<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                   FORM 10-KSB
                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

     For Fiscal Year ended December 31, 1997 Commission File Number 2-31876

                                   WORLDS INC.
             (Exact Name of Registrant as Specified in its Charter)

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<S>                                                                  <C>       
                     New Jersey                                                    22-1848316
(State or other jurisdiction of incorporation or organization)       (I.R.S. Employer Identification Number)

15 Union Wharf, Boston, Massachusetts                                                 02109
(Address of Principal Executive Offices)                                           (Zip Code)

Registrant's telephone number, including Area Code:                               (617) 725-8900
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           Securities registered pursuant to Section 12(b) of the Act:

                                      None

           Securities registered pursuant to Section 12(g) of the Act:

                                      None
                                 Title of Class

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (12) months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past ninety (90) days.
                                                                 Yes [X]  No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
registrant's best knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.                                                                   [X]

The aggregate market value of voting stock held by non-affiliates of the
Registrant: can not be determined because of the absence of an active trading
market for Registrant's securities.

The number of shares outstanding of Registrant's Common Stock as of April 3,
1998: 16,149,996.
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                                     PART I

ITEM 1.           BUSINESS

BACKGROUND

         The Company today is the result of the contemporaneous Mergers on
December 3, 1997 of Worlds Inc., a Delaware corporation formed on April 26, 1994
("Predecessor") with and into Worlds Acquisition Corp., a Delaware corporation
formed on April 8, 1997 ("WAC") and of WAC, with and into Academic Computer
Systems, Inc., a New Jersey corporation formed on May 20, 1968 ("Academic")
which changed its name to Worlds Inc. after the Mergers. Thus, the Company is
really Academic Computer Systems, Inc. with a new name carrying on the business
previously conducted by Predecessor in conjunction with the new business focus  
provided by WAC. In a transaction related to the Mergers, an aggregate of
$4,415,000 in gross proceeds was raised in a private offering. The purpose of
the Mergers was to provide financing and a publicly-held vehicle for the
technology of Predecessor to be further developed and marketed. The Merger was
accounted for as the acquisition of Predecessor by WAC and a simultaneous
merger into the Company with WAC deemed the "Accounting Acquiror" in both
transactions.

Statements contained herein which are not historical facts are forward-looking
statements. Forward-looking statements involve a number of risks and
uncertainties including, but not limited to, general economic conditions, the
Company's ability to complete development and then market its products and
competitive factors and other risk factors detailed herein. See "Risk Factors."

         Prospective investors are directed to the first paragraph in the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

OVERVIEW

         The Company develops applications for its three-dimensional ("3D")
Internet technology for different markets. At present the Company is targeting
three different markets for its 3D Internet technology. First, the Company is in
the process of marketing its 3D Internet technology with record companies to
produce music-oriented websites; second, the Company is in the process of
marketing its Worlds Chat technology to businesses for corporate intranet
applications; and third, the Company markets Worlds Chat, a 3D chat site on the
Internet, to consumers on the Internet.

         Prior to the Mergers, Predecessor marketed Worlds Chat, developed and
marketed 3D toolsets and servers and performed contract development work.
However, the Company has changed its focus and while it intends to introduce a
new and improved upgraded version of Worlds Chat and to use Worlds Chat as a
base vehicle for developing 3D corporate intranet sites, the Company does not
anticipate that, over time, they will generate the bulk of the Company's
revenues.

         The Company's primary objective is to create 3D music web sites and
other 3D internet entertainment, and to develop intranet applications for
businesses. These applications may be created directly by the Company or the
Company may license its technology for creation by third parties or the end
user.

         The Company's primary focus is upon marketing its 3D Internet
technology to record companies to produce music-oriented websites. The Company
intends to produce interactive, 3D, music related websites and distribute access
to these web sites on enhanced compact discs ("CD+") of various recording
artists via traditional retail record outlets, working in conjunction with major
record labels.

         With respect to the development of music-oriented web sites, the
Company is currently developing the combination of its 3D Internet technology
with the extra available capacity on the CD to create an interactive experience
for the CD purchaser. By utilizing the Company's technology distributed on a CD+
(a standard CD with its excess memory carrying a "bonus" as an enhancement), a
consumer using the CD ROM drive of the consumer's computer with Internet access
or services provider could enter into the interactive 3D world or site of the
recording artist, be able to interact with other fans utilizing voice or text
chat via the PC, visit the artist's merchandise shops, visit secret rooms of the
artist, see and hear advance videos and record clips of the artist, and enter
special VIP areas that would offer free concert tickets, among other things. The
Company intends to enter into revenue sharing with recording labels and artists,
from selling VIP on-line subscriber memberships, advertising and database sales.
In addition, the Company anticipates the possibility of additional revenues from
the sale of merchandise of the artist on the site.


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PREDECESSOR'S HISTORY

         Predecessor was formed with the intention of selling or licensing its
3D servers, 3D browsers, and 3D toolsets to aid programmers in the creation of
unique 3D user experiences on the Internet that would be sold or offered as
turnkey solutions, such as custom production of 3D environments on the Internet.
Predecessor expected that it would host newly created 3D environments on its own
servers and charge license fees to the owners of such 3D environments. This
market did not develop as rapidly as Predecessor had anticipated. Until
meaningful 3D Internet license fees could be developed using Predecessor's
technology, Predecessor entered the custom production business to showcase its
3D Internet technology, hiring as many as 60 full- time artists and independent
contractors, integrators, and producers to help create 3D virtual Internet
environments for companies such as, among others, Steven Spielberg's Starbright
Foundation, IBM, Visa International, MGM, Disney, and Tandem Computers Inc.
("Tandem").

         By January 1997, after almost all of Predecessor's funds had been
depleted, including approximately $17 million in equity financing, Pearson Inc.
and Tandem loaned Predecessor $1.5 million to continue Predecessor's operations
until such time as new capital could be invested in Predecessor or Predecessor
could be acquired.

         Recognizing the extent of its poor and rapidly deteriorating financial
condition, in early 1997, Predecessor began substantial layoffs to reduce costs.
In March 1997, Predecessor's Board of Directors decided to retain an outside
crisis management organization as Predecessor's general manager, which, after
Board approval, determined to proceed with the Merger Agreement.

         From inception in April 1994 through 1997, Predecessor's operations
were limited and consisted primarily of start-up activities, including
recruiting personnel, raising capital, custom production work and research and
development. In the third quarter of 1996, Predecessor launched its first
commercial user-oriented 3D chat site, Worlds Chat 1.0 and began selling the
client interface software through direct sales channels. These sales were very
nominal. In October of 1996, Predecessor introduced its first commercial toolset
for developing 3D multi-user applications. From inception through the date of
the Mergers, Predecessor generated revenues of only approximately $6 million and
had an accumulated deficit of approximately $21 million.

         The Company will not generate any meaningful revenues until after the
company successfully completes development and market testing of Worlds Platinum
(also known as "Gamma," the Company's newest 3D toolset, as further described
below) and its 3D Internet music sites, and attracts and retains a significant
number of subscribers. The Company anticipates that it will continue to incur
significant losses until, at the earliest, the Company generates sufficient
revenues to offset the substantial up-front expenditures and operating costs
associated with developing and commercializing its proposed products. There can
be no assurance that the Company will be able to attract and retain a sufficient
number of subscribers to generate meaningful revenues or achieve profitable
operations or that its products and services will prove to be commercially
viable.

THE MARKET

         Currently, the World Wide Web is almost entirely two dimensional
("2D"), in part, because the high speed data transmission technology required to
receive detailed 3D images is not yet available to the average Internet user.
However, much of the data required for interactive 3D images is template or
dynamic toolkit data that is reasonably constant and can be distributed to a
user off-line on a CD, allowing the transmission of data on-line through the
Internet to provide the updatable, interactive, variable portion of the user's
3D experience.

         The CD+ appears to be an optimal medium to distribute the Company's 3D
data. The traditional audio CD sold at record stores has excess storage
capacity. Since the audio CD is the same medium as the CD that runs on the CD
ROM drive of a personal computer ("PC"), the CD+ can be used to run computer
programs on the user's PC.


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Many recently manufactured PCs also have sound production capability that allows
the user to play the audio portion on the CD+ on the PC.

         By utilizing the Company's technology distributed on a CD+, a consumer
could enter into the interactive 3D world or site of the recording artist, be
able to interact with other fans utilizing voice or text chat via the PC, visit
the artist's merchandise shops, visit secret rooms of the artist, see and hear
advance videos and record clips of the artist, and enter special VIP areas that
would give away free concert tickets, among other things. The Company believes
these services could generate revenues from consumer subscriptions, purchases,
and advertising. While a number of recording artists have released CD+s for use
exclusively on PCs, to the best of the Company's knowledge, no record company or
artist has yet released a CD+, with a high level of interactive entertainment
and on-line extension capability.

MARKET ENTRY STRATEGY

         The Company plans to enter the market in two phases. First, the Company
plans to develop proprietary 3D music sites in conjunction with record
companies, record labels, and recording artists designed to generate revenues
from advertising, merchandise sales and VIP Tier Level subscription sales.
Second, the Company plans to seek strategic alliances with computer
manufacturers, and telecommunication, video game and merchandise sale companies
through contracts, joint ventures, business combinations and/or technology
licensing structured to generate fee and royalty revenue.

         In order for the Company to develop sales, it is imperative that
relationships be developed between the Company and record companies, record
labels (which are either owned and/or distributed by the record companies or
independently owned), and the recording artist or group and their management
companies.

         In addition to numerous independent record companies, there are six
major record companies that operate worldwide: Warner Bros. Music, Sony Music,
Polygram, BMG Entertainment, Universal Music Group (MCA), and EMI. These
companies in the aggregate sold approximately 800 million CD units in the U.S.
and 2.5 billion CD units worldwide in 1996. The record companies typically
create and finance new labels which might be owned, in whole or in part, by
them, manufacture and distribute recorded music for company and/or independently
owned labels, and provide marketing and technical assistance to their owned
and/or distributed labels. The individual record label's primary responsibility
is to sign, develop, and create records by the recording artist or group, which
is then turned over to the record company for manufacture and distribution.

         While it is best to have the full commitment and support of the record
companies, labels and artists in implementing the Company's 3D artist site
program on an enhanced CD or CD+, the Company believes that record company
support is the most important because with their commitment to a particular
effort or format, the record company can give the Company access to labels it
either owns and/or distributes and the hundreds of artists that record for these
labels. Toward this end, during the second and third quarters of 1997 and prior
to and after the Mergers, management had numerous conversations and/or meetings
with representatives and/or high level management and/or executives from all six
major record companies. The Company believes it has received a positive response
to its concept and online artist's prototype from each of the companies and
intends to continue discussions with each of them.

3D INTERNET ENVIRONMENTS; VIRTUAL REALITY MODELING LANGUAGE ("VRML")

         The technology to deliver Internet-based 3D experiences to a user's
desktop has only been developed over the past four years. This new technology
received a boost from an early standardization effort called Virtual Reality
Modeling Language ("VRML") which increased consumer and developer awareness of
the medium. The VRML


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effort evolved into a consortium of approximately 55 companies (including
Predecessor), all with competing interests and underlying technologies.

         VRML is supposed to deliver rich and dynamic 3D experiences over the
Internet, viewable through the most commonly used Web browsers. However, VRML
based Internet experiences and the companies developing these tools and
technologies have not yet achieved significant market penetration for several
reasons. To date, the user's experience with VRML has been unsatisfactory. VRML
is slow in rendering images, has a long download time, confusing user interfaces
and scene description language that is difficult to manipulate, and because it
lacks standards for support of other media within the scene, the user
experiences are less dynamic. Adequate VRML performance also requires high-end
PCs, precluding effective use by average consumers with less advanced PCs. A new
version of VRML, VRML 2.0 was just released at the end of 1997 with enhanced
performance characteristics addressing some of VRML's performance problems. If
and when VRML appears to be on the verge of overcoming its current limitations,
the Company believes that its proprietary technology can be made VRML compliant.
The Company believes that the VRML standard will ultimately overcome its
limitations but the current problems make a proprietary solution such as the
Company's technology attractive for the Company's intended use of 3D Internet
technology.

         Predecessor spent the last two years attempting to solve VRML's
performance and production quality problems and has, in management's opinion,
reduced, at least for the intended use of the Company, the barriers to the
adoption of 3D multi-user environments on the Internet. Predecessor's technical
solutions deliver user experiences that are rendered considerably faster than
equivalent VRML browsers. Typical Predecessor environments are highly textured,
object and behavior rich with a multi-user component that the Company believes
delivers user experiences far more interesting than what many VRML environments
provide today.

THE COMPANY'S TECHNOLOGY

         The following is a summary of the Company's technologies, all of which
were developed and released by Predecessor. The Company's development efforts
are now focused on adapting World Platinum to produce music-oriented websites.

Worlds Platinum

         The Worlds Platinum Development Kit is the Company's third generation
and newest 3D toolset, and is expected to be completed in the first half of
1998. The Company believes that Worlds Platinum will deliver a considerably
faster frame rate for user experiences and, in some cases, a meaningful
productivity increase in art production and integration over its previous
generation production tools.

         The Worlds Platinum Development Kit has substantial elements written in
Sun Microsystem's programming language, Java, including the WorldsBrowser
Platinum and the WorldsShaper Platinum so the Company expects that it can be
made portable across Windows and UNIX Platforms because of Java's platform
independence.

-        WorldsShaper Platinum: The WorldsShaper Platinum is an advanced
         compositing 3D building tool that integrates pre-existing or custom
         content, such as 3D models created in Kinetix' 3D Studio, textures or
         images created in Adobe's Photoshop, or .midi or .wave sound files,
         with foundation world architectural geometry and interactive behaviors
         and actions written in Java. The architectural building blocks for
         creating 3D worlds, the flexibility and power of integrating
         professional modeling and imaging tools, and the extensibility via Java
         make the WorldsShaper Platinum a tool well-suited for rapid world
         creation. Additional Application Programming Interfaces for more
         sophisticated, programmatic control of the spaces will also be
         included. Initially, the WorldsShaper Platinum will only output in the
         Company's proprietary file format. If demand and market needs warrant,
         WorldsShaper Platinum's extensibility might be expanded to include
         support for ActiveX enabled scripting languages.


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-        WorldsServer Platinum: The WorldsServer Platinum is the server software
         that the Company anticipates will be used to control and operate its
         future on-line virtual community, Worlds of Worlds, that is currently
         in development. If the Company is successful in developing this
         concept, the WorldsServer Platinum is being designed to manage the
         registration and authentication of users, the locations of users within
         the 3D environment, the physical structure of the 3D environment, all
         information regarding objects that are "shared" by the participants and
         any of the interactions between the users, such as text chat. It is
         currently proposed that the server will come in configurations that
         support 5, 20, 50, 100, 500, 1,000, and 1,000+ simultaneous users and
         is hoped to be available with a variety of add-on modules which, among
         other features, are intended to include, user tracking, encryption,
         person-to-person and multi-person voice conversations, streaming audio,
         electronic commerce transactions, and custom avatars. Additionally, the
         WorldsServer Platinum will include generalization of a "Bot" API to
         enable the use of Artificial Intelligence inference engines.

-        WorldsBrowser Platinum: The WorldsBrowser Platinum is used to access
         the 3D environments created with the Worlds Platinum Development Kit.
         The browser is optimized for speed, delivering 10 - 20 frame rates per
         second in highly textured virtual 3D worlds. After its initial
         introduction, the Company may make the browser an ActiveX control for
         Microsoft's Internet Explorer and a plug-in for the Netscape Navigator.

-        Worlds Platinum Libraries: The Worlds Platinum Libraries are composed
         of sample worlds, textures, models, avatars, actions, sensors, sounds,
         motion sequences, and other behaviors. The Worlds Platinum Libraries
         will be made available as part of the WorldsShaper Platinum and can
         easily be customized by the user or extended by adding new library
         elements.

                  The markets for the Company's products are characterized by
rapidly changing technology and evolving industry standards, often resulting in
product obsolescence or short product life cycles. Accordingly, the ability of
the Company to compete will be dependent on the Company's ability to complete
development of Worlds Platinum in a timely manner. There can be no assurance
that competitors will not develop technologies or products that render the
Company's products obsolete or less marketable or that the Company will be able
to successfully enhance its products or develop new products.

Worlds Chat 1.0 Gold

                  The Company also owns its own proprietary online 3D Internet
chat site known as Worlds Chat. Worlds Chat is the 3D environment originally
created by Predecessor and launched in 1996 to test its technologies and to
learn about user behaviors and preferences in 3D environments. Worlds Chat
enhances users' chat experiences by allowing users to see a representation of
each other in the form of highly textured characters, known as avatars, and to
explore a 3D environment together. Avatars can be created by the individual or
chosen from pre-defined figures chosen from the Company's library. Users
communicate with each other through text chat. The client interface for the
Worlds Chat environment was originally distributed through a free download and
later was sold on a CD which has a greater selection of avatars, persistent
users names, and access to six virtual worlds (over 500 rooms, compared to 100
available in the free demo version).

                  The Company believes that the user base to Worlds Chat site
will develop into a valuable asset. Although the Company has no plans to build
advertising or subscription revenues through this site, such revenues may be
possible in the future as the Company is now preparing to release a more updated
version of this product and attempting to market a customized version of this
product for intranet applications by corporations. Currently, the Company
collects a name and an e-mail address from its demo version users and a complete
name, address, and credit card information from its direct customers. In order
to rapidly increase the number of potential subscribers


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of its 3D music sites, the Company plans to offer a new and improved updated
version of Worlds Chat product at a much lower price and, in certain instances,
for free. The objective in this marketing approach is that by reducing the price
barrier, the Company may generate a significant number of members to its Chat
service. These new members may be matriculated to the 3D music sites when
launched. Additionally, the proliferation of Worlds Chat may increase corporate
brand identity that could translate into valuable consumer data and related
advertising potential.

                  The Company believes that there is an opportunity to further
exploit the Worlds Chat product in modified form. The Company is now preparing a
marketing campaign for Worlds Chat as a corporate intranet chat and information
service to human resource administrators in major corporations worldwide. The
modified application of Worlds Chat, if successfully modified and then marketed,
could provide the company with an ongoing revenue stream based on the licensing
fees for Worlds' server technology, as well as a per employee annual
subscription fee.

COMPETITION

         The markets in which the Company is currently operating and those it
intends to enter are characterized by intense competition and an increasing
number of new market entrants which have developed or are developing competitive
products. The Company will face competition from numerous sources, including
prospective customers which may develop and market their own competitive
products and services, software companies, and online and Internet service
providers. The Company believes that competition will be based primarily on ease
of use, features (including communications capabilities and content) and price.

         In addition, certain companies have developed or may be expected to
develop technologies or products in related market segments which could compete
with certain technologies or products being developed by the Company. The
Company expects that such companies, as well as other companies (including
established and newly formed companies), may attempt to develop products
directly competitive with Worlds Platinum. Certain of such competitors have
substantially greater financial, technical, marketing, distribution personnel
and other resources than the Company, permitting such companies to implement
extensive marketing campaigns.

         Technologically, the market targeted by the Company is sought after by
a combination of numerous recent start-ups and well established 3D graphics
companies. Each company has a slightly different focus and each claims a
different combination of product offerings. The Company's product solution
includes three major components: tools for building 3D worlds (known as
shapers), servers for distributing those worlds and making those worlds
multi-user, and browsers that enable end-users to enter and experience those
worlds. Many of the competitors in this market have adopted the VRML and VRML
2.0 scene description language as their file format and have limited their
expertise and scope to only one of the above categories.

         The most competitive environment is in the area of 3D world building
tools. Competitors in this area can be grouped into two categories: newcomers,
who are developing tools to create real-time, networked virtual worlds, and 3D
modeling companies, which have been successful in more traditional multimedia
application development and distribution. Companies in the former category
include Paragraph (recently acquired by Silicon Graphics), Superscape, OZ
Interactive, Dimension X (recently acquired by Microsoft), New Fire, Virtus,
VREAM, Sense8, Sony, and Electric Communities. Many 3D modeling companies have
been extending their products to import and export VRML files that would enable
them to be used in real-time networked applications. These companies include
Kinetix (Autodesk), SGI, Microsoft, Macromedia, and Caligari.

         Multi-user virtual world servers is a somewhat less competitive area
with companies such as OnLive! and Black Sun currently having a product
available. Other have announced their intention of bringing to market multi-user
servers.


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         Each of the above mentioned organizations or technologies, as well as
possibly others not now known to the Company in some way competes with the
Company. The competition may be through entry into the same markets as the
Company, or through technology that either obviates Company's advantages or
lowers the barrier to entry in one of the Company's markets.

         Besides technological competition, the Company will be competing with
established online music retailers with substantial resources and established
user bases. Among the leaders in online music web sites are N2K and CDNow. Each
of these companies, as well as others that are currently selling on-line music
related products, including CDs and other merchandise, have financial and
management resources significantly in excess of the Company's. These companies
have established themselves with consumers as music merchandise and music review
destinations; they all sell music-related products and have generated revues in
online sales.

EMPLOYEES

         The Company currently has seven full time employees, of whom one is an
executive officer, three are engaged in product development, one is engaged in
financial activities and one is engaged in marketing activities. The Company has
also re-established relationships with eight independent contractors (software
developers/programmers) who until early 1997 were performing technological
development work on its Worlds Platinum platform.

         The Company, additional financing permitting, intends to hire up to
twelve additional employees, at least two of whom will be in the area of
artist/integration production of music sites, and up to three of whom will be in
artist relations and/or administration. It is possible that one or more of the
people who might be hired for one or more of these positions will be retained as
independent consultants.

         The Company's employees are not represented by a labor union. The
Company believes that its relations with its employees are good.

ITEM 2.           PROPERTIES

         The Company's facilities are located in approximately 2,500 square feet
of leased office space in San Francisco, California and 2,500 square feet of
leased office space in Boston, Massachusetts. The lease in San Francisco is on a
month by month basis at $2,500 per month and in Boston the lease expires in
September 2000 and provides for an annual rental of approximately $50,000. The
Company has only negligible costs relating to environmental compliance laws.

ITEM 3.           LEGAL PROCEEDINGS

         The Company is currently a defendant in two lawsuits filed by a former
employee of Predecessor: Fraser v. Knowledge Adventure Worlds, Inc. d/b/a
Worlds, Inc., et al., San Francisco Superior Court No. 974470 ("State Court
Action"); and Fraser v. Worlds Inc., U.S. District Court, Northern District of
California No. C97-0277 CW ("Federal Action").

         In the State Court Action filed in December 1995, Fraser alleged
various contract and tort claims for wrongful termination and sought damages
ranging from $500,000 to $2,000,000. Pursuant to mediation in July 1996, the
parties reached a tentative settlement. In February 1997, parties again reached
a tentative settlement, this time in connection with both the State Court and
Federal Actions. Pursuant to the terms of the stipulated settlement, Fraser
filed a motion for entry of judgment. The Company filed its opposition to this
motion, and at a hearing on December 4, 1997, the Court ruled in favor of the
Company and approved the Company's proposed version of the


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settlement agreement, which, among other things, would terminate both the State
and Federal Actions. On December 18, 1997, Fraser filed a motion for
reconsideration and a motion to take discovery. The court again ruled in favor
of the Company and denied Fraser's motions at a hearing on January 22, 1998.

         In the Federal Action, filed in January 1997, Fraser asserted claims
for damages of $200,000 in connection with the use of "Worlds" name on the World
Wide Web. On September 26, 1997, Fraser filed a motion requesting enforcement of
his version of the terms of the tentative settlement of February 1997. On
September 23, 1997, Fraser also moved for a temporary restraining order and a
preliminary injunction. The Company opposed both of Fraser's motions, and on
October 31 the Court denied the October 23 motion. On November 7, 1997, the
Court also denied Fraser's motion of September 26 and ordered the parties to
participate in a settlement conference, scheduled for January 5, 1998. That
conference has now been continued to April 13, 1998.

         Fraser and the Company are presently negotiating the terms of a
settlement agreement. The Company's management and its counsel believe that the
maximum additional liability for resolution of these two lawsuits would be
approximately $150,000, which amount has been accrued at December 31, 1997.

         During February 1998, the Company was named as a defendant in a lawsuit
filed by a former employee of Predecessor seeking damages of approximately
$70,000 (plus interest and fees) relating to termination of an employment
contract. The lawsuit is in the pre-discovery phase. Management believes that
settlement, if any, would not have a material adverse affect on the Company's
financial position or results of operations.

ITEM 4.           SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         Not applicable.

                                     PART II

ITEM 5.           MARKET PRICE OF REGISTRANT'S COMMON EQUITY
                  AND RELATED STOCKHOLDER MATTERS

         While the Company has not filed a Registration Statement with the
Securities and Exchange Commission to register under, and be subject to the
reporting requirements of, the Securities and Exchange Act of 1934, as amended,
the Company files Annual, Quarterly and Current Reports required thereunder and
expects to shortly be subject to the reporting requirements.

         As of January 22, 1998, there were 633 record holders of the
Registrant's common stock.

         Since its inception, the Registrant has not paid any dividends on its
common stock and has no current intention to do so in the foreseeable future.

ITEM 6.           SELECTED FINANCIAL DATA

The following selected financial data as of December 31, 1997 and for the period
April 8, 1997 (inception) through December 31, 1997 is derived from the
Company's audited financial statements included elsewhere herein. Such data
includes the operations of Academic Computer Systems, Inc. and Predecessor from
December 4, 1997. The selected statement of operations data for Predecessor for
the period from April 26, 1994 to December 3, 1997, for the year ended December
31, 1996, for the period ended December 3, 1997 and for the period April 26,
1994 (inception) to December 3, 1997 is derived from audited financial
statements included elsewhere herein. The


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selected statements of operations data for Predecessor for the period from April
26, 1994 to December 31, 1994 and for the year ended December 31, 1995 is
derived from Predecessor's audited financial statements not included herein.

                  The following data should be read in conjunction with the
financial statements of the Company and Predecessor.

STATEMENT OF OPERATIONS DATA


<TABLE>
<CAPTION>
                               Worlds Inc.
                                (Formerly
                                 Worlds
                               Acquisition
                                 Corp.)                    Worlds, Inc. - Predecessor (a development stage enterprise)
                             ---------------      -----------------------------------------------------------------------------
                                                    Cumulative                                                      
                                                   from April 26,      For the                                         April 26,  
                              April 8, 1997            1994         Period from                                          1994    
                               (inception)          (inception)      January 1                                        (inception)
                                 through              through         through            For the Year Ended             through   
                               December 31,         December 3,       December        December         December         December
                                  1997                 1997           3, 1997         31, 1996         31, 1995         31, 1994
                              ------------        ------------     ------------     ------------     ------------     ------------
<S>                           <C>                 <C>              <C>              <C>              <C>              <C>         
Net Revenues                  $      1,420        $  6,026,691     $     80,720     $  3,784,019     $  1,882,232     $    279,720
Total Cost & Expenses            6,810,568(a)       27,779,637        2,885,088       13,871,984        9,561,265        1,461,300
Operating Loss                  (6,809,148)        (21,752,946)      (2,804,368)     (10,087,965)      (7,679,033)      (1,181,580)
Other Income and
   (Expenses)                       (3,099)            247,522          134,863           16,011           96,201              447
Net Loss Before Taxes
   and  Extraordinary Item      (6,812,247)        (21,505,424)      (2,669,505)     (10,071,954)      (7,582,832)      (1,181,133)
Income Taxes                      (120,000)             (5,000)        (115,000)              --               --
Net Loss Before
     Extraordinary Item         (6,812,247)        (21,625,424)      (2,674,505)     (10,186,954)      (7,582,832)      (1,181,133)
Extraordinary Item-Gain
   On Debt Settlement              125,776             389,285          389,285               --               --               --
Net Loss                      $ (6,686,471)       $(21,236,139)    $ (2,285,220)    $(10,186,954)    $ (7,582,832)    $ (1,181,133)

Loss per share - before
   extraordinary item
   (basic and diluted)        $      (0.73)

Loss per share
    (basic and diluted)       $      (0.72)
</TABLE>

(a) Includes $ 6,135,538 of acquired research and development costs resulting
from the merger with Predecessor.

BALANCE SHEET DATA


<TABLE>
<CAPTION>
                            December 31, 1997
                              ------------
<S>                         <C>         
Working Capital               $  1,750,112
Total Assets                     3,825,994
Total Liabilities                3,834,783
Stockholders' Deficit         $     (8,769)
</TABLE>


                                       10
<PAGE>   11
ITEM 7.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                  CONDITION AND RESULTS OF OPERATIONS

Statements contained herein which are not historical facts are forward-looking
statements. Forward-looking statements involve a number of risks and
uncertainties including, but not limited to, general economic conditions, the
Company's ability to complete development and then market its products and
competitive factors and other risk factors detailed herein. See "Risk Factors."

                  The Company was originally formed on May 20, 1968. Since 1975
the Company has been inactive with no operations and its only income has come
from interest, gain on the sale of securities and dividends. Following the
Mergers, the Company is engaged in the business and operations formerly
conducted by Predecessor. Accordingly, a discussion and analysis of the
Company's financial condition and results of its operations would be of limited
import to any reader as it would only cover activities (or lack thereof) which
have no meaning in the context of the Company's current operations. Thus,
included herein is a discussion and analysis of the financial condition and
results of the operations of Predecessor's pre-Mergers operations. Similarly,
the BUSINESS section below will also contain a discussion of the former business
of the pre-Mergers Predecessor.

Background

                  Predecessor was formed in April 1994 to design, develop and
commercialize 3D multi-user tools and technologies for the Internet market. From
inception through 1997, Predecessor's operations were limited and consisted
primarily of start-up activities, including recruiting personnel, raising
capital, custom production work, and research and development. In the third
quarter of 1996, Predecessor launched its first commercial user-oriented 3D chat
site, Worlds Chat 1.0 and began selling the client interface software through
direct sales channels. These sales were very nominal. In October of 1996,
Predecessor introduced its first commercial toolset for developing 3D multi-user
applications. In the first quarter of 1997, after an unsuccessful effort to
raise capital, Predecessor became insolvent and released most of its personnel,
and management sought to sell Predecessor and/or its technology.

                  Predecessor has not generated significant revenues, and the
Company will not generate significant revenues, if ever, until after it
successfully completes development and market testing of Worlds Platinum and its
3D Internet music sites, and attracts and retains a significant number of
subscribers and/or advertisers. The Company anticipates that it will continue to
incur significant losses until, at the earliest, the Company generates
sufficient revenues to offset the substantial up-front expenditures and
operating costs associated with developing and commercializing its proposed
products. There can be no assurance that the Company will be able to attract and
retain a sufficient number of subscribers and/or advertisers to generate
significant revenues or achieve profitable operations or that its products and
services will prove to be commercially viable.

                  Predecessor (and now the Company), classified its expenses
into three broad groups: (i) research and development; (ii) cost of revenues;
and (iii) selling, general and administration. Revenues consisted primarily of
production service activities and sales of technology licenses.

                  Software development costs (consisting primarily of salaries
and related expenses) incurred prior to establishing technological feasibility
are expensed in accordance with Financial Accounting


                                       11
<PAGE>   12
Standards Board (FASB) Statement No. 86. In accordance with FASB 86, the Company
will capitalize software development costs at such time as the technological
feasibility of the product has been established.

Plan of Operation

                  During the next twelve months of operation the Company intends
to (i) refine and commercialize the technology of Predecessor by producing
interactive, 3D, music related websites and distribute access to these web sites
on enhanced compact discs ("CD+") of various recording artists via traditional
retail record outlets, working in conjunction with major record labels, (ii)
offer the Company's 3D technology for non-music applications such as corporate
intranets, and (iii) release a new version of Worlds Chat.

                  The Company is presently completing work on Worlds Platinum,
the latest version of the Company's 3D internet software, to adapt it for
distribution and use on CD+ media. The Company is also in discussions with
several major record labels and companies for them to distribute Worlds
Platinum, along with music related web site access. While the Company foresees
no particular obstacle to completing work on Worlds Platinum, the development of
software is inherently fraught with unforeseen delays resulting from bugs, lack
of coordination among development staff, integration with other software and
hardware, and general design flaws, among other problems. In addition, the
Company's strategy of distributing its products on CD+ is wholly dependent upon
obtaining distribution agreements with record labels or companies. To date, the
Company has no such agreements.

                   The Company's present cash resources are insufficient to meet
the its requirements over the next twelve months; however, if substantially all
of the shares offered by the Company hereby are sold, the Company will have
sufficient cash resources for at least the next twelve months. The Company
currently has 7 full-time employees and is working with eight independent
software contractors who were former employees of the Company. The Company does
not anticipate hiring more than 2-3 additional employees or purchasing
additional plant or equipment other than that needed on a day-to-day basis until
product sales increase significantly and/or additional financing is obtained.

Results of Operations of the Company

                  (Note to Results of Operations. Since Predecessor merged into
WAC and Academic on December 3, 1997, a comparison of the fiscal year ended
December 31, 1996 to December 31, 1997 would not be meaningful. Consequently,
Predecessor's results of operations from December 31, 1996 are compared below
with the eleven months ended December 3, 1997. Results of operations of the
Company for the period from April 8, 1997 (the inception of WAC, the accounting
acquiror) through December 31, 1997 are discussed separately.)

Period from April 8, 1997 through December 31, 1997.

                  The Company's primary activities during the period from April
8, 1997 through December 31, 1997 were the formation of WAC, negotiating and
consummating the Mergers, attending to post-Merger administrative and legal
matters, the completion of a private placement, and the negotiation and
compromise of debts of Predecessor. Revenues were nominal at $1,420 due to an
almost total lack of sales directly attributable to the lack of operations
during this period. Selling, general and administrative expenses were $675,030
for this period and consisted largely of overhead, professional fees and other
expenses incurred in connection with the Mergers. An expense of $6,135,538 was
incurred during this period in the acquisition


                                       12
<PAGE>   13
of research and development from Predecessor, being the sum of the negative net
worth of Predecessor, plus the value of the 1,999,996 shares of the Company's
common stock given in exchange for all the outstanding stock of Predecessor at
the time of the Mergers. The Company had interest expense during this period of
$16,692 primarily attributable to interest on Predecessor's notes payable. The
Company also realized an extraordinary gain of $125,776 during this period by
settling debts of the Company at less than face value. The net loss for the
period (including the extraordinary gain on debt settlement) was $6,686,471.

Liquidity and Capital Resources of the Company

                  Net cash used by the Company's operating activities from April
8, 1997 through December 31, 1997 was approximately $350,000. At December, 31
1997, the Company had working capital of $1,750,112.

                  On December 3, 1997, Predecessor merged with and into WAC.
Contemporaneously, WAC, closed the first round of a private placement of its
common stock (the "Private Offering") raising gross proceeds of $3.8 million (of
which it netted approximately $3,000,000) and WAC merged with and into the
Company, then called Academic Computer Systems, Inc. ("Academic"), an inactive
corporation with approximately $560,000 of net assets, primarily cash.
Thereafter, Academic changed its name to Worlds Inc. The merger of Predecessor
into WAC and the subsequent merger of WAC with and into Academic are sometimes
hereinafter collectively referred to herein as the "Mergers."

                  Prior to the Mergers, the Company had 910,000 shares
outstanding. Effective December 31, 1997, the Company closed on an additional
$585,000 of gross proceeds from the Private Offering, of which it netted
$529,000, and issued an additional 585,000 shares of Common Stock and on January
2, 1998 received an additional $30,000, of which it netted $26,500, and issued
an additional 30,000 shares. The total issued and outstanding shares of the
Company as of March 1, 1998 is therefore 16,149,996 shares. The terms of the
Mergers called for the issuance, in exchange for all of the outstanding shares
of WAC (which also included the former shareholders of Predecessor), of an
aggregate of 14,624,996 shares of Academic's common stock distributed, as
follows: 8,400,000 to the former shareholders of WAC; 1,999,996 to the former
shareholders of Predecessor and; 3,800,000 to the investors in the private
placement offering. As part of the Merger, the Company issued 425,000 shares as
a financial advisory fee to International Capital Growth, Ltd. which also
received warrants to purchase 110,375 shares of Common Stock for $1.00 per
share.

                  The Company's capital requirements relating to the development
and commercialization of Worlds Platinum have been and will continue to be
significant. The Company is dependent on the proceeds of its current offering
and other future financings in order to continue in business and develop and
commercialize its proposed products.

                  The Company anticipates, based on currently proposed business
plans and assumptions relating to its operations (including the timetable of,
and costs associated with, product development and commercialization), that the
proceeds of its current offering, will provide only a portion of the funds
necessary to permit the Company to complete product development and
commercialization. Satisfactory completion of product development and
commercialization will require capital resources substantially greater than the
proceeds of its current offering or otherwise currently available to the
Company. In addition, as a result of the Mergers by operation of law, the
Company assumed Predecessor's then liabilities of approximately $4.6 million.
Although the Company is in the process of negotiating the amount and timing of
payment of some of its liabilities, there is no assurance that such negotiations
will be successful.


                                       13
<PAGE>   14
                  There can be no assurance that the Company will be able to
raise any proceeds from its current offering or otherwise obtain the substantial
additional capital necessary to permit the Company to attract and retain a
sufficient number of subscribers or that any assumptions relating to its
business plans will prove to be accurate. While the Company hopes to raise an
additional $2 million from the shares it is currently offering, the Company has
no current arrangements with respect to, or sources of, additional financing and
there can be no assurance that any such financing, particularly the significant
amounts of financing that would be required, will be available to the Company on
commercially reasonable terms, or at all. Any proceeds raised under its current
offering is not likely to provide the significant funds required by the Company.
Any inability to obtain additional financing will have a material adverse effect
on the Company, including possibly requiring the Company to significantly
curtail or cease operations. Based upon its current projections, the Company
believes it currently has sufficient funds to operate for at least the next
twelve months, if substantially all of the shares offered by the Company hereby
are sold.

Results of Operations of Predecessor

Fiscal Year Ended December 31, 1996 Compared with the Eleven Months Ended
December 3, 1997.

                  In the first quarter of 1997 Predecessor was insolvent and had
failed to raise any additional capital. In January and February the majority of
Predecessor's personnel were released and most of its management team resigned.
Normal operations of Predecessor ceased and significant wind down costs were
incurred. In March, the board of directors appointed Regent Pacific, a firm with
experience in crisis management, as acting general manager of Predecessor. The
Seattle network operations center and Active Worlds, an earlier generation of
Predecessor's technology, were both sold, resulting in net proceeds of $260,100.

                  Revenue decreased by $3,703,299 to $80,720 for the eleven
months ended December 3, 1997 from $3,784,019 for the fiscal year ended December
31, 1996. The decrease was caused primarily by the lack of any production
revenue during the period. The nominal revenue for the period was derived from
Worlds Chat CD sales and web site hosting at the Company's Seattle operations.

                  Costs of revenue decreased by $5,982,128 to $32,304 for the
eleven months ended December 3, 1997 from $6,014,432 for the fiscal year ended
December 31, 1996. The decrease was directly attributable to the lack of
operations during the period.

                  Research and development costs decreased by $1,993,827 to
$452,897 for the eleven months ended December 3, 1997 from $2,446,724 for the
fiscal year ended December 31, 1996. This was a result of a significant
reduction in research and development effort and personnel.

                  Selling, general and administrative expenses decreased by
$2,501,741 to $2,399,887 for the eleven months ended December 3, 1997 from
$4,901,628 for the fiscal year ended December 31, 1996. This decrease was due to
reduction in personnel as Predecessor ceased normal operations.

                  Predecessor's interest expense increased by $122,900 to
$139,650 for the eleven months ended December 3, 1997 from $16,750 for the
fiscal year ended December 31, 1996. This was attributable primarily to interest
on $1,685,000 in loans received by Predecessor.

                  In 1997, Predecessor recognized an extraordinary gain of
$389,285 upon the partial forgiveness of debt owed in connection with technology
purchases.


                                       14
<PAGE>   15
                  As a result of the foregoing, Predecessor incurred a net loss
of $2,285,220, inclusive of the $389,287 extraordinary gain, for the eleven
months ended December 3, 1997, compared to $10,186,954 for the fiscal year ended
December 31, 1996, a decrease of 78%.

Year Ended December 31, 1995 Compared with Year Ended December 31, 1996.

                  Revenue increased by 101% from $1,882,232 for the year ended
December 31, 1995 to $3,784,019 for the year ended December 31, 1996. This
increase was primarily attributable to an increase in the number of production
projects and the licensing revenue from these projects.

                  Costs of revenue increased by 35% from $4,445,582 for the year
ended December 31, 1995 to $6,014,432 for the year ended December 31, 1996. The
increase in costs was related to the increased number of production projects and
the high costs relative to revenue, associated with the network operations
center.

                  Research and Development costs increased by 8% from $2,257,082
for the year ended December 31, 1995 to $2,446,724 for the year ended December
31, 1996. All software development costs consisting primarily of salaries and
related costs were expensed as incurred in accordance with Financial Accounting
Standards Board (FASB) Statement No. 86.

                  Selling, general and administrative expenses were $4,901,628
for the year ended December 31, 1996 compared to $2,858,601 for the year ended
December 31, 1995, an increase of 71%. The increase was attributable to several
factors, including the addition of new management personnel, increased marketing
efforts, new office facilities and increased legal costs.

                  Other income and expenses includes interest earned from
investment capital and interest charged on finance leases. Lawsuit settlement
expenses in 1996 are primarily associated with claims asserted by ex-employees.

                  As a result of the foregoing, Predecessor incurred a net loss
of $10,071,954 for the year ended December 31, 1996 compared to $7,582,832 for
the year ended December 31, 1995, an increase of 33%.

ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                  The financial statements are included herein commencing on
page F-1. The registrant is not required to provide supplementary financial
information.

ITEM 9.           CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
                            ON ACCOUNTING AND FINANCIAL DISCLOSURE


                  On January 31,1998 Registrant dismissed Lipner, Gordon & Co.
LLP as its independent accountants ("LG&C"). This action had been approved by
Registrant's Board of Directors. During the past three years LG&C did not issue
a report on Registrant's financial statements that either contained an adverse
opinion or a disclaimer of opinion, or was qualified or modified as to
uncertainty, audit scope or accounting principles.


                                       15
<PAGE>   16
                  During the period of its engagement there were no
disagreements between Registrant and LG&C on any matter of accounting principles
or practices, financial statement disclosure, or audit scope and procedure,
which disagreement, if not resolved to the satisfaction of LG&C, would have
caused them to make reference to the subject matter of the disagreement in
connection with its opinion.

                  On January 31, 1998 the Board of Directors of Registrant
appointed BDO Seidman, LLP ("BDO") as its independent accountants. Prior to such
engagement, BDO was the independent auditor of Worlds Inc. and Worlds
Acquisition Corp., two Delaware corporations which merged into the
Registrant(the "Mergers"). BDO provided written reports of these two
corporations which was included in offering materials for a private financing
continued by the Registrant after the Mergers. BDO was also consulted regarding
the filing obligations of the Registrant pursuant to the change in fiscal year
reported in Item 8 hereof. Finally, BDO was consulted regarding the nature of
the financial statements required to be included by the Registrant in its recent
filing of a Registration Statement on Form SB-2, in which BDO also provided
written reports regarding the two merged corporations.

                  Other than as disclosed above, Registrant did not consult with
BDO regarding the application of accounting principles to a specified
transaction, or the type of audit opinion that may be rendered with respect to
the Registrant's financial statements.

                                    PART III

ITEM 10.          DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS, EXECUTIVE OFFICERS AND CONSULTANT

The directors and executive officers of the Company are as follows:

Name                          Age       Position
----                          ---       --------

Michael J. Scharf             55        Chairman of the Board
Thomas Kidrin                 45        President, Chief Executive Officer, 
                                        Secretary, Treasurer and Director
Kenneth  A. Locker            49        Director

MICHAEL J. SCHARF has been Chairman of the Board since December 3, 1997. Prior
to the Mergers, Mr. Scharf was Chairman and Secretary of Worlds Acquisition
Corp. ("WAC") since June 4, 1997, and a Director since inception. Since 1993 he
has been Chairman and President of Niagara Corporation, a company engaged in the
manufacturing and distribution of steel bars. From 1983 until 1989, Mr. Scharf
was Chairman and Chief Executive Officer of Edgcomb Corporation, the largest
independent distributor of steel in the United States. Mr. Scharf received an A.
B. degree from Princeton University and an M. B. A. from Harvard Business
School. From 1989 (when Edgcomb was sold) until 1993 (when Niagara was founded)
Mr. Scharf managed his personal investments.

THOMAS KIDRIN has been President, Chief Executive Officer, Secretary and
Treasurer since December 3, 1997. Prior to the Mergers, Mr. Kidrin was President
of WAC since its inception, Treasurer since June 4, 1997 and a Director since
inception. He has been engaged in developing the business plan and prototype for
the Company's business for over one year. From 1991 to 1996, Mr. Kidrin was a
founder, director, and President of UC Television Network Corp., a company
engaged in the design and manufacture of interactive entertainment/advertising
networks in public venues.


                                       16
<PAGE>   17
KENNETH A. LOCKER has been a Director since December 3, 1997 and prior to the
Mergers was a Director of WAC since June 4, 1997. Since 1996 he has been
Executive Producer for MGM Interactive where he is responsible for creating and
implementing the MGM Interactive online business strategy. From 1994 to 1996,
Mr. Locker was a founder and Vice President of Predecessor. From 1993 to 1994,
Mr. Locker was Senior Program Consultant for Ziff Davis Communications. From
1990 to 1993, Mr. Locker was Executive Vice President and Head of Production for
RHI Entertainment which at the time was 50% owned by New Line Cinema. Mr. Locker
is also on the Board of Directors of Softbank Forums, Inc., a division of
Softbank Corp.

STEVEN A. GREENBERG was a founder of WAC and was substantially involved in the
implementation of the early and current stages of its business. It is
anticipated that Mr. Greenberg will remain involved in the Company as a
consultant. From 1991 until the present, Mr. Greenberg has been a financial
consultant and private investor. In June 1994, Mr. Greenberg settled a civil
proceeding instituted against him by the SEC. Mr. Greenberg, without admitting
or denying the allegations of the SEC complaint, consented to an injunction
against future violations of the insider trading provisions of the federal
securities laws and paid a civil penalty. See "Risk Factors - Consent Decree of
Founder." The action had absolutely no relationship to Mr. Greenberg's
affiliation with the Company and the Company does not anticipate incurring any
costs or liability in connection with the matter. The Company's Board of
Directors is aware of the SEC's civil lawsuit and Mr. Greenberg's settlement
thereof and understands that several factors come into play in settling a
pending legal action, not the least of which is the curtailment of ongoing
litigation costs.

INDEMNIFICATION OF DIRECTORS AND OFFICERS

         The Company's By-Laws includes certain provisions permitted pursuant to
the New Jersey Business Corporation Act ("NJBCA"), whereby officers and
directors of the Company are to be indemnified against certain liabilities.
These provisions of the By-Laws have no effect on any director's liability under
Federal securities laws or the availability of equitable remedies, such as
injunction or recession, for breach of fiduciary duty. The Company believes that
these provisions will facilitate the Company's ability to continue to attract
and retain qualified individuals to serve as directors and officers of the
Company.

         At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company where indemnification might
be required or permitted. The Company is not aware of any threatened litigation
or proceeding that might result in a claim for such indemnification.

COMPENSATION OF DIRECTORS

         Non-employee directors of the Company, excluding Mr. Scharf, will be
reimbursed for reasonable travel and lodging expenses incurred in attending
meetings of the Board of Directors and any committee on which they may serve, as
well as $2,000 per Board meeting. The Company estimates total Board related
expenses, including travel, lodging, and director's fees, will be approximately
$40,000 per year.


ITEM 11.          EXECUTIVE COMPENSATION

COMPENSATION OF EXECUTIVE OFFICERS

         Prior to the Mergers, the Company had not paid any compensation to its
executive officers or directors during the prior three years. From December 3,
1997 (effective date of the Mergers) through


                                       17
<PAGE>   18
December 31, 1997, the Company paid $21,903 in compensation to its President and
Chief Executive Officer. The Company intends to enter into an employment
agreement with its President, Thomas Kidrin that will expire December 2000. The
agreement, among other things, will provide for base compensation payable to Mr.
Kidrin of $175,000 in the first year, and bonuses to be determined. The
agreement will also provide for employment on a full-time basis and contain a
provision that Mr. Kidrin will not compete or engage in a business competitive
with the Company for a period of one year after termination.

1997 STOCK OPTION PLAN

         The Board of Directors and stockholders of the Company have adopted a
Stock Option Plan (the "Option Plan") as an incentive for, and to encourage
share ownership by, the Company's officers, directors and other key employees
and/or consultants and potential management of possible future acquired
companies. The Option Plan provides that options to purchase a maximum of
1,000,000 shares of Common Stock (subject to adjustment in certain
circumstances) may be granted under the Option Plan. The Option Plan also allows
for the granting of stock appreciation rights ("SARs") in tandem with, or
independently of, stock options. Any SARs granted will not be counted against
the 1,000,000 limit.

         The purpose of the Option Plan is to make options (both "incentive
stock options" within the meaning of Section 422A of the Internal Revenue Code
of 1986, as amended (the "Code"), and non-qualified options) and "stock
appreciation rights" (with non-qualified options only, if in tandem) available
to officers, directors and other key employees and/or consultants of the Company
in order to give such individuals a greater personal interest in the success of
the Company and, in the case of employees, an added incentive to continue and
advance in their employment.

         The Option Plan is currently administered by the majority vote of a
Committee (the "Committee") appointed by the Board of Directors and comprised of
at least two "independent" members of the Board, or alternatively, by the entire
Board, who are not eligible to receive options, other than pursuant to a
formula, it being intended that such plan shall qualify under Rule 16b-3 as
promulgated pursuant to the Securities Exchange Act of 1934, as amended. With
specified limitations, the Committee may amend the terms of the Option Plan.

         The Committee will designate those persons to receive grants under the
Option Plan and determine the number of options and/or SARs, as the case may be,
to be granted and the price payable for the shares of Common Stock thereunder.
The price payable for the shares of Common Stock under each option will be fixed
by the Committee at the time of the grant, but, for incentive stock options,
must be not less than 100% (110% if the person granted such option owns more
than 10% of the outstanding shares of Common Stock) of the fair market value of
Common Stock at the time the option is granted. The Committee will also
determine the term and vesting schedule of all options and SARs granted,
provided that no option may be exercisable later than ten years after the date
of grant (or five years in the case of a 10% stockholder). The Committee may
also institute divesting schedules. All options are payable in cash or check, by
delivery of a secured personal interest bearing note, or by delivery of shares
of Common Stock equal in value to the cost of the options.

         There are currently 165,000 non-plan stock options outstanding at an
exercise price of $.50, which vest in equal amounts over a three year period,
including 60,000 to one of the Company's outside directors.


                                       18
<PAGE>   19
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934

         Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, directors and greater-than-ten-percent shareholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file. The officers, directors and shareholders of the Company are not
currently obligated to file reports under Section 16(a).

ITEM 12.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
                  OWNERS AND MANAGEMENT

         The following table sets forth, as of February 28, 1998, information
regarding the beneficial ownership of the Company's Common Stock based upon the
most recent information available to the Company for (i) each person known by
the Company to own beneficially more than five (5%) percent of its outstanding
Common Stock, (ii) each of its officers and directors, and (iii) all of its
officers and directors as a group. Each stockholder's address is c/o the
Company, 15 Union Wharf, Boston, MA 02109.

                            Shares Owned Beneficially
                                  and of Record

     Name                            No. of Shares                 % of Total
     ----                            -------------                 ----------
Michael J. Scharf (1)                  1,900,000                     11.76%
Thomas Kidrin (2)                      1,600,000                      9.91%
Kenneth A. Locker (3)                        -0-                       N/A
Steven A. Greenberg                    4,500,000                     27.86%
All Officers and Directors
    as a  Group (3 persons)            3,500,000                     21.67%

----------
      (1) Chairman.
      (2) President, Chief Executive Officer, Secretary, Treasurer and a 
          Director.
      (3) Director.


ITEM 13.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The Company intends to enter into a month-to-month consulting agreement
with Steven A. Greenberg, a founder of WAC. The agreement will provide for
monthly compensation of $15,000 plus reimbursement of reasonable expenses
actually incurred. In addition to providing consulting services, Mr. Greenberg
will also make his offices and support staff available to Company employees.
During 1997, Mr.


                                       19
<PAGE>   20
Greenberg loaned $77,000 to WAC of which $71,000 was repaid as of December 31,
1997. Also, during 1997, Mr. Greenberg received $20,000 in consulting fees.


                                     PART IV

ITEM 14.          EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
                  REPORTS ON FORM 8-K

(a)      1. and 2.         Financial Statements and Schedules

         The financial statements are listed in the Index to Financial
         Statements on page F-1 and are filed as part of this annual report.

         3.                Exhibits

         27 - Financial Data Schedule.

(b)                        Reports on Form 8-K

         A Report on Form 8-K dated January 31, 1998 regarding a change in
         accountants was filed on February 13, 1998 and an amended Report
         previously filed was filed on February 17, 1998.


                                       20
<PAGE>   21
                                   SIGNATURES

                  Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.

                                    WORLDS INC.


                                    By: /s/
                                        ---------------------------
                                        Thomas Kidrin
                                        President and CEO

Dated: 15th day of April, 1998


                  Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below as of the 30th of December, 1997 by the
following persons on behalf of Registrant and in the capacities indicated.


 /s/                                Date: April 15, 1998
---------------------        
Thomas Kidrin
President, CEO and Director
(Chief Financial/Accounting Officer)


 /s/                                Date: April 15, 1998
---------------------
Michael J. Scharf
Chairman


 /s/
---------------------               Date: April 15, 1998
Kenneth A. Locker
Director


                                       21
<PAGE>   22
                                                                     WORLDS INC.
                                                (A DEVELOPMENT STAGE ENTERPRISE)












                                                            FINANCIAL STATEMENTS
                                           PERIOD FROM APRIL 8, 1997 (INCEPTION)
                                                            TO DECEMBER 31, 1997

                                      F-1
<PAGE>   23
                                                                     WORLDS INC.
                                                (A DEVELOPMENT STAGE ENTERPRISE)

                                                                        CONTENTS


WORLDS INC. (THE "COMPANY")

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS                         F-3

FINANCIAL STATEMENTS:
   Balance sheet                                                           F-4
   Statement of operations                                                 F-5
   Statement of stockholders' deficit                                      F-6
   Statement of cash flows                                                 F-7
   Summary of accounting policies                                   F-8 - F-11
   Notes to financial statements                                   F-12 - F-21

WORLDS INC. ("PREDECESSOR")
 [Predecessor company - information prior to date of 
   merger with the Company herein disclosed]:

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS                        F-24

FINANCIAL STATEMENTS:
   Balance sheet                                                          F-25
   Statements of operations                                               F-26
   Statements of stockholders' deficit                                    F-27
   Statements of cash flows                                               F-28
   Summary of accounting policies                                  F-29 - F-31
   Notes to financial statements                                   F-32 - F-41


                                      F-2
<PAGE>   24
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


Worlds Inc.
Boston, Massachusetts


We have audited the accompanying balance sheet of Worlds Inc. (the "Company") (a
development stage enterprise) as of December 31, 1997, and the related
statements of operations, stockholders' deficit and cash flows for the period
from April 8, 1997 (inception) to December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Worlds Inc. at December 31,
1997 and the results of its operations and its cash flows for the period from
April 8, 1997 (inception) to December 31, 1997, in conformity with generally
accepted accounting principles.

As discussed in Note 1, the accompanying financial statements have been prepared
assuming Worlds Inc. will continue as a going concern. The Company is in the
development stage, has a stockholders' deficit, has had minimal revenues from
operations and will require substantial additional funds for development and
marketing of its products. These matters raise substantial doubt about its
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.




BDO Seidman, LLP



New York, New York

March 25, 1998

                                       F-3
<PAGE>   25
                                                                     WORLDS INC.
                                                (A DEVELOPMENT STAGE ENTERPRISE)

                                                                   BALANCE SHEET



<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------------------------------------------------------------
<S>                                                                                <C>        
ASSETS
CURRENT:
   Cash and cash equivalents                                                       $ 3,541,829
   Trade receivables, less allowance for doubtful accounts of $140,318                     538
   Prepaid expenses and other current assets                                            74,175
--------------------------------------------------------------------------------------------------
           TOTAL CURRENT ASSETS                                                      3,616,542
PROPERTY AND EQUIPMENT, NET (NOTE 4)                                                   209,452
--------------------------------------------------------------------------------------------------
                                                                                   $ 3,825,994
==================================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT:
   Accounts payable                                                               $    568,707
   Accrued expenses (Note 10)                                                          592,250
   Advanced customer billings and deferred revenue                                     436,140
   Current maturities of notes payable (Note 5)                                        269,333
-----------------------------------------------------------------------------------------------
           TOTAL CURRENT LIABILITIES                                                 1,866,430
LONG-TERM PORTION, NOTES PAYABLE (NOTE 5)                                            1,968,333
--------------------------------------------------------------------------------------------------
           TOTAL LIABILITIES                                                         3,834,763
--------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTES 6 AND 10)
STOCKHOLDERS' DEFICIT (NOTES 2, 3 AND 7):
   Common stock, $.001 par value - shares authorized 30,000,000; outstanding
      16,119,996                                                                        16,120
   Additional paid-in capital                                                        6,661,582
   Deficit accumulated during the development stage                                (6,686,471)
--------------------------------------------------------------------------------------------------
           TOTAL STOCKHOLDERS' DEFICIT                                                 (8,769)
--------------------------------------------------------------------------------------------------
                                                                                  $ 3,825,994
==================================================================================================
</TABLE>

                             See accompanying summary of accounting policies and
                                                  notes to financial statements.


                                      F-4
<PAGE>   26
                                                                     WORLDS INC.
                                                (A DEVELOPMENT STAGE ENTERPRISE)

                                                         STATEMENT OF OPERATIONS



<TABLE>
<S>                                                                                 <C>         
Period from April 8, 1997 (inception) to December 31, 1997 (a)
--------------------------------------------------------------------------------------------------
NET REVENUES                                                                       $      1,420
COSTS AND EXPENSES:
   Selling, general and administrative                                                 (675,030)
   Acquired research and development (Note 1)                                        (6,135,538)
--------------------------------------------------------------------------------------------------
        OPERATING LOSS                                                               (6,809,148)
OTHER INCOME (EXPENSES):
   Interest income                                                                        13,593
   Interest expense                                                                     (16,692)
--------------------------------------------------------------------------------------------------
        LOSS BEFORE EXTRAORDINARY ITEM                                               (6,812,247)
EXTRAORDINARY ITEM - GAIN ON DEBT SETTLEMENT (NOTE 9)                                    125,776
--------------------------------------------------------------------------------------------------
NET LOSS                                                                            $(6,686,471)
==================================================================================================
LOSS PER SHARE (BASIC AND DILUTED):
   Loss before extraordinary item                                                  $        (.73)
   Extraordinary item                                                                        .01
--------------------------------------------------------------------------------------------------
        NET LOSS PER SHARE (BASIC AND DILUTED)                                     $        (.72)
==================================================================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
   Basic and diluted                                                                   9,336,569
==================================================================================================
</TABLE>

--------------

(a)     Includes the results of Predecessor and Academic (from December 4, 1997)
        which were merged into the Company on December 3, 1997.

                             See accompanying summary of accounting policies and
                                                  notes to financial statements.

                                      F-5
<PAGE>   27
                                                                     WORLDS INC.
                                                (A DEVELOPMENT STAGE ENTERPRISE)

                                              STATEMENT OF STOCKHOLDERS' DEFICIT
                                                                        (NOTE 7)




Period from April 8, 1997 (inception) to December 31, 1997

<TABLE>
<CAPTION>
                                                                                         Deficit                           
                                                                                       accumulated                         
                                            Common stock                               during the           Total     
                                      ------------------------       Additional        development       stockholders' 
                                       Shares          Amount      paid-in capital        stage            deficit    
---------------------------------------------------------------------------------------------------------------------
<S>                                   <C>              <C>           <C>              <C>                <C>         
Issuance of common stock to            8,400,000       $ 8,400       $  195,600       $      --          $   204,000
   founding stockholders
Sale of shares in private
   offering memorandum and
   shares issued to placement
   agent (Note 2)                      4,810,000         4,810        3,689,866              --            3,694,676
Issuance of shares to
   Academic Computer
   Systems, Inc. (Note 1)                910,000           910          557,116              --              558,026
Issuance of shares pursuant to
   merger with Predecessor
   (Note 1)                            1,999,996         2,000        1,998,000              --            2,000,000
Capital contribution resulting
   from forgiveness of debt to
   shareholders of Predecessor
   (Note 5)                                 --            --            221,000              --              221,000
Net loss for the period April 8
   to December 31, 1997                     --            --               --          (6,686,471)        (6,686,471)
---------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997            16,119,996       $16,120       $6,661,582       $(6,686,471)       $    (8,769)
=====================================================================================================================
</TABLE>

                             See accompanying summary of accounting policies and
                                                  notes to financial statements.

                                      F-6
<PAGE>   28


                                                                     WORLDS INC.
                                                (A DEVELOPMENT STAGE ENTERPRISE)

                                                         STATEMENT OF CASH FLOWS
                                                                       (NOTE 11)

<TABLE>
<CAPTION>
Period from April 8, 1997 (inception) to December 31, 1997
-----------------------------------------------------------------------------------------------------------
<S>                                                                                        <C>         
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss                                                                                $(6,686,471)
   Adjustments to reconcile net loss to net cash used in operating activities:
      Depreciation and amortization                                                              16,323
      Gain on debt settlement                                                                 (125,776)
      Acquired research and development                                                       6,135,538
      Changes in operating assets and liabilities, net of effects from merger
        with Predecessor and Academic:
           Trade receivables                                                                      (538)
           Prepaid expenses and other assets                                                     93,716
           Accounts payable and accrued expenses                                                214,361
-----------------------------------------------------------------------------------------------------------
              NET CASH USED IN OPERATING ACTIVITIES                                           (352,847)
-----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from sale of common stock to founding stockholders                                  204,000
   Proceeds from sale of common stock in private offering memorandum                          3,694,676
   Payments on note payable                                                                     (4,000)
-----------------------------------------------------------------------------------------------------------
              NET CASH PROVIDED BY FINANCING ACTIVITIES                                       3,894,676
-----------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS                                                     3,541,829
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                                        -
-----------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD                                                    $ 3,541,829
===========================================================================================================
</TABLE>

                             See accompanying summary of accounting policies and
                                                  notes to financial statements.

                                      F-7
<PAGE>   29
                                                                     WORLDS INC.
                                                (A DEVELOPMENT STAGE ENTERPRISE)

                                                  SUMMARY OF ACCOUNTING POLICIES




DEFINITIONS                             The Company is the resulting entity of
                                        two contemporaneous mergers (the
                                        "Mergers") of Worlds Inc., a Delaware
                                        corporation ("Predecessor"), with and
                                        into Worlds Acquisition Corp., a
                                        Delaware corporation ("WAC"), and WAC
                                        with and into Academic Computer Systems,
                                        Inc., a New Jersey corporation
                                        ("Academic"), which changed its name to
                                        Worlds Inc. (see Note 2). While Academic
                                        was the legal entity that survived the
                                        mergers, WAC was the accounting acquiror
                                        in both mergers. The Company's fiscal
                                        year-end is December 31.

                                        The term the "Company," as used herein,
                                        refers to the consolidated entity
                                        resulting from the two contemporaneous
                                        mergers, as well the pre-merger
                                        Predecessor, WAC and Academic; however,
                                        Predecessor, WAC and Academic are
                                        hereinafter sometimes referred to
                                        separately as the context requires.



NATURE OF BUSINESS                      WAC was incorporated on April 8, 1997 to
                                        design, develop and market
                                        three-dimensional ("3D") music oriented
                                        Internet sites on the World Wide Web.
                                        These web sites are anticipated to
                                        utilize 3D technologies developed by
                                        Predecessor.



BASIS OF PRESENTATION                   The financial statements include the
                                        results of Predecessor and Academic from
                                        December 3, 1997, the date of the
                                        Mergers (the "Merger Date").

                                        The financial statements have been
                                        prepared in accordance with the
                                        provisions of Statement of Financial
                                        Accounting Standards ("SFAS") No. 7,
                                        "Accounting, and Reporting by
                                        Development Stage Enterprises," which
                                        requires development stage enterprises
                                        to employ the same accounting principles
                                        as operating companies.



FAIR VALUE OF FINANCIAL                 The carrying amounts of financial
INSTRUMENTS                             instruments, including cash and
                                        short-term debt, approximated fair value
                                        as of December 31, 1997 because of the
                                        relatively short maturity of the
                                        instruments. The carrying value of
                                        long-term debt, including the current
                                        portion, approximates fair value as of
                                        December 31, 1997, based upon estimates
                                        for similar debt issues.



                                      F-8
<PAGE>   30
                                                                     WORLDS INC.
                                                (A DEVELOPMENT STAGE ENTERPRISE)

                                                  SUMMARY OF ACCOUNTING POLICIES





USE OF ESTIMATES                        The preparation of financial statements
                                        in conformity with generally accepted
                                        accounting principles requires
                                        management to make estimates and
                                        assumptions that affect the reported
                                        amounts of assets and liabilities and
                                        disclosures of contingent assets and
                                        liabilities at the date of the financial
                                        statements and the reported amounts of
                                        revenues and expenses during the
                                        reporting period. Actual results could
                                        differ from these estimates.



CASH AND CASH EQUIVALENTS               Cash and cash equivalents are comprised
                                        of highly liquid money market
                                        instruments, which have original
                                        maturities of three months or less at
                                        the time of purchase.



PROPERTY AND EQUIPMENT                  Property and equipment are stated at
                                        cost. Depreciation is calculated using
                                        the straight-line method over the
                                        estimated useful lives of the assets,
                                        which range from two to five years.



REVENUE RECOGNITION                     Revenue from technology development and
                                        licensing contracts is recognized upon
                                        the attainment of contractual milestones
                                        (approximating the
                                        percentage-of-completion method). Cash
                                        received in advance of revenues earned
                                        is recorded as deferred revenue.



SOFTWARE DEVELOPMENT                    Software development costs are charged
COSTS                                   to expense when incurred until the
                                        technological feasibility of the product
                                        has been established. After
                                        technological feasibility has been
                                        established, any additional costs would
                                        be capitalizable in accordance with the
                                        Financial Accounting Standards Board's
                                        ("FASB") SFAS No. 86 ("SFAS No. 86"). No
                                        such costs have been capitalized to
                                        date.



RESEARCH AND DEVELOPMENT                Research and development costs are
COSTS                                   expensed as incurred.




                                      F-9
<PAGE>   31


                                                                     WORLDS INC.
                                                (A DEVELOPMENT STAGE ENTERPRISE)

                                                  SUMMARY OF ACCOUNTING POLICIES





INCOME TAXES                        The Company uses the liability method of
                                    accounting for income taxes in accordance
                                    with SFAS No. 109, "Accounting for Income
                                    Taxes." Deferred income tax assets and
                                    liabilities are recognized based on the
                                    temporary differences between the financial
                                    statement and income tax bases of assets,
                                    liabilities and carryforwards using enacted
                                    tax rates. Valuation allowances are
                                    established, when necessary, to reduce
                                    deferred tax assets to the amount expected
                                    to be realized.



LOSS PER SHARE                      In 1997, the FASB's SFAS No. 128, "Earnings
                                    per Share," replaced the calculation of
                                    primary and fully diluted earnings (loss)
                                    per share with basic and diluted earnings
                                    (loss) per share. Unlike primary earnings
                                    per share, basic earnings per share excludes
                                    any dilutive effects of options, warrants
                                    and convertible securities. Diluted earnings
                                    per share is very similar to the previously
                                    reported fully diluted earnings per share.
                                    The loss per share amounts have been
                                    presented to conform to SFAS No. 128
                                    requirements. The common stock equivalents
                                    which would arise from the exercise of stock
                                    options and warrants are excluded from
                                    calculation of diluted loss per share since
                                    their effect is anti-dilutive. Therefore,
                                    the amounts reported for basic and diluted
                                    loss per share are the same.



STOCK-BASED COMPENSATION            In October 1995, the FASB issued SFAS No.
                                    123, "Accounting for Stock-Based
                                    Compensation" ("SFAS No. 123"). SFAS No. 123
                                    encourages entities to adopt the fair value
                                    method in place of the provisions of
                                    Accounting Principles Board Opinion No. 25,
                                    "Accounting for Stock Issued to Employees"
                                    ("APB No. 25"), for all arrangements under
                                    which employees receive shares of stock or
                                    other equity instruments of the employer or
                                    the employer incurs liabilities to employees
                                    in amounts based on the price of its stock.
                                    The Company has not adopted the fair value
                                    method encouraged by SFAS No. 123 and will
                                    continue to account for such transactions in
                                    accordance with APB No. 25.




                                    

                                      F-10
<PAGE>   32
                                                                     WORLDS INC.
                                                (A DEVELOPMENT STAGE ENTERPRISE)

                                                  SUMMARY OF ACCOUNTING POLICIES





NEW ACCOUNTING STANDARDS            In June 1997, the FASB issued SFAS No. 130,
NOT YET ADOPTED                     "Reporting  Comprehensive Income", which
                                    establishes standards for reporting and
                                    display of comprehensive income, its
                                    components and accumulated balances.
                                    Comprehensive income is defined to include
                                    all changes in equity except those resulting
                                    from investments by owners and distributions
                                    to owners. Among other disclosures, SFAS No.
                                    130 requires that all items that are
                                    required to be recognized under current
                                    accounting standards as components of
                                    comprehensive income be reported in a
                                    financial statement that is displayed with
                                    the same prominence as other financial
                                    statements.
                                                                                

                                    SFAS No. 131, "Disclosures about Segments of
                                    an Enterprise and Related Information",
                                    which supersedes SFAS No. 14, "Financial
                                    Reporting Segments of a Business
                                    Enterprise", establishes standards for the
                                    way that public enterprises report
                                    information about operating segments in
                                    interim financial statements issued to the
                                    public. It also establishes standards for
                                    disclosures regarding products and services,
                                    geographic areas and major customers. SFAS
                                    No. 131 defines operating segments as
                                    components of an enterprise about which
                                    separate financial information is available
                                    that is evaluated regularly by the chief
                                    operating decision maker in deciding how to
                                    allocate resources and in assessing
                                    performance.

                                    Both of these new standards are effective
                                    for financial statements for periods
                                    beginning after December 15, 1997 and
                                    require comparative information for earlier
                                    years to be restated. The adoption of these
                                    standards is not expected to impact the
                                    Company's financial statements or
                                    disclosures.



                                    

                                      F-11
<PAGE>   33

                                                                     WORLDS INC.
                                                (A DEVELOPMENT STAGE ENTERPRISE)

                                                   NOTES TO FINANCIAL STATEMENTS




    1.   GOING CONCERN              As discussed in Note 3, the Company
                                    completed a private placement raising gross
                                    proceeds of $4,385,000 and consummated a
                                    merger agreement with a development stage
                                    enterprise, Predecessor. Predecessor had not
                                    generated significant revenues from
                                    operations and had an accumulated deficit
                                    from inception to the Merger Date of
                                    $21,236,139 and a capital deficit of
                                    $4,135,538. The acquisition of Predecessor
                                    by the Company was accounted for as a
                                    purchase. Accordingly, $6,135,538, the
                                    portion of the purchase allocable to in-
                                    process research and development projects
                                    that had not reached technological
                                    feasibility and had no probable alternative
                                    future uses, was expensed by the Company at
                                    the date of merger.

                                    The accompanying financial statements have
                                    been prepared assuming that the Company will
                                    continue as a going concern. The Company is
                                    in the development stage and has had minimal
                                    revenues from operations since the series of
                                    merger transactions. These matters raise
                                    substantial doubt about its ability to
                                    continue as a going concern.

                                    The Company anticipates that it currently
                                    has only a portion of the funds necessary to
                                    complete product development and
                                    commercialization. There can be no assurance
                                    that the Company will be able to obtain the
                                    substantial additional capital resources
                                    necessary to pursue its business plan or
                                    that any assumptions relating to its
                                    business plan will prove to be accurate. The
                                    Company is pursuing sources of additional
                                    financing and there can be no assurance that
                                    any such financing will be available to the
                                    Company on commercially reasonable terms, or
                                    at all. Any inability to obtain additional
                                    financing will have a material adverse
                                    effect on the Company, including possibly
                                    requiring the Company to significantly
                                    curtail or cease operations.

                                    These factors raise substantial doubt about
                                    the ability of the Company to continue as a
                                    going concern. The financial statements do
                                    not include any adjustments that might
                                    result from the outcome of this uncertainty.





                                      F-12
<PAGE>   34
                                                                     WORLDS INC.
                                                (A DEVELOPMENT STAGE ENTERPRISE)

                                                   NOTES TO FINANCIAL STATEMENTS





    2.   THE MERGERS                On December 3, 1997, Predecessor was merged
                                    with and into WAC in a series of related
                                    transactions which included the simultaneous
                                    merger of the Company with and into Academic
                                    (the "Mergers") and a private offering of
                                    WAC's securities (the "Private Placement").
                                    In both mergers, WAC was the acquiror for
                                    accounting purposes. All of the common and
                                    preferred stock of Predecessor were
                                    exchanged for 1,999,996 shares of WAC.
                                    Predecessor was a development stage company,
                                    had not generated significant revenues from
                                    operations and had an accumulated deficit
                                    from inception to December 3, 1997 of
                                    $21,236,139. Academic was an inactive
                                    company with no operations. Academic
                                    voluntarily reported under the Securities
                                    Exchange Act of 1934 (the "Exchange Act").
                                    The Company intends to continue reporting
                                    under the Exchange Act. While no trading
                                    market existed for the securities of
                                    Academic, or currently exists for the
                                    securities of the Company, the Company
                                    intends to cause its common stock to be
                                    traded on the Bulletin Board.



    3.   THE PRIVATE                The Private Placement called for WAC to
         PLACEMENT                  offer for sale a maximum of 50 units (57 1/2
                                    with the over-allotment), each consisting of
                                    120,000 shares of WAC's common stock (the
                                    "Units") at a price of $120,000 per Unit. In
                                    connection with the Private Placement, the
                                    placement agent was to receive one warrant
                                    to purchase one share of WAC's common stock
                                    at $1 per share for every $40 of gross
                                    proceeds from the sale of the Units. On
                                    November 21, 1997, WAC sold 31.67 Units with
                                    gross proceeds of $3,800,000 (3,800,000
                                    shares) (the "Initial Private Placement
                                    Closing") and the placement agent was issued
                                    425,000 shares of common stock. On December
                                    31, 1997, the Company sold 4.88 Units with
                                    gross proceeds of $585,000 (585,000 shares).
                                    Net proceeds, after commissions and expenses
                                    of the offering, were $3,689,866. WAC agreed
                                    to include the shares of common stock
                                    underlying the Units sold in the Private
                                    Placement (the "Private Placement Shares")
                                    in




                                      F-13
<PAGE>   35
                                                                     WORLDS INC.
                                                (A DEVELOPMENT STAGE ENTERPRISE)

                                                   NOTES TO FINANCIAL STATEMENTS





                                    a registration statement to be filed with
                                    the Securities and Exchange Commission (the
                                    "SEC"). In the event that the Company does
                                    not use its best efforts to have a
                                    registration statement declared effective by
                                    the SEC by May 20, 1998, the Company has
                                    agreed, upon the occurrence of such event,
                                    to issue to purchasers of the Units one
                                    warrant to purchase one share of common
                                    stock, at an exercise price of $1, for each
                                    three Private Placement Shares.



    4.   PROPERTY AND               A summary of property and equipment as of
         EQUIPMENT                  December 31, 1997 is as follows:




<TABLE>
December 31, 1997
--------------------------------------------------------------------------------
<S>                                                                    <C>     
Computers, software and equipment                                      $650,557

Less: Accumulated depreciation and amortization                         441,105
--------------------------------------------------------------------------------
                                                                       $209,452
================================================================================
</TABLE>



                                      F-14
<PAGE>   36


                                                                     WORLDS INC.
                                                (A DEVELOPMENT STAGE ENTERPRISE)

                                                   NOTES TO FINANCIAL STATEMENTS





    5.   NOTES PAYABLE              Long-term debt at December 31, 1997 consists
                                    of the following:


<TABLE>
<CAPTION>
December 31, 1997
----------------------------------------------------------------------------------------------------
<S>                                                                                     <C>     
Convertible promissory notes payable - stockholders, maturing December 3, 2000,
   plus interest at 7.5% compounded annually. The notes are convertible into
   shares of the Company's common stock as follows: pre December 3, 1998 at
   $4.375 per share, from December 4, 1998 to December 3, 1999 at $5.00 per
   share and after December 4, 1999 at $5.625 per share. (Stockholders granted
   forgiveness of accrued interest of $106,000 on this debt which had previously
   been assumed as an accrued expense in the merger - see (a)
   below).                                                                               $1,685,000
Note payable - technology obligation (noninterest                                
   bearing), payable in monthly installments of $3,333                           
   until November 2001                                                                      186,667
Note payable - stockholder, payable in monthly                                   
   installments of $6,944 until December 2000, plus                              
   interest at 8%. (Stockholder granted forgiveness of                           
   $115,000 which had previously been assumed as an                              
   account payable in the merger - see (a) below).                                          250,000
Note payable - investment banker, payable in monthly                             
   installments of $2,000 until September 1998, with a                           
   final payment of $100,000, plus interest at 8%.                                          116,000
-----------------------------------------------------------------------------------------------------
                                                                                          2,237,667
Less: Current maturities                                                                    269,333
-----------------------------------------------------------------------------------------------------
        Long-term portion                                                                $1,968,334
=====================================================================================================
</TABLE>
                                                                     

--------------
(a)      As a result of the mergers discussed in Note 2, the Company was granted
         forgiveness of debt by certain stockholders of Predecessor. Such
         forgiveness, aggregating $221,000, has been accounted for as a
         contribution of capital to the Company for the period ended December
         31, 1997.



                                      F-15
<PAGE>   37
                                                                     WORLDS INC.
                                                (A DEVELOPMENT STAGE ENTERPRISE)

                                                   NOTES TO FINANCIAL STATEMENTS





                                    Approximate maturities of long-term debt
                                    over the next four years are as follows:




<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------------------------------------------------
<S>                                                                         <C>        
1998                                                                        $   269,333

1999                                                                            123,333

2000                                                                          1,808,334

2001                                                                             36,667
=========================================================================================
</TABLE>



    6.   COMMITMENTS       (a)      During September 1997, the Company commenced
                                    leasing of office space in Boston under a
                                    noncancelable operating lease expiring in
                                    September 2000. Minimum rentals under this
                                    lease are approximately as follows:


<TABLE>
<CAPTION>
Year ending December 31,
----------------------------------------------------------------------------------
<S>                                                                     <C>
1998                                                                    $ 48,000
1999                                                                      50,000
2000                                                                      34,000
----------------------------------------------------------------------------------
Total minimum payments                                                  $132,000
==================================================================================
</TABLE>



                                    Rent expense for the period ended December
                                    31, 1997 was approximately $21,000.

                           (b)      The Company anticipates entering into an
                                    employment agreement with its president that
                                    calls for minimum annual compensation of
                                    $175,000. Bonuses will be determined at the
                                    discretion of the Board of Directors. The
                                    agreement is anticipated to expire in
                                    December 2000.




                                      F-16
<PAGE>   38


                                                                     WORLDS INC.
                                                (A DEVELOPMENT STAGE ENTERPRISE)

                                                   NOTES TO FINANCIAL STATEMENTS





    7.   STOCKHOLDERS' DEFICIT      Common Stock Split

                                    On September 15, 1997, the Company's Board
                                    of Directors approved a two-for-one split of
                                    the common stock. The additional shares
                                    resulting from the stock split were
                                    distributed on September 15, 1997 to all
                                    stockholders of record at the close of
                                    business on September 15, 1997. The balance
                                    sheet as of December 31, 1997 and the
                                    statement of stockholders' equity for the
                                    period from April 8, 1997 to December 31,
                                    1997 reflect the retroactive recording of
                                    the stock split as if it had occurred on
                                    April 8, 1997. Further, all references in
                                    the financial statements to average number
                                    of shares outstanding and related prices,
                                    per share amounts and stock option data have
                                    been restated for all periods to reflect the
                                    stock split.

                                    Stock Option Plan

                                    During September 1997, the Board of
                                    Directors and stockholders of the Company
                                    adopted a stock option plan (the "Option
                                    Plan") as an incentive for, and to encourage
                                    share ownership by, the Company's officers,
                                    directors and other key employees and/or
                                    consultants and potential management of
                                    possible future acquired companies. The
                                    Option Plan provides that options to
                                    purchase a maximum of 1,000,000 shares of
                                    common stock (subject to adjustment in
                                    certain circumstances) may be granted under
                                    the Option Plan. The Option Plan also allows
                                    for the granting of stock appreciation
                                    rights ("SAR's") in tandem with, or
                                    independent of, stock options. Any SAR's
                                    granted will not be counted against the
                                    1,000,000 limit.

                                    The Company applies APB Opinion No. 25,
                                    "Accounting for Stock Issued to Employees",
                                    and related Interpretations in accounting
                                    for the Option Plan. Under APB Opinion No.
                                    25, no compensation cost was recognized
                                    because the exercise price of Worlds'
                                    employee stock options equaled the market
                                    price of the underlying stock on the date of
                                    grant.



                                      F-17
<PAGE>   39
                                                                     WORLDS INC.
                                                (A DEVELOPMENT STAGE ENTERPRISE)

                                                   NOTES TO FINANCIAL STATEMENTS


                                    FASB Statement No. 123, "Accounting for
                                    Stock-Based Compensation", requires the
                                    Company to provide pro forma information
                                    regarding net loss as if compensation cost
                                    for the Company's stock option plans had
                                    been determined in accordance with the fair
                                    value based method prescribed in FASB
                                    Statement No. 123. The Company estimates the
                                    fair value of each stock option at the grant
                                    date by using the Black-Scholes
                                    option-pricing model with the following
                                    weighted-average assumptions used for grants
                                    in 1997, no dividend yield; 30% volatility;
                                    risk-free interest rate of 5.85%; and
                                    expected life of 3 years. The Company
                                    granted 165,000 options to a director and
                                    employees during 1997 and thus 835,000
                                    options remain available for grant as of
                                    December 31, 1997.

                                    Under the accounting provisions of FASB
                                    Statement No. 123, the Company's net loss
                                    and net loss per share would have been
                                    adjusted to the pro forma amounts indicated
                                    below:


<TABLE>
<CAPTION>
Period ended December 31, 1997
----------------------------------------------------------------------------------------
<S>                                                                       <C>
Net loss:
   As reported                                                            $(6,686,471)
   Pro forma                                                               (6,751,856)
========================================================================================
Net loss per share (basic and diluted):
   As reported                                                            $      (.72)
   Pro forma                                                                     (.72)
========================================================================================
</TABLE>

                                    The following table summarizes the stock
                                    option activity:

<TABLE>
<CAPTION>
                                                                                        
                                                   Options                             
                                                 outstanding                Weighted
                                    ------------------------------------- average price
                                           Shares        Price per share    per share
----------------------------------------------------------------------------------------
<S>                                          <C>                 <C>            <C> 
Options granted during 1997                    165,000             $.50           $.50
Options exercised                                    -                -              -
Options canceled                                     -                -              -
----------------------------------------------------------------------------------------
Balance, December 31, 1997                     165,000             $.50           $.50
========================================================================================

Options exercisble at year-end                  55,000             $.50           $.50         
----------------------------------------------------------------------------------------

Weighted average fair value of
options granted during the year                                                   $.59
----------------------------------------------------------------------------------------
</TABLE>


                                      F-18
<PAGE>   40
                                                                     WORLDS INC.
                                                (A DEVELOPMENT STAGE ENTERPRISE)

                                                   NOTES TO FINANCIAL STATEMENTS




    8.   INCOME TAXES               The use of the Predecessor's net operating
                                    loss ("NOL") is subject to annual limits due
                                    to the ownership change for the Mergers. In
                                    general, an ownership change occurs if,
                                    during any three-year test period, the
                                    aggregate of all increases in percentage
                                    ownership by stockholders is more than 50%.
                                    Upon completion of the Mergers discussed in
                                    Note 2, such an ownership change occurred.

                                    At December 31, 1997, after accounting for
                                    the estimated limitation of the
                                    Predecessor's NOL carryforward
                                    (approximately $100,000 per year over 15
                                    years), the Company has a NOL aggregating
                                    approximately $2 million to be used to
                                    offset future Federal income taxes. A
                                    deferred income tax asset for the Company's
                                    NOL has been completely offset by a
                                    valuation allowance since management cannot
                                    determine that it is more likely than not
                                    that the deferred tax asset can be realized.




     9.  EXTRAORDINARY ITEM         During December 1997, the Company negotiated
                                    settlement of certain trade payables assumed
                                    in the merger with Predecessor. Such
                                    payables which amounted to $193,501 were
                                    reduced to $67,725 resulting in a gain on
                                    debt forgiveness of $125,776.



    10.  CONTINGENCIES              The Company is currently a defendant in two
                                    lawsuits filed by a former employee of
                                    Predecessor: Fraser v. Knowledge Adventure
                                    Worlds, Inc. d/b/a Worlds Inc., et al., San
                                    Francisco Superior Court No. 974470 ("State
                                    Court Action"); and Fraser v. Worlds Inc.,
                                    U.S. District Court, Northern District of
                                    California No. C97-0277 CW ("Federal
                                    Action").



                                      F-19
<PAGE>   41
                                                                     WORLDS INC.
                                                (A DEVELOPMENT STAGE ENTERPRISE)

                                                   NOTES TO FINANCIAL STATEMENTS





                                    In the State Court Action filed in December
                                    1995, Fraser alleged various contract and
                                    tort claims for wrongful termination and
                                    sought damages ranging from $500,000 to
                                    $2,000,000. Pursuant to mediation in July
                                    1996, the parties reached a tentative
                                    settlement. In February 1997, parties again
                                    reached a tentative settlement, this time in
                                    connection with both the State Court and
                                    Federal Actions. Pursuant to terms of the
                                    stipulated settlement, Fraser filed a motion
                                    for entry of judgment. The Company filed its
                                    opposition to this motion and, at a hearing
                                    on December 4, 1997, the Court ruled in
                                    favor of the Company and approved the
                                    Company's proposed version of the settlement
                                    agreement which, among other things, would
                                    terminate both the State Court and Federal
                                    Actions. On December 18, 1997, Fraser filed
                                    a motion for reconsideration and a motion to
                                    take discovery. The Court again ruled in
                                    favor of the Company and denied Fraser's
                                    motions at a hearing on January 22, 1998.

                                    In the Federal Action, filed in January
                                    1997, Fraser asserted claims for damages of
                                    $200,000 in connection with the use of
                                    "Worlds" name on the World Wide Web. On
                                    September 26, 1997, Fraser filed a motion
                                    requesting enforcement of his version of the
                                    terms of the tentative settlement of
                                    February 1997. On October 23, 1997, Fraser
                                    also moved for a temporary restraining order
                                    and a preliminary injunction. The Company
                                    opposed both of Fraser's motions and, on
                                    October 31, the Court denied the October 23
                                    motion. On November 7, 1997, the Court also
                                    denied Fraser's motion of September 26, and
                                    ordered the parties to participate in a
                                    settlement conference, scheduled for January
                                    5, 1998. That conference has now been
                                    continued to April 13, 1998.

                                    Company management and counsel believe that
                                    the maximum additional liability for
                                    resolution of these two lawsuits would be
                                    approximately $150,000, which amount has
                                    been included in accrued expenses at
                                    December 31, 1997.

                                    During February 1998, the Company was named
                                    as a defendant in a lawsuit filed by a
                                    former employee of Predecessor seeking
                                    damages of approximately $70,000 (plus
                                    interest and fees) relating to termination
                                    of an employment contract. The lawsuit is in
                                    the pre-discovery phase. Management believes
                                    that settlement, if any, would not have a
                                    material adverse effect on the Company's
                                    financial position or results of operations.



                                      F-20
<PAGE>   42
                                                                     WORLDS INC.
                                                (A DEVELOPMENT STAGE ENTERPRISE)

                                                   NOTES TO FINANCIAL STATEMENTS





    11.  SUPPLEMENTAL CASH          Interest paid during the period ended
         FLOW INFORMATION           December 31, 1997 was approximately $1,600.

                                    Noncash investing and financing activities
                                    during the period ended December 31, 1997
                                    included the following:

                                    (a)      As discussed in Note 2, WAC
                                             exchanged all of the outstanding
                                             common and preferred stock of the
                                             Predecessor in exchange for
                                             1,999,996 shares of WAC. Also,
                                             Academic exchanged all of their
                                             outstanding common and preferred
                                             stock for 910,000 shares of WAC and
                                             WAC was merged into Academic.

                                    (b)      The Company recognized a gain of
                                             $221,000 from forgiveness of debt
                                             to shareholders of Predecessor that
                                             was recorded as a capital
                                             contribution.

                                    (c)      The Company paid for $120,000 of
                                             accrued professional fees by
                                             issuing a note payable(see Note 5).

                                    (d)      The Company converted accounts
                                             payable of $250,000 and accrued
                                             expenses of $35,000 into notes
                                             payable(see Note 5).




                                      F-21
<PAGE>   43
                                                       WORLDS INC. - PREDECESSOR
                                                            (A DEVELOPMENT STAGE
                                                                     ENTERPRISE)





                                                            FINANCIAL STATEMENTS
                                                  PERIOD ENDED DECEMBER 3, 1997,
                                    YEAR ENDED DECEMBER 31, 1996 AND PERIOD FROM
                                  APRIL 26, 1994 (INCEPTION) TO DECEMBER 3, 1997


                                      F-22
<PAGE>   44
                                                       WORLDS INC. - PREDECESSOR
                                                (A DEVELOPMENT STAGE ENTERPRISE)

                                                                        CONTENTS






Worlds Inc. ("Predecessor") is considered a predecessor company and the
information disclosed herein is as of and prior to the date of merger with
Worlds Inc. (formerly Worlds Acquisition Corp.) ("WAC") on December 3, 1997.


REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS                          F-24

FINANCIAL STATEMENTS:
   Balance sheet                                                            F-25
   Statements of operations                                                 F-26
   Statements of stockholders' deficit                                      F-27
   Statements of cash flows                                                 F-28
   Summary of accounting policies                                    F-29 - F-31
   Notes to financial statements                                     F-32 - F-41

                                                     



                                      F-23
<PAGE>   45
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


The Board of Directors
   and Stockholders of
   Worlds Inc. - Predecessor

We have audited the accompanying balance sheet of Worlds Inc. - Predecessor (a
development stage enterprise) (the "Predecessor") as of December 3, 1997, and
the related statements of operations, stockholders' deficit and cash flows for
the period ended December 3, 1997, the year ended December 31, 1996 and the
period from April 26, 1994 (inception) to December 3, 1997. These financial
statements are the responsibility of the Predecessor's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Worlds Inc. - Predecessor as of
December 3, 1997, and the results of its operations and its cash flows for the
period ended December 3, 1997, the year ended December 31, 1996 and the period
from April 26, 1994 (inception) to December 3, 1997, in conformity with
generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Predecessor will continue as a going concern. As discussed in the summary of
accounting policies, the Predecessor is in the development stage and has
suffered recurring losses from operations, has a working capital deficit, and
has a stockholders' deficit since inception that raise substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are described in Note 1 (Development Stage Risks) and Note 10
(Merger) to the financial statements. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.



BDO Seidman, LLP


San Francisco, California

March 25, 1998



                                      F-24
<PAGE>   46
                                                     WORLDS INC. - PREDECESSOR
                                              (A DEVELOPMENT STAGE ENTERPRISE)

                                                                 BALANCE SHEET



<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
December 3, 1997(a)
-------------------------------------------------------------------------------------------------
<S>                                                                                  <C>         
ASSETS
CURRENT:
  Cash and cash equivalents                                                          $     56,345
  Trade receivables, less allowance for doubtful accounts
     of $140,318                                                                               --
  Prepaid expenses and other current assets                                               167,891
-------------------------------------------------------------------------------------------------
        TOTAL CURRENT ASSETS                                                              224,236
PROPERTY AND EQUIPMENT, NET (NOTE 2)                                                      225,775
-------------------------------------------------------------------------------------------------
                                                                                     $    450,011
=================================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
  Accounts payable                                                                   $  1,082,236
  Accrued expenses (Note 9)                                                               669,109
  Advanced customer billings and deferred revenue                                         436,140
  Advance from Worlds Inc. (formerly Worlds Acquisition
    Corp.) (Note 10)                                                                      561,397
  Current maturities of notes payable (Note 3)                                             70,000
-------------------------------------------------------------------------------------------------
        TOTAL CURRENT LIABILITIES                                                       2,818,882
LONG-TERM PORTION, NOTES PAYABLE (NOTE 3)                                               1,766,667
-------------------------------------------------------------------------------------------------
        TOTAL LIABILITIES                                                               4,585,549
-------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTES 1, 4, 9 AND 10) 
STOCKHOLDERS' DEFICIT (NOTE 5):
  Preferred stock, $.0001 par value; designated as Series A; 2,000,000 shares
    authorized, 1,801,533 shares
    issued and outstanding                                                                    180
  Preferred stock, $.0001 par value; designated as Series
    B; 2,300,000 shares authorized, 1,022,726 shares
    issued and outstanding                                                                    102
  Common stock, $.0001 par value; 15,000,000 shares
    authorized; 5,535,646 shares issued and outstanding                                       553
  Deferred compensation related to stock options                                           (5,337)
  Additional paid-in capital                                                           17,105,103
  Deficit accumulated during development stage                                        (21,236,139)
-------------------------------------------------------------------------------------------------
        TOTAL STOCKHOLDERS' DEFICIT                                                    (4,135,538)
-------------------------------------------------------------------------------------------------
                                                                                     $    450,011
=================================================================================================
</TABLE>
----------
(a) Date of merger with Worlds Inc. (formerly Worlds Acquisition Corp.)
--------------------------------------------------------------------------------

                                 See accompanying summary of accounting policies
                                              and notes to financial statements.


                                      F-25
<PAGE>   47
                                                     WORLDS INC. - PREDECESSOR
                                              (A DEVELOPMENT STAGE ENTERPRISE)

                                                      STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
                                                                                 Period from
                                                                               April 26, 1994
                                           Year ended          Period ended    (inception) to
                                          December 31,          December 3,       December 3,
                                              1996                1997(a)            1997
---------------------------------------------------------------------------------------------
<S>                                      <C>                 <C>                 <C>         
NET REVENUES (NOTE 6)                    $  3,784,019        $     80,720        $  6,026,691
---------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
  Cost of revenues                          6,014,432              32,304          11,279,348
  Research and development                  2,446,724             452,897           5,388,340
  Selling, general and
    administrative                          4,901,628           2,399,887          10,602,749
  Lawsuit settlements (Note 9)                509,200                  --             509,200
---------------------------------------------------------------------------------------------
      TOTAL COSTS AND EXPENSES             13,871,984           2,885,088          27,779,637
---------------------------------------------------------------------------------------------
      OPERATING LOSS                      (10,087,965)         (2,804,368)        (21,752,946)
OTHER INCOME AND (EXPENSES):
  Interest income                             115,956              10,343             237,629
  Interest expense                            (16,750)           (139,650)           (171,082)
  Gain (loss) on disposal of
    property and equipment                    (83,195)              4,070             (79,125)
  Income from sale of technology
    (Note 7)                                       --             260,100             260,100
---------------------------------------------------------------------------------------------
      LOSS BEFORE INCOME TAXES AND
        EXTRAORDINARY ITEM                (10,071,954)         (2,669,505)        (21,505,424)
INCOME TAXES (NOTE 8)                        (115,000)             (5,000)           (120,000)
---------------------------------------------------------------------------------------------
      LOSS BEFORE EXTRAORDINARY
        ITEM                              (10,186,954)         (2,674,505)        (21,625,424)
EXTRAORDINARY ITEM - GAIN ON DEBT
  SETTLEMENT (NOTE 3)                              --             389,285             389,285
---------------------------------------------------------------------------------------------
NET LOSS                                 $(10,186,954)       $ (2,285,220)       $(21,236,139)
=============================================================================================
</TABLE>
----------
(a) Date of merger with Worlds Inc. (formerly Worlds Acquisition Corp.)
--------------------------------------------------------------------------------

                                 See accompanying summary of accounting policies
                                              and notes to financial statements.

                                         F-26
<PAGE>   48
                                                       WORLDS INC. - PREDECESSOR
                                                (A DEVELOPMENT STAGE ENTERPRISE)

                                             STATEMENTS OF STOCKHOLDERS' DEFICIT



<TABLE>
<CAPTION>
                                                      Preferred stock
                                            ---------------------------------   Deferred    
                             Common stock       Series A         Series B    compensation  Additional                     Total    
                            ---------------  ---------------  ---------------  on stock     paid-in      Accumulated   stockholders
                            Shares   Amount  Shares   Amount  Shares   Amount  options      capital        deficit        deficit  
------------------------------------------------------------------------------------------------------------------------------------
<S>                       <C>        <C>   <C>        <C>   <C>        <C>    <C>         <C>           <C>            <C>         
BALANCE, JANUARY 1, 1996  5,274,260  $527  1,801,533  $180          -  $  -   $  45,647)  $ 8,385,184   $ (8,763,965)  $   (423,721)
Issuance of common stock    261,386    26          -     -          -     -           -       112,795              -        112,821
Issuance of Series B 
   preferred stock at
   $8.80 per share, net
   of issuance costs of 
   $381,000                       -     -          -     -  1,022,726   102           -     8,618,887              -      8,618,989
Compensation related to
  stock options                   -     -          -     -          -     -      24,202        (9,394)             -         14,808
Net loss for the year             -     -          -     -          -     -           -             -    (10,186,954)   (10,186,954)
------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 
  1996                    5,535,646   553   1,801,533  180  1,022,726   102    (21,445)    17,107,472    (18,950,919)    (1,864,057)
Compensation related to
  stock options                   -     -          -     -          -     -      16,108        (2,369)             -         13,739
Net loss for the period                                                                       
  ended December 3, 1997          -     -          -     -          -     -           -             -     (2,285,220)   (2,285,220)
------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 3, 
  1997                    5,535,646  $553  1,801,533  $180  1,022,726  $102   $  (5,337)  $17,105,103   $(21,236,139)  $(4,135,538)
====================================================================================================================================
</TABLE>

                                 See accompanying summary of accounting policies
                                              and notes to financial statements.

                                      F-27
<PAGE>   49
                                                     WORLDS INC. - PREDECESSOR
                                              (A DEVELOPMENT STAGE ENTERPRISE)

                                                      STATEMENTS OF CASH FLOWS



<TABLE>
<CAPTION>
                                                                                        Period from
                                                                                          April 26,
                                                                                             1994
                                                                                         (inception)
                                                   Year ended       Period ended              to
                                                  December 31,       December 3,         December 3,
                                                     1996              1997(a)               1997
-------------------------------------------------------------------------------------------------------
<S>                                              <C>                 <C>                <C>          
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                       $(10,186,954)       $(2,285,220)       $(21,236,139)
  Adjustments to reconcile net loss to
    net cash used in operating activities:
      Depreciation and amortization                   344,345            213,434             721,097
      (Gain) loss on disposal of property
        and equipment                                  83,195             (4,070)             79,125
      Gain on debt settlement                              --           (389,284)           (389,284)
      Compensation related to stock
        options                                        14,808             13,739             761,453
      Compensation related to common stock
        issuance                                       58,525                 --              58,525
      Licensed technology expense                          --                 --             750,000
      Changes in operating assets and
        liabilities:
        Trade receivables                             342,294            489,050                  --
        Prepaid expenses and other assets             266,057            (42,575)           (167,891)
        Accounts payable and accrued
         liabilities                                  226,212             (2,755)          1,856,619
        Advanced customer billings and
         deferred revenue                            (396,667)                --             436,140
-------------------------------------------------------------------------------------------------------
           NET CASH USED IN OPERATING
             ACTIVITIES                            (9,248,185)        (2,007,681)        (17,130,355)
-------------------------------------------------------------------------------------------------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
  Acquisition of property and equipment              (476,966)            (2,063)           (999,302)
-------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from issuance of common stock               54,296                 --             116,857
  Proceeds from issuance of preferred
    stock, net of issuance costs                    8,618,989                 --          16,163,766
  Advance from Worlds Inc. (formerly
    Worlds Acquisition Corp.)                              --            561,397             561,397
  Payments on capital lease                           (56,724)                --            (116,018)
  Payments on note payable                           (110,000)           (40,000)           (190,000)
  Proceeds from note payable                        1,000,000            650,000           1,650,000
-------------------------------------------------------------------------------------------------------
           NET CASH PROVIDED BY FINANCING
             ACTIVITIES                             9,506,561          1,171,397          18,186,002
-------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH
  EQUIVALENTS                                        (218,590)          (838,347)             56,345
CASH AND CASH EQUIVALENTS, BEGINNING OF
  PERIOD                                            1,113,282            894,692                  --
-------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD         $    894,692        $    56,345        $     56,345
=======================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
  INFORMATION:
  Interest paid                                 $       9,234        $         -        $     23,916
  Income taxes paid                                     5,064                556               5,620
=======================================================================================================
</TABLE>
DISCLOSURES OF NONCASH FINANCING AND INVESTING ACTIVITIES:

In 1997, as part of the restructuring of operations, the Predecessor disposed of
 property and equipment with a net book value of $252,180, which included
 $138,439 of equipment under capital leases. The related capital lease
 obligations, totaling $123,013, were assumed by the lessor and a party which
 acquired certain assets used in the Predecessor's prior Seattle operations. The
 agreement with this party also resulted in a reduction of trade payables
 totaling $87,226.
--------------------------------------------------------------------------------
(a) Date of merger with Worlds Inc. (formerly Worlds Acquisition Corp.)
--------------------------------------------------------------------------------
                                 See accompanying summary of accounting policies
                                              and notes to financial statements.

                                      F-28
<PAGE>   50
                                                       WORLDS INC. - PREDECESSOR
                                                (A DEVELOPMENT STAGE ENTERPRISE)

                                                  SUMMARY OF ACCOUNTING POLICIES


NATURE OF BUSINESS         Worlds Inc. (the "Predecessor") was incorporated
                           under the laws of Delaware on April 26, 1994. The
                           Predecessor was formed to develop and commercialize
                           3D multi-user tools and technologies for the Internet
                           market. The Predecessor is in the development stage
                           and, as such, has not generated significant revenues
                           from operations.



BASIS OF                   The accompanying financial statements have been
PRESENTATION               prepared assuming that the Predecessor will
                           continue as a going concern. The Predecessor is in
                           the development stage (see Note 1) and has suffered
                           recurring losses from operations since its inception
                           that raises substantial doubt about its ability to
                           continue as a going concern. The financial statements
                           do not include any adjustments that might result from
                           the outcome of this uncertainty. As more fully
                           described in Note 10, on December 3, 1997, the
                           Predecessor consummated a merger agreement with
                           Worlds Inc. (formerly Worlds Acquisition Corp.)
                           ("WAC"), a company which had completed a private
                           placement offering of securities.

                           The financial statements have been prepared in
                           accordance with the provisions of Statement of
                           Financial Accounting Standards ("SFAS") No. 7,
                           "Accounting and Reporting by Development Stage
                           Enterprises," which requires development stage
                           enterprises to employ the same accounting principles
                           as operating companies.



RESTRUCTURING OF           Due to recurring losses, insufficient revenue, a
OPERATIONS                 working capital deficit and a net stockholders'
                           deficit, the Predecessor's management made
                           significant reductions in operations in February 1997
                           that are reflected in the Predecessor's financial
                           statements for the period ended December 3, 1997. In
                           March 1997, the Predecessor engaged an outside
                           management firm to assist with the downsizing of
                           operations which has included a major reduction in
                           employees and a consolidation of all operations to
                           one location in San Francisco. The Predecessor
                           decided in December 1996 to close its Seattle
                           operations resulting in a $110,000 charge to
                           operations for the year ended December 31, 1996.


                                      F-29
<PAGE>   51
                                                       WORLDS INC. - PREDECESSOR
                                                (A DEVELOPMENT STAGE ENTERPRISE)

                                                  SUMMARY OF ACCOUNTING POLICIES


USE OF ESTIMATES           The preparation of financial statements in
                           conformity with generally accepted accounting
                           principles requires management to make estimates
                           and assumptions that affect the reported amounts
                           of assets and liabilities and disclosures of
                           contingent assets and liabilities at the date of
                           the financial statements and the reported amounts
                           of revenues and expenses during the reporting
                           period. Actual results could differ from these
                           estimates.



CASH AND CASH              Cash and cash equivalents are comprised of highly
EQUIVALENTS                liquid money market instruments, which have
                           original maturities of three months or less at the
                           time of purchase.



PROPERTY AND               Property and equipment are stated at cost.
EQUIPMENT                  Depreciation is calculated using the straight-line
                           method over the estimated useful lives of the assets,
                           which range from two to five years. Maintenance and
                           repairs are expensed as incurred and improvements are
                           capitalized.



REVENUE RECOGNITION        Revenue from technology development and licensing
                           contracts is recognized upon the attainment of
                           contractual milestones (approximating the
                           percentage-of-completion method). Cash received in
                           advance of revenues earned is recorded as deferred
                           revenue.



SOFTWARE DEVELOPMENT       Software development costs are charged to expense
COSTS                      when incurred until the technological feasibility
                           of the product has been established. After
                           technological feasibility has been established, any
                           additional costs would be capitalizable in accordance
                           with SFAS No. 86. No such costs have been capitalized
                           to date.



RESEARCH AND               Research and development costs are expensed as
DEVELOPMENT COSTS          incurred.



                                      F-30
<PAGE>   52
                                                       WORLDS INC. - PREDECESSOR
                                                (A DEVELOPMENT STAGE ENTERPRISE)

                                                  SUMMARY OF ACCOUNTING POLICIES


INCOME TAXES               The Predecessor uses the liability method of
                           accounting for income taxes in accordance with
                           SFAS No. 109, "Accounting for Income Taxes.".
                           Deferred income tax assets and liabilities are
                           recognized based on the temporary differences
                           between the financial statement and income tax
                           bases of assets, liabilities and carryforwards
                           using enacted tax rates. Valuation allowances are
                           established, when necessary, to reduce deferred
                           tax assets to the amount expected to be realized.



CONCENTRATION OF           The Predecessor derives revenues from corporate
CREDIT RISK                customers in a variety of industries. For the year
                           ended December 31, 1996, five customers accounted for
                           74% of the Predecessor's revenues. For the period
                           ended December 3, 1997, no individual customer
                           accounted for more than 10% of revenues.



NEW ACCOUNTING             Effective January 1, 1996, the Predecessor adopted
STANDARDS                  the provisions of SFAS No. 123, "Accounting for
                           Stock-Based Compensation". Under this standard,
                           companies are encouraged, but not required, to adopt
                           the fair value method of accounting for employee
                           stock-based transactions. Under the fair value
                           method, compensation cost is measured at the grant
                           date based on the fair value of the award and is
                           recognized over the service period, which is usually
                           the vesting period. Companies are permitted to
                           continue to account for employee stock-based
                           transactions under Accounting Principles Board
                           Opinion ("APB") No. 25, "Accounting for Stock Issued
                           to Employees," but are required to disclose pro forma
                           net income and earnings per share as if the fair
                           value method has been adopted. The Predecessor has
                           elected to continue to account for stock-based
                           compensation under APB No. 25 (see Note 5).



                                      F-31
<PAGE>   53
                                                       WORLDS INC. - PREDECESSOR
                                                (A DEVELOPMENT STAGE ENTERPRISE)

                                                   NOTES TO FINANCIAL STATEMENTS




 1.   GOING CONCERN        The accompanying financial statements have been
                           prepared on a going-concern basis, which
                           contemplates the realization of assets and the
                           satisfaction of liabilities in the normal course
                           of business. As shown in the financial statements,
                           the Predecessor, as of December 3, 1997, had
                           incurred recurring losses since inception totaling
                           $21,236,139 had a working capital deficit of
                           $2,368,871 and a stockholders' deficit of
                           $4,135,538. As discussed in Note 10, on
                           December 3, 1997, the Predecessor consummated a
                           merger agreement with WAC, a company which had
                           completed a private placement offering of
                           securities whereby $4,385,000 of gross proceeds
                           was raised.

                           The Predecessor anticipates, however, that it
                           currently has only a portion of the funds necessary
                           to permit it to complete product development and
                           commercialization. There can be no assurance that the
                           Predecessor will be able to obtain the substantial
                           additional capital resources necessary to permit the
                           Predecessor to pursue its business plan or that any
                           assumptions relating to its business plan will prove
                           to be accurate. WAC is pursuing sources of additional
                           financing and there can be no assurance that any such
                           financing will be available to WAC on commercially
                           reasonable terms, or at all. Any inability to obtain
                           additional financing will have a material adverse
                           effect on the Predecessor and WAC, including possibly
                           requiring the Predecessor or WAC to significantly
                           curtail or cease operations.

                           These factors raise substantial doubt about the
                           ability of the Predecessor to continue as a going
                           concern. The financial statements do not include any
                           adjustments that might result from the outcome of
                           this uncertainty.



 2.   PROPERTY AND         A summary of property and equipment as of  December 
      EQUIPMENT            3, 1997 is as follows:

<TABLE>
<CAPTION>

                           December 3, 1997
                           -------------------------------------------------------------
                           <S>                                                <C>     
                           Computers, software and equipment                  $650,557
                           Less:. Accumulated depreciation and
                            amortization                                       424,782
                           -------------------------------------------------------------
                                                                              $225,775
                           =============================================================
</TABLE>


                                      F-32
<PAGE>   54
                                                       WORLDS INC. - PREDECESSOR
                                                (A DEVELOPMENT STAGE ENTERPRISE)

                                                   NOTES TO FINANCIAL STATEMENTS


 3.   NOTES PAYABLE
<TABLE>
<CAPTION>
                           December 3, 1997                                              
                           ------------------------------------------------------------- 
                           <S>                                              <C>          
                           Bridge loan payable to stockholders              $1,650,000   
                           Technology obligation                               186,667   
                           ------------------------------------------------------------- 
                                                                             1,836,667   
                           Less:   Current portion                              70,000   
                           ------------------------------------------------------------- 
                           Long-term portion                                $1,766,667   
                           ============================================================= 
</TABLE>                   



                           On December 13, 1996, the Predecessor received a
                           Bridge Loan totaling $1,000,000 from two preferred
                           stockholders. Additional advances of $650,000 were
                           made under the Bridge Loan during the eleven-month
                           period ended December 3, 1997 ($500,000 in January
                           1997 and $50,000 in June 1997 were received from the
                           same preferred stockholders; and $100,000 was
                           received in May 1997 from an affiliated person of a
                           stockholder). These advances under the Bridge Loan
                           were granted in return for convertible promissory
                           notes and options at $0.88 per share on 500,000
                           shares of the Predecessor's common stock held by a
                           founder and officer of the Predecessor as of December
                           31, 1996 (825,000 shares at December 3, 1997). Such
                           options remain exercisable for 36 months, but
                           terminate immediately upon the consummation of an
                           initial public offering of the Predecessor's capital
                           stock or any consolidation or merger by the
                           Predecessor or any sale, conveyance or disposition of
                           all or substantially all of the assets of the
                           Predecessor; such an event occurred on December 3,
                           1997 when the Predecessor consummated a merger (Note
                           10). The loan bears interest at a rate of 9% from the
                           date of the advances. Accrued interest is
                           approximately $141,000 at December 3, 1997.


                                      F-33
<PAGE>   55
                                                       WORLDS INC. - PREDECESSOR
                                                (A DEVELOPMENT STAGE ENTERPRISE)

                                                   NOTES TO FINANCIAL STATEMENTS





                           In June 1997, the Predecessor renegotiated the terms
                           of the Bridge Loan to convert it to a three year loan
                           bearing interest at 7.5% and the option to convert
                           into common stock based on the conversion price of
                           $8.75, $10.00 and $11.25 in each of the three years
                           following consummation of the merger of the
                           Predecessor into Worlds Inc. (formerly Worlds
                           Acquisition Corp) (see Note 10). The loan will not be
                           payable until the earlier of maturity or conversion.
                           The holders of the loan will also receive warrants to
                           acquire an aggregate of 100,000 shares of common
                           stock at an exercise price equal to $5.00 per share.
                           The noteholders had the option to convert the
                           outstanding principal balance and unpaid accrued
                           interest into Predecessor's equity securities at the
                           closing of Predecessor's next round of equity
                           financing, at the price per share of such equity
                           securities. There is no conversion benefit associated
                           with the convertible promissory notes and the options
                           associated with the bridge note financing.

                           On January 3, 1995, the Predecessor purchased
                           technology for $750,000 under a license agreement
                           with Kinetic Effects, Inc. ("Kinetic") and Simon
                           Fraser University of British Columbia ("SFU"). At
                           December 31, 1996, the Predecessor had an obligation
                           to make monthly payments of $10,000 ($6,667 to SFU
                           and $3,333 to Kinetic) through November 2000. The
                           purchased technology was charged to research and
                           development expense in 1995. This obligation was
                           renegotiated downward in August 1997 to $186,667,
                           with monthly payments to Kinetic of $3,333 over 56
                           months. Kinetic is an entity affiliated with a prior
                           officer and current shareholder of the Predecessor.
                           In September 1997, the Predecessor renegotiated the
                           terms with SFU. In exchange for the removal of
                           exclusivity rights on the technology, $373,333 of the
                           debt was forgiven and has been included within the
                           extraordinary item of $389,285 in the statement of
                           operations for the period ended December 3, 1997.

                           Approximate maturities of long-term debt over the
                           next four years are as follows:

<TABLE>
<CAPTION>
                                                                                        
                           -------------------------------------------------------------
                           <S>                                              <C>         
                           1998                                             $   70,000  
                           1999                                                 40,000  
                           2000                                              1,690,000  
                           2001                                                 36,667  
                           =============================================================
</TABLE>                                                     

                                      F-34
<PAGE>   56
                                                       WORLDS INC. - PREDECESSOR
                                                (A DEVELOPMENT STAGE ENTERPRISE)

                                                   NOTES TO FINANCIAL STATEMENTS


 4.   LEASE COMMITMENTS    The Predecessor has no lease commitments as of
                           December 3, 1997.

                           Rent expense for office space, computers and office
                           equipment was approximately $312,000 for the period
                           ended December 3, 1997 and $1,487,000 for the year
                           ended December 31, 1996.



 5.   STOCKHOLDERS'        Preferred Stock
      DEFICIT

                           Each share of Series A and Series B preferred stock
                           is convertible, at the option of the holder, into
                           fully paid shares of common stock. The conversion
                           rate is based upon the original purchase price,
                           subject to adjustments for stock dividends, stock
                           splits, and capital reorganizations and price based
                           antidilution, currently one-to-one.

                           Each share of Series A and Series B preferred stock
                           automatically converts to common stock upon the
                           affirmative vote of the majority of the outstanding
                           preferred stock or the closing of an underwritten
                           public offering of shares of the Predecessor's common
                           stock resulting in total proceeds of at least
                           $15,000,000. The holders of the preferred stock are
                           entitled to one vote on an "as if converted" basis.

                           Holders of Series A and Series B preferred stock are
                           entitled to receive dividends, prior and in
                           preference to any declaration or payment of any
                           dividends on common stock, at the rate of $0.39 for
                           Series A and $0.79 for Series B per share per annum.
                           Such dividends are not cumulative, except in the
                           event that the Predecessor does not enter into an
                           initial public offering of at least $15,000,000 in
                           proceeds to the Predecessor on or before May 31,
                           1998, in which case the dividends are cumulative
                           effective May 31, 1998, and are payable when and if
                           declared by the Predecessor's Board of Directors in
                           cash legally available for distribution, or in stock,
                           if no cash is legally payable. As of December 3,
                           1997, no dividends have been declared.

                           In the event of liquidation, consolidation, merger,
                           or winding up of the Predecessor prior to conversion,
                           holders of preferred stock are entitled to receive,
                           in preference to the holders of common stock, an
                           amount equal to their liquidation amount or a pro
                           rata share of the remaining assets, based on their
                           ownership of the Predecessor. As of December 3, 1997,
                           the aggregate liquidation preference was
                           approximately $16,657,000.


                                      F-35
<PAGE>   57
                                                     WORLDS INC. - PREDECESSOR
                                              (A DEVELOPMENT STAGE ENTERPRISE)

                                                 NOTES TO FINANCIAL STATEMENTS


                           A Series A preferred stock investor also has a stock
                           warrant which provides the right to purchase shares
                           of Series A preferred stock sufficient to bring its
                           holdings on a fully diluted basis to 21% of the
                           Predecessor's shares. The warrant expires in the
                           event of a qualified public offering or when the
                           holder of preferred stock no longer chooses to
                           exercise its existing antidilution rights. The
                           warrant is exercisable at fair market value at date
                           of exercise. As a result of the merger described in
                           Note 10, such warrants were extinguished and the
                           preferred stock described above (as well as the
                           Predecessor's common stock) was exchanged for
                           1,999,996 shares of WAC.

                           Stock Option Plan

                           Prior to the mergers described in Note 10, the
                           Predecessor had reserved 4,500,000 shares of common
                           stock for issuance under the 1994 Amended and
                           Restated Stock Option Plan (the "Plan"), which
                           authorized the granting of incentive and nonstatutory
                           stock options to employees and consultants of the
                           Predecessor. Under this Plan, the Predecessor's Board
                           of Directors would grant stock options at prices not
                           less than 85% of fair value. The options were all
                           immediately exercisable and were subject to vesting
                           at times and in increments as specified by the
                           Predecessor's Board of Directors. Options generally
                           vested over three years and expired 10 years from
                           date of grant.


                           The Predecessor applies APB Opinion No. 25,
                           "Accounting for Stock Issued to Employees", and
                           related Interpretations in accounting for the Plan.
                           Under APB Opinion No. 25, because the exercise price
                           of the Predecessor's stock options equals or exceeds
                           the market price of the underlying stock on the date
                           of grant, no compensation cost is recognized.
                           Compensation or other expense is recorded based on
                           intrinsic value (excess of current price over
                           exercise price on date of grant) for employees, and
                           fair value of the option awards for others.

                                      F-36
<PAGE>   58
                                                       WORLDS INC. - PREDECESSOR
                                                (A DEVELOPMENT STAGE ENTERPRISE)

                                                   NOTES TO FINANCIAL STATEMENTS





                           FASB Statement No. 123, "Accounting for Stock-Based
                           Compensation", requires the Predecessor to provide
                           pro forma information regarding net loss as if
                           compensation cost for the Predecessor's stock option
                           plans had been determined in accordance with the fair
                           value based method prescribed in FASB Statement No.
                           123. The Predecessor estimates the fair value of each
                           stock option at the grant date by using the minimum
                           value approach with the following weighted-average
                           assumptions used for grants in 1996 and 1997,
                           respectively; no dividend yield for any year;
                           near-zero volatility for both years; risk-free
                           interest rates of 6.6% for both years; and expected
                           lives ranging from 1 month to 3 years.

                           Under the accounting provisions of FASB Statement No.
                           123, the Predecessor's net loss would have been
                           adjusted to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                     Year ended     Period ended       
                                    December 31,    December 3,        
                                        1996            1997           
-----------------------------------------------------------------      
<S>                                 <C>             <C>                
Net loss:                                                              
  As reported                       $(10,186,952)   $(2,265,776)       
  Pro forma                          (10,242,063)    (2,328,421)       
=================================================================      
</TABLE>                   


                           The fair value of options granted in 1996 was
                           $133,245; there were no options granted in 1997.

                           The following table summarizes the stock option
                           activity:

<TABLE>
<CAPTION>

                                                              
                                                       Options            
                             Options                 outstanding                Weighted 
                          available for  -----------------------------------  average price 
                              grant           Shares       Price per share      per share 
-------------------------------------------------------------------------------------------
<S>                       <C>               <C>            <C>                <C>  
Balance, January 1, 1996     668,245           969,902        $.01-.43           $.379
Options authorized         1,000,000                --              --              --
Options granted           (1,171,000)        1,171,000         .43-.88             .82
Option exercised                  --          (261,386)        .20-.88             .43
Options canceled             489,704          (489,704)        .20-.88             .55
----------------------------------------------------------------------------------------
Balance,
December 31, 1996            986,949         1,389,812         .20-.88             .68
Options granted                   --                --              --              --
Options exercised                 --                --              --              --
Options canceled                  --                --              --              --
----------------------------------------------------------------------------------------
Balance,
December 3, 1997             986,949         1,389,812         .20-.88             .68
========================================================================================
</TABLE>


As a result of the mergers described in Note 10, the Plan and all options
thereunder were terminated and a new stock option plan, as described in Note 10,
was adopted.


                                      F-37
<PAGE>   59
                                                       WORLDS INC. - PREDECESSOR
                                                (A DEVELOPMENT STAGE ENTERPRISE)

                                                   NOTES TO FINANCIAL STATEMENTS


 6.   RELATED PARTY        For the year ended December 31, 1996, $1,276,780
      REVENUE              of revenues  from technology development contracts
                           were attributable to three preferred  stockholders of
                           Predecessor. There was no related party revenue 
                           for the period ended December 3, 1997.



 7.   INCOME FROM SALE     In March 1997, Predecessor sold certain of its 
      OF TECHNOLOGY        internally developed computer software programs for 
                           net proceeds of $260,100.



 8.   INCOME TAXES         From its inception, the Predecessor has generated
                           losses for both financial reporting and tax
                           purposes. As of December 3, 1997, the
                           Predecessor's net operating losses for Federal
                           income tax purposes were approximately $19
                           million, and expire between the years 2009 and
                           2012. For state income tax purposes, as of
                           December 3, 1997, the Predecessor had net
                           operating loss carryforwards of approximately
                           $14.8 million for the State of California which
                           will expire 2002. As of December 3, 1997, the
                           combined Federal and state tax benefit of the net
                           operating loss carryforwards is approximately $7.3
                           million and the deferred tax asset relating to
                           accounting differences for depreciation, certain
                           accrued expenses and technology costs was
                           approximately $300,000. This deferred tax asset
                           totaling $7.6 million has been completely offset
                           by a valuation allowance since management cannot
                           determine that it is more likely than not that the
                           deferred tax asset can be realized. The use of
                           such net operating loss carryforwards will be
                           subject to annual limits if the Predecessor has
                           incurred an "ownership change". In general, an
                           ownership change occurs if, during any three-year
                           test period, the aggregate of all increases in
                           percentage ownership by stockholders is more than
                           50%. Upon completion of the merger discussed in
                           Note 10, such an "ownership change" occurred.


                                      F-38
<PAGE>   60
                                                       WORLDS INC. - PREDECESSOR
                                                (A DEVELOPMENT STAGE ENTERPRISE)

                                                   NOTES TO FINANCIAL STATEMENTS





                           The provision for income taxes for the year ended
                           December 31, 1996 and the period ended December 3,
                           1997 consists of:


<TABLE>
<CAPTION>
                                                                                          
                                                                               Period     
                                                                Year ended     ended      
                                                               December 31,   December 3,   
                                                                   1996         1997     
                           -------------------------------------------------------------  
                           <S>                                    <C>            <C>      
                           Foreign income taxes withheld (a)      $105,000       $   -    
                           State income taxes - current             10,000       5,000    
                           -------------------------------------------------------------  
                                                                  $115,000      $5,000    
                           =============================================================  
</TABLE>                   



                           (a)  Foreign income taxes withheld relates to two
                                preferred stockholders located in Japan.



                           The Predecessor has $156,000 in research credits
                           available to reduce future Federal income taxes which
                           expire between the years 2009 and 2011. Due to the
                           merger, this carryforward will be substantially
                           reduced.


 9.   CONTINGENCIES        In 1996, the Predecessor incurred lawsuit
                           settlement expenses totalling $509,200, of which
                           $154,000 is included in accrued liabilities at
                           December 3, 1997. These settlement expenses relate
                           principally to claims by former employees and are
                           exclusive of legal fees included in general and
                           administrative expenses in the accompanying
                           financial statements.

                           The Predecessor is currently a defendant in two
                           lawsuits filed by a former employee of
                           Predecessor:  Fraser v. Knowledge Adventure
                           Worlds, Inc. d/b/a Worlds Inc., et al., San
                           Francisco Superior Court No. 974470 ("State Court
                           Action"); and Fraser v. Worlds Inc., U.S. District
                           Court, Northern District of California No. C97-
                           0277 CW ("Federal Action").

                                      F-39
<PAGE>   61
                                                       WORLDS INC. - PREDECESSOR
                                                (A DEVELOPMENT STAGE ENTERPRISE)

                                                   NOTES TO FINANCIAL STATEMENTS


                           In the State Court Action filed in December 1995,
                           Fraser alleged various contract and tort claims for
                           wrongful termination and sought damages ranging from
                           $500,000 to $2,000,000. Pursuant to mediation in July
                           1996, the parties reached a tentative settlement. In
                           February 1997, parties again reached a tentative
                           settlement, this time in connection with both the
                           State Court and Federal Actions. Pursuant to terms of
                           the stipulated settlement, Fraser filed a motion for
                           entry of judgment. The Predecessor filed its
                           opposition to this motion and, at a hearing on
                           December 4, 1997, the Court again ruled in favor of
                           the Predecessor and approved the Predecessor's
                           proposed version of the settlement agreement which,
                           among other things, would terminate both the State
                           Court and Federal Actions. On December 18, 1997,
                           Fraser filed a motion for reconsideration and a
                           motion to take discovery. The Court again ruled in
                           favor of the Predecessor and denied Fraser's motions
                           at a hearing on January 22, 1998.

                           In the Federal Action, filed in January 1997, Fraser
                           asserted claims for damages of $200,000 in connection
                           with the use of "Worlds" name on the World Wide Web.
                           On September 26, 1997, Fraser filed a motion
                           requesting enforcement of his version of the terms of
                           the tentative settlement of February 1997. On October
                           23, 1997, Fraser also moved for a temporary
                           restraining order and a preliminary injunction. The
                           Predecessor opposed both of Fraser's motions and, on
                           October 31, the Court denied the October 23 motion.
                           On November 7, 1997, the Court also denied Fraser's
                           motion of September 26, and ordered the parties to
                           participate in a settlement conference, scheduled for
                           January 5, 1998. That conference has now been
                           continued to April 13, 1998.

                           Predecessor management and counsel believe that the
                           maximum additional liability for resolution of these
                           two lawsuits would be approximately $150,000, which
                           amount has been included in accrued expenses at
                           December 3, 1997.

                           During February 1998, the Predecessor was named as a
                           defendant in a lawsuit filed by a former employee of
                           Predecessor seeking damages of approximately $70,000
                           (plus interest and fees) relating to termination of
                           an employment contract. The lawsuit is in the
                           pre-discovery phase. Management believes that
                           settlement, if any, would not have a material adverse
                           effect on Predecessor's financial position or results
                           of operations.

                                      F-40
<PAGE>   62
                                                       WORLDS INC. - PREDECESSOR
                                                (A DEVELOPMENT STAGE ENTERPRISE)

                                                   NOTES TO FINANCIAL STATEMENTS


 10.   MERGER             On December 3, 1997, the Predecessor was merged with
                          and into Worlds Inc. (formerly Worlds Acquisition
                          Corp.) ("WAC") in a series of related transactions
                          which included the simultaneous merger with and into
                          Academic Computer Systems, Inc., a New Jersey
                          corporation ("Academic") (the "Mergers") and a private
                          offering of WAC's securities (the "Private
                          Placement"). All of the common and preferred stock of
                          the Predecessor were exchanged for 1,999,996 shares of
                          WAC. WAC was incorporated in Delaware on April 8, 1997
                          to engage in designing, developing and marketing
                          three-dimensional ("3D") music oriented Internet sites
                          on the World Wide Web. These web sites are anticipated
                          to utilize 3D technologies developed by the
                          Predecessor. During the period ended December 3, 1997,
                          WAC advanced the Predecessor $561,397 for working
                          capital. Such advance is noninterest bearing with no
                          fixed repayment terms. Academic was an inactive
                          company with no operations. Academic voluntarily
                          reported under the Securities Exchange Act of 1934
                          "Exchange Act"). The combined entity that resulted
                          from the Mergers (the "Combined Entity") intends to
                          continue reporting under the Exchange Act. While no
                          trading market existed for the securities of Academic,
                          or currently exists for the securities of the Combined
                          Entity, the Combined Entity intends to cause its
                          common stock to be traded on the Bulletin Board.


                          As a result of the Mergers, the Combined Entity now
                          has a Stock Option Plan (the "Option Plan") as an
                          incentive for, and to encourage share ownership by,
                          its officers, directors and other key employees and/or
                          consultants and potential management of possible
                          future acquired companies. The Option Plan provides
                          that options to purchase a maximum of 1,000,000 shares
                          of common stock (subject to adjustment in certain
                          circumstances) may be granted under the Option Plan.
                          The Option Plan also allows for the granting of stock
                          appreciation rights ("SARs") in tandem with, or
                          independently of, stock options. Any SARs granted will
                          not be counted against the 1,000,000 limit. WAC
                          granted 165,000 options to a director and employees
                          during 1997.


                                      F-41