3)              --
                                                        ------------       ------------       ------------       ------------
        Net loss                                              (1,148)            (1,269)            (3,634)            (4,604)
Preferred stock dividend                                         (59)               (36)              (197)              (617)
                                                        ------------       ------------       ------------       ------------

        Net loss applicable to common shareholders      $     (1,207)      $     (1,305)      $     (3,831)      $     (5,221)
                                                        ============       ============       ============       ============

Net loss per share applicable to common
   shareholders - basic and diluted                     $      (0.10)      $      (0.12)      $      (0.33)      $      (0.51)
                                                        ============       ============       ============       ============

Weighted average basic and diluted
  common shares outstanding                               11,904,805         10,671,597         11,786,768         10,161,821
                                                        ============       ============       ============       ============
</TABLE>


See accompanying notes to condensed consolidated financial statements


                                       3
<PAGE>


                       Interactive Systems Worldwide Inc.
            Condensed Consolidated Statement of Stockholders' Equity
                     For the Nine Months Ended June 30, 2006
                                   (Unaudited)

                 (Amounts in thousands except number of shares)

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

Dividends on Series B and
   Series C Preferred Stock        --         --        80,517      --         188        --         --           (188)       --

Issuance of common stock
   in payment of Debenture
   principal and interest          --         --       159,417      --         392        --         --           --           392

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

Issuance of common stock
  through exercise of stock
  options                          --         --        56,742      --          44        --         --           --            44

Net share settlement on
  cashless exercise of
  stock options                    --         --        47,432      --        --          --         --           --          --

Compensation cost
   associated with stock
   options and warrants            --         --          --        --         160        --         --           --           160


Net loss                           --         --          --        --        --          --         --         (3,634)     (3,634)

Foreign currency
   translation loss                --         --          --        --        --          --         --           --          --
                                                                                                                          --------
Comprehensive loss                                                                                                          (3,634)
                             ----------   --------  ----------   -------  --------    --------    -------    ---------    --------
Balance at
   June 30, 2006                 64,000   $   --    12,190,230   $    12  $ 27,984    $   (441)   $   (50)   $ (24,696)   $  2,809
                             ----------   --------  ----------   -------  --------    ========    =======    =========    ========

</TABLE>

See accompanying notes to condensed consolidated financial statements


                                       4
<PAGE>

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

                                                                                    Nine Months Ended
                                                                                        June 30,
                                                                                  2006              2005
                                                                                  ----              ----
<S>                                                                             <C>              <C>
Cash flows from operating activities:
  Net loss                                                                      $(3,634)         $(4,604)
Adjustments to reconcile net loss
    to net cash used in operating activities:
    Depreciation and amortization                                                   243              313
      Non-cash interest expense                                                     145              668
      Non-cash option and warrant charge                                            160                2
      Non-cash amortization of debt issuance costs                                   38              194
      Non-cash other income                                                          (3)              --
Changes in assets and liabilities:
  Accounts receivable                                                                32              (46)
  Other receivables                                                                 (18)             (12)
  Prepaid expenses and other current assets                                         (40)             (13)
   Other assets
                                                                                     (3)              --
   Accounts payable                                                                  35              (79)
   Accrued expenses                                                                (419)             201
                                                                                -------          -------
         Net cash used in operating activities                                   (3,464)          (3,376)
                                                                                -------          -------

Cash flows from investing activities:
  Purchase of investments                                                        (2,562)            (760)
  Proceeds from sales of investments                                              1,777              285
  Purchase of property and equipment                                                 (5)             (20)
                                                                                -------          -------
            Net cash used by investing activities                                  (790)            (495)
                                                                                -------          -------

Cash flows from financing activities:
  Proceeds from issuance of preferred stock and warrants                             --            3,000
  Proceeds from issuance of common stock and warrants                                44            1,411
  Payment of dividends associated with Series B Preferred Stock                      --              (24)
  Costs associated with private placement                                            --             (374)
                                                                                -------          -------
         Net cash provided by financing activities                                   44            4,013
                                                                                -------          -------
Net (decrease) increase in cash and cash equivalents                             (4,210)             142
Effect of exchange rate on cash                                                      (9)             (27)
Cash and cash equivalents, beginning of period                                    5,655            2,832
                                                                                -------          -------
Cash and cash equivalents, end of period                                        $ 1,436          $ 2,947
                                                                                =======          =======

Non-cash investing and financing activity:
   Issuance of warrants to investors and private placement agent                $    --          $   847
   Beneficial conversion feature of Series B Preferred Stock                    $    --          $   552
   Issuance of common stock in relation to principal payments on Debentures     $   333          $   608
   Issuance of common stock in relation to dividend payments
            on Series B and Series C Preferred Stock                            $   188          $    --
</TABLE>

See accompanying notes to condensed consolidated financial statements


                                       5
<PAGE>

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


Note l - Basis of Presentation:

         The information at June 30, 2006 and for the three and nine months
         ended June 30, 2006 and 2005, 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. Net loss applicable to common stock
         and net loss per share applicable to common stock (basic and diluted)
         for the nine months ended June 30, 2005 were increased by $327,000 and
         $0.03 from amounts originally reported in the Company's Form 10QSB to
         retroactively reflect a change in the value of the beneficial
         conversion feature associated with the Series B Preferred Stock. These
         condensed consolidated financial statements should be read in
         conjunction with the audited financial statements for the year ended
         September 30, 2005 included in the Company's Annual Report on Form
         10-KSB filed with the SEC.

         The Company's revenue during the three and nine months ended June 30,
         2006 and 2005 consisted of license fees and service charges from
         agreements with companies located in the United Kingdom and Gibraltar.
         Revenue consists primarily of service charges calculated based on a
         percentage share of the net wagering revenue after payment of winnings
         and taxes. Revenue may be reduced for certain pool imbalance risks that
         arise from being a part of the house. The Company recognizes revenue as
         it is earned according to the terms of the related agreement.

Note 2 - Private Placements:

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

                                       6
<PAGE>

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


Note 2 - Private Placements (continued):

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

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

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



                                       7
<PAGE>

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


Note 2 - Private Placements (continued):

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

         The Series C is initially convertible into an aggregate of 1,066,667
         shares of Common Stock. In connection with the issuance of the Series
         C, the Company recorded a dividend to Series C shareholders of $777,000
         representing the beneficial conversion feature resulting from the
         difference between the effective conversion price and the quoted market
         price of the Company's Common Stock at the date of issuance. In
         addition, holders of Series C are entitled to receive a cumulative 6%
         annual dividend, payable quarterly in cash or, subject to certain
         conditions, shares of Common Stock at the Company's option. As of June
         30, 2006, unpaid cumulative dividends on the Series C amounted to
         $60,000. A placement agent in this transaction received a cash fee of
         $120,000 and warrants to purchase 65,753 shares of the Company's Common
         Stock expiring in August 2010 which are exercisable at $4.38 per share.
         The warrants were valued at $132,000 using the Black-Scholes option
         pricing model.

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


                                       8
<PAGE>

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


Note 2 - Private Placements (continued):

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

         The Company accounts for the registration rights agreements as a
         separate free-standing instrument and accounts for the liquidated
         damages provision as a derivative liability subject to SFAS 133.
         Accordingly, the liability is recorded at estimated fair value based on
         an estimate of the probability and costs of cash penalties being
         incurred and is revalued at each balance sheet date with changes in
         value recorded in other income. As of June 30, 2006, the liability
         amounted to $27,000 and is included in accrued expenses.

Note 3 - Debt:

         The 7.5% Debentures are convertible into shares of Common Stock at
         $4.58 per share subject to adjustment (initially 567,686 shares), and
         are repayable in 24 equal monthly installments ($108,333) which began
         in May 2004 with interest payable quarterly. Under the terms of the
         transaction, and subject to certain conditions, the Company may make
         periodic interest and principal payments in shares of the Company's
         Common Stock valued at a discount from the weighted average market
         price prior to such payments. During the year ended September 30, 2005,
         investors converted certain outstanding Debentures into shares of the
         Company's Common Stock. Subsequent to these conversions, the monthly
         principal repayments were reduced to $62,500. During the nine months
         ended June 30, 2006, 159,417 shares of Common Stock were issued in
         satisfaction of all remaining principal and interest payments on the
         Debentures and there are currently no remaining Debentures outstanding.
         Such shares were accounted for based on their quoted market price at
         the date of issuance. As the Company intended

                                       9
<PAGE>

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


Note 3 - Debt (continued):

         to pay the required principal payments during the year ending September
         30, 2006 amounting to $333,000 by issuing common shares, such amount
         has not been classified as a current liability in the accompanying
         balance sheet at September 30, 2005.

Note 4 - Preferred Stock:

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

Note 5 - Accounting Change:

         At June 30, 2006, the Company has three stock-based employee
         compensation plans, which are described more fully in Note 6. Prior to
         October 1, 2005, the Company accounted for those plans under the
         recognition and measurement provisions of APB Opinion No. 25,
         Accounting for Stock Issued to Employees, and related Interpretations,
         as permitted by FASB Statement No. 123, Accounting for Stock-Based
         Compensation. No stock-based employee compensation cost was recognized
         in the Statement of Operations for the year ended September 30, 2005,
         as all options granted under those plans had an exercise price equal to
         the market value of the underlying common stock on the date of grant.
         Effective October 1, 2005, the Company adopted the fair value
         recognition provisions of FASB Statement No. 123(R), Share-Based
         Payment, using the modified-prospective-transition method. Under that
         transition method, compensation cost recognized after the effective
         date includes: (a) compensation cost for all share-based payments
         granted prior to, but not yet vested as of October 1, 2005, based on
         the grant date fair value estimated in accordance with original
         provisions of Statement 123, and (b) compensation cost for all
         share-based payments granted subsequent to October 1, 2005, based on
         the grant date fair value estimated in accordance with the provisions
         of Statement 123(R) and (c) compensation costs for share-based awards
         modified, repurchased or cancelled after such date. Results for prior
         periods have not been restated.


                                       10
<PAGE>

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


   Note 5 - Accounting Change (continued):

         Stock-based employee compensation costs charged to operations during
         the three and nine months ended June 30, 2006 amounted to $54,000 and
         $140,000, respectively.

         As a result of adopting Statement 123(R) on October 1, 2005, the
         Company's net loss for the nine months ended June 30, 2006 is $41,000
         lower than if it had continued to account for share-based compensation
         under Opinion 25. This results from a change in the method of
         measurement of compensation cost under Statement 123(R) arising from a
         modification which extended the life of options held by an officer (see
         Note 6).

         Had the Company determined compensation cost based on the fair value at
         the grant date consistent with the provisions of SFAS No. 123, the
         Company's net loss and net loss per share for the three and nine months
         ended June 30, 2005 would have been increased to the pro forma amounts
         indicated below (amounts in thousands):

<TABLE>
<CAPTION>
                                                     Three months ended        Nine months ended
                                                        June 30, 2005            June 30, 2005
                                                        -------------            -------------

<S>                                                     <C>                       <C>
Net loss, as reported                                   $(1,269)                  $  (4,604)

Deduct: Total stock-based employee compensation
expense determined under fair value based method            (23)                        (67)
                                                        -------                   ---------

Pro forma net loss                                      $(1,292)                 $  (4,671)
                                                                                 =========
Net loss per share applicable to
  common shareholders - basic
  and diluted, as reported                              $ (0.12)                  $   (0.51)
                                                        =======                   =========

Net loss per share applicable to
 common shareholders - basic
 and diluted, pro forma                                 $ (0.12)                  $   (0.52)
                                                        =======                   =========
</TABLE>


                                       11
<PAGE>

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

Note 5 - Accounting Change (continued):

         The fair value of the stock options granted is estimated at grant date
         using the Black-Scholes option pricing model with the following
         weighted average assumptions for Fiscal 2006 and 2005, respectively:
         expected dividend yield 0.0% (in both periods), risk free interest rate
         of 4.43% and 3.91%, expected volatility of 68% (in both periods) and an
         expected life of 5 years (see Note 6 relating to modification) and 7
         years. The weighted average fair value of options granted in the nine
         months ended June 30, 2006 and 2005 was $1.72 and $2.23, respectively.
         Expected volatilities are based on historical volatility of the
         Company's stock price. The Company uses historical data to estimate
         option exercise and employee termination within the valuation model.
         The risk-free rate for periods within the contractual life of the
         option is based on the U.S. Treasury yield curve in effect at the time
         of grant.

         The Company accounts for equity awards issued as compensation to
         non-employees at fair value as measured on the date that vesting occurs
         or performance is complete. In May 2006, the Company issued a warrant
         to a consultant to purchase 150,000 shares of the Company's Common
         Stock, at an exercise price of $2.13 per share. The warrant became
         exercisable in July 2006 and remains exercisable through May 2009. The
         warrant agreement provides that 75,000 shares vest immediately upon
         issuance and 75,000 shares are subject to forfeiture if the consultant
         does not complete performance for the one year of the agreement.
         During the three and nine months ended June 30, 2006, the Company
         recognized compensation expense of $14,000 and $20,000, respectively,
         which was charged to general and administrative expense in relation to
         the warrant and certain options which were granted to a consultant.

Note 6 -Stock Options:

         In May 1995, the Board of Directors adopted and the stockholders
         approved the 1995 Stock Option Plan (the "1995 Plan"). The 1995 Plan
         provides for the grant of incentive stock options ("ISOs") and
         nonqualified stock options ("NQSOs"). On May 24, 2005, the term of the
         1995 Plan expired and thus, no additional options may be granted under
         this plan. In October 1996, the Board of Directors adopted and the
         stockholders approved the 1996 Stock Option Plan (the "1996 Plan"). The
         1996 Plan, as amended, is substantially similar to the 1995 Plan,
         except that there are 1,500,000 shares of Common Stock authorized and
         available for issuance pursuant to options that may be granted
         thereunder. The 1996 Plan is administered by the Stock Option
         Committee. The 1996 Plan is scheduled to expire on October 24, 2006,
         after which no more options can be granted under this plan. In January
         2006 the Board of Directors adopted and in March 2006 the stockholders
         approved the 2006 Stock Option Plan (the "2006 Plan"). The 2006 Plan,
         is substantially similar to the 1995 and 1996 Plans, except that there
         are 500,000


                                       12
<PAGE>

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

Note 6 - Stock Options (continued):

         shares of Common Stock authorized and available for issuance pursuant
         to options that may be granted thereunder, plus any shares subject to
         the 1,172,669 options under the Company's 1995 Stock Option Plan and
         1996 Stock Option Plan which were outstanding at March 30, 2006 that
         expire or terminate.

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

         Activity related to the 1995, 1996 and 2006 Plans for the nine months
ended June 30, 2006 is as follows:
<TABLE>
<CAPTION>
                                                                                            Weighted
                                                                        Weighted            Average
                                                                        Average            Remaining         Aggregate
                                                                        Exercise          Contractual        Intrinsic
                    Options                         Shares                Price               Term             Value
                    -------                         ------                -----               ----             -----

<S>                                                <C>                     <C>                <C>         <C>
Outstanding at October 1, 2005                      1,166,480              $1.45
Granted                                               228,691               1.64
Exercised                                            (130,456)              0.74
Forfeited or expired                                 (158,202)              1.65
                                                   -----------
Outstanding at June 30, 2006                        1,106,513               1.54               4.4         $1,002,000
                                                    =========               ====               ===         ==========
Vested or expected to vest                          1,106,513               1.54               4.4         $1,002,000
                                                    =========               ====               ===         ==========
Exercisable at June 30, 2006                          862,513               1.24               3.1         $  987,000
                                                      =======               ====               ===         ===========
</TABLE>

         The total intrinsic value of options exercised during the nine months
         ended June 30, 2006 was $167,000. As of June 30, 2006, there was
         $291,000 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 3 years. During the quarter ended
         December 31, 2005, the Company effectively extended the contractual
         life of

                                       13
<PAGE>

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

Note 6 - Stock options (continued):

         90,691 fully vested share options held by an officer by canceling
         existing options and replacing them with new options at the same
         exercise price. As a result of that modification, the Company
         recognized additional compensation expense of $2,000 and $6,000,
         respectively, for the three and nine months ended June 30, 2006,
         measured as the excess of the fair value of the new options over the
         fair value of the cancelled options as of the cancellation date.

Note 7 - Basic and Diluted Net Loss per Share:

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

         The Company's computation of dilutive net loss per share for the three
         and nine months ended June 30, 2006 and 2005 does not assume any
         exercise of options or warrants to purchase 2,872,337 and 2,164,448
         common shares, respectively, or the conversion of debentures or
         preferred stock to acquire 1,066,667 and 895,894 common shares,
         respectively, as their effect is antidilutive.

Note 8 - Concentration of revenues:

         Revenues from Interactive Sports Limited, a wholly-owned subsidiary of
         Sportingbet Plc, represented approximately 63% and 78% of revenues in
         the three and nine months ended June 30, 2006, respectively, and 82%
         and 83% of revenues in the three and nine months ended June 30, 2005,
         respectively. On April 20, 2006, the Company entered into a new
         agreement to provide an enhanced product which is not yet live. The
         product will be integrated and offered alongside Sportingbet's existing
         sports betting offering and will be deployed across its websites
         throughout Europe. Subsequently, Sportingbet completed the migration of
         its foreign affiliates to its next generation back-end software and
         ceased using the Company's stand-alone product. 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.


                                       14
<PAGE>

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

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

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

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

         During the three and nine months ended June 30, 2006 ("Fiscal 2006")
and 2005 ("Fiscal 2005"), the Company's revenue primarily consisted of service
charges from providing interactive gaming services using the SportXction(R)
System to business partners such as licensed bookmakers and others located in
the United Kingdom and Gibraltar.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

                                       15
<PAGE>

         The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86 "Computer Software
To Be Sold, Leased, or Otherwise Marketed". Such costs are expensed prior to a
product or product enhancement's achievement of technological feasibility and
thereafter are capitalized. The Company defines a product enhancement as an
improvement to an existing product that is intended to extend the life or
improve significantly the marketability of the original product. In order to
meet the requirements for capitalization, a product enhancement should involve
considerable development resources, requires a product design and may require a
redesign of all or part of the existing product. During Fiscal 2006 and 2005,
the Company did not capitalize any software development costs. Amortization
expense, which has been computed on a straight-line basis and an estimated
economic life of three years, amounted to $154,000 and $237,000 during the nine
months ended June 30, 2006 and 2005, respectively.

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

            On October 1, 2005, the Company adopted SFAS 123(R) and began
recognizing compensation expense for the fair value of employee stock options
over the applicable vesting period. The fair value of the stock options granted
is estimated at grant date using the Black-Scholes option pricing model. SFAS
123(R) applies to new awards and to awards modified, repurchased, or cancelled
after the required effective date, as well as to the unvested portion of awards
outstanding as of the adoption date. During the nine months ended June 30, 2006,
the Company recognized compensation expense of $140,000 which was charged to
general and administrative expense as a result of implementing SFAS 123(R).

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

FINANCIAL RESULTS

THREE MONTHS ENDED JUNE 30, 2006 AND 2005

         Revenue for the three months ended June 30, 2006 was $20,000, as
compared to $62,000 during the same period in the prior year. The decrease was
primarily because Fiscal 2005 included a full quarter of wagering activity from
the Spanish, Greek, and Turkish affiliates of Sportingbet, which were
temporarily discontinued in Fiscal 2006. In April 2006, the Company entered into
a new agreement with Sportingbet to provide an enhanced product (see "System
Deployment Status" below) which is not yet live. Subsequently, Sportingbet
completed the migration of its foreign affiliates to its next generation
back-end software and ceased using the Company's stand-alone product. The
Company is in the final stages of testing this enhanced product with
Sportingbet. The Company is also in the final stages of testing its enhanced
product with Ladbrokes eGaming Ltd. (see "System Deployment Status" below). The
Company believes this enhanced product, which it expects to deploy during the
quarter ending September 30, 2006, will result in a significant increase to
revenues following launch.

                                       16
<PAGE>

         Cost of revenues, research and development expense for the three months
ended June 30, 2006 was $388,000, as compared to $468,000 during the same period
in the prior year. The decrease in Fiscal 2006 was primarily due to lower
amortization expenses associated with a capitalized product enhancement that had
become fully amortized as well as lower payroll costs.

         General and administrative expenses during the three months ended June
30, 2006 were $806,000, as compared to $797,000 during the same period in the
prior year. The increase was primarily due to higher professional fees and
increased non-cash compensation expense associated with employee stock options
due to the adoption of Statement of Financial Accounting Standards No. 123(R)
partially offset by lower payroll and travel expenses.

         Interest income during the three months ended June 30, 2006 was
$25,000, as compared to interest expense of $66,000 during the same period in
the prior year. In Fiscal 2006, interest earned from cash and short-term
investments more than offset the non-cash expense associated with the Company's
outstanding Debentures which were satisfied primarily through the issuance of
shares of Common Stock. The Debentures were fully repaid in May 2006.

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

         Net loss applicable to common shareholders and net loss per share
applicable to common shareholders (basic and diluted) for the three months ended
June 30, 2006 was $1,207,000 and $0.10, respectively, as compared to $1,305,000
and $0.12, respectively, during the same period in Fiscal 2005.

NINE MONTHS ENDED JUNE 30, 2006 AND 2005

         Revenue for the nine months ended June 30, 2006 was $84,000, as
compared to $131,000 during the same period in the prior year. This decrease is
primarily because the Spanish, Greek, and Turkish affiliates of Sportingbet were
in operation for a higher proportion of the period during Fiscal 2005.

         Cost of revenues, research and development expense for the nine months
ended June 30, 2006 was $1,185,000, as compared to $1,496,000 during the same
period in the prior year. The decrease in Fiscal 2006 was primarily due to lower
technical consulting costs and lower amortization expense as a capitalized
product enhancement has become fully depreciated.

         General and administrative expenses during the nine months ended June
30, 2006 were $2,501,000, as compared to $2,437,000 during the same period in
the prior year. The increase was primarily due to higher professional fees and
increased non-cash compensation expense associated with employee stock options
due to the adoption of Statement of Financial Accounting Standards No. 123(R)
partially offset by lower payroll and travel expenses.

                                       17
<PAGE>

         Interest expense during the nine months ended June 30, 2006 was
$35,000, as compared to $802,000 during the same period in the prior year. This
non-cash expense has declined due to a decrease in the Company's outstanding
Debentures, which have been satisfied primarily through the issuance of shares
of Common Stock.

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

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

         Net loss applicable to common shareholders and net loss per share
applicable to common shareholders (basic and diluted) for the nine months ended
June 30, 2006 was $3,831,000 and $0.33, respectively, as compared to $5,221,000
and $0.51, respectively, during the same period in Fiscal 2005. The decrease in
the loss in Fiscal 2006 is primarily the result of lower interest expense and
preferred stock dividend (as described above).

LIQUIDITY AND CAPITAL RESOURCES

         As of June 30, 2006, the Company had liquid resources totaling
$3,201,000. These include cash and cash equivalents in the amount of $1,436,000
and investments in the amount of $1,765,000. Investments are limited to
investment grade marketable securities with maturities of less than 12 months.

         The Company's operations currently do not generate positive cash flow
and are not expected to do so during the fiscal year ending September 30, 2006.
The Company anticipates that, based on its current level of spending, its
existing resources will be adequate to fund its capital and operating
requirements for the next 9 months without any significant increase in revenues.
The Company has recently initiated several actions to reduce its payroll and
consulting costs. In addition, the Company has identified additional reductions
relating to payroll and rent which it intends to realize during the quarter
ending September 30, 2006. The annual cost savings from these actions are
estimated to be approximately $400,000.

         The Company is currently in discussions with several additional
bookmakers and other companies to provide services. The Company is also
currently pursuing strategic relationships aimed at increasing the market
penetration of its existing products and/or broadening the scope of its product
offering. There is no assurance however, that these discussions will result in
signed agreements, or that the Company's agreements with Sportingbet and
Ladbrokes will generate a significant increase in revenues. In the event that
revenues do not increase significantly during the next several months, it
appears likely that the Company will need to aggressively reduce its expenses,
or seek additional funding, or both. Such additional funding may be
significantly dilutive to existing shareholders of the Company, including as a
result of the anti-dilution protections of the Series C Convertible Preferred
Stock and of the warrants issued in connection therewith and in connection with
the Series B Convertible Preferred Stock. If the Company is unable to raise
additional funding on terms deemed reasonable or at all, then the Company's
liquidity, financial condition and business prospects will be materially and
adversely affected and the Company may have to curtail or cease operations.

                                       18
<PAGE>

         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.

         In November 2003, the Company issued $2.6 million of 7.5% Convertible
Debentures (the "Debentures"). The Debentures are repayable in 24 equal monthly
installments of $108,333 which began in May 2004 with interest payable
quarterly. The Company has the right to repay the interest and the principal in
cash or, under certain circumstances, shares of its Common Stock. The Company
also has the right, under certain circumstances, to force conversion of all or a
portion of the Debentures into Common Stock. The Debentures contain certain
provisions and restrictions, which if violated, could result in the full
principal amount together with interest and other amounts becoming immediately
due and payable in cash. To date, the Company has made all interest payments
with respect of the Debentures in shares of the Company's Common Stock. The
Company made its principal repayment in May 2004 in cash, elected to defer its
monthly repayment in June 2004 as permitted under the Debentures and made the
remainder of its principal repayments to date in shares of the Company's Common
Stock. During the year ended September 30, 2005, investors converted certain
Debentures into shares of the Company's Common Stock. In May 2006, the Company
made its final principal repayment and there are currently no Debentures
outstanding.

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

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

                                       19
<PAGE>

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

         The Series C is initially convertible into an aggregate of 1,066,667
shares of Common Stock. In connection with the issuance of the Series C, the
Company recorded a dividend to Series C shareholders of $777,000 representing
the beneficial conversion feature resulting from the difference between the
effective conversion price and the quoted market price of the Company's Common
Stock at the date of issuance. In addition, holders of Series C are entitled to
receive a cumulative 6% annual dividend, payable quarterly in cash or, subject
to certain conditions, shares of Common Stock at the Company's option. As of
June 30, 2006, unpaid cumulative dividends on the Series C amounted to $60,000.
A placement agent in this transaction received a cash fee of $120,000 and
warrants to purchase 65,753 shares of the Company's Common Stock expiring in
August 2010 which are exercisable at $4.38 per share.

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

OFF BALANCE SHEET ARRANGEMENTS

         None

SYSTEM DEPLOYMENT Status

         INTERNET

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

                                       20
<PAGE>

         PARTNER                            WEBSITES
         Littlewoods BetDirect              betdirect.net
         Victor Chandler UK Ltd             victorchandler.co.uk, vcbet.co.uk
         Victor Chandler International      victorchandler.com, vcbet.com
         ToteCredit Limited                 totesport.com

         The current system configuration is a stand-alone product. The Company
is in the final stage of testing of an enhanced product that is fully integrated
into our partner's existing betting system. It is anticipated that this enhanced
product will provide users with a significantly improved and expanded offering
of betting propositions to keep them engaged in the sporting event. The
Company's play-by-play betting propositions are placed seamlessly within our
business partners' betting offerings, thus maintaining a consistent "look and
feel". The user can then place wagers from its existing account in the same
manner as all other bets made with that partner. Because of the integrated
nature of this new offering, the Company expects to benefit from the partner's
advertising, marketing and promotion campaigns, while the partner need not
commit special resources to marketing the Company's product alone. The Company
has signed agreements with Interactive Sports Limited and Ladbrokes eGaming Ltd.
(described below) to implement this new system methodology and is in discussions
with other existing and new partners regarding this approach.

         Revenues from Interactive Sports Limited, a wholly-owned subsidiary of
Sportingbet Plc, represented approximately 78% and 83% of total revenues in the
nine months ended June 30, 2006 and 2005, respectively. The Company had been
operating under an interim agreement since August 2003. On April 20, 2006, the
Company announced that GIG had entered into a new agreement with Interactive
Sports Limited to provide software and services to allow Sportingbet to offer
timely, play-by-play betting throughout the course of a sporting event.
Subsequently, Sportingbet completed the migration of its foreign affiliates to
its next generation back-end software and ceased using the Company's stand-alone
product. Sportingbet is the world's largest online gaming group with over 3.9
million registered customers in 200 countries. The Company expects that its
play-by-play betting markets, which will be integrated and offered alongside
Sportingbet's existing offering, will be made available on over twenty
Sportingbet websites across Europe. Under the new agreement, which has an
eighteen month term from launch, GIG will manage the fast resolving in-run
"play-by-play" wagering markets, including their creation, the setting of
initial odds and subsequent odds changes, their closing and their eventual
settlement. Interactive Sports Limited will accept the wagers and manage the
bookmaking risk. The Company is in the final stages of testing and expects that
this new service will be launched during the quarter ending September 30, 2006.

         On February 24, 2006, the Company announced that GIG had signed an
agreement with Ladbrokes eGaming Ltd. to provide software and services to allow
Ladbrokes to offer timely, play-by-play betting throughout the course of a
sporting event. Ladbrokes eGaming is a part of Ladbrokes plc. Ladbrokes plc is
the world's leading retail bookmaker and Ladbrokes.com has over 2 million
registered customers from over 200 countries. Under this agreement, which has an
initial term of eighteen months from launch, GIG will provide an integrated
solution to be offered in multiple languages and currencies on the Internet. The
Company is in the final stages of testing of this integrated product.

                                       21
<PAGE>

         BETTING SHOPS

         On August 11, 2006, the Company announced that GIG had signed an
agreement with Hipodromo de Agua Caliente ("Caliente"), one of the Latin
America's largest gaming companies. Caliente owns or operates 160 betting shops,
known as Race & Sports Books, throughout Mexico, Central and South America and
the Caribbean. GIG will provide software and services which will enable Caliente
to offer an enhanced play-by-play sports betting service in its Race & Sports
Books using hand-held wireless touch screen input devices. This enhanced betting
service will also be deployed on Caliente's Internet website.

         Under an initial three year agreement, Caliente will license the
SportXction(R)software and operate the play-by-play betting service using its
own personnel. GIG will provide initial set-up support, certain software
customization, training and on-going software support. The agreement specifies
payments upon contact signing, monthly license fees for technical assistance,
and monthly fees that are based on the handle derived from the enhanced
play-by-play betting service.

         MOBILE PHONE

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

         On November 1, 2005, the Company announced that it is has extended its
agreement with Littlewoods Betdirect. Under the agreement addendum, the
SportXction(R) System will be offered over mobile phones and personal digital
assistant devices using WAP and Java technologies. The launch of services under
this agreement has been delayed as a result of the decision by Littlewoods
Betdirect to re-evaluate its mobile deployment efforts. The launch of services
under this agreement appears unlikely.

         NEW PRODUCTS

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



                                       22
<PAGE>

SAFE HARBOR STATEMENT

         Except for the historical information contained herein, this Quarterly
Report on Form 10-QSB contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Such forward-looking statements
include, but are not limited to: whether the Company's available resources will
be adequate to fund its requirements for the next 9 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; the number of shares of
stock that will be required to pay dividends on the Series C Preferred Stock and
dilutive impact to existing shareholders; whether the Company's revenue will
increase in future quarters; whether the Company will deploy its enhanced
product during the quarter ending September 30, 2006 or at all; whether the
Company will be able to enter into agreements regarding an integrated offering
with new or existing partners, and if so whether it can be launched in a timely
manner or at all, and whether the integrated offering will result in increased
revenues; how long the Company will continue to incur significant losses and
negative cash flow; and 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. Investors are cautioned that
forward-looking statements are inherently uncertain. Actual performance and
results of operations may differ materially from those projected or suggested in
the forward-looking statements due to certain risks and uncertainties,
including, without limitation, the ability of the Company and its partners to
attract adequate numbers of players to its wagering system and the ability of
the Company to develop and market other opportunities for its products.
Additional information concerning certain risks or uncertainties that would
cause actual results to differ materially from those projected or suggested in
the forward-looking statements is contained in the Company's filings with the
Securities and Exchange Commission, including those risks and uncertainties
discussed in its Form 10-KSB for the fiscal year ended September 30, 2005. The
forward-looking statements contained herein represent the Company's judgment as
of the date of this report, and the Company cautions the reader not to place
undue reliance on such matters.


                                       23
<PAGE>

Item 3.  Controls and Procedures

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

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

PART II - OTHER INFORMATION

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

         On April 5, 2006, the Company issued 485 shares of Common Stock to the
holders of its outstanding privately placed Debentures to satisfy the interest
due thereunder. On April 5, 2006, the Company issued 31,014 shares of Common
Stock to the holders of its outstanding privately placed Series C Preferred
Stock to satisfy the dividend due thereunder. Each of these issuances were made
in reliance on the exemption provided by Section 4(2) of the Securities Act of
1933, as amended (the "Act"), for transactions by an issuer not involving any
public offering.

         On April 5 and May 3, 2006, the Company issued 8,615 and 8,803 shares
of Common Stock, respectively, to the holders of its outstanding privately
placed Debentures to satisfy the principal payments due thereunder. Each of
these issuances were made in reliance on the exemption provided by Section
3(a)(9) of the Act for securities exchanged by the issuer with its existing
security holders exclusively.

         On May 15, 2006, the Company issued a warrant to a consultant to
purchase 150,000 shares of the Company's Common Stock, at an exercise price of
$2.13 per share. The warrant became exercisable in July 2006 and remains
exercisable through May 15, 2009. The warrant agreement provides that 75,000
shares vest immediately upon issuance and 75,000 shares are subject to
forfeiture if the consultant does not complete performance for the one year
of the agreement. The warrant was issued in reliance on the exemption provided
by Section 4(2) of the Act, for transactions by an issuer not involving any
public offering.


                                       24
<PAGE>

Item 6.  Exhibits

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

               31.01            Certification of Bernard Albanese, Chief
                                Executive Officer of Interactive Systems
                                Worldwide Inc., pursuant to Section 302
                                of the Sarbanes-Oxley Act of 2002.

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

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

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


                                       25
<PAGE>

                                            SIGNATURES

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

                                           Interactive Systems Worldwide Inc.


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



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


                                       26