Item 2. Management's Discussions and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

When used in this form 10-Q and in future filings by the Company with the Commission, the words or phrases such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "predict," "project," "will" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Readers are cautioned not to place undue reliance on any such forward looking statements, each of which speak only as of the date made. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company has no obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect anticipated or unanticipated events or circumstances occurring after the date of such statements.

These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different. These factors include, but are not limited to, changes that may occur to general economic and business conditions; changes in current pricing levels that we can charge for our services or which we pay to our suppliers and business partners; changes in political, social and economic conditions in the jurisdictions in which we operate; changes to regulations that pertain to our operations; changes in technology that render our technology relatively inferior, obsolete or more expensive compared to others; foreign currency fluctuations; changes in the business prospects of our business partners and customers; increased competition, including from our business partners; delays in the delivery of broadband capacity to the homes and offices of persons who use our services; general disruptions to Internet service; and the loss of customer faith in the Internet as a means of commerce.

The following discussion should be read in conjunction with the unaudited financial statements and related notes which are included under Item 1.

We do not undertake to update our forward-looking statements or risk factors to reflect future events or circumstances.

Overview

General

Worlds.com is a leading 3D entertainment portal which leverages its proprietary technology to offer visitors a network of virtual, multi-user environments which we call "worlds". These worlds are visually engaging online environments featuring animation, motion and content where people can come together and, by navigating through the website, shop, interact with others, attend events and be entertained.

Sites using our technology allow numerous simultaneous visitors to enter, navigate and share interactive "worlds". Our 3D Internet sites are designed to promote frequent, repeat and prolonged visitation by users by providing them with unique online communities featuring dynamic graphics, highly useful and entertaining information content, and interactive capabilities. We believe that our sites are highly attractive to advertisers because they offer access to demographic-specific user bases comprised of people that visit the site frequently and stay for relatively long periods of time.

Starting in mid-2001 we were not able to generate enough revenue to sustain full operations and other sources of capital were not available. As a result, we have had to significantly curtail our operations since that time and at times halt them all together.

Revenues

We generated a minimum amount of revenue during the quarter even though we have begun ramping up operations which have been in quasi hibernation since mid-2001. The revenue that was generated in the quarter was generated in the following manner:

· VIP subscriptions to our Worlds Ultimate 3-D Chat service.

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Expenses

We classify our expenses into two broad groups:

o cost of revenues; and

o selling, general and administration.

During the quarter, our operations became more active so our expenses increased.

Liquidity and Capital Resources

We have had to severely diminish our operations from mid-since 2001 until the last half of 2007 due to a lack of liquidity. We were able to issue equity in the last year and raise capital that will help us to be better positioned to compete for new business. We continue to pursue additional sources of capital. We have no current arrangements with respect to, or sources of, additional financing and there can be no assurance that any such financing would become available. If we cannot start to generate sufficient revenues, we may need to halt operations.

RESULTS OF OPERATIONS

Our net revenues for each of the three months ended March 31, 2009 and 2008 were $494 and $91,099, respectively. Management believes that this decrease was due to the software development project in 2008 to provide a demo 3-D world for a client.

Three months ended March 31, 2009 compared to three months ended March 31, 2008

Revenue decreased by $90,605, to $494 for the three months ended March 31, 2009 from $91,099 in the prior year. The business has been running in a severely diminished mode due to the lack of liquidity. We need to raise a sufficient amount of capital to provide the resources required that would enable us to generate sales.

Our cost of revenues during the three months ended March 31, 2009 and 2008 are primarily comprised of (1) cost of goods sold: 51% and 45%, respectively, and
(2) selling general and administrative expenses: 49% and 55%, respectively. Cost of sales on a consolidated basis increased $35,247 to $124,795 for the three months ended March 31, 2009, from $89,548 in the three months ended March 31, 2008, reflecting the increased business activities from the new development projects and upgrading the code.

Selling general and administrative expenses increased by approximately $8,636, from $109,505 to approximately $118,141 for the three months ended March 31, 2008 and 2009, respectively. The balances increased slightly due to our operations and selling activities increasing.

As a result of the foregoing we had a net loss of $242,441 for the three months ended March 31, 2009 compared to a loss of $107,955 in the three months ended March 31, 2008.

Liquidity and Capital Resources

Our financial and liquidity position deteriorated as exhibited by our cash and cash equivalents of $25,370 at March 31, 2009. At March 31, 2008, cash and cash equivalents was $192,374. This decrease of $167,004 was the result of our net losses from operations. There were no capital expenditures in the three months ended March 31, 2009 compared to $1,516 for 2008.

Historically, our primary cash requirements have been to fund the cost of operations, development of our products and patent protection, with additional funds having been used in promotion and advertising and in connection with the exploration of new business lines.

We have had to severely diminish our operations due to a lack of liquidity from mid-2001 through most of 2007. We were able to find a small source of additional capital in 2007 and another in 2008. There can be no assurance that any significant financing would become available to us at this time. The additional capital that we secured in previous years enabled us to bid on new business. There can be no assurance that any such new business would be sold in the future.

We have commenced litigation to enforce our intellectual property rights under our patents. If we are successful in the litigation, we expect to collect compensation for past fringement and license fees. No assurance can be given that we will be successful in the litigation or that we will receive any funds as a result of the litigation.

We are currently negotiating with various musical artists and other entities to develop worlds for them. While no assurance can be given that any of these deals will be concluded, if successful they would likely generate additional cash flows.

On May 11, 2009, our management concluded that our audited financial statements for the years ended December 31, 2007 and 2008 and our unaudited quarterly financial statements for the quarterly periods in such years should no longer be relied upon. Specifically, our liabilities were understated by approximately $1,714,179 on December 31, 2007 and by approximately $2,719,942 on December 31, 2008 (which amount is cumulative and includes the amount understated in 2007) with an overstatement of income on such dates of $1,714,179 and $1,005,763, respectively. The facts underlying our original conclusion is that all of such liabilities have exceeded the applicable statutes of limitations and based upon an opinion of counsel which stated that the likelihood of our having to pay these liabilities was highly improbable, our independent auditor concurred with our decision to write off all of such liabilities. The staff ("Staff") of the Securities and Exchange Commission, without disagreeing with our position that payment of such liabilities was highly improbable, advised us that under the facts of our situation, it was their conclusion that GAAP accounting required that the liabilities not be written off at this time. Following a series of calls with various Staff members, our management, in consultation with our counsel and independent auditor, agreed to accept the Staff's position. We have received guidance from the Staff as to the necessary steps we need to take to properly write off these liabilities and we expect to begin that process with certain of the largest creditors. Regardless of whether we are ultimately successful in writing off all or some of these liabilities, we do not believe that these restatements will have any impact on our results of operations or cash flows as the fact remains that the statute of limitations has indeed passed with respect to these liabilities and the likelihood of our having to pay them remains highly improbable.