<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 March 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 9,355,665 shares of Common Stock outstanding at May 10, 2004.

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

<PAGE>

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

Index
<TABLE>
<CAPTION>
                                                                                      Page
                                                                                      ----
<S>      <C>                                                                            <C>
Part I:  Financial Information

Item 1.  Financial Statements,

         Consolidated Balance Sheets at March 31, 2004 (Unaudited)
         and September 30, 2003                                                         2

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

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

         Consolidated Statements of Cash Flows for the Six Months
         Ended March 31, 2004 and 2003 (Unaudited)                                      5

Notes to Consolidated Financial Statements (Unaudited)                                  6-9

Item 2.  Management's Discussion and Analysis of Financial
         Condition and Results of Operations                                            10-17

Item 3.  Controls and Procedures                                                        18

Part II: Other Information

Item 2.  Changes in Securities and Small Business Issuer
         Purchases of Equity Securities                                                 18-19

Item 6.  Exhibits and Reports on Form 8-K                                               19-20

Signatures                                                                              21
</TABLE>

<PAGE>

         Part I: Financial Information

Item 1. Financial Statements

                       Interactive Systems Worldwide Inc.
                           Consolidated Balance Sheets

             (Amounts in thousands except share and per share data)

<TABLE>
<CAPTION>
                                                                                March 31,            September 30,
                                                                                  2004                    2003

                                                                               (Unaudited)               Note 1
                                                                               -----------               ------
<S>                                                                                   <C>                      <C>
Current assets:
   Cash and cash equivalents                                                         $  5,456                 $ 4,127
   Accounts receivable                                                                      2                       9
   Investments in marketable securities                                                    --                     190
   Other receivables                                                                       78                      19
   Prepaid expenses and other current assets                                              267                     153
                                                                            -------------------        ----------------
       Total current assets                                                             5,803                   4,498

   Property and equipment, net                                                            179                     233
   Capitalized software, net                                                              650                     807
   Other assets                                                                           635                     306
                                                                            -------------------        ----------------
                 Total assets                                                        $  7,267                 $ 5,844
                                                                            ===================        ================

                      Liabilities and Stockholders' Equity
Current liabilities:
   Accounts payable                                                                  $    377                 $   308
   Accrued expenses                                                                       762                     555
                                                                            -------------------        ----------------
       Total current liabilities                                                        1,139                     863
                                                                            -------------------        ----------------

Long-term debt:
   Debentures, net of discount of $818,000 and $0, respectively                         1,782                      --
                                                                            -------------------        ----------------
       Total long-term debt                                                             1,782                      --
                                                                            -------------------        ----------------
                 Total liabilities                                                      2,921                     863
                                                                            -------------------        ----------------

Stockholders' Equity:
   Preferred stock, par value $.001 per share;
       2,000,000 shares authorized, 60,000 Series A
       issued and outstanding                                                              --                      --
   Common stock par value $.001 per share;
       20,000,000 shares authorized;
       9,575,161 and 9,177,545 issued, respectively                                        10                       9
   Additional paid-in capital                                                          15,195                  13,036
   Treasury stock at cost, 242,000 shares                                                (441)                   (441)
   Accumulated other comprehensive loss                                                   (21)                     (2)
   Accumulated deficit                                                                (10,397)                 (7,621)
                                                                            -------------------        ----------------
             Total stockholders' equity                                                 4,346                   4,981
                                                                            -------------------        ----------------
                 Total liablilities and
                     stockholders' equity                                            $  7,267                 $ 5,844
                                                                            ===================        ================
</TABLE>



See accompanying notes to consolidated financial statements


                                       2
<PAGE>

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

             (Amounts in thousands except share and per share data)





<TABLE>
<CAPTION>
                                                           Three Months Ended                       Six Months Ended
                                                               March 31,                               March 31,
                                                        2004                2003               2004                 2003
                                                        ----                ----               ----                 ----
<S>                                                        <C>                <C>                 <C>                <C>
Revenues, net                                                 $  4            $      8              $  12            $       8
                                                 ------------------- ------------------- ------------------  -------------------

Costs and expenses:
   Cost of revenues, research
     and development expense                                   469                 400                927                  699

   General and
     administrative expense                                    958                 894              1,735                1,906
                                                 ------------------- ------------------- ------------------  -------------------
                                                             1,427               1,294              2,662                2,605
                                                 ------------------- ------------------- ------------------  -------------------

        Operating loss                                      (1,423)             (1,286)            (2,650)              (2,597)

Other income                                                   (54)                (49)              (113)                (102)
Interest expense                                               182                  --                239                   --
                                                 ------------------- ------------------- ------------------  -------------------




        Net loss                                           $(1,551)           $ (1,237)           $(2,776)           $  (2,495)
                                                 =================== =================== ==================  ===================

Net loss per
   common share- basic and diluted                         $ (0.17)            $ (0.14)           $ (0.30)             $ (0.28)
                                                 =================== =================== ==================  ===================

Weighted average basic and diluted
  common shares outstanding                              9,333,161           8,901,545          9,214,331            8,901,545
                                                 =================== =================== ==================  ===================
</TABLE>



See accompanying notes to consolidated financial statements


                                       3
<PAGE>

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

                    (Amounts in thousands except share data)


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

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


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

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

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

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

Issuance of common stock
    in relation to Debentures             7,226      --           --          --        --             --            --          --


Net loss                                     --      --           --          --        --             --        (2,776)     (2,776)

Foreign currency
   translation loss                          --      --           --          --        --            (19)           --         (19)
                                                                                                                        ------------
Comprehensive loss                                                                                                           (2,795)

                                    ------------------------------------------------------------------------------------------------
Balance at
   March 31, 2004                     9,575,161    $ 10      $15,195     242,000    $ (441)         $ (21)     $(10,397)    $ 4,346
                                    ================================================================================================
</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>
                                                                                     Six Months Ended
                                                                                        March 31,
                                                                                  2004               2003
                                                                                  ----               ----
<S>                                                                               <C>                <C>
Cash flows from operating activities:
  Net loss                                                                        $(2,776)           $(2,495)
Adjustments to reconcile net loss
    to net cash used in operating activities:
    Depreciation and amortization                                                     208                 97
    Non-cash interest expense                                                         188                 --
    Non-cash amortization of debt issuance costs                                       51                 --
Changes in assets and liabilities:
  Accounts receivable                                                                   7                 (8)
  Other receivables                                                                   (59)             1,046
  Prepaid expenses and other current assets                                          (114)              (100)
  Other assets                                                                          1                (57)
  Accounts payable                                                                     69                 --
  Accrued expenses                                                                    145                 31
                                                                             ---------------     -------------
         Net cash used in
           operating activities                                                    (2,280)            (1,486)
                                                                             ---------------     -------------

Cash flows from investing activities:
  Proceeds from sales of investments                                                  190              2,046
  Purchase of property and equipment                                                   (3)               (14)
  Capitalized software                                                                 --               (298)
                                                                             ---------------     -------------
         Net cash provided by
           investing activities                                                       187              1,734
                                                                             ---------------     -------------

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


Net increase in cash and cash equivalents                                           1,342                248
Effect of exchange rate on cash                                                       (13)                14
Cash and cash equivalents, beginning of period                                      4,127              4,753
                                                                             ---------------     -------------
Cash and cash equivalents, end of period                                          $ 5,456            $ 5,015
                                                                             ===============     =============

Non-cash investing and financing activity:
Issuance of warrants to investors                                                $    636        $        --
Issuance of warrants to finder                                                   $    274        $        --
Beneficial conversion feature of Debentures                                      $    353        $        --
</TABLE>



See accompanying notes to consolidated financial statements


                                       5
<PAGE>

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


Note l - Basis of Presentation:

         The information at March 31, 2004 and for the three and six months
         ended March 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. The Company's revenue during the
         three and six months ended March 31, 2004 and 2003 consisted of license
         fees and service charges from service agreements with bookmakers
         located in the United Kingdom. The Company recognizes revenue from its
         current service agreements as it is earned based on a percentage share
         of the wagering revenue. These consolidated financial statements should
         be read in conjunction with the audited financial statements for the
         year ended September 30, 2003 included in the Company's Annual Report
         on Form 10-KSB filed with the SEC.


Note 2 - Private Placement:


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


                                        6
<PAGE>

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

Note 2 - Private Placement (continued):

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

         The fair value assigned to the warrants ($636,000) was determined using
         the Black Scholes option pricing model. A beneficial conversion feature
         of $353,000 representing the intrinsic value of the conversion price
         after the allocation of the proceeds based on their relative fair
         values was recorded as a reduction in the value of the Debentures.
         These discounts to the Debentures will be accreted as additional
         non-cash interest expense over the life of the debt using the effective
         interest method. The following table summarizes the valuation of the
         debentures at March 31, 2004:

                                                                 $(000s)
                                                                 --------
         7.5% convertible debentures, principal                  $2,600
         Less:
         Discount due to allocation of proceeds                    (590)
         Beneficial conversion feature                             (353)
                                                                 --------
                                                                  1,657
         Amortization of discount                                   125
                                                                 -------
         7.5% convertible debentures, net balance
         at March 31, 2004                                       $1,782
                                                                 =======


                                       7
<PAGE>

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


Note 3 - Stock Options:


         The Company has adopted the disclosure-only provisions of SFAS No. 148,
         "Accounting for Stock-based Compensation" and applies APB Opinion 25 in
         accounting for its plans in its consolidated financial statements. Had
         the Company determined compensation cost based on the fair value at the
         grant date consistent with the provisions of SFAS No. 148, the
         Company's net loss would have been increased to the pro forma amounts
         indicated below (amounts in thousands):
<TABLE>
<CAPTION>
                                                             Three Months Ended         Six Months Ended
                                                                   March 31,                March 31,
                                                             2004           2003        2004           2003
                                                             ----           ----        ----           ----
<S>                                                        <C>            <C>         <C>            <C>

         Net loss, as reported                             $(1,551)       $(1,237)    $(2,776)       $(2,495)

         Deduct: Total stock-based
           employee compensation
           expense determined under
           fair value based method                             (25)           (72)        (50)          (145)
                                                           -------        -------     -------        -------

         Pro forma net loss                                $(1,576)       $(1,309)    $(2,826)       $(2,640)
                                                           =======        =======     =======        =======


         Net loss per
          common share- basic and diluted,
          as reported                                      $ (0.17)       $ (0.14)    $ (0.30)        $(0.28)
                                                           =======        =======     =======        =======

         Net loss per
          common share- basic and diluted,
          pro forma                                        $ (0.17)       $ (0.15)    $ (0.31)        $(0.30)
                                                           =======        =======     =======        =======
</TABLE>

         The fair value of the stock options granted is estimated at grant date
         using the Black-Scholes option pricing model with the following
         weighted average assumptions: expected dividend yield 0.0% (for all
         periods), risk free interest rates of 3.67% and 3.71% in Fiscal 2004
         and 2003, respectively, expected volatility of 85% and 89% in 2004 and
         2003, respectively, and an expected life of 7 years (for all periods).
         The weighted average fair value of options granted in Fiscal 2004 and
         2003 was $2.69 and $1.82, respectively.


                                       8
<PAGE>

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

Note 4 - Basic and Diluted Net Loss per Share:

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

         The Company's computation of dilutive net loss per share for the three
         and six months ended March 31, 2004 and 2003 does not assume any
         exercise of options or warrants to purchase 2,446,629 and 1,678,861
         common shares, respectively, as their effect is antidilutive.

Note 5 - Preferred Stock:

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

Note 6 - Consulting Agreement:

         In February 2004, the Company entered into a consulting agreement with
         a non-related third party to provide business development, product
         positioning and other strategic advice. Under the terms of this one
         year agreement, the Company granted non-qualified options to purchase
         300,000 shares of the Company's Common Stock at an exercise price of
         $3.46 per share. Options for 50,000 shares will vest on August 1, 2004;
         100,000 shares will vest on each of February 1, 2005 and February 1,
         2006; and 50,000 shares will vest on February 1, 2007. The vested
         options will remain exercisable until 90 days after termination of the
         consulting agreement or, in the event that the consultant becomes an
         employee of the Company, one year after his death or disability if then
         employed by the Company or 90 days after termination of his employment
         for any other reason. The Company will value the vested options using a
         Black-Scholes pricing model at each vesting date and charge the cost to
         general and administrative expense.


                                       9
<PAGE>

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

Description of Business

         ISWI has designed, developed and patented an interactive hardware and
proprietary software system, the SportXction(TM) System, which enables
play-by-play wagering in the emerging interactive sports gaming market. ISWI,
through its wholly owned subsidiary, Global Interactive Gaming Limited ("GIG"),
operates the SportXction(TM) System, in conjunction with established wagering
partners. The Company's revenue consists of license fees and service charges
from agreements with bookmakers located in the United Kingdom.

Critical Accounting Policies and Estimates

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

         The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86 "Computer Software
To Be Sold, Leased, or Otherwise Marketed". Such costs are expensed prior to a
product or product enhancement's achievement of technological feasibility and
thereafter are capitalized. The Company defines a product enhancement as an
improvement to an existing product that is intended to extend the life or
improve significantly the marketability of the original product. In order to
meet the requirements for capitalization, a product enhancement should involve
considerable development resources, requires a product design and may require a
redesign of all or part of the existing product. During the three and six months
ended March 31, 2004, the Company did not capitalize any software development
costs. During the three and six months ended March 31, 2003, the Company
capitalized software development costs of $162,000 and $301,000, respectively,
relating to certain enhancements to its SportXction(TM) product. Amortization
expense, which has been computed on a straight-line basis and an estimated
economic life of three years, amounted to $81,000 and $158,000 during the three
and six months ended March 31, 2004, respectively, and $36,000 and $46,000 for
the three and six months ended March 31, 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.


                                       10
<PAGE>

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

Financial Results

Three Months Ended March 31, 2004 and 2003

         Revenues for the three months ended March 31, 2004 ("Fiscal 2004") were
$4,000, as compared to $8,000 during Fiscal 2003. The Cricket World Cup, which
contributed significantly to our revenue during the same period in Fiscal 2003,
did not recur in Fiscal 2004. In addition, there was limited promotion of the
SportXction(TM) system in Fiscal 2004. The Company expects an insignificant
level of revenues during the quarter ending June 30, 2004, with increasing
amounts projected in future quarters as it launches the SportXction(TM) system
on BSkyB's digital television platform and gains new partners.

         Cost of revenues, research and development expense for the three months
ended March 31, 2004 were $469,000, as compared to $400,000 during the same
period in the prior year. The increase was due to higher programming costs in
the US as no software development costs were capitalized in Fiscal 2004 and
increased amortization of software development costs partially offset by lower
development costs in the UK.

         General and administrative expenses during the three months ended March
31, 2004 were $958,000, as compared to $894,000 during the same period in the
prior year. The increase in Fiscal 2004 was primarily due to higher business
development and consulting fees and professional fees partially offset by lower
salary and benefit expenses at GIG.

         Other income during the three months ended March 31, 2004 was $54,000,
as compared to $49,000 during the same period in the prior year. The increase in
Fiscal 2004 was due to rental income as the Company began subleasing space at
GIG partially offset by lower interest income.

         Interest expense during the three months ended March 31, 2004 was
$182,000. This non-cash expense represents an accrual for the interest payment
on the Debentures which was made in shares of Common Stock in April 2004, an
amount to reflect a reduction in the debt discount which is being accreted over
the life of the debt using the effective interest method as well as an amount
for amortization of debt issuance costs.

         Net loss and net loss per share (basic and diluted) for the three
months ended March 31, 2004 was $1,551,000 and $0.17, respectively, as compared
to $1,237,000 and $0.14, respectively, during the same period in Fiscal 2003.
The change is primarily the result of higher costs and interest expense in
Fiscal 2004 (as described above).


                                       11
<PAGE>

Six Months Ended March 31, 2004 and 2003

         Revenues for the six months ended March 31, 2004 ("Fiscal 2004") were
$12,000, as compared to $8,000 during Fiscal 2003. The increase in revenues in
Fiscal 2004 resulting from an additional partner and an increase in the number
of events covered were offset by the loss of revenues from the Cricket World
Cup, which did not recur in Fiscal 2004 and limited promotion of the
SportXction(TM) system. During Fiscal 2004, the SportXction(TM) system was in
"live" operation with the Company's partners, ukbetting plc ("ukbetting") and
Sportingbet plc ("Sportingbet"). The SportXction(TM) system was launched in
November 2002 with ukbetting on its totalbet.co.uk website.

         Cost of revenues, research and development expense for the six months
ended March 31, 2004 were $927,000, as compared to $699,000 during the same
period in the prior year. The increase was primarily due to higher programming
costs as no software development costs were capitalized in Fiscal 2004 as well
as an increase in the amortization of capitalized development costs partially
offset by lower development costs in the UK.

         General and administrative expenses during the six months ended March
31, 2004 were $1,735,000, as compared to $1,906,000 during the same period in
the prior year. The decrease in Fiscal 2004 was primarily due to lower salary
and benefit expenses at GIG partially offset by higher business development and
consulting fees.

         Other income during the six months ended March 31, 2004 was $113,000,
as compared to $102,000 during the same period in the prior year. The increase
in Fiscal 2004 was due to rental income as the Company began subleasing space at
GIG partially offset by lower interest income.

         Interest expense during the six months ended March 31, 2004 was
$239,000. This non-cash expense represents interest on the Debentures which were
made in shares of Common Stock in January and April 2004, an amount to reflect a
reduction in the debt discount which is being accreted over the life of the debt
using the effective interest method as well as an amount for amortization of
debt issuance costs.

         Net loss and net loss per share (basic and diluted) for the six months
ended March 31, 2004 was $2,776,000 and $0.30, respectively, as compared to
$2,495,000 and $0.28, respectively, during the same period in Fiscal 2003. The
change is primarily the result of higher costs and interest expense in Fiscal
2004 (as described above).

Liquidity and Capital Resources

         As of March 31, 2004, the Company had cash and cash equivalents
totaling $5,456,000. Cash and cash equivalents consist of funds held on deposit
with banking institutions with original maturities of less than 90 days.

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


                                       12
<PAGE>

         The Debentures are repayable in 24 equal monthly installments beginning
in May 2004 with interest payable quarterly. Under the terms of the transaction,
and subject to certain conditions, the Company has the right to repay the
interest and the principal in cash or shares of its Common Stock and force
conversion of all or a portion of the Debentures into Common Stock. The Company
made its January 1 and April 1, 2004 interest payments in shares of the
Company's Common Stock and made its first principal repayment of $108,333 for
the Debentures in May 2004 in cash. As permitted under the Debenture, the
Company elected to defer its monthly repayment in June 2004. While at least 50%
of the $2.6 million in Debentures are outstanding, the Debentures contain
covenants that restrict the ability of the Company to incur indebtedness that is
pari passu with or senior to the Debentures, except for certain specified types
of indebtedness not to exceed $625,000 or except for indebtedness incurred in
connection with a business combination transaction.

         The Company's operations currently do not generate positive cash flow
and are not expected to do so during the fiscal year ending September 30, 2004.
The Company anticipates that its existing resources will be adequate to fund its
capital and operating requirements for the next 12 months based upon the
Company's current business plan and longer, subject to the revenues generated by
the SportXction(TM) System.

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

         Capital expenditures are expected to be incurred in relation to system
rollout of existing contracts as well as the purchase of additional computer
equipment. Existing resources are expected to be able to fund these
requirements. The Company's capital requirements may vary materially from those
now planned due to a number of factors, including the rate at which the Company
can introduce its system, the market acceptance and competitive position of the
system and the response of competitors to the system.

System Deployment Status

         Interactive television

         On April 10, 2003, the Company announced that GIG had signed an
agreement with Sky Bet, a wholly-owned subsidiary of British Sky Broadcasting
Limited ("BSkyB"). Under a twelve month trial revenue sharing arrangement
commencing upon product launch, GIG will operate the SportXction(TM) System and
Sky Bet will be responsible for providing the players, receiving and managing
the customer's accounts, first level customer support and a comprehensive
marketing program. BSkyB is the UK's largest supplier of digital TV services
with approximately seven million active households throughout the UK and
Ireland. BSkyB is also one of the UK's leading sports rights holders and is at
the forefront of developing innovative interactive applications. We are
finalizing the necessary software interface to provide compatibility between
the SportXction (TM) system and the BSkyB interactive television platform. We
anticipate this interface will be available for final testing in July of this
year.


                                       13
<PAGE>

         Internet

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

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

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

         On December 30, 2003, the Company announced that GIG had signed an
agreement with Tote Credit Limited, a subsidiary of the Horserace Totalisator
Board which holds the internet bookmaking license for www.tote.co.uk. As part of
Tote Credit's marketing undertakings the SportXction(TM) system will be promoted
through its on-line website, specialist publications and through dedicated
direct marketing and promotions. The Company intends to launch the
SportXction(TM) system with Tote Credit during the second calendar quarter of
2004.

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


                                       14
<PAGE>

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

         Mobile phone

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

         Betting shops

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


         Non-wagering product

         On May 11, 2004, the Company announced that it had entered into an
agreement with Sportinglife.com to make available the contest version of its
SportXction(TM) product during the upcoming Tri-Nations international one-day
cricket series in June and July of 2004. Sportinglife.com is the UK's most
popular multi-sports Internet content destination. The agreement provides
minimum payments for use of the software and for operating the game, plus a
share in sponsorship revenues. The Company is also currently marketing the
contest product in the United States, the UK and Europe.


                                       15
<PAGE>

         System enhancements

          The Company is well advanced in the development of enhancements to the
SportXction(TM) System which will allow wagering using multiple currencies and
will provide players with a choice of multiple languages. The Company believes
that these enhancements will greatly expand the potential of the SportXctionTM
System by increasing the number of markets in which the product can be made
available and by making the product more appealing to global gaming operators.
It is expected that these enhancements will be available in the second quarter
of calendar 2004.

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


                                       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 dilutive
impact to existing shareholders; whether the Company's revenue will increase in
future quarters; whether the Company will have the interface needed to provide
compatibility between the SportXction(TM) System and BSkyB's digital television
platform available for final testing in July of this year and whether the
Company will launch the SportXction(TM) System on BSkyB's digital television
platform; how long the Company will continue to incur significant losses and
negative cash flow; whether the Company will enter into agreements with new
partners; whether the Company or its Internet, interactive television, mobile
phone and betting shop partners will gain a sufficient number of customers to
generate meaningful revenue; whether wagering using fixed odds betting terminals
will be introduced; whether the multi-currency and multi-language enhancements
will be made available in the second quarter of calendar 2004; whether the
SportXction(TM) system will be migrated onto Sportingbet's next generation back
end software; whether the Company will launch the SportXction(TM) System on
Stanley Leisure's on-line betting business; whether the launch of the agreement
with Tote Credit Limited will take place during the second quarter of calendar
2004; whether the Company will deploy its mobile phone product on additional
networks in the UK; and whether the contest version of the SportXction(TM)
System will be made available to the users of Sportinglife.com in June and July
2004 . Investors are cautioned that forward-looking statements are inherently
uncertain. Actual performance and results of operations may differ materially
from those projected or suggested in the forward-looking statements due to
certain risks and uncertainties, including, without limitation, the ability of
the Company and its partners to attract adequate numbers of players to its
wagering system and the ability of the Company to develop and market other
opportunities for its products. Additional information concerning certain risks
or uncertainties that would cause actual results to differ materially from those
projected or suggested in the forward-looking statements is contained in the
Company's filings with the Securities and Exchange Commission, including those
risks and uncertainties discussed in its Form 10-KSB for the fiscal year ended
September 30, 2003. The forward-looking statements contained herein represent
the Company's judgment as of the date of this report, and the Company cautions
the reader not to place undue reliance on such matters.


                                       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 Company's disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the
end of the period covered by this report. Based on such evaluation, the
Company's Chief Executive Officer and Chief Financial Officer have concluded
that, as of the end of such period, the Company's disclosure controls and
procedures are effective in alerting them in a timely manner to material
information relating to the Company (including its consolidated subsidiaries)
required to be included in the Company's periodic SEC filings.

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

Part II: Other Information

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

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

         The Debentures are initially convertible into shares of Common Stock at
a price of $4.58 per share, which share price was equal to 110% of the Closing
Price. The Company may require that the holders of the Debentures convert their
outstanding Debentures into Common Stock under specified circumstances. The
principal amount of the Debentures is repayable at the rate of $108,333 per
month, commencing on May 1, 2004 and may be paid, at the Company's option, in
cash or, subject to certain conditions, additional shares of Common Stock,
valued at 90% of the VWAP during the 20 day period prior to the applicable
payment. Interest on the Debentures is payable quarterly on January 1, April 1,
July 1, and October 1 and may be paid, at the Company's option, in cash or,
subject to certain conditions, additional shares of Common Stock, valued at 90%
of the VWAP during the 20 day period prior to the applicable payment (except for
the interest payments due on January 1, 2004 and April 1, 2004, which are valued
at 80% the VWAP during the 20-day period prior to the applicable payment). The
conversion price of the Debentures and the exercise price of the Investor
Warrants are subject to adjustment under certain circumstances. The Company paid
interest on the Debentures in January, 2004 and April, 2004 in shares of Common
Stock totaling 7,226 and 19,504 shares, respectively, to the holders of the
Debentures.


                                       18
<PAGE>

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

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

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

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

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

Item 6.  Exhibits and Reports on Form 8-K

                  (a)  Exhibits

                       NUMBER             DESCRIPTION
                       ------             -----------
                        10.01        Letter Agreement, dated April 27, 2004,
                                     between the Company and James McDade.

                        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.


                                       19
<PAGE>

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

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

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

                  (b)  Reports on Form 8-K

                       Current Report on Form 8-K furnished on February 13,
                       2004 to report that the Company had issued a press
                       release announcing its financial results for the
                       three months ending December 31, 2003.


                                       20
<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: May 17, 2004                      By:  /s/ Barry Mindes
                                              ----------------------------------
                                              Barry Mindes, Chairman and
                                              Chief Executive Officer
                                              (Principal Executive Officer)



Dated: May 17, 2004                      By:  /s/ James McDade
                                             -----------------------------------
                                              James McDade, Chief
                                              Financial Officer
                                              (Principal Financial Officer)


                                       21