<PAGE>

                       U.S. SECURITIES AND EXCHANGE COMMISSION
                                WASHINGTON, DC  20549

                                      FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934.  (Mark One)

  /X/ Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
      Act of 1934
      [NO FEE REQUIRED] for the fiscal year ended September 30, 1998.

  / /  Transitional 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 of other jurisdiction of         (I.R.S. Employer Identification Number)
incorporation or organization)

       7100 E. BELLEVIEW AVENUE, SUITE 210, GREENWOOD VILLAGE, COLORADO  80111
                  (Address of principal executive offices, Zip Code)

     Registrant's  telephone number, including area code:  (303) 874-8010

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

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

                       SERIES B COMMON STOCK, $.0001 PAR VALUE
                                   (Title of Class)

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 / /  No /X/

     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 the 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. /X/

     The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of November 30, 1998 was approximately $46,338,420.
     
     As of November 30, 1998, 10,135,164 shares of Series A Common Stock and
16,137,958 shares of Series B Common Stock were outstanding.

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                           TABLE OF CONTENTS

                                                                           PAGE
                                                                           ----

PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

   Item 1.  Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
       Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
       Business Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . .2
       Market Segmentation Approach. . . . . . . . . . . . . . . . . . . . . .4
       Products and Services . . . . . . . . . . . . . . . . . . . . . . . . .4
       Sales and Marketing . . . . . . . . . . . . . . . . . . . . . . . . . .6
       Strategic Relationships . . . . . . . . . . . . . . . . . . . . . . . .8
       Network Architecture and Technology . . . . . . . . . . . . . . . . . .9
       Information Technology and Support Systems. . . . . . . . . . . . . . .9
       Network Status and Proposed Expansion . . . . . . . . . . . . . . . . 10
       Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
       Regulation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
       Agreements with the City of Anaheim and The Irvine Company. . . . . . 17
       Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
       Risk Factors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
   Item 2.  Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
   Item 3.  Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . 32
   Item 4.  Submission of Matters to a Vote of Security Holders. . . . . . . 32
PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
   Item 5.  Market for Registrant's Common Equity and Related Stockholder
            Matters  . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
   Item 6.  Selected Financial Data. . . . . . . . . . . . . . . . . . . . . 33
   Item 7.  Management's Discussion and Analysis of Financial Condition and
       Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . 33
       Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
       Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . 35
       Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . 38
       Impact of the Year 2000 . . . . . . . . . . . . . . . . . . . . . . . 40
   Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . 40
   Item 8.  Financial Statements and Supplementary Data. . . . . . . . . . . 40
   Item 9.  Changes in and Disagreements With Accountants on Accounting and
            Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . 41
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
   Item 10. Directors and Executive Officers of the Registrant . . . . . . . 42
       Retention of New Chief Executive Officer and President. . . . . . . . 45
       Committees of the Board of Directors. . . . . . . . . . . . . . . . . 47
       Compliance With Section 16(a) of the Securities Exchange Act. . . . . 48
   Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . 48
       Director Compensation . . . . . . . . . . . . . . . . . . . . . . . . 48
       Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . . 48
   Item 12. Security Ownership of Certain Beneficial Owners and Management . 54
   Item 13. Certain Relationships and Related Transactions . . . . . . . . . 57
       Equity Investment . . . . . . . . . . . . . . . . . . . . . . . . . . 57
       Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
PART IV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
   Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 62
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

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                                        PART I

ITEM 1.  BUSINESS

     The following discussion includes forward-looking statements that involve
risks and uncertainties. All statements other than statements of historical
facts included in this Form 10-K, including without limitation, certain
statements under the captions "Business," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and located elsewhere herein
regarding the financial position and operating strategy of FirstWorld
Communications, Inc. ("FirstWorld" or the "Company"), may constitute
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct. Important
factors that could cause actual results to differ materially from the Company's
expectations ("cautionary statements") include, without limitation, those
described under the caption "--Risk Factors."

INTRODUCTION

     FirstWorld is a facilities-based integrated communications provider 
("ICP"). The key to the Company's business plan is a data-centric focus, with 
service offerings strategically bundled to address the increasingly complex 
data and voice communications needs of small and medium businesses. The 
Company uses a combination of both owned and managed facilities, with a 
digital network and related provisioning, billing and customer care 
applications. With targeted marketing and a consultative sales approach, the 
Company provides its customers with advanced, integrated data and voice 
communications solutions. Services offered include data connectivity, high 
speed Internet access, local and wide area network ("LAN/WAN") connectivity, 
web hosting, e-commerce and system integration services, as well as 
switch-based local and long distance telephone services.

     The Company began network operations in August 1997 and began providing
services to commercial customers in November 1997. As of November 30, 1998, the
Company had approximately 400 active customers. One of the Company's significant
early customers, the City of Anaheim, relies on the Company to supply local dial
tone, long distance, dedicated facilities and Internet service to substantially
all of its municipal facilities.

     The Company is implementing advanced digital networks and related 
support systems that combine advanced hardware and software from leading 
vendors with its own proprietary systems. With a combination of both owned 
and managed network facilities, the Company provides its customers with an 
integrated approach to enhanced data and voice network services. The Company 
has designed its core processes to streamline provisioning, billing, network 
management and customer service, and has incorporated operational support 
systems that implement such processes into its network offerings. Among other 
things, these systems provide single-point-of-contact customer service and 
facilitate electronic exchanges of information with other network providers 
where possible. The Company is designing its systems to be compatible with 
voice over packet technologies such as voice over IP as such technologies are 
refined in the industry.

     The Company employs a demand-driven approach to network deployment. This
approach is intended to minimize capital expenditures and to maximize
flexibility to serve the higher margin data market as demand for high speed data
communication services grows. The Company connects customers to its networks
through direct fiber connections, digital subscriber lines ("DSL") or unbundled
network 

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elements licensed from the incumbent local exchange carrier ("ILEC"),
depending on the most cost-effective connection that will support the bundle of
services provided to the customer. 

     The Company believes that the market segments within its target markets
have different customer buying patterns, are subject to different competitive
factors and can best be served by different sales and marketing initiatives. For
prime commercial customers (businesses with sophisticated communications needs),
the Company utilizes a consultative selling approach that involves a systematic
assessment of each customer's data communications, telephony, Internet and video
applications needs. For basic commercial customers (businesses with primarily
voice and Internet needs), the Company uses direct mail, telemarketing and
targeted advertising and offers standardized product bundles consisting of
switch-based local and long distance telephony and high speed Internet access.
The Company also offers use of its network capabilities on a wholesale basis to
other local exchange carriers ("LECs"), including competitive local exchange
carriers ("CLECs"), inter-exchange carriers ("IXCs"), Internet service providers
("ISPs") and other communications providers. The following chart outlines the
principal components of this approach: 

<TABLE>
<CAPTION>
MARKET SEGMENTS     PRODUCT CATEGORIES    SALES & MARKETING  NETWORK ELEMENTS
---------------     ------------------    -----------------  ----------------
<S>                 <C>                   <C>                <C>
Prime Commercial    Data, switch-based    Consultative       Fiber, DSL and
                    voice, Internet,      sales approach by  unbundled loops
                    e-commerce and        direct account
                    systems integration   teams and agents

Basic Commercial    Voice and Internet    Direct mail and    DSL and unbundled
                                          telemarketing      loops

Wholesale           Dedicated access      Direct sales to    Central office
                    (DS-1, DS-3, OC-1     other service      services and
                    and OC-3), DSL and    providers, IXCs,   unbundled loops
                    IP-based services     ISPs, resellers
                                          and CLECs
</TABLE>

     The Company uses strategic relationships with property developers, service
providers and others that provide the Company with brand identity, physical
assets, new products or technologies, joint marketing synergies or other
support. The Company believes its existing relationships with these entities
provide the Company with significant advantages in marketing and network
deployment. 
     
     The Company intends to generate near-term revenue by replacing basic
services currently provided by ILECs, IXCs and CLECs, including local, long
distance and other voice services, dedicated access lines and commercial
Internet access, as well as from advanced network services provided to select
customers. The Company believes that it is positioned to generate additional
revenue by providing advanced network services to a broader market as the demand
for such services grows. 

BUSINESS STRATEGY

     The Company's strategy is designed to exploit a number of trends 
reshaping the $180 billion telecommunications industry, including: (i) 
increasing customer demand for high speed, broadband services, such as the 
Internet, data networks and video conferencing; (ii) integration of the 
markets for local exchange and long distance services; (iii) decreased cost 
of high bandwidth connectivity over the wide area; (iv) technical and product 
innovation associated with the Internet, transmission control 
protocol/Internet protocol ("TCP/IP") and voice over Internet technologies; 
(v) the further development of

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server-based applications; (vi) the migration of existing business processes to
electronic formats; and (vii) the erosion of margins and the commodity pricing
of long distance services.
     
     The Company's goal is to become the premier ICP in the markets that it
serves. The Company seeks to achieve a high degree of market penetration,
focusing on high-margin services, forming long-term customer relationships and
establishing a diversified revenue base. The principal elements of the Company's
business strategy include: 

     TAILOR SERVICE OFFERINGS AND SALES TECHNIQUES TO MARKET SEGMENTS.  The
Company employs a market segmentation strategy, which involves tailoring service
offerings, sales and marketing techniques and network deployment to meet the
different needs of prime commercial, basic commercial, and wholesale customers.
The Company believes these market segments have different customer buying
patterns, are subject to different competitive factors and can best be served by
different sales and marketing initiatives. 

     DEPLOY FLEXIBLE NETWORKS TO PROVIDE VOICE AND DATA SOLUTIONS.  The Company
deploys sophisticated switch-based networks capable of providing integrated
data, voice, Internet and video solutions. The Company has designed its
networks, including its central office service platform, to support a wide array
of telecommunications services and to be compatible with technologies still
under development in the industry, including server-based applications, such as
virtual LANs, e-commerce and voice over Internet. 

     PURSUE DEMAND-DRIVEN NETWORK DEPLOYMENT.  The Company utilizes a
demand-driven approach to network deployment. The Company markets its services
to a geographically targeted cluster of businesses before committing to
implementation of a new network. In addition, the Company connects customers to
its networks through direct fiber connections, DSL, unbundled loops or T1s,
depending on the product set and anticipated revenue and margin from the
customers. 

     GAIN EFFICIENCY THROUGH REGIONAL CONCENTRATION.  The Company has adopted a
targeted geographic approach to network deployment. The Company believes the
benefits of implementing networks in areas with high business densities include
(i) increased market penetration due to increased focus on management of market
activities, support of sales activities and leverage of advertising or other
brand equity, (ii) enhanced operating margin from a higher proportion of calls
that both originate and terminate on the Company's network, (iii) increased
leverage of centralized assets such as a central office or product platforms and
(iv) reduced travel, regulatory and administrative expenses. 

     EXPLOIT INTERNAL ENGINEERING AND PRODUCT EXPERTISE.  The Company intends to
leverage its substantial internal engineering and product expertise to enhance
and expand the services it offers, decrease network costs, achieve a high degree
of scalability, reduce operating costs, increase reliability and facilitate
migration to new technologies over time. 
     
     SELECTIVE ACQUISITION STRATEGY.  The Company intends to aggressively pursue
a strategy of selectively acquiring data and voice telecommunications companies
that expand FirstWorld's marketing and service footprint, and its ability to
serve additional customers. In particular, the Company seeks opportunities that
provide synergies and strategic assets relating to products, services,
demographics and technology which would enhance the value of existing assets and
customer relationships.

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MARKET SEGMENTATION APPROACH

     The Company believes that the segments within its target markets have
different customer buying patterns, are subject to different competitive factors
and can best be served by different sales and marketing initiatives. The Company
tailors its data, Internet, voice and video offerings, sales and marketing
approach and network development to provide cost-effective service to prime
commercial, basic commercial and wholesale customers that it targets. 

     PRIME COMMERCIAL.  Prime commercial customers are large and medium sized
businesses that demand a range of sophisticated data, Internet, voice and video
services. Within the prime customer segment, the Company has chosen to focus on
medium-sized businesses because the Company believes that such businesses
generally are underinvested in LANs and computer systems and that their
information technology needs are being undersupported by traditional
telecommunications companies. The Company also has found that medium-sized
businesses have not been aggressively targeted by the Company's competitors,
which have tended to target large businesses. 

     The Company believes that its consultative selling approach, diverse
service offerings and customer service will offer prime customers integrated
solutions to their telecommunications and information problems. The Company
believes it adds significant value for prime customers by offering them a unique
bundle of a broad array of advanced data, Internet, voice and video services.
Moreover, the Company believes its ability to diagnose prime customers' needs
through consultative sales efforts and to meet those needs through bundled
service offerings will enhance the Company's reputation for value and build
additional revenues.

     BASIC COMMERCIAL.  Basic commercial customers typically are small to medium
sized businesses with minimal demand for data services. The Company believes
that it can best serve basic customers by providing service offerings limited to
dial tone and high-speed Internet access and by using telemarketing, direct mail
or indirect channels to minimize sales costs. In addition, the Company believes
that by offering low-cost, limited service offerings to basic customers, it will
establish relationships upon which the Company can base future efforts to sell
more advanced services. The Company intends to rely primarily upon unbundled
loops and T1s to connect basic customers to its network. 

     WHOLESALE.  The Company's wholesale sales force markets dedicated access
and other connectivity services to other service providers such as out-of-region
LECs, IXCs, other CLECs, ISPs and resellers. The primary services are DS-1,
DS-3, OC-n and dedicated Internet and voice services.

PRODUCTS AND SERVICES

     The Company currently offers a wide variety of data and voice services,
including dedicated/high speed access service, application support services,
Internet, switch-based local and long distance telephone service, video
conferencing and basic information technology services, including system
integration services and transparent LAN. The Company works with its prime
commercial customers to develop integrated bundles of services to best meet
their needs. For basic commercial customers, the Company typically offers a
standardized bundle of local and long distance telephone service and Internet
access service. 

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     TELEPHONY

     The Company currently provides switch-based local and long distance
telephone service and a full range of other narrowband telecommunications
services. 

     LOCAL EXCHANGE.  The Company offers switch-based local exchange services,
including local dial tone, with such features as call forwarding, call waiting
and voice mail. These services are offered at highly competitive terms and rates
packaged with other high margin products.

     CENTREX/PBX.  The Company provides flexible solutions to customers with
multiple telephones. The Company's Centrex services provide call forwarding,
call waiting, line hunting, station conferencing, automatic call-back and call
account tracking. The Company minimizes Centrex customers' capital expenditures
by providing such services through Company-owned equipment housed at the central
office. For large customers or customers with special needs, the Company
integrates customer-owned private branch exchange ("PBX") systems with digital
PBX trunks. 

     LONG DISTANCE, TOLL FREE AND CALLING CARD SERVICES.  The Company provides a
complete suite of domestic and international switch-based long distance service,
including advanced 8XX toll free services, enhanced call routing, operator
services, conference calling, travel card services and debit/pre-paid calling
cards.

     DEDICATED/HIGH SPEED ACCESS.  The Company offers transport and
protocol-specific services which allow customers to connect their facilities
with their regional offices, customers, vendors or remote service providers. The
Company offers a range of dedicated access services, including DS-1(T1) and DS-3
digital channels and optical carrier services up to and including OC-48. The
Company also implements numerous transmission protocols, including Integrated
Services Digital Network ("ISDN"), Asynchronous Transfer Mode ("ATM"), frame
relay, DSL, native speed Ethernet (10Mbps) and private IP. 

     APPLICATION SUPPORT SERVICES

     INTERNET.  The Company currently provides high-speed Internet access at
speeds ranging from 128Kbps to 10Mbps, allowing customers to select the access
speed that best meets their needs. The Company allows customers to choose to pay
based on a flat monthly rate or based upon the bandwidth used. 

     VALUE-ADDED INTERNET SERVICES.  The Company augments its Internet access
services with e-mail, Web hosting (shared & dedicated server), file transfer and
user-on-the-road support services. 
     
     VIRTUAL PRIVATE NETWORK.  The Company offers its Internet access customers
a virtual private network service, which uses authentication and encryption
software to provide a secure means of accessing corporate information using
dial-up remote access. 
     
     VIDEO CONFERENCING.  The Company currently offers video conferencing
services and tailors video quality and cost to meet customers' needs.

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     INFORMATION TECHNOLOGY SERVICES

     SYSTEMS INTEGRATION, INTRANET AND SERVER-BASED PRODUCTS.  The Company
offers systems integration services, including design, implementation and
support of customer networks. The Company strives to improve functionality of
customers' LANs and reduce their expenditures on LANs by utilizing elements of
the Company's networks and central office. The Company's initial focus has been
on bandwidth management, local area/wide area integration, voice and data
integration and formation of intranets.
     
     TRANSPARENT LAN.  The Company currently offers transparent LAN services
that allow customers to interconnect LANs and support corporate intranets in
metropolitan area networks ("MANs") while maintaining the functionality and, in
many cases, the speed of a LAN. In most cases, the Company provides the
customer-located equipment ("CLE") to make such interconnection possible. 

SALES AND MARKETING

     Consistent with its market segmentation strategy, the Company uses
different sales channels to target customers within the three market segments
identified by the Company. The Company uses direct sales efforts and a
consultative selling approach with prime commercial customers, direct sales
efforts for wholesale customers and more economical methods such as direct mail
and telemarketing to target basic commercial customers. The Company has
allocated responsibilities for such selling efforts among four different
positions within its sales force structure: strategic account manager, wholesale
account manager, inside sales representative and building entry manager.
Strategic account managers are primarily responsible for selling a complete line
of products and services to prime customers in their assigned territories.
Wholesale account managers sell dedicated transport facilities, among other
services, to wholesale customers. Inside sales representatives are responsible
for telemarketing to potential customers on an ongoing basis to create
appointments for strategic account managers and assisting with sales proposals.
The Company's building entry manager is responsible for establishing
relationships with property owners and building managers to gain introduction to
their tenants. 
     
     DIRECT SALES
     
     The Company uses direct sales efforts to make retail sales to prime
commercial customers and to make wholesale sales of transport and central office
functionality to IXCs, ISPs, other CLECs and resellers.
     
     PRIME COMMERCIAL.  The Company bases its direct sales efforts to prime
commercial customers on a consultative selling approach, which involves a
systematic assessment of customers' telephony usage, their satisfaction with
their existing LANs, if any, and their general communications needs. Strategic
account managers work closely with customers and the Company's own systems
engineers to develop and implement integrated telecommunications solutions. The
Company attempts to position itself as a long-term business partner able to
solve customers' problems by providing access to current and emerging
technologies through the Company's networks and systems. The Company believes
that this process results in the sale of value-added products in addition to
commodity-like services such as local and long distance services. Moreover, the
Company believes that this approach ultimately reduces customer turnover and
differs from the approach adopted by many of the Company's competitors whose
sales are based primarily on price discounting of basic dial tone services. 
The Company believes that its consultative sales approach will be 
particularly successful with respect to sales of the Company's value-added 
Internet, e-commerce and transparent LAN services.

                                      6

<PAGE>


     WHOLESALE CUSTOMERS.  The Company's wholesale account managers offer
wholesale customers, such as IXCs, ISPs, CLECs, and resellers, a variety of
services ranging from dedicated access to complete local service. Such sales
allow the Company to earn incremental revenue while limiting the associated
sales and marketing expenses. The Company's wholesale sales objective is to
utilize third party sales channels and existing customer relationships. 
     
     DIRECT MARKETING

     The Company uses direct mail and telemarketing to sell the Company's
services to basic customers and to generate leads for sales to prime customers.
Strategic account managers build upon such marketing efforts to close sales to
basic customers. The Company typically offers basic customers a bundle of
standard services at a competitive price. For example, the Company recently has
offered basic customers one free year of Internet access service for entering
into two-year contracts for switch-based local and long distance services. The
Company believes that when it gains a sale through such methods, it not only
generates revenue from the new customer but also establishes a relationship upon
which the Company may base future add-on sales efforts to sell higher margin
applications. 

     MARKETING SUPPORT AND COMMUNICATIONS POLICY

     The Company supports its direct sales and marketing efforts through the use
of targeted direct mail, targeted advertising and its Internet web page. The
Company targets businesses for direct mail efforts through careful demographic
analyses. The Company classifies and prioritizes customers on the basis of their
standard industry classification ("SIC") codes, estimates of their
telecommunications spending and their number of employees. The Company then uses
databases to identify businesses' addresses and decision makers and mapping
tools to pinpoint their locations. By targeting customers in this way, the
Company believes that it can use direct mail in a cost-effective manner to
promote understanding of the Company and its services and to stimulate qualified
leads for the Company's retail sales force. The Company augments its direct mail
efforts through the use of advertising aimed at the business community. Such
advertising is designed to create a FirstWorld brand "umbrella" that reinforces
sales efforts by generating additional leads, establishing brand awareness and
differentiating the Company from its competitors. The Company also uses public
relations to support the launch of new services as they are introduced to the
marketplace. 
     
     As of November 30, 1998, the Company employed 66 persons in sales and
marketing. The Company is in the process of expanding its sales and marketing
staff but intends to continue to be selective in its recruiting, requiring
prospective salespeople to have demonstrated success in telecommunications or
data communications sales. 

CUSTOMER RELATIONSHIPS

     The Company's goal is to become the premier ICP in the areas it serves, 
and to create service offerings that appeal to customers of varying sizes and 
in a variety of industries. Management believes that the customer's service 
purchase decision is based primarily on the strength of the value proposition 
offered, customer service and support, coupled with a price advantage for 
properly-designed Company services, relative to the customer's current 
installed service. 
     
     The Company builds its customer relationships around its data-centric
service focus, which represent higher year-over-year growth, lower churn and
greater revenue per customer, than those of 

                                      7

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traditional voice telecommunications services. In addition, the Company uses 
its high-touch customer service approach to create more value and to 
increase retention and add-on sales opportunities.

STRATEGIC RELATIONSHIPS

     The Company actively pursues strategic relationships with property
developers and service providers as part of its core business strategy. The
Company believes that these relationships can provide enhanced brand identity,
access to physical assets, new products and technologies, joint marketing
synergies and other benefits, thereby accelerating market rollout and reducing
asset deployment, sales costs and customer turnover. 

     DEVELOPER RELATIONSHIPS

     The Company pursues relationships with property developers in order to 
gain access to prime commercial customers and to facilitate marketing of the 
Company's products and services. An example of this is the preferred provider 
relationship recently established with Orange City Mills Limited Partnership 
(a subsidiary of Mills Corporation) in Orange, California. This relationship 
with the Mills Corporation grants FirstWorld (through one of its wholly owned 
subsidiaries) the right to provide telecommunications services to the tenants 
of a retail development for a five year period, along with the ability to 
market services directly to the retail development's tenants. Prior to the 
expiration of the initial five year term, the parties have agreed to 
negotiate regarding an extension of the term.  If the parties do not reach 
agreement during this exclusive negotiation period, FirstWorld retains a 
right of first refusal to match a proposal the Mills Corporation receives 
from any other service provider.

     SERVICE PROVIDER RELATIONSHIPS

     The Company has established and will continue to build relationships 
with service providers in complementary industries to create competitive or 
innovative products. The Company expects these service providers to 
contribute wholesale products, licenses of proprietary technologies, 
specialized knowledge, sales and technical support or uniquely situated fixed 
assets. In return, the Company will contribute its network platform, sales 
force channels, operational support, engineering expertise and wholesale 
purchases. 

     ENRON.  The Company and Enron Capital & Trade Resources Corp. ("Enron"), 
a subsidiary of Enron Corp., one of the world's leading integrated natural 
gas and electricity companies, have an informal collaborative relationship to 
jointly market telecommunications and utility services. The Company believes 
that this relationship can provide it with access to new markets, sales 
synergies and product development opportunities. In this regard, Enron has 
commenced a major initiative in California to compete with incumbent electric 
utilities to sell wholesale electricity and utilities management services. 
Neither the Company nor Enron is, however, obligated to pursue any 
opportunity or provide any service to customers. The Company, however, has 
granted Enron exclusive rights to pursue jointly with the Company any 
business opportunity with both telecommunications applications and utility 
applications, and has agreed not to pursue any such joint opportunity with 
any person other than Enron. See "Certain Relationships and Related 
Transactions--Equity Investment." 

     NAVINET.  The Company has entered into an agreement with Navi-Net 
Internet Services Corporation (formerly a division of Navi-Site Internet 
Services Corporation and a wholly owned subsidiary of College Marketing Group 
Incorporated), a national Internet protocol network ("NaviNet"), calling for 
the two companies to establish a remote access MegaPOP at the Company's 
Anaheim central office. The MegaPOP allows ISPs to provide local dial-up 
numbers to customers located within the Southern California area. Under the 
agreement, the Company provides power and space to NaviNet in the co-location 
room in the Company's Anaheim central office and helps manage and provision 
elements of network connectivity. In return, NaviNet has granted

                                      8

<PAGE>


the Company the right to resell NaviNet's "GeoDial" service to ISPs 
throughout California and has granted the Company "most favored purchaser" 
status, meaning that no other similarly situated LEC will receive better 
GeoDial pricing than the Company. 

NETWORK ARCHITECTURE AND TECHNOLOGY

     The Company has leveraged its substantial internal expertise with respect
to engineering, network creation and business processes to design and construct
a network architecture that it believes will result in enhanced product
offerings and enable the Company to improve scalability, reduce operating cost
and improve network profitability. The Company believes such expertise also will
facilitate the Company's implementation of new technologies.

     CENTRAL OFFICE.  The Company's central office in Anaheim is an integrated
computer/telephony facility which serves as the network operating center. The
facility houses a Nortel DMS-500 voice switch, the Company's Internet platform,
product servers primarily related to the Company's data products and co-located
equipment of strategic vendors. The facility has numerous elements of
redundancy, disaster recovery and remote recovery in order to meet or exceed
industry standards of reliability and best practices. The facility operates
24-hours a day and seven days a week. The Company believes the central office
will be sufficient to support its operations throughout Orange County. 
Additional central office facilities are anticipated for Los Angeles/San Gabriel
Valley, San Diego, the San Francisco bay area and other areas to support the 
Company's geographic expansion plans.
     
     TRANSPORT.  The Company's networks are built and operated using various
transmission technologies and topologies including fiber optics, leased
transport and unbundled network elements procured from the ILEC. The Company
targets areas with (i) high concentrations of customers with sophisticated
communications needs and (ii) large numbers of smaller customers that can be
aggregated to reduce the Company's cost of service.

     The Company leases unbundled loops from Pacific Bell and GTE Corporation
("GTE") pursuant to interconnection agreements. The interconnection agreements
allow the parties to complete local and intraLATA toll calls on each other's
network and establish rates, terms and conditions for access to unbundled
network elements, resale of local exchange services, service provider number
portability and access to operator service, directory service and 911 service.
The Company currently is implementing direct interconnection with the major
CLECs in Orange County, including MFS Communications ("MFS"), and the major
IXCs.
     
INFORMATION TECHNOLOGY AND SUPPORT SYSTEMS 

     The Company currently has in place all the necessary systems to provide 
support for customer management. FirstWorld has deployed a sales force 
automation system and prospect database tools, an order entry, billing and 
customer care application and an internally-developed network management and 
interface application that allows the Company to remotely monitor customer 
circuits. Although the Company believes that its existing systems adequately 
support its service offerings, the Company is committed to developing and 
implementing fully integrated advanced internal information systems because 
it believes that such systems are crucial to support integrated 
communications services.

     Although no single solution currently exists for seamless, end-to-end 
handling of all aspects of customer service (i.e., from initial contact with 
a potential customer to service activation and finally to customer billing), 
FirstWorld believes that the development and implementation of an advanced 
single-source management system will further differentiate it from its 
competitors and will result in significant benefits to its customers. The 
overall aim is to create the necessary back-office integration to

                                      9

<PAGE>


allow FirstWorld to provide its customers with single-source service 
management. To achieve this end, the Company has embarked on an extensive 
evaluation of available systems, using a combination of existing legacy 
applications and newly-developed systems that are currently used by other 
integrated telecommunications providers. Particular emphasis is being placed 
on enhancing access through the Internet, so both Company field personnel and 
end user customers will have access to vital information quickly and easily. 

NETWORK STATUS AND PROPOSED EXPANSION 

     LOS ANGELES BASIN/ORANGE COUNTY

     The Company currently provides on-fiber services to specific customers
connected to fiber clusters in Anaheim and Irvine. In addition, the company
continues to expand its network within the area of Irvine known as the Irvine
Spectrum (the "Irvine Spectrum") area and has begun offering services to
buildings in the Irvine Spectrum.

     The Company also currently provides service to customers located around 
several Pacific Bell central offices located in Los Angeles County and Orange 
County through Pacific Bell unbundled copper loops. The Company has applied 
for interconnections with additional Pacific Bell central offices in these 
areas by co-locating the Company's equipment at such central offices in order 
to expand the areas in which it can offer services. These interconnections, 
which the Company began establishing during the third quarter of 1998, will 
allow the Company to offer services through Pacific Bell unbundled loops to 
businesses in most parts of Los Angeles County and Orange County. 

     PLANNED EXPANSION

     In addition to its networks in the Los Angeles basin and Orange County, 
the Company intends to expand into San Diego and the San Francisco bay area 
by replicating the primary tenets of its business plan. The Company will 
target future expansion based on analysis of the number and density of 
businesses with heavy telecommunications usage in a given area and current 
and anticipated competition from other telecommunications providers. The 
Company has identified additional cities which it believes would be 
attractive markets for future expansion. These target areas and their 
priority for expansion are subject to continual re-evaluation in response to 
refinements in the Company's expansion criteria and changes in the 
communications industry and in general economic conditions. 


                                      10

<PAGE>

     ACQUISITIONS

     One of the major tenets of FirstWorld's business plan is to selectively 
acquire companies that expand the Company's marketing and service footprint 
and its ability to serve additional customers. In November 1998, the Company 
completed the acquisition of Optec, Inc. ("Optec"), from Enron 
Communications, Inc. ("ECI"). Optec is a systems integrator with operations 
in Oregon and Washington and has approximately 90 employees in engineering, 
sales and operations. The Company also purchased from ECI an indefeasible 
right of use to fiber optic cable in a MAN serving Portland with routes 
connecting Beaverton and Hillsboro, Oregon. In addition, the Company obtained 
rights to OC-3 level capacity on a WAN being developed by ECI that will 
connect up to 15 cities nationwide. The Company has selected the first eight 
cities for WAN deployment (Portland, Los Angeles, the San Francisco Bay area, 
Salt Lake City, Denver, Dallas, Houston and Miami) and will select additional 
cities in 1999. The Company intends to complement this and other acquisitions 
with its existing capabilities to provide a highly competitive product bundle 
aimed at business customers. 

COMPETITION

     In each market area in which the Company is authorized to provide services,
the Company competes or will compete with several other service providers and
technologies. Most of the Company's competitors, particularly ILECs, 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 the Company. The Company expects
to compete on the basis of service features, quality, price, reliability,
customer service and rapid response to customer needs. 

     TELEPHONY.  The telephony services offered by the Company compete 
principally with the services offered by ILECs in the areas served by the 
Company's networks. The Company also competes with various CLECs in its 
target markets, including MFS, NEXTLINK Communications, Inc. ("NEXTLINK"), 
ICG Communications, Inc. ("ICG"), GST Telecommunications, Inc. ("GST") and 
Teleport Communications Group, Inc. ("Teleport"). The ILEC dominates each of 
the markets targeted by the Company. ILECs possess ubiquitous infrastructure 
and the financial wherewithal to subsidize unprofitable deals to maintain key 
customers. The Company competes with ILECs on the basis of price, customer 
support and the ability to offer and provide value-added, integrated service 
bundles. The Company has found that its CLEC competitors, unlike the ILEC, 
tend to focus on particular segments within the market. The Company competes 
with CLECs and ICPs by providing a variety of voice, data and Internet 
services in different combinations to address the needs of different market 
segments. 

     The Company also faces, and expects to continue to face, competition 
from other current and potential market entrants, including AT&T Corp. 
("AT&T"), MCI/WorldCom, Sprint and other IXCs, wireless telephone system 
operators and private networks built by large end users. AT&T has indicated 
its intention to offer local telecommunications services in certain U.S. 
markets, either directly or in conjunction with CLECs or cable operators. 
AT&T has acquired Teleport and plans to merge with Tele-Communications, Inc. 
("TCI"), the nation's largest operator of cable television systems, and to 
provide telephone services over the TCI cable plant. Sprint has announced 
plans to deploy an advanced telecommunications network intended to boost 
speed and capacity, cut costs and provide an integrated platform to enter 
local markets, and has signed access agreements with a number of regional 
bell operating companies ("RBOCs") and GTE. WorldCom has acquired MFS (one of 
the company's CLEC competitors) and Brooks Fiber Properties, Inc., both major 
CLECs, and, most recently, MCI. Ameritech Corp. ("Ameritech") and US West, 
Inc. ("US West") have also announced

                                      11

<PAGE>


plans to enter the long distance market by forming joint sales ventures with 
Qwest Communications International Corp. ("Qwest"), a growing provider of 
fiber optic-based telecommunications services. Although these particular 
deals with Qwest have been declared unlawful by the Federal Communications 
Commission ("FCC") as a result of actions brought by AT&T and MCI/WorldCom, 
they remain subject to ongoing judicial and FCC review, and a continuing 
trend toward combinations and strategic alliances in the telecommunications 
industry, including combinations or potential consolidations among RBOCs or 
CLECs, or between IXCs and CLECs, could give rise to significant competitors 
for the Company. The Company also expects increased competition from ILECs 
operating outside of their current local service areas, cable television 
systems, electric utilities, microwave and other wireless carriers and 
satellite licensees. In addition, sweeping changes mandated by the 
Telecommunications Act of 1996 (the "Telecommunications Act") will facilitate 
entry by new competitors into local exchange and exchange access markets, 
including requirements that ILECs make available interconnection and 
unbundled network elements at cost-based rates, and resell their services to 
requesting competitors at wholesale discounts. 

     INTERNET SERVICES.  The Internet services market is extremely competitive,
and the Company expects competition in this market to intensify in the future.
The Company's current and prospective competitors include many large companies
that have substantially greater market presence and financial, technical,
marketing and other resources than the Company. The Company competes (or in the
future is expected to compete) directly or indirectly with the following
categories of companies: (i) national and regional ISPs; (ii) established
on-line services; (iii) computer software and technology companies;
(iv) national telecommunications companies; (v) RBOCs; (vi) cable operators; and
(vii) nonprofit or educational ISPs. 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 the Company. 

     ADVANCED NETWORK SERVICES.  In the markets for data services and other
advanced network services, the Company will face competition from a number of
companies focused on the LAN and WAN market, including companies with
significantly greater financial resources, more extensive business experience,
and greater market and service capabilities than the Company. In particular, the
Company will be required to compete with companies that design and manufacture
products for the LAN and WAN markets and large system integrators. 

     Substantially all of the Company's current and prospective competitors in
the markets for advanced networking services have substantially greater market
presence and financial, technical, marketing and other resources than the
Company. See "--Risk Factors--Competition." 

REGULATION

     OVERVIEW

     The Company's services are subject to regulation by federal, state and
local governmental agencies. The Company has obtained all authorizations and
approvals necessary to conduct its operations as currently structured and
believes that it is in compliance with all laws, rules and regulations governing
its current operations. Nevertheless, changes in existing laws and regulations
or any failure or significant delay in obtaining necessary future regulatory
approvals, could have a material adverse effect on the Company's business,
financial condition and results of operations. 

                                      12

<PAGE>


     At the federal level, the FCC has jurisdiction over interstate and
international telecommunications services. State regulatory commissions have
jurisdiction over intrastate communications. Municipalities and other local
jurisdictions may regulate limited aspects of the Company's business by, for
example, regulating the use of rights-of-way, imposing zoning and franchise
requirements, and requiring installation permits. The Company also is subject to
taxation at the federal and state levels and may be subject to varying taxes and
fees from local jurisdictions. 

     FEDERAL LEGISLATION

     THE TELECOMMUNICATIONS ACT OF 1996.  The Telecommunications Act, enacted on
February 8, 1996, substantially departs from prior legislation in the
telecommunications industry by establishing local exchange competition as a
national policy through the removal of state regulatory barriers to competition
and the preemption of laws restricting competition in the local exchange market.
The Telecommunications Act, among other things, mandates that (i) ILECs permit
resale of their services and facilities on reasonable and nondiscriminatory
terms and at wholesale rates, (ii) all LECs (including the Company) allow
customers to retain the same telephone number ("number portability") when they
switch local service providers, (iii) ILECs permit interconnection by
competitors to an ILEC's network at any technically feasible point that is at
least equal in quality to that which the ILEC provides to itself and pursuant to
reasonable and nondiscriminatory terms and cost-based rates, (iv) ILECs unbundle
their network services and facilities at any technically feasible point and
permit competitors and others to use these facilities at cost-based, reasonable
and nondiscriminatory rates, (v) all LECs ensure that an end user does not have
to dial any more digits to reach customers of local competitors than to reach
the ILEC's customers to the extent technically feasible ("dialing parity") and
(vi) all LECs must establish reciprocal compensation arrangements for the
transport and termination of telecommunications traffic. 

     The Telecommunications Act permits RBOCs to provide out-of-region interLATA
long distance services immediately, and also allows RBOCs to provide in-region
interLATA services on a state-by-state basis once certain market-opening
requirements are implemented and entry is determined to be in the public
interest. The RBOCs, but not other ILECs, have an added incentive to open their
local exchange networks to facilities-based competition because Section 271 of
the Telecommunications Act provides for the removal of the current ban on RBOC
provision of in-region interLATA toll service only after meeting certain
requirements. The FCC, in consultation with the United States Department of
Justice and the states, is given jurisdiction to determine whether to approve
applications for RBOC entry into long distance. These provisions of the
Telecommunications Act are designed in part to ensure that RBOCs take
affirmative steps to level the playing field for their competitors so that
others can compete effectively before the RBOC secures in-region long-distance
entry. To date, three RBOCs have filed applications with the FCC for "in-region"
long distance authority. The FCC denied the application of SBC Communications,
Inc. ("SBC") with respect to Oklahoma in June 1997; denied the application of
Ameritech in August 1997 with respect to Michigan; and denied applications filed
by BellSouth for South Carolina and Louisiana in December 1997 and February
1998, respectively. Another application filed by BellSouth for Louisiana was
denied by the FCC in October 1998, and the California Public Utilities
Commission ("CPUC") determined that a draft application submitted to the CPUC by
Pacific Bell in anticipation of its own FCC application did not satisfy Section
271 requirements. Several entities have sought reconsideration of the FCC's
decisions and some have initiated litigation claiming, among other things, that
Section 271 of the Telecommunications Act is unconstitutional, that the FCC has
exceeded its jurisdiction, and that the FCC has violated the Eighth Circuit's
ruling on the Interconnection Orders (discussed below) in several respects,
e.g., by effectively promulgating national pricing standards. In addition,
certain aspects of the Section 271 RBOC entry requirements remain subject to FCC
review. See "--Federal Regulation." 

                                      13

<PAGE>


     RBOC entry into long distance services under Section 271 of the
Telecommunications Act has, over the past year, also become a contentious
political issue. Several ranking members of Congress, including Rep. John
Dingell (D-MI) and Rep. W.J. "Billy" Tauzin (R-LA), have voiced strong
frustration at what they allege is an unwillingness by the FCC to grant RBOC
applications for long distance authority. In response, William Kennard, Chairman
of the FCC, announced in early 1998 that the FCC will, in the future, take a
more "cooperative" position with respect to RBOC applications under Section 271
of the Telecommunications Act and work closely with each RBOC to identify and
resolve issues arising in connection with RBOC entry into the long distance
service market. It is not certain at this time whether Chairman Kennard's
announcement indicates that, in the future, the FCC is prepared to grant RBOC
applications for in-region provision of interLATA long distance services. 

     The U.S. District Court for the Northern District of Texas declared
Section 271 unconstitutional in late December 1997. The district court's
decision was reversed by the United States Court of Appeals for the Fifth
Circuit in September 1997. However, if any subsequent United States Supreme
Court review affirms the district court's ruling, Pacific Bell, among other
RBOCs, will be able to provide more services to customers, making it an even
more formidable competitor for the Company. See "--Risk Factors--Competition." 

     Under the Telecommunications Act, states have begun and, in a number of
cases, completed regulatory proceedings to determine the pricing of unbundled
network elements and services, and the results of these proceedings will
determine whether it is economically attractive to use these elements. 

     FEDERAL REGULATION

     THE TELECOMMUNICATIONS ACT REGULATIONS.  The Telecommunications Act in some
sections is self-executing, but in most cases the FCC must issue regulations
that identify specific requirements before the Company and its competitors can
proceed to implement the changes the Telecommunications Act prescribes. The
Company actively monitors pertinent FCC proceedings and has participated in some
of these proceedings (including the restructuring of access charges, the
application of access charges to Internet traffic and RBOC petitions for the
deregulation of ILEC-provided DSL services). The outcome of these various
ongoing FCC rulemaking proceedings or judicial appeals of such proceedings could
materially affect the Company's business, financial condition and results of
operations. 

     As required by the Telecommunications Act, in July and August 1996 the FCC
adopted orders issuing new rules to implement the interconnection and resale
provisions of the Telecommunications Act (the "Interconnection Orders") which
are intended to remove or minimize regulatory, economic and operational
impediments to full competition for local services, including switched local
exchange service. A number of parties filed petitions for review of the
Interconnection Orders in Federal court seeking to vacate certain of the rules
adopted therein. In a July 18, 1997 decision, the United States Court of Appeals
for the Eighth Circuit vacated significant portions of the Interconnection
Orders, including its provisions governing the pricing of local
telecommunications services and unbundled network elements, its unbundling
requirements and its "pick and choose" rule (which enabled a telecommunications
carrier to demand any individual term of an ILEC's interconnection contract with
another carrier). Another Eighth Circuit decision issued on October 14, 1997
vacated an FCC rule that obligated ILECs, under certain circumstances, to
provide combinations of network elements, rather than provide them individually.
This decision may make it more difficult or expensive for competitors to use
combinations of ILEC unbundled elements. On August 22, 1997, the Eighth Circuit
vacated the FCC's interconnection rules implementing the Telecommunications Act
dialing parity requirement for LECs. In November 1997, the FCC, AT&T,

                                      14

<PAGE>


MCI/WorldCom, and a number of CLECs sought review of the Eighth Circuit's 
decisions by the Supreme Court. The RBOCs and GTE also cross-petitioned for 
Supreme Court review of several aspects of the Interconnection Orders that 
were upheld by the Eighth Circuit in the event Supreme Court review was 
granted. While these petitions were pending, the Eighth Circuit on January 
23, 1998, found that the FCC had violated the terms of its July decision, and 
ordered the FCC to cease imposing its local pricing rules on RBOCs attempting 
to enter the long distance market under Section 271 of the Act. Cross-appeals 
were argued before the Supreme Court in October 1998. A Supreme Court 
decision in the cases is not expected until some time in 1999. 

     The Eighth Circuit and Supreme Court decisions create uncertainty about 
individual state rules governing pricing and other terms and conditions of 
interconnection agreements and could make negotiating and enforcing such 
agreements in the future more difficult and protracted. They also could 
require renegotiation of relevant provisions of existing interconnection 
agreements, or subject them to additional court or regulatory proceedings. 
Although the Company generally believes that the outcome of these judicial 
proceedings will not have a material adverse effect on its business and 
operations, there can be no assurance that this will be the case. 

     In July 1996, the FCC mandated that over the course of the next year 
responsibility for administering and assigning local telephone numbers be 
transferred from the RBOCs and a few other ILECs to a neutral entity. In 
August 1996, the FCC issued regulations which addressed certain of these 
issues, but left others for decision by the states and the neutral numbering 
plan administrator, Lockheed-Martin IMS, which in August 1997 was designated 
by the FCC. The FCC numbering decisions, among other things, (a) prohibit 
states from creating new area codes that could unfairly hinder LEC 
competitors (including the Company) by requiring their customers to use 10 
digit dialing while existing ILEC customers use 7 digit dialing and (b) 
prohibit ILECs (which in many cases are still administering central office 
numbers pending an operational transition to the neutral administrator) from 
charging "code opening" fees to competitors (such as the Company) unless they 
charge the same fee to all carriers including themselves. In addition, each 
carrier is required to contribute to the cost of numbering administration 
through a formula based on net telecommunications revenues. In July 1996, the 
FCC released rules to permit both residential and business customers to 
retain their telephone numbers when switching from one local service provider 
to another (known as "number portability"). RBOCs were required to implement 
number portability in the top 100 markets in five phases beginning no later 
than March 31, 1998 and to complete it no later than December 1998, although 
the FCC has granted numerous waivers of these implementation deadlines. In 
smaller markets, RBOCs must implement number portability within six months of 
a request therefore commencing December 31, 1998. Non-RBOC ILECs are not 
required to implement number portability in any additional markets until 
December 31, 1998, and then only in markets where the feature is requested by 
another ILEC. 

     In addition, pursuant to the Telecommunications Act, the FCC issued new 
regulations in 1997 regarding the implementation of the universal service 
program and the assessment of charges on carriers obtaining access to local 
exchange networks. Both the access charge and universal service regimes were 
substantially revised. As a result of these changes, the costs of business 
and multiple residential lines are expected to increase. The FCC is currently 
examining whether IXCs and CLECs will be permitted, and if so in what manner 
and to what extent, to pass through universal service charges to end users as 
line item surcharges on bills for telecommunications services. In addition, 
in June 1998 the FCC announced that it was restructuring and narrowing 
universal support for provision of Internet services to schools, libraries 
and rural health care providers. As a result of this rapidly changing 
environment, the Company is unable to predict how the

                                      15

<PAGE>


FCC's universal service and access charge reforms will be finally implemented or
enforced, or what effect they will have on competition within the
telecommunications industry, generally, or on the competitive position of the
Company, specifically. The Company also is unable to accurately predict the
final formula for universal service contribution or its own level of
contribution in 1999 and beyond. 

     The Telecommunications Act requires the FCC to streamline its regulation of
ILECs and permits the FCC to forbear from regulating particular classes of
telecommunications services or providers. Since the Company is a non-dominant
carrier and, therefore, is not heavily regulated by the FCC, the potential for
regulatory forbearance likely will be more beneficial to ILECs than the Company
in the long run. In June 1997, the FCC granted the request of a CLEC that the
FCC forbear from imposing tariff filing requirements on exchange access services
provided by carriers other than ILECs. The FCC has sought further comment on
whether to mandate the detariffing of exchange access services. The proceeding
remains pending, and there can be no assurance how the FCC will rule on this
issue, or what effect any such ruling may have on competition within the
telecommunications industry generally, or on the competitive position of the
Company specifically. 

     There also is a risk that Telecommunications Act requirements that
currently work in the Company's favor may be implemented differently in the
future depending on marketplace developments. For example, many CLECs such as
the Company have begun to acquire an increasing number of ISP customers. This
development in turn has resulted in a rapid increase in Telecommunications
Act-mandated reciprocal compensation charges paid by ILECs to CLECs to terminate
the calls of ILEC customers to CLEC ISP customers. ILECs led by the RBOCs
currently are pursuing action in the courts and before state PUCs and the FCC to
address this issue. The outcome of such actions is uncertain, but could have a
material adverse effect on the Company. 

     Section 706 of the Telecommunications Act requires the FCC to initiate a 
proceeding to address the provision of "advanced telecommunications services" 
to all Americans. In early 1998, several RBOCs (Bell Atlantic, Ameritech, 
BellSouth and SBC) filed petitions with the FCC seeking forbearance from FCC 
and state regulation of their DSL high-speed data services. The RBOCs also 
seek an FCC ruling under Section 706 that elements of their DSL services are 
not subject to the interconnection, unbundling and resale requirements of the 
Telecommunications Act. In response to these petitions, the FCC on August 6, 
1998 proposed that RBOCs be permitted to offer DSL services on an unregulated 
basis if certain separate subsidiary and interconnection requirements are 
met. Along with other significant DSL based CLECs, the Company participated 
in the DSL Access Telecomunications Alliance to support this FCC proposal. A 
final FCC decision is expected in January 1999. There can be no assurance 
that these or similar RBOC regulatory initiatives regarding broadband service 
provision would not have a material adverse effect on the Company's business, 
financial condition and results of operations. 

     STATE REGULATION

     Many of the Company's services will be classified as intrastate services
subject to state regulation. All of the states where the Company operates, or
will operate, require some degree of state regulatory commission approval to
provide certain intrastate services. In most states, intrastate tariffs are also
required for various intrastate services, although the Company is not typically
subject to price or rate of return regulation for tariffed intrastate services.
The Company may also be subject to a variety of other state regulatory
requirements, including interconnection, universal service, reporting and
customer service requirements. 

     The Telecommunications Act requires each state to remove barriers to entry
and barriers to competition for ILEC competitors. While no assurance can be
given as to how quickly and how effectively each state will act to implement
this legislation, many state authorization processes are being streamlined

                                      16

<PAGE>


and the authorization time frames shortened considerably. Several states have 
allowed ILECs rate, special contract (selective discounting) and tariff 
flexibility, particularly for services deemed subject to completion. Such 
pricing flexibility increases the ability of the ILEC to compete with the 
Company and constrains the rates that the Company may charge for its 
services. In view of the additional competition expected to result from the 
Telecommunications Act, states may grant ILECs additional pricing 
flexibility. At the same time, some ILECs may request increases in local 
exchange rates to offset revenue losses due to competition. 

     Under the Telecommunications Act, if a request is made by the Company,
ILECs generally have a statutory duty to negotiate interconnection and access
arrangements in good faith for the Company's provision of local service (unless
they are exempted from such requirement as small or rural ILECs). The Company
has completed interconnection agreements with Pacific Bell and GTE for
California. During these negotiations, the Company or the ILEC may submit
disputes to the state regulatory commissions for mediation and, after the
expiration of the statutory negotiation period set forth in the
Telecommunications Act, the parties may submit outstanding disputes to the
states for arbitration. To date the Company has not submitted any disputes to
the states for mediation or arbitration. 

     LOCAL REGULATION

     The Company will need to interact with local governments in a variety of 
ways, and may be required to obtain various permits and authorizations from 
municipalities in which it operates. How diverse local governments will 
exercise traditional functions, including zoning, permitting and management 
of rights-of-ways, and address the expansion of telecommunications 
competition and varying means of entry in particular, is uncertain. The kinds 
and timing of approvals required to conduct aspects of the Company's business 
varies among local governments and may also vary with the specific technology 
or equipment configuration used by the Company. 

     While the Telecommunications Act permits local governments to manage 
rights-of-way, the scope of that authority, including the circumstances when 
fees can be charged and the amount of such charges, has already been the 
subject of numerous disputes between telecommunications carriers and such 
local governments. In addition, some local governments have been requiring 
substantial filings and review before telecommunications carriers can operate 
in their licensed areas and have also required the payment of significant 
franchise fees or taxes. Some of these disputes involving licensing of 
telecommunications carriers and rights-of-way are in litigation and more 
administrative and court litigation is likely. The prohibition of entry 
barriers set forth in the Telecommunications Act and the FCC's power to 
preempt such barriers have been addressed in these cases, which to date have 
rejected local government efforts to impose "franchise" or tax obligations on 
CLECs and other telecommunications carriers. The FCC has recently preempted, 
and thereby prevented enforcement of, certain state and local regulations 
that had the effect of inhibiting local competition. Any inability or 
unwillingness by the FCC to preempt additional state and local regulations in 
a timely fashion could have a material adverse impact on the Company. 

AGREEMENTS WITH THE CITY OF ANAHEIM AND THE IRVINE COMPANY

     THE CITY OF ANAHEIM

     The Company, its wholly owned subsidiary, FirstWorld Anaheim ("FWA"), and
the City of Anaheim (the "City") entered into a series of agreements in February
1997 regarding development of the first portion of the Company's initial network
located within the City (the "Anaheim Network"). 

                                      17

<PAGE>


     AGREEMENT FOR USE OF OPERATING PROPERTY.  Pursuant to an Agreement For 
Use of Operating Property (the "Operating Property Agreement"), FWA leases 
from the City 60 of 96 fiber strands contained in an approximately 50 mile 
long loop of fiber optic cable owned by the City, together with related 
facilities and rights. The term of the agreement runs through December 31, 
2027, and during calendar year 2011 the parties are obligated to negotiate in 
good faith concerning a possible 15-year extension of the term (through 
December 31, 2042). 

     The remaining 36 fiber strands within the cable (the "Reserved Fibers") are
reserved by the City for its own use in providing municipal services (i.e., uses
that are not competitive with FWA's commercial uses). If the City determines
from time to time that some portion of the Reserved Fibers is not required for
municipal services, then the City and FWA are to negotiate in good faith the
terms and conditions on which that portion of the Reserved Fibers will be leased
to FWA. In any event, the City can use the Reserved Fibers only for municipal
services unless FWA fails to proceed with development of the third phase of the
Anaheim Network (as described below) and the City proceeds with the development
of the third phase of the Anaheim Network for its own account, as described
below. 
     
     As rent for the 60 strands of fiber, FWA is obligated to make quarterly
payments to the City of approximately $114,000. In addition, FWA is obligated to
pay all costs associated with operating and maintaining the leased property,
including maintenance expenses, taxes, insurance premiums and pole usage fees.
FWA also is obligated to maintain and insure the leased property and the City's
Reserved Fibers (except to the extent the Reserved Fibers are located on certain
identified City-owned premises, such as electrical substations), subject to the
City's obligation to reimburse FWA for a pro rata share of maintenance and
insurance costs (computed based on the number of Reserved Fibers relative to the
total of 96 fibers). 

     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. FWA's interest in the leased property is not currently encumbered. 

     UNIVERSAL TELECOMMUNICATIONS SYSTEM PARTICIPATION AGREEMENT.  
Concurrently with the execution of the Operating Property Agreement, the 
City, FWA and the Company executed the Universal Telecommunications System 
Participation Agreement (as amended, the "UTS Agreement") which sets forth 
guidelines for FWA's development and operation of the Anaheim Network and 
compensation payable to the City by FWA. The term of the UTS Agreement runs 
through December 31, 2027, and during calendar year 2011 the parties are 
obligated to negotiate in good faith concerning a possible 15-year extension 
of the term (through December 31, 2042). 

     The UTS Agreement provides that FWA will construct the Anaheim Network in
three phases. The first phase extended service to identified municipal
facilities and was substantially completed in October 1997. The second phase
requires service to be extended in the ordinary course of business (i.e., within
six months following execution of a customer service agreement) to commercial,
industrial and governmental customers within certain defined service areas. The
Company was required to complete 44% of the first and second phases by April 1,
1998 and is further required to complete 90% of the first and second phases by
December 31, 1998, plus a 180-day cure period in each case. The Company
constructed and installed sufficient fiber to satisfy the 44% completion
requirement and expects completion of the fiber clusters currently under
construction and approved for construction to satisfy the 90% completion
requirement in a timely manner. 

                                      18

<PAGE>


     The third phase of the Anaheim Network requires that service be extended in
the ordinary course of business to all customers within Anaheim, including
residential customers. This phase will be commenced only after the economic
feasibility of the third phase is validated by an independent consultant's
report and financing is arranged. FWA has agreed to cause a feasibility study
with respect to the third phase to be completed by no later than January 1,
2000, and thereafter to prepare annual updates of the study if necessary. If FWA
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 (including in
a business arrangement with third parties). If the City closes the principal
financing for or commences construction of the third phase, then the provisions
of the Operating Property Agreement prohibiting the City from using the Reserved
Fibers for other than municipal services terminate. 
     
     Under the UTS Agreement, the City is obligated, with specified exceptions,
to utilize FWA as the provider of all of the City's telecommunications services,
and to provide FWA with certain rights-of-way. The UTS Agreement requires 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 $1,000,000 for periods
after June 30, 1999, (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, and not to exceed
$350,000 per year thereafter (as adjusted annually to reflect changes in the
cost of living) and (iv) $20,000 per year (adjusted annually to reflect changes
in the cost of living) to support the City's presence on the Internet. The UTS
Agreement also requires the Company to deposit an amount equal to up to 15% of
"net revenues" derived from the Anaheim Network to maintain a $6,000,000 reserve
account for debt service and capital improvements.

     The UTS Agreement requires FWA to commence construction of a 
demonstration center in the City's downtown area by November 30, 1998, and to 
complete the demonstration center by June 30, 1999. However, as a result of a 
change in the proposed scope of the project, FWA now contemplates leasing 
additional office space in the downtown area of Anaheim and housing a 
demonstration center in the leased facilities. The Company expects the 
demonstration center to be operational in the first quarter of 1999. Although 
the Company believes that 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 its obligations vis-a-vis the demonstration 
center. The parties are currently in the process of attempting to resolve 
these issues. 

     The City has an option to purchase all of the issued and outstanding stock
of FWA for appraised value (i) at any time after July 1, 2012 or (ii) if FWA
fails to meet the specified performance deadlines related to completion of the
first and second phases of the Anaheim Network as described above. Any sale or
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. 

     DEVELOPMENT FEE AGREEMENT.  Pursuant to a Development Fee Agreement between
the Company and the City, 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 fee for each Additional Network that the Company
develops ($300,000 for each Additional Network financed in the first year;
$200,000 for each Additional Network

                                      19

<PAGE>


financed in the second year; and $100,000 for each Additional Network 
financed in the third, fourth and fifth years) (each, a "Development Fee"). 
Each Development Fee must be paid within 30 days after 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 CPUC and enters into a revenue 
sharing agreement with one or more public entities. No such fee is due, 
however, with respect to the Company's relationship with The Irvine Company 
because it is not a public entity.

     THE IRVINE COMPANY

     FirstWorld Orange Coast ("FWOC"), a wholly-owned subsidiary of the Company,
and The Irvine Company entered into two agreements in February 1998 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").

     AGREEMENT FOR LEASE OF TELECOMMUNICATIONS CONDUIT.     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 ("Additional Areas").
The term of the Conduit Lease runs through December 31, 2027. 

     The Conduit Lease obligates FWOC to install fiber optic cable ("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 Conduit Lease, the Cable will be owned by The Irvine Company.
If FWOC fails to complete installation of the required Cable within 18 months,
The Irvine Company may, until such installation is completed, terminate the
Conduit Lease. 

     FWOC is obligated to make quarterly rent payments to The Irvine Company
based upon the "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. 

     TELECOMMUNICATIONS SYSTEM LICENSE AGREEMENT.  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

                                      20

<PAGE>


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 CPI increase that will not be less
than 2% or greater than 6%. The license fee will increase or decrease in the
future based on the rentable square footage of the buildings that are from time
to time subject to the License Agreement. 

     The License Agreement provides FWOC with the right to install, maintain,
operate, replace and remove Cable and associated communications equipment
("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. 
     
     The Conduit Lease and the License Agreement both require FWOC to maintain
certain minimum amounts of insurance coverage throughout the term of such
agreements. The Company has guaranteed the payment obligations of FWOC under The
Irvine Company agreements. 

EMPLOYEES

     As of November 30, 1998, the Company had 176 employees (not including
employees related to the recently acquired business of Optec), of whom 65 were
in network operations and development, 66 were in sales, marketing and product
development and 45 were in administration. The Company believes that its future
success will depend in part on its continued ability to attract, hire and retain
qualified personnel.

                                      21

<PAGE>


Competition for such personnel is intense, and there can be no assurance that 
the Company will be able to identify, attract and retain such personnel in 
the future. None of the Company's employees are represented by a labor union 
or are the subject of a collective bargaining agreement. The Company has 
never experienced a work stoppage and believes that its employee relations 
are good. 

RISK FACTORS

     LIMITED HISTORY OF OPERATIONS; NEGATIVE CASH FLOW AND OPERATING LOSSES
     
     The Company was incorporated in July 1992, commenced operations in
September 1993 and commenced commercial operation of its current network
business in November 1997. The Company has provided services to customers for
slightly more than one year, and as of November 30, 1998 had approximately 400
commercial customers under contract. The Company has generated substantial
operating losses and negative cash flow from operating activities since its
inception and expects that operating and net losses and negative operating cash
flow will continue for at least the next several years and will increase
significantly as the Company implements its growth strategy of expanding into
other cities. To date, the Company has focused primarily on the development of
its product line, the development and construction of its networks, the hiring
of management and other key personnel, the raising of capital, the acquisition
of equipment, the implementation of its sales and marketing strategy and the
development of operating systems. The Company has a very limited operating
history upon which to base estimates of the number of customers, the reliability
of its network or the amount of revenues the Company's current and planned
operations will generate. Given the Company's limited operating history, there
can be no assurance that it will be able to achieve its goals or compete
successfully in the telecommunications industry. 

     The Company's prospects must be considered in light of the risks, expenses
and difficulties frequently encountered by companies in new and rapidly evolving
markets. To address these risks, the Company must, among other things, attract
and retain customers, increase awareness of the Company's services, respond to
competitive developments, continue to attract, retain and motivate qualified
persons and continue to upgrade its technologies and commercialize its network
services incorporating such technologies. There can be no assurance that the
Company will be successful in addressing such risks and the failure to do so
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company's business strategy is unproved
and, to be successful, the Company must, among other things, develop and market
services that are widely accepted by customers at prices that will yield a
profit. There can be no assurance that the Company and its services will achieve
broad customer or commercial acceptance when compared to alternative
telecommunications services. Given the dynamic nature of the marketplace for
telecommunications services, the prices the Company charges for some or all of
its services may from time to time be higher than those charged by providers for
some competing services. Additionally, prices for telecommunications services
have fallen historically, and prices in the industry in general, and for the
services the Company offers and plans to offer in particular, are expected to
continue to fall. Accordingly, it is difficult to predict whether the Company's
pricing model will prove to be viable, whether demand for the Company's services
will materialize at the prices it expects to charge or whether current or future
pricing levels will be sustainable. The failure to achieve or sustain projected
pricing levels or to achieve or sustain broad market acceptance could result in
a material adverse effect on the Company's business, financial condition and
results of operations.  Because of the foregoing factors, among others, the
Company may not be able to forecast its revenues or the rate at which it will
add new customers or end-users with any degree of accuracy. The Company's annual
and quarterly operating results may fluctuate significantly in the future as a
result of numerous factors, many of which are outside the Company's control.
Factors that may affect the Company's operating results include the

                                      22

<PAGE>


amount and timing of capital expenditures and other costs relating to the 
expansion of the Company's network, the introduction of new services by the 
Company or its competitors, price competition by competitors, technical 
difficulties or network downtime, general economic conditions and economic 
conditions specific to the Company's industry. 

     The development of the Company's business and the deployment of its
services and systems will require significant additional capital expenditures, a
substantial portion of which will need to be incurred before the realization of
significant revenues. Together with associated start-up operating expenses,
these capital expenditures will result in substantial negative cash flow until
an adequate revenue-generating customer base is established. The Company has
incurred net losses in each quarter since it commenced operations in September
1993, with cumulative losses totaling approximately $48.1 million through
September 30, 1998. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The Company expects to continue to
generate significant operating and net losses for at least the next several
years. There can be no assurance that the Company will achieve or sustain
profitability or generate sufficient positive cash flow to meet its working
capital requirements. See "--Substantial Leverage; Ability to Service
Indebtedness." 

     SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE INDEBTEDNESS
     
     The Company is highly leveraged.  As of September 30, 1998, the Company 
had approximately $256.7 million of outstanding indebtedness, the Company's 
total debt as a percentage of capitalization was approximately 90% as of 
September 30, 1998 and the Company had a deficiency of earnings to fixed 
charges of $29.1 million for the year ended September 30, 1998. The Company's 
high degree of leverage could have material and adverse consequences, 
including, but not limited to, the following: (i) a substantial portion of 
the Company's sources of capital and cash flow from operations must be 
dedicated to debt service payments, thereby reducing the funds available to 
the Company for other purposes; (ii) the Company's ability to obtain 
additional debt financing in the future for working capital, capital 
expenditures, acquisitions, repayment of indebtedness or other purposes may 
be impaired, whether as a result of the covenants and other terms of its debt 
instruments or otherwise; (iii) the Company will be substantially more 
leveraged than certain of its competitors, which may place the Company at a 
competitive disadvantage; (iv) the Company's high degree of leverage may 
limit its ability to expand capacity and otherwise meet its growth 
objectives; and (v) the Company's high degree of leverage may hinder its 
ability to adjust rapidly to changing market conditions and could make it 
more vulnerable than its less leveraged competitors in the event of a 
downturn in general economic conditions or its business. In addition, 
pursuant to the terms of the indenture (the "Indenture") entered into in 
connection with the April 1998 debt offering, the Company is only permitted 
to incur additional indebtedness under certain conditions, and the Company 
expects that as it expands its networks beyond the areas currently designated 
for expansion, its capital requirements will require it to secure additional 
financing, including additional indebtedness. See "--Significant Capital 
Requirements." 

     The Company's ability to make principal and interest payments on its
indebtedness will depend upon, among other things, its ability to complete the
roll-out of its networks on a timely and cost-effective basis, the market
acceptance of, and the utilization, pricing and consumer demand for its
services, its future operating performance and cash flow and its ability to
obtain additional debt or equity financing, which are themselves dependent upon
a number of economic, financial, competitive and regulatory conditions and other
factors, many of which the Company is unable to control. There can be no
assurance that the Company will have adequate sources of liquidity to make
required payments of principal and interest on its indebtedness, whether at or
prior to maturity, to finance anticipated capital expenditures and to fund
working capital requirements. If the Company does not have sufficient available
resources to repay

                                      23

<PAGE>


its outstanding indebtedness when it becomes due and payable, the Company may 
find it necessary to refinance such indebtedness, and there can be no 
assurance that refinancing will be available or that it will be available on 
favorable terms. Any failure by the Company to satisfy its obligations with 
respect to its indebtedness at maturity or prior thereto would constitute a 
default under such indebtedness and could cause a default under agreements 
governing other indebtedness, if any, of the Company.

     BUSINESS DEVELOPMENT AND EXPANSION RISKS; POSSIBLE INABILITY TO MANAGE
     GROWTH
     
     The Company's business plan will, if successfully implemented, result in
rapid expansion of its operations. Rapid expansion of the Company's operations
may place a significant strain on the Company's management, financial and other
resources. The Company's ability to manage future growth, should it occur, will
depend upon its ability to attract, train, assimilate and retain additional
qualified personnel, to monitor operations, control costs, maintain regulatory
compliance, maintain effective quality controls and significantly expand the
Company's internal management, technical, information and accounting systems.
There can be no assurance that the Company will successfully implement and
maintain such operational and financial systems or that it will successfully
obtain, integrate and utilize the management, operational and financial
resources necessary to manage a developing and expanding business in an
evolving, highly regulated and increasingly competitive industry. Any failure to
expand these areas and to implement and improve such systems, procedures and
controls in an efficient manner at a pace consistent with the growth of the
Company's business could have a material adverse effect on the business,
financial condition and results of operations of the Company. 

     If the Company were unable to hire and train staff, purchase adequate
supplies of equipment, increase the capacity of its operational and accounting
information systems or successfully manage and integrate such additional
resources, customers could experience delays in connection of service and lower
levels of customer service. Failure by the Company to meet the demands of
customers and to manage the expansion of its business and operations could have
a material adverse effect on the Company's business, financial condition and
results of operations.

     DEPENDENCE UPON NETWORK INFRASTRUCTURE
     
     The Company's success will depend upon the capacity, reliability and
security of its networks. The Company expects that a substantial portion of its
future revenues will be derived from the provision of tailored value-added
network services to its customers. The Company must continue to expand and adapt
its network infrastructure as the number of users and the amount of information
they wish to transfer increase and as customer requirements change. There can be
no assurance that the Company will be able to expand or adapt its network
infrastructure to meet additional demand or its customers' changing requirements
on a timely basis, at a commercially reasonable cost, or at all. Any failure of
the Company to expand its network infrastructure on a timely basis or adapt it
to either changing customer requirements or evolving industry standards could
have a material adverse effect on the Company's business, financial condition
and results of operations. 

     The backbone of the Company's network within Anaheim, California is a
50-mile fiber loop owned by the City and leased and operated by the Company.
Under the Operating Property Agreement between the City and FWA, the Company's
lease of the loop is subject to termination upon customary default provisions,
including failure to pay rent within the required time period or a breach of its
other material duties or obligations thereunder. In addition, the UTS Agreement
requires FWA to complete 90% of a designated portion of the Anaheim network by
December 31, 1998, plus a 180 day cure period. The Company already has satisfied
a requirement to complete 44% of such work by April 1, 1998. If FWA

                                      24

<PAGE>


fails to meet the 90% deadline, then the City may elect to terminate the 
Operating Property Agreement and the UTS Agreement, or, in the alternative, 
exercise its right to purchase all of FWA's outstanding stock. See 
"--Agreements with the City of Anaheim and The Irvine Company--The City of 
Anaheim." Any termination of the Operating Property Agreement or the UTS 
Agreement, or the exercise by the City of its right to purchase all of FWA's 
outstanding stock, would have a material adverse effect on the Company's 
business, financial condition and results of operations. 

     RELIANCE ON THIRD PARTIES FOR ACCESS TO TELEPHONY SERVICES
     
     Because the Company expects to provide certain services through connections
supplied by ILECs and other providers, it is dependent upon the cooperation of
third party telecommunications providers, including certain of the Company's
major competitors, such as Pacific Bell, in providing access to their services.
The Company has entered into interconnection agreements with Pacific Bell and
GTE, which, among other things, establish the terms and conditions for access to
such networks for origination and termination of calls and set pricing for
unbundled network elements. The Company will need to enter into similar
agreements as it expands to areas where neither Pacific Bell nor GTE is the
ILEC. There can be no assurance that the Company will be able to enter into
additional interconnection agreements on favorable terms or at all. Even when
the Company has entered into an interconnection agreement, there can be no
assurance that the Company's orders for additional unbundled loops or other
services will be fulfilled in a timely manner. Failure of other parties to
interconnection agreements to maintain equipment and provide service in a
reliable and timely manner may result in interrupted service to the Company's
customers and risk of loss of business. In addition, there can be no assurance
that the rates charged to the Company under interconnection agreements will
continue to allow the Company to offer its services at competitive prices. 

     The Company provides long distance service, operator services, directory
assistance and calling card services under its own name pursuant to agreements
with Sprint. The Company has obtained volume discounts for a variety of services
the Company purchases from Sprint (including long distance), based on estimates
of the Company's monthly usage of such services. If the Company fails to meet
targeted usage (or in certain instances, exceeds targeted usage) the Company
must pay Sprint various monthly surcharges with respect to such services. The
most significant of these monthly surcharges relates to the required amount of
long distance service the Company purchases from Sprint. Beginning in August
1998, the Company was required to purchase certain minimum monthly amounts of
long distance service (which minimum requirements increase over time) or pay
Sprint a penalty equal to a percentage of the Company's shortfall. To date, the
Company has not purchased in any one month the amount of long distance service
that the Company was required to purchase beginning in August 1998. The Company
expects that its exposure to shortfall liabilities will be reduced throughout
1999 and nearly eliminated by the end of the third quarter of 1999 as a result
of increased use of Sprint's services by its customers. However, there can be no
assurance that this projected usage will be realized or when or if the Company
will purchase the required amount of long distance service thereunder.

     RISKS OF IMPLEMENTATION, SITES, EQUIPMENT AND SUITABLE INTERCONNECT
     ARRANGEMENTS
     
     The Company intends to develop and expand the Company's business and 
enter new markets as described under the caption "--Network Status and 
Proposed Expansion." There can be no assurance the Company will be able to 
complete network deployment on the timetable and in the manner currently 
planned or that it will be able to expand to new areas in the manner 
currently contemplated. The development and expansion of the Company's 
business into new markets will be dependent, among other things, upon the

                                      25

<PAGE>


Company's ability to lease or purchase suitable sites for its equipment, its 
ability to negotiate suitable interconnection and co-location agreements with 
ILECs on satisfactory terms and conditions and its ability to finance such 
expansion. The failure by the Company to expand or enter new markets in 
accordance with its plans would have a material adverse effect on the 
Company's business, financial condition and results of operations. 

     COMPETITION
     
     The telecommunications and Internet services industries are highly 
competitive. The Company has not obtained significant market share in any of 
the areas where it offers or intends to offer services, nor does it expect to 
do so in the near future given the size of the local telecommunications 
market, the intense competition therein and the diversity of customer 
requirements. In each market area in which the Company is authorized to 
provide services, the Company competes or will compete with several other 
service providers and technologies. Certain bases of competition in the 
Company's markets include price, performance, reliability of service, ease of 
access and use, services offered, product bundling, customer support, brand 
recognition and operating experience. Most of the Company's competitors, 
particularly the applicable ILEC, have longer operating histories, 
long-standing relationships with customers and suppliers in their respective 
industries, greater name recognition and significantly greater financial, 
technical and marketing resources than the Company. The Company faces intense 
competition with respect to each of the services it offers. The Company 
cannot predict the number of competitors that will emerge as a result of 
existing or new federal and state legislative actions. See "--Regulation." 

     TELEPHONY.  The Company's principal telephony competitors are the ILECs 
in the areas served by the Company's networks. While the Interconnection 
Orders of the FCC and the Telecommunications Act provide increased 
business opportunities to CLECs and ICPs such as the Company, they also 
provide the ILECs with increased pricing flexibility for their services and 
other regulatory relief, which could have a material adverse effect on CLECs 
and ICPs, including the Company. If the ILECs are allowed by regulators to 
lower their rates for their services, engage in substantial volume and term 
discount pricing practices for their customers, or seek to charge CLECs and 
ICPs substantial fees for interconnection to the ILECs' networks, the results 
of operations of CLECs and ICPs, including the Company, could be materially 
adversely affected. The legal framework governing competition in telephony 
has also been heavily impacted in recent years by a shifting series of judicial 
and administrative decisions. See "Regulation."

                                      26

<PAGE>


     The Company also competes for telephony services with various CLECs in 
its target markets, including MFS, NEXTLINK, ICG, GST and Teleport.  To date, 
the Company has not encountered a high level of competition from CLECs or 
ICPs for its targeted customers in its initial markets. The Company expects 
the level of such competition to increase substantially in the future, and 
there can be no assurance that the Company will be able to expand 
successfully, retain its existing customers or price its products profitably 
in the presence of such increased competition. The Company also faces, and 
expects to continue to face, competition from other current and potential 
market entrants, including AT&T, Sprint, MCI/WorldCom and other IXCs, 
wireless telephone system operators and private networks built by large end 
users. AT&T has indicated its intention to offer local telecommunications 
services in certain U.S. markets, either directly or in conjunction with 
CLECs or cable operators. AT&T has acquired Teleport and plans to merge with 
TCI, the nation's largest operator of cable television systems, and to 
provide telephone services over the TCI cable plant. Sprint has announced 
plans to deploy an advanced telecommunications network intended to boost 
speed and capacity, cut costs and provide an integrated platform to enter 
local markets, and has signed access agreements with a number of RBOCs and 
GTE. The Company expects additional competition from (i) industry 
consolidation and joint ventures, (ii) ILECs operating outside of their 
current local service areas, (iii) cable television systems, (iv) electric 
utilities, (v) microwave and other wireless carriers and (vi) satellite 
licensees. See "Competition--Telephony."

     INTERNET SERVICES.  The Internet services market is extremely 
competitive, and the Company expects competition in this market to intensify 
in the future. The Company's current and prospective competitors include many 
large companies that have substantially greater market presence and 
financial, technical, marketing and other resources than the Company. The 
Company competes (or in the future is expected to compete) directly or 
indirectly with the following categories of companies: (i) national and 
regional ISPs; (ii) established on-line services; (iii) computer software and 
technology companies; (iv) national telecommunications companies; (v) RBOCs; 
(vi) cable operators; and (vii) nonprofit or educational ISPs. 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 the Company. 

     ADVANCED NETWORK SERVICES.  In the markets for LAN/WAN services and 
other advanced network services, the Company will face competition from a 
number of companies focused on the LAN and WAN market, including companies 
with significantly greater financial resources, more extensive business 
experience and greater market and service capabilities than the Company. In 
particular, the Company will be required to compete with companies that 
design and manufacture products for the LAN and WAN markets and large system 
integrators. The Company also competes with the ILEC for data connectivity 
services. Pacific Bell, for example, introduced DSL services over its

                                      27

<PAGE>


existing networks. Substantially all of the Company's current and prospective
competitors in the markets for advanced network services have greater market
presence and financial, technical, marketing and other resources than the
Company. 

     RISK OF SYSTEM FAILURE; SECURITY RISKS
     
     The Company's success in marketing its services to business customers
requires the Company to provide reliable service. The Company's networks are
subject to physical damage, power loss, capacity limitations, software defects,
breaches of security (by computer virus, break-ins or otherwise) and other
factors which may cause interruptions in service or reduced capacity for the
Company's customers. FirstWorld utilizes various procedures to minimize security
risks. The Company currently provides its customers their own physical and
permanent virtual circuits throughout the FirstWorld network. The Company also
utilizes a Fire Wall to protect its Internet customers. In addition, the
Company's own fiber network is inaccessible, in that it has no electrical
interfaces that allow the possibility of monitoring.  All termination points and
manholes within FirstWorld's own fiber network are locked and secured. There can
be no assurance, however, that these security procedures will prove to be
adequate. Moreover, the Company's current, and certain of its planned networks,
are located in an area prone to earthquakes. An earthquake or other natural
disaster affecting the normal operations of the Company or the ILECs with which
the Company does business could seriously impair the Company's ability to
provide service to customers. Interruptions in service, capacity limitations or
security breaches could have a material adverse effect on customer acceptance
and, therefore, on the Company's business. Certain aspects of the Company's
network architecture involve new applications of equipment which may result in
technical issues that may not be easily resolved. Although the Company generally
seeks to limit its liability through its contracts with customers, there can be
no assurance that the Company will not be held liable for damages resulting from
service failures. Lapses in service or reliability also could lead to a loss of
customers, which could have a material adverse effect on the Company's business,
financial condition and results of operations.  In addition, while the Company
believes it has insurance comparable to that maintained by other companies in
the industry, the Company's central office facility is not fully insured
against, and the Anaheim fiber loop is not insured against, earthquake loss. 

     CHANGES IN TECHNOLOGY, SERVICES AND INDUSTRY STANDARDS
     
     The telecommunications industry has been characterized by rapid
technological advances, changes in end user requirements, frequent new service
introductions, evolving industry standards and decreases in the cost of
equipment and the pricing of services. The Company expects these changes to
continue, and believes that its long-term success will increasingly depend on
its ability to offer services that exploit advanced technologies and anticipate
or adapt to evolving industry standards. There can be no assurance that the
Company's services will not become economically or technically outmoded by
technology or services now existing or developed and implemented in the future
or that the Company will have sufficient resources to develop or acquire new
technologies or to introduce new services capable of competing with future
technologies or service offerings. The effect on the Company of technological
changes cannot be predicted and could be material and adverse to the Company's
business, financial condition and results of operations. 

     SIGNIFICANT CAPITAL REQUIREMENTS
     
     The development of the Company's business and deployment of its services
and systems will require significant additional capital to fund capital
expenditures, working capital, debt service and operating losses. The Company's
principal capital expenditure requirements involve the purchase,

                                      28

<PAGE>


installation and construction of network operations centers, other network 
infrastructure and CLE. The Company believes that the proceeds from the Debt 
Offering (as defined below) and the Additional Equity Investment (as defined 
below) will be sufficient to fund the Company's aggregate capital 
expenditures and working capital requirements, including operating losses, 
associated with its planned network roll-out throughout California.  The Company
expects that as it expands its networks beyond these areas, its capital 
requirements will require it to obtain additional financing, which may 
include commercial bank borrowings, vendor financing or the sale or issuance 
of equity and debt securities either through one or more offerings or to one 
or more strategic investors. There can be no assurance that the Company will 
be successful in raising additional capital in sufficient amounts to fund its 
strategic objectives, or that such funds, if available, will be available on 
terms that the Company will consider acceptable. Failure to raise sufficient 
funds may require the Company to modify, delay or abandon some of its planned 
future expansion or expenditures, which could have a material adverse effect 
on the Company's business, financial condition and results of operations.  
See "Management's Discussion and Analysis of Financial Condition and Results 
of Operations--Liquidity and Capital Resources." In addition, the Indenture 
imposes operating and financial restrictions on the Company and its 
subsidiaries. These restrictions affect, and in certain cases significantly 
limit or prohibit, among other things, the ability of the Company and its 
subsidiaries to incur additional indebtedness, pay dividends or make 
distributions in respect of the Company's or such subsidiaries' capital 
stock, make other restricted payments, enter into sale and leaseback 
transactions, create liens upon assets, enter into transactions with 
affiliates or related persons, sell assets, or consolidate, merge or sell all 
or substantially all of their assets.  There can be no assurance that such 
covenants will not adversely affect the Company's ability to finance its 
future operations or capital needs or to engage in other business activities 
that may be in the Company's interest. 

     DEPENDENCE ON KEY PERSONNEL
     
     The success of the Company depends, in large part, upon the continuing
contributions of its key technical, marketing, sales and management personnel.
The loss of the services of one or more key people could have a material adverse
effect upon the business, financial condition and results of operations of the
Company. The Company has employment agreements with a limited number of its
officers or employees, and does not maintain any key man life insurance. The
Company's future success also is dependent upon its continuing ability to
attract and retain additional highly qualified personnel. The Company currently
is seeking to hire a number of additional senior management personnel.
Competition for such personnel is intense, and the Company's inability to
attract and retain additional key employees could have a material adverse effect
on the Company's business, financial condition and results of operations.  There
can be no assurance that the Company's existing personnel will continue to be
employed by the Company or that the Company will be able to attract and retain
qualified personnel in the future.

     GOVERNMENT REGULATION
     
     The Company is subject to regulation by the FCC and by state public service
and public utility commissions as a provider of telecommunications services.
Changes in existing policies or regulations in the state and localities served
by the Company or by the FCC could materially and adversely affect the Company's
business, financial condition and results of operations, particularly if those
regulatory or policy changes make it more difficult to obtain unbundled network
elements from ILECs or other telecommunications services at competitive prices
or otherwise increase the cost and regulatory burdens of providing services.
There can be no assurance that regulatory authorities in the areas served by the
Company or the FCC will refrain from taking actions having an adverse effect on
the business or financial condition or results of operations of the Company. The
Telecommunications Act has significantly altered regulation of the
telecommunications industry by preempting state and local laws to the extent
that they

                                      29

<PAGE>


prevent competition and by imposing a variety of new duties on LECs and ILECs 
in order to promote competition in local exchange and access services. 
Although the Company believes that the Telecommunications Act and other 
trends in federal and state legislation and regulation that favor increased 
competition are to the Company's advantage, there can be no assurance that 
the increased competitive opportunities or other changes in current 
regulations or future regulations at the federal or state level will not have 
a material adverse effect on the Company's business, financial condition and 
results of operations or its ability to make principal and interest payments 
on its indebtedness.  See "--Regulation." 

     POTENTIAL LIABILITY FOR INFORMATION DISSEMINATED THROUGH NETWORK
     
     The law relating to the liability of on-line service providers, private
network operators and ISPs for information carried on or disseminated through
the facilities of their networks is currently unsettled. Several lawsuits
seeking a judgment of such liability are pending. While such claims have not
been asserted against the Company, there can be no assurance that such claims
will not be asserted in the future, or if asserted, will not be successful. The
Telecommunications Act prohibits and imposes criminal penalties and civil
liability for using an interactive computer service for transmitting certain
types of information and content, such as obscene communications. Numerous
states have adopted or are currently considering similar types of legislation.
The imposition upon the Company, ISPs or Web server hosts of potential liability
for materials carried on or disseminated through their systems could require the
Company to implement measures to reduce its exposure to such liability, which
may require the expenditure of substantial resources or the discontinuation of
certain product or service offerings. Further, the costs incurred in defending
against any such claims and potential adverse outcomes of such claims could have
a material adverse effect on the Company's financial condition and results of
operations. The Company believes that it is currently unclear whether the
Telecommunications Act prohibits or imposes liability for any services provided
by the Company should the content of information transmitted be subject to the
statute. 

     CONTROL BY PRINCIPAL STOCKHOLDERS; POTENTIAL CONFLICTS OF INTEREST
     
     As of November 30, 1998, Spectra 1, LLC, a Colorado limited liability 
company controlled by Donald L. Sturm ("Spectra 1"), Colorado Spectra 2, LLC, 
a Colorado limited liability company controlled by Donald L. Sturm ("Spectra 
2"), and Colorado Spectra 3, LLC, a Colorado limited liability company 
controlled by Donald L. Sturm ("Spectra 3," and together with Spectra 1 and 
Spectra 2, the "Sturm Entities") beneficially owned approximately 37.0% of 
the Company's outstanding common stock, including 49.3% of the Company's 
outstanding Series A Common Stock, which possesses super-voting rights. By 
virtue of the super-voting rights of the Series A Common Stock, the Sturm 
Entities control approximately 46.6% of the voting power of the Company's 
outstanding common stock. As of November 30, 1998, Enron beneficially owned 
approximately 31.7% of the Company's outstanding common stock, including 
49.3% of the Company's Series A Common Stock. By virtue of the super-voting 
rights of the Series A Common Stock, Enron controls approximately 45.4% of 
the outstanding voting power of the Company's common stock. In addition, the 
Sturm Entities are entitled to appoint three directors and Enron is entitled 
to appoint two directors of the Company's seven-person Board of Directors 
pursuant to a Securityholders Agreement (the "Securityholders Agreement") 
among the Sturm Entities, Enron and the Company, and Donald L. Sturm is the 
Company's Chairman of the Board.  As a result of their respective ownership 
interests and Board designees, the Sturm Entities and Enron control the 
Company. The Sturm Entities and Enron have the ability to control the 
election of at least a majority of the directors of the Company and any other 
major decisions involving the Company or its assets. The ownership and voting

                                      30

<PAGE>


interests possessed by the Sturm Entities and Enron make it impossible for a 
third party to acquire control of the Company without the consent of the 
Sturm Entities and Enron. 

     In addition to their investments in the Company, the Sturm Entities and
Enron have investments, and may in the future make investments, in other
telecommunications companies and ventures, including competitors of the Company.
As a result, conflicts may arise in the negotiation and enforcement of
arrangements entered into by the Company and entities in which the Sturm
Entities or Enron have an interest. In addition, the Company, the Sturm Entities
and Enron have agreed that the Sturm Entities and Enron are under no obligation
to bring to the Company any investment or business opportunities of which they
become aware, even if such opportunities are within the scope and objectives of
the Company.  See "Certain Relationships and Related Transactions."

     YEAR 2000 ISSUES

     The Company is continuing to determine whether its systems and its 
vendors' systems will require updating to continue to function properly 
beyond 1999. As the Company adds new features to its network it will continue 
to evaluate the functionality of such features beyond 1999. The Company 
believes that its Year 2000 problems will be less significant than competing 
telecommunications providers with a longer history. In other words, the 
Company's limited history of operations means that some of its systems are 
already Year 2000 compliant and are not subject to remediation. 
Notwithstanding this fact, the Company has made Year 2000 compliance a 
priority and has established a Year 2000 Project Team and a Year 2000 
Executive Committee to assess and evaluate its potential Year 2000 problems. 
In January 1999 additional dedicated full time resources will be procured and 
assigned to the Year 2000 compliance project in order to complete the 
evaluation process and accelerate the Company's remediation efforts. Even 
though the Company has not yet instituted a comprehensive testing and 
implementation program, management believes that such a program will be 
implemented prior to the end of March 1999 and completed by the end of June 
1999. The Company believes that its Year 2000 program will cost less than an 
aggregate of $1,000,000 (inclusive of internal labor, external consulting and 
software and hardware related costs) and will be completed in a timely 
manner. However, the Company's Year 2000 readiness program is an ongoing 
process and the estimate of costs and completion dates described above are 
subject to change. 

    Although the Company does not expect to incur significant expenditures to 
upgrade its network to address Year 2000 problems, there can be no assurance 
that the Company will be able to identify all Year 2000 problems in its 
systems in advance of their occurrence or that the Company will be able to 
successfully remedy any problems. In addition, to the extent that the 
Company's suppliers, including the ILECs, IXCs and other service providers and 
carriers over whose networks the Company provides certain of its services, or 
customers fail to address Year 2000 issues in a timely and effective manner, 
the Company's ability to provide uninterrupted, reliable service to customers 
serviced through such networks may be adversely affected. Moreover, the 
profitability and stability of the Company's customers may be adversely 
affected by Year 2000 problems not related to their relationships with the 
Company. The expenses associated with the Company's efforts to remedy any 
Year 2000 problems, the expenses or liabilities to which the Company may 
become subject as a result of such problems or the impact of Year 2000 
problems on the ability of existing or future customers to do business with 
the Company could have a material adverse effect on the Company's business, 
prospects, operating results and financial condition.

     RISKS REGARDING FORWARD LOOKING STATEMENTS

     The statements contained herein that are not historical facts are 
forward-looking statements, which can be identified by the use of 
forward-looking terminology such as "believes," "expects," "may," "will," 
"should" or "anticipates" or the negative thereof or other variations thereon 
or comparable terminology, or by discussions of strategy that involve risks 
and uncertainties. The Company wishes to caution the reader that these 
forward-looking statements, such as those relating to the Company's plans to 
build networks in new areas, its anticipation of revenues from designated 
markets and statements regarding the development of the Company's business, 
the markets for the Company's services and products, the Company's 
anticipated capital expenditures, regulatory reform and other statements 
contained herein regarding matters that are not historical facts, are only 
predictions. No assurance can be given that the expected future results will 
be achieved; actual events or results may differ materially as a result of 
risks facing the Company or other external events or due to decisions made by 
the Company in the future. The risks facing the Company include, but are not 
limited to, those relating to the Company's ability to successfully market 
its services to current and new customers, access markets, install cable and 
facilities, including switching electronics, and obtain rights-of-way, 
building access rights and any required governmental authorizations and 
permits, all in a timely manner, at reasonable costs and on satisfactory 
terms and conditions, as well as regulatory,

                                      31

<PAGE>


legislative and judicial developments that could cause actual results to 
differ materially from the future results indicated, expressed or implied, in 
such forward-looking statements.

ITEM 2.  PROPERTIES 

     The Company's headquarters are located in a suburb of Denver, Colorado and
consist of approximately 7,100 square feet under a lease that expires on
November 30, 1999. The Company has an option to renew the lease for an
additional one year term and a right of first refusal with respect to two suites
located in the same building which would give the Company access to an
additional 28,575 square feet.

     In addition, the Company maintains administrative and sales offices 
consisting of approximately 35,000 square feet in San Diego, California, 
which the Company occupies under a lease that expires on August 31, 2002. The 
Company has a central office switch in Anaheim, California that occupies 
approximately 8,900 square feet of space under a lease expiring on October 
31, 2001. In addition, pursuant to its agreement with the lessor of the 
Anaheim central office, the Company has a right of first refusal to purchase 
the central office during the term of the lease and any extensions thereof. 
The Company also leases offices and space in a number of other locations for 
sales offices and network equipment installations. 

ITEM 3.  LEGAL PROCEEDINGS

     On October 16, 1998, FirstWorld filed a declaratory relief action in San 
Diego Superior Court, asking the Court to find that FirstWorld is not 
obligated to offer stock to Dina Partners L.P. ("Dina") with respect to the 
December 1997 equity investment by Enron and Spectra 3. Dina had previously 
indicated in conversations with FirstWorld officers and counsel and in 
writing that it believed FirstWorld had breached that certain Amended and 
Restated Investor Rights Agreement to which FirstWorld and Dina were parties 
by refusing to allow Dina to purchase additional stock in FirstWorld. On 
December 3, 1998, in answer to FirstWorld's complaint, Dina filed a general 
denial with the court. Although the ultimate resolution of this dispute is 
subject to the uncertainties inherent in litigation, the Company does not 
believe that the resolution of the declaratory relief action will have a 
material adverse effect on the Company's results of operations, liquidity or 
financial position.

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

     On September 28, 1998, the Company obtained the written consent of a 
majority of its stockholders to the terms of the Employment Agreement between 
the Company and Mr. Ohringer, by which Mr. Ohringer joined the Company as its 
new Chief Executive Officer and President. See "Directors and Executive 
Officers of the Registrant--Retention of New Chief Executive Officer and 
President."

                                      32

<PAGE>


                                   PART II

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

     Not Applicable.

ITEM 6.  SELECTED FINANCIAL DATA 

     The following selected consolidated financial data has been derived from 
the Company's audited financial statements. Consolidated balance sheets at 
September 30, 1998 and 1997 and the related consolidated statements of 
operations and of cash flows for the three years in the period ended 
September 30, 1998 and notes thereto appear elsewhere herein. The data should 
be read in conjunction with the annual financial statements, related notes 
and other financial information appearing elsewhere herein.

<TABLE>
<CAPTION>

                                                                YEAR ENDED SEPTEMBER 30,
                                                   -----------------------------------------------
                                                    1994     1995     1996      1997        1998
                                                   -----    -----   -------   --------    --------
                                                                 (DOLLARS IN THOUSANDS)           
<S>                                                <C>      <C>     <C>       <C>         <C>
STATEMENT OF OPERATIONS DATA:
Service revenue                                    $  85    $  57   $   279   $     75    $  1,078
Other revenue                                          -       40        75         96          12
Costs and expenses:
  Network development and operations                   -      188     1,708      3,170       6,501
  Selling, general and administrative                429      740     2,409      4,725      10,641
  Depreciation and amortization                       21       39        75        501       2,424
                                                   -----    -----   -------   --------    --------
Loss from operations                                (365)    (870)   (3,838)    (8,225)    (18,476)
Other income (expense):
  Interest expense                                   (53)     (38)      (27)    (1,372)    (16,898)
  Interest income                                      -        -         9        149       6,749
                                                   -----    -----   -------   --------    --------
Loss before extraordinary item                      (418)    (908)   (3,856)    (9,448)    (28,625)
Extraordinary item-extinguishment of debt              -        -         -       (105)     (4,731)
                                                   -----    -----   -------   --------    --------
Net loss                                           $(418)   $(908)  $(3,856)  $ (9,553)   $(33,356)
                                                   -----    -----   -------   --------    --------
                                                   -----    -----   -------   --------    --------
OTHER DATA:
EBITDA(1)                                          $(344)   $(831)  $(3,763)  $ (7,829)   $(20,783)
Net cash used in operating activities                416      781     2,168      7,446      10,133
Net cash used in investing activities                 18       45       923     12,647     191,659
Net cash provided by financing activities            425      827     3,156     20,557     273,295
Capital expenditures                                   6       25       908     12,637      26,068
Deficiency of earnings to cover fixed charges(2)     418      908     3,856      9,500      29,075

<CAPTION>

                                                       SEPTEMBER 30, 1997      SEPTEMBER 30, 1998
                                                       ------------------      ------------------
                                                                 (DOLLARS IN THOUSANDS)
<S>                                                    <C>                     <C>
BALANCE SHEET DATA:      
Cash and cash equivalents                                   $   536               $ 72,039
Working capital (deficit)                                    (3,319)               232,565
Total assets                                                 25,321                294,105
Long-term debt                                               18,964                255,840
Total stockholders' equity                                    2,265                 29,373

</TABLE>
------------------

(1)  EBITDA represents earnings before interest, income taxes, depreciation 
     and amortization. EBITDA is not a measurement of financial performance 
     under generally accepted accounting principles, is not intended to 
     represent cash flow from operations, and should not be considered as an 
     alternative to net loss as an indicator of the Company's operating 
     performance or to cash flows as a measure of liquidity. The Company 
     believes that EBITDA is widely used by analysts, investors and other 
     interested parties in the telecommunications industry. The Company's 
     computation of EBITDA may not be comparable to similarly titled measures 
     for other companies.

(2)  For purposes of calculating the ratio of earnings to fixed charges, 
     earnings is defined as net loss plus fixed charges (other than 
     capitalized interest). Fixed charges consist of interest and 
     amortization of debt discount and debt issuance costs, whether expensed 
     or capitalized, and that portion of rental expense deemed to represent 
     interest (estimated to be one-third of such expense). For the periods 
     presented, earnings were insufficient to cover fixed charges by the 
     amounts disclosed.

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

     The following discussion should be read in conjunction with "Selected 
Financial Data" and the Consolidated Financial Statements of the Company, 
including the notes related thereto, and other financial data appearing 
elsewhere in this Form 10-K. Certain statements set forth below constitute 
"forward-looking statements." Such forward-looking statements involve known 
and unknown risks, uncertainties and other factors that may cause the actual 
results, performance or achievements of the Company, or industry results, to 
be materially different from any future results, performance or achievements 
expressed or implied by such forward-looking statements. Given these 
uncertainties, readers are cautioned not to place undue reliance on such 
forward-looking statements. Factors that could cause or contribute to such 
differences include, but are not limited to, those discussed under the 
captions "Business" and "Business--Risk Factors."

OVERVIEW

     The Company is a facilities-based ICP. The key to the Company's business 
plan is a data-centric focus, with service offerings strategically bundled to 
address the increasingly complex data and voice communications needs of small 
and medium businesses. The Company uses a combination of both owned and 
managed facilities, with a digital network and related provisioning, billing 
and customer care applications. With targeted marketing and a consultative 
sales approach, the Company provides its customers with advanced, integrated 
data and voice communications solutions. Services offered include data 
connectivity, high speed Internet access, LAN/WAN connectivity, web hosting, 
e-commerce and system integration services, as well as switch-based local and 
long distance telephone services.

     The Company is implementing advanced digital networks and related 
support systems that combine advanced hardware and software from leading 
vendors with its own proprietary systems. With a combination of both owned 
and managed network facilities, the Company provides its customers with an 
integrated approach to enhanced data and voice network services. The Company 
has designed its core processes to streamline provisioning, billing, network 
management and customer service, and has incorporated operational support 
systems that implement such processes into its network offerings. Among other 
things, these systems provide single-point-of-contact customer service and 
facilitate electronic exchanges of information with other network providers 
where possible. The Company is designing its systems to be compatible with 
voice over packet technologies such as voice over IP as such technologies are 
refined in the industry.

     To date, the Company has experienced significant operating and net 
losses and negative cash flow from operations and expects that operating and 
net losses and negative operating cash flow will continue for at least the 
next several years and will increase significantly as the Company implements 
its growth strategy of expanding into other cities. See "Risk Factors--


                                      33

<PAGE>


Limited History of Operations; Negative Cash Flow and Operating Losses," 
"--Substantial Leverage; Ability to Service Indebtedness" and "--Significant 
Capital Requirements." The Company expects to achieve positive operating 
margins over time by increasing the number of customers and increasing the 
products and services it can provide its customers. The Company expects that 
operating and net losses and negative operating cash flow will increase 
significantly as the Company implements its growth strategy of expanding its 
operations. See "--Liquidity and Capital Resources." 

     REVENUE

     The Company currently offers a broad array of telecommunications 
services, including data connectivity, high speed Internet access, LAN/WAN 
connectivity, web hosting, e-commerce and system integration services, as 
well as switch-based local and long distance telephone services. The Company 
intends to generate near-term revenue by replacing basic services currently 
provided by ILECs, IXCs and CLECs, including local, long distance and other 
voice services, dedicated access lines and commercial Internet access, as 
well as from advanced network services provided to select customers. The 
Company believes that it is positioned to generate additional revenue by 
providing advanced network services to a broader market as the demand for 
such services grows. The Company currently prices services, such as local and 
long distance services, which are directly comparable to its competitors' 
offerings, below prevailing market rates to build market share. The Company 
believes that its initial networks in Orange County and Los Angeles County 
will allow it to provide services to a market that includes approximately one 
million commercial access lines. 

     The Company employs a market segmentation strategy, which involves
tailoring service offerings, sales and marketing techniques and network
deployment to meet the different needs of prime commercial, basic commercial and
wholesale customers. For prime commercial customers (businesses with
sophisticated communications needs), the Company utilizes a consultative selling
approach that involves a systematic assessment of each customer's telephony,
Internet, data communications and video applications needs. For basic commercial
customers (businesses with primarily voice and Internet needs), the Company uses
direct mail, telemarketing and advertising and offers standardized product
bundles consisting of local and long distance telephony and high speed Internet
access. The Company also offers use of its network elements and central office
functionality on a wholesale basis to other LECs, including CLECs, IXCs, ISPs
and other communications providers. 
     
     COSTS AND EXPENSES

     NETWORK DEVELOPMENT AND OPERATIONS.  As the Company continues to operate
and maintain its existing network and deploy additional networks, it will incur
network development and operations expenses related to network central office
operations and customer service, including salaries of the employees, real
estate leases for central offices, access offices, co-location and other sites,
costs to interconnect and terminate traffic with other network providers and
network design, planning and internal project management costs. 
     
     The Company has leveraged its substantial internal expertise with respect
to engineering, network creation and business processes to design and construct
a network architecture that it believes will result in enhanced product
offerings and enable the Company to improve scalability, reduce operating costs
and improve network profitability. 
     
     SELLING, GENERAL AND ADMINISTRATIVE.  Selling, general and administrative
expenses are expected to consist primarily of product marketing, sales staff and
sales support expenses,

                                      34

<PAGE>


general management and administrative overhead expenses and office leases.

     Management has developed the Company's business processes with respect to
customer service, billing, provisioning and network management systems based on
extensive industry and engineering expertise within the Company. The Company has
developed operational support systems, incorporated systems from existing
external sources and retained third parties to produce systems meeting the
Company's specifications to create systems that implement the Company's 
business processes. As with its network architecture described above, the 
Company believes that its systems exhibit a high degree of scalability to 
support network growth, flexibility to support product or technical 
innovation, increased reliability and reduced operational cost. 
     
     The Company uses different sales channels to target customers within the
three market segments identified by the Company. The Company uses direct sales
efforts in a consultative selling approach with prime commercial customers,
direct sales efforts for wholesale customers and more economical methods such as
direct mail and telemarketing to target basic commercial customers. The Company
is in the process of significantly expanding its sales and marketing staff. 
     
     CAPITAL EXPENDITURES.  The Company employs a demand-driven approach to 
network deployment. This approach is intended to minimize capital expenditure 
and maximize flexibility to serve the higher margin data market as demand for 
high speed data communication services grows. The Company connects customers 
to its networks through direct fiber connections, DSL or unbundled network 
elements licensed from the ILEC, depending on the most cost-effective 
connection that will support the bundle of services provided to the customer.
     
Results of Operations

     YEAR ENDED SEPTEMBER 30, 1998 COMPARED WITH THE YEAR ENDED 
     SEPTEMBER 30, 1997

     Service revenue increased from $75,000 for the fiscal year ended 
September 30, 1997 to $1,078,000 for the fiscal year ended September 30, 
1998, an increase of $1,003,000 or 1,337%. The increase reflects the Company's
first full year of network operations. Prior to the commencement of 
operations of the Company's Orange County network, the Company's service 
revenue consisted principally of reimbursable engineering, design and 
construction costs associated with the design of fiber optic communications 
networks on a contract basis for the cities of Lakeland, Florida and Santa 
Clara, California. Other revenue represents royalties from the license of the 
Company's patent for fiber optic connectors. Royalty revenue decreased from 
$96,000 for the fiscal year ended September 30, 1997 to $12,000 for the 
fiscal year ended September 30, 1998, a decrease of $84,000 or approximately 
88%. Going forward, the Company expects that revenue from sales of telephony 
and data products and services in Orange County and in other areas targeted 
for network deployment will account for substantially all of the Company's 
total revenue. The Company does not expect that royalty revenue from the 
patent license will constitute a significant portion of total revenue in the 
future as the Company expands its initial network rollout. 

     Network development and operations expenses increased from $3,170,000 for
the fiscal year ended September 30, 1997 to $6,501,000 for the fiscal year ended
September 30, 1998, an increase of

                                      35

<PAGE>


$3,331,000 or approximately 105%. This increase is principally comprised of 
an increase of $1,740,000 in personnel costs associated with the operations 
and network deployment groups and increased operating costs relating to the 
Company's Orange County operations, $932,000 of which relates to an increase 
in insurance, supplies, license agreements and executory costs associated 
with the Anaheim agreements. 

     Selling, general and administrative expenses increased from $4,725,000 
for the fiscal year ended September 30, 1997 to $10,641,000 for the fiscal 
year ended September 30, 1998, an increase of $5,916,000 or approximately 
125%. During fiscal 1998, the Company entered into separate management 
consulting agreements with each of Corporate Managers, LLC, an affiliate of 
Spectra 3, and Enron, pursuant to which the Company incurred and paid 
consulting fees totaling $840,000 during fiscal 1998. See "Certain 
Relationships and Related Transactions--Equity Investment--Management 
Services Agreements."  Other significant factors contributing to the overall 
increase in selling, general and administrative expenses included an increase 
of approximately $1,683,000 in personnel costs associated with marketing, 
sales and administrative functions, an increase of approximately $1,044,000 
relating to liability insurance, consulting, legal, acccounting and travel 
expenditures, an increase of approximately $925,000 relating to marketing and 
public relations expenditures and an increase of approximately $600,000 in 
employee recruitment and relocation costs.

     Depreciation and amortization expenses increased from $501,000 for the 
fiscal year ended September 30, 1997 to $2,424,000 for the fiscal year ended 
September 30, 1998, an increase of $1,923,000 or approximately 384%. This 
increase primarily relates to depreciation expense associated with equipment 
purchased for the Anaheim central office as well as the built and leased 
elements of the Company's fiber optic network and office and other equipment 
associated with the Company's general operations.

     Interest expense increased from $1,372,000 for the fiscal year ended 
September 30, 1997 to $16,898,000 for the fiscal year ended September 30, 
1998, an increase of $15,526,000 or approximately 1,131%. $14,758,000 of the 
increase relates to interest expense associated with the Senior Notes (as 
defined below), inclusive of the amortization of related debt discount and 
deferred financing costs. The remainder of the increase relates to interest 
expense associated with a revolving credit facility which was terminated in 
April 1998 (the "Credit Facility"), inclusive of the amortization of related 
debt discount and deferred financing costs, and to interest expense 
associated with other short-term borrowings and capital leases. Interest 
expense incurred during fiscal 1998 and fiscal 1997 was offset by approximately 
$450,000 and $52,000, respectively, of capitalized interest.

     Interest income increased from $149,000 for the fiscal year ended 
September 30, 1997 to $6,749,000 for the fiscal year ended September 30, 
1998, an increase of $6,600,000 or approximately 4,430%. The increase is 
attributable to the availability of additional funds from the sale of the 
Senior Notes, which funds have been invested in marketable securities and 
cash equivalents. Marketable securities consist of commercial paper with 
original maturities of beyond 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 these securities to maturity.


                                      36

<PAGE>


     YEAR ENDED SEPTEMBER 30, 1997 COMPARED WITH YEAR ENDED SEPTEMBER 30, 1996
     
     Service revenue decreased from $279,000 in the fiscal year ended September
30, 1996 to $75,000 in the fiscal year ended September 30, 1997, a decrease of
$204,000. This decrease reflects the Company's transition from performing
engineering and consulting contracts to developing its own telecommunications
network. Prior to the commencement of operations of the Company's Orange County
network, the Company's service revenue consisted principally of reimbursable
engineering, design and construction costs associated with the design of fiber
optic communications networks on a contract basis for the cities of Lakeland,
Florida and Santa Clara, California. These engineering contracts were
substantially complete in 1996, with only $55,000 of engineering and consulting
revenue recognized in 1997, and the Company stopped bidding on new engineering
contracts in order to focus on design and construction of its Orange County
network. The Company's first customer for its Orange County network was brought
on line in August 1997, and the Company recognized service revenue from its
network operations of $20,000 in the fiscal year ended September 30, 1997. Other
revenue represents royalties from the license of the Company's patent for fiber
optic connectors. Royalty revenue increased from $75,000 in the fiscal year
ended September 30, 1996 to $96,000 in the fiscal year ended September 30, 1997.
Going forward, the Company expects that revenue from sales of telephony and data
products and services in Orange County and in other areas targeted for network
construction will account for substantially all of the Company's total revenue.
The Company does not expect that royalty revenue from the patent license will
constitute a significant portion of total revenue in the future as the Company
expands its Orange County network. 

     Network development and operations expenses increased from $1,708,000 in
the fiscal year ended September 30, 1996 to $3,170,000 in the fiscal year ended
September 30, 1997, an increase of $1,462,000 or 86%. This increase was
principally comprised of increased personnel costs in the operations and
engineering groups, increased operating costs for the Company's Anaheim central
office and costs for equipment needed to finish a 1996 engineering project. 

     Selling, general and administrative expenses increased from $2,409,000 in
the fiscal year ended September 30, 1996 to $4,725,000 in the fiscal year ended
September 30, 1997, an increase of $2,316,000 or 96%. This increase was
principally due to increased personnel costs of sales and marketing and
administrative personnel and an increase in administration expense related to
rent, insurance and telephone. 

     Depreciation and amortization expenses increased from $75,000 in the fiscal
year ended September 30, 1996 to $501,000 in the fiscal year ended September 30,
1997, an increase of $426,000. This increase consists principally of
depreciation related to the Anaheim central office and built and leased elements
of the fiber optic network in Anaheim and depreciation related to office and
other equipment associated with the Company's general operations. 

     Interest expense increased from $27,000 in the fiscal year ended September
30, 1996 to $1,372,000 in the fiscal year ended September 30, 1997. $997,000 of
the increase relates to interest expense associated with the Company's
arrangements with the City of Anaheim. See "Business--Agreements with the City
of Anaheim and The Irvine Company." The other principal reasons for the increase
are interest expense under the Credit Facility and other short-term loans and
interest expense associated with the Company's capitalized leases. 

                                      37

<PAGE>


     Interest income increased from $9,000 in the fiscal year ended September
30, to $149,000 in the fiscal year ended September 30, 1997. The increase of
$140,000 is a result of an increase in funds available for short-term investment
as a result of funds raised from sales of preferred stock in January 1997. 

LIQUIDITY AND CAPITAL RESOURCES

     The telecommunications service business is a capital intensive business.
The Company's existing operations have required and will continue to require
substantial capital investment for the installation of fiber, electronics and
related equipment in order to provide switched services in the Company's
networks and the funding of operating losses during the start-up phase of each
market. In addition, the Company's strategic plan calls for expansion into
additional market areas. Such expansion will require significant additional
capital for the design, development and construction of new networks and the
funding of operating losses during the start-up phase of each market. The
Company used $10,133,000 in cash for operating activities for the fiscal year
ended September 30, 1998, compared to $7,446,000 for the fiscal year ended
September 30, 1997. The increase was primarily due to an increase in the
Company's activities

                                      38

<PAGE>


associated with the development and initiation of switched local services in 
the City of Anaheim. The Company invested an additional $26,068,000 of cash 
in property and equipment for the fiscal year ended September 30, 1998, 
compared to $12,637,000 for the fiscal year ended September 30, 1997. The 
Company has funded substantially all of these expenditures through the 
private sale of equity securities, capital leases, and short and long-term 
debt financing. 

     From its inception through September 30, 1998, the Company raised
approximately $67 million from the private sale of stock. On December 30, 1997,
the Company consummated a private placement of equity securities to Spectra 3
and Enron. Aggregate proceeds from this offering, exclusive of the conversion of
the bridge notes, totaled approximately $26,136,000, net of offering commissions
and certain other advisory fees, and were received on January 6, 1998. See
"Certain Relationships and Related Transactions." The Company used $16.9 million
of the net proceeds to repay amounts outstanding under the Credit Facility and
other short-term debt. On April 13, 1998, the Company completed an offering of
debt securities (the "Debt Offering") pursuant to Rule 144A under the Securities
Act of 1933, as amended (the "Securities Act"). In the 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. On April 13, 1998, the Company also completed a
$20 million private placement to Spectra 3 and Enron (the "Additional Equity
Investment"), pursuant to the exercise of an existing option held by Spectra 3
and Enron. The aggregate net proceeds of the Debt Offering and the Additional
Equity Investment were $260.7 million. The Company terminated the Credit
Facility concurrently with the closing of the Debt Offering and paid the
$1,000,000 termination fee pursuant to the terms thereof.
     
     On October 8, 1998, the Company commenced an offer to exchange (the 
"Exchange Offer") the Senior Notes for a new issue of 13% Senior Discount 
Notes due 2008, which were registered with the Securities and Exchange 
Commission pursuant to a Registration Statement on Form S-4 (the "Exchange 
Notes"). The Exchange Offer expired on November 9, 1998. Under the terms of 
the Exchange Offer, the Company accepted for exchange all $470,000,000 in 
aggregate principal amount at maturity of Senior Notes and caused the 
cancellation of the Senior Notes and the issuance of the Exchange Notes.

     On November 24, 1998, FirstWorld purchased all of the outstanding capital
stock of Optec from ECI. Optec is a systems integrator with operations in Oregon
and Washington and has approximately 90 employees in engineering, sales and
operations. The Company also purchased from ECI an indefeasible right of use 
to fiber optic cable in a MAN serving Portland with routes connecting 
Beaverton and Hillsboro, Oregon. In addition, the Company obtained rights to 
OC-3 level capacity on a WAN being developed by ECI that will connect up to 
15 cities nationwide. The Company paid an aggregate of $18,000,000 in cash 
for the Optec capital stock, the indefeasible rights of use and the WAN 
rights. The Company also repaid at closing approximately $4,000,000 of 
Optec's indebtedness to ECI. FirstWorld used available cash to fund the 
acquisition.
     
     The substantial capital investment required to initiate the Company's
services and the funding of the Company's initial operations has resulted in
negative cash flow since the Company's inception. This negative cash flow is the
result of the requirement to construct the Company's central office in Anaheim
and the construction of fiber-to-the-curb clusters in anticipation of connecting
revenue generating customers. The Company expects to continue to experience
negative cash flow for the foreseeable future due to expansion activities
associated with the development of the Company's markets. There can be no
assurance that the Company will attain break-even cash flow in subsequent
periods. Until sufficient cash

                                      39

<PAGE>


flow is generated, the Company will be required to utilize its current and 
future capital resources to meet its cash flow requirements and may be 
required to issue additional debt and/or equity securities. 

     The Company expects that its available cash will be sufficient to fund 
its capital plan and operations through the expansion of its planned networks 
throughout California, which are expected to be substantially complete by the 
end of 1999. As the Company pursues expansion of its network to additional 
areas or if the Company's available cash resources are not sufficient to fund 
all of the Company's operating expenses and capital expenditures, the Company 
will require additional capital. In addition, depending on market conditions, 
the Company may determine to raise additional capital from time to time. The 
Company may obtain additional funding through the public or private sale of 
debt and/or equity securities or through securing a bank credit facility. 

IMPACT OF THE YEAR 2000

     The Company is continuing to determine whether its systems and its 
vendors' systems will require updating to continue to function properly 
beyond 1999. As the Company adds new features to its network it will continue 
to evaluate the functionality of such features beyond 1999. The Company 
believes that its Year 2000 problems will be less significant than competing 
telecommunications providers with a longer history. In other words, the 
Company's limited history of operations means that some of its systems are 
already Year 2000 compliant and are not subject to remediation. 
Notwithstanding this fact, the Company has made Year 2000 compliance a 
priority and has established a Year 2000 Project Team and a Year 2000 
Executive Committee to assess and evaluate its potential Year 2000 problems. 
In January 1999 additional dedicated full time resources will be procured and 
assigned to the Year 2000 compliance project in order to complete the 
evaluation process and accelerate the Company's remediation efforts. Even 
though the Company has not yet instituted a comprehensive testing and 
implementation program, management believes that such a program will be 
implemented prior to the end of March 1999 and completed by the end of June 
1999. The Company believes that its Year 2000 program will cost less than an 
aggregate of $1,000,000 (inclusive of internal labor, external consulting and 
software and hardware related costs) and will be completed in a timely 
manner. However, the Company's Year 2000 readiness program is an ongoing 
process and the estimate of costs and completion dates described above are 
subject to change. 

    Although the Company does not expect to incur significant expenditures to 
upgrade its network to address Year 2000 problems, there can be no assurance 
that the Company will be able to identify all Year 2000 problems in its 
systems in advance of their occurrence or that the Company will be able to 
successfully remedy any problems. In addition, to the extent that the 
Company's suppliers, including the ILECs, IXCs and other service providers and 
carriers over whose networks the Company provides certain of its services, or 
customers fail to address Year 2000 issues in a timely and effective manner, 
the Company's ability to provide uninterrupted, reliable service to customers 
serviced through such networks may be adversely affected. Moreover, the 
profitability and stability of the Company's customers may be adversely 
affected by Year 2000 problems not related to their relationships with the 
Company. The expenses associated with the Company's efforts to remedy any 
Year 2000 problems, the expenses or liabilities to which the Company may 
become subject as a result of such problems or the impact of Year 2000 
problems on the ability of existing or future customers to do business with 
the Company could have a material adverse effect on the Company's business, 
prospects, operating results and financial condition.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Not applicable.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
     The Company's audited consolidated financial statements at September 30,
1998 and 1997, and for each of the three years in the period ended September 30,
1998, are included in this report on Form 10-K as set forth on page F-1.

                                      40

<PAGE>


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

     Effective November 1996, the Company engaged Price Waterhouse LLP as the 
Company's independent accountants and dismissed Coopers & Lybrand L.L.P. as 
its independent accountants. The decision to change independent accountants 
was approved by the Company's Board of Directors. The reports of Coopers & 
Lybrand L.L.P. on the Company's financial statements for the two years ended 
September 30, 1995, and for the period from September 1, 1993 (inception) 
through September 30, 1995, did not contain an adverse opinion or disclaimer 
of opinion and were not qualified or modified as to audit scope or accounting 
principles. There were no disagreements with Coopers & Lybrand L.L.P. on any 
matter of accounting principles or practices, financial statement disclosure, 
or auditing scope or procedures during the two years ended September 30, 
1995, and for the period from September 1, 1993 (inception) through September 
30, 1995, and through the date of their dismissal. Coopers & Lybrand L.L.P. 
has not audited or reported on any financial statements subsequent to 
September 30, 1995. Prior to November 1996, the Company had not consulted 
with Price Waterhouse LLP on items which involved the Company's accounting 
principles or the form of audit opinion to be issued on the Company's 
financial statements. 


                                      41




<PAGE>

                                       PART III


ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT


     The directors and executive officers of the Company and their ages as of 
December 15, 1998 are as follows:

NAME                            AGE                    POSITION

Donald L. Sturm. . . . . . .     66     Chairman of the Board(1)(3)
Sheldon S. Ohringer. . . . .     41     President, Chief Executive Officer and
                                        Director(2)(3)
David Gandini. . . . . . . .     40     Executive Vice President
Marion K. Jenkins. . . . . .     45     Senior Vice President, Information
                                        Technology and Chief Information Officer
Douglas L. Kramer. . . . . .     44     Senior Vice President and Chief
                                        Technical Officer
John Lewis . . . . . . . . .     60     Senior Vice President, Network and
                                        Operations
Eric Hyde. . . . . . . . . .     41     Senior Vice President, Sales and Product
                                        Marketing
Scott M. Chase . . . . . . .     30     Senior Vice President, Corporate and
                                        Government Affairs
Dennis Mulroy. . . . . . . .     43     Vice President, Finance and
                                        Administration and Secretary
C. Kevin Garland . . . . . .     30     Director(3)(4)
Rodney Malcolm . . . . . . .     34     Director
James O. Spitzenberger . . .     54     Director(5)
John C. Stiska . . . . . . .     56     Director
Melanie Sturm. . . . . . . .     37     Director(4)

---------------
(1)  Mr. Sturm resigned as President and Chief Executive Officer of the Company
     at the close of business on September 30, 1998 in order to allow Mr.
     Ohringer to assume such positions.

(2)  Effective October 1, 1998, Mr. Ohringer became the Company's President and
     Chief Executive Officer and also became a Director of the Company. See
     "--Retention of New Chief Executive Officer and President."

(3)  Member of Chairman's Committee

(4)  Member of Compensation Committee

(5)  Member of Audit Committee

     DONALD L. STURM joined the Company as Chairman of the Board and President
of the Company in January 1998 and served as Chief Executive Officer of
FirstWorld from March 1998 through September 1998. Since December 1991,
Mr. Sturm has been a private equity investor, with interests in the
telecommunications, banking and healthcare industries, among others. Mr. Sturm
currently serves as chairman of the board of nine banks that he owns in the
Rocky Mountain area and the midwest. Mr. Sturm was a member of the group that
bought Continental Airlines ("Continental") out of bankruptcy in 1993, and
currently is a significant stockholder and director of Continental. Prior to
December 1991, Mr. Sturm served as Vice Chairman of Peter Kiewit Sons' Inc.
("PKS"), a construction, coal mining and telecommunications company that has
made significant investments in other industries. In 1984, Mr. Sturm led PKS's
$3.5 billion acquisition of The Continental Group Inc. (the "Group") and became
the Group's chairman and chief executive officer, positions he held until PKS
sold the Group in 1991. 


                                       42
<PAGE>

While Vice Chairman of PKS, Mr. Sturm participated in decisions to invest in 
MFS Communications which was taken public in 1993 and sold to WorldCom in 
1996 for approximately $14.4 billion. Mr. Sturm owns significant ownership 
interests in WorldCom and Level 3 Communications, Inc.

     SHELDON S. OHRINGER joined FirstWorld as its Chief Executive Officer and 
President on October 1, 1998. Prior to this time, Mr. Ohringer served in 
various capacities for ICG from November 1994 to September 1998, most 
recently as Executive Vice President-Telecom of ICG and President of ICG 
Telecom Group, Inc. Before working for ICG, Mr. Ohringer was Senior Vice 
President of Sales and Business Development for US Long Distance from May 
1991 until October 1994. From May 1984 until August 1990, Mr. Ohringer held 
key management and executive positions with Telecom* USA, a major long 
distance carrier which was acquired by MCI in 1990.

     DAVID GANDINI joined FirstWorld in November 1998 as an Executive Vice 
President. Mr. Gandini is a 16-year telecommunications industry veteran with 
extensive experience building and growing young companies. Prior to joining 
the Company, Mr. Gandini served in various capacities at ICG Communications 
from February 1997 to November 1998, most recently as Senior Vice President 
of Wholesale Services, ICG Telecom, Inc. Mr. Gandini also served as President 
of ICG's long distance and IP telephony. While at ICG, he directed the build 
of a 166-node network, representing the largest voice/data/Internet Protocol 
(IP) domestic network. Prior to joining ICG, Mr. Gandini was President of 
Pace Net Services from December 1995 to February 1997. Mr. Gandini was 
recently ranked among the top 50 most influential people in competitive long 
distance by Phone+, an industry trade publication.

     MARION K. JENKINS, Ph.D., joined the Company in November of 1998 as 
Senior Vice President of Information Technology and Chief Information 
Officer. Dr. Jenkins has over a decade of executive management experience in 
competitive telecommunications, overseeing broad operations in information 
systems, strategic planning, integration, sales and marketing and customer 
operations. His background includes positions as Vice President of Strategic 
Client Applications at Qwest Communications from June 1998 to November 1998, 
Vice President of Sales Operations at LCI International from March 1998 to 
June 1998, Chief Information Officer at USLD Communications from November 
1996 to February 1998 and Vice President of Sales for American Telco 
Incorporated from January 1986 to July 1996. Prior to that Dr. Jenkins was a 
Senior Research Engineer at Exxon Production Research Company.

     DOUGLAS L. KRAMER joined FirstWorld in December 1998 as a Senior Vice 
President and Chief Technical Officer after serving in various capacities for 
ICG Communications' Telecom Group for the previous six years, most recently 
as Vice President of Network Planning. While at ICG, Mr. Kramer directed 
integrated planning; network, switch, Signaling System 7 ("SS7") and data 
planning and engineering; switch provisioning; and industry code compliance. 
In addition, he was responsible for developing and deploying ICG's 3,000 mile 
fiber based network throughout nine states and was credited with deploying 
the nation's largest IP network. Prior to working at ICG, Mr. Kramer directed 
network services for MidAmerican Communications, acquired by WorldCom in 
1991. Mr. Kramer also served as a consultant for WilTel, in connection with 
the design and negotiation of initial SS7 network deployment with the RBOCs.

     JOHN LEWIS joined the Company in June of 1996 and has served as Senior Vice
President, Network and Operations of the Company since April 1997. Prior to
joining the Company, Mr. Lewis amassed significant experience in the
telecommunications industry, primarily in the areas of network design,
maintenance and administration. From July 1991 to September 1995, Mr. Lewis
served as Executive Director of the INFOTEL project at Pacific Bell, which
focused on designing Pacific Bell's future telephone operations model. Prior to
joining Pacific Bell, Mr. Lewis served as General Manager of Technical
Operations & Maintenance Support at AT&T Network Systems from 1984 to 1988, as
General


                                       43
<PAGE>

Manager of Switching at Pacific Telephone from 1981 to 1983 and as Division
Manager of Performance at New York Telephone from 1975 to 1980.

     ERIC HYDE joined the Company as Senior Vice President, Sales & Product
Marketing in June 1998. Mr. Hyde has 15 years experience in product marketing,
strategic planning and sales. From March 1997 to June 1998, Mr. Hyde served as
Director of Customer Marketing in the Business Communications Systems Division
at Lucent Technologies where he was responsible for the implementation of
marketing programs for call center, telephony, video and messaging applications.
From January 1994 to March 1997, Mr. Hyde served in various capacities at
Ameritech, including Senior Director of Product Marketing and Integrated
Solutions where he was responsible for launching wireless transport, data and
voice CPE products to key accounts. From January 1983 to December 1993, Mr. Hyde
held various positions with General Motors Corporation, including Director of
Strategic Marketing of the North American Export Sales Division.

     SCOTT M. CHASE joined the Company in October 1998 as Senior Vice President,
Corporate and Government Affairs. Prior to joining the Company, Mr. Chase worked
in various capacities for ICG from March 1997 to September 1998, most recently
as Vice President, Corporate Communications and Government Affairs. After
graduating from the University of Colorado in 1990 and until he joined ICG in
March 1997, Mr. Chase was actively involved in a number of local, state and
federal electoral campaigns, including serving as the Deputy Political Director
for the Colorado campaign to elect Clinton/Gore in 1992. In addition during this
period, Mr. Chase also served as a senior policy and political advisor for
several public officials, including U.S. Senator Tim Wirth and Roy Romer,
Governor of Colorado.

     DENNIS MULROY joined the Company as Vice President, Finance and
Administration in January 1997 and has served as Secretary since January 1998.
From November 1993 to December 1996, Mr. Mulroy held the position of Chief
Financial Officer and Vice President of Administration for River Medical Inc., a
medical device company. From April 1983 to October 1993, Mr. Mulroy served as
Vice President of Finance and Administration for Spectragraphics Corporation, an
international computer technology company. Mr. Mulroy is a Certified Public
Accountant and previously worked in that capacity for Ernst & Young.

     C. KEVIN GARLAND joined the Company as a director in January 1998. Mr. 
Garland has worked for Enron since January 1995. He currently serves as Vice 
President of Equity Investments for Enron and is responsible for overseeing 
minority and control investments. From June 1993 to December 1994, Mr. 
Garland served as senior associate in mergers and acquisitions for Parker & 
Parsley, an independent oil and gas company. From 1992 to April 1993, Mr. 
Garland worked as an analyst with Stephens Inc., an investment banking firm 
in Little Rock, Arkansas.

     RODNEY MALCOLM joined the Company as a director in January 1998. Mr. 
Malcolm has worked for Enron in Houston, Texas since September 1994 and 
currently serves as a Vice President with responsibilities for public power 
and finance. Prior to joining Enron, Mr. Malcom was a project finance banking 
officer at the Bank of Tokyo.

     JAMES O. SPITZENBERGER joined the Company as a director in January 1998.
Since July 1996, Mr. Spitzenberger has been a private equity investor. Prior to
July 1996, Mr. Spitzenberger was a Vice President of PKS, which he joined in
February 1981. While at PKS, Mr. Spitzenberger served as Director of Taxation.
Prior to joining PKS, Mr. Spitzenberger was a tax manager with Arthur Andersen &
Co.

     JOHN C. STISKA joined the Company as a director in September 1997.
Mr. Stiska currently is Chairman of Commercial Bridge Capital, LLC, a newly
formed company which will provide "bridge"


                                       44
<PAGE>

financing to businesses requiring funds on a short-term basis. Mr. Stiska serves
on the board of directors of several companies, including Laser Power
Corporation, a publicly traded company. From February 1996 to February 1998, he
served as Corporate Senior Vice President and General Manager of the Technology
Applications Division of QUALCOMM Incorporated, a leading developer and
manufacturer of telecommunications technology. Prior to joining QUALCOMM, he was
President and then Chairman and Chief Executive Officer of Triton Group Ltd.
from 1990 to 1996. Previously, Mr. Stiska practiced law for 20 years,
specializing in corporate law, mergers and acquisitions and securities law. In
July 1998, Mr. Stiska joined the law firm of Latham & Watkins in an of-counsel
capacity.

     MELANIE STURM joined the Company as a director in January 1998. Ms. Sturm
is a private equity investor and currently serves on the board of directors of
MD Network, a private healthcare concern. From 1990 to 1996, Ms. Sturm served as
an Investment Officer at International Finance Corporation, the private sector
affiliate of the World Bank. From 1984 to 1988, Ms. Sturm worked in the Mergers
& Acquisitions departments of Drexel, Burnham Lambert and Morgan Stanley.
Ms. Sturm is Donald L. Sturm's daughter.

     Donald L. Sturm, James O. Spitzenberger and Melanie Sturm were appointed to
the Board of Directors as the three directors the Sturm Entities are entitled to
appoint pursuant to the Securityholders Agreement. Likewise, C. Kevin Garland
and Rodney Malcolm were appointed to the Board of Directors as the two directors
Enron is entitled to appoint pursuant to the Securityholders Agreement.

Retention of New Chief Executive Officer and President

     The Company entered into an employment agreement on September 28, 1998 
with Sheldon S. Ohringer (the "Employment Agreement"), pursuant to which Mr. 
Ohringer agreed to join FirstWorld as its President and Chief Executive 
Officer on October 1, 1998 (the "Commencement Date"). The Employment 
Agreement has a three year term ending on the close of business on September 
30, 2001, unless terminated earlier by either party. The Employment Agreement 
also provides that Mr. Ohringer will be nominated to serve as a director of 
the Company during the term of the agreement. The Employment Agreement 
provides for an initial annual base salary of $200,000 and an annual cash 
bonus not to exceed 50% of Mr. Ohringer's base salary. In addition, to 
compensate Mr. Ohringer for certain benefits that he would have received from 
his previous employer, FirstWorld has agreed to pay Mr. Ohringer a cash 
payment of $4,000,000 (the "Equalization Payment") in three separate 
installments. The first installment of the Equalization Payment in the amount 
of $2,000,000 was paid on the Commencement Date, the second installment of 
the Equalization Payment in the amount of $1,000,000 is due and payable on 
October 1, 1999 and the final installment of the Equalization Payment in the 
amount of $1,000,000 is due and payable on October 1, 2000. Mr. Ohringer must 
be employed by the Company on the date an installment becomes due to be 
eligible to receive the installment payment unless the Company terminates Mr. 
Ohringer's employment other than for cause or Mr. Ohringer terminates his own 
employment for good reason (as defined in the Employment Agreement) prior to 
the installment date. In addition, Mr. Ohringer may elect to receive all or 
any portion of the second and third installment payments in the form of 
FirstWorld Series B Common Stock. If Mr. Ohringer elects to receive any of 
the second or third installment payments in Series B Common Stock, such stock 
will be valued at $5.00 and $7.50 per share, respectively.

     In addition, under the Employment Agreement, Mr. Ohringer also will be
eligible for the following performance based bonuses:

     IPO BONUS.  If the Company consummates a Qualified Initial Public Offering
(as defined below) with a price of at least $10.00 per share (subject to
adjustment upon a subdivision or combination or other


                                       45
<PAGE>

adjustment in the number of outstanding shares of the Company made without the
receipt of consideration to the Company after the Commencement Date) within the
first 18 months after the Commencement Date, the Company will pay Mr. Ohringer a
$1,000,000 cash bonus (the "IPO Bonus"). For purposes of the Employment
Agreement, the term "Qualified Initial Public Offering" shall mean the Company's
first underwritten initial public offering of common equity securities under the
Securities Act, after the date of the Employment Agreement, with gross proceeds
to the Company of at least $20,000,000, that results in such common equity
securities being listed for trading on a national securities exchange or being
authorized for trading on the Nasdaq National Market at such time.

     DEFERRED CASH BONUS.  In addition to the IPO Bonus, Mr. Ohringer also would
be entitled to receive the following additional compensation:

          (i) If the Company consummates a Qualified Initial Public Offering
     with a price of at least $10.00 per share (subject to adjustment upon a
     subdivision or combination or other adjustment in the number of outstanding
     shares of the Company made without the receipt of consideration to the
     Company after the Commencement Date) within the first 12 months after the
     Commencement Date, the Company will pay Mr. Ohringer a $4,207,500 cash
     bonus on September 30, 2001;

          (ii) If the Company consummates a Qualified Initial Public Offering
     with a price of at least $12.50 per share (subject to adjustment upon a
     subdivision or combination or other adjustment in the number of outstanding
     shares of the Company made without the receipt of consideration to the
     Company after the Commencement Date) within the first 24 months after the
     Commencement Date, the Company will pay Mr. Ohringer a $8,415,000 cash
     bonus on September 30, 2001; provided that if Mr. Ohringer earns the
     payment described in this paragraph (ii) he will not be entitled to receive
     the payment described in paragraph (i) above; and

          (iii) If the Company has a market capitalization of at least $1.2
     billion (as adjusted as described below) for a period of 20 consecutive
     trading days during a three-year period beginning on the Commencement Date,
     the Company will pay Mr. Ohringer a cash payment equal to $16,830,000 minus
     any amounts he receives pursuant to paragraph (i) or (ii) above on
     September 30, 2001. Market capitalization of $1.2 billion assumes
     60,000,000 fully diluted shares of Series B Common Stock and a market price
     of $20.00 per share, subject to adjustment. If the number of fully diluted
     shares of Series B Common Stock is greater than or less than 60,000,000
     shares of Series B Common Stock, the target market capitalization will be
     proportionately adjusted; provided that the $20.00 per share market price
     would not be so adjusted, except to the extent required to appropriately
     reflect any subdivision (by any stock split, stock dividend,
     recapitalization or otherwise), combination (by reverse stock split or
     otherwise) or other adjustment in the number of outstanding shares of the
     Company made without the receipt of consideration to the Company after the
     Commencement Date.

     The foregoing payments described in paragraph (i), (ii) and (iii) above are
referred to herein individually or collectively, as the "Deferred Cash Bonus."
Notwithstanding the foregoing, upon a change of control (as defined in the
Employment Agreement) or the termination of Mr. Ohringer's employment upon his
death, by the Company without cause or voluntarily by Mr. Ohringer for good
reason, any Deferred Cash Bonus previously earned by Mr. Ohringer that has not
yet been paid shall be paid within 30 days of the date of termination (as
defined in the Employment Agreement). In no event will the termination of Mr.
Ohringer's employment (including, without limitation, termination by the Company
for cause or disability (as defined in the Employment Agreement) or Mr.
Ohringer's voluntary termination of his


                                       46
<PAGE>

employment without good reason) affect Mr. Ohringer's right to receive the
Deferred Cash Bonus earned prior to such termination.

     Mr. Ohringer also has been granted an option to purchase 2,805,000 shares
of Series B Common Stock (representing an approximate 5% equity interest in the
Company on a fully diluted basis) 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 one-third of the shares covered by the
option on the Commencement Date, (ii) with respect to one-third of the shares
covered by the option on the first anniversary of the Commencement Date and
(iii) with respect to the remaining one-third of the shares covered by the
option on the second anniversary of the Commencement Date. Notwithstanding the
foregoing, all of the shares subject to the option shall immediately vest (i)
immediately prior to a change of control, (ii) if the Company has a market
capitalization of at least $1.2 billion for a period of 20 consecutive trading
days during a three-year period starting on the Commencement Date or (iii) if
Mr. Ohringer is terminated by the Company without cause or Mr. Ohringer
voluntarily terminates his employment with the Company for good reason. Subject
to certain exceptions, Mr. Ohringer has agreed to hold 40% of the shares he
acquires upon exercise of the option for at least one year from the date of
exercise.

     Mr. Ohringer also has been granted a right of first refusal which allows
him to maintain his percentage ownership interest (assuming the exercise in full
of the option described above) in the Company with respect to certain future
equity issuances. This right of first refusal terminates on the earlier to occur
of (i) January 31, 2004, (ii) the day immediately prior to the closing of a
Qualified Initial Public Offering or (iii) the date of termination. Mr. Ohringer
may also participate in the employee benefit plans generally available to
FirstWorld's senior executives according to the plans' terms and conditions.

     Depending on how Mr. Ohringer's employment with FirstWorld terminates, Mr.
Ohringer (or his estate) may be eligible to receive certain termination payments
and Mr. Ohringer (or his family and dependents) would also be entitled to
continuation of certain benefits for a specified period of time.

     Mr. Ohringer is subject to a one year covenant not to compete if his
employment is terminated by the Company for cause or for disability or if Mr.
Ohringer voluntarily terminates his employment without good reason.

COMMITTEES OF THE BOARD OF DIRECTORS

     CHAIRMAN'S COMMITTEE.  The Board of Directors has established the
Chairman's Committee consisting of Messrs.  Sturm, Ohringer and Garland. The
Chairman's Committee is empowered to conduct all activities that may be
conducted by the Board of Directors, subject only to limitations imposed by
applicable corporation law.

     COMPENSATION COMMITTEE.  The Board of Directors has established a
Compensation Committee consisting of Mr. Garland and Ms. Sturm. The Compensation
Committee determines compensation for the Company's senior executive officers
and administers the 1995 Stock Option Plan (as defined) and the 1997 Stock
Option Plan (as defined).

     AUDIT COMMITTEE.  The Board of Directors has established an Audit Committee
with Mr. Spitzenberger as its sole member. The Audit Committee makes
recommendations concerning the engagement of independent public accountants,
reviews with the independent public accountants the plans and results of the
audit engagement, approves professional services provided by the independent
public


                                       47
<PAGE>

accountants, reviews the independence of the independent public accountants,
considers the range of audit and non-audit fees and reviews the adequacy of the
Company's internal accounting controls.

COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT

     The Company was not subject to Section 16(a) of the Exchange Act during the
fiscal year ended September 30, 1998. The Company became subject to Section
16(a) of the Exchange Act on October 8, 1998, when the Company filed a
Registration Statement on Form 8-A, with respect to its Series B Common Stock.

ITEM 11.  EXECUTIVE COMPENSATION

DIRECTOR COMPENSATION

     Directors of the Company who are also employees of the Company receive no
directors' fees. One of the Company's non-employee directors, John C. Stiska,
receives a retainer of $1,000 per month. All non-employee directors are
reimbursed for their reasonable out-of-pocket travel expenditures. Directors of
the Company are also eligible to receive grants of stock options under the
Company's 1997 Stock Option Plan. Corporate Managers, LLC, a Colorado limited
liability company and an affiliate of the Sturm Entities (all of which are
controlled by Donald L. Sturm and in which James O. Spitzenberger and Melanie
Sturm own membership interests), receives an annual management fee of $500,000
plus out of pocket expenses. C. Kevin Garland and Rodney Malcolm are officers of
Enron, which receives an annual management fee of $500,000 plus out of pocket
expenses. Corporate Managers, LLC and Enron receive such management fees
pursuant to three-year Management Consulting Services Agreements. See "Certain
Relationships and Related Transactions."

EXECUTIVE COMPENSATION

     The following table sets forth certain information concerning the cash and
non-cash compensation during the periods indicated earned by or awarded to the
Chief Executive Officer and to the four other most highly compensated executive
officers of the Company whose combined salary and bonus exceeded $100,000 during
the fiscal year ended September 30, 1998 (the "Named Executive Officers").


                                       48
<PAGE>

                              SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>

                                                            ANNUAL COMPENSATION               LONG-TERM COMPENSATION AWARDS
                                                    ---------------------------------  --------------------------------------------
                                                                                                       SECURITIES
                                                                                        RESTRICTED     UNDERLYING       ALL OTHER
                                                    SALARY        BONUS   OTHER ANNUAL  STOCK AWARDS     OPTIONS       COMPENSATION
NAME AND PRINCIPAL POSITION                          ($)           ($)    COMPENSATION      ($)             (#)            ($)
---------------------------                         ------        -----   ------------  ------------   ----------     -------------
<S>                                                 <C>          <C>      <C>           <C>            <C>            <C>
Donald L. Sturm(1) ...............................      0(2)        --         --            --               --          --
     Former Chief Executive Officer
Renney Senn ......................................    26,667        --         --            --           16,417       72,442(3)
     Former Chief Executive Officer
Robert E. Randall(4) .............................   176,667        --         --            --          116,417          --
     Former Executive Vice President, and former
     acting Chief Financial Officer
John Lewis .......................................   139,167     2,000         --            --           56,417          --
     Senior Vice President, Network and Operations
Andrew B. Taubman(5) .............................   139,167        --         --            --           46,417          --
     Former Senior Vice President, Corporate
     Finance and Development
G. Bradford Saunders(6) ..........................   139,167        --         --            --           16,417          --
     Former Senior Vice President, Project
     Development

</TABLE>


(1)  Mr. Sturm served as the Company's Chief Executive Officer from March 1998
     through September 30, 1998. Effective with the close of business on
     September 30, 1998, Mr. Sturm resigned his position as Chief Executive
     Officer of the Company in order to allow Mr. Ohringer to assume such
     position. 

(2)  The Company pays annual management fees to Corporate Managers LLC, an
     affiliate of Mr. Sturm, pursuant to the Management Consulting Services
     Agreement between the Company and Corporate Managers, LLC, as amended. See
     "Certain Relationships and Related Transactions--Equity
     Investment--Management Services Agreements."

(3)  Mr. Senn resigned from the Company in January 1998 and in connection 
     with such resignation received $12,231 less applicable federal and state 
     taxes for accrued vacation days. In addition, pursuant to an employee 
     severance program adopted in connection with the Equity Investment (as 
     defined below), the Company paid severance payments to Mr. Senn in an 
     aggregate amount of $60,211. See "Certain Relationships and Related 
     Transactions--Equity Investment--Employee Severance Program"

(4)  Mr. Randall resigned in December 1998.


                                       49
<PAGE>

(5)  Mr. Taubman resigned in December 1998.

(6)  Mr. Saunders resigned in October 1998.


                           OPTION GRANTS DURING FISCAL 1998

The following table sets forth information with respect to grants of stock
options to each of the Named Executive Officers during the fiscal year ended
September 30, 1998.

<TABLE>
<CAPTION>
                                                                                                            POTENTIAL REALIZED
                                                                                                                VALUE AT
                                     NUMBER OF         % OF TOTAL                                           ASSUMED ANNUAL RATE
                                    SECURITIES      OPTIONS GRANTED                                            OF STOCK PRICE
                                UNDERLYING OPTIONS  TO EMPLOYEES IN   EXERCISE OR                         APPRECIATION FOR OPTION
                                      GRANTED         FISCAL YEAR      BASE PRICE                                TERM(1)
NAME                                    (#)               (%)            ($/SH)       EXPIRATION DATE         5%           10%
----                            ------------------  ---------------   ------------    ---------------        ---           ---
<S>                             <C>                 <C>               <C>             <C>                 <C>           <C>
Donald L. Sturm...................       --                 --              --              --                 --            --
Renney Senn(2)....................   16,417               1.16            3.00            4/6/98                0             0
Robert E. Randall(3)..............   16,417               1.16            3.00           3/31/99            2,463         4,925
                                    100,000               7.04            4.50           3/31/99           22,500        45,000
John Lewis........................    6,000                .42            3.00           10/2/07           11,320        28,687
                                     10,417                .73            3.00          12/16/07           19,654        49,806
                                     40,000               2.82            4.50            6/2/08          113,201       286,874
Andrew B. Taubman(4)..............   16,417               1.16            3.00           3/11/99            2,463         4,925
                                     30,000               2.11            4.50           3/11/99            6,750        13,500
G. Bradford Saunders(5)...........   16,417               1.16            3.00            1/2/99            2,463         4,925

</TABLE>

---------------
(1)  The 5% and 10% assumed annual rate of compounded stock price appreciation
     are mandated by rules of the Securities and Exchange Commission. There can
     be no assurance that the actual stock price appreciation over the ten year
     option term will be at the assumed 5% or 10% levels or at any other defined
     level.

(2)  Mr. Senn exercised the options to purchase 16,417 shares of Series B Common
     Stock on April 6, 1998.

(3)  Mr. Randall resigned from the Company in December 1998. Pursuant to the
     provisions of the SpectraNet International 1997 Stock Plan, Mr. Randall has
     until March 31, 1999 to exercise the vested portion of the options
     described above. 

(4)  Mr. Taubman resigned from the Company in December 1998. Pursuant to the
     provisions of the SpectraNet International 1997 Stock Plan, Mr. Taubman has
     until March 11, 1999 to exercise the vested portion of the options
     described above. 

(5)  Mr. Saunders resigned from the Company in October 1998. Pursuant to the
     provisions of the SpectraNet International 1997 Stock Plan, Mr. Saunders
     has until January 2, 1999 to exercise the vested portion of the options
     described above. 

OPTION EXERCISES AND FISCAL YEAR-END VALUES

     The following table sets forth the information with respect to the Named
Executive Officers concerning the exercise of options during fiscal year 1998
and unexercised options held as of September 30, 1998.

                                       50
<PAGE>

                      OPTIONS EXERCISED DURING FISCAL 1998
<TABLE>
<CAPTION>

                                                            NUMBER OF SECURITIES       VALUE OF UNEXERCISED IN-THE-
                      SHARES ACQUIRED ON       VALUE       UNDERLYING UNEXERCISED            MONEY OPTIONS   
                           EXERCISE          REALIZED       OPTIONS AT FY-END (#)              AT FY-END ($)(1)
NAME                         (#)               ($)        EXERCISABLE/UNEXERCISABLE    EXERCISABLE/UNEXERCISABLE
----                  ------------------     --------     -------------------------    ----------------------------
<S>                   <C>                    <C>          <C>                          <C>
Donald L. Sturm.........    --                  --                       --                             --
Renney Senn.............  16,417                0                       0/0                            0/0
Robert E. Randall.......    --                  --           16,417/100,000                 49,251/150,000
John Lewis..............    --                  --            43,617/62,800                190,251/168,000
Andrew B. Taubman.......    --                  --            36,417/60,000                159,251/210,000
G. Bradford Saunders....    --                  --            91,417/50,000                469,251/280,000
</TABLE>

---------------
(1)  Calculated by determining the difference between the fair market value of
     the securities underlying the options at September 30, 1998 ($6.00 per
     share as determined by the Board of Directors) and the exercise price of
     the options.


EXECUTIVE EMPLOYMENT AGREEMENTS

     The Company has employment agreements with Messrs. Sheldon S. Ohringer,
David Gandini, Marion K. Jenkins, Douglas L. Kramer and Scott M. Chase.

     For a description of the Company's Employment Agreement with Sheldon S.
Ohringer see "Directors and Executive Officers of the Registrant--Retention of
New Chief Executive Officer and President."

     The Company's employment agreement with David Gandini provides for a 
term of three years from November 30, 1998 through November 29, 2001. Mr. 
Gandini receives a base salary of $185,000 and is eligible to receive an 
annual bonus of up to 40% of his base salary pursuant to the Company's Annual 
Bonus Plan. In addition, to compensate Mr. Gandini for certain benefits that 
he would have received from his previous employer, FirstWorld has agreed to 
pay Mr. Gandini a cash payment of $500,000 (the "Equalization Payment") in 
three separate installments. The first installment in the amount of $100,000 
is due and payable on January 1, 1999, the second installment in the amount 
of $200,000 is due and payable on January 1, 2000, and the third installment 
in the amount of $200,000 is due and payable on January 1, 2001. Mr. Gandini 
must be employed by the Company on the date an installment becomes due to be 
eligible to receive the installment payment unless the Company terminates Mr. 
Gandini's employment other than for cause or Mr. Gandini terminates his own 
employment for good reason (as defined in the Employment Agreement) prior to 
the installment date. Pursuant to the terms of the employment agreement, the 
Company granted Mr. Gandini an option to purchase 500,000 shares of Series B 
Common Stock. The shares subject to the option vest in four equal increments 
of 125,000 shares on the first, second, third and fourth anniversaries of Mr. 
Gandini's start date with the Company. The shares in the first such increment 
have an exercise price of $6.00 per share, shares in the second such 
increment have an exercise price of $6.50 per share, shares in the third such 
increment have an exercise price of $7.00 per share and shares in the fourth 
such increment have an exercise price of $7.50 per share. If the Company 
terminates Mr. Gandini's employment during his first three years of 
employment without "cause" or Mr. Gandini terminates his employment with the 
Company for "good reason" (as each such term is defined in the employment 
agreement), the Company must make a severance payment to Mr. 


                                       51
<PAGE>

Gandini equal to the base salary he would have received had he remained employed
with the Company for the remainder of his employment term.

     The Company's employment agreement with Marion K. Jenkins provides for a
term that commenced on November 9, 1998 and ends on October 31, 2000. Mr.
Jenkins receives a base salary of $160,000 per year and is eligible to receive a
bonus of up to 50% of his base salary under the Company's Annual Bonus Plan.
Pursuant to the terms of the employment agreement, the Company granted Mr.
Jenkins an option to purchase 250,000 shares of Series B Common Stock. The
shares subject to the option vest in four equal increments of 62,500 shares on
the first, second, third and fourth anniversaries of Mr. Jenkins' start date
with the Company. The shares in the first such increment have an exercise price
of $6.00 per share, shares in the second such increment have an exercise price
of $6.50 per share, shares in the third such increment have an exercise price of
$7.00 per share and shares in the fourth such increment have an exercise price
of $7.50 per share. If the Company terminates Mr. Jenkins' employment prior to
October 31, 2000 without "cause" or Mr. Jenkins terminates his employment with
the Company for "good reason" (as each such term is defined in the employment
agreement), the Company must make a severance payment to Mr. Jenkins equal to
the base salary he would have received had he remained employed with the Company
for the remainder of his employment term.

     The Company's employment agreement with Douglas L. Kramer provides for a 
term that commenced on December 7, 1998 and ends on December 13, 2000. Mr. 
Kramer receives a base salary of $135,000 per year and is eligible to receive a
bonus of up to 35% of his base salary under the Company's Annual Bonus Plan. In
addition, to compensate Mr. Kramer for certain benefits that he would have
received from his previous employer, FirstWorld has agreed to pay Mr. Kramer a
cash payment of $30,000 payable in January 1999. Pursuant to the terms of the
employment agreement, the Company granted Mr. Kramer an option to purchase
100,000 shares of Series B Common Stock. The shares subject to the option vest
in four equal increments of 25,000 shares on the first, second, third and fourth
anniversaries of Mr. Kramer's start date with the Company. The shares in the
first such increment have an exercise price of $6.00 per share, shares in the
second such increment have an exercise price of $6.50 per share, shares in the
third such increment have an exercise price of $7.00 per share and shares in the
fourth such increment have an exercise price of $7.50 per share. If the Company
terminates Mr. Kramer's employment prior to October 31, 2000 without "cause" or
Mr. Kramer terminates his employment with the Company for "good reason" (as each
such term is defined in the employment agreement), the Company must make a
severance payment to Mr. Kramer equal to the base salary he would have received
had he remained employed with the Company for the remainder of his employment
term.

     The Company's employment agreement with Scott M. Chase provides for a 
term of two years from October 1, 1998 through September 30, 2000. Mr. Chase 
receives a base salary of $125,000 per year and is eligible to receive a 
bonus as determined by the Compensation Committee of the Board of Directors. 
In addition, to compensate Mr. Chase for certain benefits that he would have 
received from his previous employer, FirstWorld paid Mr. Chase a cash payment 
of $20,000 in October 1998. Mr. Chase was granted an option to purchase 
100,000 shares of Series B Common Stock at an exercise price of $4.50 per 
share. The vesting schedule and other terms and conditions of the option are 
as set forth in the applicable option plan of the Company. If the Company 
terminates Mr. Chase's employment prior to September 30, 2000 without "cause" 
or Mr. Chase terminates his employment with the Company for "good reason" (as 
each such term is defined in the employment agreement), the Company must make 
a severance payment to Mr. Chase equal to the amount of base salary he would 
have received had he remained an employee of the Company through September 
30, 2000 less any base salary paid to Mr. Chase prior to the termination of 
his employment for the 12 month period ending on the last day of the month 
preceding the month Mr. Chase's employment with the Company is terminated 
(or, if Mr. Chase is terminated without cause or he terminates his 


                                       52
<PAGE>

employment for good reason prior to October 1, 1999, the entire period of his 
employment).

STOCK OPTION PLANS AND STOCK PURCHASE PLANS

     STOCK OPTION PLANS

     The Company has two stock option plans currently in place: the 1995 Stock
Option Plan and the 1997 Stock Option Plan.

     1995 STOCK OPTION PLAN. Under the SpectraNet International 1995 Incentive
Stock Option Plan (the "1995 Stock Option Plan") the Company is authorized to
issue incentive stock options ("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 of Directors or a committee thereof
comprised of at least three directors has the authority, subject to certain
limitations, to select the employees of the Company or its subsidiaries 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 such options expire six months
and one year, respectively, after the optionee's employment with the Company is
terminated. As of November 30, 1998, options to purchase an aggregate of 533,700
shares of Series B Common Stock at prices ranging from $.15 to $.50 were
outstanding under the 1995 Stock Option Plan.

     1997 STOCK OPTION PLAN. Under the SpectraNet International 1997 Stock Plan
(the "1997 Stock Option 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 ISOs and nonqualified stock options ("NQSOs")
and the award of stock purchase rights. Subject to the terms and conditions of
the 1997 Stock Option Plan and applicable law, the Board of Directors or a duly
appointed committee thereof (the "Administrator") 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 to the Company. However, if the optionee's service to the
Company ends because of death or disability, unless otherwise indicated in the
Stock Option Agreement, such optionee has 12 months to exercise the vested
portion of his or her options. As of November 30, 1998, options to purchase an
aggregate of 1,385,603 shares of Series B Common Stock at exercise prices
ranging from $3.00 to $4.50 were outstanding under the 1997 Stock Option Plan.

     STOCK PURCHASE PLAN

     In September 1998, the Company adopted the 1998 Stock Purchase Plan of
FirstWorld Communications (the "Stock Purchase Plan"). Under the Stock Purchase
Plan, the Company may grant rights to purchase (each, a "Stock Purchase Right")
an aggregate of 500,000 shares of Series B Common Stock to employees or
directors of the Company. The Stock Purchase Plan allows for up to 50% of the
purchase price of any stock purchased thereunder to be paid in the form of a
promissory note. If the 


                                       53
<PAGE>

offeree elects to pay a portion of the purchase price with a promissory note,
such offeree must also pledge the shares acquired with the proceeds of the
promissory note to secure the promissory note. The Board or a duly appointed
committee thereof has the authority under the Stock Purchase Plan to determine,
among other things, the number of shares of stock that each offeree shall be
entitled to purchase, the price to be paid and the period during which such
offer must be accepted. In September 1998, the Company offered Stock Purchase
Rights to purchase an aggregate of 300,000 shares of Series B Common Stock to 17
offerees. 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. Subject to applicable laws, the Stock Purchase
Plan is subject to approval of the stockholders within 12 months of its
adoption.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth certain information regarding the beneficial
ownership of the Company's voting securities as of October 1, 1998, by (i) each
of the Company's named executive officers and directors; (ii) the Company's
executive officers and directors as a group; and (iii) stockholders known by the
Company to beneficially own more than 5% of any class of the Company's voting
securities. For purposes of this Form 10-K, beneficial ownership of securities
is defined in accordance with the rules of the Securities and Exchange
Commission and means generally the power to vote or exercise investment
discretion with respect to securities, regardless of any economic interests
therein. Except as otherwise indicated, the Company believes that the beneficial
owners of the securities listed below have sole investment and voting power with
respect to such shares, subject to community property laws where applicable.
Unless otherwise indicated, the business address for each of the individuals or
entities listed below is c/o FirstWorld Communications, Inc., 7100 E. Belleview
Avenue, Suite 210, Greenwood Village, Colorado 80111.


                                       54
<PAGE>

<TABLE>
<CAPTION>

                                                     NUMBER OF         NUMBER OF SERIES B
                                                  SERIES A COMMON         COMMON SHARES
                                                SHARES BENEFICIALLY      BENEFICIALLY
NAME                                                 OWNED(1)(2)           OWNED(1)(2)         PERCENT OF CLASS(1)
----                                             ------------------      ---------------   -----------------------
<S>                                              <C>                     <C>               <C>                   

Donald L. Sturm(3) ..........................        5,000,000            15,452,849       55.57% of Common Stock
                                                                                           51.13% of Voting Stock
Enron Capital & Trade Resources Corp.(4) ....        5,000,000            11,666,666       48.43% of Common Stock
                                                                                           49.09% of Voting Stock
Kevin Garland(5) ............................                0                     0           *% of Common Stock
                                                                                               *% of Voting Stock
Rodney Malcolm(6) ...........................                0                     0           *% of Common Stock
                                                                                               *% of Voting Stock
Robert E. Randall(7) ........................                0               489,748        1.87% of Common Stock
                                                                                               *% of Voting Stock
James O. Spitzenberger(8) ...................                0                     0           *% of Common Stock
                                                                                               *% of Voting Stock
John C. Stiska(9) ...........................                0                30,000           *% of Common Stock
                                                                                               *% of Voting Stock
Melanie Sturm(10) ...........................                0                     0           *% of Common Stock
                                                                                               *% of Voting Stock
John Lewis(11) ..............................                0                56,969           *% of Common Stock
                                                                                               *% of Voting Stock
G. Bradford Saunders(12) ....................                0               136,417           *% of Common Stock
                                                                                               *% of Voting Stock
Renney Senn(13) .............................                0               882,274        3.38% of Common Stock
                                                                                               *% of Voting Stock
Sheldon S. Ohringer(14) .....................                0               935,000        3.45% of Common Stock
                                                                                               *% of Voting Stock
Andrew B. Taubman(15) .......................                0                69,938           *% of Common Stock
                                                                                               *% of Voting Stock
All directors and executive officers as a            5,000,000            17,237,338       58.42% of Common Stock
group (14 persons)(16) ......................                                              52.01% of Voting Stock

</TABLE>

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

*    Less than one percent beneficially owned

(1)  In accordance with Rule 13d-3 under the Securities and Exchange Act of
     1934, as amended (the "Exchange Act"), a person is deemed to be a
     "beneficial owner" of a security if he or she has or shares the power to
     vote or direct the voting of such security or the power to dispose or
     direct the disposition of such security. A person is also deemed to be a
     beneficial owner o any securities of which that person has the right to
     acquire beneficial ownership within 60 days. More than one person may be
     deemed to be a beneficial owner of the same securities. The percentage
     ownership of each stockholder is calculated based on the total number of
     outstanding shares of Series A Common Stock and Series B Common Stock as of
     October 1, 1998 and those shares of Series A Common Stock or Series B
     Common Stock that may be acquired by such stockholder within 60 days of
     such date. Consequently, the denominator for calculating such percentage
     may be different for each stockholder.

(2)  This table is based upon information supplied by directors, executive
     officers and principal stockholders. Unless otherwise indicated in the
     footnotes to this table, each of the stockholders named in this table has
     sole voting and investment power with respect to the shares shown as
     beneficially owned.


                                       55
<PAGE>


(3)  Shares listed include: (a) 5,000,000 shares of Series A Common Stock held
     of record by Spectra 3; (b) 1,392,757 shares of Series B Common Stock held
     of record by Spectra 1; (c) 3,333,333 shares of Series B Common Stock held
     of record by Spectra 3; and (d) 10,726,759 shares of Series B Common Stock
     subject to currently exercisable warrants held of record by Spectra 1,
     Spectra 2 and Spectra 3. Beneficial ownership of the foregoing shares is
     attributable to Mr. Sturm because he is the managing member of Spectra 1,
     Spectra 2 and Spectra 3 and is therefore deemed to exercise voting power
     and investment authority with respect to the shares.

(4)  Shares listed include: (a) 5,000,000 shares of Series A Common Stock held
     of record by Enron; (b) 3,333,333 shares of Series B Common Stock held of
     record by Enron; and (c) 8,333,333 shares of Series B Common Stock subject
     to currently exercisable warrants held of record by Enron.

(5)  Excludes the securities owned by Enron described in Footnote (4) above. Mr.
     Garland is an officer of Enron, but disclaims beneficial ownership of the
     shares owned by Enron.

(6)  Excludes the securities owned by Enron described in Footnote (4) above. Mr.
     Malcolm is an officer of Enron, but disclaims beneficial ownership of the
     shares owned by Enron.

(7)  Shares listed include: (a) 149,999 shares of Series B Common Stock held of
     record by Randall Lamb Associates Profit Sharing Plan and 33,332 shares of
     Series B Common Stock subject to currently exercisable warrants held by
     Randall Lamb Associates Profit Sharing Plan; beneficial ownership of such
     shares is attributable to Mr. Randall because he has the power to direct
     the voting and investment of such shares; (b) 5,000 shares of Series B
     Common Stock held of record by Robert E. and Dianne Randall as custodians
     for Natalie Marie Ray under the California Uniform Transfers to Minors Act
     ("CUTMA") and 5,000 shares of Series B Common Stock held of record by
     Robert E. and Dianne M. Randall as custodians for Alexandra Dianne Ray
     under CUTMA; beneficial ownership of such shares is attributable to
     Mr. Randall because he is a custodian of the minor children and is
     therefore deemed to exercise voting power and investment authority with
     respect to the shares; (c) 280,000 shares of Series B Common Stock held of
     record by Robert E. and Dianne M. Randall as trustees of the Robert E. and
     Dianne M. Randall Family Trust, dated 2/3/97; beneficial ownership of such
     shares is attributable to Mr. Randall because he is a trustee of the
     Robert E. and Dianne M. Randall Family Trust and is therefore deemed to
     exercise voting power and investment authority with respect to the shares;
     and (d) 16,417 shares of Series B Common Stock subject to currently
     exercisable options held by Mr. Randall at an exercise price of $3.00.

(8)  Excludes shares of Series A Common Stock and Series B Common Stock
     beneficially owned by the Sturm Entities. Mr. Spitzenberger owns 10.0%,
     10.0% and 6.67% of the membership interests in Spectra 1, Spectra 2 and
     Spectra 3, respectively. Mr. Spitzenberger disclaims beneficial ownership
     of such shares.

(9)  Shares listed include 15,000 shares of Series B Common Stock subject to
     currently exercisable options held by Mr. Stiska at an exercise price of
     $3.00, 5,000 shares of Series B Common Stock subject to options held by Mr.
     Stiska at an exercise price of $3.00 exercisable within 60 days of October
     1, 1998 and 10,000 shares of Series B Common Stock held jointly by Mr.
     Stiska and his wife.

(10) Excludes shares of Series A Common Stock and Series B Common Stock
     beneficially owned by the Sturm Entities. Ms. Sturm owns 17.0%, 17.0% and
     20.0% of the membership interests in Spectra 1, Spectra 2 and Spectra 3,
     respectively, through a revocable trust of which she is a co-trustee. Ms.
     Sturm disclaims beneficial ownership of such shares.


                                       56
<PAGE>

(11) Shares listed include:  (a) 10,000 shares of Series B Common Stock held of
     record by John W. and Dorothy M. Lewis Family Trust; beneficial ownership
     of such shares is attributable to Mr. Lewis because he is a trustee of the
     John W. and Dorothy M. Lewis Family Trust and is therefore deemed to
     exercise voting power and investment authority with respect to the shares;
     (b) 567 shares of Series B Common Stock subject to currently exercisable
     warrants held by Mr. Lewis at an exercise price of $3.53; (c) 22,017 shares
     of Series B Common Stock subject to currently exercisable options held by
     Mr. Lewis at an exercise price of $3.00; and (d) 21,600 shares of Series B
     Common Stock subject to currently exercisable options held by Mr. Lewis at
     an exercise price of $.25.

(12) Shares listed include 20,000 shares of Series B Common Stock held of record
     by United Brice Group Ltd., a California corporation. Mr. Saunders is an
     officer of such corporation and has voting power and investment authority
     with respect to the shares. Accordingly, he may be deemed to beneficially
     own the shares held by such corporation. Shares listed also include 16,417
     shares of Series B Common Stock subject to currently exercisable options
     held by Mr. Saunders at an exercise price of $3.00; 45,000 shares of Series
     B Common Stock subject to currently exercisable options held by Mr.
     Saunders at an exercise price of $.50; 30,000 shares of Series B Common
     Stock subject to currently exercisable options held by Mr. Saunders at an
     exercise price of $.25; and 10,000 shares of Series B Common Stock subject
     to options held by Mr. Saunders at an exercise price of $.25 exercisable
     within 60 days of October 1, 1998.

(13) Shares listed include 865,856 shares of Series B Common Stock held of
     record jointly by Mr. Senn and his wife.

(14) Shares listed include 935,000 shares of Series B Common Stock subject to
     currently exercisable options held by Mr. Ohringer at an exercise price of
     $6.00.

(15) Shares listed include: (a) 5,666 shares of Series B Common Stock subject to
     currently exercisable warrants held by Mr. Taubman at an exercise price of
     $3.53; (b) 20,000 shares of Series B Common Stock subject to currently
     exercisable options held by Mr. Taubman at an exercise price of $.50; and
     (c) 16,417 shares of Series B Common Stock subject to currently exercisable
     options held by Mr. Taubman at an exercise price of $3.00.

(16) Excludes shares held by Enron Capital & Trade Resources Corp. and Renney
     Senn. See notes 3, 5-12, 14 and 15.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


EQUITY INVESTMENT


     GENERAL. On December 30, 1997, the Company completed a private placement of
equity securities to Spectra 3 and Enron (the "Equity Investment"). The Company
issued 5,000,000 shares of newly created Series A Common Stock to each of
Spectra 3 and Enron at an issue price of $3.00 per share pursuant to a Common
Stock Purchase Agreement dated as of December 30, 1997 (the "Stock Purchase
Agreement") by and among the Company, Enron, Spectra 3 and the holders of
$405,500 in principal amount of the Company's convertible subordinated
promissory notes. In addition, the Company issued an aggregate of 135,164 shares
of Series A Common Stock to the holders of the convertible subordinated
promissory notes upon the automatic conversion of the convertible subordinated
promissory notes pursuant to the terms thereof at a conversion price of $3.00
per share. The Company also issued for no additional consideration warrants to
purchase 5,000,000 shares of Series B Common Stock at $3.00 per share to each of
Spectra 3 and Enron and warrants to purchase an aggregate of 135,164 shares of
Series B Common Stock to the holders of the convertible subordinated promissory
notes (collectively, the "Recent Equity Warrants"). Spectra 3, an entity
controlled by Donald L. Sturm, was formed for the purpose of participating in
the Equity Investment. Spectra 3 is an affiliate of Colorado Spectra 1, LLC
("Spectra 1") and Colorado Spectra 2, LLC ("Spectra 2"), entities that owned
equity securities of the Company prior to the Equity Investment. See "Principal
Stockholders." Spectra 1, Spectra 2 and Spectra 3 are referred to 


                                       57
<PAGE>

herein as the "Sturm Entities" and Spectra 3, Enron and the holders of the
convertible subordinated promissory notes are referred to herein as the
"Purchasers."

     The Stock Purchase Agreement also granted Spectra 3 and Enron, for a period
of 45 days following the closing of the Equity Investment, the right to invest
an additional $20,000,000 in the aggregate on the same terms and conditions
applicable to their purchases of Series A Common Stock, except that any
additional shares of Common Stock to be acquired would be Series B Common Stock.
This option was later extended by action of a special committee of the Company's
Board of Directors. Spectra 3 and Enron fully exercised their option to make an
additional $20,000,000 investment concurrently with the closing of the Debt
Offering.

     Substantially concurrently with the Equity Investment, the Company (i)
converted the three existing classes of preferred stock into Series B Common
Stock in accordance with the automatic conversion provision of its existing
charter in order to simplify the Company's capital structure and eliminate the
rights, preferences and privileges of the preferred stock; (ii) amended its
Articles of Incorporation to substantially increase the Company's authorized
capital to allow for the Equity Investment and to provide flexibility for future
financings; and (iii) amended its Articles of Incorporation to designate two
series of Common Stock, with the investors in the Equity Investment to receive
Series A Common Stock and all existing Common Stock (including Common Stock
issued upon conversion of the existing preferred stock) designated as Series B
Common Stock. The Series A Common Stock and Series B Common Stock are identical
in all material respects, except that the Series A Common Stock possess ten
votes per share on all matters subject to a vote of stockholders while the
Series B Common Stock possess one vote per share.

     The Recent Equity Warrants are exercisable by the holder thereof in whole
or in part at an exercise price of $3.00 per share at any time following
issuance through the first to occur of (i) the seventh anniversary of the date
of issuance, (ii) the merger of the Company following which the Company's
stockholders own less than 50% of the surviving entity, and (iii) the sale of
all or substantially all of the Company's assets. The exercise price and number
of shares subject to the Recent Equity Warrants are subject to customary
anti-dilution adjustments in the event of a stock split, subdivision,
combination of shares, reorganization or reclassification or in the event that
dividends are paid on the Company's common stock in other securities or assets.

     INVESTOR RIGHTS AGREEMENT. In connection with the closing of the Equity
Investment, the Company entered into an Amended and Restated Investor Rights
Agreement which entitles the Purchasers and certain other prior investors to
certain demand and piggyback registration rights. In addition, the Sturm
Entities and Enron were granted rights of first refusal that permit them to
maintain their respective percentage ownership interest in the Company with
respect to future equity issuances. Mr. Ohringer (pursuant to the terms of his
Employment Agreement), the Sturm Entities and Enron are the only entities having
a right of first refusal or other preemptive right on future equity financing
transactions. See "Directors and Executive Offices of the Registrant--Retention
of New Chief Executive Officer and President."

     In connection with the Additional Equity Investment, the Company further
amended and restated the Amended and Restated Investor Rights Agreement in order
to (i) allow for, and coordinate with, the registration rights granted to the
Initial Purchasers pursuant to that certain Warrant Registration Rights
Agreement dated as of April 13, 1998 by and between the Company and the Initial
Purchasers and (ii) to make certain other revisions to the previous iteration of
the Amended and Restated Investor Rights Agreement.



                                       58
<PAGE>

     AMENDMENT TO STURM WARRANT. In connection with the Company's Series C
preferred stock financing, the Company and Spectra 1 and Spectra 2 entered into
a Warrant Purchase/Right to Maintain Agreement pursuant to which the Company
issued and sold to Spectra 2 a warrant (the "Sturm Warrant") that was initially
exercisable for 800,000 shares of Common Stock at an aggregate exercise price of
$3,800,000. The Sturm Warrant contained a complex anti-dilution provision
pursuant to which the number of shares purchasable could be increased
significantly based upon the weighted average issuance price of equity
securities issued by the Company prior to the earliest of (i) April 1, 1999,
(ii) the death of Donald L. Sturm and (iii) a public offering of securities by
the Company (the "Adjustment Date"). Based upon those existing provisions, upon
the closing of the Equity Investment, the Sturm Warrant would have been
exercisable for approximately 2,250,000 shares of Common Stock at an aggregate
exercise price of $3,800,000, and assuming exercise of the right of Spectra 3
and Enron to increase their investment by $20 million as described above would
have been exercisable for approximately 2,800,000 shares of Common Stock at an
aggregate exercise price of $3,800,000. The Sturm Warrant would also have
continued to adjust upon future equity issuances through the Adjustment Date.

     In connection with the Equity Investment, in order to eliminate the
uncertainty regarding the number of shares purchasable under the Sturm Warrant,
the Company and Spectra 1 and Spectra 2 set the number of shares purchasable
under the Sturm Warrant at 2,110,140 shares of Series B Common Stock with an
exercise price of $1.80 per share (aggregate exercise price of approximately
$3,800,000). The Sturm Warrant, as amended, is subject to customary adjustment
on stock splits, stock dividends, subdivisions or combinations, but would not
otherwise be subject to adjustment. In addition, Spectra 1 and Spectra 2 waived
their maintenance rights provided under the Warrant Purchase/Right to Maintain
Agreement. The Sturm Entities, however, continue to have a right of first
refusal under the Amended and Restated Investor Rights Agreement as described
above.

     BOARD OF DIRECTORS. Upon the closing of the Equity Investment, the
Company's Board of Directors was reconstituted with seven directors as follows:
three designees of the Sturm Entities -Donald L. Sturm, Melanie Sturm and James
O. Spitzenberger; two designees of Enron - C. Kevin Garland and Rodney Malcolm;
one management representative - Robert E. Randall; and John C. Stiska, an
existing director, as an independent member of the Board. Renney Senn and Robert
Cerasoli resigned from the Board at this time. In addition, pursuant to the
Stock Purchase Agreement within six months following the closing of the Equity
Investment, the Board would be further reconstituted to consist of seven
directors, three of whom would be designated by the Sturm Entities, two of whom
would be designated by Enron, one of whom would be designated by the holders of
Series B Common Stock and one of whom would be an independent director. The
right of the Series B stockholders to elect a director is set forth in the
Company's Certificate of Incorporation.

     WAIVER OF BUSINESS OPPORTUNITIES. In an effort to alleviate possible
conflicts of interest among Enron, the Sturm Entities and the Company (and each
of their respective affiliates) with respect to their existing and prospective
businesses, the Company revised its purpose clause in Article II of its
Certificate of Incorporation to provide that the Company generally may not
engage in oil, natural gas, electricity, water and other energy-related
business, in lieu of the general purpose clause that previously had been
applicable.

     In addition to the restriction on business, the Company, the Sturm Entities
and Enron entered into a Business Opportunity Agreement to address the fact that
Enron and the Sturm Entities or their affiliates own, have agreements with and
otherwise participate in, telecommunications businesses, and may develop,
finance, acquire, enter into agreements with or otherwise participate in, such
businesses in the future, including businesses that are or may become
competitive with the business of the Company. In this regard, 


                                       59
<PAGE>

Enron advised the Company and the Sturm Entities that (a) FirstPoint
Communications, Inc. and its affiliates ("FirstPoint"), which are Enron
affiliates, are engaged in the business of providing telecommunications
services, and have or may from time to time develop, finance, acquire, or
acquire interests in, telecommunications and related service and product
companies that compete with the Company (including, without limitation, those
that compete in the Company's markets in California) and (b) FirstPoint was at
the time of the investment by Enron in the Company pursuing a financing,
acquisition or investment opportunity in a competitor or potential competitor of
the Company.

     The Business Opportunity Agreement generally provides, except to the extent
expressly agreed by the parties and set forth therein, that (i) neither Enron,
the Sturm Entities nor any of their respective affiliates would have any
obligation to pursue any business opportunity jointly with the Company or to
offer any business opportunity to the Company, and any Enron or Sturm Entity
representative on the Board of Directors of the Company would have no obligation
to offer any business opportunity to the Company; (ii) Enron, the Sturm Entities
and their respective affiliates would be free to pursue business opportunities
jointly with parties other than the Company, including opportunities that had
telecommunications applications; and (iii) Enron, the Sturm Entities and their
respective affiliates would be free to compete with the Company and would have
no obligation to the Company to refrain from engaging in any business.

     GRANT OF EXCLUSIVE RIGHTS TO ENRON. The Business Opportunity Agreement also
provides that the Company would, during an "Exclusivity Period" (as defined
below), grant Enron and its affiliates the exclusive right to pursue jointly
with the Company any business opportunity that includes both telecommunications
and utility applications (i.e., the marketing of one or more of natural gas,
electricity or water and the provision of related services, including provision
of the commodity, provision of transmission, transportation or distribution,
provision of financial and risk management services and products, and provision
of customer care functions (e.g., meter, billing and collection functions) (the
"Joint Application Opportunity")). The Exclusivity Period began on the closing
of the Equity Investment and continues until the earlier of (x) the third
anniversary of the date of closing of the Equity Investment or (y) the date upon
which Enron and any of its affiliates hold less than 5% of the capital stock or
warrants of the Company (determined on a fully-diluted basis as if all warrants
or rights to acquire capital stock were exercised, and determined without
reference to any voting rights). During the Exclusivity Period, the Company is
obligated to provide Enron notice of any Joint Application Opportunity that the
Company desires to pursue anywhere in the United States. If Enron notifies the
Company that it desires to participate in the Joint Application Opportunity,
then the Company cannot pursue the Joint Application Opportunity without the
participation of Enron. If Enron elects not to participate in the Joint
Application Opportunity, then the Company is free to pursue independently the
telecommunications portion of such Joint Application Opportunity without the
participation of Enron, but cannot pursue the Joint Application Opportunity with
any other person (except for provision of the telecommunications portion thereof
on a subcontract basis only), and Enron is free to pursue the Joint Application
Opportunity (including the utility applications and/or the telecommunications
applications) on its own or with any party other than the Company.

     SECURITYHOLDERS AGREEMENT. The Sturm Entities and Enron entered into a
Securityholders Agreement, to which the Company is also a party, in connection
with the closing of the Equity Investment. The Securityholders Agreement
contains agreements among the Sturm Entities and Enron with respect to the
designation, election, removal and replacement of the members of the Board of
Directors of the Company other than those elected by the holders of the
Company's Series B Common Stock. The Securityholders Agreement also contains
agreements among the Sturm Entities and Enron (i) providing for rights of first
offer with respect to certain proposed transfers of Common Stock or warrants of
the 



                                       60
<PAGE>

Company by any of the Sturm Entities or Enron, (ii) providing for rights to
purchase the Common Stock and warrants held by a party to the Securityholders
Agreement (other than the Company) that experiences a change of control or other
triggering event and (iii) providing for rights to participate in certain
proposed dispositions of Common Stock or warrants by any of the Sturm Entities
or Enron.

     EMPLOYEE SEVERANCE PROGRAM. In connection with the Equity Investment, 
the Company established an employee severance program applicable to any 
person who was a full time employee of the Company as of December 1, 1997. 
The program provided that if any eligible employee was terminated by the 
Company without "cause" (as defined) before June 30, 1998, such employee 
would receive severance pay in an amount equal to (i) six months base salary 
for employees with the title of director, vice-president or higher, and (ii) 
two weeks base salary plus one week base salary for each full year of 
employment with the Company (with a minimum of four weeks base salary) for 
all other eligible employees. The Company would also pay the base share 
toward a terminated employee's COBRA benefits, until the employee accepts 
other employment for a period of up to nine months following termination. 
With respect to such employees with the title of director, vice-president or 
higher, the severance payments are subject to a payment schedule and are 
conditioned upon execution of a non-competition agreement. Prior to the 
expiration of the employee severance program on June 30, 1998, one employee 
received payments thereunder totaling approximately $60,000.

     TRANSACTION FEES AND EXPENSES. The Company paid the Sturm Entities and
Enron a transaction fee equal to six percent of the gross amount invested by
them in the Equity Investment (based upon the $30 million invested, $900,000 for
the Sturm Entities and $900,000 for Enron). Spectra 3 and Enron also received
the six percent transaction fee on the $20 million invested in the Additional
Equity Investment ($600,000 for the Sturm Entities and $600,000 for Enron). In
addition, the Company reimbursed all reasonable costs and expenses of the Sturm
Entities and Enron incurred in connection with the Stock Purchase Agreement, up
to a maximum of $50,000 for the Sturm Entities and $50,000 for Enron, plus the
$90,000 of required filing fees under the Hart-Scott-Rodino Act.

     MANAGEMENT SERVICES AGREEMENTS. The Company executed Management 
Consulting Services Agreements with Corporate Managers, LLC, a Colorado 
limited liability company and an affiliate of the Sturm Entities, and Enron 
pursuant to which they will provide management services to the Company for 
three years following the closing of the Equity Investment for an annual 
management fee. Both Management Services Agreements initially provided for 
annual management fees of $500,000 plus out of pocket expenses. The Company 
amended the Management Consulting Services Agreement with Corporate Managers, 
LLC in March 1998 to provide for an annual management fee of $620,000 plus 
out of pocket expenses because Mr. Sturm had taken a more active management 
role with the Company than originally anticipated. On October 1, 1998, the 
Company further amended the Management Consulting Services Agreement to 
reduce the compensation payable to Corporate Mangers, LLC thereunder to 
$500,000 per year. This reduction was intended to reflect the reduced role 
Mr. Sturm is expected to take effective with the retention of Mr. Ohringer as 
the Company's new Chief Executive Officer and President. Corporate Managers, 
LLC and Enron each has the right in its discretion to terminate its 
Management Consulting Services Agreement with the Company.

LEGAL MATTERS

     John C. Stiska, one of the Company's directors, accepted an of-counsel
position with Latham & Watkins in July 1998. Latham & Watkins provides legal
services to the Company.


                                       61
<PAGE>


                                       PART IV


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

<TABLE>
<CAPTION>
                                                                                                                PAGE
                                                                                                               NUMBER
                                                                                                               ------
<S>                                                                                                            <C>
     (a)  DOCUMENTS FILED AS PART OF THE REPORT:

  Report of Independent Accountants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     F-2

  Consolidated Balance Sheets at September 30, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . . .     F-3

  Consolidated Statements of Operations for each of the three years in the period ended September 30, 1998 .     F-4

  Consolidated Statements of Stockholders' Equity (Deficit) for each of the three years in the period ended
    September 30, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     F-5

  Consolidated Statements of Cash Flows for each of the three years in the period ended September 30, 1998 .     F-6

  Notes to Consolidated Financial Statements.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     F-7

FINANCIAL STATEMENT SCHEDULE:

  Schedule II - Valuation and Qualifying Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    F-27

</TABLE>

     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.



                                       62
<PAGE>



     (c)  Exhibits

<TABLE>
<CAPTION>

      EXHIBIT     
        NO.       DESCRIPTION
      -------     ------------
<S>               <C>

         3.1      Form of Certificate of Incorporation, as amended. (2)

         3.2      Form of Bylaws, as amended. (2)

         4.1      Indenture dated as of April 13, 1998 between the Registrant
                  and The Bank of New York. (1)

         4.2      Form of 13% Senior Discount Notes due 2008 and schedule of 13%
                  Senior Discount Notes due 2008. (1)

         4.3      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)

         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 Initial Purchasers 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 Company'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. (1)

         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. (1)

         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, as amended by that First Amendment to Management
                  Consulting Services Agreement dated as of March 17, 1998,
                  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 Trade & Capital
                  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

</TABLE>


                                       63
<PAGE>

<TABLE>
<CAPTION>

      EXHIBIT     
        NO.       DESCRIPTION
      -------     ------------
<S>               <C>

                  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. (3)

        *10.19    Telecommunications System License Agreement dated as of
                  March 5, 1998 between FirstWorld Orange Coast and The Irvine
                  Company. (3)

         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. (2)

         10.23    System Acquisition Agreement. (2)

         10.24    Employment Agreement between the Registrant and Sheldon S.
                  Ohringer. (3)

         10.25    Stock Option Agreement between the Registrant and Sheldon S.
                  Ohringer.

         10.26    Employment Agreement between the Registrant and Scott Chase.

         10.27    Employment Agreement between the Registrant and Marion K.
                  Jenkins.

         10.28    Employment Agreement between the Registrant and David Gandini.

         10.29    Employment Agreement between the Registrant and Doug Kramer.

         10.30    Lease between the Registrant and The Prudential Insurance
                  Company of America.

         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.

         10.32    Second Amendment to Management Consulting Services Agreement,
                  dated as of October 1, 1998, by and between the Registrant and
                  Corporate Managers, LLC.

         10.33    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.

         12.1     Computation of Ratio of Earnings to Fixed Charges.

         16.1     Letter Regarding Change in Certifying Accountant. (2)

         21.1     Subsidiaries of the Registrant. (2)

         23.1     Consent of PricewaterhouseCoopers LLP.

         24.1     Power of Attorney (included on signature page hereof).

         27.1     Financial Data Schedule.

</TABLE>

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

*    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)  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.

(3)  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.


                                       64
<PAGE>


(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 September 30, 1998.

(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).



                                       65
<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: December 22, 1998       FIRSTWORLD COMMUNICATIONS, INC.


                               By:  /s/ SHELDON S. OHRINGER
                                    -----------------------
                                    Name: Sheldon S. Ohringer
                                    Title: President, Chief Executive Officer, 
                                    acting Chief Financial Officer and Director


                               POWER OF ATTORNEY

Know all persons by these presents, that each person whose signature appears 
below constitutes and appoints Sheldon S. Ohringer, as his true and lawful 
attorney-in-fact and agent, with full power of substitution and 
resubstitution, for him and in his name, place and stead, in any and all 
capacities, to sign any and all amendments to this report, and to file the 
same, with all exhibits thereto, and other documents in connection therewith, 
with the Securities and Exchange Commission, granting unto said 
attorney-in-fact and agent, full power and authority to do and perform each 
and every act and thing requisite and necessary to be done in connection 
therewith, as fully to all intents and purposes as he might or could do in 
person, hereby ratifying and confirming that said attorney-in-fact and agent, 
or his substitute, may lawfully do or cause to be done by virtue thereof.


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>

           Name               Title                                 Date
<S>                          <C>                               <C>

/s/ SHELDON S. OHRINGER      President, Chief Executive        December 22, 1998
-----------------------      Officer, acting Chief Financial
    Sheldon S. Ohringer      Officer and Director (Principal
                             Executive Officer and Principal
                             Financial Officer)

/s/ DENNIS M. MULROY         Vice President, Finance and       December 22, 1998
--------------------         Administration (Principal
    Dennis M. Mulroy         Accounting Officer)

/s/ DONALD L. STURM          Chairman of the Board of          December 22, 1998
-------------------          Directors
    Donald L. Sturm

/s/ C. KEVIN GARLAND         Director                          December 22, 1998
--------------------
    C. Kevin Garland

/s/ RODNEY MALCOLM           Director                          December 22, 1998
------------------
    Rodney Malcolm

/s/ JAMES O. SPITZENBERGER   Director                          December 22, 1998
--------------------------
    James O. Spitzenberger

/s/ MELANIE STURM            Director                          December 22, 1998
-----------------
    Melanie Sturm

/s/ JOHN C. STISKA           Director                          December 22, 1998
------------------
    John C. Stiska

</TABLE>

                                       66
<PAGE>

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>

                                                                                                                PAGE
                                                                                                               ---------
<S>                                                                                                            <C>
FINANCIAL STATEMENTS:


  Report of Independent Accountants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     F-2

  Consolidated Balance Sheets at September 30, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . . .     F-3

  Consolidated Statements of Operations for each of the three years in the period ended September 30, 1998 .     F-4

  Consolidated Statements of Stockholders' Equity (Deficit) for each of the three years in the period ended
    September 30, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     F-5

  Consolidated Statements of Cash Flows for each of the three years in the period ended September 30, 1998 .     F-6

  Notes to Consolidated Financial Statements.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     F-7

FINANCIAL STATEMENT SCHEDULE:

  Schedule II - Valuation and Qualifying Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    F-27

</TABLE>

                                      F-1


<PAGE>

                          REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of FirstWorld Communications, Inc.
(formerly SpectraNet International)

    In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of FirstWorld Communications, Inc. (formerly SpectraNet International)
and its subsidiaries at September 30, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1998, in conformity with generally accepted accounting principles.
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
generally accepted auditing standards 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

San Diego, California
December 11, 1998


                                       F-2

<PAGE>

FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)

CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                        SEPTEMBER 30,
                                                                                  1998                1997
                                                                            -----------------   ------------------
<S>                                                                         <C>                 <C>
ASSETS

Current assets:
   Cash and cash equivalents                                                     $72,039,498             $536,275
   Restricted cash                                                                         -               50,000
   Marketable securities                                                         165,591,010                    -
   Interest receivable                                                             3,016,623                    -
   Accounts receivable, net of allowance for doubtful accounts of
      $9,765 and $0                                                                  493,393               72,567
   Prepaid expenses                                                                  305,834              100,442
   Other current assets                                                               10,453               14,709
                                                                            -----------------   ------------------

        Total current assets                                                     241,456,811              773,993

Property and equipment, net                                                       44,020,418           20,331,353
Deferred financing costs, net of accumulated amortization
   of $429,818 and $60,872                                                         8,217,102            4,067,932
Other assets                                                                         411,026              147,812
                                                                            -----------------   ------------------

                                                                               $ 294,105,357         $ 25,321,090
                                                                            -----------------   ------------------
                                                                            -----------------   ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Accounts payable                                                             $  6,611,380           $2,483,793
   Accrued interest                                                                  546,416              569,816
   Accrued employee costs                                                            221,785              205,012
   Other accrued expenses                                                            694,398              113,266
   Short-term borrowings, net of discount                                                  -              401,262
   Current portion of long-term debt                                                  30,070                8,446
   Current portion of capital lease obligations                                      787,874              311,166
                                                                            -----------------   ------------------

        Total current liabilities                                                  8,891,923            4,092,761

Long-term debt, net of discount                                                  249,725,538           11,756,283
Convertible bridge notes                                                                   -              405,500
Capital lease obligations                                                          6,114,509            6,801,926
                                                                            -----------------   ------------------

        Total liabilities                                                        264,731,970           23,056,470
                                                                            -----------------   ------------------

Commitments (Notes 7, 8 and 14)                                                            -                    -

Stockholders' equity:
   Preferred stock, no par value, 5,160,335 shares authorized at September 30,
      1997:
        Series C, convertible, voting, 2,600,000 shares issued and
           outstanding                                                                     -           12,279,362
        Series B, convertible, voting, 2,016,638 shares issued and
           outstanding                                                                     -            3,670,060
        Series A, convertible, non-voting, 118,667 shares issued and
           outstanding                                                                     -              395,162
   Preferred stock, $.0001 par value, 10,000,000 shares authorized at
      September 30, 1998; no shares designated, issued or outstanding                      -                    -
   Common stock, voting, no par value, 15,000,000 shares authorized
      at September 30, 1997; 3,262,900 shares issued and outstanding                       -            (226,984)
   Common stock, voting, $.0001 par value, 100,000,000 shares authorized
      at September 30, 1998:
        Series A, 10,135,164 shares designated; 10,135,164 shares
           issued and outstanding                                                      1,014                    -
        Series B, 89,864,836 shares designated; 15,929,708 shares
           issued and outstanding                                                      1,591                    -
   Additional paid-in capital                                                     45,617,220                    -
   Warrants                                                                       31,963,295            1,000,960
   Stockholder receivables                                                           (96,500)             (96,500)
   Accumulated deficit                                                           (48,113,233)         (14,757,440)
                                                                            -----------------   ------------------

        Total stockholders' equity                                                29,373,387            2,264,620
                                                                            -----------------   ------------------

                                                                               $ 294,105,357         $ 25,321,090
                                                                            -----------------   ------------------
                                                                            -----------------   ------------------
</TABLE>

            See accompanying notes to consolidated financial statements

                                       F-3
<PAGE>

FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)

CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                         YEAR ENDED SEPTEMBER 30,
                                                          --------------------------------------------------------
                                                               1998                1997                1996
<S>                                                       <C>                 <C>                 <C>
Service revenue                                                $1,078,288            $ 75,118            $279,483
Other revenue                                                      12,373              95,715              75,000
                                                          ----------------    ----------------    ----------------
                                                                1,090,661             170,833             354,483
                                                          ----------------    ----------------    ----------------

Costs and expenses:
   Network development and operations                           6,501,105           3,169,854           1,708,416
   Selling, general and administrative expenses                10,641,312           4,724,649           2,409,442
   Depreciation and amortization                                2,424,466             501,354              75,258
                                                          ----------------    ----------------    ----------------
                                                               19,566,883           8,395,857           4,193,116
                                                          ----------------    ----------------    ----------------

Loss from operations                                          (18,476,222)         (8,225,024)         (3,838,633)

Other income (expense):
   Interest expense                                           (16,898,271)         (1,372,377)            (26,517)
   Interest income                                              6,749,367             149,243               8,958
                                                          ----------------    ----------------    ----------------

Loss before extraordinary item                                (28,625,126)         (9,448,158)         (3,856,192)

Extraordinary item - extinguishment of debt
   (Notes 4 and 5)                                             (4,730,667)           (104,680)                  -
                                                          ----------------    ----------------    ----------------

Net loss                                                     $(33,355,793)       $ (9,552,838)      $  (3,856,192)
                                                          ----------------    ----------------    ----------------
                                                          ----------------    ----------------    ----------------
</TABLE>

            See accompanying notes to consolidated financial statements

                                       F-4

<PAGE>

FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
-------------------------------------------------------------------------------

<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, 1995                             -              $ -              -               $ -              $ - 

 Issuance of Series B preferred stock                                                                                        

 Issuance of Series B preferred stock for settlement
    of notes payable and for consulting services                                                                             

 Repurchase of Series A preferred stock                                                                                      

 Issuance of Series B preferred stock for property
    and equipment                                                                                                            

 Issuance of common stock for notes receivable                                                                               

 Exercise of options to purchase common stock for
    shareholder notes receivable                                                                                             

 Net loss for 1996
                                             -------------   --------------  -------------    --------------  ---------------

 BALANCE AT SEPTEMBER 30, 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 $704,638                                                                                            

 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 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
    $3,863,691                                 10,135,164       16,913,809              -                 -                - 

 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        12,279,362                - 

       Series B preferred stock and common stock;
         conversion ratio of 1:1                        -                -      5,545,638         3,486,426                - 

       Series A preferred stock; conversion ratio
         of 1:10                                        -                -         11,867           395,162                - 

 Issuance of Series B common stock with warrants to purchase 6,666,666 shares of
    Series B common stock, net of offering costs of
    $1,800,000                                          -                -      6,666,666        12,466,665                - 

 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            55,901                - 

 Establishment of $.0001 par value for Series A and
    B common stock in connection with Delaware
    reincorporation                                     -      (16,912,795)             -       (28,681,925)      45,594,720 

 Exercise of options to purchase Series B common                                   16,500                 -           22,500
    stock - post Delaware reincorporation

 Net loss for 1998                                      -                -              -                 -                - 
                                             -------------   --------------  -------------    --------------  ---------------

 BALANCE AT SEPTEMBER 30, 1998                 10,135,164          $ 1,014     15,929,708           $ 1,591     $ 45,617,220 
                                             -------------   --------------  -------------    --------------  ---------------
                                             -------------   --------------  -------------    --------------  ---------------


                                                                                          SERIES C
                                                                                        CONVERTIBLE
                                                                                      PREFERRED STOCK
                                                                              ------------------------------
                                                                                  SHARES           AMOUNT
                                                                              -------------   --------------
<S>                                                                           <C>             <C>
 BALANCE AT OCTOBER 1, 1995                                                               -               -
                                                                                                           
 Issuance of Series B preferred stock                                                                      
                                                                                                           
 Issuance of Series B preferred stock for settlement                                                       
    of notes payable and for consulting services                                                           
                                                                                                           
 Repurchase of Series A preferred stock                                                                    
                                                                                                           
 Issuance of Series B preferred stock for property                                                         
    and equipment                                                                                          
                                                                                                           
 Issuance of common stock for notes receivable                                                             
                                                                                                           
 Exercise of options to purchase common stock for
    shareholder notes receivable
                                                                                                           
 Net loss for 1996
                                                                              -------------   --------------
                                                                                                           
 BALANCE AT SEPTEMBER 30, 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 $704,638                                                2,600,000       12,279,362
                                                                                                           
 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 1997                                                                                         
                                                                              -------------   --------------
                                                                                                           
 BALANCE AT SEPTEMBER 30, 1997                                                    2,600,000      12,279,362
                                                                                                           
 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                                                     
    $3,863,691                                                                            -               - 
                                                                                                           
 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                             (2,600,000)    (12,279,362)
                                                                                                           
       Series B preferred stock and common stock;                                                          
         conversion ratio of 1:1                                                         -               - 
                                                                                                           
       Series A preferred stock; conversion ratio                                                          
         of 1:10                                                                         -               - 
                                                                                                           
 Issuance of Series B common stock with warrants to purchase 6,666,666 shares
    Series B common stock, net of offering costs of                                                        
    $1,800,000                                                                           -               - 
                                                                                                           
 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                                                                                -               - 
                                                                                                           
 Establishment of $.0001 par value for Series A and                                                        
    B common stock in connection with Delaware                                                             
    reincorporation                                                                      -               - 
                                                                                                           
 Exercise of options to purchase Series B common                                                           
    stock - post Delaware reincorporation                                                                  
                                                                                                           
 Net loss for 1998                                                                       -               - 
                                                                              -------------   --------------
                                                                                                           
 BALANCE AT SEPTEMBER 30, 1998                                                           -             $ - 
                                                                              -------------   --------------
                                                                              -------------   --------------


                                                                                          SERIES B
                                                                                        CONVERTIBLE
                                                                                      PREFERRED STOCK
                                                                              ------------------------------
                                                                                 SHARES          AMOUNT
                                                                              -------------   --------------
<S>                                                                           <C>             <C>
 BALANCE AT OCTOBER 1, 1995                                                         837,667      $1,256,502
                                                                                                           
 Issuance of Series B preferred stock                                             1,142,304       2,355,226
                                                                                                           
 Issuance of Series B preferred stock for settlement                                                       
    of notes payable and for consulting services                                     33,334         50,000 
                                                                                                           
 Repurchase of Series A preferred stock                                                                    
                                                                                                           
 Issuance of Series B preferred stock for property                                                         
    and equipment                                                                     3,333          8,332 
                                                                                                           
 Issuance of common stock for notes receivable                                                             
                                                                                                           
 Exercise of options to purchase common stock for                                                          
    shareholder notes receivable                                                                           
                                                                                                           
 Net loss for 1996                                                                                         
                                                                              -------------   --------------
                                                                                                           
 BALANCE AT SEPTEMBER 30, 1996                                                    2,016,638      3,670,060 
                                                                                                           
 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 $704,638                                                                          
                                                                                                           
 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 1997                                                                                         
                                                                              -------------   --------------
                                                                                                           
 BALANCE AT SEPTEMBER 30, 1997                                                    2,016,638      3,670,060
                                                                                                           
 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                                                     
    $3,863,691                                                                            -              - 
                                                                                                           
 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                                      -              - 
                                                                                                           
       Series B preferred stock and common stock;                                                          
         conversion ratio of 1:1                                                 (2,016,638)    (3,670,060)
                                                                                                           
       Series A preferred stock; conversion ratio                                                          
         of 1:10                                                                          -              - 
                                                                                                           
 Issuance of Series B common stock with warrants to purchase 6,666,666 shares
    Series B common stock, net of offering costs of                                                        
    $1,800,000                                                                            -              - 
                                                                                                           
 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                                                                                 -              - 
                                                                                                           
 Establishment of $.0001 par value for Series A and                                                        
    B common stock in connection with Delaware                                                             
    reincorporation                                                                       -              - 
                                                                                                           
 Exercise of options to purchase Series B common                                                           
    stock - post Delaware reincorporation                                                                  
                                                                                                           
 Net loss for 1998                                                                        -              - 
                                                                              -------------   --------------
                                                                                                           
 BALANCE AT SEPTEMBER 30, 1998                                                            -            $ - 
                                                                              -------------   --------------
                                                                              -------------   --------------

                                                                                     SERIES A                                      
                                                                                    CONVERTIBLE                                    
                                                                                  PREFERRED STOCK              COMMON STOCK        
                                                                             -------------------------  ---------------------------
                                                                                SHARES        AMOUNT        SHARES        AMOUNT    
                                                                             -----------  ------------  ------------  -------------
<S>                                                                          <C>          <C>           <C>           <C>
 BALANCE AT OCTOBER 1, 1995                                                     127,601     $ 424,912     2,520,000     $ (402,101)
                                                                                                                                   
 Issuance of Series B preferred stock                                                                                              
                                                                                                                                   
 Issuance of Series B preferred stock for settlement                                                                               
    of notes payable and for consulting services                                                                                   
                                                                                                                                   
 Repurchase of Series A preferred stock
                                                                                                                                   
 Issuance of Series B preferred stock for property                                                                                 
    and equipment                                                                                                                  
                                                                                                                                   
 Issuance of common stock for notes receivable                                                              396,000         99,000 
                                                                                                                                   
 Exercise of options to purchase common stock for                                                                                  
    shareholder notes receivable                                                                            330,000         74,167 
                                                                                                                                   
 Net loss for 1996                                                                                                                 
                                                                             -----------  ------------  ------------  -------------
                                                                                                                                   
 BALANCE AT SEPTEMBER 30, 1996                                                  118,667       395,162     3,246,000       (228,934)
                                                                                                                                   
 Cancellation of shareholder notes receivable for                                                                                  
    common stock repurchase                                                                                 (90,000)       (22,500)
                                                                                                                                   
 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 $704,638                                                                                                  
                                                                                                                                   
 Issuance of common stock warrants as finders fees                                                                                 
                                                                                                                                   
 Issuance of common stock warrant for cash                                                                                         
                                                                                                                                   
 Exercise of options and warrants to purchase                                                                                      
    common stock                                                                                            106,900         24,450 
                                                                                                                                   
 Issuance of common stock warrants with debt                                                                                       
                                                                                                                                   
 Net loss for 1997                                                                                                                 
                                                                             -----------  ------------  ------------  -------------
                                                                                                                                   
 BALANCE AT SEPTEMBER 30, 1997                                                  118,667       395,162     3,262,900       (226,984)
                                                                                                                                   
 Exercise of options to purchase common stock -                                                                                    
    October 1997 to December 1997                                                     -             -       266,100         43,350 
                                                                                                                                   
 Issuance of Series A common stock with warrants to purchase 10,135,164 shares
    of Series B common stock, net of offering costs of                                                                             
    $3,863,691                                                                        -             -             -              - 
                                                                                                                                   
 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                                  -             -             -              - 
                                                                                                                                   
       Series B preferred stock and common stock;                                                                                  
         conversion ratio of 1:1                                                      -             -    (3,529,000)       183,634 
                                                                                                                                   
       Series A preferred stock; conversion ratio                                                                                  
         of 1:10                                                               (118,667)     (395,162)            -              - 
                                                                                                                                   
 Issuance of Series B common stock with warrants to purchase 6,666,666 shares
    Series B common stock, net of offering costs of                                                                                
    $1,800,000                                                                        -             -             -              - 
                                                                                                                                   
 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                                                                             -             -             -              - 
                                                                                                                                   
 Establishment of $.0001 par value for Series A and                                                                                
    B common stock in connection with Delaware                                                                                     
    reincorporation                                                                   -             -             -              - 
                                                                                                                                   
 Exercise of options to purchase Series B common                                                                                   
    stock - post Delaware reincorporation                                                                                          
                                                                                                                                   
 Net loss for 1998                                                                    -             -             -              - 
                                                                             -----------  ------------  ------------  -------------
                                                                                                                                   
 BALANCE AT SEPTEMBER 30, 1998                                                        -           $ -             -            $ - 
                                                                             -----------  ------------  ------------  -------------
                                                                             -----------  ------------  ------------  -------------



                                                                                                 Shareholder
                                                                                  Warrants       Receivables
                                                                               --------------    ------------
<S>                                                                            <C>               <C>
 BALANCE AT OCTOBER 1, 1995                                                              $ -            $ - 
                                                                                                            
 Issuance of Series B preferred stock                                                                       
                                                                                                            
 Issuance of Series B preferred stock for settlement                                                        
    of notes payable and for consulting services                                                            
                                                                                                            
 Repurchase of Series A preferred stock                                                                     
                                                                                                            
 Issuance of Series B preferred stock for property                                                          
    and equipment                                                                                           
                                                                                                            
 Issuance of common stock for notes receivable                                                      (99,000)
                                                                                                            
 Exercise of options to purchase common stock for                                                           
    shareholder notes receivable                                                                    (74,167)
                                                                                                            
 Net loss for 1996                                                                                          
                                                                               --------------    ------------
                                                                                                            
 BALANCE AT SEPTEMBER 30, 1996                                                              -      (173,167)
                                                                                                            
 Cancellation of shareholder notes receivable for                                                           
    common stock repurchase                                                                          22,500 
                                                                                                            
 Repayment of shareholder notes receivable                                                           54,167 
                                                                                                            
 Issuance of Series C preferred stock with warrants to purchase 520,000 shares
    of common stock, net                                                                                    
    of issuance costs of $704,638                                                      16,000               
                                                                                                            
 Issuance of common stock warrants as finders fees                                     37,200               
                                                                                                            
 Issuance of common stock warrant for cash                                            200,000               
                                                                                                            
 Exercise of options and warrants to purchase                                                               
    common stock                                                                                            
                                                                                                            
 Issuance of common stock warrants with debt                                          747,760               
                                                                                                            
 Net loss for 1997                                                                                          
                                                                               --------------    ------------
                                                                                                            
 BALANCE AT SEPTEMBER 30, 1997                                                      1,000,960       (96,500)
                                                                                                            
 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                                                      
    $3,863,691                                                                      9,628,000             - 
 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                                                        
                                                                                                            
       Series B preferred stock and common stock;                                           
         conversion ratio of 1:1                                                            -             - 

       Series A preferred stock; conversion ratio                                           
         of 1:10                                                                            -             - 
                                                                                                            
 Issuance of Series B common stock with warrants to purchase 6,666,666 shares
    Series B common stock, net of offering costs of                                                         
    $1,800,000                                                                      6,333,335             - 
                                                                                                            
 Issuance of warrants to purchase 3,713,094 shares                                                          
    of Series B common stock in connection with the                                                         
    issuance of 13% Senior Discount Notes                                          15,001,000             - 
                                                                                                            
 Exercise of options to purchase Series B common                                                            
    stock                                                                                   -             - 
                                                                                                            
 Establishment of $.0001 par value for Series A and                                                         
    B common stock in connection with Delaware                                                              
    reincorporation                                                                         -             - 
                                                                                                            
 Exercise of options to purchase Series B common
    stock - post Delaware reincorporation                                                                   
                                                                                                            
 Net loss for 1998                                                                          -             - 
                                                                               --------------    ------------
                                                                                                            
 BALANCE AT SEPTEMBER 30, 1998                                                    $31,963,295     $ (96,500)
                                                                               --------------    ------------
                                                                               --------------    ------------


                                                                                                        Total
                                                                                                    Stockholders'
                                                                                    Accumulated        Equity
                                                                                      Deficit        (Deficit)
                                                                                -----------------  --------------  
<S>                                                                             <C>                <C>
 BALANCE AT OCTOBER 1, 1995                                                         $ (1,348,410)      $ (69,097)  
                                                                                                                   
 Issuance of Series B preferred stock                                                                  2,355,226   
                                                                                                                   
 Issuance of Series B preferred stock for settlement                                                               
    of notes payable and for consulting services                                                          50,000   
                                                                                                                   
 Repurchase of Series A preferred stock                                                                  (29,750)  
                                                                                                                   
 Issuance of Series B preferred stock for property                                                                 
    and equipment                                                                                          8,332   
                                                                                                                   
 Issuance of common stock for notes receivable                                                                 -   
                                                                                                                   
 Exercise of options to purchase common stock for                                                                  
    shareholder notes receivable                                                                               -   
                                                                                                                   
 Net loss for 1996                                                                    (3,856,192)     (3,856,192)  
                                                                                -----------------  --------------  
                                                                                                                   
 BALANCE AT SEPTEMBER 30, 1996                                                        (5,204,602)     (1,541,481)  
                                                                                                                   
 Cancellation of shareholder notes receivable for                                                                  
    common stock repurchase                                                                                    -   
                                                                                                                   
 Repayment of shareholder notes receivable                                                                54,167   
                                                                                                                   
 Issuance of Series C preferred stock with warrants to purchase 520,000 shares
    of common stock, net                                                                                           
    of issuance costs of $704,638                                                                     12,295,362   
                                                                                                                   
 Issuance of common stock warrants as finders fees                                                        37,200   
                                                                                                                   
 Issuance of common stock warrant for cash                                                               200,000   
                                                                                                                   
 Exercise of options and warrants to purchase                                                                      
    common stock                                                                                          24,450   
                                                                                                                   
 Issuance of common stock warrants with debt                                                             747,760   
                                                                                                                   
 Net loss for 1997                                                                    (9,552,838)     (9,552,838)  
                                                                                -----------------  --------------  
                                                                                                                   
 BALANCE AT SEPTEMBER 30, 1997                                                       (14,757,440)      2,264,620   
                                                                                                                   
 Exercise of options to purchase common stock -                                                                    
    October 1997 to December 1997                                                              -          43,350   
                                                                                                                   
 Issuance of Series A common stock with warrants to purchase 10,135,164 shares
    of Series B common stock, net of offering costs of  $3,863,691
 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                                           -               -   
                                                                                                                   
       Series B preferred stock and common stock;                          
         conversion ratio of 1:1                                                               -               -   

       Series A preferred stock; conversion ratio
         of 1:10                                                                                                   
                                                                                                                   
 Issuance of Series B common stock with warrants to purchase 6,666,666 shares
    Series B common stock, net of offering costs of                                                                
    $1,800,000                                                                                 -      18,800,000   
                                                                                                                   
 Issuance of warrants to purchase 3,713,094 shares                                                                 
    of Series B common stock in connection with the                                                                
    issuance of 13% Senior Discount Notes                                                      -      15,001,000   
                                                                                                                   
 Exercise of options to purchase Series B common                                                                   
    stock                                                                                      -          55,901   
                                                                                                                   
 Establishment of $.0001 par value for Series A and                                                                
    B common stock in connection with Delaware                                                                     
    reincorporation                                                                            -               -   
                                                                                                                   
 Exercise of options to purchase Series B common                                                          22,500   
    stock - post Delaware reincorporation                                                                          
                                                                                                                   
 Net loss for 1998                                                                   (33,355,793)    (33,355,793)  
                                                                                -----------------  --------------  
                                                                                                                   
 BALANCE AT SEPTEMBER 30, 1998                                                     $ (48,113,233)   $ 29,373,387   
                                                                                -----------------  --------------  
                                                                                -----------------  --------------  

</TABLE>

         See accompanying notes to consolidated financial statements

                                      F-5

<PAGE>

FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)

CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                            YEAR ENDED SEPTEMBER 30,
                                                             -----------------------------------------------------
                                                                   1998               1997              1996
<S>                                                          <C>                    <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss                                                     $ (33,355,793)       $(9,552,838)    $ (3,856,192)
      Adjustments to reconcile net loss to net cash used 
        in operating activities:
          Depreciation and amortization                             2,424,466            501,354           75,258
          Amortization of deferred financing costs                  1,203,452             60,872                -
          Amortization of debt discount                            14,571,093             58,242                -
          Non-cash interest expense                                   293,264             37,782                -
          Extraordinary loss on extinguishment of debt              3,730,667            104,680                -
          Changes in assets and liabilities:
             Restricted cash related to operating activities           50,000            (50,000)               -
             Accounts receivable                                     (420,826)            29,954         (101,771)
             Interest receivable                                   (3,016,623)                 -                -
             Other assets                                            (314,350)           (98,219)        (116,117)
             Accounts payable and accrued expenses                  4,702,092          1,462,457        1,830,947
                                                             -----------------  -----------------   --------------

               Net cash used in operating activities              (10,132,558)        (7,445,716)      (2,167,875)
                                                             -----------------  -----------------   --------------


CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchases of property and equipment                            (26,068,310)       (12,636,918)        (908,120)
   Purchases of held-to-maturity marketable securities           (236,701,191)                 -                -
   Maturities of held-to-maturity marketable securities            71,110,181                  -                -
   Procurement of patents                                                   -             (9,827)         (15,317)
                                                             -----------------  -----------------   --------------

               Net cash used in investing activities             (191,659,320)       (12,646,745)        (923,437)
                                                             -----------------  -----------------   --------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from issuance of Senior Discount Notes and
      related warrants                                            250,205,000                  -                -
   Proceeds from issuance of Series A common stock and
      related warrants, net of offering costs                      26,136,309                  -                -
   Proceeds from issuance of Series B common stock and
   related
      warrants, net of offering costs                              18,800,000                  -                -
   Proceeds from stock option and warrant exercises                   121,751             24,450                -
   Proceeds from issuance of Series B preferred stock                       -                  -        2,355,226
   Proceeds from issuance of Series C preferred stock
      and related common stock warrants, net of
      offering costs                                                        -          4,528,862                -
   Proceeds from issuance of commons stock warrants                         -            200,000                -
   Proceeds from collection of stockholder receivables                      -             54,167                -
   Principal payments on capital leases                              (255,930)          (114,197)         (34,371)
   Proceeds from issuance of convertible bridge notes                       -          7,347,000          835,000
   Proceeds from draws under revolving credit facility and
      related warrants                                              3,796,262         12,172,592                -
   Proceeds from short-term borrowings and related warrants                 -          1,000,000                -
   Principal payments on short-term borrowings                       (550,000)          (500,000)               -
   Proceeds from other long-term debt                                       -                  -           27,510
   Principal payments on other long-term debt                         (11,471)           (26,643)         (26,934)
   Principal payments on revolving credit facility                (16,299,900)                                  -
   Payment of deferred financing costs                             (8,646,920)        (4,129,017)               -
                                                             -----------------  -----------------   --------------

               Net cash provided by financing activities          273,295,101         20,557,214        3,156,431
                                                             -----------------  -----------------   --------------

Net increase in cash and cash equivalents                          71,503,223            464,753           65,119

Cash and cash equivalents at beginning of period                      536,275             71,522            6,403
                                                             -----------------  -----------------   --------------

Cash and cash equivalents at end of period                      $  72,039,498          $ 536,275         $ 71,522
                                                             -----------------  -----------------   --------------
                                                             -----------------  -----------------   --------------
</TABLE>

         See accompanying notes to consolidated financial statements


                                     F-6

<PAGE>

<TABLE>
<CAPTION>
                                                                            YEAR ENDED SEPTEMBER 30,
                                                             -----------------------------------------------------
                                                                   1998               1997              1996
<S>                                                          <C>                    <C>             <C>
SUPPLEMENTAL CASH FLOWS INFORMATION:
   Cash paid during the period for interest                       $ 1,292,511          $ 440,178         $ 14,142

NON-CASH TRANSACTIONS:
   Property and equipment purchased under capitalized leases           45,221          7,097,437          105,808
   Issuance of Series B preferred stock for settlement of
      note payable, for consulting services received,
      and for procurement of property and equipment                         -                  -           58,332
   Issuance of common stock for stockholder receivables                     -                  -          173,167
   Issuance of note payable to repurchase Series A
      preferred stock                                                       -                  -           29,750
   Conversion of convertible bridge notes into Series C
      preferred stock and related warrants                                  -          7,776,500                -
   Conversion of convertible bridge notes into Series A
      common stock and related warrants                               405,000                  -                -
   Issuance of common stock warrants as finders fees                        -             10,000                -
   Non-cash deferred financing costs                                        -             27,200                -
   Issuance of note payable to vendor for up-front service            150,000                  -                -
      fees
   Issuance of note payable for consulting services received                -             50,000                -
   Cancellation of stockholder receivable for stock                         -             22,500                -
      repurchase
</TABLE>


         See accompanying notes to consolidated financial statements


                                     F-7

<PAGE>

FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------

NOTE 1 - THE COMPANY

FirstWorld Communications, Inc. (the Company) commenced operations on September
1, 1993 under the name SpectraNet International. On January 29, 1998, the
Company changed its name to FirstWorld Communications, Inc. Effective June 26,
1998, the Company changed its state of incorporation from California to Delaware
(Note 9). Prior to fiscal 1998, the Company was considered a development stage
enterprise, as defined in Statement of Financial Accounting Standards No. 7.

The Company is a facilities-based integrated communications provider. The
Company has a data-centric focus, with service offerings bundled to address the
data and voice communications needs of emerging businesses. The Company's
service offerings include data connectivity, high speed Internet access, local
and wide area network (LAN/WAN) connectivity, web hosting, video communications
and system integration services, as well as switch-based local and long distance
telephone services.


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 which consist of money
market instruments and commercial paper.

MARKETABLE SECURITIES

Marketable securities consist principally of commercial paper with original
maturities of beyond 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.

RESTRICTED CASH

Restricted cash in support of outstanding letters of credit totaled $50,000 at
September 30, 1997. No restricted cash exists at September 30, 1998.


                                    F-8

<PAGE>

FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------

REVENUE RECOGNITION

The Company recognizes service revenue on local competitive access services in
the month such services are provided. Billings to customers for services in
advance of providing such services are deferred and recognized as revenue when
earned. Other revenues consist primarily of royalties earned under a certain
patent licensing agreement and are recorded when earned and when payment is
reasonably assured.

During fiscal 1998, approximately 25% of the Company's service revenue was
derived from a single telecommunications customer. During fiscal 1997,
approximately 73% of the Company's service revenue was derived under
non-recurring service contracts with two governmental entities.

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 high
credit-quality financial institutions while commercial paper investments are
placed with high credit-caliber 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 because of the
diversification of the Company's commercial telecommunications customer base.
Credit is extended to commercial customers based on an evaluation of the
customer's financial condition and generally collateral is not required.
The Company maintains reserves for potential credit losses from such customers.

As of September 30, 1998 and 1997, approximately 25% and 70% of accounts
receivable, respectively, was due from a single customer.

PROPERTY AND EQUIPMENT

Property and equipment is recorded at cost and is depreciated using the
straight-line method over the estimated useful lives of the assets. Costs
capitalized in connection with the development of communication networks include
expenses associated with network engineering, design and construction.
Depreciation of communications networks and related infrastructure commences
when the applicable network becomes commercially operational.

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

<TABLE>
<S>                                                     <C>
Network infrastructure                                     20  years
Telecommunications                                      5 - 7  years
Building and improvements                                  30  years
Furniture, office equipment and other                   3 - 7  years
Leasehold improvements                                  Shorter of estimated useful life or lease term
</TABLE>

CAPITALIZATION OF INTEREST

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 to the extent that these interest costs relate to
financing obtained in order to prepare such assets for use. During fiscal 1998
and 1997, the Company capitalized approximately $450,000 and $52,000,
respectively, in interest costs associated with the development of the Company's
telecommunications networks.

                                    F-9

<PAGE>

FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------

DEFERRED FINANCING COSTS

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.

DEBT DISCOUNT

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.

FAIR VALUE OF FINANCIAL INSTRUMENTS

With the exception of the Company's Senior Discount Notes, management believes
that the carrying amounts shown for the Company's financial instruments
reasonably approximate their fair values. The fair value of the Company's Senior
Discount Notes, determined based on quoted high-yield market bid prices,
approximates $141,000,000 at September 30, 1998. The carrying amount of such
Senior Discount Notes at September 30, 1998 is $249,596,346.

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. No such impairment losses
have been identified by the Company during the fiscal years presented.

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 minimum value method had been applied in
measuring compensation expense. Compensation charges for non-employee
stock-based compensation is measured using fair value-based methods.

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.

                                    F-10

<PAGE>

FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------

NOTE 3 - PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

<TABLE>
<CAPTION>
                                                                       SEPTEMBER 30,
                                                                 1998                1997
<S>                                                             <C>                 <C>
Network infrastructure                                          $19,758,122         $12,636,955
Telecommunications equipment                                      8,971,835           5,048,156
Building and improvements                                         1,328,237           1,328,237
Furniture, office equipment and other                             4,447,438             976,341
Leasehold improvements                                              633,175             507,573
Construction in process                                          11,881,300             427,986
                                                                -----------         -----------

                                                                 47,020,107          20,925,248
Accumulated depreciation                                         (2,999,689)           (593,895)
                                                                -----------         -----------

                                                                $44,020,418         $20,331,353
                                                                -----------         -----------
                                                                -----------         -----------
</TABLE>

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

<TABLE>
<CAPTION>
                                                                       SEPTEMBER 30,
                                                                   1998                1997
<S>                                                             <C>                 <C>
Network infrastructure                                          $ 6,000,000         $ 6,000,000
Telecommunications equipment                                        218,747             218,747
Building and improvements                                           557,612             557,612
Furniture, office equipment and other                               519,761             474,540
                                                                -----------         -----------

                                                                  7,296,120           7,250,899
Accumulated depreciation                                           (613,035)           (191,847)
                                                                -----------         -----------

                                                                $ 6,683,085         $ 7,059,052
                                                                -----------         -----------
                                                                -----------         -----------
</TABLE>

NOTE 4 - SHORT-TERM BORROWINGS

On August 29, 1997, the Company obtained a $1,000,000, 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 associated with this loan, 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 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 $104,680. 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.

On September 2, 1997, the Company issued a $50,000, 10% per annum, unsecured
promissory note to a financial adviser of the Company as payment for services
performed in connection with the attainment of debt financing.
The note was repaid on October 2, 1997.

                                          F-11

<PAGE>

FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------

NOTE 5 - LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                                           SEPTEMBER 30,
                                                                                     1998                1997
<S>                                                                                <C>                   <C>
13% senior Discount Notes, net of unamortized discount totaling
$220,403,654 at September 30, 1998                                                 $249,596,346         $         -

14% Revolving Credit Facility, net of unamortized discount totaling
$463,513 at September 30, 1997                                                                -          11,746,861

14% unsecured term note  with a vendor; monthly installments of
principal and interest payable through December 2000                                    150,000                   -

Other                                                                                     9,262              17,868
                                                                                   ------------         -----------

                                                                                    249,755,608          11,764,729
Less current portion                                                                    (30,070)             (8,446)
                                                                                   ------------         -----------

                                                                                   $249,725,538         $11,756,283
                                                                                   ------------         -----------
                                                                                   ------------         -----------
</TABLE>

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

<TABLE>
<S>                                                            <C>
FISCAL YEAR
1999                                                           $      30,070
2000                                                                  88,514
2001                                                                  40,678
2002                                                                       -
2003                                                                       -
Thereafter                                                       470,000,000
                                                               -------------

                                                                 470,159,262
Less unamortized discount on the 13% Senior Discount Notes      (220,403,654)
                                                               -------------

                                                               $ 249,755,608
                                                               -------------
                                                               -------------
</TABLE>


SENIOR DISCOUNT 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 (the Act), for gross
proceeds of $250,205,000 (the High Yield Debt Offering). In the High Yield Debt
Offering, the Company sold 470,000 units consisting of 13% Senior Discount Notes
due 2008 (the Notes) and warrants to purchase an aggregate of 3,713,094 shares
of the Company's Series B common stock (Note 10). The Company allocated
$235,204,000 of the proceeds to the Notes and $15,001,000 to the warrants,
representing their estimated fair value at the date of issuance as determined
via an independent valuation.

                                        F-12
<PAGE>

FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

The Notes will accrete in value through April 15, 2003 at a rate of 13% per 
annum, compounded semi-annually, at which time $470,000,000 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 Notes will accrue and will be payable semiannually 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 Notes prior to maturity. The 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 Notes, the 
holders of the Notes will have the right to require the Company to purchase 
their 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 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 is in compliance with such 
covenants at September 30, 1998.

REVOLVING CREDIT FACILITY

On September 16, 1997, the Company entered into a five-year $23,000,000 
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 High Yield 
Debt Offering, and paid the Lenders a $1,000,000 termination fee pursuant to 
the terms thereof. The Company has recorded an extraordinary loss of 
$4,730,667 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.

NOTE 6 - CONVERTIBLE BRIDGE NOTES

Convertible bridge notes outstanding at September 30, 1997 consist of 
$405,500 in principal funding received through the issuance of 8% 
subordinated, convertible bridge notes pursuant to a private placement in 
fiscal 1997. On December 30, 1997, such convertible bridge notes were 
converted into shares of the Company's Series A common stock and related 
warrants at the conversion rate of $3.00 per share (Note 9).

NOTE 7 - COMMITMENTS

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 fiscal 2008. Rent expense 
under noncancelable operating leases totaled $549,400, $361,156, and 
$108,429, during each of fiscal 1998, 1997 and 1996, respectively.

The Company has procured certain of its property and equipment, including its 
Anaheim network central office switching facility, through capital leases 
which expire through fiscal 2001. Additionally, the Company has accounted for 
certain agreements with the City of Anaheim, as more fully described below 
and which extend through fiscal 2027, as both capital leases and executory 
contracts in the accompanying financial statements.


                                     F-13

<PAGE>

FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

Future minimum payments under capital leases (inclusive of the minimum 
payments allocated from the agreements with the City of Anaheim) and 
noncancelable operating leases are as follows:

<TABLE>
<CAPTION>
FISCAL YEAR                                          CAPITAL            OPERATING
                                                     LEASES              LEASES
<S>                                              <C>                 <C>
1999                                                  $1,539,459          $1,206,955
2000                                                   1,396,141           1,190,403
2001                                                   1,289,953           1,205,561
2002                                                   1,277,226           1,112,133
2003                                                   1,277,226             223,713
Thereafter                                            30,014,822             462,916
                                                 ----------------    ----------------

Total minimum lease payments                          36,794,827          $5,401,681
                                                 ----------------    ----------------
                                                                     ----------------

Amount representing interest                         (29,892,444)
                                                 ----------------


Present value of minimum lease payments               $6,902,383
                                                 ----------------
                                                 ----------------
</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 (as amended, the UTS Agreement) with the City of 
Anaheim, California (the City), under which FWA has agreed to design, construct
and operate a fiber-optic telecommunications network in cooperation with the 
City. The UTS Agreement requires 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 $1,000,000 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 
discussed 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 $6,000,000 reserve account for debt service and capital 
improvements. As of September 30, 1998, 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 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, 


                                     F-14

<PAGE>

FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

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 in the amount of $113,862. In addition, the Company is obligated to 
pay all 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 total $239,555, 
$373,220, $373,220, $373,220, $373,220 and $8,770,670 during each of fiscal 
1999, 2000, 2001, 2002, 2003 and thereafter, respectively.

Pursuant to the UTS Agreement, FWA is required to meet certain future 
performance requirements for the completion of network design and the 
commencement of network construction related to certain phases of the 
city-wide network. The first phase, which extended service to identified 
municipal facilities, was substantially completed in October 1997. The second 
phase requires service to be extended in the ordinary course of business 
(i.e., within six months following execution of a customer service agreement) 
to commercial, industrial and governmental customers within certain defined 
service areas.  The Company was required to complete 44% of the first and 
second phases by April 1, 1998 and is further required to complete 90% of the 
first and second phases by December 31, 1998, plus a 180-day cure period in 
each case.  The Company has constructed and installed the necessary 
infrastructure to satisfy the 44% completion requirement and expects that the 
completion of infrastructure currently under construction and approved for 
construction will satisfy the 90% completion requirement in a timely manner.  
In the event that FWA does not meet the specified performance deadlines 
related to completion of the first and second phases of the Anaheim network 
due to financial or other reasons, the City may elect to either terminate the 
Operating Property Agreement 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 do 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, which allows 
service to be extended in the ordinary course of business to all customers 
within the city, including residential customers, will be commenced only 
after the economic feasibility of the third phase is validated by an 
independent consultant's report and financing is arranged. FWA has agreed to 
cause a feasibility study with respect to the third phase to be completed no 
later than January 1, 2000, and thereafter to provide annual updates to the 
study if  necessary. 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 UTS Agreement also requires FWA to commence construction of a 
demonstration center in the City's downtown area by November 30, 1998, and to 
complete such demonstration center by June 30, 1999. However, as a result of 
a change in the proposed scope of the project, FWA now contemplates leasing 
additional office space in the downtown area of Anaheim and housing a 
demonstration center in the leased facilities.  The Company expects the 
demonstration center to be operational prior to March 31, 1999. Although 
the Company believes that 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.  The parties are currently in 
the process of attempting to resolve these issues.  The Company does not 
believe that the ultimate resolution will have a material adverse effect on 
the Company's results of operations, liquidity or financial position.

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 


                                     F-15

<PAGE>


FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

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.

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 
(Additional Areas). The term of the Conduit Lease runs through December 31, 
2027.

The Conduit Lease obligates FWOC to install fiber optic cable (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 Cable will be owned by The Irvine Company. 
If FWOC fails to complete installation of the required Conduit within 18 
months following March 5, 1998, The Irvine Company may, until such 
installation is completed, terminate the Conduit Lease.

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 
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.


                                     F-16

<PAGE>

FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

The License Agreement requires FWOC to pay The Irvine Company a license fee 
each calendar quarter, subject to an annual 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. As of September 30, 1998, such fee totals $88,000 
per calendar quarter. 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, total approximately $359,000, $366,000, $374,000, 
$381,000, $389,000 and $11,747,000 during each of fiscal 1999, 2000, 2001, 
2002, 2003 and thereafter, respectively.

The License Agreement provides FWOC with the right to install, maintain, 
operate, replace and remove Cable and associated communications equipment 
(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.

OTHER COMMITMENTS

The Company is party to a contract with a long distance carrier pursuant to 
which the Company is committed to minimum service fees. Such minimum fees 
aggregate $487,500 and $1,437,500 during fiscal 1999 and 2000, respectively.

The Company is party to a network services agreement with a provider of 
voicemail and data services under which future minimum payments aggregate 
$239,040, $286,560 and $23,880 during fiscal 1999, 2000 and 2001, 
respectively. Additionally, the Company is party to an agreement with a 
provider of data processing and billing services under which future minimum 
payments aggregate $150,000 during each of fiscal 1999, 2000 and 2001.

During fiscal 1998, the Company entered into separate management consulting 
service agreements with its two majority 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 


                                     F-17

<PAGE>

amended, the Company is required to pay to the related parties aggregate 
consulting fees totaling $500,000 per annum. Related party consulting fees 
recorded by the Company during fiscal 1998 totaled $840,000. Future minimum 
consulting fees under these agreements aggregate $1,000,000, $1,000,000 and 
$250,000 during each of fiscal 1999, 2000 and 2001, respectively.

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 - CEO EMPLOYMENT AGREEMENT

On September 28, 1998, the Company entered into an Employment Agreement (the 
Employment Agreement) pursuant to which the Company retained the services of 
a new President and Chief Executive Officer (the 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, 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 $4,000,000, payable in three separate installments. The first 
$2,000,000 installment became due and was paid on October 1, 1998, the 
employment Commencement Date, while the second and third $1,000,000 
installments are due and payable on October 1, 1999 and October 1, 2000, 
respectively. The CEO must be employed by the Company on the date that the 
second and third installments become due to be eligible to receive such 
payments 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 second and third installment 
payments in the form of the Company's Series B common stock. If the CEO 
elects to receive any of the second or third installment payments in Series B 
common stock, such stock shall be valued at $5.00 and $7.50 per share, 
respectively.

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) within the first 18 months after the 
Commencement Date, the Company will pay the CEO a $1,000,000 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) within the first 12 months after the Commencement Date, 
the Company will be obligated to pay the CEO a $4,207,500 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) within the first 24 
months after the Commencement Date, the Company will be obligated to pay the 
CEO a $8,415,000 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 during a three-year period beginning on the Commencement Date, the 
Company will be obligated to pay the CEO a cash payment equal to $16,830,000 
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-18

<PAGE>


FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

NOTE 9 - STOCKHOLDERS' EQUITY

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 Articles of Incorporation to 
substantially increase the Company's authorized capital; and (iii) amended 
its Articles of Incorporation to designate two series of common stock, with 
the investors in the below-referenced private placement occurring on December 
30, 1997 receiving Series A common stock and all then existing shares of 
common stock (including common stock issued upon conversion of the then 
existing preferred stock) being designated as Series B common stock. 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 
Articles of Incorporation, the Company may also issue Preferred stock from 
time to time in one or more series. As of September 30, 1998, no such 
preferred stock has been issued.

PRIVATE PLACEMENTS

On April 13, 1998, the Company consummated a private placement of equity 
securities with Spectra 3 and Enron (the Additional Equity Investment) 
pursuant to the exercise of an existing option held by Spectra 3 and Enron. 
Pursuant to the Additional Equity Investment, the Company sold to each of 
Spectra 3 and Enron 3,333,333 shares of Series B common stock, resulting in 
aggregate offering proceeds totaling $18,800,000, net of offering 
commissions. In connection with this private placement, the Company also 
issued to Spectra 3 and Enron warrants to purchase an additional 3,333,333 
shares of Series B common stock (Note 10).

On December 30, 1997, the Company consummated a private placement of equity 
securities with Colorado Spectra 3, LLC (Spectra 3) and Enron Capital & Trade 
Resources Corp. (Enron). In connection with this placement, the Company 
issued 5,000,000 shares of newly created Series A common stock to each of 
Spectra 3 and Enron at an issue price of $3.00 per share pursuant to a common 
stock purchase agreement by and among the Company, Enron, Spectra 3 and the 
holders (the Noteholders) of $405,500 in principal amount of the Company's 
convertible subordinated bridge notes (Note 6). The Company also issued an 
aggregate of 135,164 shares of Series A common stock to the Noteholders upon 
the automatic conversion of the bridge 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 bridge notes, totaled 
$26,136,309, net of offering commissions and certain other advisory fees paid 
in connection with the consummation of this equity placement. In connection 
with this private placement, the Company also issued i) to each of Spectra 3 
and Enron warrants to purchase 5,000,000 shares of newly created Series B 
common stock, and ii) to the Noteholders warrants to purchase an aggregate of 
135,164 shares of such Series B common stock (Note 10).

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 $4,518,862, net of 
placement agent commissions and related fees, and 1,555,300 shares issued 
through the retirement of convertible bridge 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 common stock (Note 10).

During fiscal 1996, in connection with various private placement offerings, 
the Company issued 1,142,304 shares of Series B preferred stock for proceeds 
totaling $2,355,226.


                                     F-19

<PAGE>

FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

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 for fiscal 1998 
reflects a reclassification to additional paid-in capital for the amounts in 
excess of par value.

NOTE 10 - WARRANTS

During fiscal 1998, 1997 and 1996, the Company's non-employee warrant 
activity was as follows:

In connection with the High Yield Debt Offering which was consummated on 
April 13, 1998, the Company issued to the initial purchasers of the Notes 
warrants to purchase 3,713,094 shares of Series B common stock at an exercise 
price of $0.01 per share. Such warrants are exercisable at any time on or 
after the earlier to occur of May 1, 1999, an initial public offering of the 
Company's common stock or in the event of a change in control, as defined in 
the warrant agreement, and expire on April 15, 2008. Such warrants contain 
customary adjustments to protect against dilution, as well as certain 
additional anti-dilutive adjustments as defined in the warrant agreement. As 
of September 30, 1998, all of these warrants remain outstanding.

In connection with the December 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 September 30, 1998, 
all of these warrants remain outstanding.

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 and 30,000 shares of Series B common stock at exercise prices 
of $6.00 and $5.00, respectively, all of which have terms of five years and 
contain customary adjustments to protect against dilution. As of September 
30, 1998, all of these warrants remain outstanding.

During fiscal 1997, in connection with the attainment of a revolving credit 
facility, the Company issued to the 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 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 September 30, 
1998, all of these warrants remain outstanding.

In connection with the consummation of the credit facility described above, 
the Company also issued to certain financial advisors warrants to purchase 
83,400 shares of common stock, 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 September 30, 1998, all of these 
warrants remain outstanding.

During fiscal 1997, in connection with the attainment of short-term bridge 
financing, the Company issued to the 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 


                                     F-20

<PAGE>

FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

at an exercise price of $3.83 per share. As of September 30, 1998, all of 
these warrants remain outstanding.

During fiscal 1997, in connection with the issuance of convertible bridge 
notes, warrants for the purchase of 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 September 30, 1998, all of these 
warrants remain outstanding.

During fiscal 1997, the Company issued to certain legal service providers 
warrants to purchase 19,000 and 5,000 shares of common stock at exercise 
prices of $.50 and $5.00, respectively. 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 September 30, 1998, all of these warrants remain outstanding.

During fiscal 1997, the Company issued a warrant for the purchase of 800,000 
shares of common stock to a single investor 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 September 
30, 1998, no shares have been issued pursuant to this warrant.

In connection with a fiscal 1997 private placement of Series C preferred 
stock, 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 September 30, 
1998, all of these warrants remain outstanding.

In connection with the private placement of Series C preferred stock referred 
to above, the Company also issued to certain financial advisors warrants to 
purchase 218,118 and 15,000 shares of common stock at exercise prices of 
$5.00 and $.50, respectively, all of which have terms of five years and 
contain customary adjustments to protect against dilution. During fiscal 
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 September 30, 1998, all of the 
remaining warrants remain outstanding.

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, as previously issued in fiscal 1994, are currently exercisable into 
shares of Series B common stock. Such warrants expire in April 1999 and 
contain customary adjustments to protect against dilution. As of September 
30, 1998, all of these warrants remain outstanding.

The fair value of the above-referenced warrants was determined at their time 
of grant via application of the Black-Scholes option pricing model or, with 
respect to those warrants issued in connection with the High Yield Debt 
Offering, based on an independent valuation.


                                     F-21

<PAGE>


FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------

The following table summarizes information about warrants outstanding at
September 30, 1998:

<TABLE>
<CAPTION>
                                           OUTSTANDING                                       EXERCISABLE
                     ---------------------------------------------------------     ---------------------------------

                             NUMBER            WEIGHTED-                               NUMBER
                          OUTSTANDING           AVERAGE           WEIGHTED-          EXERCISABLE        WEIGHTED-
     RANGE OF                AS OF             REMAINING           AVERAGE              AS OF            AVERAGE
     EXERCISE            SEPTEMBER 30,        CONTRACTUAL          EXERCISE         SEPTEMBER 30,        EXERCISE
      PRICES                  1998            LIFE (YEARS)           PRICE              1998              PRICE
<S>                      <C>                  <C>                 <C>               <C>                 <C>
               $.01          3,713,094            9.6                  $.01                    -                -
               $.50             29,000            4.3                  $.50               29,000             $.50
         $1.50-1.80          2,249,634            3.1                 $1.78            2,249,634            $1.78
         $3.00-3.83         12,141,820            5.9                 $3.06           12,141,820            $3.26
         $5.00-6.00            387,807            4.2                 $5.35              387,807            $4.50
                        -----------------                                          ----------------

                            18,521,355                                                14,808,261
                        -----------------                                          ----------------
                        -----------------                                          ----------------
</TABLE>

NOTE 11 - STOCK OPTIONS AND PURCHASE RIGHTS

The Company has a 1995 Incentive Stock Option Plan (the 1995 Plan) and a 1997
Stock Plan (the 1997 Plan) (collectively, the Plans) under which stock options
or stock purchase rights to acquire an aggregate of 1,500,000 shares and
1,500,000 shares, respectively, of Series B common stock may be granted to
employees and directors of the Company, as well as to non-employee consultants
of the Company under the 1997 Plan. Both plans provide for the granting of
incentive stock options (within the meaning of Section 422A of the Internal
Revenue Code) while the 1997 Plan also provides for the granting of
non-statutory stock options. Additionally, stock purchase rights may also be
granted under the 1997 Plan.

The terms of stock options granted under the Plans are determined by the Board
of Directors. Stock options may be granted for periods of up to ten years at a
price per share not less than the fair market value of the Company's Series B
common stock at the date of grant for incentive stock options and not less than
85% of the fair market value of the Company's Series B common stock at the date
of grant for non-statutory stock options. In the case of incentive and
non-statutory stock options granted under Plans to employees, directors or
consultants who, at the time of grant of such options, own stock representing
more than 10% of the voting power of all classes of stock of the Company, the
exercise price shall be no less than 110% of the fair market value of the
Company's Series B common stock at the date of grant. Additionally, the term of
incentive stock option grants under the Plans is limited to five years if the
grantee owns in excess of 10% of the voting power of all classes of stock of the
Company at the time of grant. Options granted under the Plans generally vest to
the option holder ratably over a period of four to five years beginning on the
grant date. The terms of stock purchase rights granted under the 1997 Plan are
determined by the Board of Directors. Such purchase rights may be issued either
alone, in addition to, or in tandem with other awards granted under the 1997
Plan and/or cash awards made outside of the 1997 Plan.

The Company has a 1998 Stock Purchase Plan (the 1998 Plan) pursuant to which it
may grant to key employees and directors stock purchase rights to acquire an
aggregate of 500,000 shares of Series B common stock. The terms of stock
purchase rights granted under the 1998 Plan are determined by the Board of
Directors. Under the 1998 Plan, up to 50% of the aggregate purchase price for
shares subject to stock purchase rights may be paid by the offeree in the form
of a promissory note to the Company.

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

                                      F-22

<PAGE>

FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                          YEAR ENDED
                                         SEPTEMBER 30,

                          1998                 1997                1996
<S>                    <C>                   <C>                 <C>
NET LOSS:
   As reported         $33,355,793           $9,552,838          $3,856,192
   Pro forma           $33,434,078           $9,564,128          $3,859,992
</TABLE>

The minimum 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 fiscal 1998, 1997
and 1996: dividend yield of 0.0% for all periods; volatility of 0.0% for all
periods; risk-free interest rates of 5.88%, 6.07% and 5.79%; and an expected
life of 5.0 years for all periods, except with respect to stock purchase rights
granted during fiscal 1998, which rights have a term of .17 years. The weighted
average fair value of options and stock purchase rights granted during fiscal
1998, 1997 and 1996 was approximately $.57, $.09 and $.06, respectively.

Stock option and stock purchase right transactions during the three fiscal years
ended September 30, 1998, all of which relate to employee transactions, are
summarized as follows:

<TABLE>
<CAPTION>
                                                               WEIGHTED                                WEIGHTED
                                                               AVERAGE               STOCK              AVERAGE
                                                               EXERCISE            PURCHASE            EXERCISE
                                            OPTIONS              PRICE               RIGHTS               PRICE
<S>                                     <C>                    <C>              <C>                    <C>
Outstanding at September 30, 1995            763,333             $ .15                     -                 -
Granted                                      788,667             $ .25                     -                 -
Exercised                                   (330,000)            $ .22                     -                 -
Canceled                                    (432,000)            $ .21                     -                 -
                                        ---------------                         ----------------

Outstanding at September 30, 1996            790,000             $ .18                     -                 -
Granted                                      489,400             $ .82                     -                 -
Exercised                                   (101,900)            $ .22                     -                 -
Canceled                                    (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                     -                 -
Canceled                                     (75,854)            $2.44                     -                 -
                                        ---------------                         ----------------

Outstanding at September 30, 1998          2,033,195             $2.66               300,000             $4.50
                                        ---------------                         ----------------
                                        ---------------                         ----------------
</TABLE>


                                      F-23


<PAGE>

FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------

The following table summarizes information about stock options and stock
purchase rights outstanding at September 30, 1998:

<TABLE>
<CAPTION>
                                           OUTSTANDING                                       EXERCISABLE
                     ---------------------------------------------------------     ---------------------------------

                             NUMBER            WEIGHTED-                               NUMBER
                          OUTSTANDING           AVERAGE           WEIGHTED-          EXERCISABLE        WEIGHTED-
     RANGE OF                AS OF             REMAINING           AVERAGE              AS OF            AVERAGE
     EXERCISE            SEPTEMBER 30,        CONTRACTUAL          EXERCISE         SEPTEMBER 30,        EXERCISE
      PRICES                  1998            LIFE (YEARS)           PRICE              1998              PRICE
<S>                     <C>                   <C>                 <C>              <C>                  <C>
STOCK OPTIONS
    $  .15 -.25                301,000            7.2              $ .22               253,600           $ .22
    $       .50                341,400            8.2              $ .50               153,840           $ .50
    $      3.00                721,960            9.2              $3.00               453,753           $3.00
    $      4.50                668,835            9.8              $4.50               181,196           $4.50
                        -----------------                                          ----------------


                             2,033,195                                               1,042,389
                        -----------------                                          ----------------
                        -----------------                                          ----------------

STOCK PURCHASE RIGHTS

    $      4.50                300,000            .13              $4.50               300,000           $4.50
                        -----------------                                          ----------------
                        -----------------                                          ----------------
</TABLE>

The Company's Board of Directors approved a repricing of stock options in
December 1997, pursuant to which the exercise price of certain stock options
designated at $3.20 per share was reduced to $3.00 per share.


NOTE 12 - INCOME TAXES

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

<TABLE>
<CAPTION>
                                                                                           SEPTEMBER 30,
                                                                                     1998                1997
<S>                                                                             <C>                 <C>
Net operating loss carryforwards                                                $   11,523,433      $    4,733,931
High yield debt interest deductible when paid                                        4,945,868                   -
Accrued employee costs                                                                  70,009              39,834
Depreciation and amortization                                                       (1,537,964)            (78,845)
                                                                                ----------------    ----------------

                                                                                    15,001,346           4,694,920
Valuation allowance                                                                (15,001,346)         (4,694,920)
                                                                                ----------------    ----------------

Deferred tax assets (liabilities), net                                          $            -      $  -
                                                                                ----------------    ----------------
                                                                                ----------------    ----------------
</TABLE>

As of September 30, 1998, the Company has federal and state net operating loss
carryforwards of approximately $37,436,000 and $23,997,000 respectively, which
amounts expire beginning in fiscal 2009 and fiscal 2000, respectively. As a
result of the private equity placement which occurred on December 30, 1997 (Note
9), which resulted in a change of ownership as defined by Section 382 of the
Internal Revenue Code, the Company's utilization of net operating loss
carryforwards generated through December 30, 1997 will be subject to an annual
limitation of approximately $878,000 for both federal and state tax purposes,
the effect of which has been reflected in the summary of deferred tax assets
above. Additionally, if the Company is able to recognize certain built-in gains


                                      F-24


<PAGE>

FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------

in the future, the annual utilization rate of the net operating losses would be
increased. If the Company were to recognize certain built-in losses, they will
be subject to the annual utilization limitation when recognized.

Based upon the Company's lack of prior earnings history and other available 
evidence, management has recorded a full valuation allowance for the benefit 
of deferred tax assets. A reconciliation of the income tax benefit computed 
using the U.S. federal statutory rate (34%) and the Company's effective tax 
rate follows:


<TABLE>
<CAPTION>
                                                                                  YEAR ENDED
                                                                                 SEPTEMBER 30,

                                                                 1998                1997                1996
<S>                                                         <C>                 <C>                 <C>
Computed expected federal tax benefit                       $  (11,340,970)     $   (3,247,965)     $   (1,311,105)
Non-deductible high yield debt interest                            684,111                   -                   -
State income taxes, net of federal benefit                      (1,069,310)            161,439            (356,087)
Change in valuation allowance                                   10,306,426           2,426,858           1,689,863
Section 382 net operating loss limitations                       1,457,713             557,451                   -
Other                                                              (37,970)            102,217             (22,671)
                                                            ---------------     ----------------    ----------------

                                                            $            -      $            -      $            -
                                                            ---------------     ----------------    ----------------
                                                            ---------------     ----------------    ----------------
</TABLE>

NOTE 13 - LEGAL PROCEEDINGS

On October 16, 1998, the Company filed a declaratory relief action in San Diego
Superior Court, asking the Court to find that the Company is not obligated to
offer stock to Dina Partners L.P. (Dina) with respect to the December 30, 1997
equity investment by Spectra 3 and Enron (Note 9). Dina had previously indicated
in conversations with FirstWorld officers and counsel and in writing that it
believed the Company had breached a certain Amended and Restated Investor Rights
Agreement to which the Company and Dina were parties by refusing to allow Dina
to purchase additional stock in the Company. On December 3, 1998, in answer to
the Company's complaint, Dina filed a general denial with the court. Although
the ultimate resolution of this dispute is subject to the uncertainties inherent
in litigation, the Company does not believe that the resolution of the
declaratory relief action will have a material adverse effect on the Company's
results of operations, liquidity or financial position.


NOTE 14 - SUBSEQUENT EVENTS

On October 8, 1998, the Company commenced an offer to exchange (the Exchange
Offer) its outstanding 13% Senior Discount Notes due 2008 (the Original Notes)
for a new issue of 13% Senior Discount Notes due 2008, which were registered
with the Securities and Exchange Commission pursuant to a Registration Statement
on Form S-4 (the Exchange Notes). The Exchange Offer expired on November 9,
1998. Under the terms of the Exchange Offer, the Company accepted for exchange
all $470,000,000 in aggregate principal amount at maturity of Original Notes 
and caused the cancellation of the Original Notes and
the issuance of the Exchange Notes.

On October 16, 1998, the Board of Directors of the Company elected to change the
Company's fiscal year end from September 30 to December 31, commencing with the
short fiscal year ending on December 31, 1998. The Company intends to file a
transition report on Form 10-Q with the Securities and Exchange Commission for
the period from October 1, 1998 through December 31, 1998.

On November 1, 1998, the Company adopted a 401(k) retirement plan (the Plan)
pursuant to which eligible employees may elect to defer up to 20% of their
compensation into the Plan up to a maximum of $10,000 per annum. The Plan also
stipulates that the Company may provide discretionary matching contributions to
the 


                                      F-25


<PAGE>

FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------

participants of the Plan, which matching contributions would be allocated to
the participants on December 31 of each Plan year and would vest to the
participants at the rate of 25% per annum. All administrative expenses of the
Plan will be borne by the Company.

On November 24, 1998, pursuant to a Stock Purchase Agreement between the Company
and Enron Communications, Inc. (ECI), the Company purchased for cash all of the
outstanding capital stock of Optec, Inc. (Optec) from ECI. ECI is the parent
company of Enron Capital & Trade Resources Corp., a principal stockholder of the
Company. Optec is a telecommunications systems integrator with operations in
Oregon and Washington. Simultaneous to such transaction, the Company also
purchased from ECI an indefeasible right of use to fiber optic cable in a
metropolitan area network serving Portland with routes connecting Beaverton and
Hillsboro, Oregon. In addition, the Company obtained rights to OC-3 level
capacity on a wide area network being developed by ECI that will connect up to
15 cities nationwide. The Company paid an aggregate of $18,000,000 for the Optec
capital stock, the indefeasible rights of use and the wide area network rights.
The Company also repaid at closing approximately $4,000,000 of Optec's
indebtedness to ECI. The Company has deposited $1,000,000 of the total purchase
price into an escrow account to be held for a three year period for the purpose
of satisfying any claim made by the Company for breach of any representations,
warranties or covenants made by ECI in the agreement relating to the Company's
purchase of the Optec capital stock.

During the period October 1998 to December 1998, the Company entered into
certain employment agreements with key executive officials. Future minimum
salaries prescribed by such agreements, inclusive of equalization payments (as
defined in such agreements), total $688,000, $805,000, $421,000 and $31,000
during each of fiscal 1999, 2000, 2001 and 2002, respectively. Pursuant to such
agreements, the Company has also granted or committed to grant to the executives
a total of 950,000 options to purchase Series B common stock at exercise prices
that range from $4.50 to $7.50 per share.



                                      F-26
<PAGE>

FIRSTWORLD COMMUNICATIONS, INC.
(FORMERLY SPECTRANET INTERNATIONAL)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>

                                             Balance at                            Balance at
                                            beginning of                             end of
                                               period      Additions    Deductions   period
                                            ------------- ------------  ---------- ----------
<S>                                        <C>           <C>          <C>        <C>
DEFERRED TAX ASSET VALUATION ALLOWANCE:

       Year ended September 30, 1996 ..         578,199    1,689,863      --      2,268,062

       Year ended September 30, 1997 ..       2,268,062    2,426,858      --      4,694,920

       Year ended September 30, 1998 ..       4,694,920   10,306,426      --     15,001,346


ALLOWANCE FOR DOUBTFUL ACCOUNTS:

       Year ended September 30, 1996 ..            --           --        --           --
 
       Year ended September 30, 1997 ..            --           --        --           --

       Year ended September 30, 1998 ..            --          9,765      --          9,765

</TABLE>

                                      F-27