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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

[X] Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange
    Act of 1934

                     For fiscal year ended December 31, 2001

 [_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934

                        Commission file number 001-15819

                               ACTIVEWORLDS CORP.
                 (Name of Small Business Issuer In Its Charter)

         Delaware                                        13-3883101
(State or Other Jurisdiction of               (IRS Employer Identification No.)
 Incorporation or Organization)

95 Parker Street, Newburyport, Massachusetts                 01950
 (Address of Principal Executive Offices)                  (Zip Code)

                                  978-499-0222
                (Issuer's Telephone Number, Including Area Code)


Securities registered under Section 12(b) of the Exchange Act:

<TABLE>
<CAPTION>

Title of Each Class                                      Name of Each Exchange on Which Registered
-------------------                                      -----------------------------------------
<S>                                                      <C>
Common stock, $.001 par value per share                  Boston Stock Exchange
                                                         Nasdaq SmallCap Market

Series B redeemable common stock purchase                Boston Stock Exchange
Warrant, exercisable for one share of commons stock      Nasdaq SmallCap Market

</TABLE>

Securities registered under Section 12(g) of the Exchange Act:
None.

Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for past 90 days.

Yes [X]                No [_]

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB [X]

The issuer's revenues for the fiscal year ended December 31, 2001 were $490,503.

As of March 1, 2002, the aggregate market value of the voting stock held by
non-affiliates of the issuer based upon the average of the closing bid and asked
prices of such stock as reported on the Nasdaq SmallCap Market was $1,809,944.

As of March 1, 2002, the issuer had 8,600,088 shares of common stock, $.001 par
value, issued and outstanding.

Documents incorporated by reference
None.

Transitional Small Business Disclosure Format (check one): Yes [_]  No [X]



<PAGE>


                               ACTIVEWORLDS CORP.
                              INDEX TO FORM 10-KSB


<TABLE>
<CAPTION>

Securities and Exchange Commission
Item Number and Description                                                                         Page No.
---------------------------                                                                         --------
<S>                                                                                                 <C>

                                     PART I


Item 1.  Description of Business...............................................................           2
Item 2.  Description of Property...............................................................          10
Item 3.  Legal Proceedings.....................................................................          10
Item 4.  Submission of Matters to a Vote of Security Holders...................................          11


                                     PART II


 Item 5.  Market for Common Equity and Related Stockholder Matters.............................          11
 Item 6.  Management's Discussion and Analysis of Financial Condition and
              Results of Operations............................................................          12
 Item 7.  Financial Statements.................................................................          18
 Item 8  Changes in and Disagreements With Accountants on Accounting and
              Financial Disclosure.............................................................          18


                                    PART III


 Item 9.   Directors, Executive Officers, Promoters and Control Persons; Compliance With
               Section 16(a) of the Exchange Act...............................................          18
 Item 10. Executive Compensation ..............................................................          20
 Item 11. Security Ownership of Certain Beneficial Owners and Management ......................          22
 Item 12. Certain Relationships and Related Transactions ......................................          22
 Item 13. Exhibits, List and Reports on Form 8-K ..............................................          23
               Signatures......................................................................          25

</TABLE>

Inasmuch as the calculation of shares of the registrant's voting stock held by
non-affiliates requires a calculation of the number of shares held by
affiliates, such figure as shown on the cover page hereof, represents the
registrant's best good faith estimate for purposes of this Annual Report on Form
10-KSB, and the registrant disclaims that such figure is binding for any other
purpose. The aggregate market value of the registrant's common stock indicated
is based upon the average of the closing bid and asked prices of such stock as
reported on the Nasdaq SmallCap Market. All outstanding shares beneficially
owned by executive officers and directors of the registrant or by any
shareholder beneficially owning more than 10% of registrant's common stock, as
disclosed herein, were considered for purposes of this disclosure to be held by
affiliates.



<PAGE>



                           FORWARD-LOOKING STATEMENTS


Some of the statements in this Form 10-KSB are "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934 and
Section 27A of the Securities Act of 1933 that address, among other things, our
expectations with respect to the development of our business and the market for
three-dimensional technology for the Internet. Words such as "seek,"
"anticipate," "believe," "plan," "estimate," "expect," or "intend" indicate
forward-looking statements. We have made these statements based on currently
available operating, financial and competitive information. However, actual
results and future events may differ significantly from the results contemplated
in the forward-looking statements because of a number of factors, including
product and technology development, customer and market acceptance of our
product, demand for our product, the impact of competitive products and pricing
and other risks detailed in this Form 10-KSB and in our other Securities and
Exchange Commission filings.


                                       1

<PAGE>


PART I

Item 1. Description of Business

About Activeworlds Corp

Activeworlds Corp. ("Activeworlds" or the "Company" or "we") is a Delaware
corporation which was incorporated on September 5, 1995 under the name Vanguard
Enterprises, Inc. In January 1999, we acquired all of the issued and outstanding
stock of Circle of Fire Studios, Inc., a Nevada corporation, in exchange for
5,433,211 shares of our common stock. We also effected a one-for-two reverse
split of our common stock and sold 1,333,333 shares of our common stock in an
offering pursuant to a private placement. Concurrently with these transactions,
we changed our corporate name to Activeworlds.com, Inc. and we changed the name
of our subsidiary from Circle of Fire Studios, Inc. to Activeworlds, Inc. Our
sole business became the business of Circle of Fire Studios, which is described
in this annual report on Form 10-KSB. The former business of Vanguard
Enterprises, which was the marketing of hair care products on cable television,
was discontinued in 1996.

During June 2001, the Company changed its name from Activeworlds.com, Inc. to
Activeworlds Corp.

Recent Developments

Activeworlds has signed a letter of intent to acquire Los Angeles-based
NetBroadcaster.com, Inc., an entertainment portal and broadcast network
specializing in online media marketing. The letter of intent contemplates the
all-stock acquisition of NetBroadcaster. The acquisition is subject to certain
closing conditions, including satisfactory completion of due diligence by each
party, approval of Activeworlds' shareholders, and execution of a definitive
agreement.

Our address is 95 Parker Street, Newburyport, Massachusetts 01950. Our telephone
number is (978) 499-0222. Our Web site address is www.activeworlds.com.
Information contained on our Web site is not a part of this annual report.

Our Business

Activeworlds is a provider of Internet software products and services that
enable the efficient development and delivery of three-dimensional content over
the Internet and intranets. Our comprehensive software platform is comprised of
three principal components: our proprietary three-dimensional world server
software which we license under the names uniserver for larger applications and
galaxerver for smaller applications, a three-dimensional browser and development
authoring tools. Our Active Worlds technology allows us and other users to
create objects and structures in three-dimensional virtual environments, which
we call worlds.

We host numerous worlds on our own uniserver which visitors to our Web site can
access and explore in real time. Visitors to our Web site can enter and move
about in our worlds and interact with others either for free as tourists or,
upon payment of an annual membership fee, as members, which we call citizens. We
also license our server software to permit licensees to create their own worlds
within which they can control the content and access, either on our uniserver or
on their own uniserver or galaxerver. For example, a university licensee could
restrict access to its world to its students. We also create content for worlds
based on customer specifications. In addition, we act as an application service
provider and permit users to license our technology for integration into their
web applications, which may be hosted on our server. We also offer licensees of
our world server technical services to assist them in the development of their
worlds or to develop their worlds for them.

We currently derive our revenue primarily from three sources:

o Licenses for our world, uniserver and galaxerver server software, which
include the right to use our technology either on our server or on a separate
server which is licensed to the client for use at its facilities;

o Membership fees, which are paid by users who become citizens; and

o Three dimensional content production for our licensees.

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<PAGE>


We generally grant our world server licensees a non-exclusive right to use our
uniserver software (which can support a large number of worlds) or our
galaxerver software (which supports only one world). One-time uniserver and
galaxerver software license fees range from $1,995 to $150,000 depending on the
size of the server and include the right to receive any upgrades for a one-year
period. We generally have no obligation to maintain support for the software
under the licensing agreement. The fee to purchase a world on our uniserver
ranges between $92 and $519 with a majority of world sales being between
$92-$119. The fee allows the user access to and an exclusive right to create
permanent objects or structures within the world for one year. The fee is
significantly reduced for annual renewals of worlds. We do not constantly
monitor the content of worlds created by our licensees, but we do have access to
all worlds which reside on our uniserver and monitor the worlds from time to
time. As of December 31, 2001, there were approximately 1,500 worlds supported
by our uniserver, of which 50 worlds are our worlds and the remaining worlds
were created by our users or licensees. Approximately 1200 of these worlds are
running at any one time.

Users who wanted to become citizens of our Active Worlds worlds through our Web
site paid an annual membership fee of $19.95.

Development fees are negotiated individually with each licensee who contracts
with us for custom content development and production.

The Market for Three-Dimensional Technology

We believe the three-dimensional multi-user Internet market is a growing market
which is a natural evolution of the development of Internet communities as well
as distance learning and collaboration environments. We believe that the next
stages of Internet development will expand the Internet beyond the typical
two-dimensional environment in which users can move only along horizontal and
vertical axes (up, down, left and right) into a three-dimensional environment in
which users can move forward and backward and interact with other users in an
on-line virtual environment.

We believe that three-dimensional technology has a wide variety of applications,
including the following:

o The entertainment industry, which can use three-dimensional technology to
offer virtual settings that allow the user to interact with both the environment
and other visitors. We have created virtual worlds for the feature films
Godzilla and The 13th Floor. For The 13th Floor, we created a virtual world that
was used to launch a virtual premiere of the movie which was attended by the
virtual renditions of stars of the movie and other well-known actors;

o The education industry, which can use three-dimensional technology as part of
course material. Cornell University used our technology for the development of a
virtual science center. We have dedicated a uniserver to worlds which are to be
developed for schools and universities;

o Distance learning, which can use our technology for training purposes. We are
creating for a large pharmaceutical company a world to provide on-line training
for sales personnel;

o E-commerce, where our technology can be used to develop and implement an
electronic storefront in which visitors can interact and move about in a manner
similar to a retail store;

 o Three-dimensional communities, such as our AlphaWorld, the most popular world
served by our uniserver. We have developed these communities, in which citizens
and tourists can build structures, move about and communicate with each other.
The presence of any visitor is shown by his or her physical representation known
as an avatar; and

o Chat rooms, the chat rooms can be part of a three-dimensional community or can
be in separate worlds dedicated solely to chat. In addition to the text messages
common to two-dimensional chat room, the three-dimensional capability permits
visitors to see, move around, and interact with another visitor through their
avatars. The three-dimensional capabilities include the ability of a citizen to
develop an avatar with his or her picture.


                                       3
<PAGE>


The Active Worlds Worlds

A world is a defined segment of our virtual environment. On our uniserver, we
maintain our own worlds as well as worlds that are developed by our licensees or
by us pursuant to agreements with our licensees. The licensee may restrict
access to its world. Visitors can obtain access to our worlds by visiting our
Web site, www.activeworlds.com, downloading our browser at no charge, and using
the browser to visit one or more worlds that are maintained on our uniserver and
which are not owned by licensees which restrict access. Our licensees may
develop their worlds which are independent of our uniserver.

Once in one of our worlds, users can create virtual three-dimensional
structures, such as buildings, using our library of more than 3,000 computer
objects and textures. The design and texture of each world reflects the theme of
that world. The theme of a world is reflected in the particular type of building
objects that visitors can use to create structures. Thus, for example, our Mars
and Atlantis worlds have themes and building materials that are consistent with
our vision of a world on Mars and an undersea world. Similarly, the user's
avatar, which is the user's physical representation in the world, may vary from
world to world.

Any person who downloads our browser can visit our worlds and the worlds of
those of our licensees that permit access. A visitor may be a citizen, who
registers with us and pays an annual fee, which was $19.95 in 2001, or a
tourist, who does not make any payment. We have had over 30,000 users that have
paid us an annual fee since we began charging subscription fees in October 1997.
Any user can create a three-dimensional structure in our worlds, however, the
structures created by citizens are permanent while the structures created by
tourists can be changed or replaced by other users. While we have the ability
and right to take down a structure created by a citizen who lets his or her
citizenship lapse, it has not been our practice to do so. If a tourist
constructs a structure in one of our worlds, a citizen can claim the space on
which the tourist's structure is situated and construct his or her own
structures. Our uniserver identifies those structures that are constructed by
citizens and those that are constructed by tourists. All users can add picture,
sound, music and information to their virtual structures through direct links to
anywhere on the Internet.

We operate one uniserver, through which more than 1.5 million users have
downloaded and successfully installed our browser and entered into our virtual
worlds. This uniserver receives more than 1,000,000 hits per day, with each hit
representing an incidence of access to one of our 50 company created worlds such
as downloading of building objects. Our primary method of delivering our browser
(version 3.2) is through the Internet.

When a user visits any of our worlds, his or her presence is immediately
indicated by his or her avatar and the user is greeted by his or her screen
name. Citizens can create avatars from a range of formats, while the avatar of a
tourist is limited to two forms which identify the visitor as a tourist. The
avatar's position is shown on the world which the user is visiting. Other users
in the same section of the world can see and converse with any user who is in
the area at the same time. At present, communication is made through text
messages which appear on each visitor's screen. Our server identifies, by screen
name, each person within the area of vision. The avatars can be viewed from
different angles and positions, including a view from above or from the eyes of
user's avatar.

Our worlds are under constant development by both citizens and tourists. By
creating an object on an empty piece of land, a visitor can stake a claim to
cyberspace. Our library of thousands of building objects contains the necessary
materials for constructing a home, store, convention center, car, maze or any
other kind of building or structure. Citizens, but not tourists, can customize
their buildings with signs of all shapes and sizes. As of December 31, 2001,
visitors had placed more than 100 million virtual objects and structures in
AlphaWorld, our most popular world, and they have created virtual towns and
cities, complete with traffic signs, community artwork and parkland, in which
visitors (through their avatars) can stroll, explore and interact with other
users. In one of these structures, users have created a portrait gallery in
which citizens have placed pictures of themselves and others.



                                       4
<PAGE>

Citizens also have the ability to construct a transport, which, when touched,
moves a visitor to another destination in the same world, a different world or
another location on the Internet. We call the ability to transport users in this
manner teleporting.

Our worlds can have a commercial or non-commercial theme and can be based on
specific themes or commercial applications, which are selected either by us or
by our licensees. In addition to AlphaWorld, these other worlds include:

o     Theme worlds, with themes such as underwater themes or space themes, in
      which users can construct structures appropriate to those environments;

o     E-commerce worlds, such as a virtual shopping mall;

o     Movie and entertainment worlds, such as The 13th Floor and Godzilla, which
      we created for Centropolis Studios, a division of Columbia pictures. These
      worlds reproduce selected aspects of the movies;

o     Educational worlds, such as Cornell University's virtual science center;

o     Business worlds, such as Siemens medical training world;

o     Game worlds, such as awbingo, which we developed to use artificial
      intelligence capabilities for games such as bingo; and

o     Chat worlds, such as worlds where people can chart about specific topics.

Our Objective

Our goals are to be the leader in three-dimensional Internet environments and
interactive communication and to position our software platform as a standard
for the delivery of three-dimensional content over the Internet. In furtherance
of these goals, we have chosen to offer our three- dimensional browser to users
free of charge to promote the use of our software platform. More than 1.5
million users have downloaded and installed our browser and used it to access
the Active Worlds worlds.

o     Our objective is to be the industry leader in three-dimensional Internet
      technology platforms by:

o     Enhancing and further developing the Active Worlds software and
      technology;

o     Providing services to three-dimensional Internet virtual environments;

o     Licensing our technology to businesses who may want to develop one or more
      unique worlds as part of their e-commerce strategy, which may be used
      either for their internal use or for visits by the general public;

o     Affording advertisers the ability to offer three-dimensional Internet
      interactive advertising;

o     Developing three-dimensional e-commerce solutions for businesses seeking
      to sell goods and services throughout the Internet; and

o     Offering users a community in which they can create virtual structures,
      move about and communicate with other users.

Our Strategy

We believe that by continually enhancing our technology, developing and
promoting new applications for the three-dimensional Internet market and
partnering with and developing content for high-traffic Web sites, we will be
able to achieve our goals. We believe that three-dimensional Internet
applications provide enhanced richness that will be of interest to users
developing Internet-based distance learning, training, entertainment,
e-commerce, leisure time and chat applications and other on-line activities. As
three-dimensional Internet technology becomes more accepted, we believe that a
market will develop for our technology in these areas.



                                       5
<PAGE>

We intend to seek to meet our objective by:

Licensing our technology to businesses

As three-dimensional Internet technology becomes more accepted, we intend to
market licenses to our uniserver and galaxerver software and our technical
services to businesses. In order to achieve this goal, we intend to expand our
marketing effort directed at these businesses. As part of this marketing effort,
we will seek to develop strategic relationships with businesses to develop
commercial applications aimed at specific market segments.

These relationships could take a number of forms and may involve the grant of an
exclusive or semi-exclusive license for a specific market or application. These
relationships may also involve a revenue-sharing arrangement and may provide us
with additional development revenue.

As part of this strategy, we have expanded our educational programs to include a
new uniserver dedicated to education. We are designing this universe, which we
call Education Universe, to enable schools, universities and non-profit
educational groups to explore the potential of learning through
three-dimensional worlds based on our technology. We intend to expose potential
business licensees and individuals who have an ability to promote the use of our
technology, such as course instructors, in this manner.

Expanding our user base

We intend to expand our user base by creating awareness of the Activeworlds name
and products by promoting our Web site and technology through strategic
partnerships and other traditional public relations channels. As part of this
effort, we intend to create additional worlds and provide more content on the
Web site. We believe that in order to generate revenue from citizenships in our
worlds and licensing of our technology, we must increase the number of users who
visit our Web site and choose to become citizens or create worlds of their own.
More than 1.5 million users have downloaded and used our browser to access our
worlds. We do not believe that this number is sufficiently large to sustain our
growth. Accordingly, we believe that increasing our user base is critical to our
ability to generate revenue from citizenships in our worlds, licensing of our
technology and developing content for others.

Marketing our Technology for e-commerce and advertising

We intend to make our worlds attractive locations for both advertising and
e-commerce.

We believe that we can make our worlds more attractive for e-commerce and
advertising applications by:

o     Increasing our user base to show sufficient interest in our worlds;

o     Demonstrating the benefits which three-dimensional technology can offer
      both advertisers and businesses, both in terms of visual effects and
      technological features; and

o     Implementing an extensive public relations effort with various news
      agencies.

Our Technology

The key element to our three-dimensional environment is our proprietary
uniserver software which stores subscriber information, permits world servers to
operate and enables:

o     the creation of three-dimensional worlds;

o     the communication of physical characteristics of three-dimensional objects
      in each world, so that a visitor to any world served by the uniserver can
      see the structures in the world, move about in the world and create new
      structures;

o     the ability to locate structures and other users throughout the world,



                                       6
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o     the transmission of messages among users to the world, and

o     the transfer of information and files between any place on the Internet
      and a specific location on a world.

The uniserver can operate on Unix, Linux, Windows 95, 98, NT, 2000, Millennium
and Windows XP platforms. Our galaxerver is similar to the uniserver except that
unlike the uniserver, which supports a large number of worlds, the galaxerver
only supports one world.

We developed our proprietary three-dimensional browser, Active Worlds Browser
(version 3.2), which can be downloaded without charge. Users cannot access our
three-dimensional environment without the browser. The browser software is based
on a Windows platform and allows users to:

o     experience shared multi-user, multimedia and three-dimensional
      environments in any of the worlds which are publicly accessible in our
      universe;

o     develop and build virtual structures in our worlds;

o     access and display picture, sound or music files from anywhere on the
      Internet;

o     converse with other users by text-based chat, which can be directed to
      everyone who is currently visiting the world or conducted through private
      conversations through messaging to a specific user;

o     interface and integrate with two-dimensional Internet browsers, by
      permitting the three-dimensional window for Active Worlds to run side by
      side with a two-dimensional web page, which enables users to use all
      Internet based technologies, including ActiveX and Java;

o     move between worlds in our universe and Web sites outside our universe;

o     automatically update our software; and

o     register for citizen status.

Our platform offers true color graphics, with 16 million colors, frame rates
which could be in the range of ten to thirty frames a second and 16 bit sound
which supports MP3, Wav and Midi files. Using the browser, a visitor can see and
interact with other visitors and the virtual environment. Our platform can
accommodate thousands of simultaneous users.

Using our software, servers and authoring tools, users can communicate, play
games, conduct business and otherwise interact "face-to-face" in our shared
three-dimensional worlds on the Internet.

Marketing and Sales

Since Active Worlds is an Internet-based platform, the potential market for our
products is global. Our present marketing efforts are directed at:

o     Businesses and educational institutions, to which we are seeking to
      license our technology and assist them to develop three-dimensional
      applications to meet their specific needs;

o     Users, who we are trying to attract to our Web site by providing
      interesting content and access to our technology;

o     Advertisers, to whom we are trying to demonstrate a user base which meets
      their demographic requirements; and

o     Educational and non-profit institutions through our Education Universe.

In seeking to address the needs of businesses and educational institutions, we
license our uniserver and galaxerver technology to others to allow our licensees
to establish their own three-dimensional universe, which can be either on our
uniserver or independent of our uniserver.


                                       7
<PAGE>

We have licensed our software products to such well-known companies as Boeing,
Centropolis Studios (a division of Columbia Pictures), Siemens Electromedical
Group, Kodak, Philips Multimedia, United States Government agencies (including
NASA) and the Canadian Ministry of Education. Additionally, Cornell University,
The University of Santa Cruz, The University of London, and Nagoya University
(Japan) are using our software. Our software has received reviews, awards and
coverage from numerous sources, including Bloomberg TV, CNET, Der Spiegel
magazine, Industry Standard magazine, Softseek, Tucows, Yahoo Internet Life
magazine, ZDNet, PC Magazine, PC Games, Computer Graphics World and The New York
Times.

The Tech Museum in San Jose, California continues to maintain its Internet Cafe
project (started in 1998) focusing on the Active Worlds platform. The museum
dedicated a whole section comprised of twelve computers to showcase Active
Worlds as a computer technology advance.

We distribute a monthly newsletter, which we deliver by e-mail. This newsletter
describes developments in our program.

We presently rely on third party marketing and advertising agencies to market
our Web site and our other services both domestically and internationally. We
use third parties to market our software and related products in the United
Kingdom, Scandinavia, Spain, Germany, France, Korea, Brazil, Taiwan, Russia and
China. Our international distributors have developed foreign language versions
of our browser and have performed limited marketing activities. Our revenue from
software sold through these distributors has not been significant.

Competition

All aspects of the Internet market are relatively new, continually evolving and
intensely competitive, and we expect competition to intensify in the future.
Barriers to entry are low, and current and new competitors can easily launch new
Web sites at a relatively low cost using commercially available software. Our
present competitors include nationally-known companies that have expertise in
computer and Internet technology, and a number of other small companies,
including those that serve specialty markets. Other major companies have the
financial and technical ability to compete aggressively in the market for
three-dimensional software products on the Internet. Many, if not all, of these
companies have longer operating histories, larger customer bases, greater brand
recognition in other business and Internet markets and significantly greater
financial, marketing, technical and other resources than we have. Competitive
pressures created by any one of these companies, or by our competitors
collectively, could have a material adverse effect on our business, results of
operations and financial condition, and we can give no assurance that we will be
able to compete successfully against current and future competitors.

In addition, other major software developers have the capability both to develop
three-dimensional software products, to market their products through strong
distribution channels and to package their software with other popular products.
To the extent that a significant market develops for three-dimensional software,
we anticipate that major software, computer and Internet companies will develop
competitive products. All of these companies are better known than we are, and
they have significantly greater resources. In addition, competitive products may
be under development by major software, computer and Internet companies of which
we are unaware.

We believe that the market for three-dimensional interactive Internet
technologies is growing due to an increasing demand for interpersonal
interaction among Internet users, along with an exploding interest in
Internet-based applications generally. We also believe that the three-
dimensional aspects of our environment is a departure from most Internet
applications, which are two-dimensional and is a more aesthetically pleasing
manner of using the Internet. We believe that Active Worlds' robust
architecture, ease of use, speed, reliability and scalability have attracted and
will continue to attract users worldwide.

Companies which are developing three-dimensional Internet technology include
Wild Tangent, Macromedia, Inc., and Adobe Systems Inc.

Since the three-dimensional market is an emerging market, it is possible that
business may standardize on a technology which is not compatible with our
technology, and major software and hardware companies may have the market power
to impose on the marketplace an incompatible technology, and we may not have
access to that technology. If we cannot offer products that meet this standard,
whether imposed by a government agency or resulting from commercial preferences,
our business will suffer.


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<PAGE>

We believe that, at present, we have a competitive advantage over our
competition in four fundamental areas:

o     The content of our environments is dynamic and can be created and altered
      in real time over the web;

o     We believe that our browser has smarter architecture and a more robust
      engine than our competitors. The software is only a 1.5 megabyte download
      and upgrades itself automatically upon entrance into the environment,
      making the download and upgrade process efficient and easy;

o     Users can integrate a two-dimensional browser within our browser to
      provide a simultaneous two-dimensional and three-dimensional Internet
      experience; and

o     Each environment is unique and multimedia enriched, offering the user an
      almost unlimited combination of audio, video and graphical content
      options.

Significant Customers

During 2001, and 2000 only two clients accounted for 5% or more of our revenue.
In 2001, revenue from Siemens amounted to $51,000 for the development and
construction for them of a 3D virtual training site which amounted to
approximately 10% of our revenue for that year. During 2000, our largest
customer was 3Dglobal which resulted in revenues of $809,000 or approximately
50% of our revenue for that year.

Intellectual Property

All of our software was either developed by us or acquired from a third party.
We do not have any patents on any of our software. We have obtained copyright
registration for a version of our source code. We are developing and upgrading
our software on an ongoing basis and we do not have registered copyrights for
the most recent versions of our software. We rely upon confidentiality
agreements signed by our employees. We have registered Active Worlds,
Activeworlds and our AW design as trademarks and service marks under applicable
federal trademark law. It is our policy to vigorously oppose any infringement of
our marks. See "Legal Proceedings".

Government Regulations

We believe that no government approval is necessary for our principal products
or services and that there are no government regulations which currently have a
material effect on our operations. As Internet commerce evolves, we expect that
federal and state agencies may adopt legislation and regulations covering issues
such as user privacy, pricing, defamation, taxation, content and quality of
products and services and courts may interpret existing laws and regulations in
a manner which affects the Internet and e-commerce. Although many of these
regulations may not apply to our business directly, we expect the future
legislation and regulation could expose companies involved in e-commerce and the
sale of advertising over the Internet to liability which could limit the growth
of Internet commerce generally. We could face exposure to liability resulting
from allegations of defamation, breach of privacy or inappropriate usage of e-
mail by visitors to our Web site. In addition, regulations which increase the
cost of Internet access may have an effect on the use of the Internet.

Research and Development

We spent approximately $472,000 on research and development in 2001, and
approximately $354,000 and $381,000 in 2000 and 1999, respectively. The balance
of our research and development expenditures has been used to develop and
enhance our technology. All of our research and development has been sponsored
and paid for by us and was expensed as incurred.

Employees

As of March 1, 2002, we had 6 full-time employees and 9 part-time employees who
were engaged as follows: 2 in management, 7 in programming and content
development; 2 in sales and marketing; 1 in customer service; 1 in technical
support; and 2 in administration. In addition, we have engaged 2 part-time
independent contractors to assist us in content development, and customer
service.


                                       9
<PAGE>

Future Acquisition Strategies

We may acquire other companies either for cash, notes, equity or combination. In
addition, we may enter into joint ventures or other relationships, including
joint marketing agreements, which we believe would further our growth. Although
we anticipate that any acquisitions will be related to three-dimensional
Internet technology, we may acquire companies in unrelated businesses. We may
not generate net income from any future acquisition or agreement.

Prior Business of Vanguard Enterprises, Inc.

We were incorporated and conducted our initial public offering under the name
Vanguard Enterprises, Inc.Vanguard Enterprises was incorporated on September 5,
1995. Vanguard Enterprises was formed for the purpose of marketing a patented
hair care product produced by a hair products company, 21st Century Hair Design,
Inc. Vanguard Enterprises entered into one contract with 21st Century Hair
Design. Based upon this contract, Vanguard Enterprises raised capital and used
the funds to purchase cable TV airtime to broadcast infomercials featuring the
product. Vanguard discontinued all business activities in 1996. >From that time
until January 1999, Vanguard Enterprises was not engaged in any business
activities and had no material assets.

Item 2. Description of Property

We lease approximately 4,500 square feet of office space at 95 Parker Street,
Newburyport, Massachusetts 01950, pursuant to a lease which expires on February
28, 2002. Our present monthly rent is $2,700, which is subject to standard
escalation provisions. Our office facilities are adequate to meet our current
needs, and we believe that, if additional space is required, we will be able to
obtain it on reasonable terms.

Item 3. Legal Proceedings

World Intellectual Property Organization Filing. On February 15, 2001 we filed a
Complaint with the World Intellectual Property Organization ("WIPO") regarding a
domain name dispute with Carnatic Trade Links Pvt. Ltd (the "Respondent"). The
dispute centers upon the domain name "activeworld.com," which the Respondent has
registered. The basis for the Complaint is that the Respondent's domain name is
identical or confusingly similar to our trademarks and service marks, that the
Respondent has no rights or legitimate interest in the domain name, and the that
domain name was registered and is being used in bad faith by the Respondent.

After review, the WIPO transferred the disputed domain name to us.

In August of 2000, we entered into a contract with Juno Online Services, Inc.
wherein we would provide 3D chat services to Juno users. Pursuant to the
Agreement, we were to provide two levels of 3D chat services to Juno
subscribers. The basic (free) level of service would be known as "tourist
service," and the premium chat service would be known as "citizen service."
Juno's premium subscribers would be given access to our "citizen service" free
of charge, while Juno's free subscribers would be provided with our free
"tourist service" and could become "citizens" if they paid us a monthly
subscription fee of $3 or an annual fee of $19.95. We paid Juno three
installment payments in the amount of $337,500 for the right to be Juno's
exclusive 3D chat service provider.

At the time that we began negotiating with Juno and continuing through their
signing of the Agreement, Juno provided free and unlimited Internet access to
its subscribers worldwide. However, on or about December 4, 2000, four days
after the launch of our chat services on the Juno website pursuant to our
agreement, Juno dramatically changed its Internet access policy. The intent and
effect of Juno's changed policy was to drastically curtail Internet usage by its
free subscribers, by limiting the amount of time they could spend online and by
regularly denying them any Internet access whatsoever during the most desirable
time periods. Following Juno's unilateral and arbitrary limitation of its free
subscribers' Internet access, we experienced a substantial decline in the number
of visits by Juno users to its chat services.


                                       10
<PAGE>

We are seeking to recover in excess of $1.5 million in damages and $10 million
in punitive damages from the defendants. The Complaint asserts causes of action
for breach of contract, fraudulent concealment, fraud, unjust enrichment and
declaratory judgment. All Defendants in this matter have answered and discovery
is proceeding.

Other than the legal proceedings listed above, we are not party to any other
material legal proceeding.

Item 4. Submission of Matters to a Vote of Security Holders

None.

PART II

Item 5. Market for Common Equity and Related Stockholder Matters

Common Stock

Our common stock has been traded on the Nasdaq SmallCap Market ("Nasdaq") and on
the Boston Stock Exchange since May 2, 2000 under the symbol "AWLD." From
January 22, 1999 to May 1, 2000, our common stock was traded on the
Over-the-Counter Bulletin Board ("OTCBB") under the symbol AWDDE. From January
13, 1996 until January 21, 1999, our common stock was included in the OTCBB
under the symbol VANG. The following table sets forth the high and low closing
prices for our common stock on the Nasdaq SC, as applicable, for the periods
indicated.


                                                      Common Stock
                                                   ------------------
Period: Fiscal Year Ended December 31, 2001        High           Low
-------------------------------------------        ----           ---
First Quarter                                      $1.156         $.50
Second Quarter                                     $1.07          $.66
Third Quarter                                      $1.05          $.52
Fourth Quarter                                     $.70           $.40


                                                      Common Stock
                                                   ------------------
Period: Fiscal Year Ended December 31, 2000        High           Low
-------------------------------------------        ----           ---
First Quarter                                      $4.250         $3.250
Second Quarter                                     $5.250         $1.875
Third Quarter                                      $1.875         $1.125
Fourth Quarter                                     $1.43          $.50


On March 1, 2002, the closing price for our common stock on the Nasdaq SC was
$.56. As of March 1, 2002 there were approximately 60 holders of record of our
common stock. The number of stockholders of record does not take into account
stockholders for whom shares are being held in the name of brokerage firms or
clearing agencies.

Dividends

We are unlikely to pay dividends on our common stock in the foreseeable future.
We have not paid any dividends on our common stock since our inception and we do
not anticipate paying any dividends in the foreseeable future. We plan to retain
earnings, if any, to finance the development and expansion of our business.

Recent Sales of Unregistered Securities

Set forth below in chronological order is information regarding the sale of the
Company's unregistered securities sold by the Company during the year ended
December 31, 2001. Also included is the consideration, if any, received by the
Company for such shares and options and information relating to the section of
the Securities Act of 1933, or rule of the Securities and Exchange Commission
under which exemption from registration was claimed.


                                       11
<PAGE>

(1) From January, 2001 to December, 2001, the Company pursuant to its 1999 Stock
Incentive Plan, issued options to purchase 92,000 shares of common stock to its
employees, with exercise prices ranging from$1.00 to $1.125 per share. These
issuances were made in reliance on Section 4(2) of the Securities Act of 1933
and/or Rule 701 promulgated under the Securities Act of 1933 and were made
without general solicitation or advertising.

(2) In March, 2001 the Company issued an option to purchase an aggregate of
120,000 shares of common stock to Bruce Judson, a director of the Company. The
exercise price for the option is $1.00 per share. The issuance was made in
reliance on Section 4(2) of the Securities Act of 1933 and/or Regulation D
promulgated under the Securities Act of 1933 and was made without general
solicitation or advertising. The purchaser was a sophisticated investor with
access to all relevant information necessary to evaluate this investment, and
who represented to the Company that the shares were being acquired for
investment.

(3) In September, 2001 the Company issued an option to purchase an aggregate of
5,000 shares of common stock to Proton Media, a consultant of the Company, for
web development services. The exercise price for the option is $1.00 per share.
The issuance was made in reliance on Section 4(2) of the Securities Act of 1933
and/or Regulation D promulgated under the Securities Act of 1933 and was made
without general solicitation or advertising. The purchaser was a sophisticated
investor with access to all relevant information necessary to evaluate this
investment, and who represented to the Company that the shares were being
acquired for investment.

(4) In November, 2001, the Company pursuant to its 1999 Stock Incentive Plan,
issued an option to purchase 5,000 shares of common stock to a contractor, with
an exercise price of $1.00. These issuances were made in reliance on Section
4(2) of the Securities Act of 1933 and/or Rule 701 promulgated under the
Securities Act of 1933 and were made without general solicitation or
advertising.

(5) In June, 2001, the Company pursuant to its 1999 Stock Incentive Plan, issued
an option to purchase 100,000 shares of common stock to a Alex Adelson, a
director of the company, for consulting services above and beyond his director
duties. The exercise price of the option is $1.00 per share. These issuances
were made in reliance on Section 4(2) of the Securities Act of 1933 and/or Rule
701 promulgated under the Securities Act of 1933 and were made without general
solicitation or advertising. The purchaser was a sophisticated investor with
access to all relevant information necessary to evaluate this investment, and
who represented to the Company that the shares were being acquired for
investment.

(6) In March, 2001, the Company pursuant to its 1999 Stock Incentive Plan,
issued an option to purchase 100,000 shares of common stock to Bruce Judson, for
consulting services, prior to him becoming a director of the company. The
exercise price of the option is $1.00 per share. These issuances were made in
reliance on Section 4(2) of the Securities Act of 1933 and/or Rule 701
promulgated under the Securities Act of 1933 and were made without general
solicitation or advertising. The purchaser was a sophisticated investor with
access to all relevant information necessary to evaluate this investment, and
who represented to the Company that the shares were being acquired for
investment.

Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations

The Notes to the Financial Statements and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" set forth herein contain
forward-looking statements with respect to us and our operations that are
subject to certain risks and factors which could cause our future actual results
of operations and future financial condition to differ materially from that
described herein. The amount of revenue recognized during the periods discussed
below is not necessarily indicative of revenues to be recognized in future
periods. These risk factors include, but are not limited to, our potential
inability to realize the business plan, the intensity of competition from other
companies which focus on enabling innovations for the Internet and
business-to-business e-commerce, the status of our liquidity in future fiscal
periods, factors that affect the Internet technology and online commerce
industries such as network performance, reliability, speed of access, ease of
use and bandwidth availability, and factors that generally affect Internet
commerce, such as economic, political, regulatory, technological, and public
taste environments, as well as the factors discussed below in "Risk Factors that
May Affect our Results of Operations and Financial Condition."

You should read the following discussion of our operating results in conjunction
with the audited financial statements and notes thereto appearing elsewhere in
this Annual Report on Form 10-KSB.


                                       12
<PAGE>

Results of Operations
Fiscal Year 2001 Compared with Fiscal Year 2000

Our principal source of revenue to date has been from the license of our
uniservers, galaxervers and world servers, from the content development of
worlds for our customers, and revenue from the annual $19.95 registration fee,
which is paid by our users who become citizens. We recognize revenue from
membership fees and world licenses ratably over the periods the memberships and
licenses are in effect. We recognize revenue from licenses for uniservers and
galaxerves when the license is granted and we have performed all of our
obligations under the license agreement.

Revenue for the year ended December 31, 2001 decreased approximately 70%, to
$490,500 from $1,615,900 in the year ended December 31, 2000. This decrease
resulted from a decrease in licensing of our uniservers, galaxervers, world
servers, content development and a decrease in user fees.

Our selling, general and administrative expenses in the year ended December 31,
2001 increased approximately 59% to $2,417,900 from $1,519,300 in 2000. This
increase resulted principally from increased payroll expenses and increased
marketing expenses. Our selling, general and administrative expenses for 2001
also included approximately $51,400 from the issuance of options and warrants as
compensation for services.

Research and development expenses in the year ended December 31, 2001 increased
33% to $472,200 from $354,500 in 2000. This increase reflected an augmentation
of the level of research and development conducted during the fiscal year.

Interest income of $102,600 in 2001 resulted from the investment of proceeds of
our May 2000 public offering. These amounts are invested in money market funds.
We have a net operating loss carry forward in the amount of approximately
$3,617,000 as of December 31, 2001, which may be used to reduce our income taxes
in the future if we recognize a profit. We cannot assure you we will make a
profit.

As a result of the foregoing, we sustained a net loss of $2,297,000, or ($2.90)
per share (basic), for the year ended December 31, 2001, as compared with a net
loss of $105,000, or ($.013) per share (basic), for 2000.

Liquidity and Capital Resources

At December 31, 2001, we had working capital of $1,689,000, which included cash
of $1,840,000. The working capital reflected the remaining cash from the May
2000 public offering, from which we received aggregate net proceeds of
approximately $4.8 million (before deducting offering related expenses). We used
the balance of the net proceeds from the public offering for marketing, research
and development, new hires and working capital. We have no credit facilities,
and our revenues and the public offering have been our source of funds for
operations. During the year ended December 31, 2001, we used $1,543,000 for our
operations. Our cash balances represent 98% of our current assets.

Our principal cash requirements are for working capital, principally to develop
and implement an expanded marketing plan, research and development and for our
administrative infrastructure. In order to have sufficient cash to meet our
anticipated cash requirements for the next twelve months we will need to reduce
our expenses and increase our cash flow. However, to the extent that our
marketing program is not successful and we are not able to reduce our expenses
sufficiently and we are unable to generate cash flow from our operations, we may
require additional funding during the next twelve months. We may not be able to
obtain financing when we require it, and any financing may not be on terms which
are acceptable to us and may result in substantial dilution to our stockholders.
If we are unable to raise needed funds, we may have to reduce the scope of our
marketing and development activities, which would have a material adverse effect
upon our business and financial condition.

We may also acquire other businesses, including other companies or software or
technology that would help us expand our business in the area of the
three-dimensional Internet environments. However, we may also acquire companies
or businesses in other industries if we are unable to develop our present
business. To the extent that we make any acquisition, we may require additional
funds to be used for the purchase price in the acquisitions, to integrate the
acquired business with our existing business and to fund the operations of the
combined businesses. In addition, we may incur expenses in connection with our
negotiating acquisitions which are not consummated.


                                       13
<PAGE>

Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 141, Business Combinations and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires all
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method. Under SFAS No. 142, goodwill and intangible assets with
indefinite lives are no longer amortized but are reviewed annually (or more
frequently if impairment indicators arise) for impairment. Separable intangible
assets that are not deemed to have indefinite lives will continue to be
amortized over their useful lives (but with no maximum life). The amortization
provisions of SFAS No. 142 apply to goodwill and intangible assets acquired
after June 30, 2001. With respect to goodwill and intangible assets acquired
prior to July 1, 2001, we are required to adopt SFAS No.142 effective December
1, 2002.

In October 2001, the Financial Accounting Standards Board issued SFAS No. 144,
Accounting for Impairment or Disposal of Long-Lived Assets. SFAS No. 144
supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of, and addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. The Company is
required to adopt SFAS No. 144 on December 31, 2002 and does not expect the
adoption of SFAS No. 144 to have a material impact on our results of operations
and financial position.

Risk Factors That May Effect Our Results of Operations and Financial Condition

Risks Related to Our Business

WE HAVE INCURRED OPERATING LOSSES SINCE OUR ORGANIZATION AND WE MAY CONTINUE TO
INCUR LOSSES. We may never generate revenues sufficient to allow us to operate
profitably. For the year ended December 31, 2001, we had a net loss of
$2,297,000, or ($2.90) per share (basic) on revenue of $490,500. During 2001,
one contract with a single customer accounted for approximately 10.0% of our
revenues. We may experience a significant decrease in revenues unless we enter
into additional material contracts with other customers.

WE MAY NOT BE SUCCESSFUL IN MARKETING OUR TECHNOLOGY FOR E-COMMERCE
APPLICATIONS. To operate profitably we need to license our technology for use as
an integral component in e-commerce solutions for business, educational,
training, entertainment, leisure-time and other commercial applications. We
intend to do so through using strategic partnering and traditional media to
promote the use of our technology. If our marketing efforts are unsuccessful, we
will face difficult and costly choices in deciding whether and how to redirect
these efforts. If we are unable to develop a successful licensing program, our
business will be materially and adversely affected.

OUR FAILURE TO DEVELOP STRATEGIC RELATIONSHIPS COULD INHIBIT OUR ABILITY TO
GROW. We believe that, in order to market our technology, we need to enter into
strategic relationships with other businesses to develop commercial applications
of our technology directed at specific businesses. We do not presently have any
agreements relating to strategic relationships, we may never enter into such
agreements, and our failure to develop such relationships could impair our
ability to grow.

BECAUSE WE ARE SEEKING TO EXPAND OUR BUSINESS AND HAVE LIMITED MANAGEMENT
PERSONNEL, WE MAY HAVE DIFFICULTY IN MANAGING OUR GROWTH SHOULD WE HAVE ANY
GROWTH. Our expenses, particularly personnel expenses incurred in connection
with hiring and training new employees, have increased substantially. We expect
these expenses to continue to increase should we experience growth and as we
implement our marketing and research and development programs. As a result,
since our senior management is comprised only of our chief executive and
financial officers, our personnel, management systems and resources are being
strained, with no assurance that the implementation of our programs will result
in increased revenue. To manage our growth, we must implement operational and
financial systems and controls and recruit, train and manage new employees,
including executive, middle management and technical personnel. We cannot be
certain that we will be able to integrate new executives and other employees
into our organization effectively. If we do not manage our growth effectively,
our business, results of operations and financial condition could be materially
and adversely affected.


                                       14
<PAGE>

WE MAY HAVE DIFFICULTY HIRING QUALIFIED EMPLOYEES WITH TECHNICAL OR SALES
EXPERIENCE. There is significant competition for qualified employees in the
computer programming and Internet industries, and in the area of sales and we
have experienced, and we expect to continue to experience, difficulty in hiring
and retaining highly skilled employees with appropriate qualifications. We
cannot be certain that we will be able to recruit and retain employees to meet
our technical staffing or sales needs.

WE ARE DEPENDENT UPON OUR KEY PERSONNEL. We are dependent upon the services of
J.P. McCormick, our chief financial officer, and Richard F. Noll, our president.
The loss of any of these persons' services would have a material adverse effect
on our business and future prospects. Although Mr. McCormick, and Mr. Noll have
entered into employment agreements with us, the existence of employment
agreements does not guarantee their continued employment with us.

WE MAY BE UNABLE TO RESPOND TO THE RAPID TECHNOLOGICAL CHANGE IN OUR INDUSTRY.
The computer and Internet industries are characterized by rapidly changing
technologies, frequent new product and service introductions and evolving
industry standards. Our future success will depend on our ability to adapt to
rapidly changing technologies by continually improving the performance, features
and reliability of our services, particularly with respect to other companies in
the virtual reality area. If three-dimensional Internet standards evolve in a
manner which is incompatible with our technology, we may not be able to
effectively market our technology. Other software and hardware companies may
have the market power to impose on the marketplace an incompatible technology,
and we may not have access to that technology. Our failure to offer the most
current or widely accepted technologies could have a material adverse effect
upon our business.

WE MAY MAKE ACQUISITIONS WITHOUT INFORMING STOCKHOLDERS OR SEEKING THEIR
APPROVAL. We may make acquisitions of other businesses. Although we anticipate
that any business we acquire will be related directly or indirectly to our
present business, it is possible that we may make acquisitions in one or more
unrelated businesses. Any acquisition may be made using our cash or a
combination of cash and securities. At present, we are engaged in formal and
informal discussions with respect to acquisitions. If we make an acquisition, we
may not seek stockholder approval or provide stockholders with any information
concerning the acquisition prior to the execution of an acquisition agreement.
Furthermore, we cannot assure you that any acquisitions which we may make will
be profitable. If we make acquisitions, we could have difficulty integrating the
acquired company's personnel and operations with our own. Negotiations relating
to acquisitions could disrupt our business, distract our management and
employees, increase our expenses and otherwise impair our operations and
financial condition.

FUTURE ACQUISITIONS INVOLVE RISKS FOR US. We intend to evaluate future
acquisitions of complementary product lines and businesses as part of our
business strategy. Any future acquisitions may result in potentially dilutive
issuances of equity securities, the use of our cash resources, the incurrence of
additional debt and increased goodwill, intangible assets and amortization
expense, which could negatively impact our profitability. In addition,
acquisitions involve numerous risks, including difficulties in the assimilation
of the operations and products of the acquired companies, the diversion of
management's attention from other business concerns, risks of entering markets
in which we have no or limited direct prior experience, and the potential loss
of key employees of the acquired company.

WE DO NOT HAVE ANY PATENT PROTECTION FOR OUR SOFTWARE, AND WE MAY NOT BE ABLE TO
PROTECT OUR INTELLECTUAL PROPERTY RIGHTS. Although we have registered a version
of our source code with the United States Copyright Office, we have no patents
on our software products, and we rely primarily on our nondisclosure agreements
with our employees and others to whom we have provided technical proprietary
information for protection of our software code. We also rely on licensed
software products in our operations. However, the steps we have taken may not
protect our intellectual property rights, and it is possible that third parties
may infringe upon our proprietary rights.


                                       15
<PAGE>

Risks Related to the Internet

IF BUSINESSES DO NOT ACCEPT THREE-DIMENSIONAL INTERNET WEB SITES AS A MEDIUM FOR
ADVERTISING AND E-COMMERCE, OUR ABILITY TO GENERATE REVENUE MAY BE LIMITED. If
we cannot demonstrate to both advertisers and businesses that our
three-dimensional technology is viable and desirable as a medium for transacting
business, our ability to generate revenue from both advertising and licensing of
our technology will be limited.

OUR SYSTEMS MAY FAIL OR EXPERIENCE A SLOW DOWN AND OUR USERS DEPEND UPON OTHERS
FOR ACCESS TO OUR WEB SITE. Substantially all of our communications hardware and
some of our other computer hardware operations are located at our headquarters
in Newburyport, Massachusetts. We do not have a back-up computer system. Fire,
floods, earthquakes, power loss, telecommunications failures, break-ins and
similar events could damage these systems. Any of these occurrences could
adversely affect our business. Our insurance policies may not adequately
compensate us for any losses that may occur due to any failures or interruptions
in our systems. Furthermore, if the response time of our Web site is slow for
some reason, users could abandon our Web site and cease in using our products
and services.

IF WE ARE UNABLE TO ASSURE E-COMMERCE VENDORS AND USERS THAT WE CAN PROVIDE
ADEQUATE SECURITY, OUR WEB SITE MAY NOT BE ACCEPTED. Our Web site is vulnerable
to physical or electronic break-ins, viruses or other problems that affect Web
sites and Internet communication and commerce generally. As e-commerce becomes
more prevalent, our customers may become more concerned about security. The
circumvention of our security measures may result in the misappropriation of
proprietary information, such as credit card information, or interruptions of
our operations. Any such security breaches could damage our reputation and
expose us to a risk of loss or liability.

PORTAL LIABILITY. A portion of our business acts much as an Internet portal. The
law relating to the liability of providers of listings of products and services
sold over the Internet for errors, defects or other performance problems with
respect to those products and services is currently unsettled. We do not
pre-screen the types of products and services that may be purchased through our
Web site. Some of these products and services could contain performance or other
problems. We may not successfully avoid civil or criminal liability for problems
related to the products and services sold through our Web Site. Any claims or
litigation could still require expenditures in terms of management time and
other resources to defend ourselves. Liability of this sort could require us to
implement measures to reduce our exposure to this liability, which may require
us, among other things, to expend substantial resources or to discontinue
certain product or service offerings or to take precautions to ensure that
certain products and services are not available through our Web Site.

GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES COULD ADD ADDITIONAL COSTS TO
DOING BUSINESS ON THE INTERNET. There are currently few laws or regulations that
specifically regulate communications or commerce on the Internet. However, in
the future, laws and regulations may be adopted and existing laws and
regulations may be interpreted in a manner that address issues such as user
privacy, pricing, defamation, taxation and the characteristics and quality of
products and services which may have an adverse effect on the number of users of
our technology.

OUR GROWTH AND OPERATING RESULTS WILL BE IMPAIRED IF THE INTERNET AND ONLINE
COMMERCE INDUSTRIES DO NOT CONTINUE TO GROW. Our growth and operating results
depend in part on widespread acceptance and use of the Internet as a point of
convergence in the telecommunications, entertainment and technology industries,
as well as on continued consumer and corporate acceptance of the Internet as a
communications medium and for other forms of communication. These practices are
at an early stage of development, and demand and market acceptance are
uncertain. The Internet may not become a viable medium for telecommunications,
entertainment and technology convergence or a healthy commercial marketplace due
to inadequate development of network infrastructure and enabling technologies
that address the public's concerns about:


                                       16
<PAGE>

         o        network performance;

         o        reliability;

         o        speed of access;

         o        ease of use; and

         o        bandwidth availability.

         In addition, the Internet's overall viability could be adversely
affected by increased government regulation. Changes in or insufficient
availability of telecommunications or other services to support the Internet
could also result in slower response times and adversely affect general usage of
the Internet. Also, negative publicity and consumer concern about the security
of transactions conducted on the Internet and the privacy of users may also
inhibit the growth of commerce on the Internet.

Risks Related to the Stock Market

OUR COMMON STOCK PRICE HAS BEEN AND IS LIKELY TO BE HIGHLY VOLATILE. The market
price of our common stock and warrants has been, and is likely to continue to
be, highly volatile as the stock market in general, and the market for
Internet-related and technology companies in particular, has been highly
volatile. You may not be able to sell your shares of our common stock or our
warrants following periods of volatility because of the market's adverse
reaction to the volatility. In the past, following periods of volatility in the
market price of a company's securities, securities class action litigation has
often been instituted. Litigation could result in substantial costs and a
diversion of management's attention and resources. We cannot assure you that our
stock will trade at the same levels as other Internet stocks or that Internet
stocks in general will sustain their current market prices. Factors that could
cause volatility may include actual or anticipated fluctuations in our quarterly
operating results, announcements of technological innovations, changes in
financial estimates by securities analysts, conditions or trends in the Internet
industry and changes in the market valuations of other Internet companies.

WE ARE UNLIKELY TO PAY DIVIDENDS ON OUR COMMON STOCK IN THE FORESEEABLE FUTURE.
We have not paid any dividends on our common stock since our inception and we do
not anticipate paying any dividends in the foreseeable future. We plan to retain
earnings, if any, to finance the development and expansion of our business.

WE DO NOT CURRENTLY MEET THE CONTINUED LISTING REQUIREMENTS FOR THE NASDAQ
SMALLCAP MARKET. If we do not meet the minimum bid price requirement for The
Nasdaq SmallCap Market, we may be delisted from The Nasdaq SmallCap Market, in
which case we anticipate that we would apply for our common stock to trade on
the Over-the-Counter Bulletin Board. On February 13, 2002 we were notified
by The NASDAQ SmallCap Market that we may be delisted because of our deficiency
in the minimum bid price requirement of $1.00 for thirty consecutive trading
days. In addition, in order to continue to be listed on Nasdaq, we must meet the
following requirements:

         o        equity of at least $2,500,000, or a market capitalization of
                  $35,000,000 or $500,000 in net income for two of the last
                  three years;

         o        at least 500,000 shares in the public float;

         o        a minimum market value for the public float of $1,000,000;

         o        a minimum bid price of $1.00 per share;

         o        300 round lot (holders of 100 shares or more) stockholders;


                                       17
<PAGE>

         o        two market makers; and

         o        compliance with certain corporate governance standards.

If we are delisted from The Nasdaq Small Capital Market, it may be more
difficult to raise additional debt or equity financing and an investor likely
would find it more difficult to sell or obtain quotations as to the price of our
common stock and/or redeemable warrants. We have received a letter from Nasdaq
informing us that unless the bid price for our common stock closes at $1.00 per
share or more for a minimum of 10 consecutive trading days by August 13, 2002
that they would provide written notification that our securities be delisted
from the Nasdaq SmallCap Market.

WE MAY ISSUE PREFERRED STOCK WITHOUT APPROVAL OF OUR STOCKHOLDERS WHICH COULD
MAKE IT MORE DIFFICULT FOR A THIRD-PARTY TO ACQUIRE US AND DEPRESS OUR STOCK
PRICE. We have the authority to issue preferred stock without a vote of our
stockholders. In the future, our board of directors may issue one or more series
of preferred stock that has more than one vote per share or which give the
holders other preferential rights which may dilute or impair the rights of the
holders of common stock. This could permit our board of directors to issue such
stock to investors who support our management and give effective control of our
business to our management. Furthermore, under some circumstances issuing
preferred stock may violate the rules of the Nasdaq SmallCap Market, which could
result in our common stock being delisted from that market. The delisting of our
common stock from the Nasdaq SmallCap Market could result in both a drop in the
stock price and decline in interest in our stock which could make it more
difficult for you to sell your shares.

WE ARE CONTROLLED BY OUR MANAGEMENT WHICH MEANS THAT MANAGEMENT CAN PREVENT A
THIRD PARTY FROM ACQUIRING US EVEN IF AN ACQUISITION IS IN THE BEST INTEREST OF
OUR STOCKHOLDERS. Mr. Richard F. Noll, our president and chief executive
officer, and Mr. J.P. McCormick, our chairman of the board and chief financial
officer, together own approximately 60% of our outstanding common stock. As a
result, they may be able to exercise control over all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions. Their voting control could have the effect
of delaying or preventing a change of control which might benefit our
stockholders.

Item 7. Financial Statements

The Report of Independent Certified Public Accountants, Consolidated Financial
Statements on page F-1.

Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

None.

PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act

The directors and executive officers of our company and their ages as of March
1, 2002, are as follows:

     Name                      Age               Position
     ----                      ---               --------
Richard F. Noll                 36     Chief Executive Officer, President and
                                       Director
J.P. McCormick                  41     Chairman of the Board of Directors,
                                       Chief Financial Officer, Treasurer,
                                       Secretary and Director
Alexander M. Adelson (1)        67     Director
Sean Deson (1)                  38     Director
Bruce Judson                    43     Director


                                       18
<PAGE>

(1) Member of the Audit and Compensation Committees.

Richard F. Noll, our founder, has been president, chief executive officer and a
director of us and our predecessor, Circle of Fire Studios since its
organization in January 1997. From August 1995 until December 1996, Mr. Noll
operated the business of Circle of Fire Studios, Inc. as a sole proprietorship.
For more than five years prior to August 1995 he was an independent artist and
designer. Mr. Noll attended Massachusetts College of Art and majored in the Fine
Arts.

J.P. McCormick has been chairman of the board, chief financial officer and a
director of us and Circle of Fire Studios, Inc. since May 1997. He has been our
treasurer since May, 1997 and our secretary since July, 1997. From 1987 until
May 1997 he was the president of Associated Corporate Services Ltd., a company
which owned and operated two staffing franchises for Norrell Corp. Mr. McCormick
is a graduate of Kent State University, Ohio.

Alexander M. Adelson has been a director since November 1999. He has 36 years of
experience as an applied physicist and businessman specializing in technical
marketing matters. Mr. Adelson is Co-Chairman, Sr. Executive Vice President, and
COO, of Carels Corporation, a company dedicated to middleware with a focus on
the FDA vertical. From 1974 through 2001 he led the Technology Resource Group of
RTS Research Lab, Inc. Through RTS he helped conceive and develop the first
portable bar code scanner. He was one of the founding team of Symbol
Technologies (NYSE:SBL), and acted as program manager for twelve years. Mr.
Adelson was awarded a distinguished entrepreneur award by congress in 1997 and
holds over 70 patents and trademarks.

Sean Deson has been a director since December 1999. Mr. Deson recently became
the managing partner of Deson & Co., a strategy development and investment firm
focused on technology companies. Prior to that, Mr. Deson was a senior vice
president in investment banking at Donaldson, Lufkin & Jenrette where he was a
senior banker in its Internet focus group. Mr. Deson is also a director of
Technology Flavors and Fragrances, Inc., a company which creates and
manufactures flavors and fragrances for consumer products. Mr. Deson received
his B.S. in computers and M.B.A. in finance, both from the University of
Michigan.

Bruce Judson, has been a director since April 2001. Mr. Judson is a Faculty
Fellow at the Yale School of Management. He is the author of "HyperWars: 11
Strategies for Survival and Profit in the Era of Online Business." As well as
"NetMarketing: How Your Business Can Profit from the Online Revolution." He
previously served as General Manager of Time Inc. New Media. Mr Judson is also
the Chairman of the National Neurofibromatosis Foundation.

Directors are elected for a period of one year and thereafter serve until the
next annual meeting at which their successors are duly elected by the
stockholders. Officers serve at the will of the Board of Directors. Except as
noted herein, there are currently no arrangements or understandings regarding
the length of time each director is to serve in such a capacity. There is no
immediate family relationship between or among any of the Directors or executive
officers.

We have granted the representatives of HD Brous & Co., Inc., our underwriter,
the right, during the five-year period following the date of our May, 2000
prospectus, to designate one member to our board of directors or an advisor to
the board.

Compliance with Section 16(a) of the Exchange Act

Section 16(a) of the Securities Exchange Act of 1934 requires our directors and
executive officers and persons who own more than ten percent of a registered
class of our equity securities, to file with the Securities and Exchange
Commission initial reports of ownership and reports of changes in ownership of
common stock and other equity securities of our Company. Officers, directors and
greater than ten percent stockholders are required by SEC regulations to furnish
us with copies of Section 16(a) forms they file.

To our knowledge, based solely on review of the copies of such reports furnished
to us, the Company believes that, during the year ended December 31, 2001, all
of the Company's executive officers, directors and greater- than-ten percent
stockholders complied with all Section 16(a) filing requirements.


                                       19
<PAGE>

Item 10. Executive Compensation

Summary Compensation Table

The following table sets forth information regarding compensation earned by our
president and chief executive officer, our chief financial officer, and our lead
programmer, from the fiscal year ending December 31, 1999 to the end of our last
fiscal year. Except as set forth below, in 2001, 2000, and 1999 none of our
officers or any other employee received compensation in excess of $100,000:


<TABLE>
<CAPTION>

                                     Annual Compensation
                                                                           Long Term
                             Fiscal Year                              Compensation Number
                                Ended                                    of Securities         All Other
                             December 31     Salary        Bonus       Underlying Options    Compensation
                             -----------     ------        -----       ------------------    ------------
<S>                          <C>             <C>           <C>        <C>                    <C>
Richard F. Noll                2001          $150,000                                           -0-
Chief Executive                2000          $140,000      -0-             -0- (2)              -0-
 Officer and President         1999          $140,000      -0-            9,333(1)              -0-


J.P McCormick                  2001          $150,000                                           -0-
Chairman                       2000          $140,000      -0-             -0- (2)              -0-
Financial                      1999          $140,000      -0-            9,333(1)              -0-
Officer, Treasurer and
Secretary

Roland Vilett(3)               2001          $121,000                                           -0-
                               2000          $108,178      $1,000       150,000(4)              -0-
                               1999           $99,000      $2,000       156,667(5)              -0-

</TABLE>

(1) In January 1999, we entered into three-year employment agreements with
Messrs. Noll and McCormick, pursuant to which they received an annual salary of
$57,000. These agreements were amended and restated in June 1999, at which time
their annual salaries were increased to $140,000, retroactive to January 21,
1999. Pursuant to the agreements, in January 1999, we granted each of them an
incentive stock option to purchase 9,333 shares of common stock at $.83 per
share, which was 110% of the fair market value of the common stock on the date
of grant. The fair market value was the price at which we sold common stock to
non- affiliated parties in the January 1999 private placement.

(2) The employment agreements also provide that Messrs. Noll and McCormick will
be eligible to participate in a bonus pool of not more than 10% of our income
before income taxes in excess of $750,000. The amount of the bonus pool and the
allocation of the bonus pool among our senior executive officers will be
determined by our compensation committee. The employment agreements also provide
Messrs. Noll and McCormick with a $4,200 annual automobile allowance.

(3) In February 1999, we entered into a five year employment agreement with our
lead programmer, Mr. Vilett, pursuant to which he receives a base salary of
$100,000 with an annual increase of 10% of his salary.

(4) We granted Mr. Vilett options to purchase 150,000 shares of our common stock
at an exercise price of $1.3125 per share. These options were granted as
qualified options under our 1999 long-term incentive plan and have a duration of
the length of the plan.

(5) We granted Mr. Vilett options to purchase 40,000 and 116,667 shares of our
common stock at exercise prices per share of $.75 and $9.1875, respectively.
These options were granted as qualified options under our 1999 long-term
incentive plan and have a duration of the length of the plan.



                                       20
<PAGE>

Option Grants to Executive Officers in Fiscal 2001

No stock options or other equity incentives were granted to either Richard Noll
or J.P. McCormick in 2001.

Compensation of Directors

In 2001, we paid an annual fee of $15,000 to Mr. Adelson, $15,000 to Mr. Judson
and $24,000 to Mr. Deson for their service as a director. In addition, in 1999
we granted Mr. Adelson options to purchase 100,000 shares of our common stock at
$6.09 per share, and Mr. Deson options to purchase 146,667 shares of our common
stock at $6.09 per share. Mr. Adelson's options vest annually in equal amounts
over five years, beginning on the date he became a director, provided that he is
a director on the vesting dates. Mr. Deson's options vest annually over five
years in the amount of 66,667 options at the end of his first year of service as
a director, followed by 20,000 options at the end of each of years two, three,
four and five for so long as he is a director. Neither Mr. Adelson's 100,000 nor
Mr. Deson's 146,667 options were granted pursuant to our 1999 long-term
incentive plan. In May, 2000, we granted Mr. Adelson additional options to
purchase 46,000 shares of our common stock at $3.125 per share. These options
were granted under our 1999 long-term incentive plan and vest annually in equal
amounts over five years, provided that he is a director on the vesting dates. We
have also granted Mr. Judson options to purchase 120,000 shares of our common
stock at $1.00 per share. Mr. Judson's options were granted under our 1999
long-term incentive plan and vest in five equal amounts over five years,
beginning on the date he became a director, provided that he is a director on
the vesting dates.

Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values

The following table sets forth, for each of the named executive officers,
certain information regarding the exercise of stock options during fiscal 2001,
the number of shares of common stock underlying stock options held at fiscal
year-end and the value of options held at fiscal year-end based upon the closing
sales price of the common stock on the Nasdaq SC on December 31, 2001 ($.57 per
share).

<TABLE>
<CAPTION>

                                                              Number of Securities
                                                                   Underlying                     Value of Unexercised
                                                              Unexercised Options                 In-the-Money Options
                                                              At December 31, 2001               At December 31, 2001
                                                              --------------------               --------------------
                    Shares
                    Acquired on       Value
Name                Exercise          Realized         Exercisable       Unexercisable      Exercisable        Unexercisable
----                --------          --------         -----------       -------------      -----------        -------------
<S>                 <C>               <C>              <C>               <C>                <C>                <C>
Richard F. Noll       -0-               $-0-                                                    $0                  $0
J.P.McCormick         -0-               $-0-                                                    $0                  $0
Roland Vilett         -0-               $-0-                                                    $0                  $0

</TABLE>

Item 11. Security Ownership of Certain Beneficial Owners and Management

The following table sets forth information as of March 1, 2002, relating to the
ownership of our common stock by (i) each person known by us to be the
beneficial owner of more than five percent of the outstanding shares of our
common stock , (ii) each of our directors, (iii) each of the Named Executive
Officers, and (iv) all of our executive officers and directors as a group.
Except as may be indicated in the footnotes to the table and subject to
applicable community property laws, each such person has the sole voting and
investment power with respect to the shares owned.

<TABLE>
<CAPTION>

Name and Address of Beneficial                    Amount and Nature of Beneficial
Owner(1)                                          Ownership (2)                          Percent of Class
--------                                          -------------                          ----------------
<S>                                               <C>                                    <C>
Richard F. Noll (3)                                  2,527,899                                29.4%
J.P. McCormick (4)                                   2,495,079                                29.0%
Alexander M. Adelson (5)                               138,400                                 1.6%
Sean Deson (6)                                          86,667                                 1.0%
Bruce Judson (7)                                       120,000                                 1.4%
Michael Gardner                                        863,160                                10.0%
Directors and Executive Officers as a Group          5,368,045                                62.4%

</TABLE>


                                             21
<PAGE>


(1) The address of each person named is 95 Parker Street, Newburyport, MA 01950,
except for Mr. Gardner, whose address is c/o Baytree Capital Associates, LLC, 40
Wall Street, 58th Floor, New York, NY 10005.

(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. Shares of common stock subject to options or
warrants are deemed to be currently exercisable if they are convertible or
exercisable within 60 days of the date as to which information is provided.
Except as indicated in the footnotes to this table, the persons named in the
table have sole voting and investment power with respect to all shares of common
stock beneficially owned.

(3) Shares beneficially owned by Mr. Noll include (a) 16,351 shares of common
stock owned by Mr. Noll's wife, as to which Mr. Noll disclaims beneficial
interest, and (b) 5,600 shares of common stock issuable upon exercise of
outstanding options held by Mr. Noll.

(4) Shares beneficially owned by Mr. McCormick includes 5,600 shares of common
stock issuable upon exercise of outstanding options held by Mr. McCormick.

(5) The shares beneficially owned by Mr. Adelson represent shares of common
stock issuable upon exercise of options held by him.

(6) The shares beneficially owned by Mr. Deson represent shares of common stock
issuable upon exercise of options held by him.

Item 12. Certain Relationships and Related Transactions

Mr. Noll received cash advances from us in 1998. As of December 31, 2001,
$10,491 of these amounts were owed by Mr. Noll to us.

In 2001 and 2000, two members of the Board of Directors received annual
compensation of $15,000 and one member received compensation of $24,000. A
fourth member was added to the Board of Directors in December 2000. The member
was to receive annual compensation of $15,000, however he resigned in March of
2001.

In 2001, Bruce Judson was added to the Board of Directors, with an annual
compensation of $15,000. The board member also provided consulting services
during 2001 in the amount of $27,761 and received 100,000 stock options under
the agreement exercisable at $1.

The Company also entered into an agreement during 2001 with Alex Adelson, a
board member, to provide consulting services. The consultant was paid $4,500
during 2001. Under the agreement the consultant also received 100,000 stock
options exercisable at $1.

The wives of two officers/stockholders were employed by the Company as of
December 31, 2001.

We believe that the transactions described above between us and our officers,
directors and principal stockholders were on terms at least as fair to us as had
these transactions been concluded with unaffiliated parties. We will not offer
preferred stock to our officers, directors or principal stockholders except upon
the same terms as it is offered to all other existing stockholders or to new
stockholders, unless the issuance is approved by the audit committee, who will
have access, at our expense, to independent legal counsel. All future related
party transactions, including any loans or advances, will be for bona fide
business purposes and approved by a majority of our board which will include
unaffiliated directors or by our audit committee who do not have an interest in
the transactions and who will have access, at our expense, to independent legal
counsel.


                                       22
<PAGE>

Item 13. Exhibits, List and Reports on Form 8-K

(a) Exhibits. The following exhibits (numbered in accordance with Item 601 of
Regulation S-B) are incorporated by reference, as indicated

3.1      Certificate of Incorporation of the Issuer as filed with the Delaware
         Secretary of State on September 5, 1995. (1)

3.2      Certificate of Amendment to Certificate of Incorporation of the Issuer
         as filed with the Delaware Secretary of State on September 29, 1995.
         (1)

3.3      Certificate of Amendment to Certificate of Incorporation of the Issuer
         as filed with the Delaware Secretary of State on October 12, 1995. (1)

3.4      Certificate for Renewal and Revival of Certificate of Incorporation of
         the Issuer as filed with the Delaware Secretary of State on September
         10, 1997. (1)

3.5      Certificate of Amendment to Certificate of Incorporation of the Issuer
         as filed with the Delaware Secretary of State on January 21, 1999. (1)

3.5.1    Certificate of Amendment to Certificate of Incorporation as filed with
         the Delaware Secretary of State on April 7, 2000. (2)

3.6      Bylaws of the Issuer. (1)

3.6.1    Restated Bylaws of Issuer. (3)

4.1      Form of Common Stock Certificate. (1)

4.2      Form of Warrant Agreement, including form of Series B Redeemable Common
         Stock Purchase Warrant. (4)

4.3      Form of Series A Redeemable Common Stock Purchase Warrant. (1)

10.1     Activeworlds.com, Inc. 1999 Long-term incentive plan. (1)*

10.1.1   Activeworlds.com, Inc. Restated 1999 Long-term incentive plan. (3)*

10.1.2   Activeworlds.com, Inc. Restated 1999 Long-term incentive plan. (5)*

10.2     Lease Agreement dated February 27, 1999 between the Issuer and Robert
         L. Wood. (1)

10.3     Amended and Restated Employment Agreement, dated as of January 21,
         1999, between the Issuer and Richard F. Noll. (1)*

10.4     Amended and Restated Employment Agreement dated as of January 21, 1999,
         between the Issuer and J.P. McCormick (1)*

10.5     Stock Option Agreement between the Issuer and Richard F. Noll. (4)*

10.6     Stock Option Agreement between the Issuer and J.P. McCormick.(4)*

10.7     Agreement dated October 1999, between the Issuer and 3DGlobal (f/k/a
         Advanced Shopping Centre Management Pty. Limited). (4)


                                       23
<PAGE>

10.8     Employment Agreement, dated February 12, 1999, between the Issuer and
         Roland Vilett. (6)*

21.      Subsidiaries of the Issuer. (7)

23.      Consent of Pannell Kerr Forster, PC. (7)

4.       Power of Attorney. (7)

--------------------
(1) Incorporated by reference to similarly numbered exhibits in Issuer's
registration statement on Form SB-2 filed with the Securities and Exchange
Commission on August 13, 1999 under the Securities Act of 1933, as amended (File
No. 333-85095).

(2) Incorporated by reference to similarly numbered exhibits in Issuer's
Amendment No. 4 to Form SB-2 filed with the Securities and Exchange Commission
on April 11, 2000 under the Securities Act of 1933, as amended (File No.
333-85095).

(3) Incorporated by reference to similarly numbered exhibits in Issuer's
Amendment No. 2 to Form SB-2 filed with the Securities and Exchange Commission
on March 16, 2000 under the Securities Act of 1933, as amended (File No.
333-85095).

(4) Incorporated by reference to similarly numbered exhibits in Issuer's
Amendment No. 1 to Form SB-2 filed with the Securities and Exchange Commission
on November 5, 1999 under the Securities Act of 1933, as amended (File No.
333-85095).

(5) Incorporated by reference to Issuer's quarterly report on Form 10-QSB filed
with the Securities and Exchange Commission on November 14, 2000 under the
Securities Act of 1934, as amended.

(6) Incorporated by reference to Issuer's annual report on Form 10-KSB filed
with the Securities and Exchange Commission on April 2, 2001 under the
Securities Act of 1934, as amended.

(7) Included herewith.

 *Management contract or compensatory plan or arrangement.

(b) Reports on Form 8-K. No Current Reports on Form 8-K were filed by the
Company during the quarter ended December 31, 2001.


                                       24
<PAGE>


                                   SIGNATURES


In accordance with section 13 or 15(d) of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, hereunder duly
authorized.

Dated: April 1, 2002
                                    Activeworlds Corp.


                                    By: /s/ Richard F. Noll
                                        ------------------------
                                        Richard F. Noll
                                        President and  Chief Executive Officer



                                       25
<PAGE>




                               ACTIVEWORLDS CORP.

                        Consolidated Financial Statements
                    at December 31, 2001 and for years ended
                           December 31, 2001 and 2000


<PAGE>


                                Table of Contents



<TABLE>
<CAPTION>
                                                                                                                     Page

<S>                                                                                                            <C>
Independent Auditors' Report                                                                                          F-2

Consolidated Financial Statements

    Consolidated Balance Sheet - December 31, 2001                                                                    F-3

    Consolidated Statement of Operations for Years Ended December 31, 2001 and 2000                                   F-4

    Consolidated Statement of Changes in Stockholders' Equity for Years
       Ended December 31, 2001 and 2000                                                                               F-5

    Consolidated Statement of Cash Flows for Years Ended December 31, 2001 and 2000                                   F-6

    Notes to Consolidated Financial Statements                                                                  F-7 to 18
</TABLE>


                                      F-1
<PAGE>

                          Independent Auditors' Report



To the Stockholders
Activeworlds Corp.


We have audited the accompanying consolidated balance sheet of Activeworlds
Corp., as of December 31, 2001, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for each of the two
years in the period then ended. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Activeworlds Corp. at December 31, 2001, and the consolidated results of their
operations and their consolidated cash flows for each of the two years in the
period then ended in conformity with accounting principles generally accepted in
the United States of America.










Pannell Kerr Forster, P.C.

February 18, 2002



                                      F-2
<PAGE>

                               ACTIVEWORLDS CORP.

                           Consolidated Balance Sheet
                                December 31, 2001


<TABLE>
<S>                                                                                                <C>
                                                            Assets

Current assets
    Cash                                                                                           $     1,840,430
    Accounts receivable, trade                                                                                 774
    Prepaid expenses                                                                                        42,950
    Investments                                                                                             65,307
                                                                                                   ---------------
              Total current assets                                                                       1,949,461
                                                                                                   ---------------

Property and equipment, at cost
    Leasehold improvements                                                                                  27,334
    Equipment and fixtures                                                                                 395,141
                                                                                                   ---------------
                                                                                                           422,475
    Less: accumulated depreciation and amortization                                                        181,341
                                                                                                   ---------------
              Property and equipment, net                                                                  241,134
                                                                                                   ---------------

              Total assets                                                                         $     2,190,595
                                                                                                   ---------------


                                             Liabilities and Stockholders' Equity
Current liabilities
    Current portion - capital lease                                                                $           878
    Accounts payable                                                                                        21,287
    Accrued liabilities                                                                                     52,857
    Deferred revenue                                                                                       185,665
                                                                                                   ---------------
              Total current liabilities                                                                    260,687
                                                                                                   ---------------

Commitments and contingencies

Stockholders' equity
    Preferred stock, $.001 par value, 500,000 shares authorized, no shares issued
      or outstanding                                                                                          --
    Common stock, $.001 par value, 50,000,000 shares authorized, 8,515,235 shares
      issued and outstanding                                                                                 8,515
    Additional paid-in capital                                                                           6,344,393
    Note receivable for shares issued                                                                       (6,500)
    Treasury stock                                                                                        (118,403)
    Accumulated deficit                                                                                 (4,232,627)
    Accumulated other comprehensive income (loss)                                                          (65,470)
                                                                                                   ---------------
              Total stockholders' equity                                                                 1,929,908
                                                                                                   ---------------

              Total liabilities and stockholders' equity                                           $     2,190,595
                                                                                                   ---------------
</TABLE>


See notes to consolidated financial statements
                                      F- 3

<PAGE>

                               ACTIVEWORLDS CORP.

                      Consolidated Statement of Operations


<TABLE>
<CAPTION>
                                                                                               Year Ended December 31
                                                                                         -----------------------------------
                                                                                               2001              2000
                                                                                         ---------------     ---------------

<S>                                                                                      <C>                 <C>
Revenues                                                                                 $       490,503     $     1,615,882
                                                                                         ---------------     ---------------

Operating expenses
    Selling, general and administrative expenses                                               2,417,893           1,519,326
    Research and development expenses                                                            472,237             354,499
                                                                                         ---------------     ---------------
              Total operating expenses                                                         2,890,130           1,873,825
                                                                                         ---------------     ---------------

    (Loss) from operations                                                                    (2,399,627)           (257,943)

Interest income                                                                                  102,584             152,847
                                                                                         ---------------     ---------------
    (Loss) before income taxes                                                                (2,297,043)           (105,096)
Income taxes                                                                                        --                  --
                                                                                         ---------------     ---------------

              Net (loss)                                                                      (2,297,043)           (105,096)

Other comprehensive income (loss) -
  unrealized (losses) on securities                                                              (65,470)               --
                                                                                         ---------------     ---------------

              Comprehensive loss                                                         $    (2,362,513)    $      (105,096)
                                                                                         ---------------     ---------------

Net (loss) per share of common stock
    Basic                                                                                $         (2.90)    $         (.013)
                                                                                         ---------------     ---------------
</TABLE>


See notes to consolidated financial statements
                                       F-4
<PAGE>

                               ACTIVEWORLDS CORP.

            Consolidated Statement of Changes in Stockholders' Equity
                     Years Ended December 31, 2001 and 2000


<TABLE>
<CAPTION>

                                              Preferred Stock                          Common Stock                    Additional
                                    -----------------------------------     -----------------------------------         Paid-In
                                        Shares               Amount              Shares              Amount             Capital
                                    ---------------     ---------------     ---------------     ---------------     ---------------

<S>                                 <C>                 <C>                 <C>                 <C>                 <C>
Balances at January 1, 2000                    --       $          --             7,342,762     $         7,343     $     2,237,419

Issuance of common stock, net
  of issuance costs                                                               1,260,000               1,260           4,035,825
Purchase of common stock                                                            (87,527)                (88)
Issuance of stock
  warrants for services                                                                                                      19,750
Net (loss) for year                            --                  --
                                    ---------------     ---------------     ---------------     ---------------     ---------------

    Balances at December 31, 2000              --                  --             8,515,235               8,515           6,292,994
                                    ---------------     ---------------     ---------------     ---------------     ---------------


Accumulated other comprehensive
   income (loss)
Issuance of stock
   warrants for services                                                                                                     51,399
Net (loss) for year                            --                  --
                                    ---------------     ---------------     ---------------     ---------------     ---------------

    Balances at December 31, 2001              --       $          --             8,515,235     $         8,515     $     6,344,393
                                    ---------------     ---------------     ---------------     ---------------     ---------------

<CAPTION>
                                                             Note             Accumulated
                                                          Receivable             Other                                   Total
                                      Accumulated         for Shares         Comprehensive          Treasury         Stockholders'
                                        Deficit             Issued           Income (Loss)           Stock               Equity
                                    ---------------     ---------------     ---------------     ---------------     ---------------

<S>                                 <C>                 <C>                 <C>                 <C>                 <C>
Balances at January 1, 2000         $    (1,830,488)    $        (6,500)    $          --       $          --       $       407,774

Issuance of common stock, net
  of issuance costs                                                                                                       4,037,085
Purchase of common stock                                                                               (118,403)           (118,491)
Issuance of stock
  warrants for services                                                                                                      19,750
Net (loss) for year                        (105,096)                                                                       (105,096)
                                    ---------------     ---------------     ---------------     ---------------     ---------------

    Balances at December 31, 2000        (1,935,584)             (6,500)               --              (118,403)          4,241,022
                                    ---------------     ---------------     ---------------     ---------------     ---------------


Accumulated other comprehensive
   income (loss)                                                                    (65,470)                                (65,470)
Issuance of stock
   warrants for services                                                                                                     51,399
Net (loss) for year                      (2,297,043)                                                                     (2,297,043)
                                    ---------------     ---------------     ---------------     ---------------     ---------------

    Balances at December 31, 2001   $    (4,232,627)    $        (6,500)    $       (65,470)    $      (118,403)    $     1,929,908
                                    ---------------     ---------------     ---------------     ---------------     ---------------
</TABLE>


See notes to consolidated financial statements
                                       F-5
<PAGE>

                               ACTIVEWORLDS CORP.

                      Consolidated Statement of Cash Flows

<TABLE>
<CAPTION>
                                                                                               Year Ended December 31
                                                                                         -----------------------------------
                                                                                               2001              2000
                                                                                         ---------------     ---------------

<S>                                                                                      <C>                 <C>
Operating activities
    Net (loss)                                                                           $    (2,297,043)    $      (105,096)
    Adjustment to reconcile net (loss) to net cash (used) by operating activities
       Depreciation and amortization                                                             108,783              37,083
       Change in estimate of allowance for doubtful accounts                                      (5,000)            (15,000)
       Contract billing adjustment                                                               216,880                --
       Warrants issued for services                                                               51,399              13,500
       Contracts in progress in excess of billings                                                91,857            (308,737)
       Changes in operating assets and liabilities which provided (used) cash
          Accounts receivable                                                                     12,949            (101,981)
          Prepaid expenses                                                                       261,167            (259,285)
          Advances to officer/stockholder/employees                                               11,551                 940
          Accounts payable                                                                       (31,095)           (111,440)
          Accrued liabilities                                                                    (13,848)             34,630
          Deferred revenue                                                                        49,939            (138,169)
                                                                                         ---------------     ---------------
              Net cash (used) by operating activities                                         (1,542,461)           (953,555)
                                                                                         ---------------     ---------------

Investing activities
    Purchases of equipment and leasehold improvements                                            (97,953)           (189,903)
                                                                                         ---------------     ---------------
              Net cash (used) by investing activities                                            (97,953)           (189,903)
                                                                                         ---------------     ---------------

Financing activities
    Purchase of treasury stock                                                                      --              (118,491)
    Payments on capital lease obligation                                                         (10,974)             (9,575)
    Net proceeds from sale of stock                                                                 --             4,281,934
                                                                                         ---------------     ---------------
              Net cash provided (used) by financing activities                                   (10,974)          4,153,868
                                                                                         ---------------     ---------------

Net increase (decrease) in cash                                                               (1,651,388)          3,010,410
Cash at beginning of year                                                                      3,491,818             481,408
                                                                                         ---------------     ---------------

              Cash at end of year                                                        $     1,840,430     $     3,491,818
                                                                                         ---------------     ---------------

Supplemental disclosure information
    Cash paid for interest during the year                                               $           448     $         1,014
                                                                                         ---------------     ---------------
    Cash paid for income taxes during the year                                           $          --       $          --
                                                                                         ---------------     ---------------

Supplemental schedule of noncash investing activities
    Value of stock options issued for services relating to offering costs                $          --       $         6,250
                                                                                         ---------------     ---------------
    Deferred offering costs charged against paid-in-capital                              $          --       $       238,599
                                                                                         ---------------     ---------------
    Common stock in lieu of cash on accounts receivable                                  $       130,770     $          --
                                                                                         ---------------     ---------------
</TABLE>


See notes to consolidated financial statements
                                      F-6
<PAGE>

                               ACTIVEWORLDS CORP.

                   Notes to Consolidated Financial Statements


Note 1 - Organization and basis of presentation

         On January 22, 1999, Vanguard Enterprises, Inc., a publicly traded
         Delaware corporation, acquired all of the issued and outstanding common
         stock of Circle of Fire Studios, Inc., a Nevada corporation ("Circle of
         Fire"), in exchange for 5,433,211 shares of its common stock (the "1999
         Acquisition") pursuant to an Agreement and Plan of Reorganization with
         Circle of Fire. As part of the 1999 Acquisition, outstanding options to
         acquire common stock of Circle of Fire were exchanged for options to
         purchase 322,682 shares of the Company's common stock. (See note 8.) At
         the time of the 1999 Acquisition, Vanguard had no significant
         operations. Simultaneous with the 1999 acquisition, Vanguard
         Enterprises, Inc. changed its name to Activeworlds.com, Inc. (the
         "Company") and changed the name of its subsidiary from Circle of Fire
         Studios, Inc. to Activeworlds, Inc. ("Inc." ).

         Inc. was accounted for as the acquiring party and the surviving
         accounting entity because the former stockholders of Inc. received
         approximately 94% of the voting rights in the combined corporation.

         All intercompany accounts and transactions have been eliminated in
         consolidation. The consolidated financial statements are presented as
         those of Activeworlds.com, Inc. During June 2001, the Company changed
         its name from Activeworlds.com, Inc. to Activeworlds Corp.

         All share and per share information in the consolidated financial
         statements reflect (a) the consummation of the 1999 Acquisition whereby
         shares and options issued by Inc. were exchanged for shares of the
         Company's common stock and options to purchase shares of the Company's
         common stock, (b) the one-for-two reverse split (immediately prior to
         the 1999 Acquisition, and (c) the two-for-three reverse stock split
         which became effective on April 10, 2000.

         The Company suffered a substantial consolidated net loss during the
         year ended December 31, 2001 and has net capital at December 31, 2001
         in an amount less than its net loss for 2001. The Company expended
         significant funds towards its marketing effort and for investments in
         people to expand the Company's revenue during 2001. Certain costs are
         expected to continue to impact operating results in the future, however
         management has implemented a plan to reduce that impact. The plan
         management has implemented includes a work force reduction, reductions
         in advertising and public relations and in all unnecessary expenses.
         The Company has also incurred a number of significant non-recurring
         charges associated with the settlement of a customer contract (note 4)
         and a revenue sharing agreement which is now in litigation (note 14).
         While the Company expects to continue as a going concern, its success
         is dependent on its ability to generate adequate revenues and/or obtain
         additional sources of capital (note 15).

         In addition, during January 2002, the Company was notified by NASDAQ
         that the Company has not met the minimum requirements of the
         Association and will be delisted from the NASDAQ in August of 2002
         unless the minimum requirements are satisfied.


                                      F-7
<PAGE>

                               ACTIVEWORLDS CORP.

                   Notes to Consolidated Financial Statements


Note 2 - Summary of significant accounting policies

         A.   Nature of operations

              The Company provides computer software products and on-line
              services that permit users to enter, move about and interact with
              others in computer-generated, three-dimensional virtual
              environment using the Internet.

         B.   Accounting estimates

              The preparation of financial statements in conformity with
              accounting principles generally accepted in the United States of
              America requires management to make estimates and assumptions that
              affect the reported amounts of assets and liabilities and
              disclosure 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 those estimates.

         C.   Financial instruments

              The estimated fair value of the Company's financial instruments,
              which include cash, accounts receivable, accounts payable, accrued
              liabilities and a capital lease obligation, approximates carrying
              value.

         D.   Cash and cash equivalents

              Cash and cash equivalents consist of cash on hand and all highly
              liquid securities with an original maturity of three months or
              less.

         E.   Depreciation and amortization

              Equipment and fixtures are depreciated using accelerated methods
              over estimated lives of five years. Leasehold improvements are
              amortized over six years, the period of the lease. Depreciation
              and amortization expense of property and equipment totaled
              $108,783 and $37,083 for 2001 and 2000, respectively.

         F.   Investments

              Management determines the appropriate classification of securities
              at the time of acquisition. If management has the intent and the
              Company has the ability at the time of acquisition to hold
              securities until maturity, they are classified as investments held
              to maturity and carried at amortized historical cost. Securities
              to be held for indefinite periods of time and not intended to be
              held to maturity are classified as available for sale and carried
              at fair value.


                                      F-8
<PAGE>

                               ACTIVEWORLDS CORP.

                   Notes to Consolidated Financial Statements


              Realized gains and losses on dispositions are based on the net
              proceeds and the adjusted book value of the securities sold, using
              the specific identification method. Unrealized gains and losses on
              investment securities available for sale are based on the
              difference between book value and fair value of each security.
              Unrealized gains and losses are reported in accumulated other
              comprehensive income (loss), whereas realized gains and losses are
              included in other income.

         G.   Marketing and public relations costs

              Marketing and public relations costs are expensed as incurred if
              it was determined that the benefit was received during the year.
              Marketing and public relations costs paid for services providing a
              benefit in the future are recorded as assets and amortized over
              the period benefited usually based on contract requirements.
              Marketing and public relations costs expensed in 2001 and 2000
              were $433,908 and $87,241, respectively.

         H.   Research and development of software

              Research and development costs are expensed as incurred.

         I.   Revenues

              Memberships, licensing and royalties

              Membership revenue and revenue from licensing the Company's worlds
              are recognized ratably over the periods the memberships are in
              effect and the licensing periods for the worlds. Advances on
              royalties from licensing agreements are recognized over the period
              the royalties are earned. Revenue from licensing the Company's
              uniservers and galaxservers is recognized when the license is
              granted and the Company has performed all of its obligations under
              the license agreement.

              Services

              Revenue from technical services is recognized when the services
              are performed.

              Long-term contracts

              In 1999, the Company entered into a significant long-term contract
              (note 14). Revenue from the contract was recognized as the phases
              were accepted by the customer. At December 31, 1999, the Company
              had not completed a phase under the contract and contract payments
              received were recognized as deferred revenue. In 2000, as the
              contract developed and more reliable estimates were available, the
              percentage of completion method of accounting was determined to be
              the preferable method of accounting for long-term contracts. Under
              the percentage of completion method of accounting, costs and
              estimated gross margins are recorded as revenue as work is
              performed based on the percentage that incurred costs bear to
              estimated total costs utilizing the most recent estimates of
              costs. Billings on the contracts are recorded as advance billings
              on the contract until the contract is substantially completed.
              Management believes that the new method more accurately reflects
              periodic results of operations. Long term contracts were
              substantially complete as of December 31, 2001. As of December 31,
              2001 and 2000, costs and estimated gross margin on the contract in
              excess of advanced billings was $-0- and $308,737, respectively.


                                      F-9
<PAGE>

                               ACTIVEWORLDS CORP.

                   Notes to Consolidated Financial Statements


         J.   Significant customers

              During 2001 and 2000, revenue from one customer amounted to
              approximately 10% and 50.0%, respectively. The customer was not
              the same in the two years.

         K.   Net (loss) per share of common stock

              Net (loss) per share of common stock is computed by dividing net
              (loss) by the weighted-average number of common shares outstanding
              for the year.

         L.   Income taxes

              The Company reports income for tax purposes on the cash basis.
              Deferred taxes result from temporary differences and the net
              operating loss carryforward. An allowance for the full amount of
              the gross deferred tax asset has been established due to the
              uncertainty of utilizing the deferred tax asset in the future.

Note 3 - Cash

         The Company has a money market account with a balance of $1,725,448 at
         December 31, 2001. The Company has not experienced any losses on such
         balances.

Note 4 - Investments

         In 2001 the Company agreed to accept 9,800,000 shares of common stock
         of its largest contract customer in full and final payment on the work
         completed to date on the contract. The fair market value at the date
         the common stock was transferred was $130,770. The fair market value of
         the investment decreased by approximately $65,470 at December 31, 2001.
         Accordingly, the value of the investment has been adjusted to $65,307
         at December 31, 2001.

         The effect of the settlement under the contract has resulted in an
         adjustment to contracts in progress in excess of billings of $216,880
         (note 14).




                                      F-10
<PAGE>

                               ACTIVEWORLDS CORP.

                   Notes to Consolidated Financial Statements


Note 5 - Deferred revenue

         Deferred revenue consists of the following at December 31, 2001:

                      Deferred memberships            $      71,293
                      Advances on royalties                  24,227
                      Deferred licenses                      90,145
                                                      -------------

                                                      $     185,665
                                                      -------------

Note 6 - Capital lease

         The Company leases equipment under a capital lease which will expire in
         2002. Annual payments are applicable first to interest (at 6.3%) with
         the balance to principal.

         At December 31, 2001, future minimum payments are: 2002 (final year) -
         $878. The amount representing interest was $13, and the present value
         of net minimum lease payments was $890.

         At December 31, 2001, the cost and accumulated depreciation of the
         leased equipment were $29,088 and $17,918, respectively.

Note 7 - Issuance of common stock

         Public offering

         In May 2000, the Company issued 1,260,000 shares of its common stock in
         a public offering and received $4,819,500 of proceeds after deducting
         underwriter's discount but before deducting offering related expenses.
         The offering was for 1,260,000 units. Each unit consisted of one share
         of common stock and a Series B redeemable common stock purchase warrant
         to purchase one share of common stock at $4.675 per share. In
         connection with this offering, the underwriters were granted a unit
         purchase option to purchase 126,000 units at $7.0125. Each unit
         consists of a share of common stock and a warrant to purchase a share
         of common stock at $4.675.

Note 8 - Stock options and warrants

         Stock options

         In 1999, the Company established a qualified Stock Incentive Plan for
         its employees. From time to time, the Company issues non qualified
         stock options to independent contractors and others.

         Statement of Financial Accounting Standards No. 123 ("SFAS 123") allows
         the Company to account for stock-based compensation, including options,
         granted to employees under the provisions of Accounting Principles
         Board Opinion No. 25 ("APB 25") and disclose in a footnote the pro
         forma effect on net income (loss) if the fair value accounting method
         of SFAS 123 had been used.



                                      F-11
<PAGE>

                               ACTIVEWORLDS CORP.

                   Notes to Consolidated Financial Statements

         The methodology used in estimating the fair value of the stock options
         was the Minimum Value Method adjusted for the facts and circumstances
         of the stock option agreements. Significant assumptions included a risk
         free interest rate of 6% and an expected life of one year. The value of
         the options issued after January 22, 1999 is determined based on the
         fair value of the stock traded at the date granted.

         During 2000, four employees were granted a total of 177,000 stock
         options under the Company's Stock Incentive Plan. During 1999, the
         Company granted incentive stock options to purchase 259,667 shares to
         employees under the Stock Incentive Plan with an exercise price equal
         to the fair value of the publicly traded stock at the date the options
         were granted. Additionally, 18,666 incentive stock options were granted
         to officers at 10% above fair value. The options expire either five
         years or ten years from the grant date under the Plan.

         In 2000, the Company entered into an agreement with an individual to
         become a board member. The individual was granted 120,000 options to
         purchase stock at an exercise price of $1.00, fair value of the
         publicly traded stock at the date the option was granted.

         During November and December 1999, the Company entered into agreements
         with two individuals to become members of the Board of Directors. By
         agreeing to serve as a member of the Board of Directors, they were
         granted options to purchase 100,000 and 146,667 shares of the Company's
         common stock at an exercise price of approximately $6.09. The director
         who was granted 100,000 shares in 1999 was granted an additional 46,000
         options to purchase the Company's common stock at an exercise price of
         $3.125, in 2000.

         In 2001, six employees were granted a total of 92,000 stock options
         under the Company's Stock Incentive Plan. The exercise price was the
         fair value of the stock at the date of the grant but not less than
         $1.00.

         During 2001 the Company entered into an agreement with an individual to
         become a board member. The individual was granted options to purchase
         100,000 shares of common stock at an exercise price of $1.00. The fair
         value of the publicly traded stock at the date the option was granted
         was less than $1.00.

         In 2001, the Company entered into a consulting agreement with an
         existing board member. Under the agreement the board member was granted
         options to purchase 100,000 shares of common stock at an exercise price
         of $1.00. The fair value of the publicly traded stock at the date the
         option was granted was less than $1.00.

         In 2001, the Company granted 6,000 options to contractors to provide
         services with exercise prices ranging between $1.10 to $1.25. The fair
         value of the publicly traded stock at the date the options were granted
         was less than $1.00.



                                      F-12
<PAGE>

                               ACTIVEWORLDS CORP.

                   Notes to Consolidated Financial Statements


         Under APB 25, no compensation was recognized in the consolidated
         financial statements for the value of the stock options issued to
         employees as the exercise price was equal to or in excess of the
         estimated fair value of the Company stock at the time of grant. Pro
         forma information as if SFAS 123 had been used is not presented, as the
         pro forma compensation amounts are immaterial.

         The table below sets forth information as to options granted in 2001
         and 2000:


<TABLE>
<CAPTION>
                                                            Number            Weighted         Number of Shares        Weighted
                                                           of Shares           Average         Under Option in          Average
                                                             Under            Exercise          Excess or Less        Fair Value
                                                            Option              Price           Than Fair Value          Price
                                                        ---------------     ---------------     ---------------     ---------------

<S>                                                     <C>                 <C>                 <C>                 <C>
                 Outstanding at January 1, 2000                 879,572     $          4.15              45,889     $          3.35

                 Granted during the year                        469,000                4.34                --
                 Exercised during the year                         --                  --                  --
                 Expired during the year                           --                  --                  --
                                                        ---------------                         ---------------
                   Outstanding at December 31, 2000           1,348,572                3.26              45,889                4.53
                                                        ---------------                         ---------------

                 Granted during the year                        299,000                 .76               5,000                 .77
                 Exercised during the year                         --                  --                  --
                 Expired during the year                       (110,666)               (.97)               --
                                                        ---------------                         ---------------
                   Outstanding at December 31, 2001           1,536,906                3.35              50,889                4.41
                                                        ---------------                         ---------------

                 Exercisable at December 31, 2001               988,638                3.11              45,889                5.81
                 Exercisable at December 31, 2000               555,039                2.67              34,691                5.34
</TABLE>

         The shares under options at December 31, 2001 were in the following
         exercise price ranges:

<TABLE>
<CAPTION>
                                                                             December 31, 2001
                                          ---------------------------------------------------------------------------------------
                                                          Options Outstanding                      Options Currently Exercisable
                                          ---------------------------------------------------   ---------------------------------
                                                                Weighted         Weighted                            Weighted
                                                                 Average         Average                              Average
                                              Number            Exercise        Contractual         Number           Exercise
                      Exercise Range        of Options            Price            Life           of Options           Price
                 ----------------------   ---------------   ---------------   ---------------   ---------------   ---------------
                                                                                (in years)

<S>                                       <C>               <C>               <C>               <C>               <C>
                        $-0- - $6.75            1,275,007   $          2.49                 8           796,739   $          2.12
                        $6.76- $13.12             261,899              8.22                 5           191,899              9.51
                                          ---------------                                       ---------------
                                                1,536,906                                               988,638
                                          ---------------                                       ---------------
</TABLE>




                                      F-13
<PAGE>

                               ACTIVEWORLDS CORP.

                   Notes to Consolidated Financial Statements


         Warrants

         In May 1999, the Company issued to an investor a warrant to purchase
         166,667 shares of common stock at $8.55 per share. The warrant was
         issued in consideration of the waiver by the investor of registration
         and other rights the Company had granted in connection with its
         services relating to the 1999 Acquisition. On April 25, 2000 the
         investor transferred and gave back to the Company, without recourse,
         the warrant.

         In 2000, 325,000 warrants were granted in accordance with the terms of
         agreements for marketing and financial services. The warrants were
         granted at the fair value at the time the agreements were signed.

         In 2001, 50,000 warrants were granted for marketing services. The
         warrants were granted at an exercise price of $3.00 which exceeded the
         fair value of the stock at the time of the agreement. The contract
         allows the service provider to purchase the Company's stock in lieu of
         receiving payment on services provided at $1.00 per share with a
         maximum purchase of 2,500 shares of stock per month. No shares were
         issued as of December 31, 2001. The agreement expires in March 2002.
         Upon completion of the contract the service provider will receive
         another 50,000 warrants with an exercise price of $3.00 per share.

         Warrants outstanding as of December 31, 2001 are as follows:

<TABLE>
<CAPTION>
                                                              Date             Exercise            Exercise           Shares under
                               Description                  Granted              Price              Period              Warrant
                  ----------------------------------    ---------------     ---------------     ---------------     ---------------

<S>                                                     <C>                 <C>                 <C>                 <C>
                  Marketing services                               4/99     $          3.80                4/04             166,667
                  Financial services                               5/99                5.70                5/04          *  166,667
                  Services in connection with
                   private placement                               6/99                5.70                6/04             119,999
                  Placement agent warrants                         6/99           8.55-8.52                6/04          *   22,560
                  Public offering                                  5/00               4.675                5/05           1,260,000
                  Underwriter unit purchase warrants               5/00               4.675                5/05             126,000
                  Marketing and financial services                 8/00               1.187                8/05             300,000
                  Marketing services                               9/00                1.40                9/05              25,000
                  Marketing services                              10/01                3.00               10/06              50,000
                                                                                                                    ---------------

                                                                                                                          2,236,893

                  Cancellations                                                                                            (189,227)
                                                                                                                    ---------------
                  Outstanding at December 31, 2001                                                                        2,047,666
                                                                                                                    ---------------
</TABLE>


            * Warrants cancelled in connection with May 2000 public offering

         The estimated value of stock warrants during 2001 and 2000 ranged
         between $.76 and $.185. The expense recognized for compensation and
         services for these stock warrants granted in 2001 and 2000 was $51,399
         and $19,750, respectively.




                                      F-14
<PAGE>

                               ACTIVEWORLDS CORP.

                   Notes to Consolidated Financial Statements

Note 9 - Treasury stock

         In August, 2000 the Company announced a repurchase plan of up to
         450,000 shares of common stock. At December 31, 2001, treasury stock is
         shown at a cost of $118,403, which represents 87,527 shares of common
         stock purchased during August, September and October 2000.

Note 10 - Operating leases

         Through March, 1999 the Company leased office facilities in
         Newburyport, Massachusetts under a tenant-at-will lease agreement
         requiring sixty days' advance notice of vacancy. In March, 1999 the
         Company entered into a lease for office space with a 3 year term and a
         3 year renewal period. The annual minimum rental payments under the
         lease is approximately $31,500.

         Additionally, the Company leased vehicles in 1999 on three year
         operating leases. One vehicle's lease expired in 2001 and another lease
         was initiated for 39 months.

         The Company also leases telephone equipment. The lease expires in
         February 2002.

         The future minimum rental payment under all operating leases are as
         follows (including the 3 year renewal period on the lease for office
         space):

                               Year Ending
                               December 31                     Amount
                            ------------------            --------------

                                  2002                    $       11,709
                                  2003                             4,644
                                  2004                             1,548
                                                          --------------

                                       Total              $       17,901
                                                          --------------

         Rent expense for 2001 and 2000 was $46,697 and $43,614, respectively.

Note 11 - Income taxes

         At December 31, 2001, the Company has a net operating loss carryforward
         of approximately $3,617,000 that may be used to offset future taxable
         income. If not used, the carryforward will begin to expire with the
         year 2018. The temporary difference for income tax reporting on a cash
         basis results in additional losses of approximately $703,000.

         An allowance has been established for the full amount of the gross
         deferred tax asset due to the uncertainty of utilizing the deferred
         taxes in the future.


                                      F-15
<PAGE>

                               ACTIVEWORLDS CORP.

                   Notes to Consolidated Financial Statements


         The tax effect of each type of temporary difference and carryforward is
         reflected in the following table as of December 31, 2001:

<TABLE>
<CAPTION>
<S>                                                                                                           <C>
                 Net operating loss carryforward                                                              $   1,113,900
                 Accrual basis versus cash basis tax reporting                                                      333,100
                                                                                                              -------------
                 Deferred tax asset before valuation allowance                                                    1,447,000
                 Valuation allowance                                                                             (1,447,000)
                                                                                                              -------------

                 Net deferred tax asset                                                                       $        --
                                                                                                              -------------
</TABLE>

         The effective combined Federal and State tax rate used in the
         calculation of the deferred tax asset was 40%.

         The operating loss carryforward is available to reduce Federal and
         State taxable income and income taxes, respectively, in future years,
         if any. The realizability of deferred taxes is not assured as it
         depends upon future taxable income. However, there can be no assurance
         that the Company will ever realize any future cash flows or benefits
         from these losses.

         Permanent book/tax differences result from the value of the services of
         two officers and an employee which was accrued for financial statement
         purposes but which is not deductible for income tax purposes. These
         permanent book/tax differences are not reflected in the net deferred
         tax asset.

Note 12 - Net (loss) per share of common stock

         The number of shares on which the basic net (loss) per share of
              common stock has been calculated is as follows:

                                                            Weighted Average
                            Year Ended December 31,         Number of Shares
                          ---------------------------     --------------------

                                     2001                       8,160,899

                                     2000                       8,160,899

         Diluted net (loss) per share of common stock has not been presented for
         2001 and 2000 since the effect of including the stock options and
         warrants outstanding during these years (note 8) would be antidilutive.

Note 13 - Related party transactions

         An officer/stockholder of the Company has received advances from the
         Company during 1998. Advances to the officer/stockholder outstanding at
         December 31, 2001 and 2000 totaled $-0- and $10,490, respectively.


                                      F-16
<PAGE>

                               ACTIVEWORLDS CORP.

                   Notes to Consolidated Financial Statements


         In 2001 and 2000, two members of the Board of Directors received annual
         compensation of $15,000 and $24,000, respectively. A third member was
         added to the Board of Directors in December 2000. The member was to
         receive annual compensation of $15,000, however he resigned during
         2001.

         In 2001, a new member was added to the Board of Directors, with an
         annual compensation of $15,000. The board member also provided
         consulting services during 2001 in the amount of $27,761 and received
         100,000 stock options under the agreement exercisable at $1.

         The Company also entered into an agreement during 2001 with a board
         member to provide consulting services. The consultant was paid $4,500
         during 2001. Under the agreement the consultant also received 100,000
         stock options exercisable at $1.

         The wives of two officers/stockholders were employed by the Company as
         of December 31, 2001.

         Reference is also made to notes 2G, 8 and 14.

Note 14 - Commitments and contingencies

         A.   Software development contract

              On October 9, 1999 the Company entered into an agreement with a
              customer to develop software for use in operating a virtual
              shopping mall. The term of the agreement is four years. The total
              amount of the contract is for no less than $1,000,000 but no more
              than $1,500,000. Additionally, the Company will receive a fee
              equal to 1% of the revenue collected by the customer for the
              virtual shopping mall once it is operational. In 2000 the Company
              recognized revenue of $376,662 on the contract. In 2001, the final
              phase of the contract was completed and no further work on the
              contract is anticipated in the near future. The Company received
              stock in lieu of payment for the third phase under the contract.
              No further work is anticipated in the near future. Accordingly,
              amounts accumulated under the percentage-of-completion method of
              accounting were adjusted to reflect the essential completion of
              the contract.

         B.   Employment contracts

              Effective January 21, 1999, the Company entered into three-year
              employment agreements with its president and chief financial
              officer. Under the agreements annual compensation for each is
              $140,000. Additionally, the president and chief financial officer
              each were granted options to purchase up to 9,333 shares of the
              Company's common stock at an exercise price of $.83 per share. The
              agreements also provide for the president and chief financial
              officer to be eligible to participate in a bonus pool of not more
              than 10% of income before taxes, in excess of $750,000. A
              compensation committee will have sole discretion as to the
              allocation of the bonus pool among the senior executives. The
              bonus is not cumulative during any fiscal year.

              Each agreement contains a provision whereby if the Company
              breaches the provisions of the agreement, if the employee
              terminates the agreement for "good reason" or if the Company
              terminates the employee other than for cause (as defined in the
              agreement), the employee shall be entitled to payment equal to the
              lesser of (a) one year's salary and bonus for the period of
              employment prior to calendar year in which termination occurred;
              or (b) the salary due for the balance of the term plus a pro rata
              portion of the bonus paid to the employee for the previous year.


                                      F-17
<PAGE>

                               ACTIVEWORLDS CORP.

                   Notes to Consolidated Financial Statements


              Effective February 12, 1999, the Company entered into a five-year
              employment agreement with the Company's lead programmer. Under the
              agreement, annual compensation starts at $100,000, increased
              annually by 10% of previous year's salary. Additionally, the
              employee was granted options to purchase up to 116,667 shares of
              the Company's common stock at an exercise price of $9.19 per
              share.

         C.   Revenue Sharing Agreement - litigation

              During 2000 the Company entered into an agreement with an internet
              on-line service provider to promote and market the Activeworlds
              Corp. services to the service provider's members. The term of the
              agreement was one year. Revenue from new members generated under
              the agreement is shared equally. The agreement requires
              Activeworlds Corp. to make four quarterly installments in the
              amount of $112,500 each as a guarantee against future revenues
              earned from memberships derived from the on-line service provider.
              As of December 31, 2001, the Company made three installments in
              the total amount of $337,500. Approximately $18,039 and $3,100 was
              received from memberships under the contract as of December 31,
              2001 and 2000, respectively. The contract expired in 2001. The
              Company is currently in litigation regarding adjustments to the
              contract due to the lack of registrations received under the
              agreement. At this time the outcome of the litigation process
              cannot be determined.

         D.   Marketing services

              In 2000, the Company entered into a contract with two consultants
              to provide marketing services. Under the agreements, the
              consultants are to provide the Company with prospective customers
              to utilize the products and services of the Company. The
              consultants will receive a consulting fee and/or stock options in
              the event the prospective customers become customers. The
              contracts expired on December 31, 2001. As of December 31, 2001,
              the Company did not enter into an agreement with a prospective
              customer provided by the consultants.

         E.   Retirement plan

              The Company has a defined contribution retirement plan for all
              eligible employees. The Company has contributed $62,272 and $-0-
              to the plan on behalf of the employees in 2001 and 2000,
              respectively.

Note 15 - Subsequent events

         The Company has entered into preliminary discussions with
         NetBroadcaster.com Inc. to merge both businesses. Activeworlds Corp.'s
         intent is to acquire all the issued and outstanding capital stock of
         NetBroadcaster.com Inc. in exchange for shares of common stock of
         Activeworlds Corp. The merger is intended to be a reorganization within
         the meaning of Section 368(a) of the Internal Revenue Code, as amended.


                                      F-18