STAR TELECOMMUNICATIONS INC, 424A, 1997-05-20

STAR TELECOMMUNICATIONS INC
424A, 1997-05-20
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)

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<PAGE> 1
Filed pursuant to Rule 424(a)
Registration Statement No.333-21325

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.

SUBJECT TO COMPLETION, DATED MAY 20, 1997
PROSPECTUS
- ----------

4,000,000 SHARES

[LOGO]

COMMON STOCK

Of the 4,000,000 shares of Common Stock offered hereby, 3,750,000 shares
are being sold by the Company and 250,000 shares are being sold by the Selling
Stockholders. The Company will not receive any of the proceeds from the sale of
shares by the Selling Stockholders. See "Principal and Selling Stockholders."

Prior to this offering, there has been no public market for the Common
Stock of the Company. It is currently estimated that the initial public offering
price will be between $10.00 and $12.00 per share. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price. The Common Stock of the Company has been approved for quotation
on the Nasdaq National Market under the symbol "STRX."
------------------

THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 5.
------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<S> <C> <C> <C> <C>
=======================================================================================================
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT (1) COMPANY (2) STOCKHOLDERS
- -------------------------------------------------------------------------------------------------------
Per Share.......................... $ $ $ $
- -------------------------------------------------------------------------------------------------------
Total(3)........................... $ $ $ $
=======================================================================================================
</TABLE>

(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.

(2) Before deducting expenses payable by the Company estimated at $1,325,000.

(3) The Company and the Selling Stockholders have granted to the Underwriters a
30-day option to purchase up to 600,000 additional shares of Common Stock
solely to cover over-allotments, if any. If all such shares are purchased,
the total Price to Public, Underwriting Discount, Proceeds to Company and
Proceeds to Selling Stockholders will be $ , $ ,
$ and $ , respectively. See "Underwriting."
------------------

The shares of Common Stock are offered by the several Underwriters subject
to prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about , 1997 at the office of the agent of
Hambrecht & Quist LLC in New York, New York.

HAMBRECHT & QUIST ALEX. BROWN & SONS
INCORPORATED

, 1997
<PAGE> 2

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY, INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE
COVERING TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."

2
<PAGE> 3

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Prospectus. The Common Stock offered hereby involves a high
degree of risk. See "Risk Factors."

THE COMPANY

STAR Telecommunications, Inc. ("STAR" or the "Company") is an international
long distance provider offering highly reliable, low cost switched voice
services on a wholesale basis, primarily to U.S.-based long distance carriers.
STAR provides international long distance service to over 275 foreign countries
through a flexible network of resale arrangements with long distance providers,
various foreign termination relationships, international gateway switches, and
leased and owned transmission facilities. The Company has grown its revenues
rapidly by capitalizing on the deregulation of international telecommunications
markets, by combining sophisticated information systems with flexible routing
techniques and by leveraging management's industry expertise. STAR commenced
operations as an international long distance provider in August 1995 and
increased its revenues from $16.1 million in 1995 to $208.1 million in 1996.

The Company serves the large and growing international long distance
telecommunications market. According to industry sources, worldwide gross
revenues in this market were approximately $57 billion in 1995 and the volume of
international traffic on the public telephone network is expected to grow at a
compound annual growth rate of 12% or more from 1995 through the year 2000. A
segment of this market, the resale of international long distance capacity, has
experienced particularly rapid growth. According to FCC data, total billed
revenue of U.S. resellers of international switched services increased
approximately 55% from 1994 to 1995, from approximately $1.1 billion to $1.7
billion.

STAR markets to small and medium size long distance companies that do not
have the critical mass to invest in their own international transmission
facilities or to obtain volume discounts from the larger facilities-based
carriers. STAR also markets to larger long distance companies seeking lower
rates and overflow capacity. The Company had 88 customers during the first
quarter of 1997. STAR operates international gateway switching facilities in New
York and Los Angeles and holds ownership positions in eight digital undersea
fiber optic cables. The Company has installed an international gateway switch in
London, England, and plans to invest in additional undersea fiber optic cables.
STAR's switching facilities are linked to a proprietary reporting system, which
the Company believes provides it with a competitive advantage by permitting
management on a real-time basis to determine the most cost-effective termination
alternatives, monitor customer usage and manage gross margins by route.

In 1995 and 1996, the Company rapidly built its wholesale customer base,
traffic volume and revenue by offering favorable rates compared to other long
distance providers. STAR now seeks to lower its cost of services and improve its
gross margin by negotiating lower rates with domestic and foreign providers of
transmission capacity and, when justified by traffic volume, invest in network
facilities and enter into fixed cost arrangements, including long term leases.
In addition, the Company intends to market its international long distance
services directly to commercial customers overseas, with an initial focus on the
U.K. and selected European cities.

The Company was incorporated in Nevada in September 1993 as STAR Vending,
Inc. and was reincorporated in Delaware as STAR Telecommunications, Inc. in
April 1997. The Company's executive offices are located at 223 East De La Guerra
Street, Santa Barbara, California 93101. Its telephone number at that location
is (805) 899-1962.

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THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company............... 3,750,000 shares
Common Stock offered by the Selling 250,000 shares
Stockholders....................................
Common Stock to be outstanding after the 15,575,756 shares(1)
offering........................................
Use of proceeds................................... Repayment of indebtedness, capital
expenditures, working capital and
general corporate purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol............ STRX
</TABLE>

SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(in thousands, except per share and per minute data)

<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------- ---------------------------
1994 1995 1996 1996 1997
----- ------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues................................ $ 176 $16,125 $ 208,086 $ 35,667 $ 71,008
Gross profit............................ 176 1,768 19,656 3,381 7,270
Income (loss) from operations........... (114) (423) (5,504) 1,470 2,018
Net income (loss)....................... $(122) $ (568) $ (6,644) $ 848 $ 1,432
Pro forma net income (loss) per
share(2).............................. $ (0.54) $ 0.08 $ 0.11
Pro forma number of shares used in per
share computations(2)................. 12,198 11,281 12,825
OTHER CONSOLIDATED FINANCIAL AND OPERATING
DATA:
EBITDA(3)............................... $(121) $ (375) $ (4,531) 1,578 2,788
Cash provided by (used in) operating
activities............................ (63) (1,526) (2,332) 60 2,208
Capital expenditures.................... 21 1,950 12,935 371 3,180
Billed minutes of use................... -- 38,106 479,681 85,375 172,455
Revenue per billed minute of use(4)..... $ -- $0.4102 $ 0.4288 $ 0.4149 $ 0.4064
</TABLE>

<TABLE>
<CAPTION>
MARCH 31, 1997
--------------------------
ACTUAL AS ADJUSTED(5)
------- --------------
(UNAUDITED)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit).................................................. $(8,363) $ 28,275
Total assets............................................................... 59,036 89,872
Long-term liabilities...................................................... 5,849 5,449
Retained deficit........................................................... (5,212) (5,212)
Stockholders' equity....................................................... 8,339 45,377
</TABLE>

- ------------------------------
(1) Based on the number of shares outstanding as of March 31, 1997. Excludes
1,605,852 shares subject to outstanding options as of March 31, 1997 at a
weighted average exercise price of approximately $4.15 per share. Also
excludes 1,214,148 shares reserved for issuance under the Company's stock
plans. See "Management--1997 Omnibus Stock Incentive Plan," "--1996 Outside
Director Nonstatutory Stock Option Plan" and Notes 8 and 10 of Notes to
Consolidated Financial Statements.
(2) See Notes 2 and 10 of Notes to Consolidated Financial Statements for an
explanation of the method used to determine the number of shares used in
computing pro forma net income (loss) per share.
(3) EBITDA represents earnings before interest income and expense, income taxes,
depreciation and amortization expense; whereas, cash provided by (used in)
operating activities represents income or loss from operations plus
depreciation and amortization and also other adjustments for non-cash
amounts such as charges to bad debts as well as changes in operating assets
and liabilities. EBITDA does not represent cash flows as defined by
generally accepted accounting principles and does not necessarily indicate
that cash flows are sufficient to fund all the Company's cash needs. EBITDA
should not be considered in isolation or as a substitute for net income,
cash flows from operating activities or other measures of liquidity
determined in accordance with generally accepted accounting principles.
(4) Represents gross call usage revenue per billed minute. Amounts exclude other
revenue-related items such as finance charges.
(5) Adjusted to reflect the sale of 3,750,000 shares of Common Stock by the
Company at an assumed public offering price of $11.00 per share and the
application of the estimated net proceeds therefrom. See "Use of Proceeds"
and "Capitalization."

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

Unless otherwise indicated, the information in this Prospectus (i) assumes
no exercise of the Underwriters' overallotment option, (ii) reflects the
reincorporation of the Company from Nevada to Delaware in April 1997, and the
associated changes in the Company's charter documents, (iii) reflects a 3-for-2
reverse split of the Common Stock effected in May 1997, and (iv) except in the
Consolidated Financial Statements, reflects the conversion of all outstanding
shares of Preferred Stock into 911,360 shares of Common Stock upon completion of
the offering. See "Description of Capital Stock" and "Underwriting."

4
<PAGE> 5

RISK FACTORS

The following risk factors should be considered carefully in addition to
the other information contained in this Prospectus before purchasing the shares
of Common Stock offered hereby. This Prospectus contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ materially from those projected in the forward-looking statements.
Factors that may cause such a difference include, but are not limited to, those
set forth below and elsewhere in this Prospectus.

Risks Associated with Limited Operating History in the International
Telecommunications Market.

The Company was incorporated in September 1993, but did not commence its
current business as an international long distance provider until the third
quarter of 1995. As a result, the Company's business must be considered in light
of the risks faced by early stage companies in the rapidly evolving
international telecommunications market. Early stage companies must respond to
external factors, such as competition and changing regulations, without the
resources, infrastructure and broader business base of more established
companies. Early stage companies also must respond to these risks while
simultaneously developing systems, adding personnel and entering new markets. As
a result, these risks can have a much greater effect on early stage companies.
If the Company does not successfully address such risks, the Company's business,
operating results and financial condition would be materially adversely
affected. See "Selected Consolidated Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

Operating Results Subject to Significant Fluctuations.

The Company's quarterly operating results are difficult to forecast with
any degree of accuracy because a number of factors subject these results to
significant fluctuations. As a result, the Company believes that
period-to-period comparisons of its operating results are not necessarily
meaningful and should not be relied upon as indications of future performance.

Factors Influencing Operating Results, Including Revenues, Costs and
Margins. The Company's revenues, costs and expenses have fluctuated
significantly in the past and are likely to continue to fluctuate significantly
in the future as a result of numerous factors. The Company's revenues in any
given period can vary due to factors such as call volume fluctuations,
particularly in regions with relatively high per-minute rates; the addition or
loss of major customers, whether through competition, merger, consolidation or
otherwise; the loss of economically beneficial routing options for the
termination of the Company's traffic; financial difficulties of major customers;
pricing pressure resulting from increased competition; and technical
difficulties with or failures of portions of the Company's network that impact
the Company's ability to provide service to or bill its customers. The Company's
cost of services and operating expenses in any given period can vary due to
factors such as fluctuations in rates charged by carriers to terminate the
Company's traffic; increases in bad debt expense and reserves; the timing of
capital expenditures, and other costs associated with acquiring or obtaining
other rights to switching and other transmission facilities; changes in the
Company's sales incentive plans; and costs associated with changes in staffing
levels of sales, marketing, technical support and administrative personnel. In
addition, the Company's operating results can vary due to factors such as
changes in routing due to variations in the quality of vendor transmission
capability; loss of favorable routing options; the amount of, and the accounting
policy for, return traffic under operating agreements; actions by domestic or
foreign regulatory entities; the level, timing and pace of the Company's
expansion in international and commercial markets; and general domestic and
international economic and political conditions. Since the Company does not
generally have long term arrangements for the purchase or resale of long
distance services, and since rates fluctuate significantly over short periods of
time, the Company's gross margins are subject to significant fluctuations over
short periods of time. The Company's gross margins also may be negatively
impacted in the longer term by competitive pricing pressures.

5
<PAGE> 6

Recent Examples of Factors Affecting Operating Results. The Company has
recently encountered significant difficulties in the collection of accounts
receivable from certain of its major customers. In the fourth quarter of 1996,
Hi-Rim Communications, Inc. ("Hi-Rim"), one of the Company's major customers,
informed the Company that it was experiencing financial difficulties and would
be unable to pay in full, on a timely basis, approximately $6.0 million in
outstanding accounts receivable. The Company accepted a secured note in the
amount of $3.4 million in lieu of a portion of past due payments and was able to
offset a portion of the amounts due by sending traffic to Hi-Rim. The Company
believes that it is unlikely to receive any additional payment from Hi-Rim under
the note or otherwise. As a result, the full amount of the approximately $5.3
million owed to the Company by Hi-Rim as of December 31, 1996, which was not
subsequently collected or for which no offsetting value was received, was
written-off in the fourth quarter of 1996. In the first quarter of 1997, Cherry
Communications, Inc. ("CCI"), the Company's largest customer in 1996, also
informed the Company that it was unable to pay in full, on a timely basis, its
accounts receivable balance. To account for the potential inability to collect
on the accounts receivable and outstanding deposits which the Company had made
to CCI, the Company increased its reserve against accounts receivable and
reserve against deposits by $3.5 million and $2.0 million, respectively. In
addition, the Company wrote off $820,000 of intangible assets relating to this
customer. These reserves and write-off reflect the full amount of future
benefits to have been received by the Company from assets related to CCI
recorded on the Company's Balance Sheet at December 31, 1996. The Company
continued to provide service to CCI through March 1997 and has received payment
for services provided in the first quarter of 1997 through a combination of cash
receipts from CCI and offsetting payables from the Company to CCI resulting from
the Company's use of CCI as a vendor. While the Company no longer provides
service to CCI, the Company is continuing to utilize CCI as a vendor and has
entered into various other contractual arrangements with CCI in order to
continue to offset outstanding accounts receivable. However, there can be no
assurance that the Company will be able to collect or continue to offset any
significant portion of the accounts receivable either through utilizing CCI as a
vendor or otherwise. The Company's ability to collect or offset the CCI accounts
receivable would be adversely affected to the extent that CCI's financial
condition deteriorates or CCI becomes subject to voluntary or involuntary
bankruptcy proceedings. In the event bankruptcy proceedings are commenced, CCI's
creditors or a bankruptcy trustee would likely assert that any payments
(including offsets) received by the Company in the 90 day period prior to the
commencement of the bankruptcy proceeding are "preference payments" and should
be returned to CCI for distribution among creditors. As a result, if bankruptcy
proceedings were commenced with respect to CCI prior to September 1997, the
Company could be required to repay amounts it received (including through
accounts payable offsets) during the 90 day preference period. In such event,
the Company's reserves may be inadequate and the Company may incur a higher than
anticipated bad debt expense, which could have a material adverse effect on the
Company's results of operations. The Company also took a $1.6 million write-off
in the first quarter of 1997 due to the failure of one of its customers,
NetSource, Inc., to pay its outstanding accounts receivable. The Company has
commenced litigation against NetSource, Inc. for all outstanding amounts. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Litigation." If the Company experiences similar
difficulties in the collection of accounts receivable from its other major
customers, the Company's financial condition and results of operations could be
materially adversely affected.

In addition, the Company's revenue growth slowed in the fourth quarter of
1996 and the first quarter of 1997 relative to the third quarter of 1996
primarily due to the Company significantly reducing the traffic it received from
Hi-Rim and CCI due to financial difficulties of these companies, an additional
relatively smaller decrease in traffic from CCI due to pricing changes and
transmission quality problems on several high volume routes, primarily as a
result of call set-up delay and an ability to transmit facsimiles, that caused
customers to choose alternate routes. If similar events occur in the future,
such events could have a material adverse affect on the Company's business,
operating results or financial condition. See "--Dependence on Other Long
Distance Providers; Customer Concentra-

6
<PAGE> 7

tion and Increased Bad Debt Exposure" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."

No Assurance that Recent Growth Will Continue; Potential Impact on Net
Income and Market Expectations. Although the Company's revenues have increased
in each of the last seven quarters, such growth should not be considered
indicative of future revenue growth or operating results. If revenue levels fall
below expectations, net income is likely to be disproportionately adversely
affected because a proportionately smaller amount of the Company's operating
expenses varies with its revenues. This effect is likely to increase as a
greater percentage of the Company's cost of services are associated with owned
and leased facilities. There can be no assurance that the Company will be able
to achieve or maintain profitability on a quarterly or annual basis in the
future.

Due to all of the foregoing factors, it is likely that in some future
quarter the Company's operating results will be below the expectations of public
market analysts and investors. In such event, the price of the Company's Common
Stock would likely be materially adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

Risks of International Telecommunications Business.

The Company has to date generated substantially all of its revenues by
providing international telecommunications services to its customers on a
wholesale basis. The international nature of the Company's operations involves
certain risks, such as changes in U.S. and foreign government regulations and
telecommunications standards, dependence on foreign partners, tariffs, taxes and
other trade barriers, the potential for nationalization and economic downturns
and political instability in foreign countries. In addition, the Company's
business could be adversely affected by a reversal in the current trend toward
deregulation of telecommunications carriers. The Company will be increasingly
subject to these risks to the extent that the Company proceeds with the planned
expansion of its international operations.

Risk of Dependence on Foreign Partners. The Company will increasingly rely
on foreign partners to terminate its traffic in foreign countries and to assist
in installing transmission facilities and network switches, complying with local
regulations, obtaining required licenses, and assisting with customer and vendor
relationships. The Company may have limited recourse if its foreign partners do
not perform under their contractual arrangements with the Company. The Company's
arrangements with foreign partners may expose the Company to significant legal,
regulatory or economic risks.

Risks Associated with Foreign Government Control and Highly Regulated
Markets. Governments of many countries exercise substantial influence over
various aspects of the telecommunications market. In some cases, the government
owns or controls companies that are or may become competitors of the Company or
companies (such as national telephone companies) upon which the Company and its
foreign partners may depend for required interconnections to local telephone
networks and other services. Accordingly, government actions in the future could
have a material adverse effect on the Company's operations. In highly regulated
countries in which the Company is not dealing directly with the dominant local
exchange carrier, the dominant carrier may have the ability to terminate service
to the Company or its foreign partner and, if this occurs, the Company may have
limited or no recourse. In countries where competition is not yet fully
established and the Company is dealing with an alternative carrier, foreign laws
may prohibit or impede the entry of such new carriers in the market.

Risks Associated with International Settlement Rates, International Traffic
and Foreign Currency Fluctuations. The Company's revenues and cost of long
distance services are sensitive to changes in international settlement rates,
imbalances in the ratios between outgoing and incoming traffic and foreign
currency fluctuations. International rates charged to customers are likely to
decrease in the future for a variety of reasons, including increased competition
between existing long distance providers, new entrants into the market and the
consummation of joint ventures among large international long distance providers
that facilitate targeted pricing and cost reductions. There can be no assurance
that the Company will be able to increase its traffic volume or reduce its
operating costs sufficiently to offset any resulting rate decreases. In
addition, the Company expects that an increasing portion of the Company's

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<PAGE> 8

net revenue and expenses will be denominated in currencies other than U.S.
dollars, and changes in exchange rates may have a significant effect on the
Company's results of operations. As the Company continues to pursue a strategy
of entering into operating agreements where it is economically advantageous to
do so, the Company's results of operations will become increasingly subject to
the risks of changes in international settlement rates and foreign currency
fluctuations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

Foreign Corrupt Practices Act. The Company is also subject to the Foreign
Corrupt Practices Act ("FCPA"), which generally prohibits U.S. companies and
their intermediaries from bribing foreign officials for the purpose of obtaining
or keeping business. The Company may be exposed to liability under the FCPA as a
result of past or future actions taken without the Company's knowledge by
agents, strategic partners and other intermediaries. Such liability could have a
material adverse effect on the Company's business, operating results and
financial condition.

Potential Adverse Affects of Government Regulation.

The Company's business is subject to various U.S. federal laws,
regulations, agency actions and court decisions. The Company's international
facilities-based and resale services are subject to regulation by the Federal
Communications Commission (the "FCC"). The FCC requires authorization prior to
leasing capacity, acquiring international facilities, and/or initiating
international service. Prior FCC approval is also required to transfer control
of an authorized carrier. The Company is also subject to the FCC rules that
regulate the manner in which international services may be provided, including,
for instance, the circumstances under which carriers may provide international
switched services by using private lines or route traffic through third
countries.

The FCC's Private Line Resale Policy. The FCC's private line resale policy
prohibits a carrier from reselling international private leased circuits to
provide switched services to a country unless the FCC has found that the country
affords U.S. carriers equivalent opportunities to engage in similar activities
in that country. Certain of the Company's arrangements with foreign carriers
involve the transmission of switched services for termination in a country that
has not been found by the FCC to offer equivalent resale opportunities. These
arrangements are with foreign carriers that are not the dominant carriers in
their respective foreign countries. There can be no assurance that the FCC, upon
viewing these alternate carrier arrangements, would permit these arrangements
under its private line resale policy. If the FCC finds that these arrangements
conflict with its policy, among other measures, it may issue a cease and desist
order or impose fines on the Company, which could have a material adverse effect
on the Company's business, operating results and financial condition. It is also
possible that the regulatory agency of the foreign government would find that
foreign law does not permit the operation of alternate carriers or that the
alternate carriers have not met foreign law requirements for such operations.
Such a finding could have a material adverse effect on the Company's business,
operating results and financial condition.

FCC Policies on Transit and Refile. The FCC is currently considering
whether to limit or prohibit the practice whereby a carrier routes, through its
facilities in a third country, traffic originating from one country and destined
for another country. The FCC has permitted third country calling where all
countries involved consent to the routing arrangements (referred to as
"transiting"). Under certain arrangements referred to as "refiling," the carrier
in the destination country does not consent to receiving traffic from the
originating country and does not realize the traffic it receives from the third
country is actually originating from a different country. The FCC to date has
made no pronouncement as to whether refile arrangements comport either with U.S.
or International Telecommunications Union ("ITU") regulations. It is possible
that the FCC will determine that refiling, as defined, violates U.S. and/or
international law, which could have a material adverse effect on the Company's
business, operating results and financial condition.

The FCC's International Settlements Policy. The Company is also required
to conduct its international business in compliance with the FCC's international
settlements policy (the "ISP"). The ISP

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<PAGE> 9

establishes the permissible arrangements for U.S.-based carriers and their
foreign counterparts to settle the cost of terminating each other's traffic over
their respective networks. It is possible that the FCC would take the view that
some of the Company's arrangements with alternative foreign carriers do not
comply with the existing ISP rules. If the FCC, on its own motion or in response
to a challenge filed by a third party, determines that the Company's foreign
carrier arrangements do not comply with FCC rules, among other measures, it may
issue a cease and desist order or impose fines on the Company. Such action could
have a material adverse effect on the Company's business, operating results and
financial condition.

Recent and Potential FCC Actions. Regulatory action that has been and may
be taken in the future by the FCC may enhance the intense competition faced by
the Company. The FCC recently enacted certain changes in its rules designed to
permit more flexibility in its ISP as a method of achieving lower cost-based
accounting rates as more facilities-based competition is permitted in foreign
markets. Specifically, the FCC has decided to allow U.S. carriers, subject to
certain competitive safeguards, to propose methods to pay for international call
termination that deviate from traditional bilateral accounting rates and the
ISP. The FCC has also proposed to establish lower ceilings ("benchmarks") for
the rates that U.S. carriers will pay foreign carriers for the termination of
international services. In separate proceedings, the FCC is considering
equivalency determinations for Australia, Chile, Denmark, Finland, Hong Kong and
Mexico. While these rule changes may provide more flexibility to the Company to
respond more rapidly to changes in the global telecommunications market, it will
also provide similar flexibility to the Company's competitors. The FCC is also
considering certain other international policy issues in several rulemaking
proceedings and in response to specific applications and petitions filed by
other telecommunications carriers, including mandating lower international
accounting rates. The resolution of these proceedings could have an adverse
effect on the Company's business.

Foreign Regulations. The Company may also be subject to regulation in
foreign countries in connection with certain of its business activities. For
example, the Company's use of transit, international simple resale ("ISR") or
other routing arrangements may be affected by laws or regulations in either the
transited or terminating foreign jurisdiction. Foreign countries, either
independently or jointly as members of the ITU, may have adopted or may adopt
laws or regulatory requirements regarding such services for which compliance
would be difficult or expensive, that could force the Company to choose less
cost-effective routing alternatives and that could adversely affect the
Company's business, operating results and financial condition.

In the United Kingdom ("U.K."), the Company's services are subject to
regulation by the Office of Telecommunications ("Oftel"). The regulatory regime
currently being introduced by Oftel to facilitate competition has a direct and
material effect on the ability of the Company to conduct its business in the
U.K. The Company has been granted licenses to provide international
facilities-based voice services from the U.K. ISR services over leased lines to
all international points from the U.K. There can be no assurance that the
Company will be granted the ISR license in the immediate future, or at all.
Failure to obtain such authority would prevent the Company from providing
certain resale services in the U.K. and would limit the Company's ability to
expand its operations. Future changes in government regulation could have a
material adverse effect on the Company's business, operating results or
financial condition.

To the extent that it seeks to provide telecommunications services in other
non-U.S. markets, the Company is subject to the developing laws and regulations
governing the competitive provision of telecommunications services in those
markets. The Company currently plans to provide a limited range of services in
Belgium, France, Germany and Mexico, as permitted by regulatory conditions in
those markets, and to expand its operations as these markets implement scheduled
liberalization to permit competition in the full range of telecommunications
services in the next several years. The nature, extent and timing of the
opportunity for the Company to compete in these markets will be determined, in
part, by the actions taken by the governments in these countries to implement
competition and the response of incumbent carriers to these efforts. There can
be no assurance that

9
<PAGE> 10

the regulatory regime in these countries will provide the Company with practical
opportunities to compete in the near future, or at all, or that the Company will
be able to take advantage of any such liberalization in a timely manner. See
"Business--Government Regulation."

Regulation of Customers. The Company's customers are also subject to
actions taken by domestic or foreign regulatory authorities that may affect the
ability of customers to deliver traffic to the Company. Regulatory sanctions
have been imposed on certain of the Company's customers in the past. While such
sanctions have not adversely impacted the volume of traffic received by the
Company from such customers to date, future regulatory actions could materially
adversely affect the volume of traffic received from a major customer, which
could have a material adverse effect on the Company's business, financial
condition and results of operations.

Dependence on Availability of Transmission Capacity.

During fiscal 1996, substantially all of the Company's revenue was derived
from the sale of international long distance services terminated through resale
arrangements with other long distance providers. The Company purchased capacity
from 51 vendors in the quarter ended March 31, 1997, six of which accounted for
a majority of the Company's capacity during the same period. There can be no
assurance that such resale arrangements will continue to be available to the
Company on a cost-effective basis or at all. Currently, most transmission
capacity used by the Company is obtained on a variable, per minute basis,
subjecting the Company to the possibility of unanticipated price increases and
service cancellations. The Company also requires high voice quality transmission
capacity, which may not always be available at cost-effective rates. If the
Company is not able to continue to enter into cost-effective resale arrangements
with its primary vendors, or is unable to locate suitable replacement vendors
that offer sufficient, high quality alternative capacity, the Company's
business, operating results and financial condition could be materially
adversely affected. For instance, to the extent that the Company's variable
costs increase, the Company may experience reduced or, in certain circumstances,
negative margins for some services. As its traffic volume increases on
particular routes, the Company expects to decrease its reliance on variable
usage arrangements and enter into fixed monthly or longer-term leasing or
ownership arrangements, subject to obtaining any requisite authorization. To the
extent that the Company does so, and incorrectly projects traffic volume in a
particular geographic area, the Company would experience higher fixed costs
without a related increase in revenue. The Company has invested substantial
resources and intends to continue to invest in developing its own global
transmission and switching facilities, which is a capital intensive and
time-consuming process. There can be no assurance that the Company will
successfully complete development of its global network in a timely manner and
within budget. See "Business--Network."

Management of Changing Business.

Increased Demands on Management and Need to Continue to Improve
Systems. The Company has recently experienced significant revenue growth and
has expanded the number of its employees and the geographic scope of its
operations. These factors have resulted in increased responsibilities for
management personnel and placed increased demands upon the Company's operating
and financial systems. The Company expects that its expansion into foreign
countries will lead to increased financial and administrative demands, such as
increased operational complexity associated with expanded network facilities,
administrative burdens associated with managing an increasing number of
relationships with foreign partners and expanded treasury functions to manage
foreign currency risks. The Company's accounting systems and policies have been
developed as the Company has experienced significant growth, and the Company
will require additional personnel, systems and policies to comply with the
reporting requirements of a publicly held company. Although the Company has
recently implemented a new financial accounting system in 1997, there can be no
assurance that the Company's personnel, systems, procedures and controls will be
adequate to support the Company's future operations. Difficulties encountered in
the Company's transition to a new accounting system or the failure to implement
and improve the Company's operation, financial and management systems as

10
<PAGE> 11

needed to accommodate any expansion of the Company's business could have a
material adverse effect on the Company's business, operating results and
financial condition. See "--Dependence on Key Personnel," "Business--Employees"
and "Management."

Risks of Expansion into Commercial Market. While the Company has focused
to date solely on the wholesale market, the Company intends to expand into the
commercial market and such expansion will increase the risk of bad debt exposure
and lead to higher operating costs. The Company also may be required to update
and improve its billing systems and procedures and/or hire new management
personnel to handle the demands of the commercial market. There can be no
assurance that the Company will be able to effectively manage the costs of and
risks associated with expansion into the commercial market.

Risks Associated with Complex Switching and Information Systems Hardware and
Software.

The Company's information systems and its Northern Telecom and
Stromberg-Carlson switching equipment are expensive to purchase, complex to
install and maintain, and subject to hardware defects and software bugs. The
Company may experience technical difficulties with its hardware or software
which could adversely affect the Company's ability to provide service to its
customers, manage its network, collect billing information, or perform other
vital functions. For example, in the fourth quarter of 1996 the Company
experienced difficulties associated with the installation of a software upgrade
to its switching equipment. If similar events occur in the future, such events
could have a material adverse affect on the Company's business, operating
results or financial condition.

Dependence on Key Personnel.

The Company's success depends to a significant degree upon the efforts of
senior management personnel and a group of employees with longstanding industry
relationships and technical knowledge of the Company's operations, in
particular, Christopher E. Edgecomb, the Company's Chief Executive Officer. Mr.
Edgecomb is bound by the terms of a Non-Compete Agreement, which restricts the
Company's ability to offer domestic interexchange products and services until
September 1997 and solicit certain customers for an 18 month period thereafter.
Several of the Company's key management personnel joined the Company in the past
six months, including the Company's Chief Financial Officer and Executive Vice
President--Operations and Engineering. The Company maintains and is the
beneficiary under a key person life insurance policy in the amount of $10.0
million with respect to Mr. Edgecomb. The Company's management team has limited
experience working together and there can be no assurance that they can
successfully integrate as a management team. The Company believes that its
future success will depend in large part upon its continuing ability to attract
and retain highly skilled personnel. Competition for qualified, high-level
telecommunications personnel is intense and there can be no assurance that the
Company will be successful in attracting and retaining such personnel. The loss
of the services of one or more of the Company's key individuals, or the failure
to attract and retain other key personnel, could materially adversely affect the
Company's business, operating results and financial condition. See "Management."

Significant Competition.

11
<PAGE> 12

Agreement have committed to open their telecommunications markets to
competition, foreign ownership and adopt measures to protect against
anticompetitive behavior, effective starting on January 1, 1998. As a result,
the Company believes that competition will continue to increase, placing
downward pressure on prices. Such pressure could adversely affect the Company's
gross margins if the Company is not able to reduce its costs commensurate with
such price reductions.

Competition from Domestic and International Companies and Alliances. The
U.S.-based international telecommunications services market is dominated by
American Telephone & Telegraph Co. ("AT&T"), MCI Communications Corp. ("MCI")
and Sprint Communications Company L.P. ("Sprint"). The Company also competes
with WorldCom, Inc., Pacific Gateway Exchange, Inc., TresCom International, Inc.
and other U.S.-based and foreign long distance providers, many of which have
considerably greater financial and other resources and more extensive domestic
and international communications networks than the Company. The Company
anticipates that it will encounter additional competition as a result of the
formation of global alliances among large long distance telecommunications
providers. For example, MCI and British Telecommunications recently announced a
proposed merger that would create a global telecommunications company called
Concert, and additionally have announced an alliance with Telefonica de Espana.
The effect of the proposed merger and alliance could create significantly
increased competition. Many of the Company's current competitors are also the
Company's customers. The Company's business would be materially adversely
affected to the extent that a significant number of such customers limit or
cease doing business with the Company for competitive or other reasons.
Consolidation in the telecommunications industry could not only create even
larger competitors with greater financial and other resources, but could also
adversely affect the Company by reducing the number of potential customers for
the Company's services.

Competition from New Technologies. The telecommunications industry is in a
period of rapid technological evolution, marked by the introduction of new
product and service offerings and increasing satellite and undersea cable
transmission capacity for services similar to those provided by the Company.
Such technologies include satellite-based systems, such as the proposed Iridium
and GlobalStar systems, utilization of the Internet for international voice and
data communications and digital wireless communication systems such as personal
communications services ("PCS"). The Company is unable to predict which of many
possible future product and service offerings will be important to maintain its
competitive position or what expenditures will be required to develop and
provide such products and services.

Increased Competition as a Result of a Changing Regulatory
Environment. The FCC recently granted AT&T's petitions to be classified as a
non-dominant carrier in the domestic interstate and international markets, which
has allowed AT&T to obtain relaxed pricing restrictions and relief from other
regulatory constraints, including reduced tariff notice requirements. These
reduced regulatory requirements could make it easier for AT&T to compete with
the Company. In addition, the Telecommunications Act of 1996 (the
"Telecommunications Act"), which substantially revises the Communications Act of
1934 (the "Communications Act"), permits and is designed to promote additional
competition in the intrastate, interstate and international telecommunications
markets by both U.S.-based and foreign companies, including the Regional Bell
Operating Companies ("RBOCs"). RBOCs, as well as other existing or potential
competitors of the Company, have significantly more resources than the Company.
The Company also expects that competition from carriers will increase in the
future along with increasing deregulation of telecommunications markets
worldwide. As a result of these and other factors, there can be no assurance
that the Company will continue to compete favorably in the future. See
"--Potential Adverse Affects of Government Regulation," "Business--Competition"
and "Business--Government Regulation."

12
<PAGE> 13

Dependence on Other Long Distance Providers; Customer Concentration and
Increased Bad Debt Exposure.

The Company's primary business as a wholesale long distance provider makes
it highly dependent upon traffic delivered to the Company by other long distance
providers pursuant to arrangements that can generally be terminated by the
provider on short notice. While the list of the Company's most significant
customers varies from quarter to quarter, the Company's five largest customers
accounted for approximately 43% of revenues in the year ended December 31, 1996
and 44% for the quarter ended March 31, 1997. During 1996, the Company's largest
customer, CCI, accounted for approximately 21% of the Company's revenue. The
Company ceased providing service to CCI in March 1997 due to its failure to pay
outstanding accounts receivable. No other customer accounted for more than 10%
of the Company's revenue in 1996. The Company could lose significant customer
traffic for many reasons, including the entrance into the market of significant
new competitors with lower rates than the Company, downward pressure on the
overall costs of transmitting international calls, transmission quality
problems, changes in U.S. or foreign regulations, or unexpected increases in the
Company's cost structure as a result of expenses related to installing a global
network or otherwise. Any significant loss of customer traffic would have a
material adverse effect on the Company's business, operating results and
financial condition.

The Company's customer concentration also amplifies the risk of non-payment
by customers. The Company's two largest customers in 1996 accounted for
approximately 29% of the Company's gross accounts receivable as of December 31,
1996. The Company has recently encountered significant difficulties in the
collection of accounts receivable from certain of its major customers. In the
fourth quarter of 1996, Hi-Rim, one of the Company's major customers, informed
the Company that it was experiencing financial difficulties and would be unable
to pay in full, on a timely basis, approximately $6.0 million in outstanding
accounts receivable. The Company accepted a secured note in the amount of $3.4
million in lieu of a portion of past due payments and was able to offset a
portion of the amounts due by sending traffic to Hi-Rim. The Company believes
that it is unlikely to receive any additional payment from Hi-Rim under the note
or otherwise. As a result, the full amount of the approximately $5.3 million
owed to the Company by Hi-Rim as of December 31, 1996, which was not
subsequently collected or for which no offsetting value was received, was
written-off in the fourth quarter of 1996. In the first quarter of 1997, CCI,
the Company's largest customer in 1996, also informed the Company that it was
unable to pay in full, on a timely basis, its accounts receivable balance. To
account for the potential inability to collect on the accounts receivable and
outstanding deposits which the Company had made to CCI, the Company increased
its reserve against accounts receivable and reserve against deposits by $3.5
million and $2.0 million, respectively. In addition, the Company wrote-off
$820,000 of intangible assets relating to this customer. These reserves and
write-off reflect the full amount of future benefits to have been received by
the Company from assets related to CCI recorded on the Company's Balance Sheet
at December 31, 1996. The Company also took a $1.6 million write-off in the
first quarter of 1997 due to the failure of one of its customers, NetSource,
Inc., to pay its outstanding accounts receivable. The Company has commenced
litigation against NetSource, Inc. for all outstanding amounts. See
"-- Operating Results Subject to Significant Fluctuations,"
"Business -- Litigation" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

While the Company performs ongoing credit evaluations of its customers, it
generally does not require collateral to support accounts receivable from its
customers and there can be no assurance that reserves will be adequate in future
periods. If the Company experiences similar difficulties in the collection of
accounts receivable from its other major customers, the Company's financial
condition and results of operations could be materially adversely affected. In
addition, the identity of the Company's major customers can change significantly
over short periods of time. For example, while Hi-Rim accounted for
approximately 9% of the Company's business during 1996, Hi-Rim accounted for
less than 1% of the Company's revenues during the fiscal quarter ended March 31,
1997, and Cable & Wireless, which accounted for approximately 5% of the
Company's revenues during 1996, accounted for approximately 10% of the Company's
revenues for the fiscal quarter ended March 31, 1997. In addition, CCI, which
accounted for approximately 21% of the Company's revenues during 1996 ceased

13
<PAGE> 14

to be a customer in March 1997. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

Capital Expenditures; Potential Need for Additional Financing.

Expansion of the Company's network facilities will require a significant
investment in equipment and facilities. While the Company believes that the
proceeds of this offering, combined with other sources of liquidity, will be
sufficient to fund its capital requirements for the next 12 months, the Company
may be required to obtain additional financing depending on factors such as the
rate and extent of the Company's international expansion, increased investment
in ownership rights in fiber optic cable and increased sales and marketing
expenses to support international wholesale and commercial operations. Issuance
of additional equity securities would result in dilution to stockholders. There
can be no assurance that additional financing will be available on terms
acceptable to the Company, or at all. The Company's inability to fund its
capital requirements would have a material adverse effect on the Company's
business, operating results and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

Risks Related to STAR Trademark.

The Company has been advised that trademark registration may not be
available for the "STAR Telecommunications" mark because several companies in
telecommunications-related industries hold registered trademarks that include
the word "star." Such companies could allege that the Company's use of the STAR
Telecommunications mark is confusingly similar to existing trademarks. Although
the Company has not received any communication from a third party with respect
to its use of its trademark, there can be no assurance that a third party
utilizing a similar mark will not allege that the Company's use infringes its
rights, that the Company would successfully defend any claim of infringement or
that the Company would not be ordered to cease using the mark and/or pay any
damages. The adoption of a new trademark or any related litigation could be
costly, negatively affect customer relationships, result in confusion in the
market and have a material adverse effect on the Company's business, operating
results and financial condition.

Effects of Natural Disasters and Other Catastrophic Events.

The Company's business is susceptible to natural disasters such as
earthquakes, as well as other catastrophic events such as fire, terrorism and
war. Although the Company has taken a number of steps to prevent its network
from being affected by natural disasters, fire and the like, such as building
redundant systems for power supply to the switching equipment, there can be no
assurance that any such systems will prevent the Company's switches from
becoming disabled in the event of an earthquake, power outage or otherwise. The
failure of the Company's network, or a significant decrease in telephone traffic
resulting from effects of a natural or man-made disaster, could have a material
adverse effect on the Company's relationship with its customers and the
Company's business, operating results and financial condition. See
"Business--Network."

No Prior Trading Market for Common Stock.

Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active trading market will
develop or be sustained after this offering. The initial public offering price
will be determined through negotiations among the Company, the Selling
Stockholders and the representatives of the Underwriters based on several
factors and may not be indicative of the market price of the Common Stock after
this offering. See "Underwriting."

Potential Volatility of Stock Price.

The market price of the shares of Common Stock is likely to be highly
volatile and may be significantly affected by factors such as actual or
anticipated fluctuations in the Company's operating

14
<PAGE> 15

results, changes in federal and international regulations, activities of the
largest domestic providers, industry consolidation and mergers, conditions and
trends in the international telecommunications market, adoption of new
accounting standards affecting the telecommunications industry, changes in
recommendations and estimates by securities analysts, general market conditions
and other factors. In addition, the stock market has from time to time
experienced significant price and volume fluctuations that have particularly
affected the market prices for the common stocks of emerging growth companies.
These broad market fluctuations may adversely affect the market price of the
Company's Common Stock. In the past, following periods of volatility in the
market price of a particular company's securities, securities class action
litigation has often been brought against the company. There can be no assurance
that such litigation will not occur in the future with respect to the Company.
Such litigation could result in substantial costs and a diversion of
management's attention and resources, which could have a material adverse effect
upon the Company's business, operating results and financial condition. See
"Underwriting."

Control of Company by Named Officers, Directors and Five Percent Stockholders.

Upon the consummation of this offering, the Named Officers (as defined
below), directors, five percent stockholders and their affiliates in the
aggregate will beneficially own approximately 55.2% of the outstanding shares of
Common Stock and the Company's Chief Executive Officer will beneficially own
approximately 46.6% of the outstanding shares. These stockholders will be able
to exercise control over all matters requiring stockholder approval, including
the election of directors and approval of significant corporate transactions.
Such concentration of ownership may have the effect of delaying or preventing a
change in control of the Company. See "Principal and Selling Stockholders."

Benefits of the Offering to Current Stockholders.

The offering will provide substantial benefits to existing stockholders of
the Company, particularly the present directors, executive officers, five
percent stockholders and their affiliates and related persons. Based upon an
assumed public offering price of $11.00 per share, the Selling Stockholders will
receive approximately $2.6 million in net proceeds, after deducting estimated
underwriting discounts and commissions. In addition, all existing stockholders
of the Company will benefit from the creation of a public market for the Common
Stock held by them after the closing of the Offering. Upon the closing of the
offering and after giving effect to the sale of Common Stock by the Selling
Stockholders, the present directors, executive officers, five percent
stockholders and their affiliates and related persons will beneficially own
outstanding shares of Common Stock having an aggregate market value equal to
approximately $96.2 million based on an assumed public offering price of $11.00
per share. See "Principal and Selling Stockholders."

Effect of Certain Charter Provisions; Anti-takeover Effects of Certificate of
Incorporation, Bylaws and Delaware Law.

Upon completion of this offering, the Company's Board of Directors will
have the authority to issue up to 5,000,000 shares of Preferred Stock and to
determine the price, rights, preferences, privileges and restrictions, including
voting and conversion rights of such shares, without any further vote or action
by the Company's stockholders. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock, while providing flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire a majority of the outstanding voting stock of the
Company. The Company has no current plans to issue shares of Preferred Stock.
The Company is also subject to the anti-takeover provisions of Section 203 of
the Delaware General Corporation Law, which will prohibit the Company from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. The application of Section 203 could have

15
<PAGE> 16

an effect of delaying or preventing a change in control of the Company. In
addition, upon the closing of the offering the Company's Amended and Restated
Certificate of Incorporation will provide for a classified Board of Directors
such that approximately only one-third of the members of the Board will be
elected at each annual meeting of stockholders. Classified boards may have the
effect of delaying, deferring or discouraging changes in control of the Company.
Further, certain provisions of the Company's Certificate of Incorporation and
Bylaws and of Delaware law could delay or make more difficult a merger, tender
offer or proxy contest involving the Company. Additionally, certain Federal
regulations require prior approval of certain transfers of control of
telecommunications companies, which could also have the effect of delaying,
deferring or preventing a change in control. See "Business-Government
Regulation," "Description of Capital Stock--Preferred Stock" and "--Anti-
takeover Effects of Provisions of the Certificate of Incorporation, Bylaws and
Delaware Law."

Shares Eligible for Future Sale.

On the date of this Prospectus, only the 4,000,000 shares offered hereby
(assuming no exercise of the Underwriters' over-allotment option) will be
immediately eligible for sale in the public market. An additional approximately
11,502,756 shares of Common Stock will be eligible for sale beginning 181 days
after the date of this Prospectus, unless earlier released, in whole or in part
and with or without notice to the public, by Hambrecht & Quist LLC. At various
times after 181 days after the date of this Prospectus, an additional
approximately 73,000 shares will become eligible for sale in the public market
upon expiration of their respective one-year holding periods, subject to certain
volume and resale restrictions as set forth in Rule 144 under the Securities Act
of 1933, as amended (the "Securities Act"). In addition, the Company intends to
register, following the effective date of this offering, a total of
approximately 2,830,000 shares of Common Stock subject to outstanding options or
reserved for issuance under the Company's stock and option plans. Certain
stockholders holding approximately 2,826,000 shares of Common Stock are entitled
to registration rights with respect to their shares of Common Stock. If such
stockholders, by exercising their demand registration rights, cause a large
number of securities to be registered and sold in the public market, such sales
could have an adverse effect on the market price of the Company's Common Stock.
Sales of substantial amounts of such shares in the public market after this
offering, or the prospect of such sales, could adversely affect the market price
of the Common Stock. Such sales also might make it more difficult for the
Company to sell equity securities or equity related securities in the future at
a time and price that the Company deems appropriate. See "Description of Capital
Stock," "Shares Eligible for Future Sale" and "Underwriting."

Immediate and Substantial Dilution.

The purchasers of Common Stock in this offering will experience immediate
and substantial dilution. To the extent outstanding options to purchase the
Company's Common Stock are exercised, there will be further dilution. See
"Dilution."

DESCRIPTION OF FORWARD-LOOKING STATEMENTS

This Prospectus contains forward-looking statements, which may be deemed to
include statements in "Management's Discussion and Analysis of Financial
Condition and Results of Operations," regarding the Company's strategy to lower
its cost of services and improve its gross margin, its expectation that return
traffic under operating agreements will be immaterial through at least the first
half of 1997, its intention to begin providing international long distance
services to commercial customers in certain European countries in the second
half of 1997, the Company's belief that this traffic has the potential to
generate higher gross margins, its belief that price declines may be offset in
part by increased calling volumes and decreased costs and its belief in the
sufficiency of capital resources. Forward-looking statements in "Business" may
be deemed to include projected growth in international telecommunications
traffic; the Company's strategy of marketing its services to foreign-based long
distance providers, expanding its U.S. and developing European switching
capabilities, and expanding into foreign commercial markets and in the longer
term into the U.S. commercial market; and the Company's expectations that its
London switch will be operational in mid-1997 and that it will

16
<PAGE> 17

acquire ownership rights in additional cables. Actual results could differ from
those projected in any forward-looking statements for the reasons detailed in
the other sections of this "Risk Factors" portion of the Prospectus, or
elsewhere in the Prospectus.

USE OF PROCEEDS

The net proceeds to the Company from the sale of the shares of Common Stock
to be sold by the Company in this offering are estimated to be $37,037,500
($39,083,500 if the Underwriters' over-allotment option is exercised in full),
after deducting underwriting discounts and commissions and estimated offering
expenses payable by the Company. The Company will not receive any of the
proceeds from the sale of shares of Common Stock by the Selling Stockholders.

The Company intends to use approximately $6.4 million of the proceeds of
the offering for the repayment of outstanding indebtedness under credit
facilities, including (i) approximately $5.3 million outstanding under a
revolving line of credit that bears interest at a rate of the bank's prime rate
plus 1.0%, certain amounts of which are convertible at the time of funding into
short-term obligations that bear interest either at LIBOR plus 3.5% or the
bank's cost of funds rate plus 3.5%, and which expires on July 1, 1997, (ii)
approximately $667,000 outstanding under a bank loan that bears interest at a
rate of prime plus 1.5% and which expires on October 1, 1999, (iii)
approximately $193,000 outstanding under bank loans at a variable interest rate
equal to the Wall Street Journal Prime Rate, approximately $41,500 of which is
due in June 1997 and $151,442 of which is due in July 1997, and (iv)
approximately $279,000 in borrowings under lines of credit from Christopher
Edgecomb, the Company's Chief Executive Officer, which amounts were drawn
subsequent to March 31, 1997 at an interest rate of 9.0% expiring on March 30,
1998. The Company intends to use approximately $30 million of the proceeds of
the offering for capital expenditures during 1997 to acquire digital fiber optic
cable capacity and to acquire and install new switching equipment. The remainder
of the proceeds are expected to be used for working capital, expansion of the
Company's marketing and sales organization and general corporate purposes.
Although the Company may use a portion of the net proceeds for possible
acquisition of businesses that are complementary to those of the Company, there
are no current plans in this regard. Pending such uses, the Company plans to
invest the net proceeds in short-term, interest-bearing, investment grade
securities. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business--Strategy" and "Certain Transactions."

DIVIDEND POLICY

The Company has never declared or paid any cash dividends on its Common
Stock and does not expect to do so in the foreseeable future. The Company
anticipates that all future earnings, if any, generated from operations will be
retained by the Company to develop and expand its business. Any future
determination with respect to the payment of dividends will be at the discretion
of the Board of Directors and will depend upon, among other things, the
Company's operating results, financial condition and capital requirements, the
terms of then-existing indebtedness, general business conditions and such other
factors as the Board of Directors deems relevant. In addition, the terms of the
Company's revolving credit facility with Comerica Bank, which is collateralized
by its accounts receivable, prohibits the payment of cash dividends without the
lender's consent.

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<PAGE> 18

CAPITALIZATION

The following table sets forth (i) the actual capitalization of the Company
as of March 31, 1997 and (ii) the capitalization of the Company as adjusted to
reflect changes in the Company's charter documents in connection with the
Company's reincorporation into Delaware, a 3-for-2 reverse stock split of the
Common Stock, the conversion of the preferred stock into 911,360 shares of
Common Stock upon the closing of this offering, the sale of the shares of Common
Stock offered hereby (assuming an offering price of $11.00 per share) and the
application of the estimated net proceeds therefrom. See "Use of Proceeds."

<TABLE>
<CAPTION>
MARCH 31, 1997
-----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term liabilities, less current portion............................ $ 5,849 $ 5,449
-------
Stockholders' equity:
Preferred stock: $0.001 par value, 1,367,050 shares authorized,
1,367,047 issued and outstanding on an actual basis; 5,000,000
authorized, no shares issued and outstanding as adjusted.......... 1 --
Common stock: $0.001 par value, 30,000,000 shares authorized,
10,914,396 shares issued and outstanding on an actual basis;
30,000,000 shares authorized, 15,575,756 shares outstanding as
adjusted(1)....................................................... 11 16
Additional paid-in capital............................................. 13,637 50,671
Deferred compensation.................................................. (98) (98)
Retained earnings...................................................... (5,212) (5,212)
------- -------
Stockholders' equity................................................. 8,339 45,377
------- -------
Total capitalization................................................. $14,188 $50,826
======= =======
</TABLE>

- ------------------------------
(1) Excludes 1,605,852 shares subject to outstanding options as of March 31,
1997 at a weighted average exercise price of approximately $4.15 per share.
Also excludes 1,214,148 shares reserved for issuance under the Company's
stock plans. See "Management--1997 Omnibus Stock Incentive Plan," "--1996
Outside Directors Nonstatutory Stock Option Plan" and Notes 8 and 10 of
Notes to Consolidated Financial Statements.

18
<PAGE> 19

DILUTION

The net tangible book value of the Company's Common Stock as of March 31,
1997, giving effect to the conversion of all outstanding shares of Preferred
Stock into 911,360 shares of Common Stock upon the closing of this offering, was
$8,339,000, or approximately $0.71 per share. "Net tangible book value" per
share represents the amount of total tangible assets of the Company less total
liabilities, divided by 11,825,756 shares of Common Stock outstanding. Net
tangible book value dilution per share represents the difference between the
amount per share paid by purchasers of shares of Common Stock in the offering
made hereby and the pro forma net tangible book value per share of Common Stock
immediately after completion of the offering. After giving effect to the sale of
3,750,000 shares of Common Stock in this offering at an assumed offering price
of $11.00 per share and the application of the estimated net proceeds therefrom,
the pro forma net tangible book value of the Company as of March 31, 1997 would
have been $45,376,500, or $2.91 per share. This represents an immediate increase
in net tangible book value of $2.20 per share to existing stockholders and an
immediate dilution in net tangible book value of $8.09 per share to purchasers
of Common Stock in the offering. Investors participating in this offering will
incur immediate, substantial dilution. This is illustrated in the following
table:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share..................... $11.00
Pro forma net tangible book value per share before the offering... $0.71
Increase per share attributable to new investors.................. 2.20
-----
Pro forma net tangible book value per share after the offering...... 2.91
-----
Net tangible book value dilution per share to new investors......... $ 8.09
=====
</TABLE>

The following table summarizes, on a pro forma basis as of March 31, 1997,
the difference between the existing stockholders and the purchasers of shares in
the offering with respect to the number of shares purchased from the Company,
the total consideration paid and the average price per share paid:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.... 11,825,756 75.9% $13,649,000 24.9% $ 1.15
New stockholders(1)...... 3,750,000 24.1 41,250,000 75.1 $ 11.00
---------- ----- ---------- -----
Totals......... 15,575,756 100.0% $54,899,000 100.0%
========== ===== ========== =====
</TABLE>

- ------------------------------
(1) Sales by the Selling Stockholders in this offering will reduce the number of
shares held by existing stockholders to 11,575,756, or 74.3% (11,175,756, or
70.8%, if the over-allotment option is exercised in full), and will increase
the number of shares held by new stockholders to 4,000,000, or 25.7%
(4,600,000, or 29.2%, if the over-allotment option is exercised in full), of
the total number of shares of Common Stock outstanding after this offering.
See "Principal and Selling Stockholders."

As of March 31, 1997, there were 1,605,852 shares subject to outstanding
options at a weighted average exercise price of approximately $4.15 per share,
and 1,214,148 shares reserved for issuance under the Company's stock plans. To
the extent outstanding options are exercised, there will be further dilution to
new investors. See "Management--1997 Omnibus Stock Incentive Plan," "--1996
Outside Director Nonstatutory Stock Option Plan" and Notes 8 and 10 of Notes to
Consolidated Financial Statements.

19
<PAGE> 20

SELECTED CONSOLIDATED FINANCIAL DATA

The following selected Consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and Notes thereto and
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," which are included elsewhere in this Prospectus. The statement of
operations data for the years ended December 31, 1994, 1995 and 1996, and the
balance sheet data at December 31, 1995 and 1996 are derived from audited
financial statements included elsewhere in this Prospectus. The balance sheet
data at December 31, 1994 are derived from audited financial statements not
included in this Prospectus. Although incorporated in 1993, the Company did not
commence business until 1994. The data presented for the three-month periods
ended March 31, 1996 and 1997 are derived from unaudited financial statements
and include, in the opinion of the Company's management, all adjustments
necessary to present fairly the data for such periods. The results for an
interim period are not necessarily indicative of the results to be expected for
a full fiscal year.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1994 1995 1996 1996 1997
------ ------- -------- ------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AND PER MINUTE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues.................................................... $ 176 $16,125 $208,086 $35,667 $ 71,008
Cost of services............................................ -- 14,357 188,430 32,286 63,738
------- ------ ------- ------
Gross profit......................................... 176 1,768 19,656 3,381 7,270
Operating expenses:
Selling, general and administrative expenses.............. 290 2,063 24,087 1,803 4,530
Depreciation and amortization............................. -- 128 1,073 108 722
------- ------ ------- ------
Income (loss) from operations........................ (114) (423) (5,504) 1,470 2,018
Other income (expense):
Interest income........................................... -- -- 83 -- 21
Interest expense.......................................... -- (64) (589) (78) (369)
Other expense............................................. (7) (80) (100) -- 48
------- ------ ------- ------
Income (loss) before provision for income taxes........... (121) (567) (6,110) 1,392 1,718
Provision for income taxes.................................. 1 1 534 544 286
------- ------ ------- ------
Net income (loss).................................... $ (122) $ (568) $ (6,644) $ 848 $ 1,432
======= ====== ======= ======
Pro forma net income (loss) per share(1).................... $ (0.54) $ 0.08 $ 0.11
Pro forma number of shares used in per share
computations(1)........................................... 12,198 11,281 12,825
OTHER CONSOLIDATED FINANCIAL AND OPERATING DATA:
EBITDA(2)................................................... $ (121) $ (375) $ (4,531) $ 1,578 $ 2,788
Cash provided by (used in) operating activities............. (63) (1,526) (2,332) 60 2,208
Capital expenditures........................................ 21 1,950 12,935 371 3,180
Billed minutes of use....................................... -- 38,106 479,681 85,375 172,455
Revenue per billed minute of use(3)......................... $ -- $0.4102 $0.4288 $0.4149 $0.4064
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------------- -----------
1994 1995 1996 1997
----- ------- ------- -----------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit)............................................ $(236) $(1,400) $(7,551) (8,363)
Total assets......................................................... 139 12,869 48,674 59,036
Long-term liabilities, net of current portion........................ -- 712 5,478 5,849
Retained deficit..................................................... (122) (690) (6,644) (5,212)
Stockholders' equity (deficit)....................................... (112) 413 6,887 8,339
</TABLE>

- ------------------------------
(1) See Notes 2 and 10 of Notes to Consolidated Financial Statements for an
explanation of the method used to determine the number of shares used in
computing pro forma net income (loss) per share.
(2) EBITDA represents earnings before interest income and expense, income taxes,
depreciation and amortization expense; whereas cash provided by (used in)
operating activities represents income or loss from operations plus
depreciation and amortization and also other adjustments for non-cash
amounts such as charges to bad debts as well as changes in operating assets
and liabilities. EBITDA does not represent cash flows as defined by
generally accepted accounting principles and does not necessarily indicate
that cash flows are sufficient to fund all the Company's cash needs. EBITDA
should not be considered in isolation or as a substitute for net income,
cash flows from operating activities or other measures of liquidity
determined in accordance with generally accepted accounting principles.
(3) Represents gross call usage revenue per billed minute. Amounts exclude other
revenue related items such as finance charges.

20
<PAGE> 21

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto included elsewhere in this
Prospectus. This discussion contains forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in the forward-looking statements as a result of certain
factors, including, but not limited to those discussed in "Risk Factors" and
elsewhere in this Prospectus.

OVERVIEW

The Company is an international long distance provider focused primarily on
providing highly reliable, low cost switched voice long distance services to
U.S. and foreign-based telecommunications companies. The Company currently
offers U.S.-originated long distance service to over 200 countries worldwide
through its flexible network of resale arrangements with other long distance
providers, various foreign termination relationships, international gateway
switches and leased and owned transmission facilities. Although the Company was
incorporated in 1993, it did not commence its current business as a provider of
long distance services until the second half of 1995. During 1994, the Company
was primarily engaged in activities outside the international telecommunications
industry. During the six months ended June 1995, the Company primarily acted as
an agent for, and provided various consulting services to, companies in the
telecommunications industry. Although the Company incurred expenses in the first
half of 1995 related to the start-up of its service as a long distance provider,
the Company did not install its first international gateway switch in Los
Angeles until June 1995. The Company recognized initial revenue as an
international long distance provider in August 1995. In June 1996, the Company
began operation of its second switching facility in New York.

From the third quarter of 1995 through the first quarter of 1997, the
Company focused primarily on building international traffic volume. The
Company's customer base grew from 32 customers at the end of 1995 to 88
customers at the end of March 1997. Minutes of use increased from 34.3 million
in the fourth quarter of 1995 to 172.5 million in the first quarter of 1997.
Revenue grew from $14.0 million in the fourth quarter of 1995 to $71.0 million
in the first quarter of 1997. See "Risk Factors -- Operating Results Subject to
Significant Fluctuations."

Revenue. Currently, all of the Company's revenue is generated by the sale
of international long distance services on a wholesale basis to other, primarily
domestic, long distance providers. In the fourth quarter of 1996, the Company
began to provide international long distance services to foreign-based
telecommunications companies. The Company records revenues from the sale of long
distance services at the time of customer usage. The Company's agreements with
its wholesale customers are short term in duration and the rates charged to
customers are subject to change from time to time, generally with five days
notice to the customer. However, the Company is beginning to offer longer term,
fixed price arrangements for certain countries. The Company's five largest
customers, including CCI and Hi-Rim, accounted for approximately 43% of gross
revenues in 1996. The Company's largest customer, CCI, accounted for
approximately 21% of revenue in 1996 and 15% in the first quarter of 1997. The
Company no longer provides service to CCI or Hi-Rim. The Company's five largest
customers in the first quarter of 1997 accounted for 44% of revenue in such
period. Any loss of, or decrease in usage by, the Company's major customers
could have a material adverse effect on the Company's business operating results
and financial condition. See "Risk Factors--Dependence on Other Long Distance
Providers; Customer Concentration and Increased Bad Debt Exposure" and
"--Operating Results Subject to Significant Fluctuations."

Gross Margin. The Company has pursued a strategy of attracting customers
and building calling volume and revenue by offering favorable rates compared to
other long distance providers. This strategy adversely impacted the Company's
gross margin, and will continue to impact gross margin to the extent that the
Company continues to seek to build volume on selected routes. Having
significantly

21
<PAGE> 22

increased its call volume, the Company is now focusing on lowering its cost of
services and improving its gross margin by (i) leveraging the Company's traffic
volumes and information systems to negotiate lower variable usage based costs
with domestic and foreign providers of transmission capacity, (ii) continuing to
invest in the Company's owned network facilities and to enter into other fixed
cost arrangements, such as long-term leases, when traffic volumes justify such
investment and (iii) continuing to utilize the Company's sophisticated
information systems to route calls over the most cost-effective routes.

Cost of services includes those costs associated with the transmission and
termination of international long distance services and has historically
consisted largely of payments to other long distance providers and, to a lesser
extent, line costs. Currently, most transmission capacity used by the Company is
obtained on a variable, per minute basis. As a result, most of the Company's
current cost of services is variable. The Company's contracts with its vendors
provide that rates may fluctuate, with rate change notice periods varying from
five days to one year, with certain of the Company's longer term arrangements
requiring the Company to meet minimum usage commitments in order to avoid
penalties. Such variability and the short-term nature of many of the contracts
subject the Company to the possibility of unanticipated cost increases and the
loss of cost-effective routing alternatives. Included in the Company's cost of
services are accruals for rate and minute disputes and unreconciled billing
differences between the Company and its vendors. Each quarter management reviews
the cost of services accrual and adjusts the balance for resolved items. See
"Risk Factors--Dependence on Availability of Transmission Capacity."

The Company has initially obtained transmission capacity on a variable, per
minute basis from other long distance providers, and is now in the process of
acquiring capacity on a fixed-cost basis, either through leasing or the purchase
of its own facilities, when traffic volume makes such a commitment
cost-effective. As the Company increases the portion of traffic transmitted over
owned or leased international facilities, cost of services will have an
increasing proportion of fixed costs, reflecting lease, ownership and
maintenance costs of the Company's owned network facilities.

The Company currently has operating agreements with long distance providers
in Norway, Denmark, Australia and Colombia, and is in the process of negotiating
additional operating agreements for other countries. Operating agreements
provide for the termination of traffic in, and return traffic to, the
international long distance providers' respective countries at a negotiated
"accounting rate." Under a traditional operating agreement, the international
long distance provider that originates more traffic compensates the long
distance provider in the other country by paying an additional "settlement
payment." The Company currently expects that any return traffic that it will
receive under such agreements will be immaterial through 1997.

The Company intends to begin providing international long distance services
to commercial customers in certain European countries in the second half of
1997. In the longer term, the Company also plans to expand into commercial
markets in the U.S. and in other deregulating countries. The Company believes
that traffic from commercial customers has the potential to generate higher
gross margins than wholesale traffic. The Company also expects, however, that an
expansion into this market will also increase the risk of bad debt exposure and
lead to higher operating costs. See "Risk Factors--Management of Changing
Business" and "--Dependence on Other Long Distance Providers; Customer
Concentration and Increased Bad Debt Exposure."

Prices in the international long distance market have declined in recent
years and, as competition continues to increase, the Company believes that
prices are likely to continue to decline. Additionally, the Company believes
that the increasing trend of deregulation of international long distance
telecommunications will result in greater competition, which could adversely
affect the Company's revenue per minute and gross margin. The Company believes,
however, that the effect of such decreases in prices may be offset in part by
increased calling volumes and decreased costs.

Operating Expenses. Selling, general and administrative costs consist
primarily of personnel costs, tradeshow and travel expenses, commissions and
consulting fees and professional fees, as well as an

22
<PAGE> 23

accrual for bad debt expense. These expenses have been increasing over the past
year, which is consistent with the Company's recent growth, accelerated
expansion into Europe, and investment in systems and facilities. The Company
expects this trend to continue and believes that additional selling, general and
administrative expenses will be necessary to support the expansion of sales and
marketing efforts, the expansion into commercial markets and operations.
Selling, general and administrative expenses in the fourth quarter of fiscal
1996 include $11.6 million in bad debt expense in connection with accounts
receivable, deposits and other assets related to two major customers who are no
longer receiving services from the Company. See "Risk Factors -- Operating
Results Subject to Significant Fluctuations."

Foreign Exchange. Although the Company's functional currency is the U.S.
dollar, the Company expects to derive an increasing percentage of its net
revenue from international operations and changes in exchange rates may have a
significant effect on the Company's results of operations. For example, the
accounting rate under operating agreements is often defined in monetary units
other than U.S. dollars, such as "special drawing rights" or "SDRs." To the
extent that the dollar declines relative to units such as SDRs, the dollar
equivalent accounting rate would increase. In addition, as the Company expands
into the commercial market in foreign countries, its exposure to foreign
currency rate fluctuations is expected to increase. The Company may choose to
limit such exposure by the purchase of forward foreign exchange contracts or
similar hedging strategies. There can be no assurance that any currency hedging
strategy would be successful in avoiding exchange-related losses. See "Risk
Factors--Risks of International Telecommunications Business."

Factors Affecting Future Operating Results. The Company's quarterly
operating results are difficult to forecast with any degree of accuracy because
a number of factors subject these results to significant fluctuations. As a
result, the Company believes that period-to-period comparisons of its operating
results are not necessarily meaningful and should not be relied upon as
indications of future performance.

The Company's revenues, costs and expenses have fluctuated significantly in
the past and are likely to continue to fluctuate significantly in the future as
a result of numerous factors. The Company's revenues in any given period can
vary due to factors such as call volume fluctuations, particularly in regions
with relatively high per-minute rates; the addition or loss of major customers,
whether through competition, merger, consolidation or otherwise; the loss of
economically beneficial routing options for the termination of the Company's
traffic; financial difficulties of major customers; pricing pressure resulting
from increased competition; and technical difficulties with or failures of
portions of the Company's network that impact the Company's ability to provide
service to or bill its customers. The Company's cost of services and operating
expenses in any given period can vary due to factors such as fluctuations in
rates charged by carriers to terminate the Company's traffic; increases in bad
debt expense and reserves; the timing of capital expenditures, and other costs
associated with acquiring or obtaining other rights to switching and other
transmission facilities; changes in the Company's sales incentive plans; and
costs associated with changes in staffing levels of sales, marketing, technical
support and administrative personnel. In addition, the Company's operating
results can vary due to factors such as changes in routing due to variations in
the quality of vendor transmission capability; loss of favorable routing
options; the amount of, and the accounting policy for, return traffic under
operating agreements; actions by domestic or foreign regulatory entities; the
level, timing and pace of the Company's expansion in international and
commercial markets; and general domestic and international economic and
political conditions. Since the Company does not generally have long term
arrangements for the purchase or resale of long distance services, and since
rates fluctuate significantly over short periods of time, the Company's gross
margins are subject to significant fluctuations over short periods of time. The
Company's gross margins also may be negatively impacted in the longer term by
competitive pricing pressures.

Although the Company's revenues have increased in each of the last nine
quarters, such growth should not be considered indicative of future revenue
growth or operating results. If revenue levels fall below expectations, net
income is likely to be disproportionately adversely affected because a

23
<PAGE> 24

proportionately smaller amount of the Company's operating expenses varies with
its revenues. This effect is likely to increase as a greater percentage of the
Company's cost of services are associated with owned and leased facilities.
There can be no assurance that the Company will be able to achieve or maintain
profitability on a quarterly or annual basis in the future. See "Risk
Factors--Risks Associated with Limited Operating History in the International
Telecommunications Market" and "--Operating Results Subject to Significant
Fluctuations."

RESULTS OF OPERATIONS

In 1994 the Company was primarily engaged in activities outside the
international telecommunications industry. During the six months ended June
1995, the Company primarily acted as an agent for, and provided consulting
services to, companies in the telecommunications industry. The Company
discontinued this business in September 1995 and, as a result, the Company
believes that a comparison of financial condition and results of operations
between the years ended 1994 and 1995 is not meaningful.

QUARTERS ENDED MARCH 31, 1997 AND 1996

Revenues. Revenues increased 98.9% to $71.0 million in the first quarter of
1997 from $35.7 million in the first quarter of 1996, with minutes of use
increasing 102.0% to 172.5 million in the first quarter of 1997, as compared to
85.4 million minutes of use in the comparable quarter of the year prior. The
increase in revenue resulted from an increase in new customers as well as
increased usage by existing customers.

Gross Margin. Gross profit increased to $7.3 million in the first quarter
of 1997 from $3.4 million in the first quarter of 1996. Gross margin improved to
10.2% from 9.5%, reflecting the negotiation of lower rates on routes with
significant traffic.

Selling, General and Administrative. Selling, general and administrative
expenses increased 150.0% to $4.5 million during the first quarter of 1997 from
$1.8 million in the comparable quarter one year earlier, and increased as a
percentage of revenue to 6.4% from 5.1% in the prior period. Selling, general
and administrative expenses increased between periods as the Company continued
to increase its employee base and incurred payroll, employee benefits,
commission and related expenses. Marketing activities including tradeshows and
travel also increased in support of the growing revenue and customer base.
Selling, general and administrative expenses also increased as a percentage of
revenues as a result of an increase in bad debt expense as a percentage of
revenues.

Depreciation. Depreciation increased to $722,000 in the first quarter of
1997 from $108,000 for the first quarter of 1996. Depreciation increased as a
result of the Company's continued expansion of its transmission network,
leasehold improvements associated with the Los Angeles and New York switching
facilities and switch site buildout.

Other Income (Expense). Other expense, net, increased to $300,000 in the
first quarter of 1997 from $78,000 in the first quarter of 1996. This increase
is primarily due to $369,000 in interest expense incurred under various bank and
stockholder lines of credit. This increase was offset by $21,000 in interest
income and $48,000 gain on the sale of short term investments and cash
equivalents from funds raised in private placements of equity securities during
1996.

Provision for Income Taxes. The Company's provision for income taxes
decreased to $286,000 in the first quarter of 1997 from $544,000 in the first
quarter of 1996 reflecting the write-off of a customer accounts receivable.

YEARS ENDED DECEMBER 31, 1996 AND 1995

Revenues. Revenues increased to $208.1 million in 1996 from $16.1 million
in 1995, with minutes of use increasing to 479.7 million in 1996, as compared to
38.1 million minutes of use in the prior year. The increase in revenue resulted
from the Company's commencement of operations as an interna-

24
<PAGE> 25

tional long distance carrier, an increase in the number of customers as compared
to the prior year and an increase in minutes of traffic from new and existing
customers. The increase in traffic is also attributable to an increase in the
number of routes with favorable rates that the Company was able to offer to
customers. The Company built its revenue and a customer base quickly by offering
reliable, low cost wholesale switched long distance services utilizing capacity
purchased from other long distance providers and by leveraging the industry
relationships of its senior management. In addition, as a reseller the Company
did not have to acquire rights to undersea cable or enter into operating or
other termination agreements. Any loss of, or decrease in usage by, the
Company's major customers could have a material adverse effect on the Company's
business operating results and financial condition. The Company's two largest
customers in 1996 accounted for 36% of revenue from late charges. See "Risk
Factors--Operating Results Subject to Significant Fluctuations" and
"--Dependence on Other Long Distance Providers; Customer Concentration and
Increased Bad Debt Exposure."

Gross Margin. Gross profit increased to $19.7 million in 1996 from $1.8
million for 1995. Gross margin decreased to 9.4% in 1996 from 11.0% in 1995,
reflecting the change from the Company's prior consulting business to operating
as an international long distance carrier. Gross margin was positively impacted
during 1996 by the negotiation of lower rates on routes with significant
traffic, and negatively impacted by increases in traffic on routes with lower
margins.

Selling, General and Administrative. Selling, general and administrative
expenses increased to $24.1 million in 1996 from $2.1 million in 1995, and
decreased as a percentage of revenue to 11.6% from 12.8% in the prior period.
Selling, general and administrative expenses increased between periods as the
Company increased its employee base and incurred payroll, employee benefits,
commission and related expenses. The Company also established a reserve for
doubtful accounts to reflect its significantly higher revenue levels and
invested in sales and marketing activities including tradeshows and travel. In
particular, in the fourth quarter of 1996, Hi-Rim, one of the Company's major
customers, informed the Company that it was experiencing financial difficulties
and would be unable to pay in full, on a timely basis, approximately $6.0
million in outstanding accounts receivable. The Company accepted a secured note
in the amount of $3.4 million in lieu of a portion of past due payments and was
able to offset a portion of the amounts due by sending traffic to Hi-Rim. The
Company believes that it is unlikely to receive any additional payment from
Hi-Rim under the note or otherwise. As a result, the full amount of the
approximately $5.3 million owed to the Company by Hi-Rim as of December 31, 1996
which was not subsequently collected or for which no offsetting value was
received, was written off in the fourth quarter of 1996. In the first quarter of
1997, CCI, the Company's largest customer in 1996, also informed the Company
that it was unable to pay in full, on a timely basis, its accounts receivable
balance. To account for the potential inability to collect on the accounts
receivable and outstanding deposits which the Company had made to CCI, the
Company increased its reserve against accounts receivable and reserve against
deposits by $3.5 million and $2.0 million, respectively. In addition, the
Company wrote-off $820,000 of intangible assets relating to this customer. These
reserves and write-off reflect the full amount of future benefits to have been
received by the Company from assets related to CCI recorded on the Company's
Balance Sheet at December 31, 1996. As a result, selling, general and
administrative expenses increased by $11.6 million. See "Risk
Factors--Dependence on Other Long Distance Providers; Customer Concentration and
Increased Bad Debt Exposure."

Depreciation. Depreciation increased to $1.1 million for 1996 from
$128,000 for 1995, but decreased as a percentage of revenues to 0.5% from 0.8%
in the prior period. Depreciation increased in absolute dollars as a result of
the Company's acquisition of operating equipment and leasehold improvements
associated with its Los Angeles and New York switching facilities and switch
site buildouts. The Company expects depreciation expense to increase as the
Company expands its ownership of switching and transmission facilities through
purchase or use of capital leases.

Other Income (Expense). Other expense, net, increased to $606,000 in 1996
from $144,000 in 1995. This increase is primarily due to a $100,000 legal
settlement in the second quarter of 1996 as well as

25
<PAGE> 26

$589,000 in interest expense incurred under various bank and stockholder lines
of credit. This increase was offset by $83,000 in interest income on short term
investments and cash equivalents from funds raised in private placements of
equity securities during the first three quarters of 1996.

Provision for Income Taxes. The Company had no provision for federal
income taxes in 1995, since the Company incurred a loss for the year. In
addition, the Company was an S corporation during 1995 and thus was only subject
to 1.5% tax on taxable income for state purposes with a minimum of $800 per
year. The pro forma provision for income taxes, assuming the Company was a C
corporation for all periods presented, does not differ from the actual tax
provision during 1995. During 1996 the provision for income taxes increased to
$534,000 as a result of timing differences between the provision for income
taxes and income taxes at statutory rates primarily relating to recognition of
reserves for bad debt expense.

26
<PAGE> 27

QUARTERLY RESULTS OF OPERATIONS

The Company initiated its international telecommunications business in the
third quarter of 1995. The following tables set forth certain unaudited
statement of operations data for each of the seven quarters in the period ended
March 31, 1997, as well as the percentage of the Company's revenues represented
by each item. The unaudited financial statements have been prepared on the same
basis as the audited financial statements contained herein and include all
adjustments (consisting only of normal recurring adjustments) that the Company
considers necessary for a fair presentation of such information when read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1995 1995 1996 1996 1996 1996 1997
--------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND PER MINUTE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues...................................... $ 1,622 $13,993 $35,667 $42,852 $61,169 $68,398 $ 71,008
Cost of services.............................. 1,420 12,926 32,286 38,754 56,527 60,863 63,738
------- ------- ------- ------- ------- ------- --------
Gross profit................................ 202 1,067 3,381 4,098 4,642 7,535 7,270
Operating expenses:
Selling, general and administrative
expenses.................................. 536 1,068 1,803 2,573 3,665 16,046 4,530
Depreciation and amortization............... 21 100 108 156 343 466 722
------- ------- ------- ------- ------- ------- --------
Total operating expenses............... 557 1,168 1,911 2,729 4,008 16,512 5,252
Income (loss) from operations................. (355) (101) 1,470 1,369 634 (8,977) 2,018
Other income (expense):
Interest income............................. -- -- -- 28 42 13 21
Interest expense............................ -- (60) (78) (109) (173) (229) (369)
Other expense............................... -- (80) -- (100) -- -- 48
------- ------- ------- ------- ------- ------- --------
Income (loss) before provision for income
taxes.................................. (355) (241) 1,392 1,188 503 (9,193) 1,718
Provision (benefit) for income taxes.......... -- 1 544 485 217 (712) 286
------- ------- ------- ------- ------- ------- --------
Net income (loss)......................... $ (355) $ (242) $ 848 $ 703 $ 286 $(8,481) $ 1,432
======= ======= ======= ======= ======= ======= ========
AS A PERCENTAGE OF REVENUE
---------------------------------------------------------------------
Revenues...................................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of services.............................. 87.5 92.4 90.5 90.4 92.4 89.0 89.8
------- ------- ------- ------- ------- ------- --------
Gross profit................................ 12.5 7.6 9.5 9.6 7.6 11.0 10.2
Operating expenses:
Selling, general and administrative
expenses.................................. 33.0 7.6 5.1 6.0 6.0 23.5 6.4
Depreciation and amortization............... 1.3 0.7 0.3 0.4 0.6 0.6 1.0
------- ------- ------- ------- ------- ------- --------
Total operating expenses............... 34.3 8.3 5.4 6.4 6.6 24.1 7.4
Income (loss) from operations................. (21.9) (0.7) 4.1 3.2 1.0 (13.1) 2.8
Other income (expense):
Interest income............................. -- -- -- 0.1 0.1 -- --
Interest expense............................ -- (0.4) (0.2) (0.3) (0.3) (0.3) (0.5)
Other expense............................... -- (0.6) -- (0.2) -- -- 0.1
------- ------- ------- ------- ------- ------- --------
Income (loss) before provision for income
taxes.................................. (21.9) (1.7) 3.9 2.8 0.8 (13.4) 2.4
Provision for income taxes.................... -- -- 1.5 1.1 0.4 (1.0) 0.4
------- ------- ------- ------- ------- ------- --------
Net income (loss)......................... (21.9)% (1.7)% 2.4% 1.6% 0.5% (12.4)% 2.0%
======= ======= ======= ======= ======= ======= ========
CONSOLIDATED OPERATING DATA:
Billed minutes of use......................... 3,783 34,323 85,375 104,098 137,963 152,245 172,455
Revenue per billed minute of use(1)........... $0.3999 $0.4113 $0.4149 $0.4071 $0.4400 $0.4413 $0.4064
</TABLE>

- ------------------------------
(1) Represents gross call usage revenue per billed minute. Amounts exclude other
revenue related items such as finance charges.

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<PAGE> 28

Revenues. Revenues increased each quarter since the Company first
recognized revenue as a long distance carrier in the quarter ended September 30,
1995. These increases reflected the increase in minutes of usage over the
respective quarters as the Company increased its customer base and as usage
increased among existing customers. The Company's revenue growth in the quarter
ending June 30, 1996 was slower relative to the quarter ended March 31, 1996
because of limited port capacity at both the Los Angeles and the New York switch
sites. The Company increased its port capacity by installing new switches at
both the Los Angeles and the New York switch sites in June and July of 1996. As
a result, the quarter ending September 30, 1996 reflects revenue growth
attributable to the additional port capacity of the new switches in Los Angeles
and New York. The Company's revenue growth slowed in the fourth quarter of 1996
relative to the prior quarter primarily due to the Company significantly
reducing the traffic it received from a major customer experiencing financial
difficulties, a relatively smaller decrease in traffic from another major
customer due to pricing changes and transmission quality problems on several
high volume routes, primarily as a result of call set-up delay and an ability to
transmit facsimiles, that caused customers to choose alternative routes. The
Company's revenue growth in the first quarter of 1997 reflects increased usage
by the Company's existing customer base.

Gross Margin. Gross margin fluctuated significantly from the quarter ended
September 30, 1995 through the quarter ended December 31, 1996. Gross margin
decreased to 7.6% in the quarter ended December 31, 1995 from 12.5% in the
quarter ended September 30, 1995, reflecting the Company's continued transition
from a higher margin consulting business as well as the Company's strategy of
attracting customers and building traffic volume by offering favorable rates
compared to other long distance providers. Gross margin for the quarters ended
March 31, 1996 and June 30, 1996 improved to 9.5% and 9.6%, respectively as the
Company gained traffic volume and customers for selected higher margin routes.
As traffic volumes increased, the Company negotiated lower rates on these
routes. Increased volume also distributed the fixed costs of the Los Angeles and
New York switch sites over a larger number of minutes. Gross margin for the
quarter ended September 30, 1996 declined because of price increases on three
routes which had significant traffic. The Company elected to maintain customer
traffic on these routes at the same prices while management sought alternative
routing arrangements. New rates for these routes were negotiated and effective
in the late third quarter of 1996. The Company's gross margins improved to 11.0%
in the fourth quarter of 1996 due in part to lower costs on several major
routes. The gross margin is also affected by the change in accrued line costs.
The accrued line costs at December 31, 1996 increased to $19.5 million from
$15.8 million at September 31, 1996. This increase is net of adjustments for the
favorable settlement of disputes and the favorable reconciliation of vendor
bills. However, the improvement in the Company's gross margin was offset by
lower traffic minutes on higher margin routes due to quality problems, primarily
unacceptably low call completion rates, with the most cost-effective routing
option and by higher volume traffic to several lower margin countries. The
Company's gross margin decreased to 10.2% in the first quarter of 1997 as a
result of increased costs on selected routes and high usage by a customer on a
short-term, low priced routing arrangement.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses have increased in each quarter through December 31,
1996, since the Company commenced operation as an international long distance
provider in July 1995. These increases in expenses are the result of increased
payroll and related expenses as the Company has built its sales, marketing and
administrative staffs, expansion of the Company's tradeshow and travel
activities, increases in commissions and consulting fees related to higher
revenue levels and the establishment of reserves for doubtful accounts. Selling,
general and administrative expenses have fluctuated as a percentage of revenues.
Selling, general and administrative expenses were higher in the quarter ended
December 31, 1995 than in the prior period, due to the establishment of a
reserve for doubtful accounts. These expenses for the quarter ended December 31,
1996 increased to 23.5% of revenues largely as a result of the Company's
increase of its reserve against accounts receivable and reserve against deposit
by $3.5 million and $2.0 million, respectively, the uncertainty of payment from
CCI, who currently is experiencing financial difficulties, the write-off of
$820,000 of intangible assets also relating to CCI and the

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<PAGE> 29

$5.3 million write-off of the Hi-Rim accounts receivables. These reserves and
write-off reflect the full amount of future benefits to be received by the
Company from assets related to CCI recorded on the Company's Balance Sheet at
December 31, 1996. See "Risk Factors -- Operating Results Subject to Significant
Fluctuations" and " -- Dependence on Other Long Distance Providers; Customer
Concentration and Increased Bad Debt Exposure."

Depreciation. Depreciation increased in the quarter ended December 31,
1995 as a result of the Company's acquisition of operating equipment and
leasehold improvements for its Los Angeles switching facility. Depreciation also
increased in the quarters ended September 30, 1996 and December 31, 1996 as a
result of the addition of a third switch in Los Angeles and the increase in
operating equipment and leasehold improvements related to the New York switching
facility.

LIQUIDITY AND CAPITAL RESOURCES

To date, the Company has funded its business primarily through funds
advanced from an officer of the Company, bank debt, the private sale of equity
and, since the first quarter of 1996, cash generated from operations. The
Company used net cash from operating activities of approximately $2.3 million in
1996, primarily comprised of a net loss plus an increase in accounts receivable
and prepaid expenses and other assets and a decrease in accounts payable, offset
in part by an increase in accrued line costs and the provision for doubtful
accounts. The Company's investing activities used cash of approximately $14.9
million during 1996 primarily resulting from capital expenditures and an
increase in deposits. The Company's financing activities provided cash of
approximately $18.8 million during 1996 primarily from borrowings under various
lines of credit, the sale of Preferred Stock and the sale of Common Stock,
offset by repayments under various lines of credit.

In the first quarter of 1997, net cash provided by operating activities was
$2.2 million, consisting primarily of net income plus increases in accounts
payable and the provision for doubtful accounts, offset in part by an increase
in accounts receivable and a decrease in accrued line costs. Net cash used in
investing activities in the first quarter of 1997 was $465,000, consisting
primarily of capital expenditures, offset in part by purchase of investments.
Net cash used in financing activities in the first quarter of 1997 was $2.7
million, consisting primarily of repayments under various lines of credit,
offset in part by borrowings under such lines of credit.

In the fourth quarter of 1996, the Company wrote off $5.3 million of the
accounts receivable from Hi-Rim. The Company also increased its bad debt expense
in the fourth quarter of 1996 by $6.3 million to provide for the potential
inability to collect on accounts receivable, deposits and other assets from CCI.
In addition, in the first quarter of 1997 the Company wrote off $1.6 million as
a result of the failure of one of its customers to pay its outstanding accounts
receivable balances. See "Risk Factors--Operating Results Subject to Significant
Fluctuations" and "--Dependence on Other Long Distance Providers; Customer
Concentration and Increased Bad Debt Exposure."

As of December 31, 1995 and 1996, and March 31, 1997 the Company had cash
and cash equivalents of approximately $164,000, $1.7 million, $766,000,
respectively, and a working capital deficit of approximately $1.4 million, $7.6
million and $8.4 million, respectively. As of March 31, 1997 the Company had (i)
approximately $5.3 million outstanding under a revolving line of credit that
bears interest at a rate of the bank's prime rate plus 1.0%, certain amounts of
which are convertible at the time of funding into short-term obligations that
bear interest either at LIBOR plus 3.5% or the bank's cost of funds rate plus
3.5%, and which expires on July 1, 1997, (ii) $667,000 outstanding under an
equipment lease line that bears interest at a rate of prime plus 1.5% and which
expires on October 1, 1999, (iii) approximately $6.4 million outstanding under
nine equipment leases relating to the Company's switching facilities, including
approximately $3.0 million outstanding under a lease for the acquisition of the
Company's switching equipment in New York, and (iii) approximately $193,000
outstanding under bank loans at a variable interest rate equal to the Wall
Street Journal Prime Rate, approximately $41,500 of which is due in June 1997
and $151,442 of which is due in July 1997. The Company intends to use
approximately $6.4 million of the proceeds from this offering for the

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<PAGE> 30

repayment of indebtedness under certain of these credit facilities. The Company
anticipates making capital expenditures of approximately $30.0 million in 1997
to expand the Company's global network. See "Use of Proceeds."

The Company currently is in discussions to obtain a new line of credit to
provide it with additional funding to meet its capital requirements and will use
capital lease financings as appropriate. There can be no assurance that the
Company will be able to obtain a new line of credit or additional capital lease
financing on commercially reasonable terms, if at all. The Company believes that
the net proceeds from the offering, borrowing capacity under a new line of
credit and available vendor financing, will be sufficient to fund the Company's
net cash used in operating activities, capital expenditures and other cash needs
for the next 12 months. Additional funding through the incurrence of debt or
sale of additional equity may be required to meet the Company's growth plans
beyond the first half of 1998, although there can be no assurance that such
additional funds can be obtained on acceptable terms, if at all. If necessary
funds are not available, the Company's business and results of operations and
the future expansion of the business could be materially adversely affected. See
"Risk Factors -- Capital Expenditures; Potential Need for Additional Financing."

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<PAGE> 31

BUSINESS

OVERVIEW

STAR Telecommunications is an international long distance provider offering
highly reliable, low cost switched voice services on a wholesale basis,
primarily to U.S.-based long distance carriers. STAR provides international long
distance service to over 275 foreign countries through a flexible network of
resale arrangements with long distance providers, various foreign termination
relationships, international gateway switches, and leased and owned transmission
facilities. The Company has grown its revenues rapidly by capitalizing on the
deregulation of international telecommunications markets, by combining
sophisticated information systems with flexible routing techniques and by
leveraging management's industry expertise. STAR commenced operations as an
international long distance provider in August 1995 and increased its revenues
from $16.1 million in 1995 to $208.1 million in 1996.

INDUSTRY BACKGROUND

The international long distance telecommunications services industry
consists of all transmissions of voice and data that originate in one country
and terminate in another. This industry is undergoing a period of fundamental
change which has resulted in substantial growth in international
telecommunications traffic. According to industry sources, worldwide gross
revenues for providers of international voice telephone service were
approximately $57 billion in 1995 and the volume of international traffic on the
public telephone network is expected to grow at a compound annual growth rate of
12% or more from 1995 through the year 2000.

From the standpoint of U.S.-based long distance providers, the industry can
be divided into two major segments: the U.S. international market, consisting of
all international calls billed in the U.S. and the overseas market, consisting
of all international calls billed in countries other than the U.S. The U.S.
international market has experienced substantial growth in recent years with
gross revenues from international long distance telephone services rising from
approximately $8.0 billion in 1990 to approximately $14.9 billion in 1995,
according to FCC data.

The Company believes that a number of trends in the international
telecommunications market will continue to drive growth in international
traffic, including:

- continuing deregulation and privatization of telecommunications markets;

- pressure to reduce international outbound long distance rates paid by end
users driven by increased competition among U.S. long distance carriers
and among emerging foreign long distance carriers in deregulated
countries;

- the dramatic increase in the availability of telephones and the number of
access lines in service around the world;

- the increasing globalization of commerce, trade and travel;

- the proliferation of communications devices such as faxes, cellular
telephones, pagers and data communications devices;

- increasing demand for data transmission services, including the Internet;
and

- the increased utilization of high quality digital undersea cable and
resulting expansion of bandwidth availability.

The Development of the U.S. and Overseas Markets

The 1984 deregulation of the U.S. telecommunications industry enabled the
emergence of new long distance companies in the U.S. Today, there are over 500
U.S. long distance companies, most of which are small or medium sized companies.
In order to be successful, these small and medium size companies have to offer
their customers a full range of services, including international long distance.

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<PAGE> 32

However, most of these carriers do not have the critical mass to receive volume
discounts on international traffic from the larger facilities-based carriers
such as AT&T, MCI and Sprint. In addition, these small and medium sized
companies have only a limited ability to invest in international facilities. New
international carriers such as STAR have emerged to take advantage of this
demand for less expensive international bandwidth. These emerging international
carriers act as aggregators of international traffic for smaller carriers,
taking advantage of larger volumes to obtain volume discounts on international
routes (resale traffic), or investing in facilities when volume on particular
routes justify such investments. Over time, as these emerging international
carriers have become established, they have also begun to carry overflow traffic
from the larger long distance providers that own overseas transmission
facilities.

In an increasingly competitive market for international and domestic
telecommunications, the resale market for telecommunications services has
expanded rapidly. According to FCC data, total billed revenue of U.S. resellers
of international switched services increased approximately 55% from 1994 to
1995, from approximately $1.1 billion to $1.7 billion. The expansion of the
resale market has been facilitated by the significant increase in international
fiber optic cable capacity, creating new routing options for providers of resale
services as facilities-based carriers seek to fill that new capacity.

Deregulation and privatization have also allowed new long distance
providers to emerge in foreign markets. By eroding the traditional monopolies
held by single national providers, many of which are wholly or partially
government owned PTTs, deregulation is providing U.S.-based providers the
opportunity to negotiate more favorable agreements with both the traditional
PTTs and emerging foreign providers. In addition, deregulation in certain
foreign countries is enabling U.S.-based providers to establish local switching
and transmission facilities in order to terminate their own traffic and begin to
carry international long distance traffic originated in that country.

International Switched Long Distance Services

International switched long distance services are provided through
switching and transmission facilities that automatically route calls to circuits
based upon a predetermined set of routing criteria. The call typically
originates on a local exchange carrier's network and is transported to the
caller's domestic long distance carrier. The domestic long distance provider
then carries the call to an international gateway switch. An international long
distance provider picks up the call at its gateway and sends it directly or
through one or more other long distance providers to a corresponding gateway
switch operated in the country of destination. Once the traffic reaches the
country of destination, it is then routed to the party being called though that
country's domestic telephone network.

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<PAGE> 33

International long distance providers can generally be categorized by their
ownership and use of switches and transmission facilities. The largest U.S.
carriers, such as AT&T, MCI and Sprint, primarily utilize owned transmission
facilities and generally use other long distance providers to carry their
overflow traffic. Since only very large carriers have transmission facilities
that cover the over 200 countries to which major long distance providers
generally offer service, a significantly larger group of long distance providers
own and operate their own switches but either rely solely on resale agreements
with other long distance carriers to terminate their traffic or use a
combination of resale agreements and owned facilities in order to terminate
their traffic as shown below:

[STAR FACILITIES Illustration]

Operating Agreements. Under traditional operating agreements,
international long distance traffic is exchanged under bilateral agreements
between international long distance providers in two countries. Operating
agreements provide for the termination of traffic in, and return traffic to, the
international long distance providers' respective countries at a negotiated
"accounting rate." Under a traditional operating agreement, the international
long distance provider that originates more traffic compensates the long
distance provider in the other country by paying an additional "settlement
payment."

Under a typical operating agreement both carriers jointly own the
transmission facilities between two countries. A carrier gains ownership rights
in a digital fiber optic cable by purchasing direct ownership in a particular
cable prior to the time the cable is placed in service, acquiring an
"Indefeasible Right of Use" ("IRU") in a previously installed cable, or by
leasing or obtaining capacity from another long distance provider that either
has direct ownership or IRU rights in the cable. In situations where a long
distance provider has sufficiently high traffic volume, routing calls across
directly owned or IRU cable is generally more cost-effective on a per call basis
than the use of short-term variable capacity arrangements with other long
distance providers or leased cable. However, direct ownership and acquisition of
IRU rights require a company to make an initial investment of its capital based
on anticipated usage.

Transit Arrangements. In addition to utilizing an operating agreement to
terminate traffic delivered from one country directly to another, an
international long distance provider may enter into transit arrangements
pursuant to which a long distance provider in an intermediate country carries
the traffic to a country of destination. Transit requires agreement among the
carriers in all the countries involved and is generally used for overflow
traffic or where a direct circuit is unavailable or not volume justified.

Resale Arrangements. Resale arrangements typically involve the wholesale
purchase and sale of transmission and termination services between two long
distance providers on a variable, per minute basis. The resale of capacity,
which was first permitted with the deregulation of the U.S. market, enabling the
emergence of new international long distance providers that rely at least in
part on capacity acquired on a wholesale basis from other long distance
providers. International long distance

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<PAGE> 34

calls may be routed through a facilities-based carrier with excess capacity, or
through multiple long distance resellers between the originating long distance
provider and the facilities-based carrier that ultimately terminates the
traffic. Resale arrangements set per minute prices for different routes, which
may be guaranteed for a set time period or subject to fluctuation following
notice. The resale market for international capacity is constantly changing, as
new long distance resellers emerge and existing providers respond to fluctuating
costs and competitive pressures. In order to be able to effectively manage costs
when utilizing resale arrangements, long distance providers need timely access
to changing market data and must quickly react to changes in costs through
pricing adjustments or routing decisions.

Alternative Termination Arrangements. As the international long distance
market has become deregulated, long distance providers have developed
alternative termination arrangements in an effort to decrease their costs of
terminating international traffic. Some of the more significant of these
arrangements include refiling, international simple resale ("ISR") and ownership
of switching facilities in foreign countries. Refiling of traffic, which takes
advantage of disparities in settlement rates between different countries, allows
traffic to a destination country to be treated as if it originated in another
country that enjoys lower settlement rates with the destination country, thereby
resulting in a lower overall termination cost. The difference between transit
and refiling is that, with respect to transit, the facilities-based long
distance provider in the destination country has a direct relationship with the
originating long distance provider and is aware of the arrangement, while with
refiling, it is likely that the long distance provider in the destination
country is not aware that the received traffic originated in another country and
with another resale carrier. To date, the FCC has made no pronouncement as to
whether refiling complies with either U.S. or International Telecommunications
Union ("ITU") regulations. With ISR, a long distance provider completely
bypasses the settlement system by connecting an international leased private
line to the public switched telephone network ("PSTN") on one or both ends.
While ISR currently is only sanctioned by applicable regulatory authorities on a
limited number of routes, including U.S.-U.K., U.S.-Sweden, U.S.-New Zealand,
U.K.-Worldwide and Canada-U.K., it is increasing in use and is expected to
expand significantly as deregulation of the international telecommunications
market continues. In addition, deregulation has made it possible for U.S.-based
long distance providers to establish their own switching facilities in certain
foreign countries, enabling them to directly terminate traffic. See
"--Government Regulation."

The highly competitive and rapidly changing international
telecommunications market has created a significant opportunity for carriers
that can offer high quality, low cost international long distance service.
Deregulation, privatization, the expansion of the resale market and other trends
influencing the international telecommunications market are driving decreased
termination costs, a proliferation of routing options, and increased
competition. Successful companies among both the emerging and established
international long distance companies will need to aggregate enough traffic to
lower costs of both facilities-based or resale opportunities, maintain systems
which enable analysis of multiple routing options, to invest in facilities and
switches and remain flexible enough to locate and route traffic through the most
advantageous routes.

THE STAR APPROACH

STAR offers high quality, reliable switched international long distance
services primarily to U.S.-based telecommunications companies that are seeking
to utilize low cost routing alternatives to augment their own service and to
address increased competition in their markets. The Company is also expanding to
serve foreign-based international long distance providers. The Company provides
international long distance service to over 275 foreign countries through a
flexible network consisting of resale arrangements with other long distance
providers, various foreign termination relationships, international gateway
switches and leased and owned transmission facilities. STAR continuously
monitors the market for long distance services, detecting trends in traffic
flow, international network availability and pricing. The Company believes that
this market knowledge enables it to react quickly to address market
opportunities and to take advantage of changing market conditions. STAR utilizes
its

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<PAGE> 35

flexible network structure and state-of-the-art digital switching technology to
continuously reroute traffic to the most cost-effective transmission alternative
for a particular country. STAR is further developing its network by establishing
relationships with foreign PTTs and other foreign providers of long distance
services and building network facilities, where existing and anticipated traffic
volumes justify such investment.

STRATEGY

The Company's objective is to be a leading provider of highly reliable, low
cost switched international long distance services on a wholesale basis to U.S.
and foreign-based telecommunications companies, as well as on a retail basis to
commercial customers. Key elements of the Company's strategy include the
following:

Capitalize on Projected International Long Distance Growth. The Company
believes that the international long distance market provides attractive
opportunities due to its higher revenue and profit per minute, and greater
projected growth rate as compared to the domestic long distance market. The
Company targets international markets with high volumes of traffic, relatively
high rates per minute and prospects for deregulation and privatization. The
Company believes that the ongoing trend toward deregulation and privatization
will create new opportunities for the Company in international markets. Although
the Company has focused to date primarily on providing services for U.S.-based
long distance providers, the Company also intends in the future to expand the
international long distance services it offers to foreign-based long distance
providers to the extent allowed by U.S. and international governmental
regulations.

Leverage Traffic Volume to Reduce Costs. The Company has focused and is
continuing to focus on building its volumes of international long distance
traffic. Higher traffic volumes strengthen the Company's negotiating position
with vendors, customers and potential foreign partners, which allows the Company
to lower its costs of service. In addition, higher traffic volumes on particular
routes allow the Company to lower its cost of services on these routes by
transitioning from acquiring capacity on a variable cost per minute basis to
fixed cost arrangements such as longer-term capacity agreements with major
carriers, long-term leases and ownership of facilities.

Expand Switching and Transmission Facilities. The Company is continuing to
pursue a flexible approach to expanding and enhancing its network facilities by
investing in both switching and transmission facilities where traffic volumes
justify such investments. The Company intends to expand its U.S. switching
facilities through the addition of switching facilities in Miami, Dallas and
Atlanta. The Company is also in the process of developing switching capabilities
in foreign countries with the addition of an international gateway switch in
London, England, and is planning to install a network of switches in selected
European cities.

Leverage Information Systems and Switching Capabilities. The Company
leverages its sophisticated information systems to analyze its routing
alternatives, and select the most cost-effective routing from among the
Company's network of resale arrangements with other long distance providers,
operating agreements and other alternative termination relationships. The
Company has invested significant resources in the development of software to
track specific usage information by customer and cost and profit information on
specific routes on a daily basis. The Company's information systems are critical
components in managing its customer and vendor relationships, routing traffic to
the most cost-effective alternative, and targeting marketing efforts.

Maintain High Quality. The Company believes that reliability, call
completion rates, voice quality, rapid set up time and a high level of customer
and technical support are key factors evaluated by U.S. and foreign-based
telecommunications companies in selecting a carrier for their international
traffic. The Company has installed state-of-the-art Northern Telecom and
Stromberg-Carlson switching equipment, is fully compliant with international C-7
and domestic SS-7 signaling standards, and strives to provide a consistently
high level of customer and technical support. The Company has technical

35
<PAGE> 36

support personnel at its facilities 24 hours per day, seven days per week to
assist its customers and to continually monitor network operation.

Expand Into Commercial Market. The Company intends to market its
international long distance services directly to commercial customers in foreign
countries, with an initial focus on the U.K. and selected European cities. The
Company intends to initially provide services to closed user groups comprised of
corporate customers. As regulatory restrictions ease in these foreign markets,
the Company intends to aggregate long distance traffic from a broader range of
commercial customers that will be routed over the Company's network back to the
U.S. or to an alternate destination. In the longer term, the Company also plans
to expand into commercial markets in the U.S. and in other deregulating
countries.

NETWORK

The Company provides international long distance services to over 275
foreign countries through a flexible, switched-based network consisting of
resale arrangements with other long distance providers, various foreign
termination relationships, international gateway switches and leased and owned
transmission facilities. The Company's network employs state-of-the-art digital
switching and transmission technologies and is supported by comprehensive
monitoring and technical support personnel who are at the Company's facilities
24 hours per day, seven days per week.

Termination Arrangements

International long distance traffic is ultimately terminated at the
destination point pursuant to termination relationships between a provider of
telecommunications services in the originating country and a provider in the
terminating country. The Company seeks to retain flexibility and maximize its
termination opportunities by utilizing a continuously changing mix of routing
alternatives, including resale arrangements, operating agreements and other
advantageous termination arrangements. This diversified approach is intended to
enable the Company to take advantage of the rapidly evolving international
telecommunications market in order to provide low cost international long
distance service to its customers.

The Company utilizes resale arrangements to provide it with multiple
options for routing traffic through its switches to each destination country.
Traffic under resale arrangements typically terminates pursuant to a third
party's correspondent relationships. The Company purchased capacity from 51
vendors in the quarter ended March 31, 1997, six of which provided the majority
of the Company's capacity during the same period. The majority of this capacity
is obtained on a variable, per minute basis. The Company's contracts with its
vendors provide that rates may fluctuate, with rate change notice periods
varying from five days to one year, with certain of the Company's longer term
arrangements requiring the Company to make minimum usage commitments in order to
avoid penalties. As a result of deregulation and competition in the
international telecommunications market, the pricing of termination services
varies by carrier depending on such factors as call traffic and time of day.
Since the Company does not typically enter into long term contracts with these
providers, pricing can change significantly over short periods of time. These
changes subject the Company to unanticipated price increases and service
cancellations. The Company's proprietary information systems enable the Company
to track the pricing variations in the international telecommunications market
on a daily basis, allowing the Company's management to locate and reroute
traffic to the most cost-effective alternatives. If the Company is not able to
continue to enter into cost-effective resale arrangements with its primary
vendors, or is unable to locate suitable replacement vendors the Company may not
be able to obtain sufficient, high quality alternative capacity, in which case
the Company's business, operating results and financial condition could be
materially adversely affected. See "Risk Factors--Dependence on Availability of
Transmission Capacity."

The Company currently has operating agreements with carriers in Norway,
Denmark, Australia and Colombia and is in the process of negotiating additional
operating agreements for other countries.

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<PAGE> 37

The Company has been and will continue to be selective in entering into
operating agreements. The Company also has agreements with two providers of long
distance services in the Asia/Pacific Rim region for termination of U.S.
originated traffic that the Company aggregates in the U.S. and routes over a
leased network to such countries. The Company is exploring similar relationships
with carriers in other countries. The FCC or foreign regulatory agencies may
take the view that such arrangements are not in compliance with current
regulatory policies relating to private line resale. The operations of
alternative carriers like the Company's partners, who compete with the PTT, may
not be permitted by foreign regulatory agencies. To the extent that the revenue
generated under such arrangements becomes a significant portion of overall
revenue, the loss of such arrangements, whether as a result of regulatory
problems or otherwise, could have a material adverse effect on the Company's
business, operating results and financial condition. In addition, the FCC could
impose a range of sanctions on the Company, including fines or forfeitures, to
the extent it determined any of the Company's arrangements to be non-compliant
with FCC rules. See "Risk Factors--Risks of International Telecommunications
Business," "-- Potential Adverse Affects of Government Regulation" and "Business
- -- Government Regulation."

Switches and Transmission Facilities

International long distance traffic to and from the U.S. is generally
transmitted through an international gateway switching facility across undersea
digital fiber optic cable or via satellite to a termination point. International
gateway switches are digital computerized routing facilities that receive calls,
route calls through transmission lines to their destination and record
information about the source, destination and duration of calls. The switches
are linked to digital fiber optic cables, which are typically owned by consortia
of international carriers. The Company's global network facilities include both
international gateway switches and rights to use undersea digital fiber optic
cable.

The Company has international gateway switches, together with sophisticated
switching software, installed in Los Angeles and New York City. Each gateway
includes a Northern Telecom DMS 250/300 and two Stromberg-Carlson DCO switches.
The software in the Company's switches provide continuous and detailed feedback
about incoming and outgoing call traffic to the Company's proprietary reporting
software and to its billing system. The reporting software provides detailed
real-time vendor and customer usage reports, which allow the Company to seek the
most cost-effective routing of calls and to target customers who might absorb
increased levels of traffic. The Company has installed multiple redundancies
into its switching facilities to decrease the risk of a network failure. For
example, the Company employs both battery and generator power back-up and has
installed hardware that automatically shifts the system to auxiliary power
during a power outage, rather than relying on manual override. In addition, the
Company has contracted with a third party to provide the Company with access to
a mobile emergency power supply.

The Company's Los Angeles-based switch generally routes the majority of the
Company's Asian and Pacific Rim traffic and a portion of the Company's South
American traffic, while the New York switch generally routes the majority of the
Company's European and African traffic and the remainder of the South American
traffic. The Company plans to add switching facilities in Dallas, Texas, Miami,
Florida and Atlanta, Georgia to more efficiently address the South and Central
American markets. The Company is also installing a gateway switch in London,
England, which will serve as the focal point for the routing of calls through a
network of switches to be located in selected European cities. The Company
currently expects the London switch to be operational in mid-1997. There can be
no assurance that these facilities will become operational within the time frame
currently anticipated by the Company.

The Company currently owns or has IRUs in three trans-Atlantic (Canus-1,
Cantat-3 and TAT-12/13) and two interEuropean (Odin and Rioja) digital fiber
optic cables serving the U.K., Norway and Denmark, two trans-Pacific cables
(TPC-5 and APCN) serving Australia and the Philippines, one interEuropean cable
(UK Netherlands 14) and is in the process of negotiating to acquire ownership
rights or IRUs in other cables. The Company plans to increase its investment in

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<PAGE> 38

direct and IRU ownership of cable in situations where the Company enters into
operating agreements and in other situations in which it determines that such an
investment would enhance operating efficiency or reduce transmission costs.

The cost for each unit of transmission capacity in jointly owned carrier
undersea cables depends on the percentage of cable capacity that has been
purchased. The total cost of the cable is fully allocated among the participants
of the physical capacity of the cable. The per-unit cost of capacity declines as
the percentage of cable capacity is fully purchased.

SALES, MARKETING AND CUSTOMERS

The Company markets its services on a wholesale basis to other
telecommunications companies through its experienced direct sales force and
marketing/account management team who leverage the long term industry
relationships of the Company's senior management. The Company reaches its
customers primarily through domestic and international trade shows and through
relationships gained from years of experience in the telecommunications
industry. As of March 31, 1997, the Company had 13 sales and marketing
employees.

The Company's sales and marketing employees utilize the extensive, customer
specific usage reports and network utilization data generated by the Company's
sophisticated information systems to negotiate agreements with customers and
prospective customers more effectively and to rapidly respond to changing market
conditions. The Company believes that it has been able to compete more
effectively as a result of the personalized service and ongoing senior
management-level attention that is given to each customer.

In connection with the Company's proposed expansion into the commercial
market, the Company expects to utilize a direct sales force. Establishment of a
sales force capable of effectively expanding the Company's services into the
retail market can be expected to require substantial efforts and management and
financial resources. See "Risk Factors--Management of Changing Business."

The Company's wholesale customers include both facilities-based carriers
and switch-based long distance providers that purchase the Company's services
for resale to their own customers. In the first quarter of 1997, the Company
provided switched long distance services to 88 customers, including eight of the
twelve largest U.S.-based long distance carriers. In 1996, the Company's largest
customer, CCI, accounted for approximately 21% of the Company's revenue. No
other customer accounted for more than 10% of the Company's revenue during such
period. The Company no longer provides service to CCI. In 1995, CCI accounted
for 36.5% of the Company's revenue. In 1994, during which time the Company was
engaged in activities unrelated to its current business, the Company's largest
customer, CareTel, accounted for 56% of the Company's revenue. Any loss or
decrease in usage by the Company's major customers could have a material adverse
effect on the Company's business, operating result or financial condition. See
"Risk Factors--Dependence on Other Long Distance Providers; Customer
Concentration and Increased Bad Debt Exposure."

INFORMATION AND BILLING SYSTEMS

The Company's operations use advanced information systems including call
data collection and call data storage linked to a proprietary reporting system.
The Company also maintains redundant billing systems for rapid and accurate
customer billing. The Company's systems enable it, on a real-time basis to
determine the most cost-effective termination alternatives, monitor customer
usage and manage profit margins. The Company's systems also enable it to ensure
accurate and timely billing and reduce routing errors.

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<PAGE> 39

The Company's proprietary reporting software compiles call, price and cost
data into a variety of reports which the Company can use to re-program its
routes on a real time basis. The Company's reporting software can generate the
following reports as needed:

- customer usage, detailing usage by country and by time period within
country, in order to track sales and rapidly respond to any loss of
traffic from a particular customer;

- country usage, subtotaled by vendor or customer, which assists the
Company with route and network planning;

- vendor rates, through an audit report that allows management to determine
at a glance which vendors have the lowest rates for a particular country
in a particular time period;

- vendor usage by minute, enabling the Company to verify and audit vendor
bills;

- dollarized vendor usage to calculate the monetary value of minutes passed
to the Company's vendors, which assists with calculating operating margin
when used in connection with the customer reports; and

- loss reports used to rapidly highlight routing alternatives that are
operating at a loss as well as identifying routes experiencing
substantial overflow.

The Company has built multiple redundancies into its billing and call data
collection systems. Two call collector computers receive redundant call
information simultaneously, one of which produces a file every 24 hours for
billing purposes while the other immediately forwards the call data to corporate
headquarters for use in customer service and traffic analysis. The Company
maintains two independent and redundant billing systems in order to both verify
billing internally and to ensure that bills are sent out on a timely basis. All
of the call data, and resulting billing data, are continuously backed up on tape
drives and redundant storage devices.

COMPETITION

The international telecommunications industry is intensely competitive and
subject to rapid change. The Company's competitors in the international
wholesale switched long distance market include large, facilities-based
multinational corporations and PTTs, smaller facilities-based providers in the
U.S. and overseas that have emerged as a result of deregulation, switched-based
resellers of international long distance services and international joint
ventures and alliances among such companies. International wholesale switched
long distance providers compete on the basis of price, customer service,
transmission quality, breadth of service offerings and value-added services. The
Company believes that it competes favorably on the basis of price, transmission
quality and customer service. The number of the Company's competitors is likely
to increase as a result of the new competitive opportunities created by the WTO
Agreement. Further, under the terms of the WTO Agreement, the United States and
the other 67 countries participating in the Agreement have committed to open
their telecommunications markets to competition, and foreign ownership and adopt
measures to protect against anticompetitive behavior, effective starting on
January 1, 1998. As a result, the Company believes that competition will
continue to increase, placing downward pressure on prices. Such pressure could
adversely affect the Company's gross margins if the Company is not able to
reduce its costs commensurate with such price reductions.

Competition from Domestic and International Companies and Alliances. The
U.S.-based international telecommunications services market is dominated by
AT&T, MCI and Sprint. The Company also competes with WorldCom, Inc., Pacific
Gateway Exchange, Inc., TresCom International, Inc. and other U.S.-based and
foreign long distance providers, many of which have considerably greater
financial and other resources and more extensive domestic and international
communications networks than the Company. The Company anticipates that it will
encounter additional competition as a result of the formation of global
alliances among large long distance telecommunications providers. For example,
MCI and British Telecommunications recently announced a proposed merger that
would create a

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<PAGE> 40

global telecommunications company called Concert, and additionally have
announced an alliance with Telefonica de Espana. The effect of the proposed
merger and alliance could create significantly increased competition. Many of
the Company's current competitors are also the Company's customers. The
Company's business would be materially adversely affected to the extent that a
significant number of such customers limit or cease doing business with the
Company for competitive or other reasons. Consolidation in the
telecommunications industry could not only create even larger competitors with
greater financial and other resources, but could also adversely affect the
Company by reducing the number of potential customers for the Company's
services.

Competition from New Technologies. The telecommunications industry is in a
period of rapid technological evolution, marked by the introduction of new
product and service offerings and increasing satellite and undersea cable
transmission capacity for services similar to those provided by the Company.
Such technologies include satellite-based systems, such as the proposed Iridium
and GlobalStar systems, utilization of the Internet for international voice and
data communications and digital wireless communication systems such as PCS. The
Company is unable to predict which of many possible future product and service
offerings will be important to maintain its competitive position or what
expenditures will be required to develop and provide such products and services.

Increased Competition as a Result of a Changing Regulatory
Environment. The FCC recently granted AT&T's petitions to be classified as a
non-dominant carrier in the domestic interstate and international markets, which
has allowed AT&T to obtain relaxed pricing restrictions and relief from other
regulatory constraints, including reduced tariff notice requirements. These
reduced regulatory requirements could make it easier for AT&T to compete with
the Company. In addition, the Telecommunications Act, which substantially
revises the Communications Act, permits and is designed to promote additional
competition in the intrastate, interstate and international telecommunications
markets by both U.S.-based and foreign companies, including the RBOCs. RBOCs, as
well as other existing or potential competitors of the Company, have
significantly more resources than the Company. The Company also expects that
competition from carriers will increase in the future along with increasing
deregulation of telecommunications markets worldwide. As a result of these and
other factors, there can be no assurance that the Company will continue to
compete favorably in the future. See "Risk Factors--Potential Adverse Affects of
Government Regulation" and "--Significant Competition."

GOVERNMENT REGULATION

The Company provides international facilities-based and resale services
subject to the regulatory jurisdiction of the FCC. The Company also may be
subject to regulation in foreign countries in connection with certain business
activities. For example, the Company's use of transit agreements or
arrangements, if any, may be affected by regulations in either the transited or
terminating foreign jurisdiction. There can be no assurance that the FCC or
foreign countries will not adopt regulatory requirements that could adversely
affect the Company. See "Risk Factors--Potential Adverse Affects of Government
Regulation."

Federal Regulation

General Requirements. The Company must comply with the requirements of
common carriage under the Communications Act, including the offering of service
on a non-discriminatory basis at just and reasonable rates, and obtaining FCC
approval prior to any assignment of authorizations or any transfer de jure or de
facto control of the Company. The FCC has authority to enforce the
Communications Act and its rules as they may apply to carriers such as the
Company either in proceedings initiated upon its own motion or in response to
challenges by third parties.

The FCC has established different levels of regulation for dominant and
non-dominant carriers. The Company is classified as a non-dominant carrier for
international service. The Communications Act and the FCC's rules require all
international carriers, including the Company, to obtain authority

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<PAGE> 41

under Section 214 of the Communications Act prior to leasing or acquiring
capacity, and/or initiating international telecommunications services. Carriers
must also file at the FCC and maintain tariffs containing the rates, terms, and
conditions applicable to their services, as well as comply with various FCC
reporting and contract filing requirements. The trend at the FCC has been to
reduce regulation and facilitate competition. To that end, the FCC recently
declared AT&T to be a non-dominant international carrier. Nevertheless, an
otherwise non-dominant U.S.-based carrier may be subject to dominant carrier
regulation on a specific international route if it is affiliated with a foreign
carrier operating at the foreign point. The Company has no affiliations that
would subject it to dominant carrier treatment on any route.

International Services. FCC rules require the Company to obtain
facilities-based Section 214 authorization to operate its channels of
communication via satellites and undersea fiber optic cables, and Section 214
resale authority to resell international services. The Company holds both
facilities-based and resale international authorizations, including a "global"
Section 214 authorization that provides broad authority to offer switched and
private line international services. As required by FCC rules, the Company has
filed an international tariff with the FCC.

The FCC imposes few restrictions on the resale of international switched
services. The FCC does, however, limit the resale of international private lines
for the provision of switched telecommunications services interconnected to the
public switched network at one end or at both ends, generally referred to as
"private line resale." Private line resale is permitted only on those routes
where the FCC has found that U.S. carriers have equivalent opportunities to
offer similar services in the foreign country. The FCC permits private line
resale to Canada, the U.K., Sweden and New Zealand and is considering
applications for equivalency determinations in Australia, Denmark, Chile,
Finland and Mexico. As a result of the recent signing of the WTO Agreement, the
FCC may repeal or revise the "equivalency" test and apply the more inclusive WTO
standards.

The Company has entered into agreements with certain foreign carriers to
provide switched services over leased lines. The Company has agreed to pay a
termination charge to compensate the foreign carriers for terminating the
services over their networks. It is possible that the FCC would adopt the view
that these arrangements do not comply with the private line resale policy and
filing requirements that pertain to certain carrier agreements. In that event,
the FCC could, among other measures, impose a cease and desist order and/or
impose fines on the Company. There can be no assurance that the FCC's action in
this regard, if any, would not have a material adverse effect on the Company's
business.

The Company must also conduct its international business in compliance with
the FCC's international settlements policy ("ISP"). The ISP establishes the
permissible arrangements for U.S.-based carriers and the foreign correspondents
to settle the cost of terminating each other's traffic over their respective
networks. The precise terms of settlement are established on a correspondent
agreement, also referred to as an operating agreement. Among other terms, the
operating agreement establishes the types of service covered by the agreement,
the division of revenues between the carrier that bills for the call and the
carrier that terminates the call at the other end, the frequency of settlements
(i.e., monthly or quarterly), the currency in which payments will be made, the
formula for calculating traffic flows between countries, technical standards,
procedures for the settlement of disputes, the effective date of the agreement
and the term of the agreement.

The ISP is designed to eliminate foreign carriers' incentives and
opportunities to discriminate in their operating agreements among different U.S.
carriers through "whipsawing." Whipsawing refers to the practice of a foreign
carrier favoring one U.S.-based carrier over another in exchange for an
accounting, settlement rate and/or other term that benefits the foreign carrier
but may otherwise be inconsistent with the U.S. public interest. Under the ISP,
U.S. carriers can only enter into operating agreements that contain the same
accounting rate offered to all U.S. carriers. When a U.S. carrier negotiates an
accounting rate with a foreign correspondent that is lower than the accounting
rate offered to another U.S. carrier for the same service, the U.S. carrier with
the lower rate must file a

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<PAGE> 42

waiver or a notification letter with the FCC. If a U.S. carrier varies the terms
and conditions of its operating agreement in addition to lowering the accounting
rate, then the U.S. carrier must request a waiver of the FCC's rule. Unless
prior FCC approval is obtained, the amount of payment or "settlement rate"
generally must be one half of the accounting rate. Carriers must obtain waivers
of the FCC's rules if they wish to vary the settlement rate from one-half of the
accounting rate. U.S. carriers are also subject to the principle of
proportionate return to assure that competing U.S. carriers have roughly
equitable opportunities to receive the return traffic from foreign correspondent
that reduces the marginal cost of providing international service. Consistent
with its procompetition policies, the FCC prohibits U.S. carriers from
bargaining for any special concessions from foreign partners.

The FCC is currently considering whether to limit or prohibit the practice
whereby a carrier routes, through its facilities in a third country, traffic
originating from one country and destined for another country. The FCC has
permitted third country calling where all countries involved consent to the
routing arrangements (referred to as "transiting"). Under certain arrangements
referred to as "refiling," the carrier in the destination country does not
consent to receiving traffic from the originating country and does not realize
the traffic it receives from the third country is actually originating from a
different country. The FCC to date has made no pronouncement as to whether
refile arrangements comport either with U.S. or ITU regulations. It is possible
that the FCC will determine that refiling, as defined, violates U.S. and/or
international law. To the extent that the Company's traffic is routed through a
third country to reach a destination country, such an FCC determination with
respect to transiting and refiling could have a material adverse effect on the
Company's business operating results and financial condition.

The FCC is considering these and other international service issues in the
context of several policy rulemaking proceedings and in response to specific
petitions and applications filed by other international carriers. In one recent
proceeding, the FCC reduced regulatory requirements of nondominant international
telecommunications service providers such as the Company. The FCC also recently
enacted certain changes in its rules designed to permit more flexibility in its
ISP as a method of achieving lower cost-based accounting rates as more
facilities-based competition is permitted in foreign markets. Specifically, the
FCC has decided to allow U.S. carriers, subject to certain competitive
safeguards, to propose methods to pay for international call termination that
deviate from traditional bilateral accounting rates and the ISP. While this rule
change may provide more flexibility to the Company to respond more rapidly to
changes in the global telecommunications market, it will also provide similar
flexibility to the Company's competitors. In addition, the FCC has also recently
proposed revisions to its international settlement "benchmark" rates, which are
the FCC's target ceilings for prices that U.S. carriers should pay to foreign
carriers for terminating U.S. calls overseas. Partially in order to comply with
WTO standards of "Most Favored Nation" and "National Treatment," the FCC has
also proposed that private line resale be permitted to countries with accounting
rates within the new benchmarks even if the FCC has not decided that such
countries offer equivalent opportunities to U.S. carriers. The FCC's proposal is
intended to move settlement rates closer to the costs that would be reflected in
a competitive international telecommunications market. The FCC's continuing
resolution of issues in such proceedings either may facilitate the Company's
international business or adversely affect the Company's international business
(by, for example, liberalizing requirements that predominately affect larger
carriers). The Company is unable to predict how the FCC will resolve pending
international policy issues or how such resolution will affect its international
business.

International telecommunications service providers are required to file
copies of their contracts with other carriers, including operating agreements,
at the FCC within 30 days of execution. The Company has filed both of its
operating agreements with European carriers (including accounting rate terms)
with the FCC. The FCC's rules also require the Company to periodically file a
variety of reports regarding its international traffic flows and revenues and
use of international facilities. The FCC is engaged in a rulemaking proceeding
in which it has proposed to reduce certain reporting requirements

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of common carriers. The Company is unable to predict the outcome of this
proceeding or its effect on the Company.

Foreign Ownership and Affiliations. The Communications Act limits the
ownership of an entity holding a radio license by non-U.S. citizens, foreign
corporations and foreign governments. The Company does not currently hold any
radio licenses. Although these ownership restrictions currently do not apply to
non-radio facilities, such as fiber optic cable, there can be no assurance that
such restrictions will not be imposed on the operation of non-radio facilities
used for the provision of international services. The FCC also regulates the
extent to which U.S. international services carriers may become affiliated with
foreign carriers. U.S. carriers must report to the FCC a 10% ownership
affiliation with a foreign carrier and may be regulated as a dominant carrier on
specific routes if it has a 25% or more affiliation with a foreign carrier.
Foreign-affiliated carriers may also be subject to the FCC's "effective
competitive opportunity" test, which examines, in determining whether the
foreign carrier or its affiliate may provide services in the U.S. market, the
extent to which U.S. carriers are afforded effective competitive opportunities
to compete for like services in destination countries where the foreign carrier
has market power. The Company does not currently have any foreign affiliations,
but there can be no assurance that these rules will not prevent the Company from
implementing its business plans in the future. As a result of the recent signing
of the WTO Agreement, the FCC, after ratification of the Agreement by Congress,
may repeal or revise the "effective competitive opportunity" test and apply the
more inclusive WTO standards.

Foreign Regulation

United Kingdom. In the U.K., the Company's services are subject to
regulation by the U.K. Office of Telecommunications. The U.K. generally permits
competition in all sectors of the telecommunications market, subject to
licensing requirements and license conditions. Individual licenses (with
standard conditions) are required for the provision of facilities-based services
and for the provision of ISR services over leased international lines. The
Company has been granted licenses to provide ISR and international
facilities-based voice services to all international points from the U.K.
Implementation of these licenses would permit the Company to engage in
cost-effective routing of traffic between the U.S. and the U.K. and beyond.
However, the Company is subject to certain conditions that could limit its
ability to provide the lowest cost service to certain countries than would
otherwise be possible absent the conditions. In addition, there can be no
assurance that future changes in regulation and government will not have a
material adverse effect on the Company's business, operating results and
financial condition.

Other Countries. The Company plans to initiate a variety of services in
certain European countries including Belgium, France and Germany. These services
will include value-added services to closed user groups and other voice services
as regulatory liberalization in those countries permits. These and other
countries have announced plans or adopted laws to permit varying levels of
competition in the telecommunications market. Under the terms of the WTO
Agreement, each of the signatories has committed to opening its
telecommunications market to competition, foreign ownership and to adopt
measures to protect against anticompetitive behavior, effective starting on
January 1, 1998. Although the Company plans to obtain authority to provide
service under current and future laws of those countries, or, where permitted,
provide service without government authorization, there can be no assurance that
foreign laws will be adopted and implemented providing the Company with
effective practical opportunities to compete in these countries. Moreover, there
can be no assurance of the nature and pace of liberalization in any of these
markets. The Company's inability to take advantage of such liberalization could
have a material adverse affect on the Company's ability to expand its services
as planned.

EMPLOYEES

As of March 31, 1997, the Company employed 116 full-time employees. The
Company is not subject to any collective bargaining agreement and it believes
that its relationships with its employees are good.

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PROPERTIES

The Company's principal offices are located in Santa Barbara, California in
four facilities providing an aggregate of approximately 17,659 square feet of
office space. Approximately 5,332 square feet of this office space is leased
pursuant to two leases that both expire in July 1999. The remaining
approximately 12,327 square feet of office space is located in two buildings and
is rented by the Company pursuant to a lease that expires in June 2003. The
Company also leases approximately 16,595 square feet of space for its switching
facility in Los Angeles, California under a sublease and a lease expiring in
April 2006, approximately 7,922 square feet of space for its switching facility
in New York, New York under a lease expiring in April 2006, approximately 6,167
square feet of space for its switching facility in Dallas, Texas under a lease
expiring in March 2007, and approximately 8,000 square feet of space for its
switching facility in London, England under a lease expiring in July 2006. The
aggregate facility lease payments made by the Company in 1996 were $561,822. The
Company believes that all other terms of the leases are those commercially
reasonable other terms that are typically found in commercial leases in each of
the respective areas in which the Company leases space. The Company believes
that its facilities are adequate to support its current needs and that
additional facilities will be available as needed.

LITIGATION

In February 1996, the Company filed an action in Santa Barbara County
Superior Court against Communication Telesystems International ("CTS") seeking
$2.0 million in damages for an alleged breach of two contracts with CTS. The
Company claims that CTS failed to pay amounts due to the Company and made
certain demands that CTS was not entitled to make under the contract and that
CTS then repudiated the contracts. CTS filed a separate action against the
Company, seeking to recover liquidated damages of $6.0 million for the Company's
alleged breach of one of the contracts. CTS claims that it is entitled to
liquidated damages as a result of the Company's failure to deliver an increased
cash deposit. The Company was granted summary judgment on CTS's First Amended
Complaint claims on May 14, 1997. The Company intends to pursue its claim
against CTS and to vigorously defend against any potential appeals by CTS. There
can be no assurance, however, that the Company will prevail either in its
collection of damages or in defending against any potential appeals by CTS. In
addition, whether or not the Company is ever able to collect its damages or were
to prevail in any potential appeals, such collection process and appeal could be
time consuming and costly.

In March 1997, the Company filed an action in Santa Barbara County Superior
Court against NetSource, Inc. (formerly MTC Telemanagement Corporation)
("NetSource") seeking approximately $1.6 million in damages for an alleged
breach of a contract with NetSource. The Company claims that NetSource failed to
pay amounts due to the Company. There can be no assurance, however, that the
Company will prevail in its collection of damages. In addition, whether or not
the Company is ever able to collect its damages, such collection process could
be time consuming and costly.

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MANAGEMENT

OFFICERS AND DIRECTORS

The officers and directors of the Company, and their ages as of March 31,
1997, are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --- -------------------------------------------
<S> <C> <C>
Christopher E. Edgecomb............ 38 Chief Executive Officer, Chairman of the
Board and Director
Mary A. Casey(1)................... 34 President, Secretary and Director
David Vaun Crumly.................. 33 Executive Vice President--Sales and
Marketing
James E. Kolsrud................... 52 Executive Vice President--Operations and
Engineering
Kelly D. Enos...................... 38 Chief Financial Officer, Treasurer and
Assistant Secretary
Gordon Hutchins, Jr.(2)............ 47 Director
John R. Snedegar(1)(2)............. 47 Director
Roland A. Van der Meer(1)(2)....... 36 Director
</TABLE>

- ------------------------------
(1) Member of Audit Committee
(2) Member of Compensation Committee

Christopher E. Edgecomb co-founded the Company in September 1993, served as
President of the Company until January 1996 and has served as the Company's
Chief Executive Officer and Chairman of the Board since January 1996. Mr.
Edgecomb has been a Director of the Company since its inception. Prior to that
time, Mr. Edgecomb was a founder and the Executive Vice President of West Coast
Telecommunications ("WCT"), a nation-wide long distance carrier, from August
1989 to December 1994. Prior to founding WCT, Mr. Edgecomb was President of
Telco Planning, a telecommunications consulting firm, from January 1986 to July
1989. Prior to that time, Mr. Edgecomb held senior level sales and marketing
positions with TMC Communications, American Network and Bay Area Teleport.

Mary A. Casey has been a Director and Secretary of the Company since
co-founding the Company in September 1993, and has served as the Company's
President since January 1996. Prior to that time, Ms. Casey was Director of
Customer Service at WCT from December 1991 to June 1993, and served as Director
of Operator Services at Call America, a long distance telecommunications
company, from May 1988 to December 1991.

David Vaun Crumly has served as the Company's Executive Vice
President--Sales and Marketing since January 1996. Prior to that time, Mr.
Crumly served as a consultant to the Company from November 1995 to January 1996,
was Vice President of Carrier Sales of Digital Network, Inc. from June 1995 to
November 1995 and was Director of Carrier Sales of WCT from June 1992 to June
1995. Prior to joining WCT, Mr. Crumly served in various sales and marketing
capacities with Metromedia, a long-distance company, from September 1990 to June
1992 and with Claydesta, a long-distance company, from May 1987 to September
1989.

James E. Kolsrud has served as the Company's Executive Vice
President--Operations and Engineering since September 1996. Prior to joining the
Company, Mr. Kolsrud was an international telecommunications consultant from
March 1995 to September 1996. Prior to that time, he was a Vice President,
Corporate Engineering and Administration of IDB Communications Group, Inc.
("IDB"), an international communications company, from October 1989 to March
1995, and prior to that time, he was President of the International Division of
IDB.

Kelly D. Enos has served as the Company's Chief Financial Officer since
December 1996 and as Treasurer and Assistant Secretary since April 1997. Prior
to that time, Ms. Enos was an independent consultant in the merchant banking
field from February 1996 to November 1996 and a Vice President of Fortune
Financial, a merchant banking firm, from April 1995 to January 1996. Ms. Enos
served as a Vice President of Oppenheimer & Co., Inc., an investment bank, from
July 1994 to March 1995 and a Vice President of Sutro & Co., an investment bank,
from January 1991 to June 1994.

45
<PAGE> 46

Gordon Hutchins, Jr. has served as a Director of the Company since January
1996. Mr. Hutchins has been President of GH Associates, a management consulting
company, since July 1989. Prior to founding GH Associates, Mr. Hutchins served
as President and Chief Executive Officer of ICC Telecommunications, a
competitive access provider, and held senior management positions with several
other companies in the telecommunications industry. Mr. Hutchins serves as a
director of United Digital Network, Inc., a long distance telecommunications
company.

John R. Snedegar has served as a Director of the Company since January
1996. Mr. Snedegar has been the President of United Digital Network, Inc., a
long distance telecommunications company, since June 1990. Mr. Snedegar serves
as a director of StarBase Corporation, a software development company.

Roland A. Van der Meer has served as a Director of the Company since July
1996. Mr. Van der Meer has been a partner with Partech International, a venture
capital firm, since April 1993. Prior to that time, Mr. Van der Meer was a
partner with Communications Ventures from April 1987 to February 1993.

BOARD COMPOSITION

The Company currently has authorized seven directors, and five acting
directors. In accordance with the terms of the Company's Certificate of
Incorporation, upon the closing of the offering the terms of office of the Board
of Directors will be divided into three classes; Class I, whose term will expire
at the annual meeting of stockholders to be held in 1998; Class II, whose term
will expire at the annual meeting of stockholders to be held in 1999; and Class
III, whose term will expire at the annual meeting of stockholders to be held in
2000. The Class I directors are Gordon Hutchins, Jr. and John R. Snedegar, the
Class II directors are Roland A. Van der Meer and Mary A. Casey, and the Class
III director is Christopher E. Edgecomb. At each annual meeting of stockholders
after the initial classification, the successors to directors whose term will
then expire will be elected to serve from the time of election and qualification
until the third annual meeting following election. This classification of the
Board of Directors may have the effect of delaying or preventing changes in
control or changes in management of the Company. See "Risk
Factors -- Anti-takeover Effects of Certificate of Incorporation, Bylaws and
Delaware Law" and "Description of Capital Stock -- Anti-takeover Effects of
Provisions of the Certificate of Incorporation, Bylaws and Delaware Law."

Each officer is elected by and serves at the discretion of the Board of
Directors. Each of the Company's officers and directors, other than nonemployee
directors, devotes substantially full time to the affairs of the Company. The
Company's nonemployee directors devote such time to the affairs of the Company
as is necessary to discharge their duties. There are no family relationships
among any of the directors, officers or key employees of the Company.

DIRECTOR COMPENSATION

The Company's non-employee directors receive $2,000 for each Board meeting
attended and $1,000 for each telephonic Board meeting. In addition, each
non-employee director is reimbursed for out-of-pocket expenses incurred in
connection with attendance at meetings of the Board of Directors and its
committees. In 1996, Messrs. Hutchins and Snedegar were each granted stock
options to purchase 10,000 shares of the Company's Common Stock. In 1997,
Messrs. Hutchins, Snedegar and Van der Meer were each granted stock options to
purchase 5,000 shares of the Company's Common Stock. See "Certain
Transactions--Transactions with Outside Directors."

EXECUTIVE COMPENSATION

The following Summary Compensation Table sets forth the compensation earned
by the Company's Chief Executive Officer and four other executive officers who
earned (or would have earned) salary and bonus in excess of $100,000 for
services rendered in all capacities to the Company and its subsidiaries for the
fiscal year ended December 31, 1996 (the "Named Officers").

46
<PAGE> 47

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
AWARDS
ANNUAL ------------
COMPENSATION SECURITIES
------------ UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) OPTIONS(#) COMPENSATION($)
- ------------------------------------------------- ------------ ------------ ---------------
<S> <C> <C> <C>
Christopher E. Edgecomb.......................... $360,000 0 $ 9,223(1)
Chief Executive Officer and Chairman of the
Board
Mary A. Casey.................................... 156,042(2) 0 15,028(3)
President and Secretary
John D. Marsch................................... 160,000(4) 400,000 4,000(5)
Executive Vice President--STAR Europe
David Vaun Crumly................................ 298,002 200,000 3,920(3)
Executive Vice President--Sales and Marketing
Kelly D. Enos.................................... 12,500(6) 75,000 0
Chief Financial Officer, Treasurer and
Assistant Secretary
</TABLE>

- ------------------------------
(1) Consists of life insurance and health insurance premiums paid by the
Company.

(2) Ms. Casey's annual salary is currently set at $195,000.

(3) Consists of life insurance and health insurance premiums and a car allowance
paid by the Company.

(4) Mr. Marsch joined the Company in May 1996 and resigned as Executive Vice
President--STAR Europe effective January 30, 1997.

(5) Consists of a car allowance paid by the Company.

(6) Ms. Enos joined the Company in December 1996; her annual salary is currently
set at $150,000.

The following table contains information concerning the stock option grants
made to each of the Named Officers named below for the year ended December 31,
1996.

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE
-------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF
SECURITIES OPTIONS STOCK
UNDERLYING GRANTED TO PRICE APPRECIATION
OPTIONS EMPLOYEES EXERCISE OR OPTION TERM(1)
GRANTED IN BASE PRICE EXPIRATION -------------------
NAME (#) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- ---------------------------- ---------- ----------- ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
John D. Marsch.............. 200,000(2) 12.12% $2.00 02/28/06 $251,558 $637,497
200,000(3) 12.12 2.00 04/30/06 251,558 637,497
David Vaun Crumly........... 180,000(4) 10.91 1.50 01/21/06 169,802 430,310
20,000(5) 1.21 3.00 05/14/06 37,734 95,625
Kelly D. Enos............... 75,000(6) 4.55 8.20 12/09/06 386,770 980,152
</TABLE>

- ------------------------------
(1) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission. There can
be no assurance provided to any executive officer or any other holder of the
Company's securities that the actual stock price appreciation over the
10-year option term will be at the assumed 5% and 10% levels or at any other
defined level. Unless the market price of the Common Stock appreciates over
the option term, no value will be realized from the option grants made to
the executive officer.

(2) Mr. Marsch became vested in 100,000 of the option shares on March 1, 1997,
and, pursuant to Mr. Marsch's revised employment agreement with the Company,
the remaining 100,000 option shares are forfeited.

(3) The option is fully vested and exercisable.

47
<PAGE> 48

(4) The option is vested and exercisable with respect to 60,000 of the option
shares and becomes fully vested and exercisable with respect to the balance
upon the closing of the offering.

(5) The option is vested and exercisable with respect to 5,000 of the option
shares and becomes exercisable with respect to the balance in three equal
annual installments on December 31, 1997, 1998 and 1999, respectively.

(6) The option becomes exercisable in four equal annual installments on December
2, 1997, 1998, 1999 and 2000, respectively.

AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES

No options were exercised by the Named Officers for the fiscal year ended
December 31, 1996. No stock appreciation rights were exercised during such year
or were outstanding at the end of that year. The following table sets forth
certain information with respect to the value of stock options held by each of
the Named Officers as of December 31, 1996.

FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT FY-END(#) OPTIONS AT FY-END($)(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
John D. Marsch................................ 200,000 200,000 $ 1,520,000 $ 1,520,000
David Vaun Crumly............................. 65,000 135,000 519,000 1,071,000
Kelly D. Enos................................. 0 75,000 0 105,000
</TABLE>

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

(1) Based on the fair market value of the Company's Common Stock at year-end
($9.60 per share, as determined by the Company's Board of Directors) less
the exercise price payable for such shares.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee of the Company's Board was formed in May 1996,
and the members of the Compensation Committee are Gordon Hutchins, Jr., John R.
Snedegar and Roland A. Van der Meer. None of these individuals was at any time
during the year ended December 31, 1996, or at any other time, an officer or
employee of the Company. No member of the Compensation Committee of the Company
serves as a member of the board of directors or compensation committee of any
entity that has one or more executive officers serving as a member of the
Company's Board or Compensation Committee.

1997 OMNIBUS STOCK INCENTIVE PLAN

The Company's 1997 Omnibus Stock Incentive Plan (the "Omnibus Plan") was
adopted by the Board of Directors on January 30, 1997, subject to stockholder
approval, as the successor to the Company's 1996 Supplemental Option Plan (the
"Supplemental Plan"). The Company has reserved 1,500,000 shares for issuance
under the Omnibus Plan. This share reserve is comprised of (i) the 1,000,000
shares that were available for issuance under the Supplemental Plan, plus (ii)
an increase of 500,000 shares. As of March 31, 1997, no shares had been issued
under the Omnibus Plan, options for 466,827 shares were outstanding (from the
Supplemental Plan) and 1,033,173 shares remained available for future grant.
Shares of Common Stock subject to outstanding options, including options granted
under the Supplemental Plan, which expire or terminate prior to exercise, will
be available for future issuance under the Omnibus Plan. In addition, if stock
appreciation rights ("SARs") and stock units are settled under the Omnibus Plan,
then only the number of shares actually issued in settlement will reduce the
number of shares available for future issuance under this plan.

Under the Omnibus Plan, employees, outside directors and consultants may be
awarded options to purchase shares of Common Stock, SARs, restricted shares and
stock units. Options may be incentive

48
<PAGE> 49

stock options designed to satisfy section 422 of the Internal Revenue Code or
nonstatutory stock options not designed to meet such requirements. SARs may be
awarded in combination with options, restricted shares or stock units, and such
an award may provide that the SARs will not be exercisable unless the related
options, restricted shares or stock units are forfeited.

The Omnibus Plan will be administered by a committee designated by the
Board of Directors of the Company and comprised of two or more directors (the
"Committee"). The Committee has the complete discretion to determine which
eligible individuals are to receive awards; determine the award type, number of
shares subject to an award, vesting requirements and other features and
conditions of such awards; interpret the Omnibus Plan; and make all other
decisions relating to the operation of the Omnibus Plan.

The exercise price for options granted under the Omnibus Plan may be paid
in cash or in outstanding shares of Common Stock. Options may also be exercised
on a cashless basis, by a pledge of shares to a broker or by promissory note.
The payment for the award of newly issued restricted shares will be made in
cash. If an award of SARs, stock units or restricted shares from the Company's
treasury is granted, no cash consideration is required.

The Committee has the authority to modify, extend or assume outstanding
options and SARs or may accept the cancellation of outstanding options and SARs
in return for the grant of new options or SARs for the same or a different
number of shares and at the same or a different exercise price.

The Board may determine that an outside director may elect to receive his
or her annual retainer payments and meeting fees from the Company in the form of
cash, options, restricted shares, stock units or a combination thereof. The
Board will decide how to determine the number and terms of the options,
restricted shares or stock units to be granted to outside directors in lieu of
annual retainers and meeting fees.

Upon a change in control, the Committee may determine that an option or SAR
will become fully exercisable as to all shares subject to such option or SAR. A
change in control includes a merger or consolidation of the Company, certain
changes in the composition of the Board and acquisition of 50% or more of the
combined voting power of the Company's outstanding stock. In the event of a
merger or other reorganization, outstanding options, SARs, restricted shares and
stock units will be subject to the agreement of merger or reorganization, which
may provide for the assumption of outstanding awards by the surviving
corporation or its parent, their continuation by the Company (if the Company is
the surviving corporation), accelerated vesting and accelerated expiration, or
settlement in cash.

The Board may amend or terminate the Omnibus Plan at any time. Amendments
may be subject to stockholder approval to the extent required by applicable
laws. In any event, the Omnibus Plan will terminate on January 22, 2007, unless
sooner terminated by the Board.

1996 OUTSIDE DIRECTOR NONSTATUTORY STOCK OPTION PLAN

The Company's 1996 Outside Director Nonstatutory Stock Option Plan (the
"Director Plan") was ratified and approved by the Board of Directors as of May
14, 1996. The Company has reserved 200,000 shares of Common Stock for issuance
under the Director Plan. As of March 31, 1997, no shares had been issued under
the Director Plan, options for 55,000 shares were outstanding and 145,000 shares
remained available for future grant. If an outstanding option expires or
terminates unexercised, then the shares subject to such option will again be
available for issuance under the Director Plan.

Under the Director Plan, outside directors of the Company may receive
nonstatutory options to purchase shares of Common Stock. The Director Plan will
be administered by the Board or the Compensation Committee (known as "Plan
Administrator"). The Plan Administrator has the discretion to determine which
eligible individuals will receive options, the number of shares subject to each
option, vesting requirements and any other terms and conditions of such options.

49
<PAGE> 50

The exercise price for options granted under the Director Plan will be at
least 85% of the fair market value of the Common Stock on the option grant date,
shall be 110% of the fair market value of the Common Stock on the option grant
date if the option is granted to a holder of more than 10% of the Common Stock
outstanding and may be paid in cash, check or shares of Common Stock. The
exercise price may also be paid by cashless exercise or pledge of shares to a
broker.

The Plan Administrator may modify, extend or renew outstanding options or
accept the surrender of such options in exchange for the grant of new options,
subject to the consent of the affected optionee.

Upon a change in control, the Board may accelerate the exercisability of
outstanding options and provide an exercise period during which such accelerated
options may be exercised. The Board also has the discretion to terminate any
outstanding options that had been accelerated and had not been exercised during
such exercise period. In the event of a merger of the Company into another
corporation in which holders of Common Stock receive cash for their shares, the
Board may settle the option with a cash payment equal to the difference between
the exercise price and the amount paid to holders of Common Stock pursuant to
the merger.

The Board may amend or terminate the Director Plan at any time. In any
event, the Director Plan will terminate on May 14, 2006, unless earlier
terminated by the Board.

EMPLOYMENT CONTRACTS AND CHANGE OF CONTROL ARRANGEMENTS

The Company has an employment agreement with Mary A. Casey, pursuant to
which Ms. Casey holds the position of President of the Company, is paid an
annual salary of $16,250 per month, was entitled to purchase 818,182 shares of
Common Stock, and is eligible to receive a bonus, as determined by the Chief
Executive Officer and Board of Directors. The agreement also provides that Ms.
Casey will receive a severance payment equal to $7,000 per month for the first
six months after termination of employment, and an additional payment of $7,000
per month for the next six months, minus any amounts earned by her from other
employment during such period. In addition, the agreement provides that if Ms.
Casey's employment is terminated (other than for cause) within four months after
a Sale Transaction (as defined below), she will continue to receive the
compensation provided in this agreement until the expiration of the agreement on
December 31, 1998, instead of the severance payments described above. A Sale
Transaction is an acquisition of more than 75% of the voting securities of the
Company, pursuant to a tender offer or exchange offer approved in advance by the
Board of Directors.

In January 1996, the Company entered into an employment agreement with
David Vaun Crumly pursuant to which Mr. Crumly became Executive Vice President
of the Company. The agreement provides for an annual salary of $10,000 per month
with an annual increase, plus incentive bonuses tied to gross revenues of the
Company. The agreement also provides for a commission on certain accounts of the
Company and an option to purchase 180,000 shares of Common Stock at an exercise
price of $1.50 per share. In addition, in the event of a Sale Transaction, Mr.
Crumly will receive a bonus payment equal to the lesser of $1,500,000 or a
percentage of the monthly gross sales of accounts relating to customers
introduced to the Company by Mr. Crumly. If his employment is terminated in
certain circumstances, without cause, within four months after a Sale
Transaction, Mr. Crumly is entitled to receive the compensation provided in this
agreement, minus any compensation earned by other employment, until the
expiration of the agreement on December 31, 1998.

In December 1996, the Company entered into an employment agreement with
Kelly D. Enos, pursuant to which Ms. Enos became Chief Financial Officer of the
Company. The agreement provides for an annual salary of $150,000 and an option
to purchase 75,000 shares of Common Stock at an exercise price of $8.20 per
share. The agreement also provides that Ms. Enos will receive a severance
payment equal to the compensation which she would have received under the
remaining term of this agreement if she terminates the agreement as a result of
the Company's default of its material

50
<PAGE> 51

obligations and duties under this agreement or if she is terminated by the
Company without cause within four months after a Sale Transaction.

In March 1997, the Company entered into an agreement with John Marsch,
pursuant to which Mr. Marsch resigned as the Company's Executive Vice
President--STAR Europe. From January 30, 1997 until February 28, 1998 (the
"Effective Date"), Mr. Marsch will serve as a Director of Special Projects for
the Company. Until the Effective Date, pursuant to the terms of a previously
executed employment agreement with the Company, Mr. Marsch will continue to
receive a monthly salary of $20,000 per month, an automobile allowance of $500
per month and any other fringe benefits which he received prior to the execution
of the revised employment agreement. In consideration for the continuation of
his employment until the Effective Date, Mr. Marsch waived his rights to vest in
100,000 of the option shares granted to him in May 1996, and such 100,000 shares
have been forfeited.

51
<PAGE> 52

CERTAIN TRANSACTIONS

TRANSACTIONS WITH OUTSIDE DIRECTORS

The Company provided services to Digital Network, Inc. ("DNI") in the
amount of approximately $250,000 in 1996. DNI is a wholly owned subsidiary of
United Digital Network, Inc. ("UDN"), and John R. Snedegar, a Director of the
Company, is President of UDN. Gordon Hutchins, Jr., a Director of the Company,
serves on UDN's Board of Directors.

Gordon Hutchins, Jr. provides consulting services to the Company. In 1996,
the Company made payments of approximately $154,000 to Mr. Hutchins for general
business consulting services relating to the telecommunications industry and for
the performance of other tasks requested of him by the Company's Chief Executive
Officer, President or Board of Directors. In addition, in consideration for
consulting services provided to the Company in his capacity as a member of the
Board of Directors, the Company granted to Mr. Hutchins a nonstatutory option to
purchase 100,000 shares of Common Stock at an exercise price of $3.00.

On May 15, 1996, the Company granted to Messrs. Hutchins and Snedegar each
a nonstatutory option to purchase 10,000 shares of Common Stock at an exercise
price of $3.00 per share under the Company's 1996 Outside Director Nonstatutory
Stock Option Plan. On January 30, 1997, the Company granted to Messrs. Hutchins,
Snedegar and Van der Meer each a nonstatutory option to purchase 5,000 shares of
Common Stock at an exercise price of $10.80 per share under the Company's 1996
Outside Director Nonstatutory Stock Option Plan.

TRANSACTIONS WITH EXECUTIVE OFFICERS

On October 4, 1996, the Company entered into a $12.0 million line of credit
with Comerica Bank. The total amount outstanding under this line of credit as of
March 31, 1997, was approximately $5.3 million. This line of credit is
guaranteed by Christopher E. Edgecomb, the Company's Chief Executive Officer.
Mr. Edgecomb does not receive any additional compensation in connection with
such guarantee. The Company has entered into lines of credit with Mr. Edgecomb
in the aggregate amount of $1,448,042 that expire on March 30, 1998. Borrowings
under the lines of credit bear interest at a rate of 9.0% and there were no
amounts outstanding under these lines of credit as of March 31, 1997.

Mr. Edgecomb has two-thirds ownership of Star Aero Services, Inc. ("Star
Aero"), which has ownership interests in five airplanes that the Company
utilizes for business travel from time to time. For the years ended December 31,
1995 and 1996, the Company paid $144,000 and $68,000, respectively, in costs
related to the use of Star Aero services. As of March 31, 1997, the Company had
a receivable from Star Aero of approximately $128,000.

David Vaun Crumly had controlling ownership of four companies that resold
transmission capacity to the Company during 1996. As of March 31, 1997, the
Company had made deposits on behalf of these companies of approximately $758,000
and had made payments of approximately $185,000 for such services. In addition,
the Company has agreed to reimburse legal fees incurred by such companies in
connection with a dispute with the provider of the capacity that was resold to
STAR. To date, the fees paid or incurred total approximately $108,300.

INDEMNIFICATION

The Company's Amended and Restated Certificate of Incorporation limits the
liability of its directors for monetary damages arising from a breach of their
fiduciary duty as directors, except to the extent otherwise required by the
Delaware General Corporation Law. Such limitation of liability does not affect
the availability of equitable remedies such as injunctive relief or rescission.

The Company's Bylaws provide that the Company shall indemnify its directors
and officers to the fullest extent permitted by Delaware law, including in
circumstances in which indemnification is otherwise discretionary under Delaware
law. The Company has also entered into indemnification

52
<PAGE> 53

agreements with its officers and directors containing provisions that may
require the Company, among other things, to indemnify such officers and
directors against certain liabilities that may arise by reason of their status
or service as directors or officers (other than liabilities arising from willful
misconduct of a culpable nature), to advance their expenses incurred as a result
of any proceeding against them as to which they could be indemnified, and to
obtain directors' and officers' insurance if available on reasonable terms.

The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions, including loans between the
Company and its officers, directors, principal stockholders and their affiliates
will be approved by a majority of the Board of Directors, including a majority
of the independent and disinterested outside directors on the Board of
Directors, and will continue to be on terms no less favorable to the Company
than could be obtained from unaffiliated third parties.

53
<PAGE> 54

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information known to the Company
regarding beneficial ownership of its Common Stock as of May 1, 1997, and as
adjusted to reflect the sale of shares offered hereby and the conversion of all
outstanding shares by Preferred Stock into shares of Common Stock by (i) each
person who is known by the Company to own beneficially more than five percent of
the Company's Common Stock, (ii) each of the Company's directors, (iii) each of
the Named Officers, and (iv) all current officers and directors as a group.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
BEFORE THE OFFERING NUMBER OF AFTER THE OFFERING(2)
----------------------- SHARES BEING -----------------------
NAME AND ADDRESS OF BENEFICIAL OWNER(1) NUMBER PERCENT(3) OFFERED NUMBER PERCENT(3)
- -------------------------------------------- --------- ---------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Entities affiliated with the Hunt Family
Trusts(4)................................. 1,072,993 9.1% -- 1,072,993 6.9%
3900 Thanksgiving Tower
Dallas, Texas 75201
Gotel Investments, Ltd.(5).................. 914,406 7.7 -- 914,406 5.9
16, Rue de la Pelissiere
1204, Geneva
Switzerland
Gordon Hutchins, Jr.(6)..................... 77,000 * -- 77,000 *
John R. Snedegar(7)......................... 10,000 * -- 10,000 *
Roland A. Van der Meer(8)................... 275,840 2.3 -- 275,840 1.8
Christopher E. Edgecomb(9).................. 7,458,162 63.1 200,000 7,258,162 46.6
Mary A. Casey(10)........................... 878,226 7.4 50,000 828,226 5.3
David Vaun Crumly(11)....................... 285,000 2.4 -- 285,000 1.8
James E. Kolsrud............................ 10,000 * -- 10,000 *
Kelly D. Enos............................... -- * -- -- *
All directors and executive officers as a
group (8 persons)(12)..................... 8,994,228 74.3% 250,000 8,744,228 55.2%
</TABLE>

- ------------------------------
* Represents beneficial ownership of less than 1% of the outstanding shares
of Common Stock.

(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power
with respect to securities. Unless otherwise indicated, the address for
each listed stockholder is c/o STAR Telecommunications, Inc., 223 East De
La Guerra Street, Santa Barbara, California 93101. To the Company's
knowledge, except as indicated in the footnotes to this table and pursuant
to applicable community property laws, the persons named in the table have
sole voting and investment power with respect to all shares of Common
Stock.

(2) Assumes no exercise of the Underwriters' over-allotment option. See
"Underwriting."

(3) Percentage of beneficial ownership is based on 11,825,756 shares of Common
Stock outstanding as of May 1, 1997, and 15,575,756 shares of Common Stock
after the completion of this offering. The number of shares of Common Stock
beneficially owned includes the shares issuable pursuant to stock options
that are exercisable within sixty days of May 1, 1997 and, where indicated
below, shares issuable pursuant to stock options that are exercisable upon
the closing of the offering. Shares issuable pursuant to stock options are
deemed outstanding for computing the percentage of the person holding such
options but are not outstanding for computing the percentage of any other
person. The number of shares of Common Stock outstanding after this
offering includes 3,750,000 shares of Common Stock being offered for sale
by the Company in this offering.

(4) Consists of 357,665 shares held by Lyda Hunt--Herbert Trusts--David Shelton
Hunt, 178,832 shares held by Lyda Hunt--Herbert Trusts--Bruce William Hunt,
178,832 shares held by Lyda Hunt--Herbert Trusts--Douglas Herbert Hunt,
178,832 shares held by Lyda Hunt-- Herbert Trusts--Barbara Ann Hunt and
178,832 shares held by Lyda Hunt--Herbert Trusts-- Lyda Bunker Hunt. The
co-trustees of each of the Hunt Family Trusts hold voting and

54
<PAGE> 55

investment power for all shares of the Company's Common Stock held by the
respective trusts. Walter P. Roach and Gage A. Prichard are the co-trustees
of each such trust.

(5) The board of directors of Gotel Investments, Ltd. ("Gotel") holds voting
and investment power for all shares of the Company's Common Stock held by
Gotel. Gotel's board of directors is comprised of Barry Guterman, Walter
Stresemann and Gregory Elias.

(6) Consists of 77,000 shares issuable upon the exercise of stock options
exercisable within sixty days of May 1, 1997.

(7) Consists of 10,000 shares issuable upon the exercise of stock options
exercisable within sixty days of May 1, 1997.

(8) Consists of 91,136 shares held by Parvest U.S. Partners II C.V., 60,758
shares held by Partech U.S. Partners III C.V., 121,516 shares held by U.S.
Growth Fund Partners C.V., and 2,430 shares held by Partech International
Salary Deferral Plan U/A Dated 1/1/92 FBO: Roland A. Van der Meer. Mr. Van
der Meer, a Director of the Company, is a general partner of Parvest U.S.
Partners II C.V., Partech U.S. Partners III C.V. and U.S. Growth Fund
Partners C.V. (collectively, the "Partech Entities"). Mr. Van der Meer is
the beneficiary of the Partech International Salary Deferral Plan U/A Dated
1/1/92 FBO: Roland A. Van der Meer. Mr. Van der Meer disclaims beneficial
ownership of shares held by the Partech Entities, except for his
proportional interest therein.

(9) If the over-allotment option is exercised in full, the number of shares
beneficially owned by Mr. Edgecomb after the offering will be reduced to
6,908,162 shares, or 43.8% of shares outstanding.

(10) If the over-allotment option is exercised in full, the number of shares
beneficially owned by Ms. Casey after the offering will be reduced to
778,226 shares, or 4.9% of shares outstanding.

(11) Consists of 100,000 shares of Common Stock, 180,000 shares of Common Stock
issuable upon the exercise of stock options exercisable upon the closing of
the offering and 5,000 shares of Common Stock issuable upon the exercise of
stock options exercisable within sixty days of May 1, 1997.

(12) Includes 272,000 shares issuable upon the exercise of stock options
exercisable within sixty days of May 1, 1997, and where indicated above,
shares issuable pursuant to stock options that are exercisable upon the
closing of the offering.

55
<PAGE> 56

DESCRIPTION OF CAPITAL STOCK

Upon the closing of this offering, the authorized capital stock of the
Company will consist of 30,000,000 shares of Common Stock, $0.001 par value, and
5,000,000 shares of Preferred Stock, $0.001 par value.

COMMON STOCK

As of March 31, 1997, there were 11,825,756 shares of Common Stock
outstanding that were held of record by approximately 47 stockholders. There
will be 15,575,756 shares of Common Stock outstanding (assuming no exercise of
the Underwriters' over-allotment option and assuming no exercise after March 31,
1997, of outstanding options) after giving effect to the sale of the shares of
Common Stock to the public offered hereby and the conversion of the Company's
Preferred Stock into 911,360 shares of Common Stock.

The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding Preferred Stock, the holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the Board of Directors out of funds legally available therefor. See
"Dividend Policy." In the event of the liquidation, dissolution, or winding up
of the Company, the holders of Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities, subject to prior distribution
rights of Preferred Stock, if any, then outstanding. The Common Stock has no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock are fully paid and nonassessable, and the
shares of Common Stock to be issued upon completion of this offering will be
fully paid and nonassessable.

PREFERRED STOCK

Upon the closing of this offering, all outstanding shares of Preferred
Stock will convert into 911,360 shares of Common Stock. Thereafter, pursuant to
the Company's Amended and Restated Certificate of Incorporation, the Board of
Directors will have the authority to issue up to 5,000,000 shares of Preferred
Stock in one or more series and to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any series or the designation
of such series, without further vote or action by the stockholders. The issuance
of Preferred Stock may have the effect of delaying, deferring or preventing a
change in control of the Company without further action by the stockholders and
may adversely affect the voting and other rights of the holders of Common Stock.
The issuance of Preferred Stock with voting and conversion rights may adversely
affect the voting power of the holders of Common Stock, including the loss of
voting control to others. At present, the Company has no plans to issue any of
the Preferred Stock.

ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS
AND DELAWARE LAW

Certificate of Incorporation and Bylaws

The Company's Amended and Restated Certificate of Incorporation provides
that, upon the closing of this offering, the Board of Directors will be divided
into three classes of directors, with each class serving a staggered three-year
term. The classification system of electing directors may tend to discourage a
third party from making a tender offer or otherwise attempting to obtain control
of the Company and may maintain the incumbency of the Board of Directors, as the
classification of the Board of Directors generally increases the difficulty of
replacing a majority of the directors. The Amended and Restated Certificate of
Incorporation also provides that, effective upon the closing of this offering,
all stockholder actions must be effected at a duly called meeting and not by a
consent in writing. Further, provisions of the Bylaws and the Amended and
Restated Certificate of Incorporation provide that the stockholders may amend
the Bylaws or certain provisions of the Amended and

56
<PAGE> 57

Restated Certificate of Incorporation only with the affirmative vote of 75% of
the Company's capital stock. These provisions of the Amended and Restated
Certificate of Incorporation and Bylaws could discourage potential acquisition
proposals and could delay or prevent a change in control of the Company. These
provisions are intended to enhance the likelihood of continuity and stability in
the composition of the Board of Directors and in the policies formulated by the
Board of Directors and to discourage certain types of transactions that may
involve an actual or threatened change of control of the Company. These
provisions are designed to reduce the vulnerability of the Company to an
unsolicited acquisition proposal. The provisions also are intended to discourage
certain tactics that may be used in proxy fights. However, such provisions could
have the effect of discouraging others from making tender offers for the
Company's shares and, as a consequence, they also may inhibit fluctuations in
the market price of the Company's shares that could result from actual or
rumored takeover attempts. Such provisions also may have the effect of
preventing changes in the management of the Company. See "Risk Factors--Effect
of Certain Charter Provisions; Anti-takeover Effects of Certificate of
Incorporation, Bylaws and Delaware Law."

Delaware Takeover Statute

The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203"), which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years following the date that such stockholder
became an interested stockholder, unless: (i) prior to such date, the board of
directors of the corporation approved either the business combination or the
transaction that resulted in the stockholder becoming an interested stockholder;
(ii) upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned (x) by persons who are directors and also
officers and (y) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or (iii) on or subsequent
to such date, the business combination is approved by the board of directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66 2/3% of the outstanding voting
stock that is not owned by the interested stockholder.

Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, transfer, pledge or other disposition of 10% or more of the assets of the
corporation involving the interested stockholder; (iii) subject to certain
exceptions, any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (iv)
any transaction involving the corporation that has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder; or (v) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation. In
general, Section 203 defines an interested stockholder as any entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.

REGISTRATION RIGHTS

After this offering, the holders of approximately 2,826,000 shares of
Common Stock will be entitled to certain rights with respect to the registration
of such shares under the Securities Act. Under the terms of the agreement
between the Company and the holders of such registrable securities, if the
Company proposes to register any of its securities under the Securities Act,
either for its own account or for the account of other security holders
exercising registration rights, such holders are entitled to notice of such
registration and are entitled to include shares of such Common Stock therein.
Additionally, certain holders are also entitled to demand registration rights
pursuant to which they

57
<PAGE> 58

may require the Company to file a registration statement under the Securities
Act at its expense with respect to their shares of Common Stock, and the Company
is required to use its best efforts to effect such registration. Further,
holders may require the Company to file additional registration statements on
Form S-3 at the Company's expense. All of these registration rights are subject
to certain conditions and limitations, among them the right of the underwriters
of an offering to limit the number of shares included in such registration and
the right of the Company not to effect a requested registration within six
months following an offering of the Company's securities, including the offering
made hereby.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Common Stock is U.S. Stock
Transfer Corp., 1745 Gardena Avenue, Glendale, California 91204, and its
telephone number is (818) 502-1404.

58
<PAGE> 59

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, the Company will have 15,575,756 shares
of Common Stock outstanding. Of this amount, the 4,000,000 shares offered hereby
will be available for immediate sale in the public market as of the date of this
Prospectus. Approximately 11,502,756 additional shares will be available for
sale in the public market immediately following the expiration of 180-day lockup
agreements with the Representatives of the Underwriters or the Company, subject
in some cases to compliance with the volume and other limitations of Rule 144.

<TABLE>
<CAPTION>
DAYS AFTER DATE OF APPROXIMATE SHARES
THIS PROSPECTUS ELIGIBLE FOR FUTURE SALE COMMENT
- ------------------------- ------------------------ --------------------------------------------
<S> <C> <C>
Upon Effectiveness....... 4,000,000 Freely tradeable shares sold in offering and
shares saleable under Rule 144(k) that are
not subject to 180-day lockup.
180 days................. 11,502,756 Lockup released; shares saleable under Rule
144, 144(k) or 701.
Thereafter............... 73,000 Restricted securities held for one year or
less.
</TABLE>

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least one
year is entitled to sell within any three-month period commencing 90 days after
the date of this Prospectus a number of shares that does not exceed the greater
of (i) 1% of the then outstanding shares of Common Stock (approximately 155,758
shares immediately after the offering) or (ii) the average weekly trading volume
during the four calendar weeks preceding such sale, subject to the filing of a
Form 144 with respect to such sale. A person (or persons whose shares are
aggregated) who is not deemed to have been an affiliate of the Company at any
time during the 90 days immediately preceding the sale who has beneficially
owned his or her shares for at least two years is entitled to sell such shares
pursuant to Rule 144(k) without regard to the limitations described above.
Persons deemed to be affiliates must always sell pursuant to Rule 144, even
after the applicable holding periods have been satisfied.

The Company is unable to estimate the number of shares that will be sold
under Rule 144, since this will depend on the market price for the Common Stock
of the Company, the personal circumstances of the sellers and other factors.
Prior to this offering, there has been no public market for the Common Stock,
and there can be no assurance that a significant public market for the Common
Stock will develop or be sustained after the offering. Any future sale of
substantial amounts of the Common Stock in the open market may adversely affect
the market price of the Common Stock offered hereby.

The Company, its directors, executive officers, stockholders with
registration rights and certain other stockholders have agreed pursuant to the
Underwriting Agreement and other agreements that they will not sell any Common
Stock without the prior consent of Hambrecht & Quist LLC for a period of 180
days from the date of this Prospectus (the "180-day Lockup Period"), except that
the Company may, without such consent, grant options and sell shares pursuant to
the 1996 Stock Incentive Plan, the Omnibus Plan and the Director Plan.

Any employee or consultant to the Company who purchased his or her shares
pursuant to a written compensatory plan or contract is entitled to rely on the
resale provisions of Rule 701, which permits nonaffiliates to sell their Rule
701 shares without having to comply with the public information, holding period,
volume limitation or notice provisions of Rule 144 and permits affiliates to
sell their Rule 701 shares without having to comply with the Rule 144 holding
period restrictions, in each case commencing 90 days after the date of this
Prospectus. As of the date of this Prospectus, the holders of options
exercisable into approximately 936,475 shares of Common Stock will be eligible
to sell their shares upon the expiration of the 180-day Lockup Period.

The Company intends to file a registration statement on Form S-8 under the
Securities Act to register options to purchase shares of Common Stock issued or
reserved for issuance under the Company's stock plans or issued outside the
Company's stock plans within 180 days after the date of this Prospectus, thus
permitting the resale of such shares by nonaffiliates in the public market
without

59
<PAGE> 60

restriction under the Securities Act. The Company intends to register these
options on Form S-8, along with options that have not been issued under the
Company's stock plans as of the date of this Prospectus.

In addition, after this offering, the holders of approximately 2,826,000
shares of Common Stock will be entitled to certain rights with respect to
registration of such shares under the Securities Act. Registration of such
shares under the Securities Act would result in such shares becoming freely
tradeable without restriction under the Securities Act (except for shares
purchased by affiliates of the Company) immediately upon the effectiveness of
such registration. See "Description of Capital Stock--Registration Rights."

60
<PAGE> 61

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, a
syndicate of Underwriters named below (the "Underwriters"), for whom Hambrecht &
Quist LLC and Alex. Brown & Sons Incorporated are acting as representatives (the
"Representatives"), have severally agreed to purchase from the Company and the
Selling Stockholders an aggregate of 4,000,000 shares of Common Stock. The
number of shares of Common Stock that each Underwriter has agreed to purchase is
set forth opposite its name below:

<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
--------------------------------------------------------------------- ----------------
<S> <C>
Hambrecht & Quist LLC................................................
Alex. Brown & Sons Incorporated......................................
-------
Total......................................................
=======
</TABLE>

The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase shares of Common Stock are subject to the approval of
certain legal matters by counsel and to certain other conditions. If any of the
shares of Common Stock are purchased by the Underwriters pursuant to the
Underwriting Agreement, all such shares of Common Stock (other than the shares
of Common Stock covered by the over-allotment option described below) must be so
purchased.

Prior to this offering, there has been no established trading market for
the Common Stock. The initial price to the public for the Common Stock offered
hereby will be determined by negotiation among the Company, the Representatives
and the representatives of the Selling Stockholders. The factors considered in
determining the initial price to the public will include the history of and the
prospects for the industry in which the Company competes, the ability of the
Company's management, the past and present operations of the Company, the
historical results of operations of the Company, the prospects for future
earnings of the Company, the general condition of the securities markets at the
time of this offering and the recent market prices of securities of generally
comparable companies.

The Company, the Selling Stockholders and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.

The Company has been advised by the Representatives that the Underwriters
propose to offer the Common Stock to the public initially at the price to the
public set forth on the cover page of this Prospectus and to certain dealers
(who may include the Underwriters) at such price less a concession not to exceed
$ per share. The Underwriters may allow, and such dealers may reallow,
discounts not in excess of $ per share to any other Underwriter and
certain other dealers; and that after the initial public offering, the price to
the public, the concession and the discount to dealers may be changed by the
Representatives.

The Company and the Selling Stockholders have granted to the Underwriters
an option to purchase up to an aggregate of 600,000 additional shares of Common
Stock at the initial public offering price less underwriting discounts and
commissions solely to cover over-allotments. Such option may be exercised at any
time until thirty days after the date of this Prospectus. To the extent that the
Underwriters exercise such option, each of the Underwriters will be committed,
subject to certain conditions, to purchase a number of option shares
proportionate to such Underwriter's initial commitment as indicated in the
preceding table.

The Representatives have informed the Company that they do not expect to
make sales to accounts over which they exercise discretionary authority in
excess of 5% of the number of shares of Common Stock offered hereby.

The Company, its officers, directors, stockholders with registration rights
and certain other stockholders, have agreed not to offer, sell, contract to sell
or otherwise dispose of any shares of Common Stock or any securities convertible
into or exchangeable for Common Stock for the 180-day

61
<PAGE> 62

Lockup Period without the prior written consent of Hambrecht & Quist LLC and
provided that the Company may grant options and issue shares of Common Stock
upon the exercise of options under the 1996 Stock Incentive Plan, the Omnibus
Plan and the Director Plan. See "Shares Eligible for Future Sale."

Certain persons participating in this offering may overallot or affect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock of the Company at levels above those which might otherwise
prevail in the open market, including by entering stabilizing bids, effecting
syndicate covering transactions or imposing penalty bids. A stabilizing bid
means the placing of any bid or effecting of any purchase, for the purpose of
pegging, fixing or maintaining the price of the Common Stock of the Company. A
syndicate covering transaction means the placing of any bid on behalf of the
underwriting syndicate or the effecting of any purchase to reduce a short
position created in connection with the offering. A penalty bid means an
arrangement that permits the Underwriters to reclaim a selling concession from a
syndicate member in connection with the offering when the Common Stock of the
Company sold by the syndicate member is purchased in syndicate covering
transactions. Such transactions may be effected on the Nasdaq Stock Market, in
the over-the-counter market, or otherwise. Such stabilizing, if commenced, may
be discontinued at any time.

In July 1996, H&Q Star Vending Investors, L.P. purchased 243,031 shares of
the Company's Series A Preferred Stock for approximately $2.0 million, as part
of a financing in which the Company sold an aggregate of 911,367 shares of
Series A Preferred Stock to a group of 22 investors for an aggregate purchase
price of approximately $7.5 million. Hambrecht & Quist Management Corporation
and H&Q Star Vending Investment Management, L.L.C. are the general partners of
H&Q Star Vending Investors, L.P. Hambrecht & Quist Management Corporation is a
wholly owned subsidiary of Hambrecht & Quist California, which also owns 99% of
Hambrecht & Quist LLC. The interests of H&Q Star Vending Investment Management,
L.L.C. are beneficially owned by persons affiliated with Hambrecht & Quist LLC,
including its President and Chief Executive Officer.

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP
("Gunderson Dettmer"), Menlo Park, California. Certain legal matters in
connection with the offering will be passed upon for the Underwriters by Wilson
Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. A
partnership including partners of Gunderson Dettmer is a partner in H&Q Star
Vending Investors, L.P., a stockholder in the Company, and as a result maintains
an indirect beneficial interest in 2,736 shares of the Company's Common Stock.

EXPERTS

The Consolidated Financial Statements of STAR Telecommunications, Inc. as
of December 31, 1995 and 1996 and for each of the years in the three year period
ended December 31, 1996, included in this Prospectus and elsewhere in this
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as set forth in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing in giving said reports.

62
<PAGE> 63

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1
under the Securities Act with respect to the Common Stock offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules to the Registration Statement. For
further information with respect to the Company and such Common Stock offered
hereby, reference is made to the Registration Statement and the exhibits and
schedules filed as a part of the Registration Statement. Statements contained in
this Prospectus concerning the contents of any contract or any other document
referred to are not necessarily complete; reference is made in each instance to
the copy of such contract or document filed as an exhibit to the Registration
Statement. Each such statement is qualified in all respects by such reference to
such exhibit. The Registration Statement, including exhibits and schedules
thereto, may be inspected without charge at the Commission's principal office in
Washington, D.C., and copies of all or any part thereof may be obtained from
such office after payment of fees prescribed by the Commission. The Commission
maintains a Web site that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission at http://www.sec.gov.

63
<PAGE> 64

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Public Accountants.............................................. F-2

Consolidated Financial Statements:

Consolidated Balance Sheets........................................................... F-3

Consolidated Statements of Operations................................................. F-5

Consolidated Statements of Stockholders' Equity....................................... F-6

Consolidated Statements of Cash Flows................................................. F-7

Notes to Consolidated Financial Statements............................................ F-8
</TABLE>

F-1
<PAGE> 65

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders
of STAR Telecommunications, Inc.:

We have audited the accompanying consolidated balance sheets of STAR
Telecommunications, Inc. (a Delaware corporation) and subsidiary as of December
31, 1995 and 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of STAR Telecommunications,
Inc. and subsidiary as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Los Angeles, California
April 10, 1997

F-2
<PAGE> 66

STAR TELECOMMUNICATIONS, INC.

CONSOLIDATED BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
PRO-FORMA
(SEE NOTE 9)
DECEMBER 31, MARCH 31, MARCH 31,
--------------------------- ----------- --------------
1995 1996 1997 1997
----------- ----------- ----------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents.......... $ 164,000 $ 1,719,000 $ 766,000 $ 766,000
Short-term investments............. -- 1,630,000 -- --
Accounts receivable, net of
allowance of $208,000 and
$5,733,000 at December 31, 1995
and 1996, respectively and
$4,862,000 at March 31, 1997.... 10,046,000 22,888,000 32,879,000 32,879,000
Receivable from related parties.... 50,000 115,000 129,000 129,000
Prepaid expenses and other
assets.......................... 84,000 1,729,000 2,120,000 2,120,000
Prepaid taxes...................... -- 677,000 591,000 591,000
----------- ----------- ----------- -----------
Total current assets....... 10,344,000 28,758,000 36,485,000 36,485,000
----------- ----------- ----------- -----------
Property and Equipment:
Operating equipment................ 1,353,000 8,653,000 11,448,000 11,448,000
Leasehold improvements............. 370,000 4,214,000 4,299,000 4,299,000
Computer equipment................. 187,000 1,604,000 1,690,000 1,690,000
Furniture and fixtures............. 61,000 435,000 650,000 650,000
----------- ----------- ----------- -----------
1,971,000 14,906,000 18,087,000 18,087,000
Less-accumulated depreciation and
amortization.................... (128,000) (1,201,000) (1,924,000) (1,924,000)
----------- ----------- ----------- -----------
1,843,000 13,705,000 16,163,000 16,163,000
----------- ----------- ----------- -----------
Other Assets:
Investments........................ -- 153,000 153,000 153,000
Deposits........................... 682,000 5,630,000 5,569,000 5,569,000
Other.............................. -- 428,000 666,000 666,000
----------- ----------- ----------- -----------
682,000 6,211,000 6,388,000 6,388,000
----------- ----------- ----------- -----------
Total assets............... $12,869,000 $48,674,000 $59,036,000 $ 59,036,000
=========== =========== =========== ===========
</TABLE>

The accompanying notes are an integral part of these consolidated balance
sheets.

F-3
<PAGE> 67

STAR TELECOMMUNICATIONS, INC.

CONSOLIDATED BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
PRO-FORMA
(SEE NOTE
9)
DECEMBER 31, MARCH 31, MARCH 31,
------------------------- ----------- -----------
1995 1996 1997 1997
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current Liabilities:
Revolving lines of credit................. $ 1,330,000 $ 7,814,000 $ 5,342,000 $ 5,342,000
Revolving lines of credit with
stockholder............................ 1,198,000 26,000 -- --
Current portion of long-term debt......... -- 267,000 460,000 460,000
Current portion of capital lease
obligations............................ 143,000 827,000 1,246,000 1,246,000
Accounts payable.......................... 8,515,000 6,260,000 20,255,000 20,255,000
Accrued line costs........................ 476,000 19,494,000 15,895,000 15,895,000
Accrued expenses.......................... 82,000 1,621,000 1,650,000 1,650,000
----------- ----------- ----------- -----------
Total current liabilities......... 11,744,000 36,309,000 44,848,000 44,848,000
----------- ----------- ----------- -----------
Long-Term Liabilities:
Long-term debt, net of current portion.... -- 466,000 400,000 400,000
Capital lease obligations, net of current
portion................................ 712,000 4,808,000 5,117,000 5,117,000
Deferred compensation..................... -- 116,000 35,000 35,000
Deposits.................................. -- -- 63,000 63,000
Other..................................... -- 88,000 234,000 234,000
----------- ----------- ----------- -----------
712,000 5,478,000 5,849,000 5,849,000
----------- ----------- ----------- -----------
Commitments and Contingencies (Note 5)
Stockholders' Equity:
Preferred Stock $.001 par value:
Authorized -- 1,367,050 shares
Issued and outstanding -- 1,367,047
shares at December 31, 1996 and March
31, 1997 and none in
Pro-Forma 1997....................... -- 1,000 1,000 --
Common Stock $.001 par value:
Authorized -- 30,000,000 shares
Issued and outstanding -- 9,000,000
shares at December 31, 1995 and
10,914,396 shares at December 31,
1996 and March 31, 1997 and
11,825,756 in Pro Forma 1997......... 9,000 11,000 11,000 12,000
Additional paid-in capital................ 1,094,000 13,637,000 13,637,000 13,637,000
Deferred compensation..................... -- (118,000) (98,000) (98,000)
Retained deficit.......................... (690,000) (6,644,000) (5,212,000) (5,212,000)
----------- ----------- ----------- -----------
Stockholders' equity................... 413,000 6,887,000 8,339,000 8,339,000
----------- ----------- ----------- -----------
Total liabilities and
stockholders' equity............ $12,869,000 $48,674,000 $59,036,000 $59,036,000
=========== =========== =========== ===========
</TABLE>

The accompanying notes are an integral part of these consolidated balance
sheets.

F-4
<PAGE> 68

STAR TELECOMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------------------- -------------------------
1994 1995 1996 1996 1997
--------- ----------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues........................ $ 176,000 $16,125,000 $208,086,000 $35,667,000 $71,008,000
Cost of services................ -- 14,357,000 188,430,000 32,286,000 63,738,000
--------- ------------ ------------ ----------- -----------
Gross profit............... 176,000 1,768,000 19,656,000 3,381,000 7,270,000
Operating expenses:
Selling, general and
administrative expenses.... 290,000 2,063,000 24,087,000 1,803,000 4,530,000
Depreciation and
amortization............... -- 128,000 1,073,000 108,000 722,000
--------- ------------ ------------ ----------- -----------
290,000 2,191,000 25,160,000 1,911,000 5,252,000
--------- ------------ ------------ ----------- -----------
Income (loss) from
operations............... (114,000) (423,000) (5,504,000) 1,470,000 2,018,000
--------- ------------ ------------ ----------- -----------
Other income (expense):
Interest income............... -- -- 83,000 -- 21,000
Interest expense.............. -- (64,000) (589,000) (78,000) (369,000)
Loss on investment............ (7,000) (80,000) -- -- --
Legal settlement.............. -- -- (100,000) -- --
Other......................... -- -- -- -- 48,000
--------- ------------ ------------ ----------- -----------
(7,000) (144,000) (606,000) (78,000) (300,000)
--------- ------------ ------------ ----------- -----------
Income (loss) before
provision for income
taxes.................... (121,000) (567,000) (6,110,000) 1,392,000 1,718,000
Provision for income taxes (Note
7)............................ 1,000 1,000 534,000 544,000 286,000
--------- ------------ ------------ ----------- -----------
Net income (loss)............... $(122,000) $ (568,000) $ (6,644,000) $ 848,000 $ 1,432,000
========= ============ ============ =========== ===========
Pro forma net income (loss) per
common share.................. $ (0.54) $ 0.08 $ 0.11
============ =========== ===========
Weighted average number of
common shares used to compute
Pro forma earnings per
share......................... 12,198,000 11,281,000 12,825,000
============ =========== ===========
</TABLE>

The accompanying notes are an integral part of these consolidated statements.

F-5
<PAGE> 69

STAR TELECOMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1997

<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL RETAINED
------------------ -------------------- PAID-IN DEFERRED EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION (DEFICIT) TOTAL
---------- ------ ----------- ------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993... -- $ -- -- $ -- $ -- $ -- $ -- $ --
Issuance of common stock..... -- -- 8,100,810 8,000 2,000 -- -- 10,000
Net loss..................... -- -- -- -- -- -- (122,000) (122,000)
--------- ------ ---------- ------- ----------- --------- ----------- -----------
Balance, December 31, 1994... -- -- 8,100,810 8,000 2,000 -- (122,000) (112,000)
Issuance of common stock..... -- -- 899,190 1,000 102,000 -- -- 103,000
Conversion of debt to
equity..................... -- -- -- -- 990,000 -- -- 990,000
Net loss..................... -- -- -- -- -- -- (568,000) (568,000)
--------- ------ ---------- ------- ----------- --------- ----------- -----------
Balance, December 31, 1995... -- -- 9,000,000 9,000 1,094,000 -- (690,000) 413,000
Effect of termination of the
S-Corporation election..... -- -- -- -- (690,000) -- 690,000 --
Compensation expense relating
to stock options........... -- -- -- -- 168,000 (118,000) -- 50,000
Issuance of common stock..... -- -- 1,914,396 2,000 5,566,000 -- -- 5,568,000
Issuance of preferred
stock...................... 1,367,047 1,000 -- -- 7,499,000 -- -- 7,500,000
Net income................... -- -- -- -- -- -- (6,644,000) (6,644,000)
--------- ------ ---------- ------- ----------- --------- ----------- -----------
Balance, December 31, 1996... 1,367,047 1,000 10,914,396 11,000 13,637,000 (118,000) (6,644,000) 6,887,000
Compensation expense relating
to stock options........... -- -- -- -- -- 20,000 -- 20,000
Net income................... -- -- -- -- -- -- 1,432,000 1,432,000
--------- ------ ---------- ------- ----------- --------- ----------- -----------
Balance, March 31, 1997
(unaudited)................ 1,367,047 $1,000 10,914,396 $11,000 $13,637,000 $ (98,000) $(5,212,000) $ 8,339,000
========= ====== ========== ======= =========== ========= =========== ===========
</TABLE>

The accompanying notes are an integral part of these consolidated statements.

F-6
<PAGE> 70

STAR TELECOMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------- ---------------------------
1994 1995 1996 1996 1997
--------- ----------- ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss)................... $(122,000) $ (568,000) $ (6,644,000) $ 848,000 $ 1,432,000
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization..... -- 128,000 1,073,000 108,000 722,000
Loss on investment................ 7,000 80,000 -- -- --
Compensation expense relating to
stock options................... -- -- 50,000 -- 20,000
Provision for doubtful accounts... -- 208,000 15,561,000 416,000 1,611,000
Deferred income taxes............. -- -- -- (203,000) --
Deferred compensation............. -- -- 116,000 12,000 (81,000)
Decrease (increase) in assets:
Accounts receivable............... -- (10,254,000) (28,403,000) (8,612,000) (11,602,000)
Receivable from related parties... -- (50,000) (65,000) 50,000 (14,000)
Prepaid expenses and other
assets.......................... -- (84,000) (1,645,000) (676,000) (391,000)
Prepaid taxes..................... -- -- (677,000) -- 86,000
Increase (decrease) in liabilities:
Accounts payable.................. 32,000 8,476,000 (2,255,000) 7,591,000 13,995,000
Accrued line costs................ -- 476,000 19,018,000 (464,000) (3,599,000)
Accrued expenses.................. 20,000 62,000 1,539,000 243,000 29,000
Taxes payable..................... -- -- -- 747,000 --
--------- ------------ ------------ ----------- ------------
Net cash provided by (used
in) operating activities... (63,000) (1,526,000) (2,332,000) 60,000 2,208,000
--------- ------------ ------------ ----------- ------------
Cash Flows From Investing Activities:
Capital expenditures................ (21,000) (1,062,000) (7,838,000) (371,000) (2,127,000)
Purchases of investments, net....... (80,000) -- (1,783,000) -- 1,630,000
Increase in deposits................ (23,000) (659,000) (4,948,000) (349,000) 61,000
Increase in other long-term
assets............................ -- -- (428,000) -- (175,000)
Increase in other long-term
liabilities....................... -- -- 88,000 176,000 146,000
--------- ------------ ------------ ----------- ------------
Net cash used in investing
activities................. (124,000) (1,721,000) (14,909,000) (544,000) (465,000)
--------- ------------ ------------ ----------- ------------
Cash Flows From Financing Activities:
Borrowings under lines of credit.... -- 1,460,000 14,474,000 100,000 21,345,000
Repayments under lines of credit.... -- (130,000) (7,990,000) (100,000) (23,817,000)
Borrowings under lines of credit
with stockholder.................. 192,000 3,418,000 701,000 17,000 --
Repayments under lines of credit
with stockholder.................. -- (1,319,000) (1,873,000) (16,000) (26,000)
Borrowings under long-term debt..... -- -- 800,000 -- 193,000
Repayments under long-term debt..... -- -- (67,000) -- (66,000)
Payments under capital lease
obligations....................... -- (33,000) (317,000) (33,000) (325,000)
Issuance of common stock............ 10,000 -- 5,568,000 1,500,000 --
Issuance of preferred stock......... -- -- 7,500,000 -- --
--------- ------------ ------------ ----------- ------------
Net cash provided by (used
in) financing activities... 202,000 3,396,000 18,796,000 1,468,000 (2,696,000)
--------- ------------ ------------ ----------- ------------
Increase (decrease) in cash and cash
equivalents......................... 15,000 149,000 1,555,000 984,000 (953,000)
Cash and cash equivalents, beginning
of period........................... -- 15,000 164,000 164,000 1,719,000
--------- ------------ ------------ ----------- ------------
Cash and cash equivalents, end of
period.............................. $ 15,000 $ 164,000 $ 1,719,000 $ 1,148,000 $ 766,000
========= ============ ============ =========== ============
</TABLE>

The accompanying notes are an integral part of these consolidated statements.

F-7
<PAGE> 71

STAR TELECOMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996

1. NATURE OF BUSINESS

STAR Telecommunications, Inc. and subsidiary (the Company or STAR), a
Delaware corporation, is an international long distance provider focused
primarily on providing low cost switched voice long distance services to U.S.
and foreign-based telecommunications companies. The Company currently offers
U.S.-originated long distance service through its network of resale arrangements
with other long distance providers, foreign termination relationships,
international gateway switches and leased and owned transmission facilities.
While the Company was incorporated in 1993, it did not commence its current
business as a provider of long distance services until the second half of 1995.
During 1994, the Company was primarily engaged in activities outside the
international telecommunications industry. During the six months ended June
1995, the Company primarily acted as an agent for, and provided various
consulting services to, companies in the telecommunications industry. In
November 1996, the Company established a wholly owned subsidiary (STAR Europe
Limited) in London, England.

The Company is subject to various risks in connection with the operation of
its business. These risks include, but are not limited to, regulations (See Note
5f), dependence on transmission facilities-based carriers and suppliers, price
competition and competition from larger industry participants.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a. Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
STAR Telecommunications, Inc. and its wholly owned subsidiary STAR Europe
Limited, after elimination of all significant intercompany accounts and
transactions which were not material during 1996.

b. Revenue Recognition

The Company records revenues for long distance telecommunications sales at
the time of customer usage. Finance charges for customer late payments are
included in revenues and amount to $32,000 and $1,467,000 for the years ended
December 31, 1995 and 1996, respectively. The Company had no revenue from
finance charges during 1994.

The Company charges its customers 1.5 percent of the outstanding balance if
the customer is late in making its payment. Two customers, Cherry Communications
and Hi-Rim Communications, Inc., represented the two largest balances for the
year ended December 31, 1996, representing 20 percent and 16 percent of revenue
from late charges, respectively. These two customers also were the two largest
customers overall, representing 21 percent and 9 percent of overall revenue for
the year. The two next largest balances for the year ended December 31, 1996
represented 8 and 7 percent of revenue from late charges for the year.

c. Cost of Services

Cost of services represents direct charges from vendors that the Company
incurs to deliver service to its customers. These include leasing costs for the
dedicated phone lines which form the Company's network and rate-per-minute
charges from other carriers that terminate international traffic on behalf of
the Company.

d. Accounting for International Long Distance Traffic

At the end of 1996, the Company entered into operating agreements with
telecommunication carriers in foreign countries under which international long
distance traffic is both originated and

F-8
<PAGE> 72

STAR TELECOMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

terminated on the Company's network. The Company records international
settlement revenues and related costs as the traffic is recorded in the switch.
For the year ended December 31, 1996, $178,000 in revenue has been recorded from
foreign customers.

e. Property and Equipment

Property and equipment are carried at cost. Depreciation and amortization
of property and equipment is computed using the straight-line method over the
following estimated useful lives:

<TABLE>
<S> <C>
Operating equipment...................................... 5-25 years
Leasehold improvements................................... Life of lease
Computer equipment....................................... 3 years
Furniture and fixtures................................... 5 years
</TABLE>

Operating equipment includes assets financed under capital lease
obligations of $888,000 at December 31, 1995 and $5,985,000 at December 31,
1996. Operating equipment at December 31, 1996 also includes two Indefeasible
Rights of Use (IRU) in cable systems amounting to $110,000 and one interest in
an international cable amounting to $148,000. These assets are amortized over
the life of the agreements of 14 to 25 years.

Replacements and betterments, renewals and extraordinary repairs that
extend the life of the asset are capitalized; other repairs and maintenance are
expensed. The cost and accumulated depreciation applicable to assets sold or
retired are removed from the accounts and the gain or loss on disposition is
recognized in other income or expense.

f. Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents, receivables, other
assets, revolving lines of credit, notes payable, capital lease obligations,
accounts payable, and accrued liabilities approximate their fair value.

g. Statements of Cash Flows

During the years ended December 31, 1995 and 1996, cash paid for interest
was $43,000 and $530,000, respectively. For the same periods, cash paid for
income taxes amounted to $1,000 and $1,211,000 respectively. The Company paid no
cash for interest or income taxes during 1994.

Non-cash investing and financing activities are as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1994 1995 1996
------- ---------- ----------
<S> <C> <C> <C>
Equipment purchased through capital leases........... $ -- $ 888,000 $5,097,000
Debt converted to equity............................. -- 1,093,000 --
</TABLE>

These non-cash transactions are excluded from the statements of cash flows.

Cash equivalents consist primarily of money market accounts. The Company
considers all highly liquid investments with an original maturity of three
months or less to be cash equivalents.

h. Stock Split

On January 23, 1996, the Board of Directors authorized an increase to the
authorized number of common shares from 10,000 to 100,000,000 and effected a
8,100.8109-for-1 stock split of the Company's

F-9
<PAGE> 73

STAR TELECOMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

issued and outstanding shares. All common shares have been retroactively
restated to reflect the effect of the stock split.

On July 22, 1996, the Company changed the par value of its common stock
from $0.01 per share to $0.001 per share. All common shares have been
retroactively restated to reflect the effect of this change (also see Note 10f
for post year-end restructuring and stock split).

i. Concentrations of Risk

The Company's two largest customers account for approximately 44 percent
and 29 percent of gross accounts receivable at December 31, 1995 and 1996,
respectively. The Company's largest customer in 1995 and 1996 was Cherry
Communications, Inc. The Company's second largest customer in 1995 was Cable &
Wireless and the Company's second largest customer in 1996 was Hi-Rim
Communications, Inc. Each of these customers represents more than 10 percent of
gross accounts receivable at December 31, 1995 but only one customer represents
more than 10 percent of accounts receivable in 1996. These customers represent
approximately 47 percent of revenues during the year ended December 31, 1995 and
30 percent of revenues for the year ended December 31, 1996. Each of these
customers represents more than 10 percent of sales in 1995 while only one
represents more than 10 percent of sales in 1996. The Company performs ongoing
credit evaluations of its customers. The Company analyzes daily traffic patterns
and concludes whether or not the customer's credit status justifies the traffic
volume. If the customer is deemed to carry too large a volume in relation to its
credit history, the traffic received by the Company's switch is reduced to
prevent further build up of the receivable from this customer. The Company's
allowance for doubtful accounts is based on current market conditions.

Purchases from the three largest vendors for the year ended December 31,
1995 amounted to 49 percent of total purchases. Purchases from the four largest
vendors for the year ended December 31, 1996 amounted to 51 percent of total
purchases.

Included in the Company's balance sheet at December 31, 1995 and 1996, are
the net assets of the Company's international telecommunication switching
equipment which is located in Los Angeles at a cost of $1,288,000 at December
31, 1995 and in Los Angeles and New York at a cost of $8,205,000 at December 31,
1996. In addition, approximately $179,000 of equipment is located in foreign
countries at December 31, 1996.

j. Deposits and Other Assets

Deposits represent payments made to long distance providers to secure lower
rates. These deposits are refunded or applied against future service and are net
of a $2 million reserve at December 31, 1996. Other assets represents initial
public offering expenses.

k. Net Loss Per Common Share

Pro forma net loss per common share for the year ended December 31, 1996 is
based on the weighted average number of common shares outstanding giving effect
of the conversion of the preferred stock (see Note 9. Per share information was
computed pursuant to the rules of the Securities and Exchange Commission (SEC),
which require that common shares issued by the Company during the twelve months
immediately preceding the Company's initial public offering plus the number of
common shares issuable pursuant to the grant of options issued during the same
period, be included in the calculation of the shares outstanding using the
treasury stock method from the beginning of all periods presented.

Historical earnings per share are not presented for all periods, since such
amounts are not meaningful in light of the conversion of the preferred stock.

F-10
<PAGE> 74

STAR TELECOMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following schedule summarizes the information used to compute pro forma
net loss per common share for the year ended December 31, 1996:

<TABLE>
<S> <C>
Net loss.......................................................... $(6,644,000)
-----------
Weighted average common shares outstanding........................ 10,575,000
Effect of stock options pursuant to SEC rules..................... 1,095,000
Conversion of preferred stock..................................... 528,000
-----------
Weighted average number of common shares used to compute net
income per share................................................ 12,198,000
-----------
Pro forma net loss per common share............................... $ (0.54)
===========
</TABLE>

Pro forma net loss per common share reflects the conversion of 1,367,047
shares of preferred stock into common stock upon the effectiveness of the
initial public offering at a rate of three preferred shares to two common
shares.

l. Use of Estimates

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

m. Recently Issued Accounting Standards

In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
which requires impairment losses to be recorded on long-lived assets used in
operations when indications of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amounts. The Company adopted SFAS 121 during 1995 which had no impact
on the Company's financial position or results of operations.

In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS 123 encourages, but does not require, a fair value based
method of accounting for employee stock options or similar equity instruments.
It also allows an entity to elect to continue to measure compensation cost under
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees," but requires pro forma disclosure of net income and earnings per
share as if the fair value based method had been applied. The Company adopted
this standard in 1996, electing to measure compensation cost under APB 25 and
complying with the pro forma disclosure requirements. Therefore, the adoption of
SFAS 123 had little impact on the Company's financial position or results of
operations.

3. LINES OF CREDIT

a. Bank Lines of Credit

On November 13, 1995, the Company entered into an agreement for a one-year
$1 million revolving credit facility. On October 4, 1996 the bank increased the
revolving credit facility to $12 million, including draws on the line and
outstanding letters of credit, and extended it to May 1, 1997. Any borrowings
under this facility are limited by the balance in eligible accounts receivable,
as defined, and bear interest at the prime rate plus 1 percent (9.25 percent at
December 31, 1996). The

F-11
<PAGE> 75

STAR TELECOMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

agreement allows the Company to convert certain amounts into short-term
obligations that bear interest at the bank's LIBOR rate plus 3.5 percent (9.1
percent at December 31, 1996) or the bank's cost of fund's rate plus 3.5 percent
at the time of funding. Upon maturity of these short-term obligations, the
interest rate on these borrowings converts back to prime plus 1 percent. This
facility is collateralized by virtually all assets of the Company. Performance
under the revolving credit facility has been guaranteed up to $10 million by the
majority shareholder and officer of the Company. The agreement contains certain
financial and non-financial covenants which include, among other restrictions,
maintenance of minimum levels of net income, tangible effective net worth and
working capital. At December 31, 1996, there were no unused amounts available to
be borrowed against this line of credit. In addition, the bank issued a waiver
to cure non-compliance under the tangible effective net worth, current ratio,
ratio of total liabilities to tangible effective net worth, net income after
taxes for the fourth quarter of 1996 and the stockholder subordination covenants
for the period ended December 31, 1996 and continuing through March 30, 1997,
when new covenants come into effect.

The Company entered into a one-year $100,000 revolving line of credit on
July 19, 1995. This facility's interest rate was the prime rate plus 1 percent
and it was paid off and terminated on July 19, 1996.

The weighted average interest rate on the above facilities during the year
ended December 31, 1995 and 1996 was 10.21 percent and 9.68 percent,
respectively.

b. Lines of Credit with Stockholder

At December 31, 1996, the Company's revolving lines of credit with the
majority stockholder and chief executive officer of the Company totaled
$1,448,000 and mature on March 30, 1998. Interest is payable at maturity at a
rate of 9 percent. There was $1,422,000 available to be borrowed against these
lines of credit at December 31, 1996. The Company recognized interest expense
relating to this debt of $0, $11,000 and $34,000 for the years ended December
31, 1994, 1995 and 1996, respectively.

4. LONG-TERM DEBT

a. Note Payable

On October 4, 1996, the Company entered into an $800,000 variable rate
installment note with a bank. The agreement calls for monthly payments of
$22,222 plus interest at the prime rate plus 1.5 percent (9.75 percent at
December 31, 1996). The note is due in full by October 1, 1999 and is
collateralized by related equipment of the Company with a cost of $787,000.

F-12
<PAGE> 76

STAR TELECOMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

b. Capital Lease Obligation

The Company leases various telecommunications equipment under capital lease
arrangements. Minimum future lease payments under these capital leases at
December 31, 1996 are as follows:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
-----------------------------------------------------------------
<S> <C>
1997............................................................. $1,490,000
1998............................................................. 1,490,000
1999............................................................. 1,490,000
2000............................................................. 1,408,000
2001............................................................. 981,000
Thereafter....................................................... 748,000
----------
7,607,000
Less: Amount representing interest............................... 1,972,000
----------
5,635,000
Less: Current portion............................................ 827,000
----------
$4,808,000
==========
</TABLE>

Accumulated amortization related to assets financed under capital leases
was $59,000 and $324,000 at December 31, 1995 and 1996, respectively. The
Company had no assets financed under capital leases during 1994.

5. COMMITMENTS AND CONTINGENCIES

a. Operating Leases

The Company leases office space, dedicated private telephone lines,
equipment and other items under various agreements expiring through 2006. At
December 31, 1996, the minimum aggregate payments under non-cancelable operating
leases are summarized as follows:

<TABLE>
<CAPTION>
OFFICE FACILITIES TELECOMMUNICATIONS
YEAR ENDING DECEMBER 31, AND EQUIPMENT FACILITIES AND EQUIPMENT TOTAL
-------------------------------- ----------------- ------------------------ -----------
<S> <C> <C> <C>
1997............................ $ 393,000 $ 1,293,000 $ 1,686,000
1998............................ 364,000 1,591,000 1,955,000
1999............................ 309,000 1,710,000 2,019,000
2000............................ 241,000 1,710,000 1,951,000
2001............................ 214,000 1,441,000 1,655,000
Thereafter...................... 281,000 3,616,000 3,897,000
---------- ----------- -----------
$ 1,802,000 $ 11,361,000 $13,163,000
========== =========== ===========
</TABLE>

Office facility and equipment rent expense for the years ended December 31,
1994, 1995 and 1996 was approximately $7,000, $125,000 and $681,000,
respectively. Telecommunications facility and equipment rent expense was
approximately $604,000 in 1995 and $7,260,000 in 1996 and is included in cost of
services in the accompanying statements of operations.

b. Employment Agreements

During 1996, the Company entered into employment agreements with several
employees and amended the employment agreement of the Company president. Some of
these agreements provide for a continuation of salaries in the event of a
termination, with or without cause, following a change in

F-13
<PAGE> 77

STAR TELECOMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

control of the Company. One agreement provides for a guaranteed salary
continuation of at least six months after termination and another, under certain
conditions, for a payment of at least $1,500,000 in the event of a change in
control of the Company.

The Company entered into a consulting agreement on February 29, 1996 which
was converted to an employment agreement on May 1, 1996. The employment
agreement is with an officer of the Company. It is for a two year period and
provides for continuation of salary and certain benefits for up to 12 months
after termination. The Company also entered into two separate stock option
agreements with this officer (see Note 8).

During 1996, the Company expensed $116,000 of deferred compensation
relating to these agreements.

c. Purchase Commitments

The Company is obligated under various service agreements with long
distance carriers to pay minimum usage charges of approximately $51,995,000,
$11,685,000 and $900,000 for the twelve months ending December 31, 1997, 1998
and 1999, respectively. The Company anticipates exceeding the minimum usage
volume with these vendors.

d. Letters of Credit

At December 31, 1996, the Company has eight standby letters of credit
outstanding, which expire between January 2, 1997 and November 25, 1997. These
letters of credit total $4,751,000, of which $2,501,000 are secured by the bank
line of credit and $2,250,000 are secured by short-term investments.

e. Legal Matters

The Company is subject to litigation from time to time in the ordinary
course of business. In February 1996, the Company filed an action in Santa
Barbara County Superior Court against Communication Telesystems International
("CTS") seeking $2.0 million in damages for an alleged breach of two contracts
with CTS. The Company claims that CTS failed to pay moneys due to the Company
and made certain demands that CTS was not entitled to make under the contract
and that CTS then repudiated the contracts. CTS filed a separate action against
the Company, seeking to recover liquidated damages of $6.0 million for the
Company's alleged breach of one of the contracts. CTS claims that it is entitled
to liquidated damages as a result of the Company's failure to deliver an
increased cash deposit. The Company was granted summary judgment on CTS's First
Amended Complaint claims on May 14, 1997. The Company intends to pursue its
claim against CTS and to vigorously defend against any potential appeals by CTS.
There can be no assurance, however, that the Company will prevail either in its
collection of damages or in defending against any potential appeals by CTS. In
addition, whether or not the Company is able to collect its damages or were to
prevail in any potential appeals, such collection process and appeal could be
time consuming and costly. Since CTS's counterclaim is based on liquidating
damages, where CTS will either prevail or not prevail, a range of loss cannot be
determined.

During 1996, the Company settled a disagreement with a former consultant to
the Company for a payment of $100,000.

f. Telecommunications Legislation Revisions

In the United States, the Federal Communications Commission and relevant
state Public Service Commissions have the authority to regulate interstate and
intrastate rates, respectively, ownership of transmission facilities, and the
terms and conditions under which the Company's services are provided.

F-14
<PAGE> 78

STAR TELECOMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Legislation that substantially revised the U.S. Communications Act of 1934
was signed into law on February 8, 1996. The legislation has specific guidelines
under which the regional operating companies (RBOCs) can provide long distance
services, which will permit the RBOCs to compete with the Company in providing
domestic and international long distance services. Further, the legislation,
among other things, opens local service markets to competition from any entity
(including long distance carriers, such as AT&T, cable television companies and
utilities).

Because the legislation opens the Company's markets to additional
competition, particularly from the RBOCs, the Company's ability to compete may
be affected. Moreover, as a result of and to implement the legislation, certain
federal and other governmental regulations will be amended or modified, and any
such amendment or modification could have an effect on the Company's business,
results of operations and financial condition.

6. RELATED PARTY TRANSACTIONS

The majority stockholder and chief executive officer of the Company owns
two-thirds of Star Aero Services, Inc. (Star Aero). Star Aero's principal assets
represent airplanes which it provides to the Company for business travel on an
as needed basis. In return, the Company pays for costs related to the airplanes.
Star Aero reimburses the Company for certain costs relating to the maintenance
of the planes. For the years ended December 31, 1994, 1995 and 1996, the Company
paid $0, $144,000 and $68,000, respectively, in costs related to the use of Star
Aero services. As of December 31, 1995 and 1996, the Company has a receivable
from Star Aero of $50,000 and $115,000, respectively.

During 1995, the Company invested $128,000 in a company related to an
employee of STAR and purchased services from that company in the amount of
$167,000. During 1995 and 1996, the Company purchased consulting services from a
company owned by a board member in the amount of $60,000 and $154,000,
respectively. During the year ended December 31, 1995 and 1996, the Company also
provided long distance telephone service to a company controlled by another
board member in the amount of $43,000 and $250,000 respectively. During 1996,
the Company purchased telecommunication services from three companies controlled
by a Company executive for $240,000 and made up front payments in the amount of
$758,000, which are included in deposits in the accompanying financial
statements at December 31, 1996.

7. INCOME TAXES

Through December 31, 1995, the Company had elected to be taxed as an
S-Corporation for both federal and state income tax purposes. While the election
was in effect, all taxable income, deductions, losses and credits of the Company
were included in the tax returns of the shareholders. Accordingly, for federal
income tax purposes, no tax benefit, liability or provision has been reflected
in the accompanying financial statements at December 31, 1994 and 1995 and for
the years then ended. For state tax purposes, an S-Corporation is subject to a
1.5 percent tax on taxable income, with a minimum tax of approximately $1,000
annually. Effective January 1, 1996, the Company terminated its S-Corporation
election and is now taxable as a C-Corporation. The Company accounts for income
taxes in accordance with SFAS No. 109, "Accounting for Income Taxes," under
which deferred assets and liabilities are provided on differences between
financial reporting and taxable income using enacted tax rates. Deferred income
tax expenses or credits are based on the changes in deferred income tax assets
or liabilities from period to period.

Under SFAS No. 109, deferred tax assets may be recognized for temporary
differences that will result in deductible amounts in future periods. A
valuation allowance is recognized if on the weight of available evidence, it is
more likely than not that some portion or all of the deferred tax asset will not
be realized.

F-15
<PAGE> 79

STAR TELECOMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

There is no assurance that the Company will continue to be profitable in
future periods, therefore, a valuation allowance has been recognized for the
full amount of the deferred asset for each period presented.

The components of the net deferred tax assets at December 31, 1995 and 1996
are as follows:

<TABLE>
<CAPTION>
1995 1995
HISTORICAL PRO FORMA 1996
---------- --------- ----------
<S> <C> <C> <C>
Deferred tax asset:
Allowance for bad debts............................. $ 3,000 $83,000 $3,104,000
Accrued line cost................................... -- -- 201,000
Vacation accrual.................................... -- -- 24,000
Deferred compensation............................... -- -- 47,000
Accrued bonus....................................... -- -- 25,000
Accrued interest.................................... -- 6,000 --
State income taxes.................................. -- -- 48,000
------- -------- ----------
3,000 89,000 3,449,000
Deferred tax liability:
Depreciation........................................ (1,000) (59,000) (565,000)
------- -------- ----------
Subtotal.............................................. 2,000 30,000 2,884,000
Valuation reserve..................................... (2,000) (30,000) (2,884,000)
------- -------- ----------
Net deferred tax asset................................ $ -- $ -- $ --
======= ======== ==========
</TABLE>

The provision for income taxes for the years ended December 31, 1994, 1995
and 1996 are as follows:

<TABLE>
<CAPTION>
1994 1995 1996
------ ------ --------
<S> <C> <C> <C> <C>
Current - Federal taxes.................................... $ -- $ -- $393,000
- State taxes...................................... 1,000 1,000 141,000
------ ------ --------
1,000 1,000 534,000
------ ------ --------
Deferred - Federal taxes.................................... -- -- --
- State taxes...................................... -- -- --
------ ------ --------
-- -- --
------ ------ --------
Provision for income taxes................................... $1,000 $1,000 $534,000
====== ====== ========
</TABLE>

There is no difference between historical and pro forma provision for
income taxes for the years ended December 31, 1994 and 1995 because the amount
of provision is the minimum state taxes payable.

F-16
<PAGE> 80

STAR TELECOMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Differences between the provision for income taxes and income taxes at the
statutory federal income tax rate for the years ended December 31, 1994, 1995
and 1996 are as follows:

<TABLE>
<CAPTION>
HISTORICAL PRO FORMA 1996
--------------- -------------------- ---------------------
1994 1995 1994 1995 AMOUNT PERCENT
------ ------ -------- --------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Income taxes at the statutory
federal rate...................... $ -- $ -- $(41,000) $(193,000) $(2,077,000) (34.0)%
State income taxes, net of federal
income tax effect................. 1,000 1,000 1,000 1,000 (375,000) (6.1)%
Change in valuation reserve......... -- -- -- -- 2,882,000 47.1%
Tax benefits not recognized......... -- -- 41,000 193,000 -- --
Meals and gifts..................... -- -- -- -- 104,000 1.7%
------ ------ -------- --------- -------- -----
$1,000 $1,000 $ 1,000 $ 1,000 $ 534,000 8.7%
====== ====== ======== ========= ======== =====
</TABLE>

8. STOCK OPTIONS

On January 22, 1996, the Company adopted the 1996 Stock Incentive Plan (the
"Plan"). The Plan, which was amended on March 31, 1996, provides for the
granting of stock options to purchase up to 720,000 shares of common stock and
terminates January 22, 2006. Options granted become exercisable at a rate of not
less than 20 percent per year for five years.

Subsequent to the adoption of the Plan, the Company granted two employees
options to purchase a total of 360,000 shares of the Company's common stock
exercisable at the fair market value of $1.50 per share as determined by the
Board of Directors. One-third of the options are exercisable immediately. The
remaining options are exercisable equally on January 2, 1997 and 1998.

In May 1996, the Company issued an additional 337,100 stock options to
certain employees and consultants under the Plan, of which 10,600 were
subsequently canceled. The options are exercisable at fair market value of $3.00
per share at the date of issuance, and vest through August 2000.

In connection with the consulting agreement and subsequent employment
agreement with an officer of the Company, the Company entered into two separate
stock option agreements. The first agreement, dated March 1, 1996, provides for
200,000 non-incentive stock options exercisable immediately. The options are
exercisable at fair market value at the date of issuance, which was $2.00 per
share, and expire in 10 years. The second stock option agreement was entered
into on May 1, 1996 for an additional 200,000 shares to also be issued at $2.00
per share. These options vest half on March 1, 1997 and half on March 1, 1998.
These options, which expire in 10 years, may be subject to accelerated vesting
if a change in control occurs, as defined.

On May 15, 1996, the Company granted 100,000 options, valued at $3.00 per
share at the date of issuance to a director. Of these options 34 percent are
exercisable immediately. The remaining options are exercisable equally on May
15, 1997 and 1998.

On May 14, 1996, the Company adopted the 1996 Outside Director Nonstatutory
Stock Option Plan. The number of shares which may be issued under this plan upon
exercise of options may not exceed 200,000 shares. The exercise price of an
option is determined by the Board of Directors and may not be less than 85
percent of the fair market value of the common stock at the time of grant and
has to be 110 percent of the fair market value of the common stock at the time
of grant if the option is granted to a holder of more than 10 percent of the
common stock outstanding. At the discretion of the administrator, the options
vest at a rate of not less than 20 percent per year, which may accelerate upon a
change in control, as defined. The plan expires on May 14, 2006. On May 15,
1996, the Company issued 40,000 options under this plan at $3.00 per share,
which vest immediately and expire 10 years from the grant date.

F-17
<PAGE> 81

STAR TELECOMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

On September 23, 1996, the Company adopted the 1996 Supplemental Stock
Option Plan. This plan which expires on August 31, 2006, replaces the Plan and
has essentially the same features. The Company can issue options or other rights
to purchase up to 1,000,000 shares of stock which expire up to 10 years after
the date of grant, except for incentive options issued to a holder of more than
10 percent of the common stock outstanding, which expire five years after the
date of grant. On September 23, 1996, the Company granted 126,500 options under
this plan at $8.20 per share, which vest through September 2000 of which 2,500
shares were subsequently canceled.

In October 1996, the Company issued 254,500 options at $8.20 per share, as
determined by the Board of Directors, and in December 1996, an additional 85,000
options were issued at $8.20 per share. The Board of Directors determined the
market value of the December options to be $9.60 per share. The Company is
recognizing the difference between the market value at the date of grant and the
exercise price as compensation expense over the vesting period.

Stock Option information with respect to the Company's stock option plans
is as follows:

<TABLE>
<CAPTION>
COMMON AVAILABLE OPTION AGGREGATE
SHARES FOR PRICE OPTION
RESERVED GRANT OPTIONS PER SHARE PRICE
--------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995............ -- -- -- $ -- $ --
Adoption of 1996 Stock Incentive Plan... 720,000 720,000 -- -- --
Options granted under 1996 Stock
Incentive Plan........................ -- (697,100) 697,100 1.50-3.00 1,551,000
Canceled Options........................ -- 10,600 (10,600) 3.00 (32,000)
Options granted outside a plan.......... 500,000 -- 500,000 2.00-3.00 1,100,000
Adoption of 1996 Outside Director Non
Statutory Stock Option Plan........... 200,000 200,000 -- -- --
Granted under 1996 Outside Director Non
Statutory Stock Option Plan........... -- (40,000) 40,000 3.00 120,000
Adoption of 1996 Supplemental Stock
Option Plan........................... 1,000,000 1,000,000 -- -- --
Options granted under 1996 Supplemental
Stock Option Plan..................... -- (466,000) 466,000 8.20 3,821,000
Canceled Options........................ -- 2,500 (2,500) 8.20 (20,000)
--------- ---------- --------- ---------- ----------
Balance at December 31, 1996............ 2,420,000 730,000 1,690,000 $1.50-8.20 $6,540,000
========= ========== ========= ========== ==========
</TABLE>

The Company has elected to adopt FASB No. 123 for disclosure purposes only
and applies Accounting Principle Board (APB) Opinion No. 25 and related
interpretations in accounting for its employee stock options. Approximately
$50,000 in compensation cost was recognized relating to consultant options for
the year ended December 31, 1996.

Had compensation cost for stock options awarded under these plans been
determined based on the fair value at the dates of grant consistent with the
methodology of FASB No. 123, the Company's net loss and loss per share for the
year ended December 31, 1996 would have reflected the following pro-forma
amounts:

<TABLE>
<CAPTION>
NET LOSS LOSS PER SHARE
---------- ------------------
<S> <C> <C>
As reported.............................................. $ (6,644) $(0.54)
Pro-Forma................................................ $ (7,227) $(0.59)
</TABLE>

The fair value of each option grant is estimated on the date of grant using
the minimum value method of option pricing with the following assumptions used
for the grants; weighted average risk-free interest rate of 6.4%; expected
dividend yields of 0.00 percent; and an expected life of 10 years.

F-18
<PAGE> 82

STAR TELECOMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Because the Company did not have a stock option program prior to 1996, the
resulting pro-forma compensation cost may not be representative of that to be
expected in future years.

A summary of the status of the Company's stock options at December 31, 1996
and activity during 1996 is presented in the table below:

<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Outstanding at December 31, 1995........................ -- $ --
Granted................................................. 1,703,100 $ 3.87
Exercised............................................... -- $ --
Forfeited............................................... 13,100 $ 3.99
Expired................................................. -- $ --
Outstanding at December 31, 1996........................ 1,690,000 $ 3.87
Exercisable at end of year.............................. 448,500 $ 2.25

Weighted average fair value of options granted.......... $1.94
</TABLE>

1,226,500 of the options outstanding at December 31, 1996 have an exercise
price between $1.50 and $3.00, a weighted average exercise price of $2.24 with a
weighted average remaining contractual life of 9.5 years and 448,333 of these
options are exercisable. 463,500 of the options outstanding have an exercise
price of $8.20 and a weighted average remaining contractual life of 9.9 years,
none of which are exercisable.

9. CAPITAL STOCK

During 1994, the Company issued 8,100,810 shares of stock to the Company's
founder for $10,000. During 1995, this stockholder converted $990,000 of debt
into capital for no additional shares. During 1995, the Company also issued
899,190 shares to another executive of the Company on conversion of a loan.

On February 23, 1996, the Company sold 1,000,000 shares of common stock to
various investors for $1,500,000. These stockholders entered into an agreement
containing a non-dilution covenant. The covenant allows the investors to
purchase sufficient shares of common stock to maintain their current interest in
the Company in the event of future stock sales. The stock purchase agreement
gives the investors the same rights of first refusal, registration or other
rights as the Company may grant to other stockholders.

On July 12, 1996, the Company sold 914,396 shares of common stock to an
investor for $4,068,000. Concurrent with this stock sale, the Company entered
into a registration rights agreement with the investor. According to this
agreement, the Company has to use its best efforts to effect registration of
these shares. The stock purchase agreement also provides for non dilution rights
and rights of first refusal which terminate upon an underwritten public offering
of common stock over $5,000,000 and certain merger transactions.

On July 25, 1996, the Company sold 1,367,047 shares of Series A preferred
stock to a group of investors for $7,500,000. The holders of preferred shares
have voting rights and are entitled to receive annual noncumulative dividends of
$0.33 per share, payable only if and when declared by the Board of Directors.
Additional distributions or dividends are to be distributed to common and
preferred shareholders proportionately. These preferred shares also have
liquidation preference in the amount of $5.4863 per share plus declared but
unpaid dividends, and may be converted to common stock at a ratio of 3-for-2 at
the option of the holder. In the event of a public offering, as defined, each
three such preferred shares automatically converts to two shares of common
stock. See Note 2 for pro forma

F-19
<PAGE> 83

STAR TELECOMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

earnings per share computation assuming the preferred stock had been converted
into common stock at the beginning of the year.

In connection with this transaction, the Company and buyers of the
preferred shares entered into an investors rights agreement which obligates the
Company to file up to two registration statements to register such shares. These
stockholders also may require the company to file additional registration
statements on Form S-3, subject to certain conditions and limitations.

Holders of approximately 1,914,000 shares of common stock are also entitled
to certain registration rights.

10. UNAUDITED FIRST QUARTER INFORMATION

The unaudited financial statements for the three-month periods ended March
31, 1996 and 1997 reflect, in the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to fairly present the
financial position, results of operations and changes in cash flows as of and
for the periods presented. These unaudited financial statements should be read
in conjunction with the audited financial statements and related notes thereto.
The results for the interim periods presented are not necessarily indicative of
results to be expected for the full year.

a. Net Income Per Common Share

Net income per common share for the three months ended March 31, 1996 and
1997 are based on the weighted average number of common shares outstanding and
the dilutive effect of stock options outstanding.

Net income per share for each of the three months ended March 31, 1996 and
1997 have been computed on a pro-forma basis giving effect to the conversion of
preferred stock. Historical earnings per share are not presented, since such
amounts are not meaningful in light of the conversion of the preferred stock
(see Note 9).

The following schedule summarizes the information used to compute pro forma
net income per common share:

<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
----------------------------
1996 1997
----------- -----------
<S> <C> <C>
Net income....................................................... $ 848,000 $ 1,432,000
-------- -----------
Weighted average common shares outstanding....................... 9,956,000 10,914,000
Conversion of preferred stock.................................... 230,000 911,000
Dilutive effect of stock options pursuant to SEC Rules........... 1,095,000 1,000,000
-------- -----------
Weighted average common shares used to compute net income per
share.......................................................... 11,281,000 12,825,000
-------- -----------
Pro forma net income per common share............................ $ 0.08 $ 0.11
======== ===========
</TABLE>

b. Provision for Income Taxes

The provision for income taxes for the three months ended March 31, 1996 is
based on the estimated annualized tax rate for the year. The provision for
income taxes at March 31, 1997 is based on taxable income for the three months
then ended, because the net deferred tax asset has been fully reserved.

c. Leases

Rent expense for the three months ended March 31, 1996 and 1997 was
approximately $54,000 and $307,000, respectively.

F-20
<PAGE> 84

STAR TELECOMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

d. Supplemental Cash Flow Information

For the three month period ended March 31, 1997, the Company paid taxes of
approximately $200,000. No taxes were paid by the Company in the three month
period ended March 31, 1996. The Company paid interest in the amount of $58,000
and $326,000 in the first three months of 1996 and 1997, respectively. In the
first quarter of 1997, $1,053,000 in equipment was purchased under capital
leases. These purchases were excluded from the statement of cash flows as a
non-cash transaction. No equipment was purchased under capital leases in the
first quarter of 1996.

e. Debt

During the three months ended March 31, 1997, the Company entered into two
term loans totaling $193,000. Both loans bear interest at the prime rate and
have interest only payments until the due dates in June and July 1997.

On April 28, 1997, the Company extended its line of credit through July 1,
1997. At March 31, 1997, the Company had outstanding letters of credit in the
amount of $2 million.

At March 31, 1997, the Company was in default of certain covenants,
relating to tangible effective net worth, total liabilities to tangible
effective net worth, ratio of cash flow to fixed charges and quarterly
expenditures. The bank issued a waiver to cure non-compliance through June 29,
1997.

f. Reincorporation

On January 30, 1997, the Board of Directors approved the merger of STAR
Vending, Inc., a Nevada corporation (d.b.a. STAR Telecommunications, Inc.) with
STAR Telecommunications, Inc., a Delaware corporation. All shares of STAR
Vending, Inc. were converted into STAR Telecommunications, Inc. shares at the
ratio of 2-for-3 shares.

On March 11, 1997, the Board of Directors approved an amendment to the
certificate of incorporation increasing the number of shares authorised to 50
million common shares and 5 million preferred shares upon the consumation of the
initial public offering.

On May 15, 1997, in connection with the initial public offering, the
Company reversed the stock split by converting all outstanding common shares at
the ratio of 3-for-2 shares. The accompanying financial statements have been
retroactively restated to reflect the effect of the related stock splits.

g. Stock Options

On January 30, 1997, the Board of Directors approved the 1997 Omnibus Stock
Incentive Plan to replace the existing 1996 supplemental plan upon the effective
date of the initial public offering (IPO). The plan provides for awards to
employees, outside directors and consultants in the form of restricted shares,
stock units, stock options and stock appreciation rights. The maximum number of
shares available for issuance under this plan may not exceed 500,000 shares plus
the number of shares still unissued under the supplemental option plan. Options
granted to any one optionee may not exceed more than 500,000 common shares per
year subject to certain adjustments. Incentive stock options may not have a term
of more than 10 years from the date of grant.

On January 30, 1997, the Board of Directors granted 56,327 incentive stock
options to vest over four years and 15,000 options under the Outside Director's
plan. The options were granted at the then current market value of $10.80 per
share, as determined by the Board of Directors. The board also approved
accelerated vesting of options in certain instances following a change in
control, as defined.

F-21
<PAGE> 85

STAR TELECOMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Stock option information with respect to the Company's stock option plans
is as follows:

<TABLE>
<CAPTION>
COMMON OPTION AGGREGATE
SHARES AVAILABLE PRICE OPTION
RESERVED FOR GRANT OPTIONS PER SHARE PRICE
--------- --------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996........... 2,420,000 730,000 1,690,000 $ 1.50-8.20 $6,540,000
Options Granted........................ -- (71,327) 71,327 10.80 770,000
Options Canceled....................... (100,000) 55,475 (155,475) 2.00-8.20 (642,000)
--------- --------- --------- ----------- ----------
Balance at March 31, 1997.............. 2,320,000 714,148 1,605,852 $1.50-10.80 $6,668,000
========= ========= ========= =========== ==========
</TABLE>

During the three month period ended March 31, 1997, the Company expensed
$20,000 in connection with consultant options. The weighted average fair value
of options outstanding at March 31, 1997 is $4.15 and 697,775 options are vested
at that date.

h. Purchase Commitments

In January 1997, the Company entered into an agreement to purchase
switching equipment with a cost of $3.8 million to be installed in London,
England. On May 6, 1997, the Company entered into a capital lease to finance
approximately $3.3 million of the purchase price. The Company also entered into
a 10 year facility lease in Dallas, Texas at a cost of approximately $123,000
per year.

On March 6, 1997, the Company entered into two separate agreements to
purchase IRUs on north transatlantic cable for approximately $1.2 million. Both
agreements are effective April 1, 1997 and continue in effect for the initial
term up to the expected useful life of the cables, through September 2019 and
2020, respectively.

The cost of the first IRU is $1,024,000 to be paid in quarterly payments
through September 1999 with an initial payment of $183,000 due on April 30,
1997. The second IRU has a cost of $128,000 due in quarterly payments plus
interest through September 30, 1999 with an initial payment of $34,340 due on
April 30, 1997. Both agreements also require the Company to make quarterly
payments for operating and maintenance charges as well as for certain
restoration costs.

At March 31, 1997, the Company is obligated under various service
agreements with long distance carriers to pay minimum charges of approximately
$84,956,000 over the next three years. The Company anticipates exceeding the
minimum usage volume with these vendors.

i. Foreign Sales

Foreign sales accounted for approximately one percent of revenues in the
three month period ended March 31, 1997.

j. Employment Agreement

In February 1997, the Company revised the employment agreement of a Company
executive, to terminate effective February 28, 1998 and to eliminate the post
employment compensation provision.

k. Significant Customers

The two largest customers represent 32 percent of the gross accounts
receivable at March 31, 1997. Only one of these customers represents more than
10 percent of accounts receivable at that date. These same two customers
represent 21 percent of revenue for the quarter ended March 31, 1997, only one
of them over 10 percent. The five largest customers represent 44 percent of
revenue for the same period.

F-22
<PAGE> 86

STAR TELECOMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. NEW AUTHORITATIVE PRONOUNCEMENTS

In March 1997 the Financial Accounting Standards Board introduced SFAS No.
128 "Earnings per Share" and SFAS No. 129 "Disclosure of Information About
Capital Structure". SFAS No. 128 revises and simplifies the computation of
earnings per share and requires certain additional disclosures. SFAS No. 129
requires additional disclosure about the Company's capital structure. Both
standards will be adopted in the fourth quarter of fiscal 1997. Management does
not expect the adoption of these standards to have a material effect on the
Company's financial position or results of operations.

F-23
<PAGE> 87
APPENDIX - DESCRIPTION OF GRAPHICS

PAGE 29 [STAR FACILITIES Illustration]:

Diagram depicting route of international telephone call from the originating
telephone, through the local exchange carrier, long distance provider, STAR's
international gateway switch and then to the terminating country either through
the Company's owned, IRU or leased facilities or through resale arrangements
with third parties.

<PAGE> 88

======================================================

NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING
STOCKHOLDERS OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION
IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM
IT IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary...................... 3
Risk Factors............................ 5
Use of Proceeds......................... 17
Dividend Policy......................... 17
Capitalization.......................... 18
Dilution................................ 19
Selected Consolidated Financial Data.... 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 21
Business................................ 31
Management.............................. 45
Certain Transactions.................... 52
Principal and Selling Stockholders...... 54
Description of Capital Stock............ 56
Shares Eligible for Future Sale......... 59
Underwriting............................ 61
Legal Matters........................... 62
Experts................................. 62
Additional Information.................. 63
Index to Consolidated Financial
Statements............................ F-1
</TABLE>

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

UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

======================================================
======================================================
4,000,000 SHARES
LOGO
COMMON STOCK
-----------------------
PROSPECTUS
-----------------------
HAMBRECHT & QUIST

ALEX. BROWN & SONS
INCORPORATED
, 1997

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