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


                                   FORM 10-K
(Mark One)

[X]  Annual report pursuant to section 13 or 15(d) of the Securities Exchange
     Act of 1934 for the fiscal year ended December 31, 1999 or

[_]  Transition report pursuant to section 13 or 15(d) of the Securities
     Exchange Act of 1934 [No Fee Required] for the transition period from
     _________________ to _________________

                        Commission file number 0-24953
                                               -------

                        FIRSTWORLD COMMUNICATIONS, INC.
--------------------------------------------------------------------------------
            (Exact name of registrant as specified in its charter)

           DELAWARE                                   33-0521976
           --------                                   ----------
(STATE OR OTHER JURISDICTION OF         (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
 INCORPORATION OR ORGANIZATION)

                                ________________

                           8390 E. CRESCENT PARKWAY
                                   SUITE 300
                          GREENWOOD VILLAGE, CO 80111
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                   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
                                  (ZIP CODE)

                                (303) 874-8010
--------------------------------------------------------------------------------
             (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

--------------------------------------------------------------------------------
                 (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL
                      YEAR, IF CHANGED SINCE LAST REPORT)

                               ________________

Securities registered pursuant to Section 12(b) of the Act:   None

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

     Title of each class                 Name of exchange on which registered
------------------------------         ----------------------------------------
Series B common stock                  Not Applicable

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes  X    No
                                       ---      ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  [_]

As of January 31, 2000, the aggregate market value of the voting common equity
held by non-affiliates of the registrant was $117,381,013, based on the sale of
Series B common stock on February 10, 2000.

As of  January 31, 2000, the registrant's outstanding common stock  consisted of
10,135,164 of Series A common stock and 18,672,164 of Series B common stock,
each with a $.0001 par value.

                      DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III of this Report (Items 10, 11, 12 and 13)
is incorporated by reference from the registrant's proxy statement to be filed
pursuant to Regulation 14A with respect to the annual meeting of stockholders
scheduled to be held on June 12, 2000.

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                        FirstWorld Communications, Inc.
                                   Form 10-K
                               Table of Contents
<TABLE>
<CAPTION>

<S>      <C>                                                                                        <C>
Part     Item(s)                                                                                    Page
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I.       1 .     Business........................................................................     5
                   The Company...................................................................     5
                   Our Products and Services.....................................................     9
                   Our Customers.................................................................    11
                   Sales and Marketing...........................................................    12
                   Network Architecture and Technology...........................................    13
                   Information Technology and Support Systems....................................    14
                   Competition...................................................................    14
                   Governmental Regulation.......................................................    15
                   Intellectual Property.........................................................    19
                   Employees.....................................................................    19
         2.      Properties......................................................................    20
         3.      Legal Proceedings...............................................................    20
         4.      Submission of Matters to a Vote of Security Holders.............................    21
II.      5.      Market for Registrant's Common Equity and Related Stockholder Matters...........    21
         6.      Selected Financial Data.........................................................    24
         7.      Management's Discussion and Analysis of Financial Condition and
                   Results of Operations.........................................................    25
         7A.     Quantitative and Qualitative Disclosures About Market Risk......................    37
         8.      Financial Statements and Supplementary Data.....................................    38
         9.      Changes in and Disagreements with Accountants on Accounting and
                   Financial Disclosure..........................................................    38
III.    10.      Directors and Executive Officers of the Registrant..............................    38
        11.      Executive Compensation..........................................................    38
        12.      Security Ownership of Certain Beneficial Owners and Management..................    38
        13.      Certain Relationships and Related Transactions..................................    39
IV.     14.      Exhibits, Financial Statement Schedules and Reports on Form 8-K.................    39
                 Signatures......................................................................    43
                 Index to Consolidated Financial Statements......................................   F-1
</TABLE>

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ITEM 1.  BUSINESS

  Some of the statements contained in this Form 10-K are not historical facts,
including some statements made in the sections of this report entitled
"Business" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and are statements of future expectations and other
forward-looking statements. We use words such as expect, intend, plan, project,
believe, estimate and anticipate, and variations of these words and similar
expressions to identify such forward-looking statements. These statements are
based on management's current views and assumptions and involve known and
unknown risks and uncertainties that could cause actual results, performance or
events to differ materially from those expressed or implied in those statements,
including:

  .  the rate of expansion of our network and/or customer base;

  .  inaccuracies in our internal forecasts of communications traffic or
     customers;

  .  the loss of a customer or distributor that provides us with significant
     revenues;

  .  highly competitive market conditions;

  .  changes in or developments under laws, regulations, licensing requirements
     or telecommunications standards; and

  .  general economic conditions.

  The foregoing important factors should not be construed as exhaustive. We
undertake no obligations to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.

  In this Form 10-K, FirstWorld, we, us, our and the Company refer to FirstWorld
Communications, Inc. and its subsidiaries, unless the context otherwise
requires.  The term Enron refers to Enron Corp. and its direct and indirect
subsidiaries collectively, unless otherwise indicated.  The term Texas Pacific
Group refers to Texas Pacific Group and its affiliates.

The Company

  FirstWorld Communications, Inc. is a rapidly growing network-based provider of
Internet, data and communications services. Our service offerings include high-
speed Internet access, such as dedicated access and digital subscriber line
("DSL"); dial-up Internet access; web hosting and design; data center services
including co-location, access, application hosting and monitoring services; and
web integration and consulting services. To complement our data services
offerings, we also provide telephony services in selected markets. Beginning the
second half of 2000, we expect to begin earning revenue from e-commerce
solutions also. Our strategy is to offer our customers a single source solution
to meet a broad range of their increasingly complex Internet, data and
communications needs. We primarily market our services, using a consultative
sales approach, to small- and medium-sized businesses, and also selectively to
larger businesses, wholesale customers and consumers.

  Prior to 1998, we offered telephony and network construction services in the
Los Angeles metropolitan market. To capitalize on the growing demand for
Internet and data services, the fastest growing segment of the communications
industry, we made a strategic decision in 1998 to broaden our service offering,
emphasize Internet and data services and expand our market footprint. Since that
time, we have acquired eight companies and the customer base and certain assets
of a ninth company to enhance our Internet and data service offerings and expand
our market presence. In November 1998, we expanded into the Portland area by
acquiring Optec, Inc. doing business as FirstWorld Northwest, Inc. ("Optec"), a
company providing web integration services to businesses. In early 1999, we
entered the San Francisco Bay Area through the acquisition of two Internet
service providers, Accelerated Information, Inc. which is the parent of
Slip.Net, Inc. ("Slip.Net") and Sirius Solutions, Inc. d/b/a Sirius Connections
("Sirius"). We continued our market expansion with the acquisition of four
Internet service providers in June and July 1999, giving us a market presence in
Houston, Denver and Salt Lake City, and expanding our existing presence


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in Portland. In July 1999, we acquired Intelenet Communications, Inc.
("Intelenet"), an Irvine, California-based provider of data center and managed
services with operations in the Los Angeles basin and the Chicago metropolitan
area. Most recently, in January 2000, we entered the Dallas market by acquiring
the Internet customer base of FastLane Communications, Inc. Each of these
acquisitions is more fully discussed in "--Recent Acquisitions."

  We currently offer selected Internet and data services in the San Francisco,
San Diego, Portland, Denver, Houston, Salt Lake City, Dallas and Chicago
metropolitan markets and provide Internet, data and communications services in
the Los Angeles metropolitan market. We operate data centers in Glendale, San
Diego, Santa Clara, Irvine and Denver, totaling approximately 66,000 square
feet. We are in the process of expanding our service offering in each of the
markets we have entered in the last year to include a broad range of data
products and services. We plan to open data centers in each of the markets we
currently serve and intend to expand our service offerings into the Seattle
metropolitan market in 2000. The data centers we plan to open in 2000 will bring
our total operational data center space to over 290,000 square feet. As of
December 31, 1999, we had approximately 2,300 DSL lines, 1,300 dedicated access
lines, 55,100 dial-up accounts, 10,600 web hosting accounts, 325 web integration
customers and 1,200 telephony accounts.

  We deliver our services over a communications network that utilizes advanced
packet-switching technology and the communications protocol known as Internet
Protocol, or IP, that enables us to provide cost-effective services to our
customers. Our network combines equipment housed in our own facilities and
equipment interconnected to the incumbent local exchange carrier's central
office with redundant, high-speed connectivity to the Internet backbone. Key
components of our network architecture are our Internet data centers. These
centers house our own Internet platform, support our shared and dedicated server
hosting products and provide co-location space for our customers' equipment.

  As part of our acquisition of Optec, we acquired rights to use capacity to
connect up to 15 cities on a nationwide, long-haul fiber-optic network currently
under construction by Enron. We plan to expand into selected cities served by
the Enron network as cities on this network come on-line. In January 2000, Enron
advised us that capacity on this network is available in Portland, Los Angeles
and Salt Lake City. Enron is also obligated to deliver capacity to Denver,
Houston, Dallas and Miami.

  We have been certified as a competitive local exchange carrier in California,
Colorado, Oregon, Texas, Washington and Utah and have an application pending in
Illinois. We plan to seek certification in additional states as we expand our
services into new markets.

  We have presented information regarding our segments in Note 11-Business
Segments in the accompanying consolidated financial statements for the year
ended December 31, 1999.

  Industry Overview

  Data communications is the fastest growing segment of the communications
industry. The Internet, in particular, has emerged as one of the fastest growing
communications medium in history and is dramatically changing how businesses and
individuals communicate and share information. The Internet's rapid growth as an
essential communications medium has created a substantial market opportunity for
companies such as ours that provide Internet, data and communications services.
We believe we are well positioned to capitalize on this opportunity due to the
convergence of the following factors:

  .  Growing Demand for Single Source Internet and Data Solutions. Many
     companies, particularly small- and medium-sized businesses, lack the
     expertise, capital or personnel required to install, maintain and monitor
     their own web servers, web sites and access facilities. In addition, these
     businesses must contend with the cost and complexity of retaining multiple
     vendors for their data needs: Internet service providers for Internet
     access and web hosting, data center companies for co-location and data
     center services, and equipment integrators for network configuration and
     installation. We believe that these businesses can benefit from, and are
     increasingly demanding, a single source solution for their Internet and
     data requirements.

  .  Small- and Medium-Sized Businesses Expected to Fuel Growth. We believe that
     a significant portion of the growth in data communications will be
     generated by small- and medium-sized businesses, which we believe have
     traditionally been underserved by the larger communications providers. Data
     communications,

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    particularly through the Internet, have made it possible for smaller
    companies to compete more effectively with larger competitors by reducing
    their costs of communicating with employees, customers and suppliers.

  . Emergence of Third Party Co-location Services.   Internet infrastructure
    and applications platforms are complex and sensitive to environmental
    factors, such as temperature and power fluctuations. These factors, together
    with the need for increased bandwidth, have led many businesses to rely on
    third parties to house, monitor and maintain the equipment that supports
    their web sites, e-commerce platforms and other business-critical
    applications at secure climate controlled facilities. Housing these
    platforms at third-party sites also allows for easier maintenance and
    operation. In addition, by locating equipment in another provider's
    facility, customers can more easily increase their Internet capacity,
    allowing them to scale their presence more quickly.

    An increasing number of new businesses are conducting a significant portion
    of their operations on the Internet. These businesses have an expanding need
    for co-location space that allows them the flexibility to rapidly add
    additional servers as their businesses grow. Many of these companies are
    also building redundancy into their web presence by housing their equipment
    at multiple locations to protect against a network or server failure at any
    single location.

  . Increasing Demand for High-Speed Internet Access. The rapidly expanding
    number of Internet users and the growth in bandwidth-intensive applications,
    combined with the availability of reasonably priced high-speed access
    products, such as DSL, is increasing demand for high-speed Internet
    connections, particularly among small- and medium-sized businesses and
    individual consumers. Higher access speeds enable businesses to maintain
    complex web sites, including web sites that allow them to access critical
    business information, conduct electronic business, or e-commerce, and
    communicate more efficiently with business partners, customers and
    employees. Additionally, many companies are supporting increasing numbers of
    remote offices and workers who require high-speed access to network
    resources.

    Traditionally, small- and medium-sized businesses, telecommuters and
    individuals have relied on low speed lines for data transport. In the
    future, we believe there will be an increasing demand for high-speed
    connectivity as businesses, telecommuters and individuals seek solutions
    with higher data transmission speeds.

  . Trend Toward Outsourcing of Internet Operations.   Our customers are
    increasingly finding that investing in the resources and personnel required
    to maintain their web infrastructure is cost-prohibitive and extremely
    difficult given the shortage of technical talent and the risk of
    technological obsolescence. As a result of these factors, many small- and
    medium-sized businesses are seeking to outsource their web facilities and
    system needs, to focus on their core competencies. Demand for web hosting,
    co-location services and outsourced e-commerce solutions is expected to
    grow.

  The FirstWorld Solution

  We provide a variety of Internet, data and communications services, including
high-speed Internet access, web hosting and design, data center services, e-
commerce solutions and web integration and consulting services. To complement
our data services offerings, we also provide telephony services in selected
markets. Our strategy is designed to offer our customers a single source
solution to meet the full range of their increasingly complex Internet, data and
communications needs. We primarily market our services, using a consultative
sales approach, to small- and medium-sized businesses, and secondarily to larger
businesses, wholesale customers and consumers. We typically seek to bundle our
services, but our customers can select from the services we offer to tailor the
most appropriate solution for their needs. We believe the FirstWorld solution
offers a number of benefits to our customers including:

  . Single Source Data Solution. We currently provide a broad range of Internet
    and data services that allow our customers to effectively outsource their
    Internet and data needs to a single provider. Today, we believe most service
    providers provide a subset of the services that we offer and that we
    represent a new, single

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    source Internet and data solution. We differentiate our services from our
    competitors by providing our customers with sophisticated, integrated data
    solutions and superior customer service. In addition, we attempt to bundle
    our services which allows us to lower customer turnover, increase revenue
    per customer and lower customer acquisition costs.

  . Flexibility and Scalability.   We have designed our service offerings to
    enable customers to purchase the level of service, product set, access speed
    and functionality that meet their existing requirements while at the same
    time allowing them to easily upgrade services as their Internet and
    communications needs grow. We provide flexible service pricing, billing our
    customers according to their bandwidth and capacity utilization, as opposed
    to traditional flat-rate billing.

  . Small- and Medium-Sized Business Focus. Our primary target market is small-
    and medium-sized businesses, which we believe have traditionally been
    underserved by larger communications providers, have limited resources and
    are increasingly looking to outsource their Internet, data and
    communications requirements. Using a consultative sales approach, we work
    with small- and medium-sized businesses to solve the full range of these
    needs. These businesses typically lack the expertise to address all of their
    Internet, and data requirements in-house and are therefore best positioned
    to benefit from our solution.

  . Reliable and Secure Data Centers. We currently operate five data centers and
    are in the process of constructing six additional data centers to meet the
    growing demand for third party co-location services. Our data centers are
    technologically advanced facilities with redundant, high-speed connectivity
    to the Internet, uninterruptible power supplies, back-up generators, fire
    suppression, computer floors, separate cooling zones, seismically braced
    racks, 24 hours/7 days a week monitoring and high levels of security.
    Through these centers we offer our customers a secure environment in which
    to house their critical data communications equipment and obtain access to
    high bandwidth connectivity to the Internet.

  . High-Speed, Cost-Effective Internet Access.   We provide a full range of
    high-speed Internet access products from a wide range of DSL service options
    through DS-3 connectivity, allowing our customers to choose a cost-effective
    solution that fits their high-speed access needs. We also offer dial-up
    Internet access for those seeking entry-level connectivity and remote access
    services.

  . High Quality Service and Customer Support.   We strive to provide our
    customers with end-to-end solutions to their Internet, data and
    communications needs. An important part of our solution is to provide our
    customers with superior customer service and support. We believe that this
    differentiates us from many of our competitors, particularly larger service
    providers who have typically not focused on our market segment. By
    organizing a direct sales organization around customers and focusing on end-
    users' needs, we seek to attain a high level of customer satisfaction,
    achieve customer loyalty and accelerate the adoption of our services.

  Growth Strategy

  Our objective is to become a leading provider of a comprehensive range of
Internet, data and communications solutions. Key elements of our strategy
include:

  . Provide Single Source Internet and  Data Services.   We seek to provide a
    broad range of services to fulfill the Internet, data and communications
    requirements of our customers. We believe that "one-stop shopping"
    capabilities enable us to provide significant value to our customers and
    ultimately reduce customer turnover. As such, we are in the process of
    expanding our service offering in each of the markets we have entered. We
    believe that our focus on data solutions differentiates us from other
    communications companies, many of whom sell a limited number of data
    services, and enables us to attract customers with intensive Internet and
    data needs. We are also continuing to develop and expand our product set
    with services and features that have technologically advanced and value-
    added capabilities to serve the evolving needs of our customer base.


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  . Focus on Small- and Medium-sized Business Customers. We target primarily
    small- and medium-sized business customers. We believe these customers have
    traditionally been underserved by larger communications providers. In
    addition, many of them find it difficult and uneconomical to maintain their
    web infrastructure and are increasingly looking to outsource their Internet,
    data and communications requirements.

  . Employ Consultative Sales Approach and Superior Customer Care. Our sales
    personnel consult with our customers, offering them a broad array of
    products and services and tailored Internet, data and communications
    solutions to fit their business needs. Our direct sales force has been
    trained to sell a broad range of Internet, data and communications products.
    We believe that by actively consulting with customers to help them identify
    and implement their data communications initiatives, we develop close
    relationships with our customers, enhance customer retention and
    differentiate ourselves from our competitors.

  . Deploy Flexible, Cost-Effective Networks. To provide Internet, data and
    communications solutions, we are deploying an advanced integrated platform
    that utilizes standard, scalable resources and architecture components. We
    have designed our networks to support a wide array of services and to be
    compatible with technologies still under development in the industry. We use
    a demand-driven approach to network deployment, marketing our services to a
    geographically targeted cluster of businesses before committing to
    implementation of network infrastructure. Additionally, we seek to combine
    elements of our network with those of other service providers to offer a
    more cost-effective solution to our customers and expand our network reach.

  . Pursue a Focused Acquisition Strategy. To date, we have acquired eight
    companies and the customer base of a ninth to expand our Internet and data
    product offerings and geographic market presence. We expect to continue to
    pursue a strategy of acquiring Internet and data communications companies
    that increases the breadth of our product offering, accelerates our
    penetration into new markets and grows our customer base. By pursuing market
    entry through acquisitions, we can quickly acquire new customers in a given
    region, cross-sell additional data services to existing customers and
    enhance our network utilization. Our senior management team has significant
    experience in the acquisition and integration of businesses.

Our Products and Services

  We provide a wide range of Internet, data and communications products and
services that enable our customers to increase the speed, efficiency and
reliability of their communications. These products and services include:
Internet access services, including dial-up, ISDN, DSL and dedicated access;
data center services;   web hosting and design services; e-commerce solutions;
web integration and consulting services; and voice services. Our products and
services are designed to meet the evolving needs of our customers and to support
them as those needs grow, thus enhancing sales efficiency and lowering customer
turnover.

  Internet Access Services. We offer a variety of Internet access solutions,
providing customers with reliable access to the Internet. With access speeds
ranging from 56 kilobits per second for entry-level, dial-up customers to
dedicated services at 1.54 megabits per second (T-1) to 45 megabits per second
(DS-3) for large enterprise users and growing online businesses, we tailor our
Internet access offerings to meet the varying needs of our customers. Many new
customers are selecting advanced, high-speed access services such as DSL. DSL
services allow data transfer rates at speeds of up to 7.1 megabits per second
over existing copper telephone lines. Our access customers can also purchase our
enhanced web services, such as domain name registration, web hosting, additional
Internet protocol addressing, and multiple e-mail accounts. All of our customers
have access to technical support 24 hours a day, 7 days a week.

  Data Center Services.   We currently operate data centers in Glendale, Santa
Clara, San Diego, Irvine and Denver, totaling approximately 66,000 square feet,
and are constructing additional data centers in Dallas, San Francisco, Irvine,
Salt Lake City, Portland and Houston to meet the growing demand for third-party
co-location services. These new centers will bring our total operational data
center space to over 290,000 square feet. We also provide data center services
in the Chicago area using leased facilities. Our data centers house our
Internet, data and

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packet-switching equipment and provide space for our customers to co-locate
their own equipment. These facilities provide a secure, monitored environment,
coupled with high-speed connectivity to the Internet. Our data centers have a
number of features designed to assure continuous, reliable service, including
uninterruptible power supplies, back-up generators, fire suppression, computer
floors, separate cooling zones and, where required, seismically braced racks.
These centers are monitored 24 hours a day, 7 days a week. We plan to open data
centers in each of our markets to offer our customers a broad range of data
center services.

  Our data center customers require the higher performance, reliability and
security associated with housing their equipment at a third-party custom data
center. Customers have physical access to the equipment they co-locate in our
facilities 24 hours a day, 7 days a week and remote access for software
maintenance and administration. Specialized services are also available for
those customers who want us to manage and administer their co-located hardware
or software.

  We support most leading Internet hardware and software platforms, including
Ascend, Check Point Software, Cisco, Compaq, EMC, Lucent, Microsoft, Netscape
and Sun Microsystems. In addition, we can host a variety of software
applications in our data centers, making them available to customers in a secure
environment and with direct connectivity to the Internet. Standard applications
include advanced e-mail services, e-commerce applications, HTML development,
security and firewall services, remote monitoring and backup and web authoring.

  We are also providing application hosting services in our data centers. We
currently have agreements with Microsoft and Onyx Software to host some of their
software applications.

  Web Hosting and Design. We offer a variety of shared and dedicated web hosting
services that allow customers to create and maintain high quality, sophisticated
Internet sites without purchasing, configuring, maintaining and administering
the necessary hardware, software and Internet connectivity that would be
necessary if they were to create and host the sites themselves.

  Our shared web hosting services, targeted to small- and medium-sized
businesses, can be rapidly deployed and include standard levels of storage on
our servers and data transfer bandwidth that can be increased to accommodate our
customers' expanding needs.  Additional development tools, such as Microsoft
FrontPage extensions, server-side scripting and custom interfaces, give
customers the ability to grow their Internet business. We also offer utility
programs that enable customers to control, maintain and update their sites
remotely, monitor site performance, create reports on site activity, check
billing information and evaluate the overall performance of their web site. All
shared hosting servers have regular back-up and recovery procedures to protect
customer files and are monitored with the same systems that we use to monitor
our own network systems and transport backbone.

  Our dedicated server web hosting services are targeted to customers desiring
substantially more server and network capacity or for customers desiring their
own physical server. We support the two most common operating systems, Windows
NT and UNIX. Our customers can create and support applications that are more
complex, require higher throughput, and have greater storage requirements while
still outsourcing the maintenance and monitoring of their site and equipment. In
addition, we can typically create and configure these platforms within several
business days. Customers can control and monitor these dedicated servers with
all the same tools that are available for our shared hosting customers.

  E-commerce Solutions.   Our e-commerce products and services are designed to
enable our customers to easily design a web site that allows them to sell their
products and services on-line and execute electronic transactions. We have
licensed advanced e-commerce software from Intershop that provides an
application platform that allows our customers to establish their own e-commerce
sites without the significant capital investment and expert personnel usually
required in e-commerce web site creation. Using our application platform, a
customer can quickly create an e-commerce site that includes product
descriptions, graphics, a credit card transaction system, security, encryption
and back-end marketing support utilities. Additionally, we have the ability to
create custom web sites for our larger customers requiring features or
functionality not available from our standard Intershop package. Custom service
offerings are typically priced on a per-hour basis.


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  Web Integration and Consulting.   As part of our acquisitions of Optec and
Intelenet, we acquired considerable expertise in planning, designing and
implementing advanced network solutions. These solutions include high-speed
Internet access, router and server design and configuration, and security and
operational support systems. Our services include client/server consulting,
implementation, support services, network management and monitoring and
equipment sales. For high-end customers needing sophisticated network solutions,
such as large enterprise customers, corporate or regional headquarters locations
and state and local government agencies, we have a consulting practice that
provides an integrated solution to complex communications problems.

  Our web integration services involve enterprise network design and consulting,
specification, purchase, installation and maintenance of servers, routers and
related infrastructure. We provide these web integration and consulting services
to complement our existing products and services in selected markets. While we
believe that offering web integration and consulting services will provide us
with access to a broader customer base, we expect consulting and equipment sales
to decrease as a percentage of total revenue in the future as we grow our data
services offerings.

  Telephony Services. We currently offer telephony service in the Los Angeles
metropolitan market, including local, long distance and private line services.

Our Customers

  We market our services primarily to small- and medium-sized businesses. We
also selectively market our services to larger businesses, consumers and
wholesale customers. We employ a market segmentation strategy, which involves
tailoring our service offerings, sales and marketing techniques and network
deployment to meet the varying needs of small- and medium-sized businesses,
larger businesses, consumers and wholesale customers. Our consulting, sales and
marketing initiatives and tailored product offerings are designed to reflect the
varying customer buying patterns and address competitive factors in our target
market.

  Small- and Medium-sized Businesses. Small- and medium-sized businesses
typically have between two and 1,000 employees and often access the Web using
slower speed dial-up access, or have no Internet access at all. Many of these
businesses maintain either a very limited web site, or none at all, and an
extremely small percentage of these businesses are conducting e-commerce. We
believe we add significant value to small- and medium-sized business customers
by offering them a broad range of Internet and data services. Moreover, we
believe our ability to understand customers' needs through consultative sales
efforts and to meet those needs through bundled service offerings will enhance
our reputation for value and ultimately result in additional revenues.

  Major Accounts.   Major accounts include larger businesses as well as
companies whose primary activities take place on the Web. We believe that these
customers are increasingly looking to outsource the housing of the equipment
that supports their web site, e-commerce platform and content applications, as
well as the monitoring and maintenance of this equipment, at secure,
environmentally sound third-party locations. Our data center services offer
these customers a variety of solutions to meet their needs.

  Wholesale.   We market our wholesale product line primarily to Internet
service providers and other service providers such as web developers and content
providers. Our primary wholesale service offerings include products such as
dial-up, DSL and dedicated access, as well as co-location services and dedicated
Internet services. We believe that smaller service providers will continue to
find it cost effective to purchase services on a wholesale basis from larger
providers such as FirstWorld. Additionally, these accounts allow us to leverage
the fixed cost components of our network by adding traffic quickly to our
network.

  Consumer.   Consumer customers are individual, home office and single employee
businesses requiring services that range from dial-up access to broadband DSL
access to value-added Internet services, such as e-mail applications, web
hosting and design, basic e-commerce and file transfer services. We believe that
these customers will increasingly demand higher speed access and more
sophisticated web functionality and will look to their Internet provider to
facilitate such services.

                                       9
<PAGE>

Sales and Marketing

  We market our services primarily through our direct sales force, employing a
consultative approach. We believe that our direct sales strategy allows us to
develop close relationships with our customers and manage the sales and service
process more effectively. Small- and medium-sized businesses, in particular,
often do not have a dedicated, in-house communications manager and consequently
prefer to purchase services from an integrated or a single source solution
provider. As a result, we believe that our ability to provide a comprehensive
range of Internet and data solutions and act as an experienced consultant is
attractive to our current and potential customers. We have also developed a
sales methodology and a training program that we believe to be a key ingredient
in our ability to successfully compete for the data communications requirements
of our customers.

  Direct Sales Channels

  Our direct sales force consists of:

  . Account Managers.   Account managers focus on selling our end-to-end
    Internet and data services to small- and medium-sized businesses. Account
    managers qualify customer leads and establish initial appointments. Account
    managers are supported by sales engineers who assist in pre- and post-sale
    technical consulting. Sales managers and regional sales directors also
    provide local sales leadership to the account teams in each market.

  . National Account Managers.   National account managers focus on selling our
    services to larger accounts, typically technology intensive businesses with
    multiple locations and large numbers of distributed workers and to
    businesses who conduct a significant amount of business on the Web. National
    account managers primarily focus on selling our data center solutions to
    these customers. Our national account managers seek to work directly with
    the chief information officer and the communications manager responsible for
    Internet services in the target account. National account managers are
    supported by regional sales directors who provide leadership and sales
    strategy, as well as sales and network engineers to assist with custom,
    sophisticated solutions.

  . Wholesale Account Managers.   Wholesale account managers focus on selling
    our services to Internet service providers and other service providers. Our
    wholesale account managers sell dial-up and DSL Internet access, co-location
    services and dedicated Internet services. Wholesale account managers are
    supported by regional sales directors who provide leadership and sales
    strategy.


  Indirect Sales Channels

  We also market our services through indirect channels, including network
service providers, independent agents and value-added resellers. We offer each
service provider the ability to select those services that it would like to
bundle with its own service offerings to offer a total solution to its
customers.

  Marketing

  Our marketing team develops and implements our positioning, branding, pricing
and promotional strategies. We have formulated detailed criteria for identifying
target customers for each of our services and have created a bundle of services
to be offered to each segment of our potential customer base. In particular, we
are focused on building our brand identification as we roll out our service
offerings. We promote our brands through direct mail to targeted accounts,
outdoor advertising, radio advertisements, print advertisements, television
advertisements and our general public relations effort.


                                      10
<PAGE>

Network Architecture and Technology

  We deliver our services over a network that utilizes advanced packet-switching
technology and the communications protocol known as Internet Protocol, or IP,
that enables us to provide cost-effective services to our customers. Our network
combines equipment housed in our data centers and equipment interconnected to
the telephone company's central offices with redundant, high-speed connectivity
to the Internet backbone. Our metropolitan networks consist of elements we own
as well as elements we lease from third parties. We believe that this approach
allows us to deploy a network that is both cost-effective and responsive to our
customers' needs. Our metropolitan networks will be connected via the long-haul
capacity we purchased from Enron as part of the Optec acquisition, or via
capacity purchased from other long-haul carriers, to create a national platform
for the provision of our services.

  Our current infrastructure includes Internet equipment in all of our markets,
fiber in Portland and the Los Angeles basin, Lucent PathStar local packet
switches in Southern California, a Nortel DMS 500 local switch housed in
Anaheim, and DSL access equipment located in incumbent carriers' central
offices. The Cisco BPX, our core ATM switch, connects our central office co-
locations to our data centers and serves as our primary backbone switch.

  As part of the Optec acquisition we acquired rights to use 15 OC-3 level data
network capacity increments in cities located on Enron's long-haul network
currently under construction. An OC-3 level data network capacity increment
represents the capacity to transport 155 million bits of information per second
from one point to another. Enron has advised us that capacity is available in
Portland, Los Angeles and Salt Lake City. Enron is obligated to deliver capacity
to Denver, Houston, Dallas and Miami by November 24, 2001. If capacity is not
delivered by this date we may extend the agreement. We may select capacity
increments in additional cities or increase capacity in selected cities which in
the aggregate does not exceed 15 OC-3 level increments. Our rights terminate on
the earlier of November 24, 2005 or four years after the date capacity is made
available to the last of the cities listed above.

  Data Center Facilities.   We maintain facilities in each of our markets to
house our network platforms. In each of our markets we have expanded or plan to
expand these facilities into Internet data centers, or IDCs, which include space
for customers who want to co-locate their equipment with ours. We currently
operate five data center facilities in four markets and we are building
additional data center facilities in each of our markets. We plan to have 11
data center facilities operational by the end of 2000. These centers will
support our Internet gateway platform, allowing a broad range of Internet
access, shared- and dedicated-server hosting products, as well as co-location
space for our customers' equipment.

  Telephone Company Central Office Facilities.   We establish our central office
co-locations by installing equipment in the incumbent local exchange carrier's
central offices. We use DSL technology to transmit high-speed data over copper
lines between our customers and a central office. We install an endpoint device
at the customer's premises to manage the transmission of data from the
customer's internal information technology system to a central office. We plan
to install ATM switches in each of our data centers to more efficiently
aggregate and consolidate data in our markets. From the data center, traffic is
transported on our network to major Internet traffic exchange points or the
public switched transport networks. Leasing existing transport services from
other providers, including the copper wire to our customers' premises wherever
possible, allows us to focus our capital outlay on the value-added elements of
our network, including equipment, ATM switches, routers and data centers.

  Digital Subscriber Line Technologies. We use a variety of DSL technologies
that we purchase from multiple vendors. We provide DSL services utilizing our
own network as well as reselling the networks of others. DSL switching
technology provides for high-speed transmission of information over existing
copper telephone lines by encoding the information in a digital format. This
allows us to offer connection speeds ranging from 128Kbps to 7.1Mbps. Actual
speeds are a function of the distance from the end user or local area network to
the central office and the quality of the copper line.

  National Operations Center.   Our network is managed from our National
Operations Center in Denver. The center is staffed 24 hours a day and 7 days a
week, and monitors the integrity and performance of the entire network,
including environmental and security systems. Our monitoring network is
independent from our transport network,

                                      11
<PAGE>

providing complete independence for fault monitoring. Our monitoring
capabilities extend from our data centers through the telephone company central
offices to the customer premise equipment. This monitoring system is backed up
by our secondary network operations center in Anaheim.

Information Technology and Support Systems

  We currently have billing and other back-office systems to support our
different lines of business. We are in the process of upgrading many of those
systems to support our planned expansion, end-to-end customer relationship
management and cross-product bundling. We expect that these upgrades will
provide us with a scalable system that will not only provide greater
efficiencies for supporting a large diverse customer base, but also
differentiate the value proposition we offer to customers. We expect to
substantially complete this upgrade by early 2000, and expect to perform ongoing
upgrades as our business expands.

  Our approach to systems focuses on implementing mature, commercial off-the-
shelf applications that we integrate through an advanced messaging protocol that
allows consistent communication and coordination throughout our entire network.
Web-based user interfaces are designed to be used by both internal and external
customers for such activities as account activation, billing presentment,
trouble ticket and sales funnel management. We plan to leverage our internal
expertise with that of outside vendors to assist with project/program management
and implementation/integration services.

  Although we are using standard commercial applications to address major
functionality of such processes as billing and customer care, we are integrating
these applications to provide strategic and operating advantages such as direct
customer access to account information and integrated provisioning for all
products and services. In addition, certain of our trading partners and
application providers are working with us to jointly develop specialized
applications to support such processes as flow-through provisioning, supply
chain management and web-based processes. We expect these activities to give us
significant strategic advantages.


                                      12
<PAGE>

Competition

  In each market area in which we offer or plan to offer services we compete or
will compete with several other service providers. Most of our competitors have
long-standing relationships with customers and suppliers in their respective
industries, greater name recognition and significantly greater financial,
technical, marketing and other resources than we do. We expect to compete on the
breadth, quality and reliability of our service offering; the quality and
responsiveness of our customer services; and price. There have been rapid and
continuing price reductions, particularly for Internet access services.
Accordingly, we may need to reduce our prices to remain competitive. Price
competition could result in lower margins.

  Internet Services.   The Internet services market is extremely competitive,
and we expect competition in this market to intensify in the future. We compete,
or in the future we expect to compete, directly or indirectly with the following
categories of companies:

  .  national and regional Internet service providers;

  .  high-speed Internet access providers, including DSL and cable modem
     companies;

  .  web hosting and data center companies;

  .  computer software and technology companies;

  .  national and regional telecommunications companies, including regional bell
     operating companies and competitive local exchange carriers; and

  .  wireless service providers.

  The entry of new participants from these categories and the potential entry of
competitors from other categories, such as computer hardware manufacturers,
would result in substantially greater competition for us.

  Web Integration and Consulting.   In the markets for web integration and
consulting, we compete against a number of companies focused on the data
integration and consulting market, including USWeb/CKS, Sapient, Electronic Data
Services and IBM, as well as a number of small systems and network integration
service providers. In particular, we will be required to compete with companies
that design and manufacture products for the local and wide area network markets
and large system integrators.

  Telephony.   Our telephony services compete principally with the services
offered by incumbent telephone companies in the markets in which we operate,
including GTE, PacificBell and U S WEST. We also compete with various
competitive local exchange carriers including MFS Communications, NEXTLINK
Communications, ICG Communications, GST Telecommunications, and Teleport
Communications Group. The incumbent telephone


                                      13
<PAGE>
company dominates each of the markets targeted by us and possesses ubiquitous
infrastructure and the financial wherewithal to offer service at subsidized
prices to maintain key customers. We compete with incumbent telephone companies
on the basis of price, customer support and the ability to offer and provide
value-added, integrated service bundles. We compete with competitive local
exchange carriers by providing a variety of voice, data and Internet services in
different combinations to address the needs of different market segments.

Governmental Regulation

  The following summary of regulatory developments and legislation describes
material telecommunications regulations and legislation directly affecting our
industry in general.

  The facilities and services that we obtain from incumbent local exchange
carriers in order to provide DSL and other services are regulated extensively by
the FCC and state telecommunications regulatory agencies. To a lesser extent,
the FCC and state telecommunications regulators exercise direct regulatory
control over the terms under which we provide our services to the public.
Municipalities also regulate limited aspects of our telecommunications business
by imposing zoning requirements, permits or right-of-way procedures or fees,
among other regulations. The FCC and state regulatory agencies generally have
the authority to condition, modify, cancel, terminate or revoke operating
authority for failure to comply with applicable laws, or rules, regulations or
policies. Fines or other penalties also may be imposed for such violations.

  We cannot assure you that regulators or third parties will not raise issues
regarding our compliance or non-compliance with applicable laws and regulations.
We believe that we operate our business in compliance with applicable laws and
regulations of the various jurisdictions in which we operate and that we possess
the approvals necessary to conduct our current operations.

  Federal Regulation. The Telecommunications Act of 1996 (the
"Telecommunications Act") departs significantly from prior legislation in the
telecommunications industry by establishing competition as a national policy in
all telecommunications markets. The Telecommunications Act removes many state
regulatory barriers to competition in telecommunications markets dominated by
incumbent local exchange carriers and directs the FCC to preempt, after notice
and an opportunity to comment, state and local laws restricting competition in
those markets. Among other things, the Telecommunications Act also greatly
expands the interconnection requirements applicable to incumbent carriers. It
requires the incumbents to:

  .  provide interconnection at any technically feasible point;

  .  allow customers to retain the same telephone number when they switch
     providers (this is also required of us);

  .  provide co-location, which allows competitive telecommunications companies
     to install and maintain their own network termination equipment in
     telephone company central offices;

  .  unbundle and provide access to components of their service networks to
     other providers of telecommunications services;

  .  establish "wholesale" rates for the services they offer at retail prices to
     promote resale by competitive telecommunications companies;

  .  provide nondiscriminatory access to telephone poles, ducts, conduits and
     rights-of-way; and

  .  establish reciprocal compensation arrangements for transport and
     termination of telecommunication services.

  Incumbent carriers also are required by the Telecommunications Act to
negotiate interconnection agreements in good faith with carriers requesting any
or all of the above arrangements. If a requesting carrier cannot reach an
agreement within the prescribed time, either carrier may request binding
arbitration by the state telecommunications regulatory agency.


                                      14
<PAGE>

The FCC and state telecommunications regulators also are required by the
Telecommunications Act to fulfill certain duties to implement the regulatory
policy changes prescribed by the Telecommunications Act. The outcome of various
ongoing proceedings against industry participants to carry out these
responsibilities, or judicial appeals of these proceedings, could materially
affect our business, operating results and financial condition.

  In July 1997, the United States Court of Appeals for the Eighth Circuit
overruled some of the rules initially adopted by the FCC to implement the
Telecommunications Act, including rules:

  .  requiring incumbents to combine network elements and make them available
     for use by competitive telecommunication companies;

  .  providing the detailed standard that state telecommunications regulators
     must use in prescribing the price that incumbents charge for collocation
     and for the copper telephone lines and other network elements that
     competitive telecommunications companies must obtain from traditional
     telephone companies in order to provide service; and

  .  giving competitive telecommunications companies the right to "pick-and-
     choose" interconnection provisions by requiring that an incumbent carrier
     enter into interconnection agreements with competitive telecommunications
     companies that combine provisions from a variety of interconnection
     agreements between that incumbent carrier and other competitive
     telecommunications companies.

  The FCC and others appealed this decision to the U.S. Supreme Court. In
January 1999, the U.S. Supreme Court reversed much of the Eighth Circuit's
decision, finding that the FCC has broad authority to interpret the
Telecommunications Act and issue rules for its implementation, including
authority to establish the methodology that state telecommunications regulators
must use in setting the price that incumbent carriers charge competitive
telecommunications companies for collocation, copper telephone lines and other
network elements. The Supreme Court also reversed the Eighth Circuit's holding
invalidating the FCC's "pick-and-choose" rule. However, the Supreme Court found
that the FCC was not adequately justified under the Telecommunications Act in
defining the individual network elements incumbents must make available to
competitive telecommunications companies, and required the FCC to reconsider its
delineation of these elements. It sent the matter back to the FCC with
instructions to consider further the question of which parts of an incumbent
network must be provided to competitors. The FCC released an order on November
5, 1999 that sought to follow the Supreme Court's instructions in delineating
the particular network elements that incumbent carriers must make available to
competitors. The FCC's November decision reaffirms its earlier holding that
incumbents must make available the particular inputs that we need in order to
provide our services (including, but not limited to, copper telephone lines,
transmission facilities between incumbent central offices and various back-
office support services). In addition, the FCC's November order requires, upon
the request of competitive telecommunications companies like us, that incumbents
provide competitive carriers with certain other inputs (such as "subloops" and,
in limited cases, packet switching) that may prove useful as we expand our
services into new geographic areas, especially into more suburban areas.

  The Supreme Court's determination in its January 1999 order that the FCC,
rather than state telecommunications regulators, has jurisdiction to determine
pricing methodology also could be helpful to us since the FCC has adopted a
pricing standard that appears to be more beneficial to competitive
telecommunications companies in some respects than the pricing standards that
some state telecommunications regulators have employed. However, it remains
unclear whether the particular pricing methodology prescribed by the FCC will be
fully implemented because some parties have challenged the lawfulness of that
methodology in the U.S. Court of Appeals for the Eighth Circuit. That litigation
is still pending.

  In an order released March 31, 1999, the FCC adopted new regulations that are
designed to clarify the obligations of an incumbent local exchange carrier in
providing space inside its central offices to competitors like us so that they
can access the telephone company's copper telephone lines and connect those
lines to the competitor's electronic equipment located inside that telephone
company's central office. Another rule adopted in that order is intended to help
ensure that the customers of companies who provide services like our Internet
access services do


                                      15
<PAGE>

not receive or cause harmful interference from or to other users of the
traditional telephone company network on which the service is provided.

  An FCC order released on December 9, 1999 is designed to make it easier for
companies like ours to market high-speed data services like ours to customers.
Under this "line-sharing" order, incumbent carriers are required to let a
competitor use the same copper telephone line for providing the customer with
data service that the telephone company uses for providing the same customer
with local telephone service. At present, the incumbent carriers provide
customers with local phone service and high-speed Internet access service over a
single phone line, but require competitors like us to lease a separate phone
line to provide high-speed Internet access to any customer when that customer
obtains local phone service from the incumbent. The FCC's December 9, 1999 order
is designed to make it easier for companies like ours to compete with the
incumbent carriers in the high-speed Internet access market by permitting
competitors to reduce significantly their costs to serve this market. However,
it is not yet clear that the FCC's order will achieve its intended objective
since it will take several months before the incumbents put in place the
policies and procedures necessary to implement the order. It also is possible
that the order will be appealed to the courts on grounds that the FCC's new line
sharing requirements are unlawful. If appealed, we have no way of determining
whether the FCC's requirements will be affirmed.

  The FCC made another potentially favorable ruling for competitive carriers in
another recent case. That case involved the question of whether a
telecommunications service that provides high-speed dedicated connection to the
Internet is an interstate service or an intrastate service. An interstate
service must be provided subject to FCC regulatory controls, whereas an
intrastate service must be provided subject to regulatory controls of the
telecommunications regulatory agency of the state where the service is offered.
In its decision, the FCC held that such services are predominantly interstate
from a jurisdictional standpoint and therefore must be provided on terms and
conditions set by the FCC rather than state telecommunications regulators. This
ruling is potentially advantageous to us because it could reduce the number of
telecommunications regulatory agencies that control the terms under which we can
provide our primary services. It also is potentially advantageous because FCC
regulatory controls in many respects are less burdensome than state regulatory
controls. For example, the Telecommunications Act authorizes the FCC to forbear
from regulating the terms under which carriers classified as "non-dominant"
provide interstate telecommunications service. The FCC has exercised its
forbearance authority by issuing rulings that exempt non-dominant domestic
carriers like us from obtaining a certificate from the FCC prior to providing
any interstate service or from filing a tariff setting forth the terms under
which they provide any interstate access service. Because we believe that our
services constitute predominantly interstate service, we believe that we may not
need a certificate from state telecommunications regulatory agencies to provide
them. However, we have generally filed tariffs with state authorities for our
high-speed Internet services where requested by those agencies.

  Many of these FCC decisions have been appealed. We do not know how the courts
will decide these appeals, but any decision that invalidates one or more of
these rules could adversely affect our Internet access business.

  On May 8, 1997, in compliance with the requirements of the Telecommunications
Act, the FCC released an order establishing a new federal universal service
support fund, which provides support to carriers that provide service to
customers in high-cost or low-income areas and to companies that provide
telecommunications services for schools and libraries and to rural health care
providers. We are required to contribute to the universal service fund and also
may be required to contribute to state universal service funds. The new
universal service rules are administered jointly by the FCC, the fund
administrator, and state regulatory authorities, many of which are still in the
process of establishing their administrative rules. We cannot determine the net
revenue effect of these regulations at this time.

  On November 2, 1999, the FCC determined that a statute requiring that
incumbent carriers offer their retail services at a wholesale price to
competitors like us does not apply when these incumbents provide a discounted
DSL service directed to Internet service providers. In that case, while
competitors may purchase the incumbent carriers' Internet service provider-
directed DSL offering on the same terms as the Internet service providers, the
FCC ruled that competitors have no legal right to a wholesale discount off the
price paid by Internet service providers. This ruling could adversely affect us
if it gives Internet service providers an economic incentive to meet all of
their DSL

                                      16
<PAGE>


needs by subscribing to the incumbents' Internet service provider-directed
discounted DSL offerings rather than by subscribing to DSL services offered by
competitors like us.

  Various incumbent carriers have requested that the FCC substantially
deregulate the retail price charged for various types of telecommunications
services, including high-speed data services. The FCC recently issued a decision
in response that establishes a procedure by which incumbent carriers may apply
for certain pricing flexibility. We cannot yet determine the precise extent to
which incumbents will qualify for this pricing flexibility. The ultimate impact
of the FCC's order also is uncertain because the order has been appealed to the
U.S. Court of Appeals. If the FCC were to substantially eliminate price
regulation of the high-speed data services that incumbents provide in
competition with us, our business could be adversely affected.

  The FCC also has proposed to permit incumbent carriers to provide advanced
services like DSL through separate affiliates or subsidiaries on a deregulated
basis. This proposal could permit the separate affiliates to provide advanced
services free of the requirements relating to interconnection, unbundling,
resale and collocation imposed by the Telecommunications Act. Bills have been
introduced in Congress that would grant regional Bell operating companies
regulatory relief to provide data services in areas where they are currently
restricted from doing so.

  State Regulation.   While it is clear from the January 1999 Supreme Court
decision that the FCC has broad authority to implement provisions in the
Telecommunications Act that are intended to open all telecommunications markets
to competition, state telecommunications regulators also have substantial
authority in this area. For example, although the Supreme Court's decision
validated the FCC's jurisdiction to prescribe the methodology incumbents must
use in setting the price of copper telephone wires and other network elements,
the FCC has exercised that jurisdiction by adopting a pricing standard and has
given state regulators substantial authority to apply that standard in order to
determine actual prices. Many states have set only temporary prices for some
network elements that are critical to the provision of DSL services because they
have not yet completed the regulatory proceedings necessary to determine
permanent prices. Other states have begun proceedings to set new permanent
prices based on more current data. The results of these proceedings will
determine the price we pay for, and whether it is economically attractive for us
to use, these network elements and services.

  The Telecommunications Act also gives state telecommunications regulators
broad authority to approve or reject interconnection agreements that competitive
telecommunications companies enter into with incumbent carriers and broad
authority to resolve disputes that arise under these interconnection agreements.
Under the Telecommunications Act, if we request, incumbent providers have a
statutory duty to negotiate in good faith with us for agreements for
interconnection and access to unbundled network elements. A separate agreement
is signed for each of the states in which we operate. During these negotiations
either the incumbent or we may submit disputes to the state regulatory
commissions for mediation and, after the expiration of the statutory negotiation
period provided in the Telecommunications Act, we may submit outstanding
disputes to the states for arbitration. The Telecommunications Act also allows
state regulators to supplement FCC regulations as long as the state regulations
are not inconsistent with FCC requirements.

  In addition, DSL may, as to some customers, be classified as intrastate
service subject to state regulation. All of the states where we operate, or will
operate, require some degree of state regulatory commission approval to provide
certain intrastate services. We have obtained non-expiring state authorizations
to provide intrastate services from the state regulatory agency in all states
where we currently provide our service. We also have obtained non-expiring
certificates to provide intrastate service in many of the states where we may
provide our services in the future. In most states, intrastate tariffs are also
required for various intrastate services, although non-dominant carriers like us
are not typically subject to price or rate of return regulation for tariffed
intrastate services. In some states, pursuant to state statutes and regulations,
regulated telecommunications carriers such as our company may be required to
obtain prior approval for certain actions, such as issuing stock, incurring
indebtedness, or transferring control of the company holding a state
certification. Actions by state telecommunications regulatory agencies could
cause us to incur substantial legal and administrative expenses. It is possible
that laws and regulations could be adopted that address other matters that
affect our business. We are unable to predict what laws or regulations may be
adopted in the future, to what extent existing laws and regulations may be found
applicable to our business, or the impact such new or existing laws or
regulations may have on our business. In addition, laws or regulations could be
adopted in

                                      17
<PAGE>

the future that may decrease the growth and expansion of the Internet's use,
thereby decreasing demand for our services.

  Local Government Regulation.   In certain instances, we may be required to
obtain various permits and authorizations, including the payment of certain fees
to certain local municipalities, from municipalities in which we operate our own
facilities. The extent to which such actions by local governments pose barriers
to entry for competitive telecommunications companies that may be preempted by
the FCC is the subject of litigation. Although our network consists primarily of
unbundled network elements of the incumbent local exchange carriers, in certain
instances we may deploy our own facilities and therefore may need to obtain
certain municipal permits or other authorizations. The actions of municipal
governments in imposing conditions on the grant of permits or other
authorizations or their failure to act in granting such permits or other
authorizations could have a material adverse effect on our business, operating
results and financial condition.

Intellectual Property

  We regard our products, services and technology as proprietary and attempt to
protect them with copyrights, trademarks, trade secret laws, restrictions on
disclosure and other methods. These methods may not be sufficient to protect our
intellectual property. We also generally enter into confidentiality agreements
with our employees and consultants, and generally control access to and
distribution of our documentation and other proprietary information. Despite
these precautions, it may be possible for a third party to copy or otherwise
obtain and use our products, services or technology without authorization, or to
develop similar technology independently.

  Further, effective copyright, trademark and trade secret protection may be
unavailable or limited in certain foreign countries. The global nature of the
Internet makes it virtually impossible to control the ultimate destination of
our proprietary information. Steps taken by us may not prevent misappropriation
or infringement of our technology. In addition, litigation may be necessary in
the future to enforce our intellectual property rights to protect our trade
secrets or to determine the validity and scope of proprietary rights of others.
Such litigation could result in substantial costs and diversion of resources.

Employees

  As of December 31, 1999, excluding temporary personnel and consultants, we had
approximately 700 employees, of which 5 were part-time employees, employed in
engineering, sales and marketing, customer support and general and
administrative functions. None of our employees are represented by a labor
union, and we consider our relations with our employees to be good. Our ability
to achieve our financial and operational objectives depends in large part upon
the continued service of our senior management and key technical, sales,
marketing and managerial personnel, and our continuing ability to attract and
retain highly qualified technical, sales, marketing and managerial personnel.
Competition for such qualified personnel is intense, particularly in software
development, network engineering and product management.


                                      18
<PAGE>

ITEM 2.  PROPERTIES

  Our headquarters are located in Greenwood Village, a suburb of Denver,
Colorado. We have entered into two leases for office space to accommodate our
headquarters.  The first is a lease for approximately 42,000 square feet which
expires July 2001. We have an option to renew the lease for up to five years.
The second is for approximately 16,000 square feet which expires in February
2001, with two one-year extension provisions.  In addition, we have leases for
various terms for our smaller regional offices. We consider our headquarters and
regional office space adequate for our current operations. However, as we
execute our business plan and additional personnel are hired, our space
requirement will increase.  We also lease space in a number of traditional
telephone central offices and private facilities in which we locate our
Internet, data and communications equipment. The following table lists our
Internet data center leases:

                                                         Approximate
           Location               Lease Expiration     Square Footage
-------------------------------  -------------------  -----------------
  San Francisco, CA                 November 2009                40,000
  Dallas, TX                        March 2010                   38,000
  Portland, OR                      January 2010                 35,000
  Salt Lake City, UT                January 2010                 30,000
  Denver, CO                        August 2009                  21,500
  San Diego, CA                     March 2014                   20,000
  Santa Clara, CA                   April 2009                   18,900
  Glendale, CA                      July 2008                     5,000
  Irvine, CA                        April 2008                    1,000


Each of the above listed leases contain certain renewal provisions.  We
currently have plans to open additional data centers in Houston, TX and Irvine,
CA.

ITEM 3.  LEGAL PROCEEDINGS

  On May 13, 1999, the City of Anaheim (the "City") filed a complaint in Orange
County (California) Superior Court, Case Number 809281, against FirstWorld and
our wholly-owned subsidiary, FirstWorld Anaheim. The City alleges that we and
our subsidiary repudiated our respective obligations under a series of
agreements that we entered into with the City in February 1997 primarily
regarding the development of a fiber-optic network located in Anaheim,
California. The City specifically alleged that we materially breached certain of
our respective obligations under those agreements by failing to:

  .  commence construction and operation of a demonstration center;

  .  provide verification that phase I of the construction of the network is
     substantially complete;

  .  provide a Subsequent Implementation Program, a report that specifies
     construction, operation and maintenance activities;

  .  comply with certain specified auditing procedures; and

  .  make a quarterly payment under the agreements.

  The City alleges that it is entitled to damages in excess of $45.0 million as
well as costs, pre-judgment interest and such other relief as the court deems
proper. The City also seeks specific performance compelling us to completely
perform some or all of our obligations under the agreements.

  In response to the lawsuit, we filed a motion to compel arbitration and
requested a stay of the court proceeding. The Court granted our motion on
September 16, 1999. On October 6, 1999, the court entered a written order
finding that there is a valid arbitration provision in the agreements and that
the City had not established that the FirstWorld


                                      19
<PAGE>

parties unequivocally repudiated the agreements. The court action has been
stayed pending completion of the arbitration. On January 7, 2000, the City gave
notice of a dispute under the network construction agreement and initiated
arbitration with respect to the following issues:

  .  the City seeks a declaration that we are obligated to make revenue sharing
     payments to the City in the amount of the greater of 5% of the revenues
     generated under the agreement or $1.0 million per year for the remaining 27
     years of the agreement and that all sums shall be paid forthwith, plus
     interest as provided in the agreement;

  .  the City seeks an award in the amount of $145,000 corresponding to the
     amount we withheld for certain maintenance and repair expenses charged to
     the City;

  .  the City seeks a declaration that the City is entitled to conduct an audit
     of our books and records and an order that we have failed to disclose
     information and cooperate with the City in connection with the audit
     requirements of the agreements; and

  .  in addition to damages, the City seeks specific performance with respect to
     the construction and operation of a demonstration center.

  The notice also identified the City's appointed arbitrator. On January 27,
2000, we responded, identifying our appointed arbitrator and identifying an
additional matter for the arbitration relating to certain City employee
reimbursements not properly earned under the network construction agreement. We
believe that we are not in breach of the agreements as alleged and intend to
vigorously defend any such claims by the City. However, the outcome of this
dispute is uncertain and cannot be predicted at this time. Any adverse result
could have a material adverse effect on our financial condition and results of
operations.

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

  No items were submitted to a vote of Securities holders during the fourth
quarter of 1999.

                                    PART II

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

Market Information

  There is no established public trading market for the Company's Series A nor
Series B common stock.

Recent Sales of Unregistered Securities

  The company has issued and sold the following securities since December 1,
     1996:

  Between December 1996 and January 2000, 1,182,836 shares of the Company's
Series B common stock were issued upon exercise of stock options granted under
the Company's 1995 Stock Option Plan, 1997 Stock Option Plan and the 1999 Equity
Incentive Plan, at exercise prices between $0.15 and $7.50 per share.

  On January 29, 1997, the Company issued and sold an aggregate of 1,044,700
shares of its Series C preferred stock for cash and issued 1,555,300 upon
retirement of certain convertible bridge notes. In addition, warrants to
purchase an aggregate of 520,000 shares of common stock were issued to such
investors and note holders at an initial exercise price of $5.00 per share. Upon
consummation of the equity restructuring of the Company, however, the shares and
warrants were converted into an aggregate of 3,621,120 shares of Series B common
stock and warrants to purchase 736,564 shares of Series B common stock at a
purchase price of $3.53 per share. In connection with this private placement,
the Company also issued to financial advisors warrants to purchase 218,118 and
15,000 shares of common stock at purchase prices of $5.00 and $0.50,
respectively. In March 1997, 5,000 shares of


                                      20
<PAGE>

common stock were issued upon exercise of one of the financial advisor warrants
at a purchase price of $0.50 per share. As a result of the equity restructuring,
these warrants were converted into warrants to purchase shares of Series B
common stock.

  On January 29, 1997, the Company issued warrants to purchase 800,000 shares of
common stock to a single investor at an initial purchase price of $4.75 per
share.  On December 30, 1997, the warrant was amended to increase the number of
shares exercisable to 2,110,140 shares of Series B common stock and to decrease
the purchase price to $1.80 per share.

  Warrants to purchase 19,000 and 5,000 shares of common stock at prices of
$0.50 and $5.00, respectively, were issued in January 1997 in consideration for
legal services provided to the Company.  As a result of the equity
restructuring, these warrants were converted into warrants to purchase shares of
Series B common stock.

  On May 29, 1997, 60,000 shares of common stock were issued upon conversion of
Series B preferred stock.  These shares were converted to Series B common stock
upon consummation of the Company's equity restructuring.

  During August and September 1997, in connection with a short-term bridge
financing, the Company issued to a certain lender a warrant to purchase 300,000
shares of common stock at an initial purchase price of $6.00 per share.  As a
result of the equity restructuring of the Company, this warrant was converted
into a warrant to purchase 470,092 shares of Series B common stock at a purchase
price of $3.83 per share.

  On September 16, 1997, 156,208 shares of Series A preferred stock, which were
later converted to 1,562 shares of Series B common stock as a result of the
equity restructuring, were issued to an entity as compensation for services
rendered to the Company.

  During July and September 1997, warrants to purchase 33,789 shares of common
stock were issued at a purchase price of $6.00 per share to the holders of
certain convertible bridge notes issued in July 1997. As a result of the equity
restructuring, these warrants were converted into warrants to purchase shares of
Series B common stock.

  On September 17, 1997, the lender involved in the Company's revolving credit
facility was issued a warrant to purchase 800,000 shares of Series B common
stock at an initial purchase price of $6.00 per share.  This warrant was later
amended and replaced on December 30, 1997 and on April 13, 1998.  The current
purchase price of the warrant is $3.00 per share.  Upon consummation of the
revolving credit facility, the Company also issued warrants to certain financial
advisors to purchase 83,400 shares of common stock at a purchase price of $6.00
per share.  As a result of the equity restructuring, these warrants were
converted into warrants to purchase shares of Series B common stock.

  In connection with the equity restructuring of the Company on December 30,
1997, all outstanding shares of the Company's previously issued common stock,
Series A preferred stock, Series B preferred stock and Series C preferred stock
were converted into 9,178,625 shares of Series B common stock.

  On December 30, 1997, 10,000,000 shares of Series A common stock and warrants
to purchase 10,000,000  shares of Series B common stock at a purchase price of
$3.00 per share were issued by the Company to certain investors.  At the same
time, 135,164 shares of Series A common stock and warrants to purchase 135,164
shares of Series B common stock at a purchase price of $3.00 per share were
issued upon automatic conversion to the holders of certain convertible
subordinated bridge notes.  In connection with the Series A common stock private
placement, warrants were also issued to certain financial advisors to purchase
17,500 and 30,000 shares of Series B common stock at purchase prices of $6.00
and $5.00 per share, respectively.

  On April 13, 1998, 6,666,666 shares of Series B common stock and warrants to
purchase 6,666,666 shares of Series B common stock at a purchase price of $3.00
per share were issued to two existing investors pursuant to the exercise of
options held by them in connection with the Company's December 30, 1997 private
placement.

  In connection with the issuance and sale of its debt offering on April 13,
1998, the Company issued warrants to

                                      21
<PAGE>

purchase 3,713,094 shares of Series B common stock, at a purchase price of $0.01
per share.

  On January 7, 1999, 187,500 shares of Series B common stock were issued
pursuant to the Company's acquisition of Accelerated Information, Inc.

  On February 11, 1999, 42,250 shares of Series B common stock were issued to
employees of the Company who participated in the 1998 Employee Stock Purchase
Plan in November 1998.

  The Company issued 285,000 shares of Series B common stock in connection with
its acquisition of Sirius Solutions, Inc. on March 2, 1999.

  In connection with the Hypercon acquisition on June 2, 1999, the Company
issued 49,993 shares of Series B common stock.

  On June 14, 1999, the Company issued 30,000 shares of Series B common stock in
connection with its acquisition of Internet Express.

  Between March and December 1999, 109,495 shares of the Company's Series B
common stock were issued upon exercise of common stock Purchase Warrants, at a
purchase price of $1.50 per share.

  In February 2000, 470,092 shares of the Company's Series B common stock were
issued upon exercise of common stock Purchase Warrants, at a purchase price of
$3.83 per share.

  In connection with the Transport Logic acquisition, the Company issued
392,935 shares of Series B common stock on July 7, 1999.

  The Company issued 875,000 shares of Series B common stock on July 14, 1999 in
connection with its acquisition of Intelenet.

  On February 10, 2000 we sold 3,333,333 shares of Series B common stock to an
existing investor at a purchase price of $7.50 per share.

  As of December 31, 1999, 14,116 shares of Series B common stock have been
issued to certain employees under the Company's quarterly bonus program.

  All of the above transactions were completed without registration in reliance
upon the exemption provided by Section 4(2) of the Securities Act of 1933, as
amended, for transactions not involving a public offering.  All of the above-
referenced option shares and bonus shares were subsequently registered on Form
S-8s filed with the Commission on October 10, 1998, April 14, 1999 and May 17,
1999.

Holders

  As of January 31, 2000, there are approximately 10 and 450 holders of Series A
and Series B common stock, respectively.

Dividend Policy

  We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain any future earnings to finance the growth and
development of our business and therefore do not anticipate paying any cash
dividends in the foreseeable future. The terms of our outstanding indebtedness
limit our ability to pay dividends. Any future determination to pay cash
dividends will be at the discretion of our board of directors and will depend
upon our financial condition, operating results, capital requirements and other
factors that our board of directors deems relevant.


                                      22
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

  The financial data set forth below should be read together with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our financial statements and related notes included elsewhere in this Form 10-K.
The data for the year ended December 31, 1999, the three months ended December
31, 1998 and each of the two years ended September 30, 1998 have been derived
from the audited financial statements appearing elsewhere in this Form 10-K. The
data for the three months ended December 31, 1997 have been derived from the
unaudited financial statements appearing elsewhere in this Form 10-K. The
selected financial data for the years ended September 30, 1996 and 1995 have
been derived from audited financial statements not included in this Form 10-K.
The results of operations for the three months ended December 31, 1997 and 1998
are not necessarily indicative of the results of operations that may be expected
for a full year. In our management's opinion, the accompanying consolidated
unaudited financial statements include all adjustments (consisting of normal
recurring items) necessary for a fair presentation of our results of operations
and financial position. Certain prior period amounts have been reclassified to
conform to the 1999 basis of presentation.

<TABLE>
<CAPTION>

                                                                     Three Months
                                                                        Ended
                                                    Year Ended        December 31,              Year Ended September 30,
                                                   December 31,   ---------------------  -----------------------------------------
                                                       1999          1998       1997        1998       1997       1996      1995
                                                   -------------  ----------  ---------  ----------  ---------  ---------  -------
                                                                             (unaudited)
                                                                  (in thousands, except share and per share data)
<S>                                                <C>            <C>         <C>        <C>         <C>        <C>        <C>
Statement of Operations Data (1):
Revenue:
Internet services................................ $       21,246  $      123  $      --  $       --  $      --  $      --  $    --
 Web integration and consulting services.........         28,512       2,285         --          --         --         --       --
 Telephony services..............................          4,738         565        114       1,091        171        354       97
                                                   -------------  ----------  ---------  ----------  ---------  ---------  -------
    Total revenue................................         54,496       2,973        114       1,091        171        354       97
                                                   -------------  ----------  ---------  ----------  ---------  ---------  -------
Operating expenses:
 Network and service costs.......................         39,606       2,707        144       1,029        474        247      188
 Selling, general and administrative.............         67,128      10,812      2,248      16,113      7,421      3,870      740
 Depreciation and amortization...................         23,411       1,812        478       2,425        501         75       39
                                                   -------------  ----------  ---------  ----------  ---------  ---------  -------
    Total operating expenses.....................        130,145      15,331      2,870      19,567      8,396      4,192      967
                                                   -------------  ----------  ---------  ----------  ---------  ---------  -------
Loss from operations.............................        (75,649)    (12,358)    (2,756)    (18,476)    (8,225)    (3,838)    (870)
Other income (expense):
 Interest income.................................          6,960       3,227          7       6,749        149          9       --
 Interest expense................................        (37,928)     (8,600)    (1,349)    (16,898)    (1,372)       (27)     (38)
                                                   -------------  ----------  ---------  ----------  ---------  ---------  -------
Loss before extraordinary item...................       (106,617)    (17,731)    (4,098)    (28,625)    (9,448)    (3,856)    (908)
Extraordinary loss--extinguishment of debt.......             --          --         --      (4,731)      (105)        --       --
                                                   -------------  ----------  ---------  ----------  ---------  ---------  -------
Net loss.........................................  $    (106,617) $  (17,731) $  (4,098) $  (33,356) $  (9,553) $  (3,856) $  (908)
                                                   =============  ==========  =========  ==========  =========  =========  =======

Other Data:
EBITDA  (2)......................................  $     (50,346) $  (10,546) $  (2,278) $  (16,051) $  (7,724) $  (3,763) $  (831)
Capital expenditures, excluding acquisitions (3).         63,085      14,453      2,490      23,041     12,647        908       25

Consolidated Cash Flow Data:
Net cash used by operating activities............  $     (41,656) $     (931) $  (1,117) $  (13,160) $  (7,446) $  (2,168) $  (781)
Net cash provided (used) by investing activities.         41,672     (41,199)    (2,490)   (188,632)   (12,647)      (923)      45
Net cash provided (used) by financing activities.         (1,067)       (250)     3,291     273,295     20,557      3,156      827

Balance Sheet Data (at year end):
Cash and cash equivalents   .....................  $      28,608  $   29,659  $     220  $   72,039  $     536  $      72  $     6
Marketable securities  ..........................         20,615     170,030         --     165,591         --         --       --
Working capital (deficit)........................         22,482     190,589     (8,993)    233,059     (3,319)    (1,801)    (192)
Property and equipment, net .....................        123,161      61,247     22,391      44,020     20,331      1,088      122
Total assets.....................................        261,783     294,816     30,544     294,105     25,321      1,427      173
Long-term debt, including current portion........        302,205     265,427     22,694     256,659     19,684      1,009      106
Total stockholders' equity (deficit).............        (86,800)     11,794     (1,385)     29,373      2,264     (1,541)     (68)

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

(Footnotes on following page.)
</TABLE>


                                      23
<PAGE>


(1)  The Statement of Operations data for the three months ended December 31,
     1998 presented above include our results for the entire three months and
     for Optec for the period from November 24, 1998, the date of our
     acquisition of Optec, through December 31, 1998. The Statement of
     Operations data for the year ended December 31, 1999 presented above
     include our results for FirstWorld and Optec for the entire year and for
     Slip.Net, Sirius, Hypercon, Internet Express, inQuo, Transport Logic and
     Intelenet, beginning with their respective acquisition dates through
     December 31, 1999.
(2)  EBITDA, shown above under "Other Data," consists of earnings before
     interest, income taxes, extraordinary loss, depreciation and amortization
     and a one-time, non-cash litigation charge for the year ended December 31,
     1999 of $1.9 million. We have included information concerning EBITDA in
     this Form 10-K because this type of information is commonly used in the
     communications industry as one measure of a company's operating performance
     and liquidity. EBITDA is not determined using generally accepted accounting
     principles and, therefore, EBITDA is not necessarily comparable to EBITDA
     as calculated by other companies. EBITDA also does not indicate cash
     provided by operating activities. You should not use our EBITDA as a
     measure of our operating income and cash flows from operations under
     generally accepted accounting principles. Both of those measures are
     presented above. You also should not look at our EBITDA in isolation, as an
     alternative to or as more meaningful than measures of performance
     determined in accordance with generally accepted accounting principles.
(3)  Capital expenditures shown above under "Other Data" represent the cash paid
     for property and equipment. Capital expenditures, including accounts
     payable accruals, were $65.9 million, $15.5 million, $26.1 million and
     $12.6 million for the year ended December 31, 1999, the three months ended
     December 31, 1998 and the years ended September 30, 1998 and 1997,
     respectively.


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

     The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with "Selected Financial
Data" and the financial statements and related notes included elsewhere in this
Form 10-K. This discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results may differ materially from those
indicated in such forward looking statements.

Overview

  Prior to 1997, we were engaged in the business of engineering, designing and
installing fiber optic communications networks for third parties. Revenue
generated from these activities has been shown as telephony services revenue. In
1997, we stopped bidding on engineering contracts in order to focus on the
design and construction of our own communications network to service the Los
Angeles metropolitan market. We commenced network operations in August 1997.
Substantially all of our revenues generated in 1997 and 1998 resulted from
providing telephony services to customers in the Los Angeles metropolitan
market.  We made a strategic decision in the fourth quarter of 1998 to expand
our services and emphasize Internet and data services and expand our market
footprint. As a result of this decision, we began to acquire data communications
companies beginning in November 1998. Since that time, we have acquired eight
data communications and Internet companies in seven metropolitan markets and the
customer base of a ninth company in an additional market.

  From October 1, 1994 through December 31, 1999, we generated cumulative net
losses of approximately $172.5 million and approximately $66.1 million of
negative cash flow from operations. We expect that operating and net losses and
negative operating cash flow will continue for at least the next several years
and will increase significantly as we implement our growth strategy of expanding
into new markets.

                                       24
<PAGE>

  In October 1998, we changed our fiscal year end from September 30 to December
31. We had a three-month transition period from October 1, 1998 through December
31, 1998.


Acquisitions

  Optec

  On November 24, 1998, we acquired Optec, a company with operations in Oregon
and Washington that provides web integration services to businesses, from Enron.
As part of this acquisition, we also acquired rights to use fiber optic cable in
parts of Oregon and rights to OC-3 level capacity to connect up to 15 cities on
a nationwide long-haul network being developed by Enron. As consideration for
the acquisition, we paid $18.3 million in cash and repaid $4.0 million of
Optec's outstanding debt. We assigned values of $11.1 million, $9.2 million and
$2.0 million to the long-haul network rights, Optec and the Oregon fiber optic
rights, respectively. Since the long-haul network rights have not yet been
placed into service, we are not amortizing this asset. We accounted for the
acquisition of Optec under the purchase method of accounting. Approximately $5.6
million was recorded as goodwill and is being amortized on a straight-line basis
over 10 years. We are amortizing the fiber optic rights on a straight-line basis
over 20 years.

  Slip.Net

  On January 7, 1999, we purchased all of the outstanding capital stock of
Accelerated Information, Inc., the parent company of Slip.Net, Inc., an Internet
service company providing Internet access, web hosting services, e-commerce
solutions and co-location services, primarily in the San Francisco Bay Area. The
purchase price consisted of approximately $10.5 million in cash and 187,500
shares of our Series B common stock. We accounted for the acquisition under the
purchase method of accounting. Approximately $10.8 million was recorded as
goodwill and is being amortized on a straight-line basis over three years.

  Sirius

  On March 2, 1999, we purchased all of the outstanding capital stock of Sirius
Solutions, Inc., d/b/a Sirius Connections, an Internet service company providing
Internet access, web hosting services, e-commerce solutions and co-location
services, primarily in the San Francisco Bay Area. The purchase price consisted
of approximately $7.5 million in cash and 285,000 shares of our Series B common
stock. We accounted for the acquisition under the purchase method of accounting.
Approximately $8.5 million was recorded as goodwill and is being amortized on a
straight-line basis over three years.

  Hypercon

  On June 1, 1999, we purchased all of the outstanding capital stock of
Hypercon, Inc., ("Hypercon") an Internet service company providing Internet
access, web hosting services, e-commerce solutions and co-location services in
the Houston metropolitan area. The purchase price consisted of approximately
$2.0 million in cash and 49,993 shares of our Series B common stock. Subsequent
to the acquisition, we repaid approximately $215,000 in debt. We accounted for
the acquisition under the purchase method of accounting. The total consideration
of cash, stock and assumption of net liabilities was approximately $2.8 million.
Approximately $2.8 million was recorded as goodwill and is being amortized on a
straight-line basis over three years.

  Internet Express

  On June 14, 1999, we purchased all of the outstanding membership interests of
Internet Express, LLC, ("Internet Express") an Internet service company
providing Internet access and web hosting services in the Denver/Front Range
metropolitan area, including Colorado Springs and Fort Collins. The purchase
price consisted of approximately $1.0 million in cash and 30,000 shares of our
Series B common stock. Subsequent to the acquisition, we repaid approximately
$959,000 in various liabilities of Internet Express. We accounted for the
acquisition under the purchase method of accounting. The total consideration of
cash, stock and assumption of certain net liabilities was approximately $2.2
million. Approximately $2.2 million was recorded as goodwill and is being
amortized on a straight-line basis over three years.

                                       25
<PAGE>

inQuo

  On June 22, 1999, we purchased all of the outstanding capital stock of inQuo,
Inc., ("inQuo") an Internet service company providing dedicated Internet access
in the Salt Lake City metropolitan area. The purchase price was approximately
$844,000 of cash. We accounted for the acquisition under the purchase method of
accounting. The total consideration of cash and acquired net liabilities of
approximately $150,000 resulted in total consideration of approximately $1.0
million, which we recorded as goodwill and is being amortized on a straight-line
basis over three years.

  Transport Logic

  On July 7, 1999, we acquired all of the outstanding capital stock of Oregon
Professional Services, Inc., d/b/a Transport Logic, ("Transport Logic") an
Internet service company providing Internet access, web hosting services, e-
commerce solutions and co-location services in the western and northwestern
United States. The purchase price consisted of approximately $7.2 million in
cash and 392,935 shares of our Series B common stock. We accounted for the
acquisition under the purchase method of accounting. The total consideration of
cash, stock and assumption of certain liabilities of approximately $1.0 million
resulted in consideration of $10.5 million, which we recorded as goodwill and is
being amortized on a straight-line basis over three years.

  Intelenet

  On July 14, 1999, we purchased all of the outstanding capital stock of
Intelenet Communications, Inc., an Internet service company providing advanced
connectivity, data center services and networking consulting in Southern
California. The purchase price consisted of approximately $16.0 million in cash
and 875,000 shares of our

Series B common stock. We accounted for the acquisition under the purchase
method of accounting. Approximately $20.2 million was recorded as goodwill and
is being amortized on a straight-line basis over three years.

  FastLane

  On January 14, 2000 we purchased certain Internet assets of FastLane
Communications, Inc. an Internet service provider and consultant in the
Dallas/Fort Worth market, for a total consideration of $2.4 million.

  Many of the above acquired businesses were operating at or near the capacity
of their operating platforms at the time we acquired them. We are currently in
the process of integrating these businesses and expanding their platforms.
Integrating acquired businesses involves significant risks.  We are devoting
substantial resources towards expanding the platforms of these acquired
businesses, and expect these businesses to experience increased rates of growth
once these platforms are expanded and their operations are fully integrated
into those of our company.

Revenue

  We currently derive revenue from three primary product categories: Internet
services, web integration and consulting services and telephony services.

Internet Services

  Internet services revenue is derived from providing high-speed Internet
access, such as dedicated access and DSL, web hosting services, data center
services and dial-up access. We first generated revenue from providing Internet
services in December of 1998.

  Dial-up Internet access customers pay fixed monthly charges. High-speed
Internet access customers, including dedicated access and DSL customers, when
market conditions permit, pay us equipment charges, a one-time set-up fee and
thereafter, fixed monthly charges. These charges vary depending on the type of
service, the length of contract and local market conditions. High-speed Internet
access customers typically sign a contract for a one year initial service period
which becomes a month-to-month contract thereafter. These contracts may be
terminated at any time; however, our customers generally remain obligated to pay
for the initial contract period if they terminate within that period.


                                       26
<PAGE>

For web hosting services, we typically charge a flat rate fee for shared and
dedicated web hosting services based on the customer's server and network
capacity requirements. We typically charge a one-time set-up fee and recurring
fees based on the amount of data transmitted. We also receive fees for
additional services provided to customers, such as remote monitoring and
management and providing information on their site performance.

  Data center services revenue is derived from customers co-locating their file
servers and equipment within our facilities. The fee paid by a customer is
primarily based on the amount of space required to house their equipment and the
related Internet connectivity as well as any value-added services provided.

  Revenue for all services is recognized as the service is provided. Amounts
billed relating to future periods are recorded as deferred revenue and are
recognized as revenue as services are rendered. To encourage potential customers
to adopt our services, we sometimes offer reduced prices for an initial period.
Internet services revenue is primarily affected by the number of customers,
price and service competition. Prices for these services have been falling and
we expect prices to continue to fall.

Web Integration and Consulting Services

  Web integration and consulting services revenue is derived from network
consulting, design, integration and equipment sales. Revenues are recognized
under the percentage-of-completion method of accounting based upon the ratio
that costs incurred bear to the total estimated costs for each contract. Web
integration and consulting services revenue is primarily affected by the number
of customers, price and service competition, price of equipment, product
offering and timing of sales. While we believe that offering web integration and
consulting services will provide us with access to a broader customer base, we
expect this revenue to decrease as a percentage of total revenue in the future
as we grow our Internet service offerings.

Telephony Services

  Telephony services revenue is generated from local, long distance and other
telephone services. We currently provide telephony services in the Los Angeles
metropolitan market. We are installing switching equipment in the San Francisco
Bay Area and in San Diego and expect to begin offering telephony services to
customers in these markets during the second half of 2000. We generate telephony
services revenue by replacing the basic telephony services currently provided by
incumbent local exchange carriers, interexchange carriers and competitive local
exchange carriers, including local, long distance and other telephony services.

  We recognize telephony services revenue in the month services are provided.
Amounts billed relating to future periods are recorded as deferred revenue, and
are recognized as revenue when services are rendered. Telephony services revenue
is primarily affected by number of customers, price and service competition.
Prices for these services have been falling and we expect prices to continue to
fall.

Costs and Expenses

Network and Service Costs

  Network and service costs include a variety of service and network operations
costs. Network costs consist of payments to other communications carriers and
DSL wholesalers for monthly recurring and non-recurring communications line
charges incurred to provide DSL, integrated services digital network, frame
relay and telephony services as well as backbone transport charges. Service
costs include labor and materials associated with web integration and consulting
services. Network and service operations costs include rent and utilities
associated with co-locations, points of presence and network operations centers.
We currently enter into operating leases for a significant portion of our
infrastructure and we expect this practice to continue as we enter into new
markets. Labor associated with line repair and maintenance is also included in
network and service costs.

Selling, General and Administrative

  Our selling, general and administrative, or SG&A, expenses consist of costs
related to selling, marketing, customer care, provisioning, billing and
collections, information technology, general management and overhead and other
administrative expenses. We expect that SG&A expenses will increase
significantly in the future as we expand operations into new markets and grow
our sales and marketing staff.


                                      27
<PAGE>

Depreciation and Amortization

  Depreciation and amortization expenses include charges relating to
depreciation of property and equipment, which consists principally of network
infrastructure, communications equipment, buildings and leasehold improvements,
furniture and equipment, and amortization of intangibles, including goodwill. We
depreciate our assets and network infrastructure on a straight-line basis over
the estimated useful life of each asset. Estimated useful lives for our assets
currently range from three to 30 years. In addition, we have recorded goodwill
in connection with our acquisitions, which we will amortize over a period
generally expected to be three years, with the exception of goodwill associated
with the acquisition of Optec, which is being amortized over 10 years.

Interest

  Interest expense consists of interest expense associated with our debt. We
incurred minimal interest expense prior to 1997. Interest expense during the
fiscal year ended September 30, 1997 was primarily related to a revolving credit
facility that we terminated on April 13, 1998. On April 13, 1998, we completed
the issuance of our senior notes. Interest expense subsequent to this date
primarily relates to our senior notes and capital leases. We are not currently
scheduled to make any cash interest payments on our senior notes until the year
2003.

  Prior to 1998, interest income was minimal. Interest income during 1998 and
subsequent to 1998 primarily represents interest earned on our investments in
high-grade, short-term marketable securities and cash equivalents. Marketable
securities consist of commercial paper with original maturities greater than
three months but less than six months. Cash equivalents consist of money market
instruments, commercial paper and government agency issues with maturities less
than three months. We have classified our marketable securities as held-to-
maturity, as we have the intent and ability to hold these securities to
maturity.

Year Ended December 31, 1999 Compared with Year Ended September 30, 1998

Revenues

  Total revenues increased from $1.1 million for the year ended September 30,
1998 to $54.5 million for the year ended December 31, 1999, an increase of $53.4
million. The increase was primarily a result of increases in the aggregate
number of our data communications customers. These customers were acquired as a
result of our acquisitions of Optec, Slip.Net, Sirius, Hypercon, Internet
Express, inQuo, Transport Logic and Intelenet. The remaining increase was due to
the continued expansion of our customer base in the Los Angeles metropolitan
area.

  Internet services. Internet services revenue was $21.2 million for the year
ended December 31, 1999. There were no revenues for Internet services during the
year ended September 30, 1998. Internet services revenue associated with our
acquisitions was $18.6 million for the year ended December 31, 1999. The
remaining increase is due to the provision of Internet services to our customer
base in the Los Angeles metropolitan area.

  Web integration and consulting services. Web integration and consulting
services revenue was $28.5 million for the year ended December 31, 1999. There
were no revenues for Web integration and consulting services revenue during the
year ended September 30, 1998. Web integration and consulting services revenue
associated with our acquisitions was $26.3 million for the year ended December
31, 1999. The remaining increase is due to expansion of our services in the Los
Angeles metropolitan area.

  Telephony services. Telephony services increased from $1.1 million for the
year ended September 30, 1998 to $4.7 million for the year ended December 31,
1999, an increase of $3.6 million. This increase is due to the continued market
penetration and expansion of our customer base in the Los Angeles metropolitan
area.

Operating Expenses

  Network and service costs. Network and service costs increased from $1.0
million for the year ended September 30, 1998 to $39.6 million for the year
ended December 31, 1999, an increase of $38.6 million. Our acquisitions and the
support of the customers acquired in those acquisitions increased network and
service costs in aggregate by approximately $28.7 million for the year ended
December 31, 1999. The remaining increase is due to the cost of providing
service to our expanded customer base in the Los Angeles metropolitan area.



                                      28
<PAGE>

  Selling, general and administrative. SG&A expenses increased from $16.1
million for the year ended September 30, 1998 to $67.1 million for the year
ended December 31, 1999, an increase of $51.0 million. The SG&A of acquired
businesses increased our SG&A by an aggregate of approximately $18.5 million for
the year ended December 31, 1999. Salaries and other related expenses, excluding
the acquisitions, increased approximately $18.2 million for the year ended
December 31, 1999, primarily due to higher staffing levels at our headquarters.
Also, sales and marketing expenses, excluding the acquisitions, increased
approximately $3.1 million for the year ended December 31, 1999, primarily due
to various advertising campaigns. In addition, as further discussed in Note 14
in the accompanying financial statements for the year ended December 31, 1999,
in accordance with Securities and Exchange Commission Staff Accounting Bulletin
No. 79, we recorded a one-time capital contribution and corresponding one-time
non-cash litigation charge during the year ended December 31, 1999 in the amount
of $1.9 million. The remaining increase was due to higher overall expenses
resulting from expansion of operations in accordance with the execution of our
business plan.

  Depreciation and amortization. Depreciation and amortization expenses
increased from $2.4 million for the year ended September 30, 1998 to $23.4
million for the year ended December 31, 1999, an increase of $21.0 million. The
majority of the increase in depreciation and amortization is due to the
amortization of goodwill and depreciation expense associated with our various
acquisitions. Amortization of the goodwill and depreciation associated with
these acquisitions approximated $12.8 million and $1.9 million, respectively,
for the year ended December 31, 1999. The remaining increase related primarily
to depreciation associated with communications equipment placed in service.

Other

  Interest income. Interest income increased from $6.7 million for the year
ended September 30, 1998 to $7.0 million for the year ended December 31, 1999,
an increase of $211,000. In April 1998, the Company completed a debt offering of
senior notes raising approximately $250.0 million in proceeds. The increase in
interest earned is due to a higher average return on investments in marketable
securities.

  Interest expense. Interest expense increased from $16.9 million for the year
ended September 30, 1998 to $37.9 million for the year ended December 31, 1999,
an increase of $21.0 million. This increase relates primarily to interest
expense associated with the senior notes, partially offset by a reduction in
interest expense associated with a revolving credit facility, which was
terminated in April 1998. The Company is not currently scheduled to make any
cash interest payments on the senior notes until the year 2003. Capitalized
interest for the year ended December 31, 1999 and September 30, 1998 was
$843,000 and $450,000, respectively.

  Extraordinary loss. An extraordinary loss of $4.7 million on the
extinguishment of debt was recorded in the year ended September 30, 1998. The
Company reported no extraordinary loss in the year ended December 31, 1999. On
September 16, 1997, the Company entered into a revolving credit facility with a
syndicate of lenders to provide financing for the construction of
telecommunication networks and for general working capital purposes. The Company
terminated the credit facility concurrently with the closing of the senior notes
and paid the syndicate of lenders a $1.0 million termination fee pursuant to the
terms thereof. This loss was inclusive of the termination fee and the write-off
of unamortized debt discount and deferred financing costs.

Quarter Ended December 31, 1998 Compared With Quarter Ended December 31, 1997

Revenue

  Total revenue increased from $114,000 for the quarter ended December 31, 1997
to $3.0 million for the quarter ended December 31, 1998, an increase of $2.9
million. Our revenue increased primarily as a result of our acquisition of
Optec, which generated $2.3 million of revenue in the quarter ended December 31,
1998.

  Internet services.   Internet services revenue was $123,000 for the quarter
ended December 31, 1998. We had no Internet services revenue for the quarter
ended December 31, 1997. Our Internet services revenue increased primarily as a
result of the addition of the resale of high-speed Internet access to our
product mix in the Los Angeles metropolitan market.

  Web integration and consulting services.   Web integration and consulting
services revenue was $2.3 million for the quarter ended December 31, 1998. We
had no web integration and consulting services revenue for the quarter ended
December 31, 1997. Our web integration and consulting services revenue related
entirely to our acquisition of Optec.


                                      29
<PAGE>

 Telephony services.   Telephony services increased from $114,000 for the
quarter ended December 31, 1997 to $565,000 for the quarter ended December 31,
1998, an increase of $451,000. This increase was due to market penetration and
expansion of our customer base in the Los Angeles metropolitan market.

Costs and Expenses

  Network and service costs.   Network and service costs increased from $144,000
for the quarter ended December 31, 1997 to $2.7 million for the quarter ended
December 31, 1998, an increase of $2.6 million. This increase resulted from the
following factors: the acquisition of Optec, which resulted in the addition of
$1.8 million in operating costs; personnel costs associated with the expansion
of our operations and network deployment groups; and increased operating costs
relating to our expanded customer base in the Los Angeles metropolitan market.

  Selling, general and administrative.   SG&A expenses increased from $2.2
million for the quarter ended December 31, 1997 to $10.8 million for the quarter
ended December 31, 1998, an increase of $8.6 million.

Significant factors contributing to the overall increase in SG&A expenses
included an increase of approximately $4.5 million in personnel costs associated
with increased staffing, executive signing bonuses and personnel bonuses; and an
increase of approximately $558,000 associated with the operations of Optec.

  Depreciation and amortization.   Depreciation and amortization expenses
increased from $478,000 for the quarter ended December 31, 1997 to $1.8 million
for the quarter ended December 31, 1998, an increase of $1.3 million. This
increase primarily related to depreciation expense associated with new equipment
purchases for our central office in Orange County, California. Also, during the
quarter ended December 31, 1998, we recorded a charge of approximately $328,000
related to the write-down of certain unused telecommunications equipment.

Other

  Interest income.   Interest income increased from $7,000 for the quarter ended
December 31, 1997 to $3.2 million for the quarter ended December 31, 1998. The
increase in interest income is primarily attributable to the investment of the
net proceeds from the sale of our outstanding senior notes.

  Interest expense.   Interest expense increased from $1.3 million for the
quarter ended December 31, 1997 to $8.6 million for the quarter ended December
31, 1998, an increase of $7.3 million. The increase in interest expense related
primarily to additional interest expense associated with our outstanding senior
notes, partially offset by a reduction in interest expense associated with a
revolving credit facility which was terminated in April 1998. During the quarter
ended December 31, 1998, interest costs of $333,000 were capitalized. No
interest was capitalized for the quarter ended December 31, 1997.

Year Ended September 30, 1998 Compared With Year Ended September 30, 1997

Revenue

  Telephony services.   Telephony services revenue increased from $171,000 for
the fiscal year ended September 30, 1997 to $1.1 million for the fiscal year
ended September 30, 1998, an increase of $929,000. Telephony services revenue
increased as a result of our Orange County network being operational for a full
year. This network began servicing customers in August 1997. Prior to the
commencement of operations of the Orange County network, telephony services
revenue consisted principally of reimbursable engineering, design and
construction costs associated with the design of fiber optic communications
networks and royalties from the license of a patent for fiber optic connectors.
We did not generate revenue from any other source during this period.

                                      30
<PAGE>

Costs and Expenses

  Network and service costs.   Network and service costs increased from $474,000
for the fiscal year ended September 30, 1997 to $1.0 million for the fiscal year
ended September 30, 1998, an increase of $565,000. This increase was principally
due to increased personnel costs associated with operating and deploying our
Orange County operations.

  Selling, general and administrative.   SG&A expenses increased from $7.4
million for the fiscal year ended September 30, 1997 to $16.1 million for the
fiscal year ended September 30, 1998, an increase of $8.7 million. The increase
primarily resulted from the commencement of operations of our communications
network in the Los Angeles metropolitan market. The increase also resulted in
part from our management consulting obligations with an entity controlled by
Donald L. Sturm and with Enron, pursuant to which we incurred costs aggregating
$840,000 for the year ended September 30, 1998.

  Depreciation and amortization.   Depreciation and amortization expenses
increased from $501,000 for the fiscal year ended September 30, 1997 to $2.4
million for the fiscal year ended September 30, 1998, an increase of $1.9
million. This increase primarily related to depreciation expense associated with
equipment purchased for our central office in Orange County as well as the built
and leased elements of our fiber optic network and office and other equipment
associated with our general operations.

Other

  Interest income.   Interest income increased from $149,000 for the fiscal year
ended September 30, 1997 to $6.7 million for the fiscal year ended September 30,
1998, an increase of $6.6 million. The increase in interest income was primarily
attributable to the investment of the net proceeds from the sale of our
outstanding senior notes.

  Interest expense.   Interest expense increased from $1.4 million for the
fiscal year ended September 30, 1997 to $16.9 million for the fiscal year ended
September 30, 1998, an increase of $15.5 million. The increase in interest
expense related primarily to additional interest expense associated with our
outstanding senior notes, partially offset by a reduction in interest expense
associated with a revolving credit facility that was terminated in April 1998.
Interest expense incurred during fiscal 1998 and fiscal 1997 was offset by
approximately $450,000 and $52,000, respectively, of capitalized interest.

Quarterly Results of Operations

  The following table sets forth certain unaudited consolidated statements of
operations data for our most recent nine quarters. This information has been
derived from our unaudited consolidated financial statements. In our
management's opinion, this unaudited information has been prepared on the same
basis as the audited annual consolidated financial statements and includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the results of operations for the quarters presented. This
information should be read in conjunction with the audited consolidated
financial statements and the related notes included elsewhere in this Form 10-K.
The operating results for any quarter are not necessarily indicative of results
for any future period. Certain prior period amounts have been reclassified to
conform to the 1999 basis of presentation.

<TABLE>
<CAPTION>

                                                                       Quarter Ended
                              ----------------------------------------------------------------------------------------------

                               Dec. 31,   Sep. 30,   June 30,  Mar. 31,   Dec. 31,   Sep. 30,   June 30,  Mar. 31,  Dec. 31,
                                1999       1999       1999       1999       1998       1998       1998      1998     1997
                              ----------------------------------------------------------------------------------------------
                                                                       (in thousands)
<S>                           <C>        <C>        <C>        <C>        <C>        <C>       <C>        <C>      <C>
Revenue...................... $ 18,034   $ 16,022   $ 12,178   $  8,262   $  2,973   $   431   $    416   $   130  $   114
Gross margin..................   4,204      4,828      3,292      2,566        266       (15)       169       (62)     (30)
Operating expenses............  43,490     40,124     26,934     19,597     15,331     7,473      5,956     3,268    2,870
                              --------   --------   --------   --------   --------   -------   --------   -------  -------
Loss from operations.......... (25,456)   (24,102)   (14,756)   (11,335)   (12,358)   (7,042)    (5,540)   (3,138)  (2,756)
Other income (expense).......   (8,772)    (8,116)    (7,651)    (6,429)    (5,373)   (2,324)    (5,401)   (1,082)  (1,342)
                              --------   --------   --------   --------   --------   -------   --------   -------  -------
Loss before extraordinary
   item....................... (34,228)   (32,218)   (22,407)   (17,764)   (17,731)   (9,366)   (10,941)   (4,220)  (4,098)
Extraordinary item............     ---        ---        ---        ---        ---       ---     (4,731)      ---      ---
                              --------   --------   --------   --------   --------   -------   --------   -------  -------
Net loss......................$(34,228)  $(32,218)  $(22,407)  $(17,764)  $(17,731)  $(9,366)  $(15,672)  $(4,220) $(4,098)
                              ========   ========   ========   ========   ========   =======   ========   =======  =======
</TABLE>

  We could experience quarterly variations in revenue and operating income as a
result of many factors, including:

  .  changes in our revenue mix among our various service offerings;

  .  the introduction of new services by us;

  .  actions taken by competitors;

  .  the timing of an acquisition or loss of customers; and

  .  the timing of additional SG&A expenses incurred to acquire and support new
     or additional business.

                                      31
<PAGE>

Liquidity and Capital Resources

  Our existing operations have required and will continue to require substantial
capital investment for the construction of data center facilities, installation
of communications equipment, DSL equipment, incumbent local exchange carrier co-
locations, fiber optics and other electronics and related equipment. In
addition, we expect to incur operating losses for at least several years. Such
expansion will require significant additional capital for the design,
development and construction of our network, business acquisitions and the
funding of operating losses as a result of expanding the network into new
markets.

  To date, we have satisfied our cash requirements through the private
placements of debt and equity securities. From our inception through December
31, 1999, we raised approximately $63.7 million in net proceeds from the sale of
equity securities and $241.8 million in net proceeds from the sale of debt
securities.

  On December 30, 1997, we consummated a private placement of our Series A
common stock to an entity controlled by Donald L. Sturm and Enron. Aggregate
proceeds from this offering totaled approximately $26.5 million, net of offering
commissions and certain other advisory fees, and were received on January 6,
1998. On April 13, 1998, concurrent with our senior notes offering discussed
below, we completed an additional $18.8 million, net of offering commissions and
other fees, private placement of capital stock to an entity controlled by Donald
L. Sturm and Enron. In addition, we have raised approximately $16.2 million, net
of offering commission and other fees, from the issuance of Series A, B and C
preferred stock and $1.1 million from the exercise of options to purchase our
Series B common stock. All shares of preferred stock have subsequently been
converted to Series B common stock.

  On April 13, 1998, we completed an offering of senior notes pursuant to Rule
144A under the Securities Act of 1933. In this debt offering, we sold 470,000
units consisting of 13% Senior Discount Notes due 2008 and warrants to purchase,
at $.01 per share, an aggregate of 3,713,094 shares of our Series B common
stock. The aggregate net proceeds of the debt offering were $241.8 million.

  On December 2, 1999 in order to secure additional financing that was expected
to become necessary during the first quarter of 2000, we entered into an equity
investment agreement with Colorado Spectra 4, LLC, which is an affiliate of
Donald L. Sturm. This agreement allowed us to require Spectra 4 to purchase up
to $50.0 million of our Series B common stock at a price of $7.50 per share. In
return for this agreement Spectra 4 received a $5.0 million commitment fee.

  The agreement expires on the earlier of June 18, 2000 or the closing of our
initial public offering, and sets forth three dates upon which we may require
Spectra 4 to make a purchase of Series B common stock: February 15, 2000, March
31, 2000 and the date on which the agreement ultimately expires. In addition,
the agreement provides that if at any time the value of the cash, cash
equivalents and marketable securities we hold falls below $20.0 million, we will
be deemed to have automatically exercised $25.0 million of this commitment. On
February 7, 2000 we gave notice that this condition had been met and on February
10, 2000 we sold 3,333,333 shares of Series B common stock to Spectra 4 under
the automatic trigger provision of the agreement for $25.0 million. We may
exercise the right to cause Spectra 4 to purchase the remaining $25.0 million at
a later date.

  On February 3, 2000 we issued 470,092 shares of Series B common stock upon the
exercise of a warrant at a price of $3.83 per share, resulting in proceeds to
FirstWorld of $1.8 million. An additional warrant holder has notified us that,
prior to the closing of an initial public offering, it intends to exercise a
warrant to purchase 800,000 shares of Series B common stock at a price of $3.00
per share, which will result in proceeds to us of $2.4 million.

  On February 16, 2000, we filed Amendment No. 1 to Form S-1 ("Amended Form S-
1") to register 11.5 million shares of Series B common stock for an initial
public offering with a stock price ranging from $11.00 to $13.00. In conjunction
with this filing, we have entered into agreements to sell to the following
investors, in private placements concurrent with an initial public offering, an
aggregate of $91.5 million of our Series B common stock at a price per share
equal to 93% of the public offering price, which is approximately equal to the
net of the underwriting discount in an initial public offering.   Each of these
concurrent private placements are contingent upon the closing of an initial
public offering and are further described as follows:

  .  Texas Pacific Group. This agreement calls for TPG FirstWorld I LLC, an
     affiliate of Texas Pacific Group, to purchase $50.0 million of our Series B
     common stock. FirstWorld has been informed that Enron and this entity have
     entered into an unrelated agreement pursuant to which Texas Pacific Group
     will purchase all of Enron's Series A and Series B common stock and all but
     3.0 million of Enron's warrants to purchase Series B common stock. The
     Series A common stock will, in accordance with the terms of our certificate
     of incorporation, convert automatically to Series B common stock. Based on
     an assumed public offering price of $12.00 (the midpoint of the price range
     presented on our Amended Form S-1), this entity will purchase 4,480,227
     shares of Series B common stock in the private placement, and will hold an
     aggregate of 12,716,310 shares of Series B common stock and warrants to
     purchase an additional 5,236,038 shares of Series B common stock after the
     closing of an initial public offering. The concurrent private placement is
     subject to customary closing conditions and is terminable at the investor's
     option if we have not consummated an initial public offering by May 12,
     2000.


                                      32
<PAGE>

  .  Microsoft Corporation. This agreement calls for Microsoft to purchase $10.0
     million of our Series B common stock. In return for this investment,
     Microsoft will receive a five-year warrant to purchase 75% of the number of
     shares of Series B common stock purchased, at a price equal to 125% of the
     public offering price. Based on an assumed public offering price of $12.00
     (the midpoint of the price range presented on our Amended Form S-1),
     Microsoft will purchase 1,075,269 shares, and the warrant will be
     exercisable for 806,452 shares at a per share strike price of $15.00. This
     agreement is subject to customary closing conditions.


  .  SAIC Venture Capital Corporation. Our agreement with SAIC Venture Capital
     Corporation, an affiliate of Science Applications International
     Corporation, calls for SAIC to purchase $19.5 million of our Series B
     common stock. This agreement is terminable at SAIC's option if we have not
     consummated an initial public offering as of May 12, 2000, among other
     customary closing conditions. Based on an assumed public offering price of
     $12.00 (the midpoint of the price range presented on our Amended Form S-1),
     SAIC will purchase 1,747,312 shares of Series B common stock.

  .  Lucent Technologies Inc. This agreement calls for Lucent to purchase $12.0
     million of our Series B common stock. Based on an assumed public offering
     price of $12.00 (the midpoint of the price range presented on our Amended
     Form S-1), Lucent will purchase 896,057 shares of Series B common stock.
     This agreement is subject to customary closing conditions.

  Assuming an initial offering price of $12.00 per share, (the midpoint of the
price range presented on our Amended Form S-1) these concurrent private
placements are likely to result in a total non-cash charge of approximately $7.0
million, equal to the difference between the gross public offering price per
share and the price per share paid in the private placements, times the number
of shares sold in the private placements. In addition, we anticipate that a
deferred non-cash charge of approximately $2.4 million will be recorded in
connection with a business relationship entered into with Microsoft concurrently
with the private placement. This deferred charge would be amortized to earnings
over the duration of this business relationship.


  As of December 31, 1999, we had $49.2 million of cash, cash equivalents and
marketable securities, and an accumulated deficit of $172.5 million.

  For the year ended December 31, 1999, the three months ended December 31, 1998
and the year ended September 30, 1998, capital expenditures were $63.1 million,
$14.5 million and $23.0 million, respectively. In addition, we had expenditures
related to acquisitions of $44.8 million for the year ended December 31, 1999.
FirstWorld's Statements of Cash Flows for the year ended December 31, 1999, the
three months ended December 31, 1998 and the year ended September 30, 1998 have
been adjusted to remove accruals associated with capital expenditures.

  We have a number of commitments, including certain contractual obligations
with the City of Anaheim, the Irvine Company, and a long distance carrier. See
further discussion in Note 7 - "Commitments and Contingent Liabilities" in the
accompanying financial statements for the year ended December 31, 1999.

  We believe that the net proceeds of the 1999 equity investment agreement with
Colorado Spectra 4, LLC, our existing cash, cash equivalents and marketable
securities, will be sufficient to meet our anticipated cash needs for working
capital for at least the next 12 months. We will require additional funds to
support our capital expenditure requirements associated with our 2000 capital
expenditure program. We believe that we can generate the funds needed through
the net proceeds of an initial public offering and the concurrent private
placements, detailed above.  These sources of cash in addition to the net
proceeds of  the 1999 equity investment agreement with Colorado Spectra 4, LLC
and our existing cash, cash equivalents and marketable securities, will be
sufficient to meet our anticipated cash needs for working capital and capital
expenditures for the next 12 months. Thereafter, we may require additional funds
to support our working capital and capital expenditure requirements and may seek
to raise additional funds through public or private equity or debt financing or
other sources for such requirements and acquisitions of technologies, companies
and development of our existing and new services. Any additional financing we
may need may not be available on terms favorable to us, or at all.

                                      33
<PAGE>

  Our sources and uses of funds were as follows:

<TABLE>
<CAPTION>
                                                                           Three Months
                                                          Year Ended           Ended          Year Ended September 30,
                                                         December 31,      December 31,     --------------------------
                                                             1999              1998             1998           1997
                                                        --------------     -------------    -----------    -----------
                                                                                (in thousands)
<S>                                                     <C>               <C>                <C>            <C>
Net cash used by operating activities................   $      (41,656)    $        (931)   $   (13,160)   $    (7,446)
Net cash provided (used) by investing activities  .             41,672           (41,199)      (188,632)       (12,647)
Net cash provided (used) by financing activities .  .           (1,067)             (250)       273,295         20,557
</TABLE>

  Net cash used in operations for the year ended December 31, 1999, the three
months ended December 31, 1998 and the fiscal years ended September 30, 1998 and
1997 were primarily due to net operating losses, offset in part by, non-cash
items, consisting mainly of depreciation and amortization.

  Net cash provided by investing activities for the year ended December 31, 1999
was primarily a result of the maturity of short-term investments, partially
offset by the purchase of short-term investments, acquisitions and capital
expenditures. Net cash used by investing activities for the three months ended
December 31, 1998 was primarily the result of acquisitions and capital
expenditures. Net cash used by investing activities for the fiscal year ended
September 30, 1998 was primarily a result of the purchase of short-term
investments and capital expenditures partially offset by the maturity of short-
term investments. Net cash used by investing activities for the year ended
September 30, 1997 was primarily a result of our capital expenditures.

  Net cash used by financing activities for the year ended December 31, 1999 was
primarily a result of the repayment of debt assumed in our acquisitions,
partially offset by proceeds from the exercise of stock options and warrants.
Net cash provided by financing activities for the year ended September 30, 1998
was primarily due to proceeds from the issuance of our outstanding senior notes.
Net cash provided by financing activities for the year ended September 30, 1997
was primarily due to proceeds from the issuance of equity securities and
borrowings under a credit facility.

Quantitative and Qualitative Disclosures about Market Risk

  We are exposed to fluctuations in interest rates and market value of our
investments. Our exposure to fluctuations in interest rates and market values of
our investments relates primarily to our short-term investment portfolio, which
is included in cash and cash equivalents and marketable securities. We have not
used derivative financial instruments in our investment portfolio. We invest our
excess cash in high-grade commercial paper, money market instruments and
government agency issues and we limit the amount of credit exposure to any one
issuer. Due to the short-term nature of our investments, the impact of interest
rate changes would not be expected to have a significant impact on the value of
these investments. The effect of interest rate and investment risk on us has not
been significant.

  Investments in fixed rate interest earning instruments carry a degree of
interest rate risk. Fixed rate securities may have their fair market value
adversely impacted due to a rise in interest rates. Because of this, our future
investment income may fall short of expectations due to changes in interest
rates or we may suffer losses in principal if we are forced to sell securities
that have declined in market value due to changes in interest rates.

Year 2000 Readiness Disclosure

  All references to Year 2000 within this Form 10-K are provided as "Year 2000
Statements" within the meaning of the Year 2000 Information and Readiness
Disclosure Act.


                                      34
<PAGE>

  We instituted a comprehensive internal Year 2000 compliance program designed
to enable us to continue our business without interruption as we moved into the
Year 2000. We established our Year 2000 compliance program to address the impact
of the Year 2000 date transition on our operations. This program covered not
only our internal information systems and other information technology
facilities such as data and telephony communications, building management, and
security systems, but also the readiness and compliance programs of our key
suppliers.

  We completed our evaluation of all of our systems and applications for Year
2000 compliance prior to the end of 1999. These systems and applications
included internal information technology applications (such as billing and
customer service), network infrastructure (such as corporate local- and wide
area networks, user workstations and off-shelf software applications), customer
Internet service provider platform, customer telephony platform, and corporate
facilities (such as offices, phone systems and voice mail). In most cases, we
obtained these systems and applications from third parties. Our evaluation
consisted of extensive review of product Year 2000 compliance information on
vendor supplied items and services available online, in vendor literature and
through trade group resources, and inquiries made to our significant third-party
business partners, suppliers and vendors to determine whether their products
were Year 2000 compliant. As a result of our evaluation, we generally executed
vendor prescribed methodologies, where applicable, to make these items Year 2000
compliant. Since the century date change, we have not experienced any
significant disruption in our business due to Year 2000 issues.

  To date, our expenses associated with our Year 2000 compliance program have
been approximately $350,000. Our expenses have generally related to the
operation costs associated with time spent by our employees and consultants in
the evaluation process and Year 2000 compliance in general.

Recent Accounting Pronouncements

  In June 1998 and June 1999, the Financial Accounting Standards Board issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS No. 133"), and SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities--Deferral of the Effective Date of FASB No. 133" ("SFAS No.
137"). We are required to adopt SFAS No. 133 and SFAS No. 137 in the year ended
December 31, 2001. These pronouncements establish methods of accounting for
derivative financial instruments and hedging activities related to those
instruments as well as other hedging activities. To date, we have not entered
into any derivative financial instruments or hedging activities.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

  The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investment portfolio and long-term debt obligations.

  As of December 31, 1999, the Company's interest bearing cash equivalents and
short-term investments consist exclusively of commercial paper having original
maturities of six months or less. The Company classifies those instruments
having original maturities of three months or less as cash equivalents whereas
instruments having original maturities of greater than three months, but less
than six months are classified as short-term investments. The Company places its
commercial paper investments with high credit-quality counterparts and limits
the amount of credit exposure to any one entity. The Company has the ability and
intent to hold such investments, which are not held for trading or speculative
purposes, through their maturity dates.

  The Company's long-term debt at December 31, 1999, consists principally of
Senior Discount Notes which bear interest at a fixed rate.  The Senior Discount
Notes accrete in value at a stated rate of 13% per annum through April 2003 and
thereafter bear interest at a stated rate of 13% per annum payable semi-annually
in arrears.  The Senior Discount Notes mature as to principal in the aggregate
amount of $470,000,000 in April 2008.  The Company has no cash flow exposure due
to rate changes for its Senior Discount Notes.


                                      35
<PAGE>

  The following table presents notional amounts and related weighted-average
interest rates by year of maturity for the Company's investment portfolio and
Senior Discount Note obligations of which have fixed interest rates:

                           Interest Rate Sensitivity
                         Principal Amount by Maturity
                             (Dollars in Millions)

<TABLE>

                                                                                              Fair Value at
                                     2000        2001      2002      2003      Thereafter        12/31/99
                                     -----------------------------------------------------------------------
<S>                                 <C>         <C>       <C>       <C>       <C>            <C>
CASH EQUIVALENTS
Commercial Paper                      $10.0        --        --        --            --             $ 10.0
Average Interest Rate                  5.49%       --        --        --            --

HELD TO MATURITY INVESTMENTS
Commercial Paper                      $20.6        --        --        --            --             $ 20.6
Average Interest Rate                  6.58%       --        --        --            --

SENIOR NOTES (A)                         --        --        --        --        $470.0             $314.9
Average Interest Rate (B)                --        --        --        --          13.0%

</TABLE>

(A)  The carrying amount of the Senior Discount Notes at December 31, 1999 is
     approximately $294.0 million, which amount represents the $470.0 million
     principal amount due at maturity less the unamortized debt discount of
     approximately $176.0 million at December 31, 1999.

(B)  Represents the stated interest rate of the Senior Discount Notes per the
     indenture.  The Senior Discount Notes' effective interest rate, inclusive
     of the amortization of debt discount and deferred financing costs over
     their term, approximates 14.2%.



ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

  The Company's audited consolidated financial statements at December 31, 1999
and 1998, for the year ended December 31, 1999, the three months ended December
31, 1998, for each of the two years in the period ended September 30, 1998, and
the unaudited consolidated financial statements for the three months ended
December 31, 1997 are included in this report on Form 10-K as set forth on page
F-1.


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

None.


                                      36
<PAGE>

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

ITEM 11.  EXECUTIVE COMPENSATION

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

  Pursuant to instruction G(3) to Form 10-K, Items 10, 11, 12 and 13 are omitted
because the Company will file a definitive proxy statement (the "Proxy
Statement") pursuant to Regulation 14A under the Securities and Exchange Act of
1934 not later than 120 days after the close of the fiscal year. The information
required by such Items will be included in the definitive proxy statement to be
so filed for the Company's annual meeting of stockholders scheduled for June 12,
2000 and is hereby incorporated by reference.


                                    PART IV

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

  (a)  DOCUMENTS FILED AS PART OF THE REPORT:

(1)  Financial Statements

     Reference is made to page F - 1 for a list of all financial statements
     filed as part of this report.

(2)  Financial Statement Schedules:

     Reference is made to page F - 1 for Schedule II - Valuation and Qualifying
     Accounts and accompanying Audit Opinion. Financial statement schedules
     other than those listed above have been omitted because they are either not
     required, not applicable or the information is otherwise included herein.

(3)

Exhibits

      Exhibit
        Number                         Description
        ------                         -----------

3.1   Certificate of Incorporation of the Registrant. (2)
3.2   Bylaws of the Registrant, as amended. (2)
4.1   Reference is made to Exhibits 3.1 through 3.2.
4.2   Specimen stock certificate representing shares of Series B Common Stock of
      the Registrant. (13)
4.3   Purchase Agreement, dated April 6, 1998, among the Registrant, Bear,
      Stearns & Co. Inc., ING Baring (U.S.) Securities, Inc., J.P. Morgan
      Securities, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated.
      (1)
4.4   Indenture, dated as of April 13, 1998, between the Registrant and The Bank
      of New York. (1)
4.5   Form of 13% Senior Discount Notes due 2008 and schedule of 13% Senior
      Discount Notes due 2008. (1)
4.6   Registration Rights Agreement, dated as of April 13, 1998 among the
      Registrant and the Initial Purchasers. (1)
10.1  Form of Indemnification Agreement entered into by the Registrant and each
      of its executive officers and directors and schedule listing all executive
      officers and directors who have executed an Indemnification Agreement. (2)
10.2  1995 Stock Option Plan and related form of option agreement. (1)

                                       37
<PAGE>

10.3    1997 Stock Option Plan and related form of option agreement.  (1)
10.4    Warrant Agreement, dated as of April 13, 1998, among the Registrant and
        the Bank of New York and related form of warrant attached thereto. (1)
10.5    Warrant Registration Rights Agreement, dated as of April 13, 1998, among
        the Registrant and the Initial Purchasers. (1)
10.6    Common Stock Purchase Agreement, dated as of December 30, 1997, among
        the Registrant, Colorado Spectra 3, LLC, Enron Capital & Trade Resources
        Corp. and the holders of $405,000 in principal amount of the
        Registrant's convertible subordinated promissory notes. (1)
10.7    First Amendment to Common Stock Purchase Agreement, dated as of February
        9, 1998, among the Registrant, Colorado Spectra 3, LLC and Enron Capital
        & Trade Resources Corp. (1)
10.8    Amended and Restated Investor Rights Agreement, dated as of April 13,
        1998, among the Registrant and the Investors set forth therein, as
        amended. (2)
10.9    Securityholders Agreement, dated as of December 30, 1997, among the
        Registrant, Enron Capital & Trade Resources Corp., Colorado Spectra 1,
        LLC, Colorado Spectra 2, LLC and Colorado Spectra 3, LLC, as amended.(2)
10.10   Business Opportunity Agreement, dated as of December 30, 1997, among the
        Registrant, Enron Capital & Trade Resources Corp., Colorado Spectra 1,
        LLC, Colorado Spectra 2, LLC and Colorado Spectra 3, LLC. (1)
10.11   Management Consulting Services Agreement, dated as of December 30, 1997,
        between the Registrant and Corporate Managers, LLC. (1)
10.12   Management Consulting Services Agreement, dated as of December 30, 1997,
        between the Registrant and Enron Capital & Trade Resources Corp. (1)
10.13   Form of Warrant to Purchase Series B Common Stock and schedule listing
        all holders of such warrants entitled to purchase a number of shares of
        Series B Common Stock equal to or greater than 1% of the Company's
        common stock outstanding as of May 31, 1998. (1)
10.14   Warrant to Purchase 2,110,140 shares of Series B Common Stock issued to
        Colorado Spectra 2, LLC on December 30, 1997. (1)
10.15   Agreement for Use of Operating Property, dated as of February 25, 1997,
        between FirstWorld Anaheim and the City of Anaheim. (1)
10.16   Universal Telecommunications System Participation Agreement, dated as of
        February 25, 1997, among the Registrant, FirstWorld Anaheim and the City
        of Anaheim. (1)
10.17   Development Fee Agreement, dated as of February 25, 1997, between the
        Registrant and the City of Anaheim. (1)
*10.18  Agreement for Lease of Telecommunications Conduit, dated as of March
        5, 1998, between FirstWorld Orange Coast and The Irvine Company. (4)
*10.19  Telecommunications System License Agreement, dated as of March 5,
        1998, between FirstWorld Orange Coast and The Irvine Company. (4)
10.20   Office Lease for Genesee Executive Plaza, dated as of September 4, 1996,
        between Talcott Realty I Limited Partnership and the Registrant. (1)
10.21   Standard Industrial/Commercial Single-Tenant Lease-Gross, dated as of
        August 26, 1996, between Scope Development and FirstWorld Anaheim. (1)
10.22   SpectraNet International Founders' Sale Agreement, dated as of January
        31, 1997. (3)
10.23   System Acquisition Agreement, dated as of June 19, 1997, between ACE*COM
        and the Registrant. (3)
10.24   Employment Agreement, dated as of September 28, 1998, between the
        Registrant and Sheldon S. Ohringer. (4)
10.25   Stock Option Agreement, dated as of September 28, 1998, between the
        Registrant and Sheldon S. Ohringer. (5)
10.26   Employment Agreement, dated as of October 1, 1998, between the
        Registrant and Scott Chase. (6)
10.27   Employment Agreement, dated as of November 9, 1998, between the
        Registrant and Marion K. Jenkins. (6)
10.28   Employment Agreement, dated as of November 30, 1998, between the
        Registrant and David Gandini. (6)

                                      38
<PAGE>

10.29   Employment Agreement dated as of December 7, 1998 between the Registrant
        and Doug Kramer. (6)
10.30   Lease between the Registrant and The Prudential Insurance Company of
        America, dated as of December 1, 1999. (6)
10.31   First Amendment to Lease (Genesee Executive Plaza) dated as of July 31,
        1998 between Arden Realty Limited Partnership (successor in interest to
        Talcott Realty I Limited Partnership) and the Registrant. (6)
10.32   First Amendment to Amended and Restated Investor Rights Agreement, dated
        as of September 28, 1998, among the Registrant, Enron Capital & Trade
        Resources Corp., Colorado Spectra 1, LLC, Colorado Spectra 2, LCC and
        Colorado Spectra 3, LLC. (6)
10.33   Employment Agreement, as amended, between the Registrant and Jeffrey L.
        Dykes dated December 14, 1998. (7)
10.34   Employment Agreement dated January 27, 1999, between the Company and
        Paul C. Adams. (8)
10.35   First Amendment to Lease between the Registrant and the Prudential
        Insurance Company of America dated March 1, 1999. (8)
10.36   FirstWorld Communications, Inc. Quarterly Bonus Program adopted as of
        May 3, 1999. (9)
10.37   The 1999 Equity Incentive Plan of FirstWorld Communications, Inc.
        effective as of March 8, 1999. (10)
10.38   Form of Incentive Stock Option Agreement of FirstWorld Communications,
        Inc. under the 1999 Plan.  (10)
10.39   Form of Non-Qualified Stock Option Agreement of FirstWorld
        Communications, Inc. under the 1999 Plan. (10)
10.40   Form of Stock Appreciation Right Award Agreement of FirstWorld
        Communications, Inc. under the 1999 Plan. (10)
10.41   First Amendment to Employment Agreement, dated as of May 20, 1999,
        between the Registrant and Sheldon S. Ohringer. (11)
10.42   Office Lease, dated June 28, 1999, between Board of Administration as
        Trustee for the Police and Fire Department Retirement Fund and the
        Registrant. (11)
10.43   Equity Investment Agreement, effective as of December 22, 1999, as
        amended, between the Company and Colorado Spectra 4, LLC. (12)
10.44   Stock Purchase Agreement dated February 3, 2000 between the Registrant
        and Lucent Technologies, Inc. (13)
10.45   Stock Purchase Agreement dated February 3, 2000 between the Registrant
        and SAIC Venture Capital Corporation. (13)
10.46   Stock Purchase Agreement dated February 9, 2000 between the Registrant
        and Microsoft Corporation. (13)
10.47   Stock Purchase Agreement dated February 11, 2000 between the Registrant
        and TPG FirstWorld I LLC. (13)
10.48   First Amendment to Employment Agreement dated January 27, 2000 between
        the Registrant and Paul C. Adams. (13)
21.1    Subsidiaries of the Registrant, as amended. (12)
27.1    Financial Data Schedule. (13)

*  Portions of this exhibit have been omitted pursuant to an order granting
   confidential treatment filed with the Securities and Exchange Commission.

(1)  Incorporated herein by reference to the Registrant's Registration Statement
     on Form S-4 (No. 333-57829) filed with the Securities and Exchange
     Commission on June 26, 1998.

(2)  Original agreement incorporated by reference to the Registrant's
     Registration Statement on Form S-4 (No. 333-57829) filed with the
     Securities and Exchange Commission on August 24, 1998; amendment dated
     December 22, 1999 incorporated herein by reference to the Registrant's
     Registration Statement on Form S-1 filed with the Securities and Exchange
     Commission on December 22, 1999.

                                      39
<PAGE>

(3)  Incorporated herein by reference to Amendment No. 1 to the Registrant's
     Registration Statement on Form S-4 (No. 333-57829) filed with the
     Securities and Exchange Commission on August 24, 1998.

(4)  Incorporated herein by reference to Amendment No. 2 to the Registrant's
     Registration Statement on Form S-4 (No. 333-57829) filed with the
     Securities and Exchange Commission on October 8, 1998.

(5)  Incorporated herein by reference to the Registrant's Registration Statement
     on Form S-8 (No. 333-68195) filed with the Securities and Exchange
     Commission on December 1, 1998.

(6)  Incorporated herein by reference to the Registrant's Annual Report on Form
     10-K filed with the Securities and Exchange Commission on December 22,
     1998.

(7)  Incorporated herein by reference to the Registrant's Quarterly Report on
     Form 10-Q filed with the Securities and Exchange Commission on February 12,
     1999.

(8)  Incorporated herein by reference to the Registrant's Quarterly Report on
     Form 10-Q filed with the Securities and Exchange Commission on May 17,
     1999.

(9)  Incorporated herein by reference to the Registrant's Registration Statement
     on Form S-8 (No. 333-78611) filed with the Securities and Exchange
     Commission on May 17, 1999.

(10) Incorporated herein by reference to the Registrant's Registration Statement
     on Form S-8 (No. 333-76325) filed with the Securities and Exchange
     Commission on April 14, 1999.

(11) Incorporated herein by reference to the Registrant's Quarterly Report on
     Form 10-Q filed with the Securities and Exchange Commission on August 16,
     1999.

(12) Incorporated herein by reference to the Registration Statement on Form S-1
     (No. 333-93357) filed with the Securities and Exchange Commission on
     December 22, 1999.

(13) Incorporated herein by reference to Amendment No. 1 to  the Registration
     Statement on Form S-1 (No. 333-93357) filed with the Securities and
     Exchange Commission on February 16, 2000.

(b)  REPORTS ON FORM 8-K

      There were no reports on Form 8-K filed by the Company during the fourth
      quarter of the fiscal year ended December 31, 1999.

(c)  EXHIBITS

      The exhibits required by this Item are listed under Item 14(a)(3).

(d)  FINANCIAL STATEMENT SCHEDULES

      The consolidated financial statement schedules required by this Item are
      listed under Item 14(a)(2).


                                      40
<PAGE>

                                  SIGNATURES

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

Dated: February 28, 2000     FIRSTWORLD COMMUNICATIONS, INC.

                               /s/   Sheldon S. Ohringer

                              ___________________________
                              Name: Sheldon S. Ohringer
                              Title: President, Chief Executive Officer,
                                     and director

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
        Signature                                      Title                                      Date
___________________________             --------------------------------------          ------------------------
<S>                                     <C>                                            <C>

/s/  Sheldon S. Ohringer                President and Chief Executive Officer               February 28, 2000
___________________________             (Principal Executive Officer)
    Sheldon S. Ohringer


/s/   Paul C. Adams                     Vice President, Finance, Treasurer                  February 28, 2000
___________________________             and Assistant Secretary (Principal
      Paul C. Adams                     Financial and Accounting Officer)


/s/   Donald L. Sturm                   Chairman of the Board                               February 28, 2000
___________________________
     Donald L. Sturm


/s/   C. Kevin Garland                  Director                                            February 28, 2000
___________________________
     C. Kevin Garland


/s/   Stephen R. Horn                   Director                                            February 28, 2000
___________________________
      Stephen R. Horn


/s/   James O. Spitzenberger            Director                                            February 28, 2000
___________________________
  James O. Spitzenberger


/s/   John C. Stiska                    Director                                            February 29, 2000
___________________________
     John C. Stiska


/s/   Melanie L. Sturm                  Director                                            February 28, 2000
___________________________
     Melanie L. Sturm
</TABLE>

                                       41
<PAGE>

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
<S>                                                                                  <C>
Audited Financial Statements:
  Report of Independent Accountants................................................   F-3

  Consolidated Balance Sheets at December 31, 1999 and 1998........................   F-4

  Consolidated Statements of Operations for the year ended December 31, 1999, the
   three months ended December 31, 1998 and each of the years ended
   September 30, 1998 and 1997.....................................................   F-5

  Consolidated Statements of Stockholders' Equity (Deficit) for the year ended
   December 31, 1999, the three months ended December 31, 1998 and each of the
   years ended September 30, 1998 and 1997.........................................   F-6

  Consolidated Statements of Cash Flows for the year ended December 31, 1999, the
   three months ended December 31, 1998 and each of the years ended
   September 30, 1998 and 1997.....................................................   F-8

  Notes to Consolidated Financial Statements.......................................   F-9

Unaudited Interim Financial Statements:
  Consolidated Statement of Operations (Unaudited) for the three months ended
    December 31, 1997..............................................................  F-33

  Consolidated Statement of Stockholders' Equity (Deficit) (Unaudited) for the
   three months ended December 31, 1997............................................  F-34

  Consolidated Statement of Cash Flows (Unaudited) for the three months ended
   December 31, 1997...............................................................  F-36

  Notes to Consolidated Financial Statements (Unaudited)...........................  F-37

Financial Statement Schedule
  Report of Independent Accountants on Financial Statement Schedule................  F-38

  Schedule II--Valuation and Qualifying Accounts...................................  F-39
</TABLE>

                                      F-1
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS



To the Board of Directors and Stockholders of FirstWorld Communications, Inc.

  In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
FirstWorld Communications, Inc. and its subsidiaries at December 31, 1999 and
1998, and the results of their operations and their cash flows for the year
ended December 31, 1999, the three months ended December 31, 1998 and each of
the years ended September 30, 1998 and 1997, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.



PRICEWATERHOUSECOOPERS LLP
Denver, Colorado
February 11, 2000


                                      F-3
<PAGE>

                        FIRSTWORLD COMMUNICATIONS, INC.
                          CONSOLIDATED BALANCE SHEETS
                       (IN THOUSANDS, EXCEPT SHARE DATA)


<TABLE>
<CAPTION>
                                                                                         December 31,     December 31,
                                                                                             1999             1998
                                                                                        ---------------  --------------
                                        ASSETS
Current assets:
<S>                                                                                      <C>              <C>
 Cash and cash equivalents.............................................................     $  28,608         $ 29,659
 Marketable securities.................................................................        20,615          170,030
 Accounts receivable, net of allowance for doubtful accounts of
     $2,568 and  $120, respectively....................................................        11,551            4,656
 Due from affiliates...................................................................         3,240                7
 Prepaid expenses and other............................................................         3,773            2,627
 Revenues in excess of billings........................................................         1,628            1,539
                                                                                            ---------         --------
        Total current assets...........................................................        69,415          208,518
                                                                                            ---------         --------

Property and equipment, net............................................................       123,161           61,247
Goodwill and intangibles, net of accumulated amortization of
     $12,903, and $97, respectively....................................................        48,858            5,350
Long-haul network rights,  not in service..............................................        11,060           11,060
Deferred financing costs, net..........................................................         7,340            8,259
Other assets...........................................................................         1,949              382
                                                                                            ---------         --------
        Total assets...................................................................     $ 261,783         $294,816
                                                                                            =========         ========


LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:
 Accounts payable......................................................................     $  28,521         $ 13,573
 Other accrued liabilities.............................................................        13,863            2,866
 Accrued payroll and related liabilities...............................................         3,994            1,156
 Capital lease obligations, current portion............................................           468              259
 Long-term debt, current portion.......................................................            87               75
                                                                                            ---------         --------
        Total current liabilities......................................................        46,933           17,929
                                                                                            ---------         --------

Long-term debt, net of current portion and discount....................................       294,034          258,135
Capital lease obligations, including interest, net of current portion..................         7,616            6,958
                                                                                            ---------         --------
        Total liabilities..............................................................       348,583          283,022
                                                                                            ---------         --------

Commitments and contingent liabilities (Notes 7 and 14)

Stockholders' equity (deficit):
 Preferred stock, $.0001 par value per share, 10,000,000 shares
      authorized; no shares outstanding................................................            --               --
 Common stock, voting, $.0001 par value, 100,000,000 shares authorized;
      Series A, 10,135,164 shares designated; 10,135,164 shares issued
          and outstanding..............................................................             1                1
      Series B, 89,864,836 shares designated; 18,663,358,  and 16,137,958
          shares issued and outstanding at  December 31, 1999 and 1998,
           respectively................................................................             2                2

 Additional paid-in capital............................................................        53,740           45,830
 Warrants..............................................................................        31,963           31,963
 Stockholder receivables...............................................................           (45)            (158)
 Accumulated deficit...................................................................      (172,461)         (65,844)
                                                                                            ---------         --------
        Total stockholders' equity (deficit)...........................................       (86,800)          11,794
                                                                                            ---------         --------
        Total liabilities and stockholders' equity (deficit)...........................     $ 261,783         $294,816
                                                                                            =========         ========

</TABLE>

                See notes to consolidated financial statements.


                                      F-4
<PAGE>

                        FIRSTWORLD COMMUNICATIONS, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                Three Months                   Year Ended
                                           Year Ended               Ended            --------------------------------
                                        December 31, 1999        December 31,        September 30,     September 30,
                                               1999                  1998                 1998              1997
                                      ------------------------------------------------------------------------------
<S>                                     <C>                   <C>                    <C>               <C>
Revenue:
 Internet services....................          $  21,246            $    123              $   ---            $  ---
 Web integration and consulting
   services (Note 2)..................             28,512               2,285                  ---               ---
 Telephony services...................              4,738                 565                1,091               171
                                                ---------            --------             --------           -------
   Total revenue......................             54,496               2,973                1,091               171
                                                ---------            --------             --------           -------

Operating expenses:
 Network and service costs............             39,606               2,707                1,029               474
 Selling, general and
   administrative  (Note 14)..........             67,128              10,812               16,113             7,421
 Depreciation and amortization........             23,411               1,812                2,425               501
                                                ---------            --------             --------           -------
   Total operating expenses...........            130,145              15,331               19,567             8,396
                                                ---------            --------             --------           -------

Loss from operations..................            (75,649)            (12,358)             (18,476)           (8,225)

Other income (expense):
 Interest income......................              6,960               3,227                6,749               149
 Interest expense.....................            (37,928)             (8,600)             (16,898)           (1,372)
                                                ---------            --------             --------           -------
   Total other expense................            (30,968)             (5,373)             (10,149)           (1,223)
                                                ---------            --------             --------           -------

Loss before extraordinary item........           (106,617)            (17,731)             (28,625)           (9,448)

Extraordinary item---extinguishment
 of debt..............................                 --                  --               (4,731)             (105)
                                                ---------            --------             --------           -------

Net loss..............................          $(106,617)           $(17,731)            $(33,356)          $(9,553)
                                                =========            ========             ========           =======
</TABLE>

                See notes to consolidated financial statements.

                                      F-5
<PAGE>

                        FIRSTWORLD COMMUNICATIONS, INC.
           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                       (IN THOUSANDS, EXCEPT SHARE DATA)


<TABLE>
<CAPTION>
                                                                                    Series A               Series B
                                                                                   Common Stock        Common Stock      Additional
                                                                          -----------------------  ---------------------   Paid-in
                                                                            Shares         Amount   Shares        Amount   Capital
                                                                          ----------    --------- ----------    --------  ---------
                                                                                   (Note 1)               (Note 1)
<S>                                                                       <C>           <C>       <C>           <C>       <C>
Balance at October 1, 1996...............................................         --    $      --         --    $     --  $      --
Cancellation of shareholder notes receivable for common stock repurchase.         --           --         --          --         --
Repayment of shareholder notes receivable................................         --           --         --          --         --
Issuance of Series C preferred stock with warrants to purchase 520,000
 shares of common stock, net of issuance costs of $706...................         --           --         --          --         --
Issuance of common stock warrants as finders fees........................         --           --         --          --         --
Issuance of common stock warrant for cash................................         --           --         --          --         --
Exercise of options and warrants to purchase common stock................         --           --         --          --         --
Issuance of common stock warrants with debt..............................         --           --         --          --         --
Net loss for the fiscal year ended September 30, 1997....................         --           --         --          --         --
                                                                          ----------    --------- ----------    --------  ---------
Balance at September 30, 1997............................................         --           --         --          --         --
Exercise of options to purchase common stock--October 1997 to............         --           --         --          --         --
 December 1997
Issuance of Series A common stock with warrants to purchase
  10,135,164 shares of Series B common stock, net of offering costs
  of $3.9 million........................................................ 10,135,164       16,914         --          --         --
Conversion of Series C preferred stock, Series B preferred stock,
 Series A preferred stock and common stock to Series B common stock
 as follows:
 Series C preferred stock; conversion ratio of 1.39:1, including
  anti-dilutive adjustments..............................................         --           --  3,621,120      12,279         --
 Series B preferred stock and common stock; conversion ratio of 1:1......         --           --  5,545,638       3,486         --
 Series A preferred stock; conversion ratio of 1:10......................         --           --     11,867         395         --
Issuance of Series B common stock with warrants to purchase 6,666,666
  shares of Series B common stock, net of offering costs of $1.8 million.         --           --  6,666,666      12,467         --
Issuance of warrants to purchase 3,713,094 shares of Series B common
 stock in connection with the issuance of 13% Senior Discount Notes......         --           --         --          --         --
Exercise of options to purchase Series B common stock....................         --           --     67,917          56         --
Establishment of $.0001 par value for Series A and B common stock in
 connection with Delaware reincorporation................................         --      (16,913)        --     (28,681)    45,594
Exercise of options to purchase Series B common stock--post Delaware
 reincorporation.........................................................         --           --     16,500          --         23
Net loss for  the fiscal year ended September 30, 1998...................         --           --         --          --         --
                                                                          ----------    --------- ----------    --------  ---------
Balance at September 30, 1998............................................ 10,135,164            1 15,929,708           2     45,617
Proceeds from issuance of stock and related warrants.....................         --           --     42,250          --        190
Shares issued in connection with the exercise of options.................         --           --    166,000          --         23
Net loss for the three months ended December 31, 1998....................         --           --         --          --         --
                                                                          ----------    --------- ----------    --------  ---------
Balance at December 31, 1998............................................. 10,135,164            1 16,137,958           2     45,830
Shares issued in connection with acquisitions............................         --           --  1,820,428          --      9,924
Exercise of options and warrants to purchase Series B common stock.......         --           --    704,972          --      1,364
Charge associated with equity investment (Note 1)........................         --           --         --          --     (5,270)
Charge associated with stock sold by shareholders (Note 14)..............         --           --         --          --      1,892
Write-off of stockholder receivables.....................................         --           --         --          --         --
Net loss for the year ended December 31, 1999............................         --           --         --          --         --
                                                                          ----------    --------- ----------    --------  ---------
Balance at December 31, 1999............................................. 10,135,164    $       1 18,663,358    $      2  $  53,740
                                                                          ==========    ========= ==========    ========  =========



                                                                                                                       See notes to

</TABLE>


                                      F-6
<PAGE>

<TABLE>
<CAPTION>

        Series C                Series B              Series A
      Convertible              Convertible          Convertible
    Preferred Stock          Preferred Stock      Preferred Stock              Common Stock
-----------------------  -----------------------  -----------------------  ---------------------                  Stockholder
   Shares      Amount       Shares       Amount      Shares      Amount       Shares      Amount      Warrants    Receivables
------------  ---------  ------------  ---------  ------------  ---------  ------------  ---------  ------------  -----------
<S>           <C>        <C>           <C>        <C>           <C>        <C>           <C>        <C>           <C>
         --   $      --    2,016,638    $ 3,670       118,667    $   395     3,246,000   $  ( 229)      $   --     $    (173)
         --          --           --         --            --         --       (90,000)       (23)          --            23
         --          --           --         --            --         --            --         --           --            53

  2,600,000      12,279           --         --            --         --            --         --           16            --
         --          --           --         --            --         --            --         --           37            --
         --          --           --         --            --         --            --         --          200            --
         --          --           --         --            --         --       106,900         25           --            --
         --          --           --         --            --         --            --         --          748            --
         --          --           --         --            --         --            --         --           --            --
------------  ---------  ------------  ---------  ------------  ---------  ------------  ---------  ------------  -----------
  2,600,000      12,279    2,016,638      3,670       118,667        395     3,262,900       (227)       1,001           (97)
         --          --           --         --            --         --       266,100         43           --            --



         --          --           --         --            --         --            --         --        9,628            --




 (2,600,000)    (12,279)          --         --            --         --            --         --           --            --
         --          --   (2,016,638)    (3,670)           --         --    (3,529,000)       184           --            --
         --          --           --         --      (118,667)      (395)           --         --           --            --

         --          --           --         --            --         --            --         --        6,333            --

         --          --           --         --            --         --            --         --       15,001            --
         --          --           --         --            --         --            --         --           --            --

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

         --          --           --         --            --         --            --         --           --            --
         --          --           --         --            --         --            --         --           --            --
------------  ---------  ------------  ---------  ------------  ---------  ------------  ---------  ------------  -----------
         --          --           --         --            --         --            --         --       31,963           (97)
         --          --           --         --            --         --            --         --           --           (61)
         --          --           --         --            --         --            --         --           --            --
         --          --           --         --            --         --            --         --           --            --
------------  ---------  ------------  ---------  ------------  ---------  ------------  ---------  ------------  -----------
         --          --           --         --            --         --            --         --       31,963          (158)
         --          --           --         --            --         --            --         --           --            --
         --          --           --         --            --         --            --         --           --            --
         --          --           --         --            --         --            --         --           --            --
         --          --           --         --            --         --            --         --           --            --
         --          --           --         --            --         --            --         --           --           113
         --          --           --         --            --         --            --         --           --            --
------------  ---------  ------------  ---------  ------------  ---------  ------------  ---------  ------------  -----------
         --   $      --           --    $    --            --    $    --            --   $     --      $31,963        $  (45)
============  =========  ============  =========  ============  =========  ============  =========  ============  ===========
</TABLE>



<TABLE>
<CAPTION>
<S>                 <C>

                       Total
  Accumu-           Stockholders'
   lated               Equity
  Deficit             (Deficit)
-----------         -------------
 $ (5,204)           $  (1,541)
       --                   --
       --                   53

       --               12,295
       --                   37
       --                  200
       --                   25
       --                  748
   (9,553)              (9,553)
---------           ----------
  (14,757)               2,264
       --                   43

       --               26,542



       --                   --




       --                   --
       --                   --
       --               18,800

       --               15,001

       --                   56
       --                   --

       --                   23
  (33,356)             (33,356)
---------           ----------
  (48,113)              29,373
       --                  129
       --                   23
  (17,731)             (17,731)
---------           ----------
  (65,844)              11,794
       --                9,924
       --                1,364
       --               (5,270)
       --                1,892
       --                  113
 (106,617)            (106,617)
---------           ----------
$(172,461)           $ (86,800)
=========           ==========

</TABLE>


consolidated financial statements.



                                      F-7


<PAGE>

                        FIRSTWORLD COMMUNICATIONS, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                    Three Months             Year Ended
                                                                  Year Ended           Ended          -----------------------------
                                                                  December 31,       December 31,     September 30,   September 30,
                                                                     1999              1998               1998             1997
                                                                --------------     -------------      ------------    -------------
<S>                                                           <C>                   <C>              <C>                    <C>
Cash flows from operating activities:
  Net loss..................................................    $     (106,617)    $     (17,731)     $    (33,356)   $      (9,553)
  Adjustments to reconcile net loss to net cash
    used by operating activities:
    Depreciation and amortization expense...................            23,411             1,812             2,425              501
    Amortization of deferred financing costs................               919               243             1,203               61
    Non-cash interest expense...............................               ---               ---               293               38
    Write-off of stockholder receivable.....................               113               ---               ---              ---
    Accretion of senior notes...............................            35,200             8,323            14,571               58
    Charge associated with stock sold by Stockholders.......             1,892               ---               ---              ---
    Extraordinary loss - extinguishment of debt.............               ---               ---             3,731              105
    Changes in assets and liabilities, net of effects of
      acquisitions:
      Restricted cash related to operating activities.......               ---               ---                50              (50)
      Accounts receivable..................................             (8,024)           (1,449)             (420)              30
      Other assets.......................................               (1,332)              962            (3,330)             (98)
      Accounts payable.....................................              9,728             5,054             1,100            1,462
      Accrued payroll related liabilities..................              2,421               555                17              ---
      Revenue in excess of billings........................               (746)              ---               ---              ---
      Other liabilities....................................              1,379             1,300               556              ---
                                                                --------------     -------------      ------------    -------------
      Net cash used by operating activities... .............           (41,656)             (931)          (13,160)          (7,446)
                                                                --------------     -------------      ------------    -------------
Cash flows from investing activities:
  Purchases of held-to-maturity marketable securities........         (189,606)         (127,212)         (236,701)             ---
  Maturities of held-to-maturity marketable securities.......          339,021           122,773            71,110              ---
  Purchase of property and equipment.........................          (63,085)          (14,453)          (23,041)         (12,647)
  Acquisitions, net of cash acquired.........................          (44,761)          (22,307)              ---              ---
  Proceeds from sale of assets...............................              103               ---               ---              ---
                                                                --------------     -------------      ------------    -------------
      Net cash provided (used) by investing activities......            41,672           (41,199)         (188,632)         (12,647)
                                                                --------------     -------------      ------------    -------------
Cash flows from financing activities:
  Proceeds from issuance of Senior Discount Notes and
   related warrants..........................................              ---               ---           250,205              ---
  Principal payments on debt, capital leases and related
   warrants...................................................          (2,431)             (117)             (817)            (641)
  Proceeds from exercise of stock options and warrants.......            1,364                23               122               25
  Proceeds from issuance of Series A common stock and
   related warrants net of offering costs.....................             ---               ---            26,136              ---
  Proceeds from issuance of Series B common stock and
   related warrants, net of offering costs....................             ---               129            18,800              ---
  Proceeds from issuance of Series C preferred stock and
   related warrants...........................................             ---               ---               ---            4,529
  Proceeds from issuance of common stock warrants............              ---               ---               ---              200
  Proceeds from collection of stockholder receivables........              ---               ---               ---               53
  Proceeds from issuance of convertible bridge notes.........              ---               ---               ---            7,347
  Proceeds from draws under revolving credit facility and
   related warrants...........................................             ---               ---             3,796           12,172
  Proceeds from short-term borrowings........................              ---               ---               ---            1,000
  Principal payments on revolving credit facility............              ---               ---           (16,300)             ---
  Payment of deferred financing costs........................              ---              (285)           (8,647)          (4,128)
                                                                --------------     -------------      ------------    -------------
    Net cash provided (used) by financing activities..........          (1,067)             (250)          273,295           20,557
                                                                --------------     -------------      ------------    -------------
Net increase (decrease) in cash and cash equivalents........            (1,051)          (42,380)           71,503              464
Cash and cash equivalents, beginning of period..............            29,659            72,039               536               72
                                                                --------------     -------------      ------------    -------------
Cash and cash equivalents, end of period....................    $       28,608     $      29,659      $     72,039    $         536
                                                                ==============     =============      ============    =============
Supplemental cash flow information:
 Effects of acquisitions:
   Assets acquired............................................  $       63,341      $     24,617      $        ---    $         ---
   Liabilities assumed........................................          (8,656)           (2,310)              ---              ---
   Common stock issued........................................          (9,924)              ---               ---              ---
   Less cash paid.............................................         (45,431)          (22,307)              ---              ---
                                                                --------------     -------------      ------------    -------------
   Net cash acquired from acquisitions......................    $         (670)     $        ---      $        ---    $         ---
                                                                ==============     =============      ============    =============
</TABLE>

                See notes to consolidated financial statements.


                                      F-8
<PAGE>

                        FIRSTWORLD COMMUNICATIONS, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--THE COMPANY

  FirstWorld Communications, Inc. (together with its wholly owned subsidiaries,
the "Company" or "FirstWorld") commenced operations in July 1992. On January 29,
1998, the Company changed its name to FirstWorld Communications, Inc. from
SpectraNet International. Effective June 26, 1998, the Company changed its state
of incorporation from California to Delaware. On October 16, 1998, the Board of
Directors of the Company (the "Board") voted to change the Company's fiscal year
end from September 30 to December 31, beginning with a transition period ending
on December 31, 1998. Accordingly, the Company has included audited financial
information for the three months ended December 31, 1998.

  FirstWorld is a network-based provider of Internet, data and communications
services. The Company's service offerings include data center co-locations;
high-speed Internet access, such as dedicated access and digital subscriber line
("DSL"); web hosting and design; dial-up Internet access; and web integration
and consulting services. To complement its data services offerings, FirstWorld
also provides local, long distance and other telephony services in the Los
Angles metropolitan market. The Company's strategy is to offer its customers a
single source solution to meet the broad range of the increasingly complex
Internet, data and communications needs. The Company markets its services, using
a consultative sales approach, to small- and medium-sized businesses, and also
selectively to larger businesses, consumers and wholesale customers.

Equity Recapitalization

  On December 30, 1997, the Company (i) converted its three existing classes of
preferred stock into common stock in accordance with the automatic conversion
provision of its then existing charter in order to simplify the Company's
capital structure and to eliminate the rights, preferences and privileges of the
preferred stock; (ii) amended its Certificate of Incorporation to substantially
increase the Company's authorized capital; and (iii) amended its Certificate of
Incorporation to designate two series of common stock (See December 30, 1997
Private Placement below). The Series A common stock and Series B common stock
are identical in all material respects, except that the holders of Series A
common stock possess ten votes per share on all matters subject to a vote of
shareholders while the holders of Series B common stock possess one vote per
share. Pursuant to the amended Certificate of Incorporation, the Company may
also issue preferred stock from time to time in one or more series. As of
December 31, 1999, no such preferred stock had been issued.

Private Placements

  January 31, 1997 private placement.  On January 31, 1997, in connection with a
private placement offering, the Company issued 2,600,000 shares of Series C
preferred stock, consisting of 1,044,700 shares issued for cash proceeds
totaling $4.5 million, net of placement agent commissions and related fees, and
1,555,300 shares issued through the retirement of certain convertible notes at
$5.00 per share. In connection with this offering, the holders of Series C
shares also received warrants for the purchase of 520,000 shares of Series B
common stock (Note 12).

  December 30, 1997 private placement.  On December 30, 1997, the Company
consummated a private placement of equity securities with entities controlled by
a majority shareholder (the "Sturm Entities") and Enron North America Corp.
("ENA"). In connection with this placement, the Company issued 5,000,000 shares
of Series A common stock to each of the Sturm Entities and ENA at an issue price
of $3.00 per share. The Company also issued an aggregate of 135,164 shares of
Series A common stock to noteholders upon the automatic conversion of certain
notes pursuant to the terms thereof at a conversion price of $3.00 per share.
Aggregate proceeds from this offering, exclusive of the conversion of the notes,
totaled $26.5 million, net of offering commission fees paid in connection with
the consummation of this equity placement. In connection with this private
placement, the Company also issued to each of the Sturm Entities and ENA
warrants to purchase 5,000,000 shares of Series B common stock; and to
noteholders, warrants to purchase an aggregate of 135,164 shares of such Series
B common stock (Note 12).


                                      F-9
<PAGE>

  April 13, 1998 private placement.  On April 13, 1998, the Company consummated
a private placement of equity securities with the Sturm Entities and Enron
Communications, Inc. ("Enron Communications") pursuant to the exercise of an
existing option held by the Sturm Entities and Enron Communications. Pursuant to
this option, the Company sold to each of the Sturm Entities and Enron
Communications 3,333,333 shares of Series B common stock, resulting in aggregate
offering proceeds totaling $18.8 million, net of offering commissions. In
connection with this private placement, the Company also issued to each of the
Sturm Entities and Enron Communications warrants to purchase an additional
3,333,333 shares of Series B common stock (Note 12).


  December 2, 1999 equity investment agreement.  On December 2, 1999, the
Company entered into an Equity Investment Agreement (the "Agreement") with one
of the Sturm Entities, for a $50.0 million equity commitment. The Agreement
allows the Company to require that the Sturm Entity purchase up to $50.0 million
of Series B common stock priced at $7.50 per share. The Agreement will expire on
the earlier of June 18, 2000 or the closing of an initial public offering by the
Company.   The Agreement contains three dates on which the Company can require
that the Sturm Entity purchase the Company's Series B common stock. These dates
are: February 15, 2000, March 31, 2000 and the expiration date of the Agreement.
Additionally, if the cash, cash equivalents and marketable securities position
of the Company is $20.0 million or less, the Company will be deemed to have
automatically exercised $25.0 million of the commitment. The Company is required
to pay the Sturm Entity a $5.0 million fee for the commitment upon the earlier
of the (i) closing of an initial public offering by the Company; (ii) first
purchase date under the Agreement; (iii) or a sale of the Company as defined in
the Agreement.  Such commitment fee and related costs of approximately $270,000
was accounted for as a current liability and a permanent reduction of equity as
of December 31, 1999. See Note 15--Subsequent Events.

  February 10, 2000 equity transaction.  Effective February 10, 2000, ENA and an
affiliate of Enron Communications agreed to sell substantially all of their
Series A and Series B common shares, as well as all but three million of their
warrants to purchase shares of Series B common stock to a third party, subject
to customary closing conditions. The Series A shares will convert to Series B
shares upon transfer. Concurrent with this transaction, certain restrictions
were put in place with respect to the exercise of a warrant to purchase
approximately 375,000 shares, such that this warrant cannot be exercised prior
to the earlier of sixty-one days following the close of an initial public
offering, or February 15, 2001.

Delaware Reincorporation

  Effective June 26, 1998, the Company changed its state of incorporation from
California to Delaware. In connection therewith, a par value equal to $.0001 per
share was assigned to each series of common and preferred stock. As a result,
the consolidated statement of stockholders' equity (deficit) reflects a
reclassification to additional paid-in capital for the amounts in excess of par
value.

NOTE 2--SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

  The consolidated financial statements include the accounts of FirstWorld
Communications, Inc. and its wholly owned subsidiaries. All intercompany
accounts and transactions have been eliminated in consolidation.

Use of Estimates

  The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the financial statement date,
as well as the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.

Cash Equivalents

  The Company considers all highly liquid investments with original maturities
of three months or less at the time of purchase to be cash equivalents. The
Company invests primarily in high-grade, short-term investments that consist of
money market instruments, commercial paper and government agency issues.


                                     F-10
<PAGE>

Marketable Securities

  Marketable securities consist principally of commercial paper with original
maturities greater than three months but less than six months. The Company has
classified its marketable securities as held-to-maturity as management has the
intent and ability to hold those securities to maturity. Such securities are
recorded at cost, which approximates fair value.

Concentration of Credit Risk

  The Company's financial instruments that are exposed to concentrations of
credit risk consist principally of cash equivalents, marketable securities and
accounts receivable. The Company places its short-term cash investments with
government agencies and high credit-quality financial institutions while
commercial paper investments are placed with investment grade corporate issuers.
The Company limits the amount of credit exposure in any one institution or type
of investment instrument. Credit risk with respect to accounts receivable is
minimized due to the diversification of the Company's customer base. For
purchases of equipment for resale, the Company bears the credit risk of such
purchases independent of sales by the Company to its customers. For all
customers with monthly recurring or non-recurring monthly revenue in excess of
$250, for all DSL customers and all customers of resale equipment, credit is
extended based on an evaluation of the customer's financial condition and
generally, collateral is not required. The Company maintains allowances for
potential credit losses from such customers.

Property and Equipment

  Property and equipment is recorded at cost and depreciated using the straight-
line method generally over the estimated useful lives of the assets. Costs
capitalized in connection with the development of communication networks include
expenses associated with network infrastructure, data centers, communications
equipment, construction, capitalized labor and capitalized interest. Labor costs
incurred to construct or make assets ready for their intended use are
capitalized. Interest costs incurred during the period of time that internally
constructed assets are being made ready for their intended use are capitalized
as part of acquiring such assets. Depreciation of communications networks
commences when the applicable network becomes commercially operational. Data
centers are comprised of several different assets with varying useful lives,
accordingly, depreciation is determined based on each asset's classification.
Certain of the Company's assets are held under capital leases. Assets held under
capital leases are depreciated over the lesser of the term of the lease or the
estimated useful life of the asset.

  The Company capitalizes certain costs of developing software for internal use
in accordance with Statement of Position No. 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use."  Such costs generally
include personnel and related costs incurred during the application and
development stage of purchased software packages.  In addition, the Company also
capitalizes costs associated with purchased software.  Such costs are amortized
on a straight-line basis over the estimated useful lives of the assets,
generally five years.

  The estimated useful lives of the Company's principal classes of assets are as
follows:

    Building and improvements  ................ 30 years
    Network infrastructure  ................... 20 years
    Telecommunications equipment  ............. 5-7 years
    Furniture, office equipment and other  .... 3-7 years
    Leasehold improvements  ................... Shorter of estimated useful life
                                                or lease term

Goodwill and Intangibles

  Goodwill and intangibles consists substantially of goodwill associated with
acquisitions completed since November 1998.  All acquisitions are accounted for
using the purchase method of accounting.  Accordingly, the excess of total
consideration, including cash, stock and any assumed liabilities, over the fair
value of the assets and liabilities acquired is recorded as goodwill and is
generally being amortized over a three year life, with the exception of Optec,
Inc., doing business as FirstWorld Northwest, Inc. ("Optec"), which is being
amortized over 10 years.  The effects of the acquired businesses are included in
the Company's consolidated financial statements from the respective dates of
acquisition.  See further discussion in Note 3 - Business Acquisitions.



                                     F-11
<PAGE>

Long-Haul Network Rights

  The long-haul network rights to OC-3 level capacity to connect up to 15 cities
on a nationwide long-haul network being developed by Enron Communications, have
not yet been placed into service and are not being amortized as the network is
not yet available.  The Company anticipates that these long-haul network rights
will be placed into service during the first quarter of 2000. See further
discussion in Note 3 - Business Acquisitions.

Long-Lived Assets

  The Company assesses potential impairments to its long-lived assets when there
is evidence that events or changes in circumstances have made recovery of the
asset's carrying value unlikely. Potential impairment associated with network
infrastructure costs is measured on the basis of specific network projects. An
impairment loss would be recognized when the sum of the expected future net cash
flows is less than the carrying amount of the asset. Assets to be disposed of
are carried at the lower of their carrying amount or fair value less costs to
sell.

Debt Discount and Deferred Financing Costs

  Discounts recorded in connection with the issuance of debt financing are
deferred and amortized over the term of the related debt using the interest
method. Deferred financing costs include commitment fees and other costs related
to certain debt financing transactions and are being amortized over the term of
the related debt using the interest method.

Revenue Recognition

  The Company derives revenue from three primary sources: Internet services, web
integration and consulting services, and telephony services.

  Internet services revenue is derived from providing high-speed Internet
access, such as dedicated access and DSL, web hosting services, data center co-
location services, related equipment sales and dial-up access. Revenue for all
Internet services is recognized when the service is provided. Amounts billed
relating to future periods are recorded as deferred revenue and are recognized
in revenue when services are rendered.

  Web integration and consulting services revenue is derived from network
consulting, design, integration and equipment sales. Revenue is recognized under
the percentage-of-completion method of accounting based upon the ratio that
costs incurred bear to the total estimated cost for each contract. Included in
revenue for the year ended December 31, 1999 is approximately $3.4 million
relating to an equipment sale to Enron Communications Leasing Corporation, a
related party.

  Telephony services revenue is generated from local and long distance telephone
services. The Company generates telephony services revenue by replacing the
basic telephony services currently provided by incumbent local exchange
carriers, interexchange carriers and competitive local exchange carriers,
including local, long distance and other telephony services. Revenue is
recognized in the month telephony services are provided. Amounts billed relating
to future periods are recorded as deferred revenue and are recognized in revenue
when services are rendered.

  As of December 31, 1999, deferred revenue included in "Other Current
Liabilities" totaled $2.8 million.

Stock-Based Compensation Accounting

  The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic value method and provides pro forma
disclosures of net loss as if the fair value method had been applied in
measuring compensation expense. Compensation charges for non-employee, stock-
based compensation are measured using fair value-based methods.



                                     F-12
<PAGE>

Income Taxes

  Current income tax expense is the amount of income taxes expected to be
payable for the current year. A deferred tax asset or liability is computed for
both the expected future impact of differences between the financial statement
and tax bases of assets and liabilities and for the expected future tax benefit
to be derived from tax loss and tax credit carryforwards. Valuation allowances
are established when necessary to reduce deferred tax assets to the amount
expected to be "more likely than not" realized in future tax returns. Tax rate
changes are reflected in the statement of operations in the period such changes
are enacted.

Segment Reporting

  The Company has adopted Statement of Financial Accounting Standard No. 131,
"Disclosure About Segments of an Enterprise and Related Information" ("SFAS No.
131").  The Company has disclosed the business segments in which it operates as
well as certain financial information used by management in measuring the
performance of those segments (Note 11).

Reclassifications

  Certain prior period amounts have been reclassified to conform to the 1999
basis of presentation.

Recent Accounting Pronouncements

  In June 1998 and June 1999 respectively, the Financial Accounting Standards
Board issued SFAS No. 133, ''Accounting for Derivative Instruments and Hedging
Activities'' (''SFAS No. 133''), and SFAS No. 137, ''Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB No.
133'' (''SFAS No. 137'').  The Company is required to adopt SFAS No. 133 and
SFAS No. 137 in the year ended December 31, 2001. These pronouncements establish
methods of accounting for derivative financial instruments and hedging
activities related to those instruments as well as other hedging activities. To
date, the Company has not entered into any derivative financial instruments or
hedging activities.

NOTE 3--BUSINESS ACQUISITIONS

Optec

  On November 24, 1998, the Company acquired Optec, a company with operations in
Oregon and Washington that provides web integration services to businesses, from
Enron Communications. As part of this acquisition, the Company also acquired
rights to use fiber optic cable in parts of Oregon and rights to OC-3 level
capacity to connect up to 15 cities on a nationwide long-haul network being
developed by Enron Communications. As consideration for the acquisition,
FirstWorld paid $18.3 million in cash and repaid $4.0 million of Optec's
outstanding debt. The Company assigned values of $11.1 million, $9.2 million and
$2.0 million to the long-haul network rights, Optec and the Oregon fiber optic
rights, respectively. The long-haul network rights, included as a separate line
in the accompanying consolidated balance sheets, have not yet been placed into
service and therefore the Company is not amortizing this asset.  Approximately
$5.6 million of the $9.2 million associated with Optec was recorded as goodwill
and is being amortized on a straight-line basis over 10 years. The Company is
amortizing the Oregon fiber optic rights on a straight-line basis over 20 years.

Slip.Net

  On January 7, 1999, the Company purchased all of the outstanding capital stock
of Accelerated Information, Inc., the parent company of Slip.Net, Inc.
("Slip.Net"), an Internet service company providing Internet access, web hosting
services, and co-location services, primarily in the San Francisco Bay Area. The
purchase price consisted of approximately $10.5 million in cash and 187,500
shares of FirstWorld's Series B common stock. In order to determine the total
consideration paid, the Company assigned a value, based on a valuation performed
by an independent third party, of $3.68 per share to the Series B common stock.
This resulted in total consideration of $11.1 million.  Approximately $10.8
million was recorded as goodwill and is being amortized on a straight-line basis
over three years.



                                     F-13
<PAGE>

Sirius

  On March 2, 1999, the Company purchased all of the outstanding capital stock
of Sirius Solutions, Inc., d/b/a Sirius Connections ("Sirius"), an Internet
service company providing Internet access, web hosting services, and co-location
services, primarily in the San Francisco Bay Area. The purchase price consisted
of approximately $7.5 million in cash and 285,000 shares of FirstWorld's Series
B common stock. In order to determine the total consideration paid, the Company
assigned a value, based on a valuation performed by an independent third party,
of $4.02 per share to the Series B common stock. This resulted in total
consideration of $8.6 million. Approximately $8.5 million was recorded as
goodwill and is being amortized on a straight-line basis over three years.

Hypercon

  On June 1, 1999, the Company purchased all of the outstanding capital stock of
Hypercon, Inc. ("Hypercon"), an Internet service company providing Internet
access, web hosting services, e-commerce solutions and co-location services in
the Houston metropolitan area. The purchase price consisted of approximately
$2.0 million in cash and 49,993 shares of FirstWorld's Series B common stock.
Subsequent to the acquisition, the Company repaid approximately $215,000 in
debt. In order to determine the total consideration paid, the Company assigned a
value, based on a valuation performed by an independent third party, of $6.00
per share to the Series B common stock. The total consideration of cash, stock
and assumption of net liabilities was approximately $2.8 million. Approximately
$2.8 million was recorded as goodwill and is being amortized on a straight-line
basis over three years.

Internet Express

  On June 14, 1999, the Company purchased all of the outstanding membership
interests of Internet Express, LLC ("Internet Express"), an Internet service
company providing Internet access and web hosting services in the Denver/Front
Range metropolitan area, including Colorado Springs and Fort Collins. The
purchase price consisted of approximately $1.0 million in cash and 30,000 shares
of FirstWorld's Series B common stock. Subsequent to the acquisition, the
Company repaid approximately $959,000 in various liabilities of Internet
Express. In order to determine the total consideration paid, the Company
assigned a value, based on a valuation performed by an independent third party,
of $6.00 per share to the Series B common stock.  The total consideration of
cash, stock and assumption of certain net liabilities was approximately $2.2
million. Approximately $2.2 million was recorded as goodwill and is being
amortized on a straight-line basis over three years.

inQuo

  On June 22, 1999, the Company purchased all of the outstanding capital stock
of inQuo, Inc. ("inQuo"), an Internet service company providing dedicated
Internet access in the Salt Lake City metropolitan area. The purchase price was
approximately $844,000 of cash. The total consideration of cash and acquired net
liabilities of approximately $150,000 resulted in total consideration of
approximately $1.0 million, which was recorded as goodwill and is being
amortized on a straight-line basis over three years.

Transport Logic

  On July 7, 1999, the Company acquired all of the outstanding capital stock of
Oregon Professional Services, Inc., d/b/a Transport Logic ("Transport Logic"),
an Internet service company providing Internet access, web hosting services, and
co-location services in the western and northwestern United States. The purchase
price consisted of approximately $7.2 million in cash and 392,935 shares of
FirstWorld's Series B common stock. In order to determine the total
consideration paid, the Company assigned a value, based on a valuation performed
by an independent third party, of $6.00 per share to the Series B common stock.
The total consideration of cash, stock and assumption of certain liabilities of
approximately $1.0 million resulted in consideration of approximately $10.5
million, which was recorded as goodwill and is being amortized on a straight-
line basis over three years.


                                     F-14
<PAGE>

Intelenet

  On July 14, 1999, the Company purchased all of the outstanding capital stock
of Intelenet Communications, Inc. ("Intelenet"), an Internet service company
providing advanced connectivity, data center services and networking consulting
in Southern California. The purchase price consisted of approximately $16.0
million in cash and 875,000 shares of FirstWorld's Series B common stock. In
order to determine the total consideration paid, the Company assigned a value,
based on a valuation performed by an independent third party, of $6.00 per share
to the Series B common stock. This resulted in total consideration of
approximately $21.3 million.  Approximately $20.2 million was recorded as
goodwill and is being amortized on a straight-line basis over three years.

Pro Forma Acquisition Information (Unaudited)

  The following unaudited condensed pro forma information presents the unaudited
consolidated results of operations of the Company as if the acquisitions of the
above mentioned companies in 1999 and 1998 had occurred on the first day of the
respective periods presented:

<TABLE>
<CAPTION>
                                                                                                  Three Months
                                                                                    Year Ended       Ended        Year Ended
                                                                                   December 31,   December 31,   September 30,
                                                                                       1999           1998            1998
                                                                                   -------------  -------------  --------------
                                                                                                  (in thousands)
<S>                                                                                <C>            <C>            <C>
Revenue..........................................................................   $    64,146    $    12,168     $    34,434
Loss before extraordinary item...................................................      (114,461)       (24,463)        (51,457)
Net loss.........................................................................      (114,461)       (24,463)        (56,188)
</TABLE>

  The above mentioned companies may have performed differently if they had
actually been combined with the Company's operations during these periods. No
reliance should be placed on the unaudited pro forma information as indicative
of the historical results that the Company would have had or the future results
that it will experience after the acquisitions.

NOTE 4--SUPPLEMENTAL CASH FLOW INFORMATION

<TABLE>
<CAPTION>
                                                                              Three Months
                                                               Year Ended        Ended         Year Ended       Year Ended
                                                              December 31,    December 31,    September 30,    September 30,
                                                                  1999            1998            1998             1997
                                                              ------------    ------------    -------------    -------------
<S>                                                           <C>             <C>             <C>              <C>
Cash paid during the period for interest....................  $        943    $        110    $       1,293    $         440
Non-cash transactions:
 Property and equipment purchased under capitalized
  leases.....................................................          ---             ---               45            7,097
 Conversion of convertible bridge notes into Series C
  preferred stock and related warrants.......................          ---             ---              ---            7,777
 Conversion of convertible bridge notes into Series A
  common stock and related warrants..........................          ---             ---              405              ---
 Issuance of common stock warrants as finders fees..........           ---             ---                                10
 Non-cash deferred financing costs..........................                                                              27
 Issuance of note payable to vendor for up-front
  service fees...............................................          ---             ---              150              ---
 Issuance of note payable for consulting services
  received...................................................          ---             ---              ---               50
 Cancellation of stockholder receivable for stock
  repurchased................................................          ---             ---              ---               23
 Vendor financing for asset purchase........................         1,599             ---              ---              ---
 Charge associated with equity investment...................         5,270             ---              ---              ---

 Accruals associated with capital expenditures..............         2,788           1,065            3,027              ---
</TABLE>

  The Company's statements of cash flows for the three months ended December 31,
1998 and the year ended September 30, 1998 have been adjusted to remove accruals
associated with capital expenditures.


                                     F-15
<PAGE>

  NOTE 5--PROPERTY AND EQUIPMENT

  Property and equipment, including assets under capital lease, consists of the
following:

<TABLE>
<CAPTION>
                                                                         December 31,            December 31,
                                                                             1999                    1998
                                                                     --------------------     ------------------
                                                                                    (in thousands)
<S>                                                                  <C>                      <C>
  Network infrastructure  ........................................           $ 34,340                $28,000
  Telecommunications equipment  ..................................             42,544                 18,480
  Building and improvements  .....................................                922                  1,092
  Furniture, office equipment and other  .........................             34,979                  6,129
  Leasehold improvements  ........................................              1,551                    726
  Construction in process  .......................................             21,887                 11,217
                                                                             --------                -------
                                                                              136,223                 65,644
  Accumulated depreciation  ......................................            (13,062)                (4,397)
                                                                             --------                -------
                                                                             $123,161                $61,247
                                                                             ========                =======
</TABLE>

  The following is a summary of property and equipment acquired under capital
leases, included in the above:

<TABLE>
<CAPTION>
                                                                        December 31,             December 31,
                                                                            1999                     1998
                                                                     --------------------     -------------------
                                                                                   (in thousands)
<S>                                                                <C>                      <C>
  Network infrastructure (Note 7)  ..................................        $  6,000                $  6,000
  Telecommunications equipment  .....................................             625                     219
  Building and improvements  ........................................             321                     321
  Furniture, office equipment and other  ............................             350                     470
                                                                             --------                --------
                                                                                7,296                   7,010
  Accumulated depreciation  .........................................            (240)                   (706)
                                                                             --------                --------
                                                                             $  7,056                $  6,304
                                                                             ========                ========
</TABLE>

  During the year ended December 31, 1999, the three months ended December 31,
1998 and the year ended September 30, 1998 the Company capitalized approximately
$843,000, $333,000 and $450,000 respectively, in interest costs associated with
the development of the Company's data centers and communications networks.  The
Company did not capitalize any interest costs during the year ended September
30, 1997.  Depreciation expense was $10.6 million, $1.4 million, $2.4 million
and $421,000 for the year ended December 31, 1999, the three months ended
December 31, 1998 and the years ended September 30, 1998 and 1997, respectively.

NOTE 6--DEBT

  Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                                December 31,             December 31,
                                                                                   1999                     1998
                                                                                -------------            ------------
                                                                                       (in thousands)
<S>                                                                          <C>                        <C>
   13% Senior Notes, net of unamortized discount
        totaling $176.0 million at December 31, 1999
        and $212.1 million at December 31, 1998............................     $     293,962            $    257,919
   9.03% term loan secured by certain assets;
        monthly installments of principal and interest
        payable through July 2002  ........................................                96                     129
   14% unsecured term note with a vendor  .................................                --                     150
   Other  .................................................................                63                      12
                                                                                -------------            ------------
                                                                                      294,121                 258,210
   Less current portion  ..................................................               (87)                    (75)
                                                                                -------------            ------------
                                                                                $     294,034            $    258,135
                                                                                =============            ============
</TABLE>



                                     F-16
<PAGE>

  Aggregate principal maturities of long-term debt are as follows:

<TABLE>
<CAPTION>
                                                              (in thousands)
                                                              --------------
<S>                                                           <C>
   2000  ....................................................      $      87
   2001  ....................................................             46
   2002  ....................................................             26
   2003  ....................................................            ---
   2004  ....................................................            ---
   Thereafter  ..............................................        470,000
                                                                   ---------
                                                                     470,159
   Less unamortized discount on the 13% Senior Notes  .......       (176,038)
                                                                   ---------
                                                                   $ 294,121
                                                                   =========
</TABLE>

Senior Notes

  On April 13, 1998, the Company completed an offering of debt securities
pursuant to Rule 144A under the Securities Act of 1933, as amended, for gross
proceeds of $250.2 million (the "Senior Notes Debt Offering"). In the Senior
Notes Debt Offering, the Company sold 470,000 units consisting of 13% Senior
Discount Notes due 2008 (the "Senior Notes") and warrants to purchase an
aggregate of 3,713,094 shares of the Company's Series B common stock (Note 12).
The Company allocated $235.2 million of the proceeds to the Senior Notes and
$15.0 million to the warrants, representing their estimated fair value at the
date of issuance as determined via an independent valuation.

  The Senior Notes will accrete in value through April 15, 2008 at a rate of 13%
per annum, compounded semi-annually, at which time $470.0 million in aggregate
principal amount at maturity will be outstanding. Cash interest will neither
accrue nor be payable prior to April 15, 2003. Thereafter, cash interest on the
Senior Notes will accrue and will be payable semi-annually in arrears on each
April 15 and October 15, commencing October 15, 2003, at a rate of 13% per
annum. The Company is not required to make mandatory redemption or sinking fund
payments with respect to the Senior Notes prior to maturity. The Senior Notes
are redeemable at the option of the Company, in whole or in part, at any time on
or after April 15, 2003, at a premium declining to par on April 15, 2006, plus
accrued and unpaid interest through the date of redemption. In the event of a
change in control, as defined in the indenture governing the Senior Notes, the
holders of the Senior Notes will have the right to require the Company to
purchase their Senior Notes in an amount equal to 101% of the aggregate
principal amount at maturity or accreted value thereof, as applicable, plus
accrued and unpaid interest to the date of purchase.

  The indenture pursuant to which the Senior Notes are issued contains certain
covenants which, among other things, limit the ability of the Company and its
subsidiaries to incur additional indebtedness, issue stock in subsidiaries, pay
dividends or make other distributions, engage in sale and leaseback
transactions, create certain liens, enter into certain transactions with
affiliates, sell assets of the Company and its subsidiaries, and enter into
certain mergers and consolidations. The Company was in compliance with such
covenants at December 31, 1999 and 1998.

Revolving Credit Facility

  On September 16, 1997, the Company entered into a five-year $23.0 million
revolving credit facility (the "Credit Facility") with a syndicate of lenders
(the "Lenders") to provide financing for the construction of telecommunication
networks and for general working capital purposes. The Company terminated this
facility April 13, 1998, concurrent with the closing of the Senior Notes Debt
Offering, and paid the Lenders a $1.0 million termination fee pursuant to the
terms thereof. The Company recorded an extraordinary loss of $4.7 million
associated with such debt extinguishment, which loss is inclusive of the
aforementioned termination fee and the write-off of unamortized debt discount
and deferred financing costs associated with the Credit Facility.

Short-term Bridge Notes

  On August 29, 1997, the Company obtained a $1.0 million, 18% per annum, short-
term bridge loan with an institutional lender which was due on October 15, 1997.
On September 17, 1997, the Company repaid $500,000 of the outstanding principal
balance, plus accrued interest thereon, and extended the maturity date of the
remaining principal balance of $500,000 to March 16, 1998 through the
consummation of a new loan agreement with the


                                     F-17
<PAGE>

lender. Simultaneous to the execution of the new loan agreement on September 17,
1997, which was considered to be a substantial modification of the original loan
agreement which it superseded, the Company recognized an extraordinary charge on
debt extinguishment totaling $105,000. The extraordinary charge consisted of the
write-off of unamortized debt discount and deferred financing costs associated
with the original bridge loan. The remaining $500,000 bridge loan balance was
repaid during January 1998.

NOTE 7--COMMITMENTS AND CONTINGENT LIABILITIES

Lease Commitments

  The Company leases its office space, certain network access facilities and
fiber transport and automobiles under noncancelable operating lease arrangements
which expire on varying dates through March 2014. Rent payments under
noncancelable operating leases totaled $2.9 million, $393,000, $549,000 and
$361,000 during the year ended December 31, 1999, the three months ended
December 31, 1998 and the years ended September 30, 1998 and 1997, respectively.

  The Company has procured certain of its property and equipment, including its
Anaheim network central office switching facility, through capital leases that
expire through October 2006. Additionally, the Company has accounted for certain
agreements with the City of Anaheim, as more fully described below and which
extend through January 2027, as both capital leases and executory contracts in
the accompanying financial statements.

  Listed below are the future minimum payments under capital leases (inclusive
of the minimum payments allocated from the agreements with the City of Anaheim)
and noncancelable operating leases for each of the years ending December 31,

<TABLE>
<CAPTION>
                                                      Capital         Operating
                                                      Leases            Leases
                                                 -------------------------------
                                                            (in thousands)
<S>                                              <C>                   <C>
   2000  .......................................     $  1,820          $ 6,391
   2001  .......................................        1,543            6,560
   2002  .......................................        1,352            5,343
   2003  .......................................        1,346            4,182
   2004  .......................................        1,349            3,770
   Thereafter  .................................       28,570           17,201
                                                     --------          -------
   Total minimum lease payments  ...............       35,980          $43,447
                                                                       =======
   Amount representing interest  ...............      (27,896)
                                                     --------
   Present value of minimum lease payments  ....     $  8,084
                                                     ========

</TABLE>

Commitments Relating to Agreements with the City of Anaheim

  During February 1997, the Company and its wholly owned subsidiary FirstWorld
Anaheim ("FWA") entered into a 30-year Universal Telecommunications System
Participation Agreement (the "UTS Agreement") with the City of Anaheim,
California (the "City"), under which FWA agreed to design, construct and operate
a fiber-optic telecommunications network in cooperation with the City. The UTS
Agreement provides for FWA to pay to the City (i) an annual payment in lieu of a
franchise fee based on a percentage of FWA's "adjusted gross revenues," as
defined, related to the Anaheim network, subject to a minimum annual payment of
$1.0 million for periods after June 30, 1999 through the term of the agreement;
(ii) a percentage of FWA's "net revenues," as defined, derived from the Anaheim
network; (iii) certain of the City's annual operating costs associated with the
UTS Agreement, not to exceed $175,000 per year prior to the commencement of the
third phase of the Anaheim network (as described below), and not to exceed
$350,000 per year thereafter, subject to inflationary adjustments; and (iv)
$20,000 per year to support the City's presence on the Internet, subject to
inflationary adjustments. The UTS Agreement also requires the Company to deposit
an amount equal to up to 15% of "net revenues" derived from the Anaheim network,
as defined, to fund and maintain a $6.0 million reserve account for debt service
and capital improvements. As of December 31, 1999, no amounts have been
deposited into such reserve account, as "net revenues" have not yet been
generated from the Anaheim network. Pursuant to the UTS Agreement, the City has
been granted an irrevocable option to purchase all of the issued and outstanding
stock of FWA at anytime after July 1, 2012 for its then current appraised fair
value, the determination of which is to be derived by qualified independent
appraisers selected by both the Company and the City, as more specifically
defined within the UTS Agreement. Any sale or


                                     F-18
<PAGE>

issuance of FWA stock can only be made if such sale or issuance is expressly
made subject to the City's purchase option. Moreover, any sale of the Anaheim
network or other sale of substantially all of FWA's assets can only be made if
the City is equitably compensated for the loss of its future income stream under
the UTS Agreement or the buyer expressly assumes the obligations of FWA under
the UTS Agreement.

  Simultaneous to the execution of the UTS Agreement, FWA entered into a 30-year
Agreement for Use of Operating Property (the "Operating Property Agreement")
with the City under which FWA has been granted the exclusive right to lease 60
of 96 fiber strands contained in an approximate 50 mile loop of fiber optic
cable owned by the City, together with related facilities and rights. Under the
terms of the Operating Property Agreement, the Company is obligated to make
quarterly payments to the City of approximately $114,000. In addition, the
Company is obligated to pay its pro rata share (62.5%) of the costs associated
with operating and maintaining the leased property, including maintenance
expenses, taxes, insurance premiums and pole usage fees. FWA has the right to
assign its rights under the Operating Property Agreement, but will not be
released from liability unless the City expressly consents. FWA also has the
right to encumber its interest in the leased property.

  Although the Company considers the Operating Property Agreement to be a
capital lease and the UTS Agreement to be an executory contract, certain of the
minimum payments prescribed by the UTS Agreement have been accounted for as
additional minimum capital lease payments. The Operating Property Agreement and
the UTS Agreement were bid, negotiated and consummated simultaneously with each
other. In addition, both agreements have identical 30-year terms and include
certain cross-default provisions. Moreover, the Operating Property Agreement
contains payment terms which are below the fair value of the benefits conferred
by such agreement; whereas, the UTS Agreement contains payment terms which are
above the fair value of the benefits conferred by such agreement. Accordingly,
the Company has allocated the collective payments prescribed by the agreements
between the two contracts based upon the estimated fair value of the benefits
the Company receives under each of the two agreements. Future minimum payments
prescribed by the UTS Agreement and not allocated to the capital lease are as
follows:

                                                      (in thousands)
                                                     ----------------
   2000  ........................................       $      373
   2001  ........................................              373
   2002  ........................................              373
   2003  ........................................              373
   2004  ........................................              373
   Thereafter  ..................................            8,491
                                                        ----------
                                                        $   10,356
                                                        ==========

  The UTS Agreement also sets forth requirements for the completion of network
design and the commencement of network construction related to certain phases of
the citywide network. The first phase, which extended service to identified
municipal facilities, was substantially completed in October 1997. The second
phase extended the network to allow service to be provided within six months
following execution of a customer service agreement to commercial, industrial
and governmental customers within certain defined service areas. It is the
Company's position that the second phase was substantially completed by December
1998. The City initially rejected the Company's position regarding completion of
the second phase and is conducting an independent analysis of the completion. In
the event that FWA did not meet the specified performance deadlines related to
completion of the first and second phases of the Anaheim network, the City could
elect to either terminate the Operating Property Agreement if FWA agreed to
return the leased fiber, or to immediately exercise its option to purchase all
of the issued and outstanding stock of FWA under the same option terms, as
defined within the UTS Agreement, which otherwise would not become effective
until after July 1, 2012. Any termination of the Operating Property Agreement
would have a material adverse effect on the Company's business, financial
condition and results of operations.

  Under the UTS Agreement, the third phase of the Anaheim network would allow
service to be extended, within six months of a customer service agreement, to
all customers within the city, including residential customers. The third phase
will be commenced only after a feasibility study for the third phase, prepared
by an independent consultant, validates the business plan for the third phase
and financing is arranged. The UTS Agreement provides for an initial feasibility
study with respect to the third phase to be completed no later than January 1,
2000, and thereafter for FWA to commission annual studies to determine whether
the business plan for the third phase can be validated. The City has approved
the consultant selected by the Company to prepare the feasibility study.  The


                                     F-19
<PAGE>

delivery of the study will occur after January 1, 2000. The UTS Agreement
provides for 180 days to cure any potential default and the Company believes it
could cure any potential default within the applicable cure period. If the
Company determines not to proceed with the development of the third phase of the
Anaheim network, or if for any reason the principal financing for the third
phase is not funded, or construction of the third phase is not commenced by
December 31, 2002, then the City may pursue development of the third phase on
its own.

     The Company commenced operation of a demonstration center in the City's
downtown area in May 1999. Although the Company believes it is in compliance
with its obligations with respect to the demonstration center, the City has
asserted its belief that the Company is not satisfying such obligations. See
Note 14--Legal Proceedings for a discussion of the legal proceeding between the
City and FWA and the Company.

     Pursuant to a Development Fee Arrangement dated simultaneous to the
aforementioned City agreements, for a period of five years, commencing with the
earlier to occur of the closing of the financing for or the commencement of
construction of the first Additional Network (as defined below), the Company
must pay to the City a lump sum development fee for each Additional Network
which the Company develops ($300,000 for each Additional Network financed in the
first year; $200,000 for each Additional Network financed in the second year;
and $100,000 for each Additional Network financed in the third, fourth and fifth
years, which amounts must be paid within thirty days following the closing of
the principal financing for an Additional Network or the commencement of
construction of such Additional Network, whichever occurs first). "Additional
Network" means (a) any expansion of the Anaheim network into one or more
adjacent or nearby cities where FWA enters into a revenue sharing agreement with
any such city, and (b) any separate communications system developed by any other
subsidiary of the Company that holds a Certificate of Public Convenience and
Necessity issued by the Public Utilities Commission and enters into a revenue
sharing agreement with one or more public entities. See Note 14--Legal
Proceedings for a discussion of the legal proceeding between the City and FWA
and the Company.

Commitments Relating to Agreements with the Irvine Company

     On March 5, 1998, FirstWorld Orange Coast ("FWOC"), a wholly owned
subsidiary of the Company, and The Irvine Company entered into two agreements
regarding FWOC's development of a network to serve certain areas that have been
or are planned to be developed by The Irvine Company (the "Irvine Network"). The
Company has guaranteed the payment obligations of FWOC under each of such
agreements.

  Pursuant to an Agreement for Lease of Telecommunications Conduit dated as of
March 5, 1998 (the "Conduit Lease"), FWOC leases from The Irvine Company space
within two underground telecommunications tubes (the "Conduit"), and, in
connection therewith, has received the non-exclusive right to use undivided
space within the pull boxes serving such Conduit (collectively, the "Leased
Premises"). The Conduit Lease applies to (i) an existing Conduit system within
certain already-developed areas in the Irvine Spectrum and (ii) Conduit to be
constructed in the future in the as yet undeveloped areas of the Irvine
Spectrum. The Irvine Company may also install Conduit in other areas it may
develop in the cities of Irvine, Newport Beach and Tustin, and in unincorporated
areas of Orange County, and such areas may in the future be incorporated into
the Conduit Lease upon the mutual agreement of the parties (the "Additional
Areas"). The term of the Conduit Lease runs through December 31, 2027.

  The Conduit Lease obligates FWOC to install fiber optic cable (the "Cable") in
the Conduit pursuant to a phasing plan. A phase is completed when sufficient
Cable has been installed to enable FWOC to connect and provide service (for that
portion of the Irvine Network) to property abutting the Conduit. Upon
termination of the agreement, The Irvine Company will own the Cable. If FWOC
fails to complete installation of the required Cable within 18 months following
March 5, 1998, The Irvine Company may, until such installation is completed,
terminate the Conduit Lease. The Company is currently verifying the completion
of the required installation.

  The Conduit Lease obligates FWOC to make quarterly rent payments to The Irvine
Company based upon its "adjusted gross revenue", as defined, from the Irvine
Network. In addition, FWOC is obligated to pay all costs associated with its
lease, operation, maintenance, repair and use of the Leased Premises, including
maintenance expenses, taxes and insurance premiums. Any assignment of FWOC's
rights under the Conduit Lease and any sale of a controlling interest in FWOC
require The Irvine Company's prior approval, and The Irvine Company has a right
of first refusal in the event of any such proposed sale.

  Based upon its term, the Conduit Lease is a capital lease. However, as such
lease does not prescribe any fixed rental payments and as it is not practicable
for the Company to estimate any future probable contingent rental



                                     F-20
<PAGE>

payments associated with such lease, no amount has been capitalized in the
accompanying consolidated financial statements. Contingent rental payments
associated with this lease are recorded as additional operating expenditures
when they become due pursuant to the lease.

  Concurrently with the execution of the Conduit Lease, FWOC and The Irvine
Company executed a Telecommunications System License Agreement (the "License
Agreement") which provides FWOC, with some exceptions, with the right and
obligation to provide telecommunications services to (i) the 106 buildings
currently owned by The Irvine Company in the Irvine Spectrum area, (ii)
commercial, industrial and retail buildings in the future owned by The Irvine
Company in the Irvine Spectrum, and (iii) under certain circumstances in The
Irvine Company's discretion, similar buildings located in the Additional Areas
and other locations in California.

  The License Agreement requires FWOC to pay The Irvine Company a license fee
each calendar quarter, subject to an annual consumer price index ("CPI")
increase that will not be less than 2% or greater than 6%. The base license fee
was initially $62,500 for the buildings owned by Irvine in the Irvine Spectrum
area at the time that the License Agreement was consummated. Pursuant to the
License Agreement, such fee is increased or decreased over its term based on the
rentable square footage of the buildings that are from time to time subject to
the License Agreement.  Such fee totaled approximately $103,000 and $88,000 per
calendar quarter as of December 31, 1999 and 1998, respectively.  Future minimum
payments prescribed by the License Agreement, based upon this current fee and
assuming a 2% per annum upward CPI adjustment over its term, are as follows:

                                                 (in thousands)
                                                ----------------
   2000  ......................................     $   420
   2001  ......................................         429
   2002  ......................................         437
   2003  ......................................         446
   2004  ......................................         455
   Thereafter  ................................      13,383
                                                    -------
                                                    $15,570
                                                    =======

  The License Agreement provides FWOC with the right to install, maintain,
operate, replace and remove Cable and associated communications equipment (the
"Equipment") in, as well as access rights to, such buildings, subject to the
rights of The Irvine Company's tenants and to reasonable requirements and
procedures imposed by The Irvine Company. Except with respect to buildings that
are leased to a single tenant, The Irvine Company is required to provide FWOC
with a reasonable amount of equipment room space in each building, sufficient to
enable FWOC to install Cable and Equipment and deliver services. FWOC's rights
to a building are non-exclusive, meaning that The Irvine Company can grant
similar licenses to other service providers. Although all the Cable becomes the
property of The Irvine Company upon termination of the License Agreement, FWOC
has the right to remove and retain ownership of the Equipment, subject to The
Irvine Company's election to purchase the Equipment at a price to be negotiated
by the parties.

  Subject to certain qualifications, FWOC will have the obligation to provide
telecommunications services to any tenant who wishes to subscribe with FWOC for
those services, and FWOC is required to install Cable and Equipment in that
tenant's building if FWOC owns or leases Conduit located within 1,000 feet of
that building. Under certain circumstances, FWOC may be required to provide
completion and performance bonds to The Irvine Company in connection with that
work. To the extent that FWOC provides fiber optic service to a building, it is
required to achieve and maintain standards of minimum reliability. Subject to
force majeure, if  there is a system-wide failure to provide such service that
exceeds five consecutive days, The Irvine Company has the right to use the
network (and if necessary bring in an alternative service provider) and to
charge its costs to FWOC.

  Whenever FWOC is the first competitive access provider to a building, it is
required to install a building entrance conduit system (which connects the
building to the street access point) (a "BECS"), with a capacity equal to 200%
of the capacity required by FWOC to service the building. The Irvine Company can
grant other providers the right to use that BECS, but must pay or cause that
provider to pay FWOC 50% of FWOC's cost of installing the BECS, which costs are
subject to increase based on a CPI calculation. Where a BECS already exists, The
Irvine Company must make any excess capacity therein available to FWOC.



                                     F-21
<PAGE>

Employment Agreements

     The Company has entered into employment agreements with key executive
officers, including its Chief Executive Officer ("CEO").  In general, the
employment agreements for the key officers ("Key Officers"), other than the CEO,
provide for annual salaries and eligibility for a bonus based on a certain
percentage of each Key Officers' annual salary. In certain instances the
employment agreements also provide for cash payments of up to $500,000 to
compensate an executive for certain benefits that would have been received from
previous employers. In addition, under these employment agreements, options to
acquire a certain number of shares of the Company's Series B common stock are
typically granted to the executive. If the Company terminates any Key Officers'
employment during the term of his employment agreement without cause or the
executive terminates employment for good reason the executive would generally be
entitled to receive a severance payment. During 1999, the Company paid key
officers $1.0 million in compensation under these agreements and is committed to
pay $687,000 for the year ended December 31, 2000.  However, actual amounts paid
during 2000 will likely be higher as each key officer is eligible to receive a
bonus as determined under The Bonus Program (see Note 13 - Employee Benefit
Plans).

     On September 28, 1998, the Company entered into an Employment Agreement, as
amended May 20, 1999, (the  "Employment Agreement") pursuant to which the
Company retained the services of a new President and CEO effective October 1,
1998 (the "Commencement Date"). The Employment Agreement has a three-year term
ending on the close of business on September 30, 2001, and thereafter will renew
for one year periods unless terminated earlier by either party, and provides an
initial annual base salary of $200,000 per annum. Additionally, the Employment
Agreement granted the CEO an Equalization Payment (as defined within the
Employment Agreement) in the amount of $4.0 million, payable in three separate
installments. The first $2.0 million installment and the second $1.0 million
installment became due and were paid in cash on October 1, 1998 and October 1,
1999, respectively, while the third $1.0 million installment is due and payable
on October 1, 2000. The CEO must be employed by the Company on the date that the
third installment becomes due to be eligible to receive the payment unless the
Company terminates the CEO's employment other than for cause or the CEO
terminates his own employment for good reason (as defined in the Employment
Agreement) prior to the installment date. In addition, the CEO may elect to
receive all or any portion of the third installment payment in the form of the
Company's Series B common stock. If the CEO elects to receive any of the third
installment payment in Series B common stock, such stock shall be valued at
$7.50 per share.

     The Employment Agreement stipulates that the CEO will also be eligible for
the following performance-based bonuses: (i) if the Company consummates a
Qualified Initial Public Offering (as defined in the Employment Agreement) with
a price of at least $10.00 per share (subject to adjustment as set forth in the
Employment Agreement) before April 1, 2000, the Company will pay the CEO a $1.0
million cash bonus; (ii) if the Company consummates a Qualified Initial Public
Offering with a price of at least $10.00 per share (subject to adjustment as set
forth in the Employment Agreement) before April 1, 2000, the Company will be
obligated to pay the CEO a $4.2 million cash bonus on September 30, 2001 (unless
otherwise accelerated as described in the Employment Agreement); (iii) if the
Company consummates a Qualified Initial Public Offering with a price of at least
$12.50 per share (subject to adjustment as set forth in the Employment
Agreement) before October 1, 2000, the Company will be obligated to pay the CEO
an $8.4 million cash bonus on September 30, 2001 (unless otherwise accelerated
as described in the Employment Agreement); provided that if the CEO earns the
payment described in this clause (iii) he will not be entitled to receive the
payment described in clause (ii) above; and (iv) if the Company has a market
capitalization of at least $1.2 billion (as adjusted as described in the
Employment Agreement) for a period of 20 consecutive trading days before October
1, 2001, the Company will be obligated to pay the CEO a cash payment equal to
$16.8 million minus any amounts he receives pursuant to clause (ii) or (iii)
above on September 30, 2001 (unless otherwise accelerated as described in the
Employment Agreement).

     The Employment Agreement also granted the CEO on October 1, 1998 an option
to purchase 2,805,000 shares of Series B common stock at an exercise price of
$6.00 per share (subject to anti-dilution protections set forth in the
Employment Agreement). The option vests (i) with respect to 1/3 of the shares
covered by the option on the Commencement Date, (ii) with respect to 1/3 of the
shares covered by the option on the first anniversary of the Commencement Date
and (iii) with respect to the remaining 1/3 of the shares covered by the option
on the second anniversary of the Commencement Date (unless otherwise accelerated
in accordance with the terms of the Employment Agreement).


                                     F-22

<PAGE>

Other Commitments

  The Company is party to a three year contract commencing July 7, 1999 with a
long distance carrier pursuant to which the Company is committed to minimum
service fees. Such minimum fees aggregate $1.7 million, $2.8 million and $1.8
million during the years ending December 31, 2000, 2001 and 2002, respectively.

  The Company entered into separate management consulting service agreements
with two significant shareholders (or affiliates thereof) whereby such parties
will provide general management consulting services to the Company for a period
of three years commencing January 1, 1998. Pursuant to such agreements, as
amended, the Company is required to pay to the related parties aggregate
consulting fees totaling $1.0 million per annum. Related party consulting fees
recorded by the Company as part of selling, general and administrative expenses
during the year ended December 31, 1999, the three months ended December 31,
1998 and the year ended September 30, 1998 totaled $1.0 million, $250,000 and
$840,000, respectively.  Future minimum consulting fees under these agreements
aggregate $1.0 million for year 2000.

  The Company is party to an arrangement with the owner of a retail development
located in Orange County, California, whereby it is required to remit to the
owner of such development a percentage of "adjusted gross revenues", as defined,
derived from serving tenant customers located within such development.

NOTE 8--FINANCIAL INSTRUMENTS

  The estimated fair values of the Company's financial instruments have been
determined by the Company using available market information and valuation
methodologies. Considerable judgment is required to develop the estimates of
fair value; thus the estimates provided herein are not necessarily indicative of
the amount that the Company could realize upon the sale or refinancing of such
financial instruments. Carrying value for cash and cash equivalents, marketable
securities, accounts receivable and accounts payable approximates fair value due
to their short-term nature. At December 31, 1999, the fair value and the
carrying value of the long-term debt, net of discount, was approximately $314.9
million and $294.1 million, respectively. The fair value of the long-term debt
represents the amount at which the instrument could be exchanged in a current
arms-length transaction.

NOTE 9--MAJOR CUSTOMER

  Revenue earned from one contract with a variety of the State of Oregon
governmental agencies amounted to approximately $8.3 million (15%) and $1.6
million (53%), of total revenue for the year ended December 31, 1999 and the
three months ended December 31, 1998, respectively. This revenue is part of the
Company's web integration segment. Also, approximately $1.1 million and $1.6
million included in accounts receivable is related to this contract as of
December 31, 1999 and 1998, respectively.

NOTE 10--INCOME TAXES

  Deferred tax assets (liabilities) are comprised of the following:

<TABLE>
<CAPTION>
                                                                  December 31,             December 31,
                                                                      1999                     1998
                                                              --------------------     ---------------------
                                                                              (in thousands)
Current:
<S>                                                           <C>                      <C>
  Accrued liabilities  ......................................   $        1,576              $      319
Non-current:
  Net operating loss carryforwards  .........................           40,795                  15,251
  Interest   ................................................           19,855                   7,788
  Depreciation and amortization  ............................           (7,157)                 (2,236)
                                                                --------------              ----------
                                                                        55,069                  21,122
  Valuation allowance  ......................................          (55,069)                (21,122)
                                                                --------------              ----------
  Deferred tax assets (liabilities), net  ...................   $           --              $       --
                                                                ==============              ==========
</TABLE>

  Based upon the Company's lack of prior earnings history and evaluation of
other available evidence, management has recorded a full valuation allowance
against the benefit of deferred tax assets.


                                     F-23
<PAGE>

     As of December 31, 1999, the Company has federal and state net operating
loss carryforwards of approximately $113.5 million and $74.1 million,
respectively. Federal losses expire beginning in 2008 and state losses expire
beginning in 2000. As a result of a change in ownership, as defined in the
Internal Revenue Code, which occurred on December 31, 1997, the Company's
utilization of approximately $13.0 million of the net operating loss
carryforwards is subject to an annual limitation of approximately $878,000 for
both federal and state tax purposes. If the Company is able to recognize certain
built-in gains in the future the annual utilization rate of the net operation
losses would be increased. If the Company were to realize certain built-in
losses they would be subject to the annual utilization limitation when
recognized. Additional changes in the Company's equity may further limit the
utilization of net operating losses.

     A reconciliation of the income tax benefit computed using the U.S. federal
statutory rate and the Company's effective tax rate follows:

<TABLE>
<CAPTION>


                                                                    Three Months                      Year Ended
                                              Year Ended               Ended           -----------------------------------------
                                             December 31,           December 31,         September 30,          September 30,
                                                 1999                   1998                  1998                   1997
                                           ----------------      -----------------     -----------------     -------------------
                                                                              (in thousands)
<S>                                        <C>                    <C>                   <C>                   <C>
Computed expected federal tax benefit...          $(37,316)               $(6,028)             $(11,341)                $(3,248)
State income taxes, net of federal                  (2,629)                  (591)               (1,069)                    161
 benefit................................
Increase in valuation allowance.........            33,947                  6,121                10,306                   2,427
Section 382 net operating loss
 limitations............................                --                     --                 1,457                     557
Permanent differences ..................             6,887                    521                   693                       5
Net operating loss carryforwards from
 subsidiaries...........................              (277)                  (113)                   --                      --
Deferred tax rate change to 35%.........              (648)                    --                    --                      --
Other...................................                36                     90                   (46)                     98
                                                  --------                -------              --------                 -------
                                                  $     --                $    --              $     --                 $    --
                                                  ========                =======              ========                 =======
</TABLE>

NOTE 11 - BUSINESS SEGMENTS

   The Company operates in the United States of America and conducts
transactions through three primary segments:  Internet/Data, Web Integration and
Other.  Senior management evaluates and makes operating decisions about each of
these operating segments.  The Company does not report assets by business
segment and, therefore, asset information is not presented by segment.
Inter-segment revenues were not material for any period presented.

   The Company's Internet/Data segment represents the operations of Slip.Net,
Sirius, Hypercon, Internet Express, inQuo, Transport Logic and Intelenet.  The
primary operations of these entities include high-speed Internet access,
dedicated access, data center co-location and related equipment sales.  The Web
integration segment primarily represents Optec's operations and includes
activities related to network consulting, design, integration and equipment
sales.  The selling, general and administrative expenses shown for the
Internet/Data and Web Integration segments represent direct costs associated
with the segment.  These costs include, among other things, office rent, certain
sales and support staff housed in the various locations.

   The Other segment includes transactions primarily associated with the
Company's operations in Southern California and its corporate headquarters.  The
Other segment also includes all eliminating intercompany transactions.  Direct
and indirect costs incurred by  the corporate headquarters are not allocated
among the business segments.  Accordingly, selling, general and administrative
expense presented for the Other segment includes, among other items, costs
related to selling, marketing, customer care, provisioning, billing and
collections, information technology, general management and overhead and other
administrative expenses.


                                     F-24


<PAGE>

<TABLE>
<CAPTION>


                                                            Internet/           Web
             Year Ended December 31, 1999                      Data         Integration         Other       Total
----------------------------------------------------------  ----------    ---------------    ----------   ----------
                                                                                 (in thousands)
Revenue
<S>                                                         <C>          <C>                 <C>          <C>
 Internet services........................................  $   19,040     $           ---   $    2,206   $   21,246
 Web integration and consulting services..................         ---              26,297        2,215       28,512
 Telephony................................................         ---                 ---        4,738        4,738
                                                            ----------     ---------------   ----------   ----------
  Total revenue...........................................      19,040              26,297        9,159       54,496
Gross margin..............................................      10,676               5,008         (794)      14,890
Selling, general and administrative.......................      13,308               6,061       47,759       67,128
Deprecation and amortization..............................         ---                 ---       23,411       23,411
Interest income...........................................         ---                 ---        6,960        6,960
Interest expense..........................................         104                 ---       37,824       37,928
                                                            ----------     ---------------   ----------   ----------
Net loss..................................................  $   (2,736)    $        (1,053)  $ (102,828)  $ (106,617)
                                                            ==========     ===============   ==========   ==========

                    Three Months                            Internet/           Web
               Ended December 31, 1998                         Data         Integration         Other       Total
----------------------------------------------------------  ----------    ---------------    ----------   ----------
                                                                                (in thousands)
Revenue...................................................
 Internet services........................................  $      ---     $           ---   $      123   $      123
 Web integration and consulting services..................         ---               2,157          128        2,285
 Telephony................................................         ---                 ---          565          565
                                                            ----------     ---------------   ----------   ----------
  Total revenue...........................................         ---               2,157          816        2,973
Gross margin..............................................         ---                 327          (61)         266
Selling, general and administrative.......................         ---                 559       10,253       10,812
Deprecation and amortization..............................         ---                  56        1,756        1,812
Interest income...........................................         ---                 ---        3,227        3,227
Interest expense..........................................         ---                   1        8,599        8,600
                                                            ----------     ---------------   ----------   ----------
Net loss..................................................  $      ---     $          (289)  $  (17,442)  $ (17,731)
                                                            ==========     ===============   ==========   =========
</TABLE>

   Prior to November 24, 1998, when the Company purchased Optec, all of the
operations were located in Southern California, with the primary focus on the
telephony business.  Accordingly, the Company operated in only one segment prior
to that date.

NOTE 12--WARRANTS

  The following table summarizes information about non-employee warrants
outstanding at December 31, 1999:

<TABLE>
<CAPTION>
                                                                   Outstanding and Exercisable
                                                     --------------------------------------------------------
                                                          Number as of                  Weighted-Average
Exercise Prices                                           December 31,               Remaining Contractual
---------------                                               1999                        Life (years)
                                                     -----------------------       --------------------------
<S>                                                  <C>                           <C>
    $  .01.........................................                3,713,094                  8.3
    $  .50.........................................                   29,000                  2.1
    $  1.80........................................                2,110,140                  2.1
    $  3.00........................................               17,601,830                  5.0
    $  3.53........................................                  736,564                  2.1
    $  3.83........................................                  470,092                  4.3
    $  5.00........................................                  253,118                  2.2
    $  6.00........................................                  134,689                  2.8
                                                                  ----------
                                                                  25,048,527                  6.4
                                                                  ==========
</TABLE>

  The fair value of the warrants discussed below were determined at their time
of grant via application of the Black-Scholes option pricing model, and with
respect to those warrants issued in connection with the Senior Notes Debt
Offering, based on an independent valuation.

  $.01 Warrants

  In connection with the Senior Notes Debt Offering, which was consummated on
April 13, 1998, the Company issued to the initial purchasers of the Senior Notes
warrants to purchase 3,713,094 shares of Series B common stock at an exercise
price of $0.01 per share. As of December 31, 1999, such warrants are currently
exercisable and expire on April 15, 2008. Such warrants contain customary
adjustments to protect against dilution, as well as certain


                                     F-25
<PAGE>

additional anti-dilutive adjustments as defined in the warrant agreement. As of
December 31, 1999, all of these warrants remain outstanding.

     $.50 Warrants

     During January 1997, the Company issued to certain legal service providers
warrants to purchase 19,000 shares of common stock at an exercise price of $.50.
Such warrants have terms of five years and contain customary adjustments to
protect against dilution. As a result of the equity recapitalization which
occurred on December 30, 1997, these warrants are currently exercisable into
shares of Series B common stock. As of December 31, 1999, all of these warrants
remain outstanding.

     In connection with the private placement of Series C preferred stock
referred to above, during January 1997 the Company also issued to certain
financial advisors warrants to purchase 15,000 shares of common stock at an
exercise price of $.50, which have terms of five years and contain customary
adjustments to protect against dilution. During March 1997, 5,000 of the $.50
warrants were exercised for proceeds totaling $2,500. As a result of the equity
recapitalization which occurred on December 30, 1997, the remaining outstanding
warrants are currently exercisable into shares of Series B common stock. As of
December 31, 1999, all of the remaining warrants remain outstanding.

     $1.80 Warrants

     During January 1997, the Company issued a warrant for the purchase of
800,000 shares of common stock to the Sturm Entities for cash proceeds totaling
$200,000, which warrant has a term of five years. As issued, the original
warrant agreement contained a complex anti-dilution provision pursuant to which
the number of underlying common shares and exercise price per common share would
have been adjusted based upon the occurrence of certain future events, as
defined in the warrant agreement. On December 30, 1997, the warrant agreement
was amended whereby the number of shares purchasable under the warrant was set
at 2,110,140 shares of Series B common stock with an exercise price of $1.80 per
share. This warrant, as amended, remains subject to certain customary
adjustments to protect against dilution. As of December 31, 1999, no shares have
been issued pursuant to this warrant.

     $3.00 Warrants

     In connection with the April 13, 1998 private placement of Series B common
stock, the Company issued warrants for the purchase of 6,666,666 shares of
Series B common stock to the investors therein. Such warrants were issued with
an exercise price of $3.00 per share, contain customary adjustments to protect
against dilution, and may be exercised at any time prior to the first to occur
of (i) April 13, 2005; (ii) the merger of the Company with or into another
entity in which the shareholders of the Company immediately prior to the merger
own less than 50% of the voting securities of the surviving entity immediately
following the merger; and (iii) the sale by the Company of all or substantially
all of its assets. As of December 31, 1999, all of these warrants remain
outstanding.

     In connection with the December 30, 1997 private placement of Series A
common stock, the Company issued warrants for the purchase of 10,135,164 shares
of Series B common stock to the investors therein. Such warrants were issued
with an exercise price of $3.00 per share, contain customary adjustments to
protect against dilution, and may be exercised at any time prior to the first to
occur of (i) December 30, 2004; (ii) the merger of the Company with or into
another entity in which the shareholders of the Company immediately prior to the
merger own less than 50% of the voting securities of the surviving entity
immediately following the merger; and (iii) the sale by the Company of all or
substantially all of its assets. As of December 31, 1999, all of these warrants
remain outstanding. Effective February 10, 2000, concurrent with the sale of
warrants by ENA and an affiliate of Enron Communications to a third party (Note
1), certain restrictions were put in place with respect to the exercise of a
warrant to purchase approximately 375,000 shares, such that the warrant cannot
be exercised prior to the earlier of sixty-one days following the close of an
initial public offering, or February 15, 2001.

     During January 1997, the Company issued to a lender warrants to purchase
800,000 shares of common stock. Such warrants were issued with an exercise price
of $6.00 per share, a term of five years, and contain customary adjustments to
protect against dilution, as well as certain additional anti-dilutive
adjustments as defined in the warrant agreement. As a result of the capital
transaction and the equity recapitalization which occurred on December


                                     F-26

<PAGE>

30, 1997, these warrants are currently exercisable into 800,000 shares of Series
B common stock at an exercise price of $3.00 per share. As of December 31, 1999,
all of these warrants remain outstanding. During February 2000, the Company
received notice from such lender that they intend to exercise these warrants.

     $3.53 Warrants

     In connection with a private placement of Series C preferred stock in
January 1997, the Company issued warrants for the purchase of 520,000 shares of
common stock to the investors. Such warrants were issued with an exercise price
of $5.00 per share, a term of five years, and contain customary adjustments to
protect against dilution, as well as certain additional anti-dilutive
adjustments as defined in the warrant agreements. As a result of the capital
transactions which occurred on December 30, 1997 and April 13, 1998, such
warrants are currently exercisable into 736,564 shares of Series B common stock
at an exercise price of $3.53 per share. As of December 31, 1999, all of these
warrants remain outstanding.

     $3.83 Warrants

     During August 1997, the Company issued a lender warrants to purchase
300,000 shares of common stock. Such warrants were issued with an exercise price
of $6.00 per share, a term of seven years, and contain customary adjustments to
protect against dilution, as well as certain additional anti-dilutive
adjustments as defined in the warrant agreements. As a result of the capital
transaction and the equity recapitalization which occurred on December 30, 1997
and the capital transaction occurring on April 13, 1998, such warrants are
currently exercisable into 470,092 shares of Series B common stock at an
exercise price of $3.83 per share. As of December 31, 1999, all of these
warrants remain outstanding. On February 3, 2000, all such warrants were
exercised and accordingly, the Company received $1.8 million in cash.

     $5.00 Warrants

     In connection with the private placement of Series A common stock referred
to above, the Company also issued to certain financial advisors warrants to
purchase 30,000 shares of Series B common stock at an exercise price of $5.00,
all of which have terms of five years and contain customary adjustments to
protect against dilution. As of December 31, 1999, all of these warrants remain
outstanding.

     During January 1997, the Company issued to certain legal service providers
warrants to purchase 5,000 shares of common stock at an exercise price of $5.00.
Such warrants have terms of five years and contain customary adjustments to
protect against dilution. As a result of the equity recapitalization which
occurred on December 30, 1997, these warrants are currently exercisable into
shares of Series B common stock. As of December 31, 1999, all of these warrants
remain outstanding.

     In connection with the private placement of Series C preferred stock
referred to above, during January 1997 the Company also issued to certain
financial advisors warrants to purchase 218,118 shares of common stock at an
exercise price of $5.00, which have terms of five years and contain customary
adjustments to protect against dilution. As a result of the equity
recapitalization which occurred on December 30, 1997, the outstanding warrants
are currently exercisable into shares of Series B common stock. As of December
31, 1999, all of the remaining warrants remain outstanding.

     $6.00 Warrants

     In connection with the private placement of Series A common stock referred
to above, the Company also issued to certain financial advisors warrants to
purchase 17,500 shares of Series B common stock at an exercise price of $6.00,
all of which have terms of five years and contain customary adjustments to
protect against dilution. As of December 31, 1999, all of these warrants remain
outstanding.

                                     F-27

<PAGE>

     During January 1997, the Company issued warrants to purchase 83,400 shares
of common stock to certain financial advisors, which warrants have an exercise
price of $6.00 and a term of five years. As a result of the equity
recapitalization which occurred on December 30, 1997, these warrants are
currently exercisable into shares of Series B common stock. As of December 31,
1999, all of these warrants remain outstanding.

     During July 1997, warrants to purchase 33,789 shares of common stock were
issued to the note holders. Such warrants, which expire in July 2002, have an
exercise price of $6.00 per share and contain customary adjustments to protect
against dilution. As a result of the equity recapitalization which occurred on
December 30, 1997, these warrants are currently exercisable into shares of
Series B common stock. As of December 31, 1999, all of these warrants remain
outstanding.

     Warrants - Other

     As a result of the equity recapitalization which occurred on December 30,
1997, outstanding warrants to purchase 139,494 shares of Series B preferred
stock and 122,828 and 16,666 warrants issued during April 1994 and July 1994,
respectively, have been exercised into shares of Series B common stock. During
the year ended December 31, 1999, 109,495 shares of Series B common stock were
issued pursuant to warrants exercised for total proceeds of $152,000, and 29,999
warrants expired.

NOTE 13--EMPLOYEE BENEFIT PLANS

401(k) Plans

     The Company has several 401(k) plans due to its various acquisitions.
Effective January 1, 2000, the plans associated with the acquisitions were
merged with the FirstWorld Communications, Inc. 401(k) Retirement Plan ("401(k)
Plan").  This 401(k) Plan was adopted on November 1, 1998, pursuant to which
eligible employees may elect to defer up to 20% of their compensation into the
401(k) Plan up to a maximum allowable, as determined by the Internal Revenue
Service.  The 401(k) Plan also stipulates that the Company may provide
discretionary matching contributions to the participants of the 401(k) Plan,
which matching contributions would be allocated to the participants as of
December 31 of each 401(k) Plan year and would vest to the participants at the
rate of 25% per year of service. All administrative expenses of the 401(k) Plan
will be borne by the Company.  On December 13, 1999, the Board approved a
matching contribution in cash in the amount equal to 50% of each eligible
participants contribution to the 401(k) Plan, up to a maximum contribution of 6%
of the participant eligible compensation for the 1999 plan year.  The Company
recorded a selling, general and administrative expense of approximately $400,000
associated with the match for the year ended December 31, 1999.  Matching
contributions in future plan years will be made at the discretion of the Board.

The Bonus Program

     The Quarterly Bonus Program of the Company (the "Bonus Program") was
adopted by the Board on May 3, 1999 amended by the Board in December 1999, and
also approved by the Company's stockholders at the Company's 1999 Annual Meeting
of Stockholders held on June 3, 1999. The Bonus Program is intended to
incentivize both individual productivity and employee retention. A bonus paid
out to each eligible employee in the Bonus Program is based in part on the
productivity of that participant's profit and loss center and in part on that
participant's individual performance. Certain executive officers may elect to
receive shares, in lieu of a cash bonus payment under the Bonus Program. An
aggregate of 200,000 Shares will be available for issuance under the Bonus
Program. As of December 31, 1999, the Company has issued 14,116 shares
associated with the Bonus Program. The compensation expense associated with the
issuance of these shares was calculated based on the fair value of the shares at
the time of issuance. The Company incurred expenses related to the Bonus Program
of approximately $3.2 million for the year ended December 31, 1999. Such costs
are reflected in selling, general and administrative expenses in the
consolidated statement of income.

1999 Equity Incentive Plan

     The 1999 Equity Incentive Plan (the "Incentive Plan") was adopted by the
Board on March 8, 1999, and approved by the Company's stockholders at the
Company's 1999 Annual Meeting of Stockholders held on June 3, 1999. The
principal purposes of the Incentive Plan are to provide incentives for key
employees and consultants of

                                     F-28

<PAGE>

the Company through granting of options and stock appreciation rights ("SARs").
Unless the Board determines otherwise, payment upon the exercise of any options
or SARs must be made in cash at the time of exercise. Options granted under the
plan are non-transferable and expire 90 days after an employee or consultant
relationship with the Company is terminated. Options generally vest over a
period of not more than 4 years, and expire 5 or 7 years after the grant date,
based on compliance with certain securities laws. As of December 31, 1999,
options covering an aggregate of 4,261,825 shares of the Company's Series B
common stock, at exercise prices ranging from $6.00 to $7.50, were outstanding
under the Incentive Plan. Included in the 4,261,825 options as of December 31,
1999, were outstanding SARs covering an aggregate of 968,325 shares of the
Company's Series B common stock and 738,175 shares remained available for future
grant under the Incentive Plan. The Incentive Plan terminates automatically on
March 8, 2004, unless terminated sooner. The aggregate number of shares of
Series B common stock of the Company or the equivalent in other equity
securities that may be issued upon exercise of options may not exceed 5,000,000.

1999 Employee Stock Purchase Plan

     In December 1999 the Board adopted the 1999 Employee Stock Purchase Plan
covering an aggregate of 1,000,000 shares of common stock.  The 1999 Employee
Stock Purchase Plan is intended to qualify as an "employee stock purchase plan"
within the meaning of Section 423 of the Internal Revenue Code. Under the 1999
Employee Stock Purchase Plan, the Board may authorize participation by eligible
employees, including officers, in periodic offerings following the adoption of
the 1999 Employee Stock Purchase Plan.  The 1999 Employee Stock Purchase Plan is
administered by the Board or a committee authorized by the Board to act on its
behalf.  The 1999 Employee Stock Purchase Plan will terminate at the direction
of the Board or when all of the shares reserved for issuance have been
purchased.

1998 Stock Purchase Plan

     Under the Company's 1998 Stock Purchase Plan (the "Stock Purchase Plan")
the Company is authorized to issue rights to purchase up to 500,000 shares of
its Series B common stock to employees. Administration of the Stock Purchase
Plan has been delegated to the compensation committee of the Board, subject to
certain limitations. That committee may determine to whom purchase rights are to
be granted, the number of such rights to be granted, the price per share of the
purchase rights and the time limit for exercise of the purchase rights. Shares
granted under the Stock Purchase Plan may be purchased using a promissory note
for up to 50% of the purchase price of the stock. If the purchaser elects to use
a promissory note as any part of the purchase price, the shares purchased must
be pledged to secure that note. Unless the compensation committee determines
otherwise, shares purchased through the Stock Purchase Plan shall be subject to
a right of repurchase on behalf of the Company. The right of repurchase must
lapse not more slowly than 20% per year. In September 1998, the Company offered
rights to purchase an aggregate of 300,000 shares of Series B common stock to 17
employees. Prior to the stated expiration of the stock purchase rights in
November 1998, five employees purchased 42,250 shares of Series B common stock
at a price of $4.50 per share. No stock purchase rights have been granted under
the Stock Purchase Plan since September 1998. The Stock Purchase Plan terminates
automatically on September 18, 2008 unless it is terminated sooner.

1997 Stock Option Plan

     Under the SpectraNet International 1997 Stock Plan the Company is
authorized to issue an aggregate of 1,500,000 options to purchase Series B
common stock. The 1997 Stock Option Plan provides for the grants of incentive
stock options ("ISOs") and nonqualified stock options and the award of stock
purchase rights. Subject to the terms and conditions of the 1997 Stock Option
Plan and applicable law, the Board or a duly appointed committee of the Board
has the authority to determine, among other things, which employees, directors
or consultants should be awarded options, the type of options to be awarded, the
number of shares covered by option awards, the exercise price applicable to
options awarded and the vesting schedule of such options. Options awarded under
the 1997 Stock Option Plan are nontransferable and generally expire ten years
from the date of grant. Unless otherwise indicated in the applicable stock
option agreement, the vested portion of options awarded pursuant to the 1997
Stock Option Plan generally remain exercisable for three months after the
termination of the optionee's service with the Company. However, if the
optionee's service with the Company ends because of death or disability, unless
otherwise indicated in the Stock Option Agreement, the optionee has 12 months to
exercise the vested portion of his or her options. As of December 31, 1999,
options to purchase an aggregate of 587,407 shares of Series B common stock at
exercise prices ranging from $3.00 to $7.50 were outstanding under the 1997
Stock Option Plan.


                                     F-29

<PAGE>

1995 Stock Option Plan

     Under the SpectraNet International 1995 Incentive Stock Option Plan the
Company is authorized to issue ISOs to acquire up to an aggregate of 1,500,000
shares of Series B common stock.  Subject to the limitations set forth in the
1995 Stock Option Plan, the Board or a committee thereof comprised of at least
three directors has the authority, subject to certain limitations, to select the
employees of the Company to whom grants are made, to designate the number of
shares to be covered by each option, to establish vesting schedules, and to
specify other terms of the options.  Generally, options vest over a four and one
half-year period and expire ten years from the date of grant. Options granted
under the 1995 Stock Option Plan are nontransferable and expire 90 days after
the termination of an optionee's employment with the Company, unless such
optionee's service with the Company is terminated by death or disability, in
which case the options expire six months and one year, respectively, after the
optionee's employment with the Company is terminated. As of December 31, 1999,
options to purchase an aggregate of 60,800 shares of Series B common stock at
prices ranging from $.25 to $4.50 were outstanding under the 1995 Stock Option
Plan.

     Stock option, SARs, and stock purchase right transactions beginning October
1, 1996 through the year ended December 31, 1999, all of which relate to
employee transactions, are summarized as follows:

<TABLE>
<CAPTION>
                                                        Weighted-                    Weighted        Stock        Weighted-
                                                         Average        Stock         Average        Appre-        Average
                                             Stock      Exercise      Purchase       Exercise       ciation       Exercise
                                            Options       Price        Rights          Price         Rights         Price
                                         -------------  ---------  ---------------  -----------  --------------  -----------
<S>                                      <C>            <C>        <C>              <C>          <C>             <C>
Outstanding at October 1, 1996  .........     790,000       $ .18              --            --             --            --
  Granted  ..............................     489,400       $ .82              --            --             --            --
  Exercised  ............................    (101,900)      $ .22              --            --             --            --
  Forfeited  ............................    (138,700)      $ .48              --            --             --            --
                                            ---------       -----        --------         -----       --------         -----
Outstanding at September 30, 1997  ......   1,038,800       $ .44              --            --             --            --
  Granted  ..............................   1,420,766       $3.71         300,000         $4.50             --            --
  Exercised  ............................    (350,517)      $ .35              --            --             --            --
  Forfeited  ............................     (75,854)      $2.44              --            --             --            --
                                            ---------       -----        --------         -----       --------         -----
Outstanding at September 30, 1998  ......   2,033,195       $2.66         300,000         $4.50             --            --
  Granted  ..............................   3,173,275       $5.96              --            --        168,550         $6.75
  Exercised  ............................    (166,000)      $ .20         (42,250)        $4.50             --            --
  Forfeited  ............................    (268,017)      $3.82        (257,750)        $4.50             --            --
                                            ---------       -----        --------         -----       --------         -----
Outstanding at December 31, 1998  .......   4,772,453       $4.88              --            --        168,550         $6.75
  Granted  ..............................   3,158,290       $6.20              --            --        999,125         $7.24
  Exercised  ............................    (601,399)      $1.52              --            --             --            --
  Forfeited  ............................    (582,637)      $3.16              --            --       (199,350)        $6.81
                                            ---------       -----        --------         -----       --------         -----
Outstanding at December 31, 1999  .......   6,746,707       $6.29              --            --        968,325         $7.32
                                            =========       =====        ========         =====       ========         =====
</TABLE>
  The following table summarizes information about stock options and stock
appreciation rights outstanding as of December 31, 1999:

<TABLE>
<CAPTION>
                                                 Outstanding                                     Exercisable
                         -----------------------------------------------------------  ----------------------------------
                                                    Weighted-
                                                     Average            Weighted-                          Weighted-
                              Number as of          Remaining            Average       Number as of         Average
                              December 31,         Contractual          Exercise       December 31,        Exercise
Range of Exercise Prices          1999             Life (years)           Price            1999              Price
------------------------  ---------------------  ---------------  ---------------  -----------------  ------------------
<S>                      <C>                  <C>                    <C>              <C>              <C>
     $        .25                     2,000            5.9            $    .25                --           $    --
     $        .50                    30,500            4.9            $    .50            23,800           $   .50
     $       3.00                   282,582            7.9            $   3.00           224,408           $  3.00
     $       4.50                   323,125            8.8            $   4.50           118,320           $  4.50
     $  6.00-7.50                 7,076,825            6.5            $   6.68         2,180,174           $  6.00
                                  ---------                                            ---------
                                  7,715,032            6.4            $   6.42         2,546,702           $  5.61
                                  =========                                            =========
</TABLE>

     The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic value method and provides pro forma
disclosures of net loss as if the fair value method had been

                                     F-30

<PAGE>
applied in measuring compensation expense. Had compensation cost for the
Company's stock-based compensation plans been determined based on the fair
value method at the grant dates for awards under this plan consistent with the
method prescribed by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," the Company's net loss would have
been increased to the pro forma amounts indicated below:


<TABLE>
<CAPTION>
                                                                                          Year Ended
                                 Year Ended         Three Months Ended    -----------------------------------------
                              December 31, 1999      December 31, 1998    September 30, 1998     September 30, 1997
                              -----------------     ------------------    ------------------     ------------------
<S>                           <C>                   <C>                   <C>                    <C>
                                                                 (in thousands)
  Net loss:
     As reported..........             $106,617                $17,731               $33,356                 $9,553
     Pro forma............             $107,765                $17,883               $33,515                 $9,557
</TABLE>

   The fair value of each option and stock purchase right grant is estimated
on the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions used for grants during the year ended
December 31, 1999, three months ended December 31, 1998 and the years ended
September 30, 1998 and 1997: dividend yield of 0.0% for all periods; volatility
of 45% for all periods; risk-free interest rates of 5.53%, 4.53%, 5.88% and
6.07% respectively; and an expected life of 5.0 years for all periods, except
with respect to stock purchase rights granted during the year ended September
30, 1998, which rights have a term of 10 years. The weighted average fair value
of options and stock purchase rights granted during the year ended December 31,
1999, three months ended December 31, 1998 and the years ended September 30,
1998 and 1997 was approximately $7.00, $4.94, $.57 and $.09, respectively.

NOTE 14--LEGAL PROCEEDINGS

City of Anaheim

  On May 13, 1999, the City filed a lawsuit in Orange County Superior Court,
Case Number 809281, against FirstWorld and FirstWorld Anaheim (collectively
"FirstWorld Parties"). The City alleged that the FirstWorld Parties repudiated
their contractual obligations under the Universal Telecommunications System
Participation Agreement (the "Participation Agreement"), the Agreement for Use
of Operating Property (the "Operating Property Agreement") and the Development
Fee Agreement (the "Development Agreement," and together with the Participation
Agreement and the Operating Property Agreement, the "UTS Agreements"). In
addition, the City alleged, among other things, that the FirstWorld Parties
materially breached their obligations under the UTS Agreements by: (i) failing
to commence construction of a demonstration center in downtown Anaheim and that
the FirstWorld Parties would not commence operation of this downtown
demonstration center by June 30, 1999 under the UTS Agreements; (ii) failing to
provide verification that Substantial Completion of Phase I, as each such term
is defined in the UTS Agreements, had been achieved; (iii) failing to provide a
"Subsequent Implementation Program" (as defined in the UTS Agreements); (iv)
failing to comply with various auditing procedures in the UTS Agreements; and
(v) failing to make a quarterly payment due under the Participation Agreement.
The City alleged that it is entitled to damages in excess of $45.0 million as
well as costs, pre-judgment interest and such other relief as the Court deems
proper. The City also sought specific performance compelling FirstWorld Parties
to completely perform certain obligations under the UTS Agreements.

  In response to the lawsuit, the FirstWorld Parties filed a Motion to Compel
Arbitration.  The Court granted the FirstWorld Parties' Motion on September 16,
1999.  On October 6, 1999, the Court entered a written Order finding that there
is a valid arbitration provision in the agreements and that the City had not
established that the FirstWorld Parties unequivocally repudiated the UTS
Agreements. The court action has been stayed pending completion of the
arbitration.  On January 7, 2000, the City gave notice of a dispute under the
Participation Agreement and initiated arbitration against the Company and FWA
with respect to the following alleged disputes: (i) the City seeks a declaration
and order that the FirstWorld Parties are obligated to make all payments to the
City pursuant to section 6.2 of the Participation Agreement and that all sums
shall be paid forthwith, plus interest, as provided in the Participation
Agreement; (ii) the City seeks an award from the FirstWorld Parties in the
amount of $145,000, corresponding to the amount withheld by the FirstWorld
Parties for certain maintenance and repair expenses charged to the City; (iii)
in addition to damages, the City seeks a declaration and order to the effect
that the City is entitled to conduct a full and complete audit of the FirstWorld
Parties' books and records and a declaration and order to the effect that the
FirstWorld Parties have failed to fulfill their obligations to disclose
information and cooperate with the City in connection with the Annual Operations
Audit and the Annual Compliance Audit provided for in the UTS

                                     F-31
<PAGE>

Agreements; (iv) in addition to damages, the City seeks a declaration and order
to the effect that the FirstWorld Parties specifically perform pursuant to the
Participation Agreement with respect to building a fully operational
Demonstration Center within a specified region of the City. The City seeks such
additional relief as is appropriate, including attorneys fees and costs. The
notice also identified the City's appointed arbitrator. On January 27, 2000, the
FirstWorld Parties delivered their response identifying their appointed
arbitrator and, in addition to the issues raised by the City, identifying an
additional matter for the arbitration relating to restitution of certain City
employee reimbursements not properly earned under the Participation Agreement.
The two party appointed arbitrators are to meet to select a third arbitrator.
The Company believes that the FirstWorld Parties are not in breach as alleged
and intends to vigorously defend the City's allegations; however, there can be
no assurance that an unfavorable outcome of this dispute would not have a
material adverse effect on the Company's results of operations, liquidity or
financial position.

Dina Partners L.P.

  On October 16, 1998, the Company filed a declaratory relief action in San
Diego Superior Court, asking the Court to find that the Company was not
obligated to offer stock to Dina Partners, L.P. ("Dina") in connection with the
December 30, 1997 equity investment by the Sturm Entities and ENA. On September
3, 1999, the lawsuit was dismissed with prejudice. The Company did not
contribute any consideration to the settlement.

  Prior to the dismissal of the lawsuit, certain shareholders of the Company
agreed to sell certain securities to Dina. In accordance with Securities and
Exchange Commission Staff Accounting Bulletin No. 79, the Company recorded a
capital contribution and corresponding one-time, non-cash charge during the year
ended December 31, 1999 in connection with this transaction in the amount of
$1.9 million.

Other

  The Company is engaged in other legal matters arising in the ordinary course
of its business and believes that the outcome of these actions will not have a
material adverse effect on its results of operations, liquidity or financial
positions.

NOTE 15--SUBSEQUENT EVENTS

   Private P1acements.  In February 2000, the Company entered into four
definitive private placement agreements (the "Private Placements").  The closing
of the Private Placements is contingent upon and will not be effective until the
closing of an initial public offering.  If the Private Placements close, they
will result in proceeds of approximately $91.5 million.  The number of shares
purchased will be based upon the initial public offering price, less 7% which
represents the underwriters' discount.  In connection with one of the private
placements, the Company has also agreed to issue a warrant to purchase Series B
common stock equal to 75% of the shares purchased by such investor. The warrant
will have a five-year term and an exercise price equal to 125% of the initial
public offering price.

   In the event that these transactions are consummated, assuming an initial
public offering price of $12.00 per share, the Company anticipates that a non-
cash charge of approximately $7.0 million will be recorded.  This charge will be
equal to the difference between the gross public offering price per share and
the price per share paid in the Private Placements, times the number of shares
sold in the Private Placements.  In addition, the Company anticipates that a
deferred charge of approximately $2.4 million will be recorded in connection
with a business relationship entered into concurrently with one of the Private
Placements. Such deferred charge would be amortized to earnings over the
duration of the business relationship.

  December 2, 1999 equity investment agreement.  On February 7, 2000, the
Company's cash, cash equivalents and marketable securities position fell below
$20.0 million and as a result the Company gave notice to require the  Sturm
Entity to purchase $25.0 million of Series B common stock.  The Company received
the funds and paid the related commitment fee of $5.0 million on February 10,
2000.

   FastLane Communications.  On January 14, 2000, the Company purchased certain
equipment and intangible assets of FastLane Communications, Inc., an Internet
service provider and consultant in the Dallas/Fort Worth, Texas market for a
total consideration of $2.4 million.


                                     F-32
<PAGE>

                        FIRSTWORLD COMMUNICATIONS, INC.

               CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)

                                (in thousands)


<TABLE>
<CAPTION>
                                                                                                  Three Months
                                                                                                      Ended
                                                                                                  December 31,
                                                                                                      1997
                                                                                                 ---------------
<S>                                                                                              <C>
Revenue:
  Internet services  ..........................................................................         $    --
  Web integration and consulting services  ....................................................              --
  Telephony services  .........................................................................             114
                                                                                                        -------
     Total revenue  ...........................................................................             114
                                                                                                        -------
Cost and expenses:
  Network and service costs  ..................................................................             144
  Selling, general and administrative expenses  ...............................................           2,248
  Depreciation and amortization  ..............................................................             478
                                                                                                        -------
     Total costs and expenses  ................................................................           2,870
                                                                                                        -------
Loss from operations  .........................................................................          (2,756)
Other income (expense):
  Interest income  ............................................................................               7
  Interest expense  ...........................................................................          (1,349)
                                                                                                        -------
     Total other expense  .....................................................................          (1,342)
                                                                                                        -------
Net loss.......................................................................................         $(4,098)
                                                                                                        =======
</TABLE>



                See notes to consolidated financial statements.


                                     F-33
<PAGE>

                        FIRSTWORLD COMMUNICATIONS, INC.

     CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) (Unaudited)

                       (in thousands, except share data)


<TABLE>
<CAPTION>
                                                                              Series A             Series B
                                                                            Common Stock          Common Stock       Additional
                                                                            ------------          ------------        Paid-In
                                                                       Shares        Amount     Shares     Amount     Capital
                                                                     ----------    ---------   --------    -------   ----------
<S>                                                                  <C>           <C>         <C>         <C>       <C>
Balance at October 1, 1997..........................................         --    $      --         --    $    --   $       --
Exercise of options to purchase common stock--October 1997 to
  December 1997  ...................................................         --           --         --         --           --
Issuance of Series A common stock with warrants to purchase
  10,135,164 shares of Series B common stock,--December 30, 1997.... 10,135,164       20,778         --         --           --
Conversion of Series C preferred stock, Series B preferred stock,
  Series A preferred stock and common stock to Series B common
  stock--December 30, 1997; as follows:
Series C preferred stock; conversion ratio of 1.39:1, including
  anti-dilutive adjustments.........................................         --           --  3,621,120     12,279           --
Series B preferred stock and common stock; conversion ratio of 1:1..         --           --  5,545,638      3,486           --
Series A preferred stock; conversion ratio of 1:10..................         --           --     11,867        395           --
Net loss for the three-month period ended December 31, 1997.........         --           --         --         --           --
                                                                     ----------    ---------  ---------    -------   ----------
Balance at December 31, 1997........................................ 10,135,164    $  20,778  9,178,625    $16,160   $       --
                                                                     ==========    =========  =========    =======   ==========

                                                                                                      See notes to consolidated
</TABLE>

                                     F-34
<PAGE>

<TABLE>
<CAPTION>
        Series C                Series B              Series A
      Convertible              Convertible          Convertible
    Preferred Stock          Preferred Stock      Preferred Stock        Common Stock
------------------------  ---------------------  ------------------  --------------------
   Shares       Amount      Shares      Amount    Shares    Amount     Shares     Amount   Warrants
-------------  ---------  -----------  --------  ---------  -------  -----------  -------  --------
<S>            <C>        <C>          <C>       <C>        <C>      <C>          <C>      <C>
  2,600,000    $ 12,279    2,016,638   $ 3,670    118,667    $ 395    3,262,900    $(227)   $ 1,001
         --          --           --        --         --       --      266,100       43         --
         --          --           --        --         --       --           --       --      9,628
 (2,600,000)    (12,279)          --        --         --       --           --       --         --
         --          --   (2,016,638)   (3,670)        --       --   (3,529,000)     184         --
         --          --           --        --   (118,667)    (395)          --       --         --
         --          --           --        --         --       --           --       --         --
-----------    --------   ----------   -------   --------   ------   ----------    -----    -------
         --    $     --           --   $    --         --    $  --           --    $  --    $10,629
===========    ========   ==========   =======   ========   ======   ==========    =====    =======

<CAPTION>
                Deficit
              Accumulated        Total
                During        Stockholders'
Stockholder   Development        Equity
Receivables      Stage         (Deficit)
-----------   -----------     -------------
<C>           <C>             <C>
 $    (97)      $(14,757)        $ 2,264
       --             --              43
  (30,000)            --             406
       --             --              --
       --             --              --
       --             --              --
       --         (4,098)         (4,098)
 --------       --------         -------
 $(30,097)      $(18,855)        $(1,385)
 ========       ========         =======
</TABLE>

financial statements.

                                     F-35
<PAGE>

                        FIRSTWORLD COMMUNICATIONS, INC.

                CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                                             Three Months
                                                                                                Ended
                                                                                           December 31, 1997
                                                                                          ------------------
Cash flows from operating activities:
<S>                                                                                       <C>
   Net loss...........................................................................         $   (4,098)
Adjustments to reconcile net loss to net cash used by operating activities:
   Depreciation and amortization expense..............................................                478
   Amortization of deferred financing costs...........................................                358
   Accretion of senior notes..........................................................                120
   Non-cash interest expense..........................................................                293
   Changes in assets and liabilities:
      Accounts receivable.............................................................                 (3)
      Other assets....................................................................                (17)
      Accounts payable and other liabilities..........................................              1,752
                                                                                                   ------
         Net cash used by operating activities........................................             (1,117)
                                                                                                   ------
Cash flows from investing activities:
   Purchase of property and equipment.................................................             (2,490)
                                                                                                   ------
         Net cash used by investing activities........................................             (2,490)
                                                                                                   ------
Cash flows from financing activities:
   Proceeds from issuance of Series B Common Stock and related warrants...............                 43
   Principal payments on debt and capital leases......................................                (70)
   Proceeds from short-term borrowings and related warrants...........................              3,370
   Principal payments on borrowings...................................................                (52)
                                                                                                   ------
         Net cash provided by financing activities....................................              3,291
                                                                                                   ------
Net decrease in cash and cash equivalents.............................................               (316)
Cash and cash equivalents, beginning of period........................................                536
                                                                                                   ------
Cash and cash equivalents, end of period..............................................            $   220
                                                                                                   ======
</TABLE>


                See notes to consolidated financial statements.

                                     F-36


<PAGE>

                        FIRSTWORLD COMMUNICATIONS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITIED)

NOTE 1--BASIS OF PRESENTATION

  The consolidated financial statements include the accounts of FirstWorld
Communications, Inc. (''FirstWorld'') and its wholly owned subsidiaries
(collectively, the ''Company''). All significant intercompany transactions and
balances have been eliminated in consolidation.

  In the opinion of management, the accompanying consolidated financial
statements include all adjustments (consisting of normal recurring items)
necessary for a fair presentation of results for the interim periods presented
for the Company. The results of operations for any interim period are not
necessarily indicative of results for the full year. The consolidated financial
statements and footnote disclosures should be read in conjunction with the
audited consolidated financial statements and related notes thereto included
elsewhere in this report on Form 10-K.

NOTE 2--OTHER MATTERS

  The Company is engaged in other legal matters arising in the ordinary course
of its business and believes that the outcome of these actions will not have a
material adverse effect on its results of operations, liquidity or financial
position.



                                     F-37
<PAGE>


                     Report of Independent Accountants on
                         Financial Statement Schedule

To the Board of Directors and Stockholders of FirstWorld Communications, Inc.:

Our audits of the consolidated financial statements referred to in our report
dated February 11, 2000 appearing in this Form 10-K of FirstWorld
Communications, Inc. also included an audit of the financial statement schedule
listed in Item 14(a)(2) of this Form 10-K. In our opinion, this financial
statement schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.

PricewaterhouseCoopers LLP
Denver, Colorado
February 11, 2000


                                     F-38
<PAGE>

FirstWorld Communications, Inc.

Schedule II--Valuation and Qualifying Accounts

<TABLE>
<CAPTION>
                                    Balance at                       Balance at
                                   beginning of                        end of
                                      period    Additions Deductions   period
                                   ------------ --------- ---------- ----------
                                                   (in thousands)
<S>                                <C>          <C>       <C>        <C>
Deferred Tax Asset Valuation
 Allowance:
  Year ended September 30, 1997...   $ 2,268     $ 2,427    $ --      $ 4,695
  Year ended September 30, 1998...     4,695      10,306      --       15,001
  Three months ended December 31,
   1998...........................    15,001       6,121      --       21,122
  Year ended December 31, 1999....    21,122      33,947      --       55,069

Allowance for Doubtful Accounts:
  Year ended September 30, 1997...   $   --      $   --     $ --      $   --
  Year ended September 30, 1998...       --           10      --           10
  Three months ended December 31,
   1998...........................        10         110      --          120
  Year ended December 31, 1999....       120       2,544       96       2,568
</TABLE>


                                     F-39