STAR TELECOMMUNICATIONS INC, S-1/A, 1997-05-19

STAR TELECOMMUNICATIONS INC
S-1/A, 1997-05-19
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 16, 1997.

REGISTRATION NO. 333-21325

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

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

AMENDMENT NO. 1 TO

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------

STAR TELECOMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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<S> <C> <C>
DELAWARE 4813 77-0362681
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>

223 EAST DE LA GUERRA STREET
SANTA BARBARA, CALIFORNIA 93101
(805) 899-1962
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------

CHRISTOPHER E. EDGECOMB
CHIEF EXECUTIVE OFFICER
STAR TELECOMMUNICATIONS, INC.
223 EAST DE LA GUERRA STREET
SANTA BARBARA, CALIFORNIA 93101
(805) 899-1962
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------

COPIES TO:

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<S> <C>
CARLA S. NEWELL NEIL WOLFF
CRAIG M. SCHMITZ ARMANDO CASTRO
ANTHONY J. MCCUSKER JASON B. WACHA
GUNDERSON DETTMER STOUGH VAHE H. SARRAFIAN
VILLENEUVE FRANKLIN & HACHIGIAN, LLP WILSON SONSINI GOODRICH & ROSATI, PROFESSIONAL
155 CONSTITUTION DRIVE CORPORATION
MENLO PARK, CALIFORNIA 94025 650 PAGE MILL ROAD
(415) 321-2400 PALO ALTO, CALIFORNIA 94304-1050
(415) 493-9300
</TABLE>

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [ ]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]__________

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]__________

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SUCH SECTION 8(a), MAY DETERMINE.

================================================================================
<PAGE> 2

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 16, 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.

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<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 certain 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> 3

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> 4

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.

3
<PAGE> 5

THE OFFERING

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<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)................. 12,198,000 11,281,000 12,825,000
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 Note 2 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> 6

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> 7

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 paid or offset, 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> 8

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

7
<PAGE> 9

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> 10

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

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<PAGE> 11

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 switched over to 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

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<PAGE> 12

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 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.

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<PAGE> 13

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."

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

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<PAGE> 14

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

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<PAGE> 15

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 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

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<PAGE> 16

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, directors, five
percent stockholders and their affiliates in the aggregate will beneficially own
approximately 55.3% of the outstanding shares of Common Stock and the Company's
Chief Executive Officer will beneficially own approximately 46.7% 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 $96.4 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 an effect of
delaying or preventing a change in control of the Company. In addition, upon the
closing of the offering the Company's 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

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<PAGE> 17

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 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.

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<PAGE> 18

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 $151,442 of which is
due in July 1997 and $41,500 of which is due in June 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.

17
<PAGE> 19

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> 20

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> 21

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 Note 2 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> 22

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> 23

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> 24

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; 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> 25

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> 26

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 paid or offset 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 $589,000 in interest expense
incurred under various bank and stockholder lines of credit. This increase

25
<PAGE> 27

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.

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<PAGE> 28

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> 29

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

28
<PAGE> 30

$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 $151,442 of which is due in July 1997
and $41,500 of which is due in September 1997. The Company intends to use
approximately $6.4 million of the proceeds from this offering for the

29
<PAGE> 31

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."

30
<PAGE> 32

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.

31
<PAGE> 33

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> 34

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> 35

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> 36

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

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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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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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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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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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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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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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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.

44
<PAGE> 46

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> 47

Gordon Hutchins, Jr. has served as a Director of the Company since January
23, 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 23,
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
8, 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.

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> 48

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> 49

(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 1,088,673 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> 50

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 have 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> 51

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> 52

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> 53

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 in 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 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 the 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 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> 54

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> 55

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, (iv) all current officers and directors as a group, and (v)
each other Selling Stockholder.

<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 63.1 187,500 7,270,662 46.7
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% 237,500 8,756,728 55.3%

OTHER SELLING STOCKHOLDERS
Bancommerce Capital Corporation............. 50,000 * 12,500 37,500 *
</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 60 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

54
<PAGE> 56

Hunt. The co-trustees of each of the Hunt Family Trusts hold voting and
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
6,920,662 shares or 44.4% 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 5.0% 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> 57

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

The Company's Amended and Restated Certificate of Incorporation authorizes
1,367,050 shares of Preferred Stock. The Board of Directors has the authority to
issue the 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 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 Certificate of Incorporation only with the
affirmative vote of 75% of the Company's capital stock. These provisions of the
Certificate of

56
<PAGE> 58

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 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

57
<PAGE> 59

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> 60

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 Stock Plan and the Purchase Plan and sell shares upon the exercise of an
outstanding warrant.

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> 61

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> 62

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 Stockholder 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 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, the Selling Stockholder and one additional holder of the
Company's Common Stock 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 30 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> 63

Lockup Period without the prior written consent of Hambrecht & Quist LLC and
provided that the Company may issue shares of Common Stock upon the exercise of
an outstanding warrant, grant options and issue shares of Common Stock upon the
exercise of options under its Stock 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> 64

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> 65

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> 66

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> 67

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> 68

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> 69

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> 70

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> 71

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> 72

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> 73

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> 74

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> 75

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> 76

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> 77

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> 78

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-14
<PAGE> 79

STAR TELECOMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

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.

F-15
<PAGE> 80

STAR TELECOMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

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> 81

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> 82

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> 83

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> <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> 84

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> 85

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> 86

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> 87

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> 88
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> 89

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

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

============================================================
<PAGE> 90

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of Common Stock being registered. All amounts are estimates except
the SEC registration fee and the NASD filing fees.

<TABLE>
<S> <C>
SEC Registration fee.................................................. $ 22,652.00
NASD fee.............................................................. 7,975.00
Nasdaq National Market listing fee.................................... 37,187.50
Printing and engraving expenses....................................... 135,000.00
Legal fees and expenses............................................... 550,000.00
Accounting fees and expenses.......................................... 492,000.00
Blue sky fees and expenses............................................ 10,000.00
Transfer agent fees................................................... 5,000.00
Miscellaneous fees and expenses....................................... 65,185.50
-------------
Total....................................................... $1,325,000.00
=============
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's Board of Directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). Article VII, Section 6, of the Registrant's
Bylaws provides for mandatory indemnification of its directors and officers and
permissible indemnification of employees and other agents to the maximum extent
permitted by the Delaware General Corporation Law. The Registrant's Amended and
Restated Certificate of Incorporation provides that, pursuant to Delaware law,
its directors shall not be liable for monetary damages for breach of the
directors' fiduciary duty as directors to the Company and its stockholders. This
provision in the Amended and Restated Certificate of Incorporation does not
eliminate the directors' fiduciary duty, and in appropriate circumstances
equitable remedies such as injunctive or other forms of non-monetary relief will
remain available under Delaware law. In addition, each director will continue to
be subject to liability for breach of the director's duty of loyalty to the
Company for acts or omissions not in good faith or involving intentional
misconduct, for knowing violations of law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemptions that are unlawful under Delaware law. The
provision also does not affect a director's responsibilities under any other
law, such as the federal securities laws or state or federal environmental laws.
The Registrant has entered into Indemnification Agreements with its officers and
directors, a form of which is attached as Exhibit 10.1 hereto and incorporated
herein by reference. The Indemnification Agreements provide the Registrant's
officers and directors with further indemnification to the maximum extent
permitted by the Delaware General Corporation Law. Reference is made to Section
7 of the Underwriting Agreement contained in Exhibit 1.1 hereto, indemnifying
officers and directors of the Registrant against certain liabilities.

II-1
<PAGE> 91

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

Since inception, the Company has issued and sold the following securities:

1. As of March 31, 1997, the Registrant had issued 9,000,000 shares of its
Common Stock pursuant to direct issuances to employees in consideration
for services provided by such employees for an aggregate purchase price
of approximately $1,115,960.45.

2. On February 23, 1996, the Registrant issued and sold 1,000,000 shares of
its Common Stock to a group of six investors for an aggregate purchase
price of $1,500,000.00.

3. On July 12, 1996, the Registrant issued and sold 914,406 shares of its
Common Stock to Gotel Investments Ltd. for an aggregate purchase price
of $4,068,651.00.

4. On July 25, 1996, the Registrant issued and sold 1,367,047 (911,360
shares after giving effect to the reverse stock split effective upon the
closing of this offering) shares of its Series A Preferred Stock to a
group of twenty-two investors for an aggregate purchase price of
$7,500,003.51.

The issuances described in Item 15(1) were deemed exempt from registration
under the Securities Act in reliance upon Rule 701 promulgated under the
Securities Act or Section 4(2) of the Securities Act. The issuances of the
securities described in Item 15(2), Item 15(3) and Item 15(4) were deemed to be
exempt from registration under the Securities Act in reliance on Section 4(2) of
such Act as transactions by an issuer not involving any public offering. In
addition, the recipients of securities in each such transaction represented
their intentions to acquire the securities for investment only and not with a
view to or for sale in connection with any distribution thereof and appropriate
legends were affixed to the share certificates issued in such transactions. All
recipients had adequate access, through their relationships with the Registrant,
to information about the Registrant.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(A) EXHIBITS.

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- ------------------------------------------------------------------------------------
<C> <S>
1.1+ Form of Underwriting Agreement (preliminary form).
3.1 Certificate of Incorporation of the Registrant, as amended to date.
3.3* Form of Restated Certificate of Incorporation of the Registrant to be filed upon the
closing of the offering made hereby.
3.4+ Bylaws of the Registrant.
3.5* Form of Bylaws of the Registrant to be filed upon the closing of the offering made
hereby.
4.1+ Reference is made to Exhibits 3.1, 3.3, 3.4, and 3.5.
4.2* Specimen Common Stock certificate.
4.3+ Registration Rights Agreement, dated September 24, 1996, between the Registrant and
the investors named therein.
4.4+ Registration Rights Agreement, dated July 12, 1996, between the Registrant and the
investor named therein.
4.5+ Investor Rights Agreement dated July 25, 1996, between the Registrant and the
investors named therein.
5.1* Opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP.
10.1+ Form of Indemnification Agreement.
10.2+ 1996 Amended and Restated Stock Incentive Plan.
10.3+ 1996 Outside Director Nonstatutory Stock Option Plan.
10.4 1997 Omnibus Stock Incentive Plan.
</TABLE>

II-2
<PAGE> 92

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- ------------------------------------------------------------------------------------
<C> <S>
10.5+ Employment Agreement between the Registrant and Mary Casey dated July 14, 1995, as
amended.
10.6+ Employment Agreement between the Registrant and Kelly Enos dated December 2, 1996.
10.7+ Employment Agreement between the Registrant and David Vaun Crumly dated January 1,
1996.
10.8+ Employment Agreement between the Registrant and James Kolsrud dated December 18,
1996.
10.9+ Consulting Agreement between the Registrant and Gordon Hutchins, Jr. dated May 1,
1996.
10.10+ Nonstatutory Stock Option Agreement between the Registrant and Gordon Hutchins, Jr.
dated May 15, 1996.
10.11+ Free Standing Commercial Building Lease between the Registrant and Thomas M. Spear,
as receiver for De La Guerra Court Investments, dated for reference purposes as of
March 1, 1996.
10.12+ Standard Office Lease--Gross between the Registrant and De La Guerra Partners, L.P.
dated for reference purposes as of July 9, 1996.
10.13+ Office Lease between the Registrant and WHUB Real Estate Limited Partnership dated
June 28, 1996, as amended.
10.14+ Standard Form of Office Lease between the Registrant and Hudson Telegraph Associates
dated February 28, 1996.
10.15+ Agreement for Lease between the Registrant and Telehouse International Corporation
of Europe Limited dated July 16, 1996.
10.16+ Sublease between the Registrant and Borton, Petrini & Conron dated March 20, 1994,
as amended.
10.17+ Office Lease between the Registrant and One Wilshire Arcade Imperial, Ltd. dated
June 28, 1996.
10.18+ Lease Agreement between the Registrant and Telecommunications Finance Group dated
April 6, 1995.
10.19+ Lease Agreement between the Registrant and Telecommunications Finance Group dated
January 3, 1996, as amended.
10.20 Master Lease Agreement between the Registrant and NTFC Capital Corporation dated
December 20, 1996.
10.21+ Variable Rate Installment Note between the Registrant and Metrobank dated October 4,
1996.
10.22+ Assignment of Purchase Order and Security Interest between the Registrant and DSC
Finance Corporation dated January 1, 1996.
10.23 Line of Credit Promissory Note between the Registrant and Christopher E. Edgecomb
dated November 7, 1996, as amended.
10.24 Office Lease Agreement between the Registrant and Beverly Hills Center LLC effective
as of April 1, 1997.
10.25 Agreement between the Registrant and John Marsch dated March 1, 1997.
11.1+ Computation of Loss Per Share.
</TABLE>

II-3
<PAGE> 93

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- ------------------------------------------------------------------------------------
<C> <S>
21.1+ Subsidiary of the Registrant.
23.1 Consent of Arthur Andersen LLP, Independent Accountants.
23.2* Consent of Counsel. Reference is made to Exhibit 5.1.
24.1+ Power of Attorney (see page II-5).
27.1+ Financial Data Schedule.
</TABLE>

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

* To be filed by amendment.

+ Previously filed.

(B) FINANCIAL STATEMENT SCHEDULES

Schedule II -- Valuation and Qualifying Accounts.

Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.

ITEM 17. UNDERTAKINGS

The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Delaware General Corporation Law, the Certificate of
Incorporation or the Bylaws of the Registrant, the Underwriting Agreement, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act, and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered hereunder, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.

The Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

II-4
<PAGE> 94

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this amendment to registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Santa Barbara, State of California, on this 16th day of May, 1997.

STAR TELECOMMUNICATIONS, INC.

By: /s/ MARY A. CASEY

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

Mary A. Casey

President

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS AMENDMENT TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:

<TABLE>
<C> <S> <C>
/s/ CHRISTOPHER E. EDGECOMB* Chief Executive Officer and Director May 16, 1997
- ---------------------------------------- (Principal Executive Officer)
Christopher E. Edgecomb

/s/ KELLY D. ENOS* Chief Financial Officer (Principal May 16, 1997
Financial and Accounting Officer)
- ----------------------------------------
Kelly D. Enos

/s/ MARY A. CASEY President and Director May 16, 1997
- ----------------------------------------
Mary A. Casey

/s/ GORDON HUTCHINS, JR.* Director May 16, 1997
- ----------------------------------------
Gordon Hutchins, Jr.

/s/ JOHN R. SNEDEGAR* Director May 16, 1997
- ----------------------------------------
John R. Snedegar

/s/ ROLAND A. VAN DER MEER* Director May 16, 1997
- ----------------------------------------
Roland A. Van der Meer

*By: /s/ MARY A. CASEY
- ----------------------------------------
Mary A. Casey
Attorney-in-Fact
</TABLE>

II-5
<PAGE> 95

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

We have audited in accordance with generally accepted auditing standards
the consolidated financial statements of STAR Telecommunications, Inc., included
in this registration statement and have issued our report thereon dated April
10, 1997. Our audits were made for the purpose of forming an opinion on the
basic consolidated financial statements taken as a whole. The schedule of
valuation and qualifying accounts is the responsibility of the Company's
management and is presented for the purpose of complying with the Securities and
Exchange Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic consolidated financial statements and, in our
opinion, fairly states, in all material respects, the financial data required to
be set forth therein in relation to the basic consolidated financial statements
taken as a whole.

ARTHUR ANDERSEN LLP

Los Angeles, California

April 10, 1997

S-1
<PAGE> 96

SCHEDULE II

STAR TELECOMMUNICATIONS, INC.

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING OF END OF
PERIOD PROVISION WRITE-OFF PERIOD
------------ --------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
1994......................................... $ -- $ -- $ -- $ --
1995......................................... $ -- $ 208 $ -- $ 208
1996......................................... $208 $15,561 $ (10,036) $5,733
Deferred tax asset valuation allowance
1994......................................... $ -- $ -- $ -- $ --
1995......................................... $ -- $ 30 $ -- $ 30
1996......................................... $ 30 $ 2,854 $ -- $2,884
</TABLE>

S-2
<PAGE> 97

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. EXHIBIT PAGE NUMBER
- ------- -----------------------------------------------------------------------
<C> <S> <C>
1.1+ Form of Underwriting Agreement (preliminary form).
3.1 Certificate of Incorporation of the Registrant, as amended to date.
3.3* Form of Restated Certificate of Incorporation of the Registrant to be
filed upon the closing of the offering made hereby.
3.4+ Bylaws of the Registrant.
3.5* Form of Bylaws of the Registrant to be filed upon the closing of the
offering made hereby.
4.1+ Reference is made to Exhibits 3.1, 3.3, 3.4, and 3.5.
4.2* Specimen Common Stock certificate.
4.3+ Registration Rights Agreement, dated September 24, 1996, between the
Registrant and the investors named therein.
4.4+ Registration Rights Agreement, dated July 12, 1996, between the
Registrant and the investor named therein.
4.5+ Investor Rights Agreement dated July 25, 1996, between the Registrant
and the investors named therein.
5.1* Opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian,
LLP.
10.1+ Form of Indemnification Agreement.
10.2+ 1996 Amended and Restated Stock Incentive Plan.
10.3+ 1996 Outside Director Nonstatutory Stock Option Plan.
10.4 1997 Omnibus Stock Incentive Plan.
10.5+ Employment Agreement between the Registrant and Mary Casey dated July
14, 1995, as amended.
10.6+ Employment Agreement between the Registrant and Kelly Enos dated
December 2, 1996.
10.7+ Employment Agreement between the Registrant and David Vaun Crumly dated
January 1, 1996.
10.8+ Employment Agreement between the Registrant and James Kolsrud dated
December 18, 1996.
10.9+ Consulting Agreement between the Registrant and Gordon Hutchins, Jr.
dated May 1, 1996.
10.10+ Nonstatutory Stock Option Agreement between the Registrant and Gordon
Hutchins, Jr. dated May 15, 1996.
10.11+ Free Standing Commercial Building Lease between the Registrant and
Thomas M. Spear, as receiver for De La Guerra Court Investments, dated
for reference purposes as of March 1, 1996.
10.12+ Standard Office Lease--Gross between the Registrant and De La Guerra
Partners, L.P. dated for reference purposes as of July 9, 1996.
10.13+ Office Lease between the Registrant and WHUB Real Estate Limited
Partnership dated June 28, 1996, as amended.
10.14+ Standard Form of Office Lease between the Registrant and Hudson
Telegraph Associates dated February 28, 1996.
10.15+ Agreement for Lease between the Registrant and Telehouse International
Corporation of Europe Limited dated July 16, 1996.
10.16+ Sublease between the Registrant and Borton, Petrini & Conron dated
March 20, 1994, as amended.
10.17+ Office Lease between the Registrant and One Wilshire Arcade Imperial,
Ltd. dated June 28, 1996.
10.18+ Lease Agreement between the Registrant and Telecommunications Finance
Group dated April 6, 1995.
</TABLE>

<PAGE> 98

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. EXHIBIT PAGE NUMBER
- ------- -----------------------------------------------------------------------
<C> <S> <C>
10.19+ Lease Agreement between the Registrant and Telecommunications Finance
Group dated January 3, 1996, as amended.
10.20 Master Lease Agreement between the Registrant and NTFC Capital
Corporation dated December 20, 1996.
10.21+ Variable Rate Installment Note between the Registrant and Metrobank
dated October 4, 1996.
10.22+ Assignment of Purchase Order and Security Interest between the
Registrant and DSC Finance Corporation dated January 1, 1996.
10.23 Line of Credit Promissory Note between the Registrant and Christopher
E. Edgecomb dated November 7, 1996, as amended.
10.24 Office Lease Agreement between the Registrant and Beverly Hills Center
LLC effective as of April 1, 1997.
10.25 Agreement between the Registrant and John Marsch dated March 1, 1997.
11.1 Computation of Loss Per Share.
21.1+ Subsidiary of the Registrant.
23.1 Consent of Arthur Andersen LLP, Independent Accountants.
23.2* Consent of Counsel. Reference is made to Exhibit 5.1.
24.1+ Power of Attorney (see page II-5).
27.1+ Financial Data Schedule.
</TABLE>

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

* To be filed by amendment.

+ Previously filed.

<PAGE> 1
EXHIBIT 3.1

AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION OF
STAR TELECOMMUNICATIONS, INC.,
A DELAWARE CORPORATION

STAR Telecommunications, Inc., a corporation organized and existing
under the General Corporation Law of the State of Delaware (the "General
Corporation Law")

DOES HEREBY CERTIFY:

FIRST: That this corporation was originally incorporated on
September 13, 1996, pursuant to the General Corporation Law.

SECOND: That the Board of Directors duly adopted resolutions
proposing to amend and restate the Certificate of Incorporation of this
corporation, declaring said amendment and restatement to be advisable and in the
best interests of this corporation and its stockholders, and authorizing the
appropriate officers of this corporation to solicit the consent of the
stockholders therefor, which resolution setting forth the proposed amendment and
restatement is as follows:

"RESOLVED, that the Certificate of Incorporation of this corporation
be amended and restated in its entirety as follows:

ARTICLE I

The name of this corporation is STAR Telecommunications, Inc.
(the "Corporation").

ARTICLE II

The address of the registered office of this corporation in the
State of Delaware is 1209 Orange Street, in the City of Wilmington, County of
New Castle. The name of its registered agent at such address is The Corporation
Trust Company.

ARTICLE III

B. Rights, Preferences and Restrictions of Preferred Stock. The rights,
preferences, privileges, and restrictions granted to and imposed on the Series A
Preferred Stock (the "Series A Preferred Stock") are as follows:

<PAGE> 2

1. Distributions.

The holders of shares of Series A Preferred Stock shall be
entitled to receive dividends, out of any assets legally available therefor,
prior and in preference to any declaration or payment of any distribution (but
excluding any dividends payable in Common Stock or other securities and rights
convertible into or entitling the holder thereof to receive, directly or
indirectly, additional shares of Common Stock of this Corporation) on the Common
Stock of this Corporation, at the rate of $0.3267 per share per annum, payable
only when and if declared by the Board of Directors. Such dividends shall not be
cumulative and no right shall accrue to the holders of Series A Preferred Stock
by reason of the fact that dividends on such shares are not declared in any
year, nor shall any undeclared dividends bear or accrue interest.

After payment of any such dividends, any additional dividends or
distributions shall be distributed among all holders of Common Stock and all
holders of Series A Preferred Stock in proportion to the number of shares of
Common Stock which would be held by each such holder if all shares of Series A
Preferred Stock were converted to Common Stock at the then effective conversion
rate.

2. Liquidation Preference.

(a) In the event of any liquidation, dissolution, or winding up of
this Corporation, either voluntary of involuntary, the holders of Series A
Preferred Stock shall be entitled to receive, prior and in preference to any
distribution of any of the assets of this Corporation to the holders of Common
Stock by reason of their ownership thereof, an amount per share equal to $5.4863
for each outstanding share of Series A Preferred Stock (the "Original Series A
Issue Price"), plus any declared but unpaid dividends on such share (such amount
of declared but unpaid dividends being referred to herein as the "Premium"). If
upon the occurrence of such event, the assets and funds thus distributed among
the holders of the Series A Preferred Stock shall be insufficient to permit the
payment to such holders of the full aforesaid preferential amounts, then the
entire assets and funds of this Corporation legally available for distribution
shall be distributed ratably among the holders of the Series A Preferred Stock
in proportion to the amount of such stock owned by each such holder.

(b) Upon the completion of the distribution required by
subparagraph (a) of this Section 2, the remaining assets of this Corporation
available for distribution to stockholders shall be distributed among the
holders of Common Stock pro rata based on the number of shares of Common Stock
held by each.

(c) A consolidation or merger of this Corporation (a "Merger")
with or into any other corporations (other than a wholly owned subsidiary
corporation) wherein the stockholders of the Company immediately before such
merger or consolidation do not retain in substantially the same proportions as
their ownership of shares of the Company's voting stock immediately before such
event, directly or indirectly (including, without limitation, through their
ownership of shares of the voting stock of a corporation which, as a result of
such merger or consolidation, owns this Corporation either directly or through
one or more subsidiaries), at least a majority of the beneficial interest in the
voting stock of this Corporation immediately after such

<PAGE> 3

merger or consolidation; or a sale, conveyance, or other disposition of all or
substantially all of this Corporation's property or business, shall be deemed to
be a liquidation, dissolution, or winding up within the meaning of this Section
2. In any of such events, if the consideration received by this Corporation is
other than in cash or indebtedness, its value will be deemed to be its fair
market value. In the case of publicly traded securities, fair market value shall
mean the average closing market price for such securities for the thirty (30)
consecutive trading days ending three (3) business days prior to such
consolidation, merger, or sale is consummated. If such considerations is in a
form other than publicly traded securities, its fair market value shall be
determined in good faith by the Board of Directors of this Corporation.

3. Redemption. The Series A Preferred Stock is not redeemable.

4. Conversion. The holders of the Series A Preferred Stock
shall have conversion rights as follows (the "Conversion Rights"):

(a) Right to Convert. Subject to subsections 4(d), 4(e) and 4(f)
hereof: each share of Series A Preferred Stock shall be convertible, at the
option of the holder thereof, at any time after the date of issuance of such
share, at the office of this Corporation or any transfer agent for such stock,
into one share of Common Stock, such share being fully paid and nonassessable.

(b) Automatic Conversion. Subject to subsections 4(d), 4(e) and
4(f) hereof: each share of Series A Preferred Stock shall automatically be
converted into one share of Common Stock immediately upon the earlier of (i) the
Corporation's sale of its Common Stock in a firm commitment underwritten public
offering pursuant to a registration statement on Form S-1 under the Securities
Act of 1933, as amended, the public per share offering price of which would
value the Company's total pre-offering capitalization (on a fully-diluted basis)
at $150,000,000 or more, and where aggregate proceeds to the Company are at
least $10,000,000 (a "Public Offering"), or (ii) the date specified by written
consent or agreement of the holders of a majority of the then outstanding shares
of Series A Preferred Stock.

(c) Mechanics of Conversion. Before any holder of Series A
Preferred Stock shall be entitled to convert the same into shares of Common
Stock, it shall surrender the certificate or certificates therefor, duly
endorsed, at the office of this Corporation or of any transfer agent for the
Series A Preferred Stock, and shall give written notice to this Corporation at
its principal corporate office, of the election to convert the same and shall
state therein the name or names in which the certificate or certificates for
shares of Common Stock are to be issued. This Corporation shall, as soon as
practicable thereafter, issue and deliver at such office to such holder of
Series A Preferred Stock, or the nominee or nominees of such holder, a
certificate or certificates for the number of shares of Common Stock to which
such holder shall be entitled as aforesaid. Such conversion shall be deemed to
have been made immediately prior to the close of business on the date of such
surrender of the shares Series A Preferred Stock to be converted, and the person
or persons entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder or holders of
such shares of Common Stock as of such date. If the conversion is in connection
with a Merger or an underwritten offering of securities registered pursuant to
the Securities Act of 1933, the conversion may, at the option of any holder
tendering Series A Preferred Stock for conversion, be

<PAGE> 4

conditioned upon the closing of the Merger or with the underwriters of the sale
of securities pursuant to such offering, in which event the person(s) entitled
to receive the Common Stock upon conversion of the Series A Preferred Stock
shall not be deemed to have converted such Series A Preferred Stock until
immediately prior to the closing of such sale of securities.

(d) Adjustment for Combinations or Subdivisions of Common Stock.
In the event this Corporation at any time or from time to time effects a
subdivision or combination of its outstanding Common Stock into a greater or
lesser number of shares, then and in each such event the respective conversion
rate for the Series A Preferred Stock shall be increased or decreased
proportionately.

(e) Other Distributions. In the event this Corporation shall
declare a distribution payable in securities of other persons, evidences of
indebtedness issued by this Corporation or other persons, assets (excluding cash
dividends), then, in each case for the purpose of this subsection 4(e), the
holders of the Series A Preferred Stock shall be entitled to a proportionate
share of any such distribution as though they were the holders of the number of
shares of Common Stock of this Corporation into which their shares of Series A
Preferred Stock are convertible as of the record date fixed for the
determination of the holders of Common Stock of this Corporation entitled to
receive such distribution.

(f) Recapitalizations. If at any time or from time to time there
shall be a recapitalization of the Common Stock (other than a subdivision,
combination or merger or sale of assets transaction provided for elsewhere in
this Section 4 or Section 2) provision shall be made so that the holders of the
Series A Preferred Stock shall thereafter be entitled to receive upon conversion
of the Series A Preferred Stock the number of shares of stock or other
securities or property of this Corporation or otherwise, to which a holder of
the number of shares of Common Stock deliverable upon conversion of such shares
of Preferred Stock would have been entitled on such recapitalization. In any
such case, appropriate adjustment shall be made in the application of the
provisions of this Section 4 with respect to the rights of the holders of the
Series A Preferred Stock after the recapitalization to the end that the
provisions of this Section 4 shall be applicable after that event as nearly
equivalent as may be practicable.

(g) No Impairment. This Corporation will not, by amendment of
its Articles of Incorporation or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by this
Corporation, but will at all times in good faith assist in the carrying out of
all the provisions of this Section 4 and in the taking of all such actions as
may be necessary or appropriate in order to protect the Conversion Rights of the
holders of the Series A Preferred Stock against impairment.

(h) No Fractional Shares and Certificate as to Adjustments.

(i) No fractional shares shall be issued upon the
conversion of any share or shares of the Series A Preferred Stock, and the
number of shares of Common Stock to be issued shall be rounded to the nearest
whole share. Whether or not fractional shares are issuable

<PAGE> 5

upon such conversion shall be determined on the basis of the total number of
shares of Series A Preferred Stock the holder is at the time converting into
Common Stock and the number of shares of Common Stock issuable upon such
aggregate conversion.

(ii) Upon the occurrence of each adjustment or readjustment
of the Conversion Price of Series A Preferred Stock pursuant to this Section 4,
this Corporation, at its expense, shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to each
holder of Series A Preferred Stock a certificate setting forth such adjustment
or readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. This Corporation shall, upon the written request at any
time of any holder of Series A Preferred Stock, furnish or cause to be furnished
to such holder a like certificate setting forth (a) such adjustment and
readjustment, (b) the conversion rate then in effect, and (c) the number of
shares of Common Stock and the amount, if any, of other property which at the
time would be received upon the conversion of a share of Series A Preferred
Stock.

(i) Notice of Record Date. In the event of any taking by this
Corporation of a record of the holders of any class of securities for the
purposes of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any right to
subscriber for, purchase or otherwise acquire any shares of stock of any class
or any other securities or property, or to receive any other right, this
Corporation shall mail to each holder of Series A Preferred Stock, at least 20
days prior to the date specified therein, a notice specifying the date on which
any such record is to be taken for the purpose of such dividend, distribution or
right, and the amount and character of such dividend, distribution or right.

(j) Reservation of Stock Issuable Upon Conversion. This
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of Series A Preferred Stock, such number of its shares
of Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of the Series A Preferred Stock; and if any
at any time the number of authorized but unissued shares of Common Stock shall
not be sufficient to effect the conversion of all then outstanding shares of the
Series A Preferred Stock, in addition to such other remedies as shall be
available to the holder of such Preferred Stock, this Corporation will take such
corporate action as may, in the opinion of its counsel, be necessary to increase
its authorized but unissued shares of Common Stock to such number of shares as
shall be sufficient for such purposes, including, without limitation, engaging
in best efforts to obtain the requisite shareholder approval of any necessary
amendment to these articles.

(k) Notices. Any notice required by the provisions of this
Section 4 to be given to the holders of shares of Series A Preferred Stock shall
be deemed given three (3) days after deposited in the United States mail,
postage prepaid, and addressed to each holder or record at his address appearing
on the books of this Corporation.

5. Voting Rights.

(a) The holder of each share of Series A Preferred Stock shall
have the right to one vote for each share of Common Stock into which such Series
A Preferred Stock could then

<PAGE> 6

be converted (with any fractional share determined on an aggregate conversion
basis being rounded to the nearest whole share), and with respect to such vote,
such holder shall have full voting rights and powers equal to the voting rights
and powers of the holders of Common Stock, and shall be entitled,
notwithstanding any provision hereof, to notice of any stockholders' meeting in
accordance with the Bylaws of this Corporation, and shall be entitled to vote,
together with holders of Common Stock, with respect to any question upon which
holders of Common Stock have the right to vote.

(b) At each annual or other election of Directors, the holders
a majority of the then outstanding shares of Series A Preferred Stock, voting
together as a single class, shall be entitled to elect one (1) director of this
Corporation. Such director may be removed only with the written consent of the
holders of a majority of the then outstanding shares of Series A Preferred
Stock, voting together as a single class. Any vacancy occurring because of the
death, resignation, or removal of a director elected by the holders of Series A
Preferred Stock shall be filled by the vote or written consent of the holders of
a majority of the then outstanding shares of Series A Preferred Stock.

6. Protective Provisions. So long as at least 683,525 shares of
Series A Preferred Stock are outstanding (subject to stock splits, combinations
or recapitalizations), this Corporation shall not without first obtaining the
approval (by vote or written consent, as provided by law) of the holders of at
least a majority of the then outstanding shares of Series A Preferred Stock,
voting as a separate class:

(a) sell, convey, or otherwise dispose of or encumber all or
substantially all of its property or business ("Sale of Assets") or effect or
consummate a Merger; provided however, that no such prior approval shall be
required if the consideration received in such Sale of Assets or Merger reflects
a total valuation exceeding $150,000,000; or

(b) alter or change the rights, preferences, or privileges
of the Series A Preferred Stock or increase the authorized number of
shares thereof; or

(c) create any new class or series of stock or any other
securities convertible into equity securities of this Corporation senior to the
Series A Preferred Stock with respect to conversion, redemption, distributions,
voting rights, or liquidation; or

(d) voluntarily dissolve or liquidate this Corporation; or

(e) apply any of its assets to the assumption, retirement,
purchase or acquisition, directly or indirectly, of any shares of any class or
series of this Corporation's stock, except from employees and directors upon
termination of employment or services pursuant to repurchase rights set forth in
repurchase agreements.

7. Status of Converted Stock. In the event any shares of Series A
Preferred Stock shall be converted pursuant to Section 4 hereof, the shares so
converted shall be canceled, and shall not be issuable by this Corporation. The
Certificate of Incorporation of this Corporation shall be appropriately amended
to effect the corresponding reduction in this Corporation's

<PAGE> 7

authorized capital stock.

C. Common Stock.

1. Dividend Rights. Subject to the prior rights of holders of all
classes of stock at the time outstanding having prior rights as to dividends,
the holders of the Common Stock shall be entitled to receive, when and as
declared by the Board of Directors, out of any assets of this Corporation
legally available therefor, such dividends as may be declared from time to time
by the Board of Directors.

2. Liquidation Rights. Upon the liquidation, dissolution, or
winding up of this Corporation, the assets of this Corporation shall be
distributed as provided in subsection 2(b) of this Article III hereof.

3. Redemption. The Common Stock is not redeemable.

4. Voting Rights. The holder of each share of Common Stock shall
have the right to one vote, and shall be entitled to notice of any stockholders'
meeting in accordance with the Bylaws of this Corporation, and shall be entitled
to vote upon such matters and in such manner as may be provided by law.

ARTICLE IV

Except as otherwise provided in this Amended and Restated
Certificate of Incorporation, in furtherance and not in limitation of the powers
conferred by statute, the Board of Directors is expressly authorized to make,
repeal, alter, amend and rescind any or all of the Bylaws of this corporation.
Any adoption, amendment or repeal of Bylaws of the Corporation by the Board of
Directors shall require the approval of a majority of the total number of
authorized directors (whether or not there exist any vacancies in previously
authorized directorships at the time any resolution providing for adoption,
amendment or repeal is presented to the Board). The stockholders shall also have
power to adopt, amend or repeal the Bylaws of the Corporation. Any adoption,
amendment or repeal of Bylaws of the Corporation by the stockholders shall
require, in addition to any vote of the holders of any class or series of stock
of this Corporation required by law or by this Certificate of Incorporation, the
affirmative vote of the holders of at least a majority of the voting power of
all of the then outstanding shares of the capital stock of the Corporation
entitled to vote generally in the election of directors, voting together as a
single class; provided, however, that following the closing of the Corporation's
initial public offering pursuant to an effective registration statement under
the Securities Act of 1933, as amended (the "1933 Act"), covering the offer and
sale of Common Stock of the Corporation (the "Initial Public Offering"), any
such adoption, amendment or repeal of Bylaws of the Corporation by the
stockholders shall require, in addition to any vote of the holders of any class
or series of stock of this Corporation required by law or by this Certificate of
Incorporation, the affirmative vote of the holders of at least seventy-five
percent (75%) of the voting power of all of the then outstanding shares of the
capital stock of the Corporation entitled to vote generally in the election of
directors, voting together as a single class.

<PAGE> 8
ARTICLE V

The number of directors of the corporation shall be fixed from time
to time by a Bylaw or amendment thereof duly adopted by the Board of Directors.
Except as provided by applicable law and the Protective Provisions, the Board of
Directors shall have the exclusive power and authority to fill any vacancies or
an newly created directorships on the Board of Directors and the stockholders
shall have no right to fill such vacancies. A director appointed by the Board of
Directors to fill a vacancy shall serve for the remainder of the term of the
vacated directorship he is filling.

Following the closing of the Corporation's initial public offering
pursuant to an effective registration statement under the Securities Act of
1933, as amended (the "1933 Act"), covering the offer and sale of Common Stock
of the corporation (the "Initial Public Offering"), the directors shall be
divided into three classes, as nearly equal in number as reasonably possible,
with the term of office of the first class to expire at the 1998 annual meeting
of stockholders, the term of office of the second class to expire at the 1999
annual meeting of stockholders and the term of office of the third class to
expire at the 2000 annual meeting of stockholders. At each annual meeting of
stockholders following such initial classification and election, directors
elected to succeed those directors whose terms expire shall be elected for a
term of office to expire at the third succeeding annual meeting of stockholders
after their election. The foregoing notwithstanding, each director shall serve
until his successor shall have been duly elected and qualified, unless he shall
resign, become disqualified, disabled or shall otherwise be removed.

At each annual election, directors chosen to succeed those whose
terms then expire shall be of the same class as the directors they succeed,
unless by reason of any intervening changes in the authorized number of
directors, the Board shall designate one or more directorships whose term then
expires as directorships of another class in order more nearly to achieve
equality of number of directors among the classes.

Notwithstanding the rule that the three classes shall be as nearly
equal in number of directors as possible, in the event of any change in the
authorized number of directors each director then continuing to serve as such
shall nevertheless continue as a director of the class of which he is a member
until the expiration of his current term, or his prior death, resignation or
removal. If any newly created directorship may, consistently with the rule that
the three classes shall be as nearly equal in number of directors as possible,
be allocated to either class, the Board shall allocate it to that of the
available class whose term of office is due to expire at the earliest date
following such allocation.

ARTICLE VI

Elections of directors need not be by written ballot unless the
Bylaws of this corporation shall so provide.

ARTICLE VII

Following the closing of the Corporation's Initial Public Offering,
and except as

<PAGE> 9

otherwise provided in this Certificate of Incorporation, any action required or
permitted to be taken by the stockholders of the Corporation must be effected at
an annual or special meeting of the stockholders of the Corporation, and no
action required to be taken or that may be taken at any annual or special
meeting of the stockholders of the Corporation may be taken without a meeting
except by the unanimous written consent of all stockholders entitled to vote on
such action, and the power of stockholders to consent in writing to the taking
of any action by less than unanimous consent of all such stockholders is
specifically denied.

ARTICLE VIII

A director of this corporation shall not be personally liable to
this corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to this corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the General Corporation
Law, or (iv) for any transaction from which the director derived any improper
personal benefit.

If the General Corporation Law is amended after approval by the
stockholders of this Article to authorize corporation action further eliminating
or limiting the personal liability of directors, then the liability of a
director of this corporation shall be eliminated or limited to the fullest
extent permitted by the General Corporation Law, as so amended.

Any repeal or modification of the foregoing paragraph by the
stockholders of this corporation shall not adversely affect any right or
protection of a director of this corporation existing at the time of such repeal
or modification.

ARTICLE IX

In addition to any vote of the holders of any class or series of the
stock of this Corporation required by law or by this Certificate of
Incorporation, the affirmative vote of the holders of a majority of the voting
power of all of the then outstanding shares of capital stock of the Corporation
entitled to vote generally in the election of directors, voting together as a
single class, shall be required to amend or repeal the provisions of ARTICLE I,
ARTICLE II, and ARTICLE III of this Certificate of Incorporation.
Notwithstanding any other provision of this Certificate of Incorporation or any
provision of law which might otherwise permit a lesser vote or no vote, but in
addition to any vote of the holders of any class or series of the stock of this
Corporation required by law or by this Certificate of Incorporation, following
the closing of the Corporation's Initial Public Offering, the affirmative vote
of the holders of at least seventy-five percent (75%) of the voting power of all
of the then outstanding shares of the capital stock of the Corporation entitled
to vote generally in the election of directors, voting together as a single
class, shall be required to amend or repeal any provision of this Certificate of
Incorporation not specified in the preceding sentence.

ARTICLE X

The nature of the business and, the objects and purposes proposed to
be

<PAGE> 10

transacted, promoted and carried on, are to do any or all the things herein
mentioned, as fully and to the same extent as natural persons might or could do,
and in any part of the world, viz:

The purpose of the corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.

* * *

THIRD: That thereafter said amendment and restatement was duly
adopted in accordance with the provisions of Section 242 and Section 245 of the
General Corporation Law by obtaining a majority vote of each of the Common Stock
and Preferred Stock, in favor of said amendment and restatement.

<PAGE> 11

IN WITNESS WHEREOF, the undersigned has signed this Certificate this
20th day of February, 1997.

Christopher E. Edgecomb
Chief Executive Officer

<PAGE> 12
CERTIFICATE OF AMENDMENT OF THE
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION OF
STAR TELECOMMUNICATIONS, INC.

STAR Telecommunications, Inc., a corporation organized and existing
under and by virtue of the General Corporation Law of the State of Delaware (the
"Corporation"),

DOES HEREBY CERTIFY:

FIRST: The name of the Corporation is STAR Telecommunications,
Inc.

SECOND: The date on which the Certificate of Incorporation of the
Corporation was originally filed with the Secretary of State of the State of
Delaware is September 13, 1996, under the name of STAR Telecommunications, Inc.

THIRD: That by written consent of the Board of Directors of the
Corporation, resolutions setting forth proposed amendments to the Amended and
Restated Certificate of Incorporation of the Corporation were duly adopted,
declaring said amendments to be advisable and in the best interests of the
Corporation, and authorizing the appropriate officers of the Corporation to
solicit the consent of the stockholders of the Corporation therefor, which
resolutions setting forth the proposed amendments are as follows:

RESOLVED, that Article III, Paragraph A of the Amended and Restated
Certificate of Incorporation of the Corporation be amended to read in full
as follows:

"ARTICLE III

A. Classes of Stock. This Corporation is authorized to issue two
classes of stock to be designated, respectively, "Common Stock" and
"Preferred Stock." The total number of shares which this Corporation is
authorized to issue is thirty-one million three hundred sixty-seven
thousand fifty (31,367,050) shares. Thirty million (30,000,000) shares
shall be Common Stock, par value of $0.001 per share, and one million
three hundred sixty-seven thousand fifty (1,367,050) shares shall be
Series A Preferred Stock, par value of $0.001 per share. Upon the filing
of this Certificate of Amendment of the Amended and Restated Certificate
of Incorporation, each issued and outstanding share of Common Stock shall
be automatically combined and reconstituted as two-thirds (2/3) of a share
of Common Stock. No fractional shares shall be issued. In lieu thereof,
the holder of any fractional shares resulting from the stock split (after
aggregating all fractional shares to which any one stockholder shall be
entitled) shall be entitled to an amount of cash equal to the product of
such fraction multiplied by the Common Stock's fair market value (as
determined by the Corporation's Board of Directors)

<PAGE> 13

on the date of conversion."

RESOLVED FURTHER, that Article III, Paragraph B(4)(h)(i) of the
Corporation's Amended and Restated Certificate of Incorporation of the
Corporation be amended to read in full as follows:

"(h) No Fractional Shares and Certificate as to
Adjustments.

(i) No fractional shares shall be issued upon the
conversion of any share or shares of the Series A Preferred Stock.
All shares of Common Stock (including fractions thereof) issuable
upon conversion of shares of Series A Preferred Stock by a
stockholder thereof shall be aggregated with all other fractional
shares to which such stockholder is entitled for purposes of
determining whether the conversion would result in the issuance of
any fractional shares. If after the aforementioned aggregation, the
conversion would result in the issuance of any fractional shares,
this Corporation shall, in lieu of issuing any fractional shares,
pay cash for such fractional share equal to the product of such
fraction multiplied by the Common Stock's fair market value (as
determined by the Corporation's Board of Directors) on the date of
conversion."

FOURTH: That thereafter said amendment was duly adopted in
accordance with the provisions of Section 242 of the General Corporation Law by
the written consent of the Corporation's Board of Directors.

FIFTH: The foregoing amendment was approved by the holders of
the requisite number of shares of the Corporation in accordance with Section
228 of the General Corporation Law.

<PAGE> 14

IN WITNESS WHEREOF, STAR Telecommunications, Inc., has caused this
Certificate of Amendment of the Amended and Restated Certificate of
Incorporation to be signed by its Chief Executive Officer and attested to by its
Secretary this ________ day of May, 1997.

STAR TELECOMMUNICATIONS, INC.

Christopher E. Edgecomb
Chief Executive Officer

Mary A. Casey
Secretary

<PAGE> 1
EXHIBIT 10.4

1997 OMNIBUS STOCK INCENTIVE PLAN OF

STAR TELECOMMUNICATIONS, INC.

(ADOPTED _____________, 1997)
<PAGE> 2
1997 OMNIBUS STOCK INCENTIVE PLAN OF
STAR TELECOMMUNICATIONS, INC.

1. ARTICLE 1. INTRODUCTION

The Plan was adopted by the Board on __________, 1997, subject
to approval by the Company's stockholders. The Plan is effective as of the date
of the Company's initial public offering.

The purpose of the Plan is to promote the long-term success of
the Company and the creation of stockholder value by (a) encouraging Employees,
Outside Directors and Consultants to focus on critical long-range objectives,
(b) encouraging the attraction and retention of Employees, Outside Directors
and Consultants with exceptional qualifications and (c) linking Employees,
Outside Directors and Consultants directly to stockholder interests through
increased stock ownership. The Plan seeks to achieve this purpose by providing
for Awards in the form of Restricted Shares, Stock Units, Options (which may
constitute incentive stock options or nonstatutory stock options) or stock
appreciation rights.

The Plan shall be governed by, and construed in accordance
with, the laws of the State of Delaware (except their choice-of-law provisions).

2. ARTICLE 2. ADMINISTRATION

2.1. Committee Composition. The Plan shall be administered by
the Committee. The Committee shall consist exclusively of two or more directors
of the Company, who shall be appointed by the Board. In addition, the
composition of the Committee shall satisfy:

(a) Such requirements as the Securities and Exchange
Commission may establish for administrators acting under plans intended to
qualify for exemption under Rule 16b-3 (or its successor) under the Exchange
Act; and

(b) Such requirements as the Internal Revenue Service
may establish for outside directors acting under plans intended to qualify for
exemption under section 162(m)(4)(C) of the Code.

The Board may also appoint one or more separate committees of
the Board, each composed of one or more directors of the Company who need not
satisfy the foregoing requirements, who may administer the Plan with respect to
Employees and Consultants who are not considered officers or directors of the
Company under section 16 of the Exchange Act, may grant Awards under the Plan to
such Employees and Consultants and may determine all terms of such Awards.

2.2. Committee Responsibilities. The Committee shall (a)
select the Employees, Outside Directors and Consultants who are to receive
Awards under the Plan,
<PAGE> 3
(b) determine the type, number, vesting requirements and other features and
conditions of such Awards, (c) interpret the Plan and (d) make all other
decisions relating to the operation of the Plan. The Committee may adopt such
rules or guidelines as it deems appropriate to implement the Plan. The
Committee's determinations under the Plan shall be final and binding on all
persons.

ARTICLE 3. SHARES AVAILABLE FOR GRANTS

3.1. Basic Limitation. Common Shares issued pursuant to the
Plan may be authorized but unissued shares or treasury shares. The aggregate
number of Restricted Shares, Stock Units, Options and SARs awarded under the
Plan shall not exceed the sum of (i) 750,000 shares, plus (ii) that number of
shares available for issuance under the Supplemental Option Plan from time to
time, less those shares actually issued or reserved for issuance upon the
exercise of options awarded under the Supplemental Option Plan. The limitation
of this Section 3.1 shall be subject to adjustment pursuant to Article 10.

3.2. Additional Shares. If Stock Units, Options or SARs are
forfeited or if Options or SARs terminate for any other reason before being
exercised, then the corresponding Common Shares shall again become available for
Awards under the Plan. If Stock Units are settled, then only the number of
Common Shares (if any) actually issued in settlement of such Stock Units shall
reduce the number available under Section 3.1 and the balance shall again become
available for Awards under the Plan. If SARs are exercised, then only the number
of Common Shares (if any) actually issued in settlement of such SARs shall
reduce the number available under Section 3.1 and the balance shall again become
available for Awards under the Plan. If Restricted Shares are forfeited, then
such Shares shall not become available for subsequent Awards under the Plan.

3.3. Dividend Equivalents. Any dividend equivalents
distributed under the Plan shall not be applied against the number of Restricted
Shares, Stock Units, Options or SARs available for Awards, whether or not such
dividend equivalents are converted into Stock Units.

ARTICLE 4. ELIGIBILITY

4.1. General Rules. Only Employees, Outside Directors and
Consultants shall be eligible for designation as Participants by the Committee.

4.2. Incentive Stock Options. Only Employees shall be eligible
for the grant of ISOs. In addition, an Employee who owns more than 10% of the
total combined voting power of all classes of outstanding stock of the Company
or any of its Parents or Subsidiaries shall not be eligible for the grant of an
ISO unless the requirements set forth in section 422(c)(6) of the Code are
satisfied.

ARTICLE 5. OPTIONS

5.1. Stock Option Agreement. Each grant of an Option under the
Plan shall be evidenced by a Stock Option Agreement between the Optionee and the
Company. Such

2
<PAGE> 4
Option shall be subject to all applicable terms of the Plan and may be subject
to any other terms that are not inconsistent with the Plan. The Stock Option
Agreement shall specify whether the Option is an ISO or an NSO. The provisions
of the various Stock Option Agreements entered into under the Plan need not be
identical. Options may be granted in consideration of a cash payment or in
consideration of a reduction in the Optionee's other compensation. A Stock
Option Agreement may provide that a new Option will be granted automatically to
the Optionee when he or she exercises a prior Option and pays the Exercise Price
in the form described in Section 6.2.

5.2. Number of Shares. Each Stock Option Agreement shall
specify the number of Common Shares subject to the Option and shall provide for
the adjustment of such number in accordance with Article 10. Options granted to
any Optionee in a single calendar year shall in no event cover more than 750,000
Common Shares, subject to adjustment in accordance with Article 10.

5.3. Exercise Price. Each Stock Option Agreement shall specify
the Exercise Price; provided that the Exercise Price under an ISO shall in no
event be less than 100% of the Fair Market Value of a Common Share on the date
of grant and the Exercise Price under an NSO shall in no event be less than the
par value of the Common Shares subject to such NSO. In the case of an NSO, a
Stock Option Agreement may specify an Exercise Price that varies in accordance
with a predetermined formula while the NSO is outstanding.

5.4. Exercisability and Term. Each Stock Option Agreement
shall specify the date when all or any installment of the Option is to become
exercisable. The Stock Option Agreement shall also specify the term of the
Option; provided that the term of an ISO shall in no event exceed 10 years from
the date of grant. A Stock Option Agreement may provide for accelerated
exercisability in the event of the Optionee's death, disability or retirement or
other events and may provide for expiration prior to the end of its term in the
event of the termination of the Optionee's service. Options may be awarded in
combination with SARs, and such an Award may provide that the Options will not
be exercisable unless the related SARs are forfeited. NSOs may also be awarded
in combination with Restricted Shares or Stock Units, and such an Award may
provide that the NSOs will not be exercisable unless the related Restricted
Shares or Stock Units are forfeited.

5.5. Effect of Change in Control. The Committee may determine,
at the time of granting an Option or thereafter, that such Option shall become
fully exercisable as to all Common Shares subject to such Option in the event
that a Change in Control occurs with respect to the Company.

5.6. Modification or Assumption of Options. Within the
limitations of the Plan, the Committee may modify, extend or assume outstanding
options or may accept the cancellation of outstanding options (whether granted
by the Company or by another issuer) in return for the grant of new options for
the same or a different number of shares and at the same or a different exercise
price. The foregoing notwithstanding, no modification of an Option shall,

<PAGE> 5
without the consent of the Optionee, alter or impair his or her rights or
obligations under such Option.

ARTICLE 6. PAYMENT FOR OPTION SHARES

6.1. General Rule. The entire Exercise Price of Common Shares
issued upon exercise of Options shall be payable in cash at the time when such
Common Shares are purchased, except as follows:

(a) In the case of an ISO granted under the Plan,
payment shall be made only pursuant to the express provisions of the applicable
Stock Option Agreement. The Stock Option Agreement may specify that payment may
be made in any form(s) described in this Article 6.

(b) In the case of an NSO, the Committee may at any
time accept payment in any form(s) described in this Article 6.

6.2. Surrender of Stock. To the extent that this Section 6.2
is applicable, payment for all or any part of the Exercise Price may be made
with Common Shares which are already owned by the Optionee. Such Common Shares
shall be valued at their Fair Market Value on the date when the new Common
Shares are purchased under the Plan. The Optionee shall not surrender Common
Shares in payment of the Exercise Price if such surrender would cause the
Company to recognize compensation expense with respect to the Option for
financial reporting purposes.

6.3. Exercise/Sale. To the extent that this Section 6.3 is
applicable, payment may be made by the delivery (on a form prescribed by the
Company) of an irrevocable direction to a securities broker approved by the
Company to sell Common Shares and to deliver all or part of the sales proceeds
to the Company in payment of all or part of the Exercise Price and any
withholding taxes.

6.4. Exercise/Pledge. To the extent that this Section 6.4 is
applicable, payment may be made by the delivery (on a form prescribed by the
Company) of an irrevocable direction to pledge Common Shares to a securities
broker or lender approved by the Company, as security for a loan, and to deliver
all or part of the loan proceeds to the Company in payment of all or part of the
Exercise Price and any withholding taxes.

6.5. Promissory Note. To the extent that this Section 6.5 is
applicable, payment may be made with a full-recourse promissory note; provided
that the par value of the Common Shares shall be paid in cash.

6 .6. Other Forms of Payment. To the extent that this Section
6.6 is applicable, payment may be made in any other form that is consistent with
applicable laws, regulations and rules.

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<PAGE> 6
ARTICLE 7. STOCK APPRECIATION RIGHTS

7.1. SAR Agreement. Each grant of an SAR under the Plan shall
be evidenced by an SAR Agreement between the Optionee and the Company. Such SAR
shall be subject to all applicable terms of the Plan and may be subject to any
other terms that are not inconsistent with the Plan. The provisions of the
various SAR Agreements entered into under the Plan need not be identical. SARs
may be granted in consideration of a reduction in the Optionee's other
compensation.

7.2. Number of Shares. Each SAR Agreement shall specify the
number of Common Shares to which the SAR pertains and shall provide for the
adjustment of such number in accordance with Article 10. SARs granted to any
Optionee in a single calendar year shall in no event pertain to more than
750,000 Common Shares, subject to adjustment in accordance with Article 10.

7.3. Exercise Price. Each SAR Agreement shall specify the
Exercise Price. An SAR Agreement may specify an Exercise Price that varies in
accordance with a predetermined formula while the SAR is outstanding.

7.4. Exercisability and Term. Each SAR Agreement shall specify
the date when all or any installment of the SAR is to become exercisable. The
SAR Agreement shall also specify the term of the SAR. An SAR Agreement may
provide for accelerated exercisability in the event of the Optionee's death,
disability or retirement or other events and may provide for expiration prior to
the end of its term in the event of the termination of the Optionee's service.
SARs may also 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. An
SAR may be included in an ISO only at the time of grant but may be included in
an NSO at the time of grant or thereafter. An SAR granted under the Plan may
provide that it will be exercisable only in the event of a Change in Control.

7.5. Effect of Change in Control. The Committee may determine,
at the time of granting an SAR or thereafter, that such SAR shall become fully
exercisable as to all Common Shares subject to such SAR in the event that a
Change in Control occurs with respect to the Company.

7.6. Exercise of SARs. If, on the date when an SAR expires,
the Exercise Price under such SAR is less than the Fair Market Value on such
date but any portion of such SAR has not been exercised or surrendered, then
such SAR shall automatically be deemed to be exercised as of such date with
respect to such portion. Upon exercise of an SAR, the Optionee (or any person
having the right to exercise the SAR after his or her death) shall receive from
the Company (a) Common Shares, (b) cash or (c) a combination of Common Shares
and cash, as the Committee shall determine. The amount of cash and/or the Fair
Market Value of Common Shares received upon exercise of SARs shall, in the
aggregate, be equal to the amount by which the Fair Market Value (on the date of
surrender) of the Common Shares subject to the SARs exceeds the Exercise Price.

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<PAGE> 7
7.7. Modification or Assumption of SARs. Within the
limitations of the Plan, the Committee may modify, extend or assume outstanding
SARs or may accept the cancellation of outstanding SARs (whether granted by the
Company or by another issuer) in return for the grant of new SARs for the same
or a different number of shares and at the same or a different exercise price.
The foregoing notwithstanding, no modification of an SAR shall, without the
consent of the Optionee, alter or impair his or her rights or obligations under
such SAR.

ARTICLE 8. RESTRICTED SHARES AND STOCK UNITS

8.1. Time, Amount and Form of Awards. Awards under the Plan
may be granted in the form of Restricted Shares, in the form of Stock Units, or
in any combination of both. Restricted Shares or Stock Units may also be awarded
in combination with NSOs or SARs, and such an Award may provide that the
Restricted Shares or Stock Units will be forfeited in the event that the related
NSOs or SARs are exercised.

8.2. Payment for Awards. To the extent that an Award is
granted in the form of newly issued Restricted Shares, the Award recipient, as a
condition to the grant of such Award, shall be required to pay the Company in
cash an amount equal to the par value of such Restricted Shares. To the extent
that an Award is granted in the form of Restricted Shares from the Company's
treasury or in the form of Stock Units, no cash consideration shall be required
of the Award recipients.

8.3. Vesting Conditions. Each Award of Restricted Shares or
Stock Units shall become vested, in full or in installments, upon satisfaction
of the conditions specified in the Stock Award Agreement. A Stock Award
Agreement may provide for accelerated vesting in the event of the Participant's
death, disability or retirement or other events. The Committee may determine, at
the time of making an Award or thereafter, that such Award shall become fully
vested in the event that a Change in Control occurs with respect to the Company.

8.4. Form and Time of Settlement of Stock Units. Settlement of
vested Stock Units may be made in the form of (a) cash, (b) Common Shares or (c)
any combination of both, as determined by the Committee. The actual number of
Stock Units eligible for settlement may be larger or smaller than the number
included in the original Award, based on predetermined performance factors.
Methods of converting Stock Units into cash may include (without limitation) a
method based on the average Fair Market Value of Common Shares over a series of
trading days. Vested Stock Units may be settled in a lump sum or in
installments. The distribution may occur or commence when all vesting conditions
applicable to the Stock Units have been satisfied or have lapsed, or it may be
deferred to any later date. The amount of a deferred distribution may be
increased by an interest factor or by dividend equivalents. Until an Award of
Stock Units is settled, the number of such Stock Units shall be subject to
adjustment pursuant to Article 10.

8.5. Death of Recipient. Any Stock Units Award that becomes
payable after the recipient's death shall be distributed to the recipient's
beneficiary or beneficiaries. Each recipient of a Stock Units Award under the
Plan shall designate one or more beneficiaries for this purpose by filing the
prescribed form with the Company. A beneficiary designation may be

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<PAGE> 8
changed by filing the prescribed form with the Company at any time before the
Award recipient's death. If no beneficiary was designated or if no designated
beneficiary survives the Award recipient, then any Stock Units Award that
becomes payable after the recipient's death shall be distributed to the
recipient's estate.

8.6 Creditors' Rights. A holder of Stock Units shall have no
rights other than those of a general creditor of the Company. Stock Units
represent an unfunded and unsecured obligation of the Company, subject to the
terms and conditions of the applicable Stock Award Agreement.

ARTICLE 9. VOTING AND DIVIDEND RIGHTS

9.1. Restricted Shares. The holders of Restricted Shares
awarded under the Plan shall have the same voting, dividend and other rights as
the Company's other stockholders. A Stock Award Agreement, however, may require
that the holders of Restricted Shares invest any cash dividends received in
additional Restricted Shares. Such additional Restricted Shares shall be subject
to the same conditions and restrictions as the Award with respect to which the
dividends were paid. Such additional Restricted Shares shall not reduce the
number of Common Shares available under Article 3.

9.2. Stock Units. The holders of Stock Units shall have no
voting rights. Prior to settlement or forfeiture, any Stock Unit awarded under
the Plan may, at the Committee's discretion, carry with it a right to dividend
equivalents. Such right entitles the holder to be credited with an amount equal
to all cash dividends paid on one Common Share while the Stock Unit is
outstanding. Dividend equivalents may be converted into additional Stock Units.
Settlement of dividend equivalents may be made in the form of cash, in the form
of Common Shares, or in a combination of both. Prior to distribution, any
dividend equivalents which are not paid shall be subject to the same conditions
and restrictions as the Stock Units to which they attach.

ARTICLE 10. PROTECTION AGAINST DILUTION

10.1. Adjustments. In the event of a subdivision of the
outstanding Common Shares, a declaration of a dividend payable in Common Shares,
a declaration of a dividend payable in a form other than Common Shares in an
amount that has a material effect on the price of Common Shares, a combination
or consolidation of the outstanding Common Shares (by reclassification or
otherwise) into a lesser number of Common Shares, a recapitalization, a spin-off
or a similar occurrence, the Committee shall make such adjustments as it, in its
sole discretion, deems appropriate in one or more of (a) the number of Options,
SARs, Restricted Shares and Stock Units available for future Awards under
Article 3, (b) the limitations set forth in Sections 5.2 and 7.2, (c) the number
of Stock Units included in any prior Award which has not yet been settled, (d)
the number of Common Shares covered by each outstanding Option and SAR or (e)
the Exercise Price under each outstanding Option and SAR. Except as provided in
this Article 10, a Participant shall have no rights by reason of any issue by
the Company of stock of any class or securities convertible into stock of any
class, any subdivision or consolidation of

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<PAGE> 9
shares of stock of any class, the payment of any stock dividend or any other
increase or decrease in the number of shares of stock of any class.

10.2. Reorganizations. In the event that the Company is a
party to a merger or other reorganization, outstanding Options, SARs, Restricted
Shares and Stock Units shall be subject to the agreement of merger or
reorganization. Such agreement may provide, without limitation, for the
assumption of outstanding Awards by the surviving corporation or its parent, for
their continuation by the Company (if the Company is a surviving corporation),
for accelerated vesting and accelerated expiration, or for settlement in cash.

ARTICLE 11. AWARDS UNDER OTHER PLANS

The Company may grant awards under other plans or programs.
Such awards may be settled in the form of Common Shares issued under this Plan.
Such Common Shares shall be treated for all purposes under the Plan like Common
Shares issued in settlement of Stock Units and shall, when issued, reduce the
number of Common Shares available under Article 3.

ARTICLE 12. PAYMENT OF DIRECTOR'S FEES IN SECURITIES

12.1. Effective Date. No provision of this Article 12 shall be
effective unless and until the Board has determined to implement such provision.

12.2. Elections to Receive NSOs, Restricted Shares or Stock
Units. An Outside Director may elect to receive his or her annual retainer
payments and meeting fees from the Company in the form of cash, NSOs, Restricted
Shares, Stock Units, or a combination thereof, as determined by the Board. Such
NSOs, Restricted Shares and Stock Units shall be issued under the Plan. An
election under this Article 12 shall be filed with the Company on the prescribed
form.

12 .3. Number and Terms of NSOs, Restricted Shares or Stock
Units. The number of NSOs, Restricted Shares or Stock Units to be granted to
Outside Directors in lieu of annual retainers and meeting fees that would
otherwise be paid in cash shall be calculated in a manner determined by the
Board. The terms of such NSOs, Restricted Shares or Stock Units shall also be
determined by the Board.

ARTICLE 13. LIMITATION ON RIGHTS

13.1. Retention Rights. Neither the Plan nor any Award granted
under the Plan shall be deemed to give any individual a right to remain an
Employee, Outside Director or Consultant of the Company, a Parent or a
Subsidiary. The Company and its Parents and Subsidiaries reserve the right to
terminate the service of any Employee, Outside Director or Consultant at any
time, with or without cause, subject to applicable laws, the Company's
certificate of incorporation and by-laws and a written employment agreement (if
any).

13.2. Stockholders' Rights. A Participant shall have no
dividend rights, voting rights or other rights as a stockholder with respect to
any Common Shares covered by his or her

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<PAGE> 10
Award prior to the time when a stock certificate for such Common Shares is
issued or, in the case of an Option, the time when he or she becomes entitled to
receive such Common Shares by filing a notice of exercise and paying the
Exercise Price. No adjustment shall be made for cash dividends or other rights
for which the record date is prior to such time, except as expressly provided in
Articles 8, 9 and 10.

13.3 Regulatory Requirements. Any other provision of the Plan
notwithstanding, the obligation of the Company to issue Common Shares under the
Plan shall be subject to all applicable laws, rules and regulations and such
approval by any regulatory body as may be required. The Company reserves the
right to restrict, in whole or in part, the delivery of Common Shares pursuant
to any Award prior to the satisfaction of all legal requirements relating to the
issuance of such Common Shares, to their registration, qualification or listing
or to an exemption from registration, qualification or listing.

ARTICLE 14. LIMITATION ON PAYMENTS

14.1. Basic Rule. Any provision of the Plan to the contrary
notwithstanding, in the event that the independent auditors most recently
selected by the Board (the "Auditors") determine that any payment or transfer by
the Company under the Plan to or for the benefit of a Participant (a "Payment")
would be nondeductible by the Company for federal income tax purposes because of
the provisions concerning "excess parachute payments" in section 280G of the
Code, then the aggregate present value of all Payments shall be reduced (but not
below zero) to the Reduced Amount; provided that the Committee, at the time of
making an Award under this Plan or at any time thereafter, may specify in
writing that such Award shall not be so reduced and shall not be subject to this
Article 14. For purposes of this Article 14, the "Reduced Amount" shall be the
amount, expressed as a present value, which maximizes the aggregate present
value of the Payments without causing any Payment to be nondeductible by the
Company because of section 280G of the Code.

14.2. Reduction of Payments. If the Auditors determine that
any Payment would be nondeductible by the Company because of section 280G of the
Code, then the Company shall promptly give the Participant notice to that effect
and a copy of the detailed calculation thereof and of the Reduced Amount, and
the Participant may then elect, in his or her sole discretion, which and how
much of the Payments shall be eliminated or reduced (as long as after such
election the aggregate present value of the Payments equals the Reduced Amount)
and shall advise the Company in writing of his or her election within 10 days of
receipt of notice. If no such election is made by the Participant within such
10-day period, then the Company may elect which and how much of the Payments
shall be eliminated or reduced (as long as after such election the aggregate
present value of the Payments equals the Reduced Amount) and shall notify the
Participant promptly of such election. For purposes of this Article 14, present
value shall be determined in accordance with section 280G(d)(4) of the Code. All
determinations made by the Auditors under this Article 14 shall be binding upon
the Company and the Participant and shall be made within 60 days of the date
when a Payment becomes payable or transferable. As promptly as practicable
following such determination and the elections hereunder, the Company shall pay
or transfer to or for the benefit of the Participant such amounts

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<PAGE> 11
as are then due to him or her under the Plan and shall promptly pay or transfer
to or for the benefit of the Participant in the future such amounts as become
due to him or her under the Plan.

14.3. Overpayments and Underpayments. As a result of
uncertainty in the application of section 280G of the Code at the time of an
initial determination by the Auditors hereunder, it is possible that Payments
will have been made by the Company which should not have been made (an
"Overpayment") or that additional Payments which will not have been made by the
Company could have been made (an "Underpayment"), consistent in each case with
the calculation of the Reduced Amount hereunder. In the event that the Auditors,
based upon the assertion of a deficiency by the Internal Revenue Service against
the Company or the Participant which the Auditors believe has a high probability
of success, determine that an Overpayment has been made, such Overpayment shall
be treated for all purposes as a loan to the Participant which he or she shall
repay to the Company, together with interest at the applicable federal rate
provided in section 7872(f)(2) of the Code; provided, however, that no amount
shall be payable by the Participant to the Company if and to the extent that
such payment would not reduce the amount which is subject to taxation under
section 4999 of the Code. In the event that the Auditors determine that an
Underpayment has occurred, such Underpayment shall promptly be paid or
transferred by the Company to or for the benefit of the Participant, together
with interest at the applicable federal rate provided in section 7872(f)(2) of
the Code.

14.4. Related Corporations. For purposes of this Article 14,
the term "Company" shall include affiliated corporations to the extent
determined by the Auditors in accordance with section 280G(d)(5) of the Code.

ARTICLE 15. WITHHOLDING TAXES

15.1. General. To the extent required by applicable federal,
state, local or foreign law, a Participant or his or her successor shall make
arrangements satisfactory to the Company for the satisfaction of any withholding
tax obligations that arise in connection with the Plan. The Company shall not be
required to issue any Common Shares or make any cash payment under the Plan
until such obligations are satisfied.

15.2. Share Withholding. The Committee may permit a
Participant to satisfy all or part of his or her withholding or income tax
obligations by having the Company withhold all or a portion of any Common Shares
that otherwise would be issued to him or her or by surrendering all or a portion
of any Common Shares that he or she previously acquired. Such Common Shares
shall be valued at their Fair Market Value on the date when taxes otherwise
would be withheld in cash.

ARTICLE 16. FUTURE OF THE PLAN

16.1. Term of the Plan. The Plan, as set forth herein, was
adopted on _________, 1997, and shall become effective on the date of the
Company's initial public offering. The Plan shall remain in effect until it is
terminated under Section 16.2, except that no ISOs shall be granted after
____________, 2007.

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16.2. Amendment or Termination. The Board may, at any time and
for any reason, amend or terminate the Plan. An amendment of the Plan shall be
subject to the approval of the Company's stockholders only to the extent
required by applicable laws, regulations or rules. No Awards shall be granted
under the Plan after the termination thereof. The termination of the Plan, or
any amendment thereof, shall not affect any Award previously granted under the
Plan.

ARTICLE 17. DEFINITIONS

17.1. "Award" means any award of an Option, an SAR, a
Restricted Share or a Stock Unit under the Plan.

17.2. "Board" means the Company's Board of Directors, as
constituted from time to time.

17.3. "Change in Control" shall mean the occurrence of any of
the following events:

(a) The consummation of a merger or consolidation of
the Company with or into another entity or any other corporate reorganization,
if more than 50% of the combined voting power of the continuing or surviving
entity's securities outstanding immediately after such merger, consolidation or
other reorganization is owned by persons who were not stockholders of the
Company immediately prior to such merger, consolidation or other reorganization;

(b) A change in the composition of the Board, as a
result of which fewer than one-half of the incumbent directors are directors who
either:

(A) Had been directors of the Company 24
months prior to such change; or

(B) Were elected, or nominated for election,
to the Board with the affirmative votes of at least a majority of the directors
who had been directors of the Company 24 months prior to such change and who
were still in office at the time of the election or nomination; or

(c) Any "person" (as such term is used in sections
13(d) and 14(d) of the Exchange Act) by the acquisition or aggregation of
securities is or becomes the beneficial owner, directly or indirectly, of
securities of the Company representing 50% or more of the combined voting power
of the Company's then outstanding securities ordinarily (and apart from rights
accruing under special circumstances) having the right to vote at elections of
directors (the "Base Capital Stock"); except that any change in the relative
beneficial ownership of the Company's securities by any person resulting solely
from a reduction in the aggregate number of outstanding shares of Base Capital
Stock, and any decrease thereafter in such person's ownership of securities,
shall be disregarded until such person increases in any manner, directly or
indirectly, such person's beneficial ownership of any securities of the Company.

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The term "Change in Control" shall not include a transaction,
the sole purpose of which is to change the state of the Company's incorporation.

17.4. "Code" means the Internal Revenue Code of 1986, as
amended.

17.5. "Committee" means a committee of the Board, as
described in Article 2.

17.6."Common Share" means one share of the common stock of the
Company.

17.7. "Company" means Star Telecommunications, Inc., a
Delaware corporation.

17.8. "Consultant" means a consultant or adviser who provides
bona fide services to the Company, a Parent or a Subsidiary as an independent
contractor. Service as a Consultant shall be considered employment for all
purposes of the Plan, except as provided in Section 4.2.

17.9. "Employee" means a common-law employee of the Company,
a Parent or a Subsidiary.

17.10. "Exchange Act" means the Securities Exchange Act of
1934, as amended.

17.11. "Exercise Price," in the case of an Option, means the
amount for which one Common Share may be purchased upon exercise of such Option,
as specified in the applicable Stock Option Agreement. "Exercise Price," in the
case of an SAR, means an amount, as specified in the applicable SAR Agreement,
which is subtracted from the Fair Market Value of one Common Share in
determining the amount payable upon exercise of such SAR.

17.12. "Fair Market Value" means the market price of Common
Shares, determined by the Committee as follows:

(a) If the Common Shares were traded over-the-counter
on the date in question but was not traded on the Nasdaq system or the Nasdaq
National Market System, then the Fair Market Value shall be equal to the mean
between the last reported representative bid and asked prices quoted for such
date by the principal automated inter-dealer quotation system on which the
Common Shares are quoted or, if the Common Shares are not quoted on any such
system, by the "Pink Sheets" published by the National Quotation Bureau, Inc.;

(b) If the Common Shares were traded over-the-counter
on the date in question and were traded on the Nasdaq system or the Nasdaq
National Market System, then the Fair Market Value shall be equal to the
last-transaction price quoted for such date by the Nasdaq system or the Nasdaq
National Market System;

(c) If the Common Shares were traded on a stock
exchange on the date in question, then the Fair Market Value shall be equal to
the closing price reported by the applicable composite transactions report for
such date; and

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<PAGE> 14
(d) If none of the foregoing provisions is
applicable, then the Fair Market Value shall be determined by the Committee in
good faith on such basis as it deems appropriate.

Whenever possible, the determination of Fair Market Value by the Committee shall
be based on the prices reported in the Western Edition of The Wall Street
Journal. Such determination shall be conclusive and binding on all persons.

17.13 "ISO" means an incentive stock option described in
section 422(b) of the Code.

17.14. "NSO" means a stock option not described in sections
422 or 423 of the Code.

17.15. "Option" means an ISO or NSO granted under the Plan
and entitling the holder to purchase one Common Share.

17.16. "Optionee" means an individual or estate who holds an
Option or SAR.

17.17. "Outside Director" shall mean a member of the Board
who is not an Employee. Service as an Outside Director shall be considered
employment for all purposes of the Plan, except as provided in Section 4.2.

17.18. "Parent" means any corporation (other than the Company)
in an unbroken chain of corporations ending with the Company, if each of the
corporations other than the Company owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain. A corporation that attains the status of a Parent on
a date after the adoption of the Plan shall be considered a Parent commencing as
of such date.

17.19. "Participant" means an individual or estate who holds
an Award.

17.20. "Plan" means this 1997 Omnibus Stock Incentive Plan of
the Company, as amended from time to time.

17.21. "Restricted Share" means a Common Share awarded under
the Plan.

17.22. "SAR" means a stock appreciation right granted under
the Plan.

17.23. "SAR Agreement" means the agreement between the Company
and an Optionee which contains the terms, conditions and restrictions pertaining
to his or her SAR.

17.24. "Stock Award Agreement" means the agreement between
the Company and the recipient of a Restricted Share or Stock Unit which contains
the terms, conditions and restrictions pertaining to such Restricted Share or
Stock Unit.

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17.25. "Stock Option Agreement" means the agreement between
the Company and an Optionee which contains the terms, conditions and
restrictions pertaining to his or her Option.

17.26. "Stock Unit" means a bookkeeping entry representing the
equivalent of one Common Share, as awarded under the Plan.

17.27. "Subsidiary" means any corporation (other than the
Company) in an unbroken chain of corporations beginning with the Company, if
each of the corporations other than the last corporation in the unbroken chain
owns stock possessing 50% or more of the total combined voting power of all
classes of stock in one of the other corporations in such chain. A corporation
that attains the status of a Subsidiary on a date after the adoption of the Plan
shall be considered a Subsidiary commencing as of such date.

17.28. "Supplemental Option Plan" means the Company's 1996
Supplemental Stock Option Plan as in effect on the date of the adoption of this
Plan by the Company's Board of Directors.

ARTICLE 18. EXECUTION

To record the adoption of the Plan by the Board, the Company
has caused its duly authorized officer to affix the corporate name and seal
hereto.

STAR TELECOMMUNICATIONS, INC.

By:__________________________
Name:
Title:

<PAGE> 1
EXHIBIT 10.20

Lessor NTFC CAPITAL CORPORATION Master Lease Agreement

Lessee STAR VENDING, INC. Person to Contact/Title
D/B/A STAR TELECOMMUNICATIONS, INC. MARY CASEY, PRESIDENT

Address 740 STATE STREET Telephone Number Facsimile Number
SUITE 202 (805) 899-1962 ( ) -

/X/ Corporation
/ / Proprietorship
/ / Partnership
/ / _________

City County State Zip Code Master Lease Agreement No.
SANTA BARBARA SANTA BARBARA CA 93101 54273

TERMS AND CONDITIONS (The Reverse side contains Terms and
Conditions which are also a part of this Agreement)

1. LEASE: Lessor shall purchase and lease to Lessee the equipment and associated
items ("Equipment") described in any Equipment Schedule ("Schedule") executed
from time to time by Lessor and Lessee that makes reference to this Master Lease
Agreement ("Agreement"). This Agreement shall be incorporated into each
Schedule. When computer programs and related documentation are furnished with
the Equipment, and a non-exclusive license and/or sublicense (collectively,
"Software") is granted to Lessee in an agreement ("Supplier Agreement") with the
suppliers (collectively, "Supplier") identified on the Schedule. Lessor, to the
extent permitted, grants Lessee a similar non-exclusive sublicense to use the
Software only in conjunction with the Equipment for so long as the Equipment is
leased hereunder. The Equipment and Software include, but are not limited to,
all additions, attachments and accessions thereto and replacements therefore
(collectively, "System"). Any reference to "Lease" shall mean with respect to
each System, this Agreement, a Schedule, a Consent of Supplier, an Acceptance
Certificate, any riders, amendments and addenda thereto, and any other documents
as may from time to time be made a part thereof.

As conditions precedent to Lessor's obligation to purchase any Equipment and
obtain any Software, not later than the Commitment Date set forth on the
applicable Schedule, (a) Lessee and Lessor shall execute this Agreement, a
Schedule, an Acceptance Certificate and other documentation contemplated herein,
and (b) there shall have been no material adverse change in Lessee's financial
condition. Upon Lessor's execution of a Schedule, Lessee assigns to Lessor its
rights to receive title to the Equipment and any non-exclusive sublicense to use
the Software described in the Supplier Agreement as of the day the System is
delivered to the installation Site set forth in the applicable Schedule but no
other right or any warranty thereunder. In consideration of such an assignment
and subject to the terms and conditions herein, Lessor agrees to pay to the
Supplier the Price (as defined in Section 3 below) for the System pursuant to
the Supplier Agreement, but not to perform any other obligation thereunder.
Unless Lessee exercises its Purchase Option as set forth in the applicable
Schedule, Lessee hereby assigns to Lessor all of Lessee's then-remaining rights
pursuant to the applicable Supplier Agreement effective upon the termination or
expiration of the Term (as set forth in the applicable Schedule) for any reason.

2. TERM, RENEWAL AND EXTENSIONS: If all other conditions precedent to a Lease
have been met, the Lease Term for the System described on each Schedule shall
commence on the date of Lessee's execution of an Acceptance Certificate
("Commencement Date"), and continue for the number of whole months, or other
periods set forth in such Schedule ("Initial Term"), the first such full month
commencing on the first day of the month following the Commencement Date (or
commencing on the Commencement Date if such date is the first day of the month).
If Lessee selects Purchase Option B or C in the applicable Schedule, on the
expiration date of the Initial Term, the Lease shall be automatically renewed
for a six-month period ("Renewal Term") unless, by giving written notice to
Lessor six (6) months prior to the expiration date, the Lessee elects to
terminate the Lease. After the Renewal Term, at Lessor's option, the Lease shall
be automatically extended on a month-to-month basis until either party gives the
other not less than thirty (30) days prior written notice of its intention to
terminate the Lease. Any renewals and extensions shall be on the same terms and
conditions as during the Initial Term. "Term" shall mean the applicable Initial
Term, the Renewal Term, if any, and any extension thereof as provided herein.

3. RENT AND PAYMENT: Lessee shall pay to Lessor all the rental payments as shown
in the applicable Schedule ("Rent') during the Term of the Lease, except as such
Rent may be adjusted pursuant to this Section and Sections 2 and 8 of a
Schedule, plus such additional amounts as are due Lessor under the Lease. Rent
shall be paid as designated in the applicable Schedule in advance on the first
day of each Payment Period ("Rent Payment Date"). If the Commencement Date is
not the first day of a calendar month (or other Payment Period), Lessee shall
pay to Lessor, on demand, interim Rent prorated daily based on a 360-day year
for each day from and including the Commencement Date to and including the last
day of such month or other Payment Period.

The Rent is based upon the Price of the System and the acceptance of the System
by Lessee on or before the Commitment Date set forth in the applicable Schedule.
The "Price" of the System shall be as set forth in the Schedule, and shall
exclude all other costs, including sales or other taxes included in the Supplier
Agreement as part of the purchase price. If the Price is increased or decreased
as a result of a job change order ("JCO"), the Lessee authorizes Lessor to
adjust the Rent. If the Commencement Date occurs after the Commitment Date, and
Lessor waives the condition precedent that the Commencement Date occurs on or
before the Commitment Date, Lessor's then-current Lease Rate Factor for similar
transactions shall apply and the Lessee authorizes Lessor to adjust the Rent,
accordingly.

Whenever any payment of Rent or other amount is not made within ten (10) days
after the date when due, Lessee agrees to pay on demand (as a fee to offset
Lessor's collection and administrative expenses), the greater of twenty-five
dollars ($25.00) or ten (10%) of each such overdue amount, but not exceeding the
lawful maximum, if any. All payments shall be payable to Lessor in U.S. dollars
at Lessor's address set forth in Section 18 or such other place as Lessor
directs in writing. If Lessee requests changes or amendments to any Lease,
Lessor may charge Lessee Lessor's reasonable costs and expenses of negotiation
and documentation, including fees of legal staff or outside counsel.

4. DELIVERY: All transportation, delivery and installation costs (unless
included in the Price) are the sole responsibility of Lessee. Lessee assumes all
risk of loss and damage if the Supplier fails to deliver or delays in the
delivery of any System, or if any System is unsatisfactory for any reason.

5. NET LEASE: Lessee's obligations under each Lease are absolute, unconditional
and non-cancelable and shall not be subject to any delay, reduction, setoff,
defense, counterclaim or recoupment for any reason including any failure of any
System, or any misrepresentations of any supplier, manufacturer, installer,
vendor or distributor. Lessor is not responsible for the delivery, installation,
maintenance or operation of any System.

6. WARRANTIES: Lessor agrees that third-party warranties, if any, inure to the
benefit of Lessee during the Term and on exercise of the Purchase Option. Lessee
agrees to pursue any warranty claim directly against such third party and shall
not pursue any such claim against Lessor. Lessee shall continue to pay Lessor
all amounts payable under any Lease under any and all circumstances.

7. QUIET ENJOYMENT: Lessor shall not interfere with Lessee's quiet enjoyment and
use of the System during the Term if no Event of Default has occurred and is
continuing.

8. TAXES AND FEES: Lessee shall promptly reimburse Lessor, upon demand, as
additional Rent, or shall pay directly, if so requested by Lessor, all license
and registration fees, sales, use, personal property taxes and all other taxes
and charges imposed by any federal, state, or local government or taxing
authority, relating to the purchase, ownership, leasing, or use of the System or
the Rent excluding, however, all taxes computed upon the net income of Lessor.

9. DISCLAIMER OF WARRANTIES AND DAMAGE: LESSEE ACKNOWLEDGES THAT (a) THE SIZE,
DESIGN, CAPACITY OF EACH SYSTEM AND THE MANUFACTURER AND SUPPLIER HAVE BEEN
SELECTED BY LESSEE; (b) LESSOR IS NOT A MANUFACTURER, SUPPLIER, DEALER,
DISTRIBUTOR OR INSTALLER OF ANY SYSTEM; (c) NO MANUFACTURER OR SUPPLIER OR ANY
OF THEIR REPRESENTATIVES IS AN AGENT OF LESSOR OR AUTHORIZED TO WAIVE OR ALTER
ANY TERM OR CONDITION OF ANY LEASE; AND (d) EXCEPT FOR LESSORS' WARRANTY OF
QUIET ENJOYMENT SET FORTH IN SECTION 7, LESSOR HAS NOT MADE, AND DOES NOT HEREBY
MAKE, ANY REPRESENTATION, WARRANTY OR COVENANT, WRITTEN OR ORAL, STATUTORY,
EXPRESS OR IMPLIED, AS TO ANY MATTER WHATSOEVER INCLUDING, WITHOUT LIMITATION,
THE DESIGN, QUALITY, CAPACITY, MATERIAL, WORKMANSHIP, OPERATION, CONDITION,
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, HIDDEN OR LATENT DEFECTS,
OR AS TO ANY PATENT, COPYRIGHT OR TRADEMARK INFRINGEMENT. LESSEE LEASES EACH
SYSTEM "AS IS, WHERE IS."

LESSOR SHALL HAVE NO LIABILITY TO LESSEE OR ANY THIRD PARTY FOR ANY SPECIAL
DIRECT, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES
- -------------------------------------------------------------------------------
Except as otherwise provided in Section 3 of this Agreement and Sections 2, 3
and 8 of a Schedule, any modifications, amendments or waivers to a Lease shall
be effecvtive only if mutually agreed upon in a writing, duly executed by
authorized representatives of the parties.
- -------------------------------------------------------------------------------
NTFC CAPITAL CORPORATION STAR VENDING INC.
D/B/A STAR TELECOMMUNICATIONS, INC.

By /s/ L.W. Middleton By /s/ Mary Casey
--------------------------------- --------------------------------
Authorized Representative Authorized Representative

PRINT NAME /s/ L.W. Middleton PRINT NAME /s/ Mary Casey
------------------------- ------------------------

TITLE Secretary DATE 12/17/96 TITLE President DATE 11/5/96
------------ ----------- ------------ ----------

<PAGE> 2
OF ANY SORT INCLUDING, WITHOUT LIMITATION, DAMAGES FOR PERSONAL INJURY, LOSS OF
PROFITS OR SAVINGS, LOSSES OF USE, OR ANY OTHER DAMAGES, WHETHER BASED ON STRICT
LIABILITY OR NEGLIGENCE, WHETHER RESULTING FROM USE OF A SYSTEM OR BREACH OF A
LEASE OR OTHERWISE, EXCEPT FOR DIRECT, SPECIFIC DAMAGES FOR PERSONAL INJURY OR
PROPERTY DAMAGE TO THE EXTENT CAUSED BY LESSOR'S ACTIVE GROSS NEGLIGENCE OR
WILLFUL MISCONDUCT.

IF LESSEE HAS ELECTED PURCHASE OPTION B OR C, ARTICLE 2A OF THE UCC MAY APPLY TO
THE LEASE AND LESSEE MAY HAVE CERTAIN RIGHTS THEREUNDER. IF SO, LESSEE
ACKNOWLEDGES THAT SUCH A LEASE IS A FINANCE LEASE AS DEFINED IN UCC SECTION
2A-103. TO THE EXTENT PERMITTED BY LAW, LESSEE HEREBY WAIVES ANY RIGHTS OR
REMEDIES LESSEE MAY HAVE UNDER UCC SECTIONS 2A-608-822 INCLUDING, WITHOUT
LIMITATION, RIGHTS OF REJECTION, REVOCATION, CANCELLATION, GRANTING OF SECURITY
INTERESTS, AND RECOVERY FOR BREACH OF WARRANTY.

10. INSURANCE: At its expense, Lessee shall keep each System insured against all
risks of loss and damage for an amount equal to the installed replacement cost
of such System with Lessor named as a loss payee. Lessee shall also maintain
comprehensive general liability insurance, with Lessor named as an additional
insured. All insurance policies shall be with an insurer having a "Best Policy
Holders" rating of "A-X" or better, and be in such form, amount and deductibles
as are satisfactory to Lessor. Each such policy must state by endorsement that
insurer shall give Lessor not less than thirty (30) days prior written notice of
any amendment, renewal or cancellation. Lessee shall, upon request, furnish to
Lessor satisfactory evidence that such insurance coverage is in effect. Lessee
may self insure for such coverages only with Lessors prior written consent.

11. CASUALTY: If any System, in whole or in part, is lost, stolen, damaged or
destroyed, or is taken in any condemnation or similar proceeding (an "Event of
Loss"), Lessee shall immediately notify Lessor. Lessee shall, at its option (a)
immediately place the affected Equipment and Software in good condition and
working order, (b) replace the affected item with like equipment or software in
good condition and transfer clear title and any sublicense to Lessor, or (c) pay
to Lessor, within thirty (30) days of the Event of Loss, an amount equal to the
Stipulated Loss Value ("SLV") as defined below, for such affected Equipment or
Software plus any other unpaid amounts then due under the Lease. If an Event of
Loss occurs as to part of a System for which the SLV is paid, a prorata amount
of Rent shall abate from the date the SLV payment is received by Lessor. Upon
payment of the SLV, title to the applicable Equipment and the sublicense to the
applicable Software, shall pass to Lessee with no warranties, subject to the
rights, if any, of the insurer.

The SLV shall be an amount equal to all future Rent from the last Rent Payment
Date for which Rent has been paid to the end of the Term with each such payment
discounted to present value at a simple interest rate of five percent (5%) per
annum or the Lease Rate, as applicable, or, if such rate is not permitted by
law, then at the lowest permitted rate, plus (a) if Lessee selects Purchase
Option B, twenty percent of the product obtained by multiplying the total number
of Rent payments shown on the Schedule for the applicable Term by the then
periodic Rent, or (b) if Lessee selects Purchase Option C, the percent set forth
in the Purchase Option C election in the Schedule times the Price as it may have
been adjusted ("Percent Option Amount"). If Lessor receives any insurance
proceeds, Lessor shall apply such proceeds to Lessee's outstanding obligations
with any remaining sums to be delivered to Lessee.

12. INDEMNITY: Lessee shall indemnify Lessor against, and hold Lessor harmless
from, and covenants to defend Lessor against, any and all losses, claims, liens,
encumbrances, suits, damages, and liabilities (and all costs and expenses
including, without limitation, reasonable attorney's fees) related to the Lease
including, without limitation, the selection, purchase, delivery, ownership,
condition, use, operation of a System, or violation of a Software Sublicense,
or arising by operation of law (excluding any of the foregoing to the extent
caused by the active gross negligence or willful misconduct of Lessor). Lessee
shall assume full responsibility for or, at Lessor's sole option, reimburse
Lessor for the defense thereof. This Section shall survive the termination of
the Lease but not longer than the applicable statute of limitations.

13. TAX INDEMNITY: If Lessee selects Purchase Option B, the Lease is entered
into based upon the assumptions ("Assumptions") that for federal, state, and
local income tax purposes, Lessor shall be entitled to deduct, at the highest
marginal rate of tax imposed on corporations, the maximum depreciation or cost
recovery allowances provided in the Internal Revenue Code of 1986, as amended,
and under state and local law in effect on the date Lessee executes the
applicable Schedule. If, in its reasonable opinion, Lessor determines that its
net after-tax economic yield or after-tax cash flow ("Net Economic Return") has
been adversely affected as a result of a change in the Assumptions (a "Loss"),
Lessee agrees to pay to Lessor, on demand, an amount which will cause Lessors'
then Net Economic Return to equal the Net Economic Return that Lessor would have
received had such Loss not occurred. Lessee shall have no right to inspect the
tax returns of Lessor.

14. DEFAULT: Any of the following shall constitute an Event of Default: (a)
Lessee fails to pay when due any Rent or other amount payable under a Lease that
is not paid within ten (10) days of Lessee's receipt of written notice of
nonpayment; (b) Lessee fails to perform any other material term in any Lease or
other agreement given in connection with any Lease that continues uncured for
twenty (20) days after Lessee's receipt of written notice thereof; (c) the
inaccuracy of any material representation or warranty made by Lessee or any
guarantor in connection with any Lease and the continuation thereof for thirty
(30) days or more; (d) Lessee attempts to make a Transfer (as defined in Section
10) without Lessor's prior written consent; (e) Lessee dissolves or ceases to do
business as a going concern; (f) Lessee sells all or substantially all of its
assets, merges or consolidates with or into, or reorganizes with any entity; (g)
Lessee becomes insolvent, makes an assignment for the benefit of creditors,
files a voluntary petition or has an involuntary petition filed or action
commenced against it under the United States Bankruptcy Code or any similar
federal or state law; (h) Lessee fails to perform its obligations under any
other Lessee or agreement with Lessor; or (i) Any partner of Lessee or any
guarantor takes any actions described in subsections (e), (f), or (g) above.

15. REMEDIES: If an Event of Default has occurred, Lessor shall have the right
to exercise one or more of the following remedies set forth below. Lessor may
(a) terminate and/or declare an Event of Default under any Lease or other
agreement with Lessee; (b) recover from Lessee all Rent and any and all amounts
then due and unpaid, and (c) recover from Lessee all Rent and other amounts to
become due, by acceleration or otherwise (plus, if the System is not returned in
accordance with Section 9 of the applicable Schedule, an amount equal to (i)
Lessor's reasonable estimate of the fair market value of the System at the end
of the applicable Term if Lessee selects Purchase Option B in the Schedule, or
(ii) if Lessee selects Purchase Option C in the Schedule, Percent Option Amount.
The amounts described in subsection (c) shall be present valued using a five
percent (5%) simple interest rate per annum or the Lease Rate, as applicable,
or, if such rate is not permitted by law, then at the lowest permitted rate. The
amounts set forth in subsections (b) and (c) above shall be the agreed upon
damages ("Lessor's Loss"). Lessor may also charge Lessee interest on the
Lessor's Loss from the date of the Event of Default until paid at the rate of
one and one-half percent (1-1/2%) per month, but in no event more than the
maximum rate permitted by law; demand the Lessee return any System to Lessor in
the manner provided in Section 9 of the Schedule, and take possession of, render
unusable, or disable any System wherever located, with or without demand or
notice or any court order or any process by law.

Upon repossession or return of a System, Lessor shall have the right to sell,
lease or otherwise dispose of the System, with or without notice and by public
or private bid, and shall apply the net proceeds thereof, if any, toward
Lessor's Loss but only after deducting from such proceeds (a) in the case of any
reletting of the System, the rent due for any period beyond the scheduled
expiration of the Lease; (b) in the case of sale, (i) if Lessee has elected
Purchase Option B, the estimated fair market value of the System as of the
scheduled expiration of the Term of the Lease, or (ii) if Lessee has elected
Purchase Option C, an amount equal to the Percent Option Amount; and (c) all
expenses including, without limitation, reasonable attorney's fees incurred in
enforcement of any remedy. Lessee shall be liable for any deficiency if the net
proceeds available after the permitted deductions are less than Lessor's Loss.
No right or remedy is exclusive of any other provided herein or permitted by law
or equity. All rights and remedies shall be cumulative and may be enforced
concurrently or individually from time to time.

16. ASSIGNMENT: Lessor may, without notice to or the consent of Lessee, sell,
assign, grant a security interest in, or pledge its interest in all or a portion
of a System and/or a Lease and any amounts payable hereunder to any third party
("Assignee"). Lessee shall, if directed, pay all Rent and other amounts due to
Assignee free from any claim or counterclaim, defense or other right which
Lessee may have against Lessor. Lessor shall be relieved of its future
obligations under the Lease as a result of such assignment if Lessor assigns to
Assignee its interest in the System and Assignee assumes Lessor's future
obligations. WITHOUT LESSOR'S PRIOR WRITTEN CONSENT, LESSEE SHALL NOT ASSIGN,
SUBLEASE, TRANSFER, PLEDGE, MORTGAGE OR OTHERWISE ENCUMBER ("TRANSFER") ANY
SYSTEM OR ANY LEASE OR ANY OF ITS RIGHTS THEREIN OR PERMIT ANY LEVY, LIEN OR
ENCUMBRANCE THEREON. Any attempted non-consensual Transfer by Lessee shall be
void ab inibo. No Transfer shall relieve Lessee of any of its obligations under
a Lease.

17. ORGANIZATION AND AUTHORITY: Lessee is duly organized, validly existing and
in good standing under the laws of its State of formation and in any
jurisdiction where a System is located. Lessee has the power and authority to
execute, delivery and perform each Lease. The person executing this Agreement
and any Schedules on behalf of Lessee has been given authority to bind the
Lessee and each Lease constitutes or will constitute a legally binding and
enforceable obligation of the Lessee. The execution, delivery and performance of
each Lease is not and will not be in contravention of, or will not result in a
breach of, any of the terms of Lessee's organizational documents, and any
agreements, contracts or instruments to which Lessee is a party or under which
it is bound.

18. NOTICES: Notices, demands and other communications shall be in writing and
shall be sent by hand delivery, certified mail (return receipt requested), or
overnight courier service, or facsimile transmission (effective upon
transmission) with a copy sent by one of the foregoing methods, to Lessee at the
address or facsimile number stated above and to Lessor at 220 Athens Way,
Nashville, Tennessee 37228-1314. Attention: V.P. Finance, or facsimile no. (615)
734-6110. Notices shall be effective upon the earlier of actual receipt or four
days after the mailing date. Either party may substitute another address by such
written notice.

19. JURISDICTION AND GOVERNING LAW: EACH LEASE SHALL BE GOVERNED BY THE LAWS OF
THE STATE OF TENNESSEE AND THE LESSEE CONSENTS AND AGREES THAT, AT LESSOR'S
OPTION, PERSONAL JURISDICTION, SUBJECT MATTER JURISDICTION AND VENUE SHALL BE
WITH THE COURTS OF THE STATE OF TENNESSEE, OR THE FEDERAL COURT FOR THE MIDDLE
DISTRICT OF TENNESSEE.

20. MISCELLANEOUS: (a) Any failure of Lessor to require strict performance by
Lessee, or any waiver by Lessor of any provision of a Lease, shall not be
construed as a consent to or waiver of any other breach of the same or of any
other provision. (b) If there is more than one Lessee, the obligations of each
Lessee are joint and several. (c) Lessee agrees to execute and deliver, upon
demand, any documents necessary, in Lessor's reasonable opinion, to evidence the
intent of a Lease, and/or to protect Lessor's interest in a System. Lessee
appoints Lessor as its attorney-in-fact for the sole purpose of executing and
delivering any UCC financing statements. Lessee agrees to pay Lessor's
out-of-pocket costs of filing and recording such documentation. (d) Lessee shall
deliver to Lessor such additional financial information as Lessor may reasonably
request. (e) If any provision shall be held to be invalid or unenforceable, the
validity and enforceability of the remaining provisions shall not in any way be
affected or impaired. (f) In the event Lessee fails to pay or perform any
obligations under a Lease, Lessor may, at its option, pay or perform such
obligation, and any payment made or expense incurred by Lessor in connection
therewith shall be due and payable by Lessee upon Lessor's demand with interest
thereon accruing at the maximum rate permitted by law until paid. (g) Time is of
the essence in each Lease. (h) Lessee shall pay Lessor, on demand, all costs and
expenses, including reasonable attorneys' and collection fees, incurred by
Lessor in enforcing the terms and conditions of a Lease or in protecting
Lessor's rights and interests in a Lease or a System. (i) LESSOR INTENDS TO
COMPLY WITH ALL APPLICABLE LAWS, INCLUDING THOSE CONCERNING THE REGULATION OF
INTEREST. Therefore, no lease charge, late charge, fee or interest, if
applicable, is intended to exceed the maximum amount permitted to be charged or
collected by applicable law. If one or more of such charges exceed such maximum,
then such charges will be reduced to the legally permitted maximum charge and
any excess charge will be used to reduce the future Rent and/or the Price of the
System or refunded. (j) Each Lease may be executed by one or more of the parties
on any number of separate counterparts (which may be originals or copies sent by
facsimile transmission), each of which counterparts shall be an original. (k)
Each Lease constitutes the entire agreement between Lessor and Lessee with
respect to the subject matter thereof and supersedes all previous writing and
understandings of any nature whatsoever. (l) No agent, employee, or
representative of Lessor has any authority to bind Lessor to any representation
or warranty concerning any System and, unless such representation or warranty is
specifically included in a Lease, it shall not be enforceable by Lessee against
Lessor.
<PAGE> 3
Lessor NTFC Capital Corporation Agreement Addendum

Lessee Star Vending, Inc. Agreement No.
d/b/a Star Telecommunications, Inc. 54273

Contemporaneously with entering into the Agreement referenced above, Lessee and
Lessor agree to the following amendments to the Agreement:

1. SECTION 1. LEASE. The words "since the later of January 30, 1996 or the date
financial information was last delivered by Lessee to Lessor," are added at the
end of the first sentence of the second paragraph of Section 1.

The following is added as an additional conditions precedent in paragraph 2 of
Section 1 of the Lease.

(c) Lessee shall have obtained a release from Metrobank releasing any and
all right, title and interest it may have in any Lease or the Systems
subject thereto.

(d) No Event of Default, or no event which, with the giving of notice or
passage of time or both, would constitute an Event of Default, has occurred
and is continuing.

The following is added as the third paragraph of Section 1.

The Price of all Systems subject to all Leases entered into pursuant to
this Agreement, including any Purchase Price Payment adjustments, CSO
Equipment (as defined in the Schedule) and Equipment and Software added as
a result of JCO's (as defined in Section 3 thereof) shall not exceed
$3,200,000 in the aggregate. All Leases entered into pursuant to this
Agreement must commence on or before December 31, 1996.

2. SECTION 2. TERM, RENEWAL AND EXTENSIONS. The second, third and fourth
sentences of Section 2 are deleted and the following substituted in lieu
thereof:

If Lessee selects Purchase Option B or C in the Schedule, Lessee must give
Lessor not less than four (4) months written notice of its intent to (a)
renew the Lease ("Option Renewal Term") with such renewal to be on the same
terms and conditions as the Lease for the Initial Term, except that the
Optional Renewal Term shall be for a six month period commencing on the
first day after the expiration date of the Initial Term, and the Rent for
the System during the Optional Renewal Term shall be equal to the then fair
market rental value for the System; (b) exercise its purchase option set
forth in Section 10 in the Schedule, or (c) return the System in accordance
with Section 9 of the Schedule.

In the event the Lessee does not notify Lessor in writing of its election,
the Lease shall be automatically renewed for a six-month period ("Automatic
Renew Term"). Such renewal shall be on the same terms and conditions as the
Lease for the Initial Term including the Rent for the Automatic Renewal
Term which shall be equal to the Rent during the Initial Term. The "Renewal
Term" shall mean the Optional Renewal Term or the Automatic Renewal Term,
as applicable.

After the end of the Renewal Term, if any, the Term of the Lease shall be
automatically extended until terminated by either party as provided herein.
Such extension shall be on the same terms and conditions as during the
applicable Renewal term. Lessor and Lessee may terminate such Lease
effective as of the first day of any calendar month after the end of the
Renewal Term, by giving to the other not less than thirty (30) days prior
written notice of such termination.

3. SECTION 3. RENT AND PAYMENT. The words "approved in writing by Lessee as
evidenced by Lessee's initials on the Supplier invoice relative thereto" are
added after "(JCO")" in the third sentence of the second paragraph of Section 3.

The fourth sentence of the second paragraph of Section 3 of the Agreement is
deleted and the following substituted in lieu thereof:

The following Lease Rate Factors shall be increased or decreased based upon
changes from April 15, 1996 until the Commencement Date of a Lease in three
(3) year Treasury Constant Maturities' ("Yield") as reported by the Federal
Reserve Statistical Release (H.15 Report). For each five (5) basis points
of increase or decrease (rounded downward to the nearest whole five (5)
basis point increment or decrement) in the Yield, the Lease Rate Factors
shall be increased or decreased, respectively by the applicable Adjustment
Factors set forth below. This adjusted Lease Rate Factors shall be the
Lease Rate Factors used to determine the Rent relative to the Schedule.

NTFC CAPITAL CORPORATION STAR VENDING, INC
D/B/A/ STAR TELECOMMUNICATIONS, INC

BY /s/ L.W. Middleton BY /s/ Mary Casey
----------------------------------- ------------------------------------
Authorized Representative Authorized Representative

PRINT NAME L.W. Middleton PRINT NAME Mary Casey
--------------------------- ----------------------------
TITLE Secretary DATE 12/17/96 TITLE President DATE 10-31-96
--------------- ----------- --------------- -------------
<PAGE> 4
<TABLE>
<CAPTION>
Lease payment Nos. Lease Rate Factors Adjustment Factors
<S> <C> <C>
1-12 .013173 .0000180
13-24 .015808 .0000216
25-72 .018443 .0000251
</TABLE>

The words "legal staff of" are deleted from the last sentence of the third
paragraph of Section 3.

4. SECTION 4. DELIVERY. The word "engineering," is added after the word "All" in
the first sentence of Section 4.

5. SECTION 9. DISCLAIMER OF WARRANTIES AND DAMAGES. The words "ACTIVE GROSS" are
deleted from the last line of the first paragraph of Section 9.

6. SECTION 10. INSURANCE. The word "reasonably" is added prior to the word
"satisfactory" in the third sentence of Section 10.

7. SECTION 12. INDEMNITY. The words "active gross" are deleted from the second
parenthetical in Section 12.

8. SECTION 13. TAX INDEMNITY. The text of Section 13 is deleted in its entirety
and the following is substituted in lieu thereof:

The Lease is entered into based on the assumptions ("Assumptions") that for
federal, state, and local income tax purposes, Lessor: (a) shall be the
owner of the System and (b) shall be entitled to deduct, at the highest
marginal rate of tax imposed on corporations in effect on the date Lessee
executes the Lease ("Execution Date") (i) interest expense incurred to
finance the Price of the System, (ii) the maximum depreciation or cost
recovery allowances provided in the Internal Revenue Code of 1986 in effect
on the Execution Date, based on the Price, and (iii) any similar allowances
provided for by state and local income tax codes in effect on the Execution
Date, based on the Price. If, in its reasonable option, Lessor determines
that its net after-tax economic yield or after-tax cash flow ("Net Economic
Return") has been adversely affected as a result of a change in the
Assumptions caused in whole or in part, directly or indirectly, by (x) any
act or failure to act of Lessee, (y) the breach of or inaccuracy of any of
Lessee's representations and warranties set forth in any Lease, or (z) any
use of any System by Lessee which would prevent deductions for depreciation
or cost recovery allowances as set forth above (a "Loss"), Lessee agrees to
pay to Lessor, on demand, and amount which will cause Lessor's then Net
Economic Return to equal the Net Economic Return that Lessor would have
received had such Loss not occurred. For purposes of this paragraph, the
term "Lessor" shall include any affiliated group of which Lessor is a
member for purposes of filing consolidated tax return. Lessee agrees that
it shall have no right to inspect the tax returns of Lessor.

9. SECTION 14 DEFAULT. The words "without Lessor's prior written consent" are
added at the end of subsection (f) of Section 14 prior to the semicolon.

The following is added as the second paragraph of Section 14.

With respect to Section 14 (f) above, Lessor consents to the Reorganization
defined and described as follows subject to the terms and conditions
setforth below. Lessee is currently a corporation incorporated under the
laws of the State of Nevada. On or before December 31, 1996, (a) Lessee
will incorporate a wholly owned subsidiary under the laws of the State of
Delaware under a name yet to be determined, and (b) merge the Nevada
corporation into the Delaware corporation. The Nevada corporation will be
merged out of existence with the Delaware corporation being the surviving
corporation. As a result of the merger, all assets and liabilities of the
Nevada corporation will be assets and liabilities of the Delaware
corporation and all of the outstanding capital stock of the Nevada
corporation will be exchanged by the shareholders for the common stock of
the Delaware corporation. The foregoing is collectively called
"Reorganization." Lessor's consent to this Reorganization is conditioned
upon Lessee providing Lessor within five days of the date of
Reorganization, the following: (a) a certified copy of the Articles of
incorporation showing the name of the reorganized entity, (b) appropriate
UCC financing statements, and (c) a document evidencing the assumption by
the reorganized entity of all obligations of Lessee under this Lease, all
of which shall be in a form and substance satisfactory to Lessor.

10. SECTION 17. ORGANIZATION AND AUTHORITY. The text of Section 17 is deleted in
its entirety and the following substituted in lieu thereof:

Lessee is duly organized, validly existing, and in good standing under the
laws of the state of its formation and in any jurisdiction where a System
is located. Lessee has the corporate power and authority to execute,
deliver, and perform each Lease. The person executing this Agreement and
any Schedules on behalf of Leases has been given authority to bind the
Lessee, and each Lease constitutes or will constitute a legally binding and
enforceable obligation of the Lessee, except as such enforcement may be
limited by provision of applicable bankruptcy, insolvency, moratorium, or
similar laws affecting the rights of creditors generally. The execution,
deliver, and performance of each Lease is not and will not be in
contravention of, or will not result in a breach of, any of the terms of
Lessee's organizational documents, and any agreements, contracts, or
instruments to which Lessee is a party or under which it is bound;
provided, however, that Lessee shall not be deemed to have violated this
representation as a result of any failure to comply that would not have a
Material Advance Effect.

11. SECTION 19. JURISDICTION AND GOVERNING LAW. The text of Section 19 is
deleted and the following substituted in lieu thereof

EACH LEASE SHALL BE GOVERNED BY THE LAWS OF THE STATE OF CALIFORNIA.

12. SECTION 20. MISCELLANEOUS. The text of subsection (d) is deleted.

The following new sections are added to the Agreement.

Page 2 of 5

<PAGE> 5
21. AFFIRMATIVE COVENANTS. In addition to other covenants set forth herein,
Lessee hereby agrees that as long as this Agreement remains in effect or any
amount is owing to Lessor or under any Lease, Lessee shall keep and perform
fully each and all of the following covenants. Lessee shall:

(a) Maintain it corporate existence, good standing and rights in full force
and effect in its jurisdiction of incorporation. Lessee shall qualify and
remain qualified and in good standing as a foreign corporation in each
jurisdiction in which failure to receive or retain such qualification would
have a Material Advance Effect on the business, operations or financial
condition of Lessee as a whole.

(b) Comply with all laws applicable to Lessee or its properties (including,
without limitation, any employee benefit law, and tax law, securities law,
product safety law, occupational safety or health law, communications and
utilities law, environmental protection or pollution control law, and
hazardous waste or toxic substances management, handling or disposal law)
in all respect, provided that Lessee shall not be deemed to be in violation
of this Section as a result of any failures to comply which would not
results in fines, penalties, injunctive relief or other civil or criminal
liabilities which, in the aggregate, would have a Material Advance Effect.

(c) Lessee shall at all times obtain and maintain in force all
authorizations, permits, consents, approvals, licenses, franchises,
exemptions and other action by, and all registrations, qualifications,
designations, declarations and other filings with, any governmental
authority necessary in connection with execution and delivery of this
Agreement, consummation of the transactions herein or therein contemplated,
performance of or compliance with the terms and condition hereof or thereof
or to ensure the legality, validity and enforceability hereof or thereof
provided that Lessee shall not be deemed to be in violation of this Section
as a result of any failure to comply which would not have a Material
Advance Effect.

(d) Pay its taxes and discharge its liabilities as and when due, except if
contested in good faith by appropriate proceedings;

(e) Comply in all respects with all material agreements or instruments to
which it is a party or by which it or any of its properties are bound; and

(f) Notify Lessor at least sixty (60) days prior to the date of Mr.
Christopher Edgecomb ceases to be an employee.

In the event of Mr. Christopher Edgecomb to be an employee of Lessee, and
Lessor finds in its reasonable opinion that such cessation of employment
will have a Material Advance Effect on Lessee, Lessee shall, within thirty
(30) days of a receipt of a demand therefore, pay to Lessor (a) all Rent
and any and all amounts then due and unpaid and (b) all Rent and other
amounts to become due, by acceleration or otherwise discounted to present
value using a five percent (5%) simple interest rate per annum, or if such
rate is not permitted by law, then at the lowest permitted rate. Lessee
shall either immediately return the System to Lessor or purchase the System
for its then fair market value. Notwithstanding the foregoing, the
preceding requirement shall be eliminated upon the occurrence of one of the
following (a) NTFC receives satisfactory evidence that the Lessee has
successfully completed an initial public offering of its stock in an amount
not less than fifteen million dollars: or (b) NTFC determines that the
Lessee has maintained a Debt Service Coverage Ratio in excess of 2.5:1 for
two consecutive fiscal years.

22. FINANCIAL COVENANTS. In addition to other covenants set forth herein, Lessee
hereby agrees that as long as this Agreement remains in effect or any amount is
owing to Lessor or under any Lease, Lessee will comply with the following ratios
and covenants on a consolidated and non-consolidated basis as such covenants may
be adjusted in accordance with this Section;

(a) A ratio of Current Assets to Current Liabilities of greater than
1.10:1.

(b) Tangible Effective Net Worth in an amount not less than $17,500,000 as
of 12/31/96, increasing to $22,500,000 by 6/30/97.

(c) A ratio of Total Liabilities (less Subordinated Debt) to Tangible
Effective Net Worth of less than 2.5:1.00 at 12/31/96, 3.0:1.00 at 3/31/97
and 2.75:1 at 6/30/97.

(d) Net Income after taxes not less than $500,000 at 12/3196, $750,000 at
3/31/97 and $1,000,000 at 6/30/97.

(e) A ratio, calculated in arrears on a rolling four quarter basis, of Cash
Flow to Debt Service plus capital expenditures of not less than 1.75:1 at
12/31/96, 1.50:1 at 3/31/97 and 1.75:1 at 6/30/97

In the event the covenants contained in the Revolving Credit Loan and Security
Agreement dated October 4, 1996 between Lessee and Metrobank ("Metrobank Loan")
are amended, without further action on the part of Lessor and Lessee, the
covenants contained in this Section shall be automatically amended to the extent
necessary to be identical to the respective covenants in the Metrobank Loan, as
amended.

23. REPORTING REQUIREMENTS. Lessee shall furnish to Lessor each of the following
items:

(a) As soon as practicable, and in any event within ninety (90) days after
the close of each fiscal year of Lessee, Lessee shall furnish or cause to
be furnished to Lessor consolidated statement of income, cash flow and
retained earnings of Lessee for such fiscal year and the consolidated
balance sheet of Lessee as of the close of such fiscal year, and notes to
each, all in reasonable detail, and, beginning with Lessee's second full
fiscal year, setting forth in comparative form the corresponding figures
for the preceding fiscal year, with such consolidated statements and
balance sheet to be certified (without qualification) by independent
certified public accountants of recognized national standing selected by
Lessee and reasonably satisfactory to Lessor. In addition, Lessee shall
furnish consolidating work papers for the statements of income and balance
sheet of Lessee an unaudited statement of all consolidating eliminations.

(b) Within thirty (30) days after the last Business Day of each month
(other than the last month of each fiscal year), Lessee shall furnish to

Page 3 of 5
<PAGE> 6
Lessor (i) unaudited consolidated statements of income, cash flow and
retained earnings for Lessee for such month and for the period from the
beginning of Lessee's then current fiscal year to the end of such month,
and an unaudited consolidated balance sheet of Lessee as of the end of such
month, all in reasonable detail and certified by a responsible officer of
Lessee as presenting fairly the financial position of Lessee as of the end
of such month and the results of their operations and the changes in their
financial position for such month, in conformity with GAAP applied in a
manner consistent with that of the most recent audited financial statements
furnished to Lessor, subject to year end audit adjustments, and (ii) an
aging of accounts payable and accounts receivable.

(c) As soon as practical, and in any event within twenty (20) days of a
receipt of a request therefore, Lessee shall provide Lessor with such
other information concerning its business, records or financial conditions
as Lessor may reasonably request including annual updates of five year
projections.

24. Definitions. In addition to other words and terms defined elsewhere in a
Lease, the following words and terms shall have the following meanings unless
the context otherwise clearly requires.

"Business Day" means a day other than a Saturday, Sunday or other day on
which commercial banks in Nashville, Tennessee or California are authorized
law to close.

"Cash Flow" means during any fiscal period of Lessee, the sum of (i) net
income (or loss) (which may be a positive or negative number) for such
period plus (ii) all non-cash items deducted in determining such net income
(or loss), minus (iii) all non-cash items added in determining such net
income (or loss) during such period, less (iv) any equity payments or
payments on Subordinated Debt made during such period.

"Current Assets" means, as of any applicable date of determination, all
cash, non-affiliated customer receivables, United States government
securities, claims against the United States government, and inventories.

"Current Liabilities" means, as of any applicable date of determination,
(i) all liabilities of a Person that should be classified as current in
accordance with GAAP, including without limitation any portion of the
principal of the indebtedness classified as current, plus (ii) to the
extent not otherwise included, all liabilities of the Lessee to any of its
affiliates whether or not classified as current in accordance with GAAP.

"Debt service" means for any fiscal period of Lessee, the sum of all
principal and interest payments that Lessee is required to make during such
period on account of all of its indebtedness including, without limitation,
(a) amounts due during such period on account of capitalized leases, (b)
the then current portion of any long-term indebtedness, (c) amounts due on
short-term indebtedness, and (d) amounts due under this Agreement or any
lease.

"Debt Service Coverage Ratio" means at the end of any fiscal period, the
ratio of Lessee's Cash Flow for such fiscal period to Lessee's Debt Service
for such fiscal period.

"GAAP" means as of any applicable period, generally accepted accounting
principles in effect during such period.

"Material Adverse Effect" means a material adverse effect on, or material
adverse change in, all cases whether attributable to a single event or an
aggregation of circumstances or events (i) the business operations or
financial condition of Lessee, (ii) the ability of Lessees to perform
obligations under any Lease, or (iii) Lessor's ability to enforce the
rights and remedies granted under any Lease.

"Net Income" means the net income (or loss) of a person for any period
determined in accordance with GAAP but excluding in any event:

(a) any gains or losses on the sale or other disposition, not in the
ordinary course of business, of investments fixed or capital assets, and
any taxes on the excluded gains and any tax deductions or credits on
account on any excluded losses; and

(b) in the case of the Lessee, net earning of any Person in which Lessee
has an ownership interest, unless such net earning shall have actually been
received by Lessee in the form of cash distributions.

"Person" or "person" means and includes any individual, corporation,
partnership, joint venture, association, trust, incorporated association,
joint stock company, government, municipality, political subdivision or
agency, or other entity.

"Subordinated Debt" means indebtedness of the Lessee to third parties
which has been subordinated to Lessee's obligations to Lessor pursuant to a
subordination agreement in form and content satisfactory to Lessor.

"Tangible Effective Net Worth" means net worth as determined in accordance
with GAAP consistently applied, increased by Subordinated Debt, if any, and
decreased by the following: patents, licenses, goodwill, subscription
lists, organization expenses, trade receivable converted to notes, money
due from affiliates (including officers, directors, subsidiaries and
commonly held companies).

"Total Liabilities" means the total of all items of indebtedness,
obligations or liability which, in accordance with GAAP consistently
applied, would be included in determining the total liabilities of the
Lessee as of the date Total Liabilities is to be determined, including
without limitation (a) all obligations secured by any mortgage, pledge,
security interest or other lien on property owned or acquired, whether or
not the obligations secured thereby shall have been assumed; (b) all
obligations which are capitalized lease obligations; and (c) all
guaranties, endorsements or other contingent or surety obligations with
respect to the indebtedness of others, whether or not reflected on the
balance sheets of the Lessee, including any obligation to furnish funds,
directly or indirectly through the purchase of goods, suppliers, services
or by the way of stock, capital
<PAGE> 7
contribution, advance or loan or any obligation to enter into a contract
for any of the foregoing.

All financial covenants shall be computed in accordance with GAAP
consistently applied except as otherwise specifically set forth in this
Agreement. All monies due from affiliates (including officers, directors
and shareholders) shall be excluded from Lessee's assets for all purposes
hereunder.
<PAGE> 8
Lessor NTFC Capital Corporation Agreement Addendum

Lessee Star Vending, Inc. Agreement No.
d/b/a Star Telecommunications, Inc. 54273

Contemporaneously with entering into the Agreement addendum dated October 31,
1996 relative to the Agreement referenced above, Lessee and Lessor agree to the
following amendment to Agreement Addendum:

1. SECTION 3. RENT AND PAYMENT. The table contained in Section 3 of the
Agreement Addendum is deleted and the following substituted in lieu thereof:

"For Leases with Purchase Option B (FMV):

<TABLE>
<CAPTION>
Lease Payment Nos. Lease Rate Factors Adjustment Factors
- ------------------ ------------------ ------------------
<S> <C> <C>
1-12 .013173 .0000180
13-14 .015808 .0000216
25-72 .018443 .0000251
</TABLE>

For Lease with Purchase Option A ($1.00):

<TABLE>
<CAPTION>
Lease Payment Nos. Lease Rate Factor Adjustment Factor
- ------------------ ------------------ ------------------
<S> <C> <C>
1-72 .019489 .000025
</TABLE>

NTFC CAPITAL CORPORATION STAR VENDING, INC
d/b/a STAR TELECOMMUNICATIONS, INC

BY /s/ L.W. Middleton BY /s/ Mary Casey
-------------------------------------- -----------------------------------

PRINT NAME L.W. Middleton PRINT NAME Mary Casey
----------------------------- --------------------------

TITLE Secretary DATE 12/31/96 TITLE President DATE 12/23/96
------------- -------------- --------------- ----------
<PAGE> 9
Lessor Equipment Schedule

NTFC CAPITAL CORPORATION

Lessee STAR VENDING, INC.
D/B/A STAR TELECOMMUNICATIONS, INC.

Billing Address Attention
740 STATE STREET MARY CASEY, PRESIDENT
SUITE 202

City State Zip Code
SANTA BARBARA CA 93101

Installation Site City County State Zip Code
624 SOUTH GRAND AVENUE LOS ANGELES LOS ANGELES CA 90017

Supplier Name
NW-CARRIER NETWORKS

Agreement No./Schedule No. Price
54273 / 54273 $3,200,000.00

Date of Schedule Initial Term
(months)
10/17/1996 072

Commitment Date Payment Period
10/10/96 /X/ Monthly / / Other________

<TABLE>
<CAPTION>
Payment Nos. Lease Rate Factor Rent
<S> <C> <C>
1 - 12 0.0131730 $42,153.60
13 - 24 0.0158080 $50,585.60
25 - 72 0.0184430 $59,017.60
</TABLE>

Purchase Option
/ / (A) $1.00 /X/ (B) FMV
/ / (C) ______________%

Advance Payment
$42,153.60

The Advance Payment shall be applied to the first 1 and last 0 Rent payment(s).

TERMS AND CONDITIONS (The reverse side contains Terms and Conditions which are
also a part of this Schedule)

The terms and conditions of the Master Lease Agreement between Lessor and Lessee
referenced above are made a part of this Schedule. Lessor and Lessee hereby
agree to the terms defined above and further agree as set forth herein.

1. ADVANCE PAYMENT: Lessee shall pay to Lessor, upon the execution and delivery
of this Schedule, the advance payment set forth above ("Advance Payment") in
consideration of the Lessor holding funds available to purchase the Equipment
and obtain the Software and as compensation for Lessor's review of Lessee's
credit and document preparation. Upon Lessor's acceptance of the Lease, the
Advance Payment shall be applied to the payment of Rent as set forth above. Any
Advance Payment shall be non-refundable if Lessee fails to timely provide all
documentation or satisfy all conditions required by this Lease.

2. PURCHASE PRICE PAYMENTS: Lessee acknowledges that it has signed and received
a copy of the Supplier Agreement. If Lessee is required to make payments to
Supplier under the Supplier Agreement prior to the Commencement Date ("Purchase
Price Payments"), Lessee requests Lessor to pay such payments subject to the
following terms and conditions. The Price will be increased by adding a price
adjustment for each Purchase Price Payment. Each such price adjustment shall be
computed by multiplying the Purchase Price Payment paid by Lessor to Supplier by
a rate equal to the "Base Lending Rate" from time to time designated by Citibank
N.A., NY, NY in effect on the date Lessor makes the first Purchase Price Payment
plus two and one-half percent, divided by 360, and multiplied by the actual
number of days elapsed from the date of the Purchase Price Payment to the
Commencement Date or, if the Lease does not commence, to the date Lessee refunds
the Purchase Price Payments to Lessor in accordance with Section 3. In no event
will all or any price adjustment(s) exceed any limits imposed by applicable law.
The periodic Rent shall be increased as a result of adding to the Price of the
System an amount equal to the total price adjustment(s).

3. ACCEPTANCE: Lessee agrees to accept the System for purposes of this Lease by
signing the Acceptance Certificate within ten (10) days after the System has met
the acceptance criteria specified in the Supplier Agreement. If Lessee fails or
refuses to sign the Acceptance Certificate within such (10) ten day period,
Lessor may declare Lessee's assignments and Lessor's agreement to pay the Price
set forth in Section 1 of the Agreement and Section 2 of this Schedule to be
null and void ab initio and thereupon the Lease shall terminate. Lessor shall
then have no obligations under the Lease and Lessee shall, within ten (10) days
of a demand therefore, immediately pay to Lessor all Purchase Price Payments and
all price adjustment(s) under Section 2 herein as well as Lessor's out-of-pocket
expenses.

4. MAINTENANCE, USE, AND OPERATION: At all times during the Term, at its sole
cost and expense, Lessee shall maintain the System in good repair, condition and
working order, ordinary wear and tear excepted. Lessee shall use the System and
all parts thereof for its designated purpose and in compliance with all
applicable laws, shall keep the System in its possession and control and shall
not permit the System to be moved from the Installation Site set forth above
without Lessor's prior written consent.

5. PERSONAL PROPERTY: The System is, and shall at all times remain, personal
property even if the Equipment is affixed or attached to real property or any
improvements thereon. At Lessor's request, Lessee shall, at no charge, promptly
affix to the System any tags, decals, or plates furnished by Lessor indicating
Lessor's interest in the System and Lessee shall not permit their removal or
concealment. At Lessee's expense, Lessee shall (a) at all times keep the System
free and clear of all liens and encumbrances, except those described in Section
6 and those arising through the actions of Lessor, and (b) otherwise cooperate
to defend lessor's interest in the System and to maintain the status of the
System and all parts thereof as personal property. If requested by Lessor,
Lessee will, at Lessee's expense, furnish a waiver of any interest in the System
from any party having an

A complete description of the System is set forth on the Equipment and Software
Listing attached hereto and made a part hereof.

NTFC CAPITAL CORPORATION

BY /s/ L. W. MIDDLETON
---------------------------------------
Authorized Representative

PRINT NAME L. W. Middleton
-------------------------------

TITLE Secretary DATE 12/17/96
------------------- ----------

STAR VENDING, INC.
D/B/A STAR TELECOMMUNICATIONS, INC.

BY /s/ MARY CASEY
---------------------------------------
Authorized Representative

PRINT NAME Mary Casey
-------------------------------

TITLE President DATE 11-5-96
------------------- ----------
<PAGE> 10
interest in the real estate or building in which the System is located. Lessor
may inspect the System and any related maintenance records at any time during
Lessee's normal business hours.

6. TRUE LEASE AND SECURITY INTEREST: If Lessee has selected Purchase Option B,
(a) Lessor holds title to the Equipment and the right to use the Software and
Lessor shall be entitled to all tax benefits resulting therefrom, (b) Lessee
shall have no right, title or interest therein, other than possession and use as
a lessee and non-exclusive sublicensee, and (c) Lessee and Lessor intend the
Lease to create a true lease and not a security interest, and the provisions of
this Section or the filing of any financing statements with respect to the Lease
shall not be deemed evidence of any contrary intent but of an attempt to protect
Lessor's rights and title. Regardless of the purchase option selected, and
without limiting or negating the foregoing sentence, to secure the performance
of Lessee's obligations under this Lease including, without limitation, the
repayment of any Purchase Price Payments, price adjustments and out-of-pocket
expenses under Section 3 above, Lessee hereby grants to Lessor a first priority
security interest in Lessee's existing and future right, title and interest in,
to and under (i) the System including all additions, attachments, accessions,
and leased Modifications and Additions (as defined in Section 7 below) thereto,
and replacements therefor, (ii) the applicable Supplier Agreement, and (iii) all
products and proceeds of the foregoing including, without limitation, insurance
proceeds, rents and all sums due or to become due to Lessee without respect to
any of the foregoing, and all monies received in respect thereof.

7. MODIFICATIONS, ADDITIONS AND ALTERATIONS: After the Commencement Date of this
Lease and without notice to Lessor, Lessee may, at Lessee's expense, alter or
modify any item of Equipment with an upgrade, accessory or any other equipment
that meets the specifications of the System's manufacturer for use on or in
connection with the System ("Modification") or with Software or other associated
items or materials that meet the specifications of such manufacturer and are to
be use on or in connection with such System ("Addition"). Any other modification
or addition ("Alteration") shall be permitted only upon written notice to Lessor
and at Lessee's expense and risk, and any such Alteration shall be removed and
the System restored to its normal, unaltered condition at Lessee's expense prior
to its return to Lessor. If not removed upon return of the System, any
Modification or Addition shall become, without charge, the property of Lessor
free and clear of all encumbrances. Restoration will include replacement of any
parts removed in connection with the installation of an Alteration, Modification
or Addition. Any Equipment or Software installed in connection with warranty or
maintenance service or manufacturer's upgrades provided at no charge to Lessee
shall be the property of Lessor.

8. LEASES FOR MODIFICATIONS AND ADDITIONS: During the Term of this Lease, at
Lessee's request, Lessor may elect to lease to Lessee Modifications and
Additions ("CSO Equipment") subject to the terms of this Lease. While the CSO
Equipment shall be added to and become a part of this Lease as of the CSO
Commencement Date (as defined below), the CSO Lease Addendum shall be assigned a
separate Schedule number. The lease for CSO Equipment shall expire at the same
time as this Lease. The applicable Lease Rate Factor shall be Lessor's
then-current Lease Rate Factor for similar transactions based upon the remaining
length of the Term. The rent for CSO Equipment shall be determined by Lessor who
shall adjust the then-current Rent and notify Lessee in writing of such
adjustment(s), which shall be effective as of the first day of the month
following the date of the notice (or the date of the notice if it is the first
day of the month) ("CSO Commencement Date"). Any adjustment notice shall be
added to and become a part of this Lease.

CSO Equipment must be ordered by Lessee from the Supplier. On the date any CSO
Equipment is delivered to Lessee, Supplier shall pass title to such CSO
Equipment (other than any Software which shall be licensed and/or sublicensed)
directly to Lessor. Such title shall be good and marketable and free and clear
of any and all liens and encumbrances of any nature whatsoever. Lessor shall
promptly pay to Supplier the appropriate price of the CSO Equipment after the
later of (a) the date the CSO Equipment is installed and functioning, or (b)
Lessor's receipt of a full and complete listing of the CSO Equipment and the
Supplier's invoice. No interest shall be payable by Lessor to Supplier with
respect to such payment. Lessor's agreement to lease any CSO Equipment is
subject to the condition that the Price payable to Supplier with respect thereto
shall not exceed $100,000.00 or be less than $1,000.00, and is subject to
satisfactory credit review by Lessor of Lessee's credit at the time of the CSO.

9. RETURN OF SYSTEM: (a) Upon any termination of this Lease pursuant to the term
hereof prior to the end of the Term, (b) at Lessor's request upon the occurrence
of an Event of Default, or (c) if Lessee has not exercised its Purchase Option
set forth herein at the end of the applicable Term, Lessee shall, at its own
risk and sole expense, immediately return the System to Lessor by properly
removing, disassembling and packing it for shipment, loading it on board a
carrier acceptable to Lessor, and shipping the same to a destination in the
continental United States specified by Lessor, freight and insurance prepaid.
The returned System shall be in the same condition and operating order as
existed when received, ordinary wear and tear excepted. If the Lessee does not
immediately return the System to Lessor as required, Lessee shall pay to Lessor,
on demand, an amount equal to the then-current Rent prorated on a daily basis
for each day from and including the termination or expiration date of the Lease
through and including the day Lessee ships the System to Lessor in accordance
with this Section . Lessee shall pay to Lessor, upon written demand, any amount
necessary to place the System in good repair, condition and working order,
ordinary wear and tear excepted.

10. PURCHASE OPTION: At the expiration of the initial Term or any Term, if
Lessee has performed all terms and conditions of the Lease, except the return of
the System pursuant ot Section 9 herein, Lessee shall have the right to purchase
all, but not less than all, of the Equipment and all leased Modifications and to
receive an assignment of all, but not less than all, non-exclusive sublicenses
to use the Software and Additions, if any, for the purchase price described
below subject to the following terms and conditions:

If Lessee has elected Purchase Option B or C above, Lessee shall provide written
notice to Lessor at least six (6) months prior to such purchase that Lessee has
elected to exercise its Purchase Option. In any event, upon exercise of its
purchase option, Lessee shall purchase the Equipment and all leased
Modifications and obtain a non-exclusive sublicense to use the associated
Software and Additions, AS-IS, WHERE-IS, WITH ALL FAULTS AND SUBJECT TO THE SAME
DISCLAIMERS OF WARRANTIES AND DAMAGES AS SET FORTH IN SECTION 9 OF THE
AGREEMENT. Lessee also shall be responsible for the payment of any sales tax or
other fees in connection with Lessee's exercise of this Purchase Option. The
purchase price shall be due and payable to Lessor by Lessee at the expiration of
the applicable Term.

Upon satisfaction by Lessee of the purchase conditions, Lessor's sole and
exclusive obligations under this Purchase Option shall be to deliver to Lessee
good title to such Equipment and leased Modifications such as Lessor received
from the Supplier, to assign to Lessee a non-exclusive sublicense, as described
in the Supplier Agreement, to use the associated Software and Additions, free
and clear of all liens, encumbrances and rights of others arising solely out of
or created by Lessor's actions. Lessor's assignment of the sublicense is limited
to such sublicense as Lessor can assign without incurring further cost and is
subject to all applicable terms and conditions of the license and/or sublicense
set forth in the Supplier Agreement.

The purchase price shall be as follows:

(a) Purchase Option A. If Lessee has selected Purchase Option A above, the
purchase price shall be $1.00.

(b) Purchase Option B. If Lessee has selected Purchase Option B above, the
purchase price shall be the installed fair market value thereof assuming the
System is in good repair, condition and working order, ordinary wear and tear
excepted ("FMV"). The FMV shall be determined by Lessor and Lessee. If Lessor
and Lessee are unable to agree, the FMV shall be determined by an independent
appraiser selected by Lessor and approved by Lessee which approval shall not be
unreasonably withheld or delayed. Lessee shall bear the fees of the appraiser.

(c) Purchase Option C. If Lessor has selected Purchase Option C, the purchase
price shall be the product obtained by multiplying the Price, as it may have
been adjusted, by the percent set forth in Option C above.

11. LEASE RATE: By signing a Lease with a Purchase Option A or Purchase Option
C, Lessee agrees to pay Rent (consisting of a principal payment for Equipment
and, if applicable, Software, Maintenance, and/or other costs) based on the
Price of such items and a Lease charge derived from an implied interest rate
("Lease Rate"). The Lease Rate, as used to calculate the portion of each monthly
Rent payment that constitutes a lease charge, may be determined by applying to
the Price, the rate that will amortize such Price (adjusting for any Advance
Rent) down to the amount of the Purchase Option at a constant rate over the
Initial Term by payment of the monthly Rent. The Lease Rate is the constant rate
referred to in the preceding sentence. The Lease Rate can also be calculated
using the Price as the present value, the Purchase Option as the future value,
the Rent as the payment and the stated Term.
<PAGE> 11
Lessor Equipment and Software Listing
NTFC CAPITAL CORPORATION

Lessee STAR VENDING, INC. Agreement No./Schedule No.
D/B/A STAR TELECOMMUNICATIONS, INC. 54273 / 54273

Lessor and Lessee agree that the following described Equipment and Software are
subject to the Master Lease Agreement and Schedule referenced above.

1 DMS 250/300 SWITCH
<PAGE> 12
Lessor Schedule Addendum
NTFC CAPITAL CORPORATION

Lessee Star Vending, Inc. Agreement No./Schedule No.
d/b/a Star Technologies, Inc. 54273 / 54273

Contemporaneously with entering into the Schedule to the Agreement referenced
above, Lessee and Lessor agree to the following amendments to the Schedule.

1. SECTION 1. ADVANCE PAYMENT. The word "Any" is deleted as the first word of
the last sentence of Section 1 and the words "An amount equal to fifty percent
(50%) of any" substituted in lieu thereof.

2. SECTION 4. MAINTENANCE, USE AND OPERATION. The words "to the extent such
release may be obtained from or through Supplier" are added at the end of the
second sentence of Section 4.

3. SECTION 5. PERSONAL PROPERTY. The words "upon not less than forty-eight (48)
hours prior written notice by Lessor to Lessee" are added as the final words of
the last sentence of Section 5.

NTFC CAPITAL CORPORATION

BY /s/ L. W. MIDDLETON
------------------------------------
Authorized Representative

PRINT NAME L. W. Middleton
----------------------------
TITLE Secretary DATE 12/17/96
---------------- -----------

STAR VENDING, INC.
d/b/a STAR TELECOMMUNICATIONS, INC.

BY /s/ MARY CASEY
------------------------------------
Authorized Representative

PRINT NAME Mary Casey
----------------------------

TITLE President DATE 11-5-96
---------------- -----------

<PAGE> 13
Lessor Acceptance Certificate
NTFC CAPITAL CORPORATION

Lessee STAR VENDING, INC. Agreement No./Schedule No.
D/B/A STAR TELECOMMUNICATIONS, INC. 54273 / 54273

This Acceptance Certificate is made with respect to that Master Lease Agreement
and Schedule referenced above. Capitalized terms used herein shall have the same
meanings assigned to them in the Agreement and the Schedule.

On behalf of Lessee, I hereby certify that all of the System described in the
Schedule to the Agreement has been delivered to and received by the Lessee. The
System has been examined by the Lessee and is in good operating order and
condition and is satisfactory to the Lessee. Therefore, the System is
irrevocably accepted by the Lessee for all purposes under the Lease as of the
following date:

11-5-96
- -----------------------------------------
(Insert Date of Acceptance)

By /s/ MARY CASEY
--------------------------------------
Authorized Representative

Print Name Mary Casey
------------------------------

Title President Date 11-5-96
--------------- -------------
<PAGE> 14
Lessor Equipment Schedule
NTFC CAPITAL CORPORATION

Lessee STAR VENDING, INC.
D/B/A STAR TELECOMMUNICATIONS, INC.

Billing Address Attention
740 STATE STREET MARY CASEY, PRESIDENT
SUITE 202

City State Zip Code
SANTA BARBARA CA 93101

Installation Site City County State Zip Code
60 HUDSON STREET SUITE 1215 NEW YORK, NEW YORK, NY 10013

Supplier Name
NORTEL COMMUNICATIONS SYSTEMS, INC.

Agreement No./Schedule No. Price
54273/3002296-002 $3,200,000.00

Date of Schedule Initial Term
(months)
12/18/96 072

Commitment Date Payment Period

12-20-96 /X/ Monthly / / Other_________

<TABLE>
<CAPTION>
Payment Nos. Lease Rate Factor Rent
<S> <C> <C>
1 - 72 .019489 $62,364.80
</TABLE>

Purchase Option
/X/ (A) $1.00 / / (B) FMV
/ / (C) ______________%

Advance Payment
$62,364.80
--------------------

The Advance Payment shall be applied to the first 1 and last 0 Rent payment(s).

TERMS AND CONDITIONS (The reverse side contains Terms and Conditions which are
also a part of this Schedule)

5. PERSONAL PROPERTY: The System is, and shall at all times remain, personal
property even if the Equipment is affixed or attached to real property or any
improvements thereon. At Lessor's request, Lessee shall, at no charge, promptly
affix to the System any tags, decals, or plates furnished by Lessor indicating
Lessor's interest in the System and Lessee shall not permit their removal or
concealment. At Lessee's expense, Lessee shall (a) at all times keep the System
free and clear of all liens and encumbrances, except those described in Section
6 and those arising through the actions of Lessor, and (b) otherwise cooperate
to defend Lessor's interest in the System and to maintain the status of the
System and all parts thereof as personal property. If requested by Lessor,
Lessee will, at Lessee's expense, furnish a waiver of any interest in the System
from any party having an

A complete description of the System is set forth on the Equipment and Software
Listing attached hereto and made a part hereof.

NTFC CAPITAL CORPORATION

BY /s/ L. W. MIDDLETON
-----------------------------------------
Authorized Representative

PRINT NAME L. W. Middleton
---------------------------------

TITLE Secretary DATE 12/31/96
----------------- -------------

STAR VENDING, INC.
D/B/A STAR TELECOMMUNICATIONS, INC.

BY /s/ MARY CASEY
-----------------------------------------
Authorized Representative

PRINT NAME Mary Casey
---------------------------------
TITLE President DATE 12-23-96
----------------- -------------
<PAGE> 15
Lessor Schedule Addendum
NTFC CAPITAL CORPORATION

Lessee Star Vending, Inc. Agreement No./Schedule No.
d/b/a Star Telecommunications, Inc. 54273 / 3002296-002

Contemporaneously with entering into the Schedule to the Agreement referenced
above, Lessee and Lessor agree to the following amendments to the Schedule.

1. SECTION 1. ADVANCE PAYMENT. The word "Any" is deleted as the first word of
the last sentence of Section 1 and the words "An amount equal to fifty percent
(50%) of any" substituted in lieu thereof.

2. SECTION 4. MAINTENANCE, USE AND OPERATION. The words "to the extent such
release may be obtained from or through Supplier" are added at the end of the
second sentence of Section 4.

3. SECTION 5. PERSONAL PROPERTY. The words "upon not less than forty-eight (48)
hours prior written notice by Lessor to Lessee" are added as the final words of
the last sentence of Section 5.

NTFC CAPITAL CORPORATION

BY /s/ L. W. MIDDLETON
---------------------------------------
Authorized Representative

PRINT NAME L. W. Middleton
-------------------------------

TITLE Secretary DATE 12/31/96
---------------- -----------

STAR VENDING, INC.
d/b/a STAR TELECOMMUNICATIONS, INC.

BY /s/ MARY CASEY
---------------------------------------
Authorized Representative

PRINT NAME Mary Casey
-------------------------------

TITLE President DATE 12-23-96
---------------- -----------
<PAGE> 16
Lessor Equipment and Software Listing
NTFC CAPITAL CORPORATION

Lessee STAR VENDING, INC. Agreement No./Schedule No.
D/B/A STAR TELECOMMUNICATIONS, INC. 54273/3002296-002

Lessor and Lessee agree that the following described Equipment and Software are
subject to the Master Lease Agreement and Schedule referenced above.

DMS 250/300 SWITCH
<PAGE> 17
STAR VENDING, INC. d/b/a/ STAR TELECOMMUNICATIONS, INC.

ACCOUNT SCHEDULE #3002296-002

Legal Description of Property:

BEGINNING, at the corner formed by the intersection of the northerly
side of Thomas Street and the westerly side of West Broadway, running thence
northerly along the westerly side of West Broadway 180 feet, more or less, to
the southerly side of Worth Street; thence westerly along the southerly side of
Worth Street 329 feet, more or less, to the northeasterly side of Hudson Street,
thence southeasterly along the northeasterly side of Hudson Street 193 feet 5
inches to the northerly side of Thomas Street, thence easterly along the
northerly side of Thomas Street 254 feet, more or less, to the westerly side of
West Broadway and the point or place of beginning.
<PAGE> 18
Lessor Acceptance Certificate
NTFC CAPITAL CORPORATION

Lessee STAR VENDING, INC. Agreement No./Schedule No.
D/B/A STAR TELECOMMUNICATIONS, INC. 54273/3002296-002

December 17, 1996
- --------------------------------------
(Insert Date of Acceptance)

By /s/ MARY CASEY
-----------------------------------
Authorized Representative

Print Name Mary Casey
---------------------------

Title President Date 12-23-96
--------------- -----------

<PAGE> 1
EXHIBIT 10.23

LINE OF CREDIT PROMISSORY NOTE

1. FUNDAMENTAL PROVISIONS

The following terms will be used as defined terms in this Note:

Date of this Note: NOVEMBER 7, 1995

Borrower: STAR VENDING, INC.

Lender: CHRISTOPHER E. EDGECOMB

Principal Amount: $248,042.49

Interest Rate: 5.90 PERCENT PER ANNUM

Maturity Date: NOVEMBER 6, 1996

Prepayment Charge: NONE

Default Rate: THE MAXIMUM RATE PERMITTED BY CALIFORNIA
LAW, NOT TO EXCEED FIFTEEN PERCENT (15%)

2. PROMISE TO PAY

For good and valuable consideration, Borrower promises to pay to
Lender, or order, the Principal Amount, or so much thereof as is advanced
(pursuant to the terms of this Note) and outstanding, with interest at the
Interest Rate from the dates of the respective advances by Lender, or at the
Default Rate as hereinafter provided, until paid, in accordance with the terms
contained herein. The unpaid balance of this obligation at any time shall be the
total amounts advanced hereunder less the amount of payments made hereon by or
for Maker, which balance may be endorsed from time to time by Holder at Exhibit
A hereto. Interest shall be computed on the basis of a 360-day year and the
actual number of days elapsed. Should any interest not be paid when due, it
shall thereafter accrue interest as principal.

3. LIMITATIONS ON ADVANCES

The total advances hereunder may not exceed $248,042.49.
Advances of the amounts described in this Note may be made by Lender to
Borrower at the oral or written request of Mr. Christopher E. Edgecomb,
President.

4. PAYMENTS

- 1 -
<PAGE> 2
The Principal Amount (as advanced hereunder from time to time) and all
accrued and unpaid interest shall be due and payable on the Maturity Date. All
payments prior to the Maturity Date, if any, shall be applied first to accrued
interest, and then to the principal balance.

5. PLACE AND MANNER OF PAYMENT

All payments shall be made to Lender at 4167 Creciente Drive, Santa
Barbara, California or at such other place as the holder of this Note may from
time to time designate. All payments shall be made in lawful money of the United
States. Checks will constitute payment only when collected.

6. LATE CHARGES

If Maker fails to pay any installment of interest on this Note within
ten (10) days when due, then (in addition to any other remedies available to
Holder) Maker shall be subject to and shall pay a late charge of ten percent
(10%) of the amount of the installment due.

7. DEFAULT INTEREST RATE

Commencing on the first to occur of (a) the Maturity Date, or (b) the
occurrence of an Event of Default followed by the acceleration of this Note and
the lapse of such time (if any) as may then be required by law during which
lender must allow Borrower to reinstate the obligation evidenced hereby as if no
acceleration had occurred, and continuing thereafter until this Note has been
paid in full, all amounts due and owing under this Note shall bear interest at
the Default Rate. The provisions of this Paragraph shall not limit the Lender's
right to compel prompt performance hereunder.

8. PREPAYMENTS

All amounts due under this Note may be prepaid without penalty.

9. EVENT OF DEFAULT

At the option of Lender, it shall be an "Event of Default" hereunder if
(a) Borrower fails to pay when due any sum payable under this Note, (b) Borrower
fails to perform any obligation or commits a breach of any agreement set forth
in this Note, or (c) if Borrower makes an assignment for the benefit of
creditors, or if a petition is filed by or against Borrower under the provisions
of the Bankruptcy Code.

10. ACCELERATION

- 2 -
<PAGE> 3
Upon the occurrence of an Event of Default, then, at the option of
Lender, the entire sum of principal, interest, and all other charges due under
this Note shall become immediately due and payable.

11. ATTORNEYS' FEES

If Lender refers this Note to an attorney to enforce, construe or
defend any provision hereof, or as a consequence of any Event of Default
hereunder, with or without the filing of any legal action or proceeding,
Borrower shall pay to Lender upon demand the amount of all attorneys' fees,
costs and other expenses incurred by Lender in connection therewith, together
with interest thereon from the date of demand at the rate applicable to the
principal balance of this Note. The reference to "attorneys' fees" in this
Paragraph shall include without limitation such amounts as may then be charged
by Lender for legal services furnished by attorneys in the employ of Lender, at
rates not exceeding those that would be charged by outside attorneys for
comparable services.

12. WAIVER

No delay or omission of Lender in exercising any right or power arising
in connection with any Event of Default shall be construed as a waiver or as an
acquiescence therein, nor shall any single or partial exercise thereof preclude
any further exercise thereof. Lender may, at his option, waive any of the
conditions herein and no such waiver shall be deemed to be a waiver of Lender's
rights hereunder, but rather shall be deemed to have been made in pursuance of
this Note and not in modification thereof. No waiver of any Event of Default
shall be construed to be a waiver of or acquiescence in or consent to any
preceding or subsequent Event of Default.

13. WAIVER OF NOTICES

Borrower, and all endorsers, all guarantors and all persons liable or
to become liable on this Note waive presentment, protest, demand, notice of
protest, dishonor or non-payment of this Note, and any and all other notices or
matters of a like nature, consent to any and all renewals and extensions of the
time of payment hereto, and agree further that at any time and from time to time
without notice, the terms of payment hereof may be modified, or the security
described in any of the Loan Documents at any time securing this Note may be
released in whole or in part, or increased, changed or exchanged by agreement
between the holder hereof and any owner of the Collateral or other collateral
affected thereby, without in any way affecting the liability of any party to
this Note, any endorser, any guarantor, or any person liable or to become liable
with respect

- 3 -
<PAGE> 4
to any indebtedness evidenced hereby.

14. MISCELLANEOUS PROVISIONS

No provision of this Note may be amended, modified, supplemented,
changed, waived, discharged or terminated unless Lender consents thereto in
writing. In case any one or more of the provisions contained in this Note should
be held to be invalid, illegal or unenforceable in any respect, the validity,
legality and enforceability of the remaining provisions contained herein shall
not in any way be affected or impaired thereby. This Note shall be binding upon
and inure to the benefit of Borrower, Lender and their respective successors and
assigns. This Note is not assumable. The Note Holder shall have the right to
sell, assign or otherwise transfer, either in part or in its entirety, this Note
or the Loan Documents, without Borrower's consent, with any such transferee
being entitled to be treated in all favorable respects as a holder or holders in
due course. Time is of the essence of this Note and the performance of each of
the covenants and agreements contained herein. This Note shall be governed by
and construed in accordance with the laws of the State of California. If
Borrower consists of more than one person or entity, the obligations of Borrower
shall be the joint and several obligations of all such persons or entities, and
any married person who executes this Note agrees that recourse may be had
against his or her separate property for satisfaction of his or her obligations
hereunder.

IN WITNESS WHEREOF, Borrower has executed this Note on the Date of this
Note.

BORROWER:

STAR VENDING, INC.,
a Nevada corporation

By
--------------------------------------
Christopher E. Edgecomb, President

By
--------------------------------------
Mary Casey, Secretary

- 4 -
<PAGE> 5
EXHIBIT A

Outstanding balances, as enclosed by holder

- 5 -
<PAGE> 6
MODIFICATION OF LINE OF CREDIT PROMISSORY NOTE

THIS MODIFICATION OF LINE OF CREDIT PROMISSORY NOTE (the
"Modification") is executed between STAR VENDING, INC., a Nevada corporation
(the "Borrower") and CHRISTOPHER E. EDGECOMB (the "Lender"). Borrower previously
executed that certain Line of Credit Promissory Note dated November 7, 1995 (the
"Note") (see copy attached as Exhibit A), under which Borrower promised to pay
certain amounts to Lender under the terms and conditions set forth in such Note.
The full amount of the principal and accrued and unpaid interest of the Note
became due and payable on November 6, 1996. Borrower failed to pay the full
amount owed at the Maturity Date, as set forth in the Note, which failure
constitutes an Event of Default, as defined in the Note. Lender has waived his
right to take any actions allowed under the Note resulting from Borrower's
default, and has agreed with Borrower to modify the terms of the Note as
follows:

1. MODIFICATION DATE. The date of this modification of the Note
is December 31, 1996 (the "Modification Date").

2. PRINCIPAL AMOUNT. The total remaining amount owed under the
Note as December 31, 1996 is $248,042.49 (the "Principal
Amount").

3. INTEREST RATE. The interest rate of the Note from the
Modification Date through Maturity Date shall be nine percent
(9%) per annum.

4. MATURITY DATE. The Maturity Date for the Note shall be March
30, 1998.

5. NO OTHER MODIFICATIONS. In all other respects, the terms and
conditions of the Note shall remain unchanged.

IN WITNESS WHEREOF, the parties have executed this Modification
effective as of the Modification Date.

BORROWER: LENDER:

STAR VENDING, INC.

By:
------------------------------------- -------------------------------------
Mary Casey, President Christopher E. Edgecomb

- 1 -
<PAGE> 7
EXHIBIT A

ORIGINAL PROMISSORY NOTE

<PAGE> 1
EXHIBIT 10.24

- -------------------------------------------------------------------------------
ALLIANZ FINANCIAL CENTRE
- -------------------------------------------------------------------------------

OFFICE LEASE AGREEMENT

Between

BEVERLY HILLS CENTER LLC
as Landlord

and

STAR VENDING, INC.
as Tenant

Dated

January 29, 1997

<PAGE> 2
TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
<S> <C> <C>
1. DEFINITIONS AND BASIC PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. GRANTING CLAUSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
3. EARLY OCCUPANCY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
4. RENTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
5. USE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
6. SERVICES TO BE PROVIDED BY LANDLORD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
7. REPAIR AND MAINTENANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
8. FIRE AND OTHER CASUALTY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
9. COMPLIANCE WITH LAWS AND USAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
10. LIABILITY AND INDEMNITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
11. ADDITIONS AND FIXTURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
12. ASSIGNMENT AND SUBLETTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
13. SUBORDINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
14. OPERATING EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
15. EMINENT DOMAIN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
16. ACCESS BY LANDLORD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
17. LANDLORD'S LIEN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
18. DEFAULTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
19. NONWAIVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
20. HOLDING OVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
21. COMMON AREA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
22. RULES AND REGULATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
23. TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
24. INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
25. PARKING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
</TABLE>

i
<PAGE> 3
<TABLE>
<S> <C> <C>
26. PERSONAL LIABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
27. NOTICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
28. LANDLORD'S MORTGAGEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
29. BROKERAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
30. PREPAID RENTAL AND SECURITY DEPOSIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
31. SPRINKLERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
32. ROOFTOP RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
33. INTERCONNECTION RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
36. REMOVAL OF ABOVE-CEILING ALTERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
37. DELIVERY OF LEASED PREMISES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
38. RENEWAL OPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
39. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
40. ENTIRE AGREEMENT AND BINDING EFFECT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
</TABLE>

EXHIBIT A LEASED PREMISES
EXHIBIT B LAND
EXHIBIT C RULES AND REGULATIONS
EXHIBIT D EMERGENCY GENERATOR AND HVAC LOCATIONS
EXHIBIT E NON-DISTURBANCE AND ATTORNMENT AGREEMENT
EXHIBIT F APPROVED CONTRACTORS

ii
<PAGE> 4

OFFICE LEASE AGREEMENT

1. DEFINITIONS AND BASIC PROVISIONS.

A. Date of Lease: January 29, 1996.

B. "Landlord": Beverly Hills Center LLC

C. Address of Landlord:

2323 Bryan Street, Suite 2020
Lock Box 120
Dallas, Texas 75201

D. "Tenant": Star Vending, Inc.

E. Address of Tenant: 223 E. De La Guerra Street
Santa Barbara, CA 93101

F. "Building": The structure commonly known as the
Allianz Financial Centre and which is located on the 0.8437 acre tract of land
(the "Land") described by metes and bounds on Exhibit B attached hereto and
made a part hereof for all purposes.

G. "Leased Premises": Approximately 6,167 square feet
of rentable area on the third (3rd) floor of the Building, as outlined and
hatched on the floor plan attached hereto as Exhibit A and made a part hereof
for all purposes. Tenant acknowledges that Tenant has had the opportunity to
measure the Leased Premises and that there has been applied to the usable
square footage of the Leased Premises a common area factor to arrive at the
rentable square footage of the Leased Premises. Therefore, Landlord and Tenant
hereby stipulate that notwithstanding anything herein to the contrary, the
Leased Premises shall be deemed to consist of 6,167 rentable square feet, and
that no shortage or overage in the rentable square feet of the Leased Premises
purported by either party shall be the basis for changing the number of
rentable square feet herein stipulated.

H. "Project": The Building, the parking facilities,
parking garage, the Skybridge and other structures, improvements, landscaping,
fixtures, appurtenances and other common areas now or hereafter, constructed or
erected on the Land.

I. "Rentable area in the Building" shall be 464,542
square feet of rentable area, unless modified as provided herein.

J. "Commencement Date": Sixty (60) days after Landlord
delivers the Leased Premises to Tenant. The estimated Commencement Date is
April 1, 1997. Upon request of either party hereto, Landlord and Tenant agree
to execute and deliver a written declaration in recordable form expressing the
Commencement Date hereof.

1
<PAGE> 5

K. "Term": Commencing on the Commencement Date and
ending ten (10) years after the Commencement Date, plus any partial calendar
month following the Commencement Date, unless sooner terminated as provided
herein.

L. "Base Rental": $123,340.00 per year for the first ten
(10) years of the Term of this Lease, payable in equal monthly installments of
$10,278.33 each; each such monthly installment shall be due and payable on the
first day of each calendar month, monthly in advance without demand and without
setoff or deduction whatsoever. Tenant's rental obligations with respect to
the first eight (8) diameter inches of conduits or equivalent cable runs (the
"Initial Conduits") shall be abated during the Term and any extensions thereof.
In the event at Tenant's request Landlord permits Tenant to install additional
conduits on equivalent cable runs in excess of Initial Conduits, Tenant shall
pay a riser fee ("Riser Fee") with respect to such additional installations in
an amount equal to the then prevailing market riser fee rate; provided,
however, that during the first ten (10) years of the Term, the Riser Fee shall
be $250.00 per month per one inch diameter of conduit or equivalent cable run.
The foregoing shall apply to all conduits and equivalent cable runs installed
by or on behalf of Tenant, including, without limitation, conduits and
equivalent cable runs related to Paragraph 33, the Emergency Power Installation
and the HVAC Installation (as defined in Paragraphs 34 and 35, respectively)
which exceed the Initial Conduits.

M. "Prepaid Rental": $10,278.33, to be applied to the
first accruing monthly installments of rental.

N. "Security Deposit": $10,278.33.

O. "Permitted Use": The Leased Premises shall be used
only for office purposes and for a telecommunications facility.

P. "Common Area": That part of the Project designated
by Landlord from time to time for the common use of all tenants, including
among other facilities, the Skybridge, sidewalks, service corridors, curbs,
truckways, loading areas, private streets and alleys, lighting facilities,
mechanical and electrical rooms, janitors' closets, halls, lobbies, delivery
passages, elevators, drinking fountains, meeting rooms, public toilets, parking
areas and garages, decks and other parking facilities, landscaping and other
common rooms and common facilities.

Q. "Prime Rate": The rate announced as such from time
to time by Chase Manhattan Bank, N.A., or its successors, at its principal
office.

R. "Broker": Cushman & Wakefield of Texas
The MTA Company

S. "Parking": Three (3) parking spaces for three (3)
vehicles or the placement of equipment, subject, however, to the payment of
prevailing market rental established from time to time for similar parking
spaces and further subject to the other terms, covenants and conditions
specified in Paragraph 25 hereof. Notwithstanding the foregoing or anything in
Paragraph 25 to the contrary, during the first ten (10) years of the Term,
Tenant's rental obligations with respect to such three (3) parking spaces shall
be $120.00 (plus applicable taxes)

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per month per parking space utilized for a vehicle and $250.00 (plus applicable
taxes) per month per parking space utilized for equipment.

T. "Base Operating Expenses Rate": The Actual Operating
Expenses Rate for the 1997 calendar year.

U. "Skybridge": The aerial walkway connecting the
Building with the Plaza of the Americas, together with any alterations,
improvements and/or replacements thereof.

Each of the foregoing definitions and basic provisions shall
be construed in conjunction with the references thereto contained in the other
provisions of this Lease and shall be limited by such other provisions. Each
reference in this Lease to any of the foregoing definitions and basic
provisions shall be construed to incorporate each term set forth above under
such definition or provision.

2. GRANTING CLAUSE. Landlord, in consideration of the covenants
and agreements to be performed by Tenant, and upon the terms and conditions
hereinafter stated, does hereby lease, demise and let unto Tenant, and Tenant
does hereby lease from Landlord, the Leased Premises specified in Paragraph
1.G. hereof to have and to hold for the Term of this Lease, as specified in
Paragraph 1.K. hereof.

3. EARLY OCCUPANCY. Any occupancy of the Leased Premises by
Tenant prior to the Commencement Date shall be subject to all of the terms and
provisions of this Lease excepting only those requiring the payment of rental
and other charges.

If this Lease is executed before the Leased Premises becomes
vacant, or if any present tenant or occupant of the Leased Premises holds over
and Landlord cannot acquire possession thereof prior to the Commencement Date,
then Landlord shall not be deemed in default hereunder, and Tenant agrees to
accept possession of the Leased Premises at such time as Landlord is able to
tender the same and, in such event, the date of such tender by Landlord shall
be deemed to be the Commencement Date, and Landlord hereby waives the payment
of rental and other charges covering any period prior to the date of such
tender. If Landlord does not deliver possession of the Leased Premises to
Tenant on or before May 1, 1997, Tenant shall have the option, as Tenant's sole
and exclusive right and remedy, to terminate this Lease by delivering written
notice to Landlord of such termination prior to Landlord's delivery of
possession. In the event of such termination, Landlord and Tenant shall be
automatically discharged of any obligations hereunder.

4. RENTAL. As rental for the lease and use of the Leased
Premises, Tenant will pay Landlord or Landlord's assigns, at the address of
Landlord specified in Paragraph 1.C. hereof, without demand and without
deduction, abatement or setoff (except as otherwise expressly provided for
herein in Paragraph 8 hereof and Paragraph 15 hereof), the Base Rental in the
manner specified in Paragraph 1.L. hereof, in lawful money of the United
States. However, Tenant reserves the right to make payment under protest if
any of the charges are in dispute. If the Term of this Lease does not commence
on the first day of a calendar month, Tenant shall pay to Landlord in advance a
pro rata part of such sum as rental for such first partial month. Tenant shall
not pay any installment of rental more than one (1) month in advance. All past
due

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installments of rental or other payment specified herein shall bear interest at
the lower per annum rate of (i) four percent (4%) in excess of Prime Rate (as
defined in Paragraph 1.Q. hereof), or (ii) the highest lawful rate, from the
date due until paid.

If Tenant fails to timely pay three (3) consecutive
installments of Base Rental, or other payment specified herein, or any
combination thereof, Landlord may require Tenant to pay (in addition to any
interest) Base Rental and other payments specified herein (as estimated by
Landlord, if necessary) quarterly in advance, and, in such event, all future
payments shall be made on or before the due date in cash or by cashier's check
or money order, and the delivery of Tenant's personal or corporate check shall
no longer constitute payment thereof. Any acceptance of Tenant's personal or
corporate check thereafter by Landlord shall not be construed as a waiver of
the requirement that such payments be made in cash or by cashier's check or
money order. Any amount so estimated by Landlord and paid by Tenant shall be
adjusted promptly after actual figures become available and paid or credited to
Landlord or Tenant, as the case may be.

5. USE. Tenant shall use the Leased Premises solely for the
Permitted Use specified in Paragraph 1.0 hereof and for no other business or
purpose without the prior written consent of Landlord.

6. SERVICES TO BE PROVIDED BY LANDLORD.

A. Subject to the rules and regulations hereinafter
referred to, Landlord shall furnish Tenant, at Landlord's expense, while Tenant
is occupying the Leased Premises, the following services during the Term of
this Lease:

(1) Air conditioning and heating in season, during
Building Hours at such temperatures and in such amounts as are
reasonably considered by Landlord to be standard, but such service at
times other than Building Hours to be furnished only upon the request
of Tenant, who shall bear the cost thereof. As used herein, the term
"Building Hours" shall mean 7:00 a.m. to 6:00 p.m. Monday through
Friday and Saturday 8:00 a.m. to 1:00 p.m., except legal holidays.
Tenant acknowledges that such service and temperature may be subject
to change by local, county, state or federal regulation. Whenever
machines or equipment that generate abnormal heat are used in the
Leased Premises which affect the temperature otherwise maintained by
the air conditioning system, Landlord shall have the right to install
supplemental air conditioning in the Leased Premises, and the cost
thereof, including the cost of installation, operation, use and
maintenance, shall be paid by Tenant to Landlord as additional rental
upon demand.

(2) Water at those points of supply provided for general
use.

(3) Janitor service in and about the Building, and the
Leased Premises, as may in the judgment of Landlord be reasonably
required; however, Tenant shall pay the additional costs attributable
to the cleaning of improvements within the Leased Premises other than
building standard improvements.

(4) Elevators for ingress to and egress from the Building
as may in the judgment of Landlord be reasonably required. Landlord
may reasonably limit the number

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<PAGE> 8

of elevators in operation after usual and customary business hours and
on Saturday afternoons, Sundays and legal holidays.

(5) Replacement of fluorescent lamps in the building
standard ceiling mounted fixtures installed by Landlord and
incandescent bulb replacement in all public areas.

B. Landlord shall provide or cause to be provided to the
Leased Premises all electrical current required by Tenant in the normal use and
occupancy of the Leased Premises. Without Landlord's prior written consent,
which consent shall not be unreasonably withheld, delayed or conditioned,
Tenant shall not install any equipment which would result in Tenant's connected
load exceeding 3.0 watts per square foot of rentable area within the Leased
Premises or which would generate sufficient heat to affect the temperature
otherwise maintained in the Leased Premises by the normal operation of the
Building air conditioning equipment serving the Leased Premises. The
obligation of Landlord to provide or cause to be provided electrical service
shall be subject to the rules and regulations of the supplier of such
electricity and of any municipal or other governmental authority regulating the
business of providing electrical utility service. Landlord shall not be liable
or responsible to Tenant for any loss, damage or expense which Tenant may
sustain or incur if either the quantity or character of the electric service is
changed or is no longer available or no longer suitable for Tenant's
requirements. At any time when Landlord is furnishing electric current to the
Leased Premises pursuant to this Paragraph 6.B., Landlord may, at its option,
upon not less than sixty (60) days prior written notice to Tenant, discontinue
the furnishing of such electric current. If Landlord gives such notice of
discontinuance, Landlord shall make all reasonably necessary arrangements with
the public utilities supplying the electric current to the Project with respect
to connecting electric current to the Leased Premises, but Tenant shall
contract directly with such public utility with respect to supplying such
service. Landlord shall have the right to measure electrical usage in the
Leased Premises (1) by installing a submeter, (2) by periodic determinations by
Landlord's engineers or other competent consultants selected by Landlord, or
(3) by any combination of such methods. The cost of purchase and installation
of a submeter in the Leased Premises shall be borne by Tenant.

C. Tenant shall be obligated to pay to Landlord, as
additional rental, (1) Tenant's proportionate share of all electrical service
to the Common Area (collectively, "Common Area Electrical Service") and (2) the
cost of electrical service to the Leased Premises. Tenant's proportionate
share of the cost of Common Area Electrical Service shall be equal to the cost
of such service times a fraction in which the numerator is the rentable area of
the Leased Premises and the denominator is the rentable area of the Building.
In the event the electrical service to the Leased Premises is submetered or
otherwise measured in accordance with the provisions of Paragraph 6.B., Tenant
shall pay to Landlord the cost of such electrical service based upon rates
determined by Landlord from time to time (which shall not exceed the amount
Tenant would have been charged for such service by the local utility company
furnishing such service). In the event electrical service to the Leased
Premises is not measured by a submeter or periodic determination by Landlord's
engineers or other competent consultants selected by Landlord (or a combination
of such methods), then, Tenant shall pay to Landlord Tenant's proportionate
share of the cost of all electrical service to tenants in the Building which
does not exceed Building standard consumption as established from time to time
by Landlord. Such

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<PAGE> 9

proportionate share shall be based upon the statements therefor received by
Landlord from the electrical utility company providing such service, adjusted
as Landlord reasonably determines appropriate to eliminate over-standard
consumption, and shall be determined by multiplying the cost of such service
times a fraction (the "Leased Premises Electrical Expense Percentage") the
numerator of which is the rentable area of the Leased Premises and the
denominator of which is the rentable area of the Building. In the event that
other tenants of the Building pay directly either to Landlord or third parties
for electricity supplied to their respective premises (e.g. separately metered
electricity), then Landlord may, at its sole option, adjust the Leased Premises
Electrical Expenses Percentage by excluding from the denominator thereof the
rentable area of all tenants making such payments. The cost of electrical
service shall include without limitation all fuel adjustment charges, demand
charges and taxes. If, during any period of time, the Building is not fully
leased, then, for purposes of this Paragraph 6.C., the area of the Building
shall be deemed to mean and include that portion of the Building which is
occupied (calculated on the basis of rentable area).

D. Prior to the Commencement Date, Landlord shall
deliver to Tenant a statement which sets forth the Estimated Monthly Charge (as
hereinafter defined) due and payable by Tenant under the terms of Paragraph
6.C. hereof for electrical service each month during the Term. Tenant shall
pay to Landlord on the first day of each calendar month during the Term,
commencing with the Commencement Date, as additional rental, the Estimated
Monthly Charge. In the event the Commencement Date occurs on a day other than
the first day of a calendar month, the Estimated Monthly Charge payable in
respect of the month in which the Commencement Date falls shall be prorated and
the Estimated Monthly Charge, as so prorated, shall be due and payable on or
before the Commencement Date. Thereafter, as the actual amounts owed by Tenant
for Tenant's proportionate share of Common Area Electrical Service and
electrical service to the Leased Premises are determined, Landlord shall
deliver to Tenant a statement setting forth the electrical service utilized
during the period in question and the actual amount owed by Tenant under the
terms of Paragraph 6.C. hereof in respect of such electrical service. If the
Estimated Monthly Charge previously paid by Tenant is less than the amount owed
by Tenant based upon Landlord's actual utility bills (for the period covered in
such bills), Tenant shall pay to Landlord the amount of the deficiency for such
period within ten (10) days after receipt of Landlord's statement. In the
event the Estimated Monthly Charge exceeds Tenant's proportionate share of such
costs, the excess payment shall be credited against subsequent amounts next due
from Tenant for electrical service. From time to time Landlord shall review
the Estimated Monthly Charge and make such adjustments as may appear to be
appropriate in the reasonable discretion of Landlord. Landlord shall have the
right to revise the Estimated Monthly Charge at any time and from time to time
in the exercise of Landlord's reasonable judgment upon at least ten (10) days
prior written notice to Tenant. All payments due under this paragraph 6.D.
after the expiration of such ten (10) day period shall be increased or
decreased as may be required to make such payments consistent with such revised
Estimated Monthly Charge. As used in this Paragraph 6.D., the term "Estimated
Monthly Charge" shall mean Landlord's estimate of the amount due and payable by
Tenant each month during the Term with respect to Tenant's proportionate share
of Common Area Electrical Service and electrical service to be provided to the
Leased Premises.

E. If Tenant's connected load for electrical design
exceeds 3.0 watts per square foot, Tenant shall pay as a surcharge a
proportionate part of all electrical service costs

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<PAGE> 10

which are attributable to the aggregate over-standard electrical consumption by
all tenants in the Building. Such proportion shall be equal to the product of
the aggregate cost of all over-standard electrical consumption in the Building
(as determined by Landlord) times a fraction in which the numerator is Tenant's
electrical design load in excess of 3.0 watts per square foot and the
denominator is the aggregate of the total electrical design load of all tenants
in the Building in excess of 3.0 watts per square foot. Tenant's proportionate
share of such sums shall be due within ten (10) days after the date of receipt
of a statement therefor from Landlord setting forth the amount of the charges
involved and calculating Tenant's proportionate share thereof.

F. No interruption or malfunction of any of such
services shall constitute an eviction or disturbance of Tenant's use and
possession of the Leased Premises or the Building or a breach by Landlord of
any of Landlord's obligations hereunder or render Landlord liable for damages
or entitle Tenant to be relieved from any of Tenant's obligations hereunder
(including the obligation to pay rental) or grant Tenant any right of setoff or
recoupment. In the event of any such interruption, however, Landlord shall use
reasonable diligence to restore such service or cause same to be restored in
any circumstances in which such restoration is within the reasonable control of
Landlord and the interruption was not caused in whole or in part by Tenant's
fault. Notwithstanding the foregoing, in the event that an interruption of any
of those services to be provided by Landlord under this Paragraph 6 shall
render the Leased Premises untenantable, such interruption was not caused by
any act or omission of Tenant or Tenant's employees, agents or contractors and
such interruption shall continue for a period in excess of ten (10) consecutive
days, then Tenant's Base Rental obligations under the Lease shall abate for
such period which exceeds ten (10) consecutive days; provided, however, that
such rental abatement shall be on a pro rata basis to reflect only that portion
of the Leased Premises affected by the interruption of services. The abatement
of rent provided for in this paragraph shall not be applicable in the case of
any interruption or malfunction resulting from a reduction or elimination of
electrical service to the Building from the electrical utility company or
governmental agency providing such electrical service or change in quality of
such service, nor shall such abatement be applicable in the event of any
interruption or malfunction of services due to regulations of any government or
governmental authority or any utility company providing electrical service
provided such interruption or malfunction is not due to the failure of Landlord
to make payment for such service or the failure to comply or perform its
contractual obligations or Landlord's failure to comply with existing
applicable rules or regulations.

G. Should Tenant desire any additional services beyond
those described in this Paragraph 6 hereof or rendition of any of such services
outside the normal times of Landlord for providing such service, Landlord may
(at Landlord's option), upon reasonable advance notice from Tenant to Landlord,
furnish such services, and Tenant agrees to pay Landlord such charges as may be
agreed on between Landlord and Tenant, but in no event at a charge less than
Landlord's actual cost plus overhead for the additional services provided.

7. REPAIR AND MAINTENANCE.

A. Landlord shall, at Landlord's own cost and expense,
except as may be provided elsewhere herein, make necessary repairs of damage to
the Building corridors, lobby, structural members of the Building and equipment
used to provide the services referred to in Paragraph 6 hereof, unless any such
damage is caused in whole or in part by acts or omission of

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<PAGE> 11

Tenant, or Tenant's agents, employees or invitees, in which event Tenant shall
bear the cost of such repairs. Tenant shall promptly give Landlord notice of
any damage in the Leased Premises requiring repair by Landlord, as aforesaid.

B. Tenant shall not in any manner deface or injure the
Leased Premises or the Building but shall maintain the Leased Premises,
including, without limitation, all fixtures installed by Tenant and all plate
glass, walls, carpeting and other floor covering placed or found therein, in a
clean, attractive, first-class condition and in good repair, except as to
damage required to be repaired by Landlord, as provided in Paragraph 7.A.
hereof. Upon the expiration of the Term of this Lease, Tenant shall surrender
and deliver up the Leased Premises with all improvements located thereon
(except as provided in Paragraph 11.B. hereof) to Landlord broom-clean and in
the same condition in which they existed at the commencement of the Lease,
excepting only ordinary wear and tear and damage arising from any cause not
required to be repaired by Tenant, failing which Landlord may restore the
Leased Premises to such condition, and Tenant shall pay the reasonable cost
thereof.

C. This Paragraph 7 shall not apply in the case of
damage or destruction by fire or other casualty which is covered by insurance
maintained by Landlord on the Building (as to which Paragraph 8 hereof shall
apply), or damage resulting from an eminent domain taking (as to which
Paragraph 15 hereof shall apply).

8. FIRE AND OTHER CASUALTY.

A. If at any time during the Term of this Lease, the
Leased Premises or any portion of the Building shall be damaged or destroyed by
fire or other casualty, then Landlord shall have the election to terminate this
Lease or to repair and reconstruct the Leased Premises and the Building to
substantially the same condition in which they existed immediately prior to
such damage or destruction, except that Landlord shall not be required to
rebuild, repair or replace any part of the partitions, fixtures and other
improvements which may have been installed by Tenant or other tenants within
the Building. In the event that the Leased Premises are damaged or destroyed
by fire or other casualty, or a portion of the Building is damaged or destroyed
by fire or other casualty so as to materially impair the use and occupancy by
Tenant of the Leased Premises, then Landlord shall be obligated to provide
written notice (the "Restoration Notice") to Tenant within sixty (60) days of
such event of casualty stating a good faith estimate, certified by an
independent architect of the period of time (the "Stated Restoration Period")
which shall be required for the repair and restoration of the Leased Premises
and/or the Building. Tenant shall have the right, at its election, to
terminate the Lease if either (i) the Stated Restoration Period shall be in
excess of one hundred eighty (180) days following the event of casualty and
Tenant terminates this Lease with written notice thereof to Landlord within ten
(10) days following delivery of the Restoration Notice, or (ii) Landlord shall
fail to substantially complete the repair and restoration of the Leased
Premises or the Building within the Stated Restoration Period and Tenant
delivers written notice of such termination to Landlord within ten (10) days
following the expiration of the restoration deadline.

B. In any of the aforesaid circumstances, rental shall
abate proportionately during the period and to the extent that the Leased
Premises are unfit for use by Tenant in the ordinary conduct of Tenant's
business. If this Lease continues, such repairs shall be made within

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a reasonable time thereafter, subject to delays arising from shortages of labor
or material, acts of God, war or other conditions beyond Landlord's reasonable
control. In the event that this Lease is terminated as herein permitted,
Landlord shall refund to Tenant the prepaid rental (unaccrued as of the date of
damage or destruction) less any sum then owing Landlord by Tenant. If this
Lease continues, then the Term of this Lease shall be extended by a period of
time equal to the period of such repair and reconstruction. Any insurance
which may be carried by Landlord or Tenant against loss or damage to the
Building or to the Leased Premises shall be for the sole benefit of the party
carrying such insurance under its control, and it is understood that Landlord
shall in no event be obligated to carry insurance on Tenant's contents.

9. COMPLIANCE WITH LAWS AND USAGE. Tenant, at Tenant's own
expense, (a) shall comply with all federal, state, municipal, fire underwriting
and other laws, ordinances, orders, rules and regulations applicable to
Tenant's particular use of the Leased Premises and the business conducted
therein by Tenant, (b) shall not engage in any activity which would cause
Landlord's fire and extended coverage insurance to be cancelled or the rate
therefor to be increased (or, at Landlord's option, Tenant shall pay any such
increase to Landlord immediately upon demand as additional rental in the event
of such rate increase by reason of such activity), (c) shall not commit, and
shall cause Tenant's agents, employees and invitees not to commit, any act
which is a nuisance or annoyance to Landlord or to other tenants, or which
might, in the exclusive judgment of Landlord, damage Landlord's goodwill or
reputation, or tend to injure or depreciate the Building, (d) shall not commit
or permit waste in the Leased Premises or the Building, (e) shall comply with
reasonable rules and regulations from time to time promulgated by Landlord
applicable to the Leased Premises and/or the Building applied to all tenants of
the Building on a uniform basis, (f) shall not paint, erect or display any
sign, advertisement, placard or lettering which is visible in the corridors or
lobby of the Building or from the exterior of the Building without Landlord's
prior written approval, and (g) shall not occupy or use, or permit any portion
of the Leased Premises to be occupied or used, for any business or purpose
other than the Permitted Use specified in Paragraph 1.0. hereof. If a
controversy arises concerning Tenant's compliance with any federal, state,
municipal or other laws, ordinances, orders, rules or regulations applicable to
the Leased Premises and the business conducted therein by Tenant, Landlord may
retain consultants of recognized standing to investigate Tenant's compliance.
If it is determined that Tenant has not complied as required, Tenant shall
reimburse Landlord on demand for all reasonable consulting and other reasonable
costs incurred by Landlord in such investigation. Landlord and Tenant
acknowledge that, in accordance with the provisions of the Americans with
Disabilities Act of 1990 and the Texas Elimination of Architectural Barriers
Act, each as amended from time to time, and all regulations and guidelines
issued by authorized agencies with respect thereto (collectively, the "ADA" and
the "EAB", respectively), responsibility for compliance with the terms and
conditions of Title III of the ADA and the EAB may be allocated as between
Landlord and Tenant. Notwithstanding anything to the contrary contained in the
Lease, Landlord and Tenant agree that the responsibility for compliance with
the ADA and the EAB shall be allocated as follows: (i) Tenant shall be
responsible for compliance with the provisions of Title III of the ADA and with
the provisions of the EAB with respect to the Leased Premises, including
restrooms within the Leased Premises, and (ii) Landlord shall be responsible
for compliance with the provisions of Title III of the ADA and with the
provisions of the EAB with respect to the exterior of the Building, parking
areas, sidewalks and walkways, and any and all areas appurtenant thereto,
together with all common areas of the Building not included within the Leased
Premises. The allocation of responsibility for ADA and EAB

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compliance between Landlord and Tenant, and the obligations of Landlord and
Tenant established by such allocations, shall supersede any other provisions of
the Lease that may contradict or otherwise differ from the requirements of this
paragraph.

10. LIABILITY AND INDEMNITY.

A. Tenant agrees to indemnify and save Landlord harmless
from all claims (including costs and expenses of defending against such claims)
arising or alleged to arise from any act or omission of Tenant or Tenant's
agents, employees, invitees or contractors, or arising from any injury to any
person or damage to the property of any person occurring during the Term of
this Lease in or about the Leased Premises, except to the extent attributable
to Landlord's negligence or willful misconduct. Tenant agrees to use and
occupy the Leased Premises and other facilities of the Building at Tenant's own
risk and hereby releases Landlord, Landlord's agents or employees, from all
claims for any damage or injury to the full extent permitted by law.

B. Tenant waives any and all rights of recovery, claim,
action, or cause of action, against Landlord, its agents, officers, or
employees, for any loss or damage that may occur to the Leased Premises, or any
improvements thereto, or the Project, or any improvements thereto, or any
personal property of such party therein, by reason of fire, the elements, or
any other cause which could be insured against under the terms of standard fire
and extended coverage insurance policies, regardless of cause or origin,
including negligence of Landlord, its agents, officers or employees, and Tenant
covenants that no insurer shall hold any right of subrogation against Landlord
and all such insurance policies shall be amended or endorsed to reflect such
waiver of subrogation.

C. Tenant, to the extent permitted by law, waives all
claims Tenant may have against Landlord, and against Landlord's agents and
employees for injury to person or damage to or loss of property sustained by
Tenant or by any occupant of the Leased Premises, or by any other person,
resulting from any part of the Building or any equipment or appurtenances
becoming out of repair or resulting from any accident in or about the Building
or resulting directly or indirectly from any act or neglect of any tenant or
occupant of any part of the Building or of any other person unless such damage
is a result of the negligence of Landlord, or Landlord's agents or employees.
If any damage results from any act or neglect of Tenant, Landlord may, at
Landlord's option, repair such damage, and Tenant shall thereupon pay to
Landlord the total cost of such repair to the extent not reimbursed by
Landlord's insurance. All personal property belonging to Tenant or any
occupant of the Leased Premises that is in or on any part of the Building shall
be there at the risk of Tenant or of such other person only, and Landlord,
Landlord's agents and employees shall not be liable for any damage thereto or
for the theft or misappropriation thereof unless such damage, theft or
misappropriation is a result of the gross negligence of Landlord or Landlord's
agents or employees. Tenant agrees to indemnify and hold Landlord harmless
from and against any and all loss, cost, claim and liability (including
reasonable attorneys' fees) for injuries to all persons and for damage to or
loss of property occurring in or about the Building, due to any act or
negligence or default under this Lease by Tenant, Tenant's contractors, agents
or employees.

11. ADDITIONS AND FIXTURES.

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A. Tenant will make no alteration, change, improvement,
repair, replacement or physical addition in or to the Leased Premises without
the prior written consent of Landlord. Notwithstanding anything in the Lease
to the contrary, Landlord shall not unreasonably withhold or delay its consent
in the event Tenant requests Landlord's permission to make non-structural
alterations, additions or improvements to the Leased Premises which do not
affect the electrical mechanical, or heating, ventilating and air conditioning
systems of the Leased Premises on the Building. Notwithstanding anything in
Paragraph 11.B. of the Lease to the contrary, in the event Landlord approves
such request, Landlord shall advise Tenant, contemporaneously with delivery of
Landlord's consent, whether Landlord will require Tenant to remove such
additions or alterations prior to the termination of the Lease. If such prior
written consent of Landlord is granted, the work in such connection shall be at
Tenant's expense but by workmen of Landlord or by workmen and contractors
reasonably approved in advance in writing by Landlord and in a manner and upon
terms and conditions and at times satisfactory to and approved in advance in
writing by Landlord. In any instance where Landlord grants such consent,
Landlord may grant such consent contingent and conditioned upon Tenant's
contractors, laborers, materialmen and others furnishing labor or materials for
Tenant's job working in harmony and not interfering with any labor utilized by
Landlord, Landlord's contractors or mechanics or by any other tenant or such
other tenants contractors or mechanics; and if at any time such entry by one
(1) or more persons furnishing labor or materials for Tenant's work shall cause
disharmony or interference for any reason whatsoever without regard to fault,
the consent granted by Landlord to Tenant may be withdrawn at any time upon
written notice to Tenant.

B. Tenant, if Tenant so elects, may remove Tenant's
trade fixtures, office supplies and movable office furniture and equipment not
attached to the Building provided (i) such removal is made prior to the
expiration of the Term of this Lease, (ii) Tenant is not in default of any
obligation or covenant under this Lease at the time of such removal, and (iii)
Tenant promptly repairs all damage caused by such removal. All other property
at the Leased Premises and any alteration or addition to the Leased Premises
(including wall-to-wall carpeting, paneling or other wall covering) and any
other article attached or affixed to the floor, wall or ceiling of the Leased
Premises shall become the property of Landlord shall be in good condition,
normal wear and tear excepted, and shall remain upon and be surrendered with
the Leased Premises as part thereof at the expiration of the Term of this
Lease, Tenant hereby waiving all rights to any payment or compensation
therefor. If, however, Landlord so requests in writing, Tenant will, prior to
the termination of this Lease, remove in a good and workmanlike manner any and
all alterations, additions, fixtures, equipment and property placed or
installed by Tenant in the Leased Premises and will repair any damage
occasioned by such removal.

12. ASSIGNMENT AND SUBLETTING.

A. Except as provided in subparagraph E, neither Tenant
nor Tenant's legal representatives or successors in interest by operation of
law or otherwise shall assign this Lease or sublease the Leased Premises or any
part thereof or mortgage, pledge or hypothecate its leasehold interest or grant
any concession or license within the Leased Premises without the prior express
written permission of Landlord, and any attempt to do any of the foregoing
without the prior express written permission of Landlord shall be void and of
no effect. Except with respect to a Permitted Assignee (as defined in
subparagraph E below), in the event Tenant requests Landlord's prior express
permission as to any such assignment or a sublease of substantially all

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<PAGE> 15

of the Leased Premises, Landlord shall have the right and option, as of the
requested effective date of such assignment or sublease (but no obligation), to
cancel and terminate this Lease as to the portion of the Leased Premises with
respect to which Landlord has been requested to permit such assignment or
sublease, and if Landlord elects to cancel and terminate this Lease as to the
aforesaid portion of the Leased Premises, then the rental and other charges
payable hereunder shall thereafter be proportionately reduced. In the event of
any such attempted assignment or attempted sublease, or should Tenant, in any
other nature of transaction, permit or attempt to permit anyone to occupy the
Leased Premises (or any portion thereof) without the prior express written
permission of Landlord, Landlord shall thereupon have the right and option to
cancel and terminate this Lease effective upon ten (10) days' notice to Tenant
given by Landlord at any time thereafter either as to the entire Leased
Premises or as to only the portion thereof which Tenant shall have attempted to
assign or sublease or otherwise permitted some other party's occupancy without
Landlord's prior express written permission, and if Landlord elects to cancel
and terminate this Lease as to the aforesaid portion of the Leased Premises,
then the rental and other charges payable hereunder shall thereafter be
proportionately reduced. This prohibition against assignment or subletting
shall be construed to include a prohibition against any assignment or
subletting by operation of law.

B. Notwithstanding that the prior express written
permission of Landlord to any of the aforesaid transactions may have been
obtained, the following shall apply:

(1) In the event of an assignment, contemporaneously with
the granting of Landlord's aforesaid consent, Tenant shall cause the
assignee to expressly assume in writing and agree to perform all of
the covenants, duties and obligations of Tenant hereunder, and such
assignee shall be jointly and severally liable therefor along with
Tenant; Tenant shall further cause such assignee to grant Landlord an
express first and prior contract lien and security interest in the
manner hereinafter stated as applicable to Tenant;

(2) A signed counterpart of all instruments relative
thereto (executed by all parties to such transactions with the
exception of Landlord) shall be submitted by Tenant to Landlord prior
to or contemporaneously with the request for Landlord's prior express
written permission thereto (it being understood that no such instrument
shall be effective without the prior express written permission of
Landlord);

(3) Tenant shall subordinate to Landlord's statutory lien
and Landlord's aforesaid contract lien and security interest any liens
or other rights which Tenant may claim with respect to any fixtures,
equipment, goods, wares, merchandise or other property owned by or
leased to the proposed assignee or sublessee or other party intending
to occupy the Leased Premises;

(4) No usage of the Leased Premises different from the
usage herein provided to be made by Tenant shall be permitted, and all
other terms and provisions of this Lease shall continue to apply after
any such transaction;

(5) In any case where Landlord consents to an assignment,
sublease, grant of a concession or license or mortgage, pledge or
hypothecation of the leasehold, the

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<PAGE> 16

undersigned Tenant will nevertheless remain directly and primarily
liable for the performance of all of the covenants, duties and
obligations of Tenant hereunder (including, without limitation, the
obligation to pay all rental and other sums herein provided to be
paid), and Landlord shall be permitted to enforce the provisions of
this Lease against the undersigned Tenant and/or any assignee,
sublessee, concessionaire, licensee or other transferee without demand
upon or proceeding in any way against any other person; and

(6) If the rental due and payable by a sublessee under
any such permitted sublease (or a combination of the rental payable
under such sublease plus any bonus or other consideration therefor or
incident thereto) exceeds the hereinabove provided rental payable
under this Lease, or if with respect to a permitted assignment,
permitted license or other transfer by Tenant permitted by Landlord,
the consideration payable to Tenant by the assignee, licensee or other
transferee exceeds the rental payable under this Lease, then Tenant
shall be bound and obligated to pay Landlord all such excess rental
and other excess consideration within ten (10) days following receipt
thereof by Tenant from such sublessee, assignee, licensee or other
transferee, as the case might be.

C. If Tenant is a corporation, then any transfer of this
Lease from Tenant by merger, consolidation or dissolution or any change in
ownership or power to vote a majority of the voting stock in Tenant outstanding
at the time of execution of this Lease shall constitute an assignment for the
purpose of this Lease; provided, however, that acquisition of all stock of a
corporate tenant by any corporation, the stock of which is registered pursuant
to the Securities Act of 1933 or the merger of a corporate tenant into such a
corporation, the stock of which is so registered, shall not itself be deemed to
be a violation of Paragraph 12.A. For purposes of this Paragraph 12.C., the
term "voting stock" shall refer to shares of stock regularly entitled to vote
for the election of directors of the corporation involved.

If Tenant is a general partnership having one (1) or more
corporations as partners or if Tenant is a limited partnership having one (1)
or more corporations as general partners, the provisions of the preceding
paragraph of this Paragraph 12.C. shall apply to each of such corporations as
if such corporation alone had been the Tenant hereunder.

If Tenant is a general partnership (whether or not having any
corporations as partners) or if Tenant is a limited partnership (whether or not
having any corporations as general partners), the transfer of the partnership
interest or interests constituting a majority shall constitute an assignment
for the purposes of this Lease.

D. Consent by Landlord to a particular assignment or
sublease or other transaction shall not be deemed a consent to any other or
subsequent transaction. If this Lease is assigned, or if the Leased Premises
are subleased (whether in whole or in part), or in the event of the mortgage,
pledge or hypothecation of the leasehold interest or grant of any concession or
license within the Leased Premises without the prior express written permission
of Landlord, or if the Leased Premises are occupied in whole or in part by
anyone other than Tenant without the prior express written permission of
Landlord, then Landlord may nevertheless collect rental and other charges from
the assignee, sublessee, mortgagee, pledgee, party to whom the leasehold
interest was hypothecated, concessionaire or licensee or other occupant and
apply the net amount

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<PAGE> 17

collected to the rental and other charges payable hereunder, but no such
transaction or collection of rental and other charges or application thereof by
Landlord shall be deemed a waiver of these provisions or a release of Tenant
from the further performance by Tenant of Tenant's covenants, duties and
obligations hereunder.

E. Notwithstanding any provision in this Lease to the
contrary, the undersigned Tenant may, without Landlord's prior written consent,
assign its rights hereunder or sublease the Leased Premises to any parent,
subsidiary or entity under the common control of the owner of the controlling
interest of the undersigned Tenant's voting common stock, to a bona fide
purchaser of substantially all of the undersigned Tenant's assets or all of the
corporate stock of the undersigned Tenant, or to an entity with which the
undersigned Tenant enters into a bona fide merger or consolidation or in
connection with Tenant's reincorporation in the State of Delaware
(collectively, a "Permitted Assignee"); provided, however, that (i) the
undersigned Tenant shall remain liable for the performance of all covenants,
duties and obligations under the Lease, irrespective of any such assignment or
sublease, (ii) the use of the Leased Premises by the Permitted Assignee may not
violate any other agreements affecting the Leased Premises, the Building,
Landlord or other tenants, and (iii) use of the Leased Premises by the
Permitted Assignee shall conform with the uses permitted by this Lease. Tenant
shall notify Landlord, in writing, of any such assignment or sublease within
thirty (30) days of its occurrence and shall provide Landlord with all such
reasonable information as Landlord may request regarding the identity and
status of such assignee or sublessee.

F. Landlord acknowledges that the business to be
conducted by the undersigned Tenant in the Leased Premises requires the
installation of certain communications equipment owned by customers and
co-locators of the undersigned Tenant ("Permitted Licensees") in (but not
outside of) the Leased Premises, in order for the Permitted Licensees to
interconnect with Tenant's facilities. To expedite the Permitted Licensees'
access to the Leased Premises, Landlord expressly agrees that Tenant may
license the use of portions of the Leased Premises to, or enter into other
co-location agreements (collectively, "Permitted Agreements") with, the
Permitted Licensees without Landlord's further consent. Landlord expressly
waives its right to prior review of such Permitted Agreements; provided,
however, that Tenant shall promptly provide Landlord with copies of all such
Permitted Agreements and shall accede to Landlord's reasonable requests, if
any, as to floor plans and space layout. In addition, Landlord expressly
waives any right it may have to terminate this Lease or any portion hereof as
set forth in Paragraph 12.A. above with respect to such Permitted Agreements.
Paragraph 12.B.(6), 12.C. and 12.D. above shall not apply with respect to
Tenant's Permitted Agreements with Permitted Licensees. Notwithstanding
anything herein to the contrary, Tenant's Permitted Agreements with the
Permitted Licensees may not affect the Building's riser facilities or the
Common Area of the Building.

13. SUBORDINATION. Tenant accepts this Lease subject and
subordinate to any ground lease, mortgage, deed of trust or other lien
presently existing or hereafter placed upon the Leased Premises or upon the
Building or any part thereof, and to any renewals, modifications, extensions
and refinancings thereof, which might now or hereafter constitute a lien upon
the Building or any part thereof, and to zoning ordinances and other building
and fire ordinances and governmental regulations relating to the use of the
Leased Premises, but Tenant agrees that any such ground lessor, mortgagee
and/or beneficiary of any deed of trust or other lien ("Landlord's

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<PAGE> 18

Mortgagee") and/or Landlord shall have the right at any time to subordinate
such ground lease, mortgage, deed of trust or other lien to this Lease on such
terms and subject to such conditions as such Landlord's Mortgagee may deem
appropriate in its discretion. Upon demand Tenant agrees to execute such
further commercially reasonable instruments subordinating this Lease, as
Landlord may reasonably request, and such nondisturbance and attornment
agreements, as any such Landlord's Mortgagee shall request, in form reasonably
satisfactory to Landlord's Mortgagee. In the event that Tenant shall fail to
execute any such instrument within ten (10) days after requested, Tenant hereby
irrevocably constitutes Landlord as Tenant's attorney-in-fact to execute such
instrument Tenant's name, place and stead, it being stipulated by Landlord and
Tenant that such agency is coupled with an interest in Landlord and is,
accordingly, irrevocable. Upon foreclosure of the Building or upon acceptance
of a deed in lieu of such foreclosure, Tenant hereby agrees to attorn to the
new owner of such property after such foreclosure or acceptance of a deed in
lieu of foreclosure, if so requested by such new owner of the Building.
Landlord shall use reasonable efforts to obtain from Landlord's current
Mortgagee a non-disturbance and attornment agreement in the form attached
hereto as Exhibit E and made a part hereof for all purposes. In addition,
notwithstanding any contrary provision contained herein, the subordination of
this Lease to any mortgage, deed of trust or other lien hereafter placed upon
the Leased Premises or the Building or any part thereof and Tenant's agreement
to attorn to the holder of such mortgage, deed of trust or other lien as
provided in this Paragraph 13 shall be conditioned upon such holder's entering
into a non-disturbance and attornment agreement providing Tenant with
substantially the same protection as to Tenant's use and enjoyment of Tenant's
leasehold estate, use, possession, tenancy and other rights hereunder as is
afforded Tenant under the form instrument attached hereto as Exhibit E.

14. OPERATING EXPENSES.

A. For purposes of this Paragraph 14, the following
definitions and calculations shall apply:

(1) The term "Operating Expenses" shall mean all
expenses, costs and disbursements of every kind and nature which
Landlord shall pay or become obligated to pay because of or in
connection with the ownership, operation, maintenance, repair,
replacement, protection and security of the Project, determined on an
accrual basis in accordance with generally accepted accounting
principles, including, without limitation, the following:

(i) Salaries and wages of all employees engaged
in the operation, maintenance and security of the Project,
including taxes, insurance and benefits (including pension,
retirement and fringe benefits) relating thereto;

(ii) Cost of all supplies and materials used in
the operation, maintenance and security of the Project;

(iii) Cost of all water and sewage service supplied
to the Project;

(iv) Cost of all maintenance and service
agreements for the Project and the equipment therein,
including, without limitation, alarm service, parking

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<PAGE> 19
facilities, security (both on-site and off-site), janitorial
service, landscaping, fire protection, sprinklers, window
cleaning and elevator maintenance;

(v) Cost of all insurance relating to the
Project, including the cost of casualty, rental and liability
insurance applicable to the Project and Landlord's personal
property used in connection therewith;

(vi) All taxes, assessments and governmental
charges (foreseen or unforeseen, general or special, ordinary
or extraordinary) whether federal, state, county or municipal
and whether levied by taxing districts or authorities
presently taxing the Project or by others subsequently created
or otherwise, and any other taxes and assessments attributable
to the Project or its operation, and all taxes of whatsoever
nature that are imposed in substitution for or in lieu of any
of the taxes, assessments or other charges herein defined;
provided, however, Operating Expenses shall not include taxes
paid by tenants of the Project as a separate charge on the
value of their leasehold improvements, death taxes, excess
profits taxes, franchise taxes and state and federal income
taxes;

(vii) Cost of repairs and general maintenance,
including, without limitation, reasonable depreciation charges
applicable to all equipment used in repairing and maintaining
the Project, but specifically excluding repairs and general
maintenance paid by proceeds of insurance or by Tenant or by
other third parties;

(viii) Cost of capital improvement items, including
installation thereof, which are acquired primarily for the
purpose of reducing Operating Expenses; and

(ix) Reasonable management fees paid by Landlord
to third parties or to management companies owned by, or
management divisions of, Landlord, not to exceed the then
prevailing market rate for the management of high quality
class A office buildings comparable to the Project.

To the extent that any Operating Expenses are attributable to
the Project and other projects of Landlord, a fair and reasonable allocation of
such Operating Expenses shall be made between the Project and such other
projects.

(2) The term "Operating Expenses" shall exclude the cost
of electrical energy supplied to the Project and to tenants of the
Building.

(3) The term "Base Operating Expenses Rate" is stipulated
to be the rate specified in Paragraph 1.T. hereof per square foot of
rentable area in the Leased Premises.

(4) The term "Actual Operating Expenses" shall mean, with
respect to each calendar year during the Term of this Lease, the
actual Operating Expenses for such year. The term "Actual Operating
Expenses Rate" shall mean, with respect to each calendar year during
the Term of this Lease, the Actual Operating Expenses attributable to
each square foot of rentable area in the Building, and shall be
calculated by dividing the Actual Operating Expenses by the total
number of square feet of rentable area in the Building, as

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<PAGE> 20

specified in Paragraph 1.I. hereof. The term "Tenant's Proportionate
Share of Actual Operating Expenses" shall mean, with respect to each
calendar year during the Term of this Lease, an amount equal to the
product of (i) the positive difference (if any) obtained by
subtracting the Base Operating Expenses Rate from the Actual Operating
Expenses Rate, multiplied by (ii) the weighted average number of
square feet of rentable area in the Leased Premises in such year;
provided, however, if the Actual Operating Expenses Rate is determined
on the basis of a partial calendar year, then in making the foregoing
calculation, the Base Operating Expenses Rate shall be multiplied by a
fraction, the numerator of which is the number of days in such partial
calendar year and the denominator of which is 365, and the foregoing
weighted average shall be calculated only on the basis of the portion
of such calendar year covered by the Term of this Lease.

For example, if the Actual Operating Expenses Rate
for a calendar year is $3.20 and the Base Operating Expenses Rate is
$3.00, and the Leased Premises contains 19,000 square feet of rentable
area during the entire calendar year, Tenant's Proportionate Share of
Actual Operating Expenses is $3,800.00, calculated as follows: ($3.20
- $3.00) x 19,000 = $3,800.00.

B. If the Actual Operating Expenses Rate during any
calendar year is greater than the Base Operating Expenses Rate, Tenant shall be
obligated to pay to Landlord as additional rental an amount equal to Tenant's
Proportionate Share of Actual Operating Expenses. To implement the foregoing,
Landlord shall provide to Tenant within ninety (90) days (or as soon thereafter
as reasonably possible) after the end of the calendar year in which the
Commencement Date occurs, a statement of the Actual Operating Expenses for such
calendar year, the Actual Operating Expenses Rate for such calendar year, and
Tenant's Proportionate Share of Actual Operating Expenses. If the Actual
Operating Expenses Rate for such calendar year exceeds the Base Operating
Expenses Rate, Tenant shall pay to Landlord, within thirty (30) days after
Tenant's receipt of such statement, an amount equal to Tenant's Proportionate
Share of Actual Operating Expenses for such calendar year.

C. Beginning with January 1, 1998 (or as soon thereafter
as reasonably possible), Landlord shall provide to Tenant a statement of the
projected annual Operating Expenses per square foot of rentable area in the
Project (the "Projected Operating Expenses Rate"). Tenant shall pay to
Landlord on the first day of each month an amount (the "Projected Operating
Expenses Installment") equal to one-twelfth (1/12) of the product of (i) the
positive difference (if any) obtained by subtracting the Base Operating
Expenses Rate from the Projected Operating Expenses Rate for such calendar
year, multiplied by (ii) the number of square feet of rentable area in the
Leased Premises on the first day of the prior month. Until Tenant has received
the statement of the Projected Operating Expenses Rate from Landlord, Tenant
shall continue to pay Projected Operating Expenses Installments to Landlord in
the same amount (if any) as required for the last month of the prior calendar
year. Upon Tenant's receipt of such statement of the Projected Operating
Expenses Rate, Tenant shall pay to Landlord, or Landlord shall pay to Tenant
(whichever is appropriate), the difference between the amount paid by Tenant
prior to receiving such statement and the amount payable by Tenant as set forth
in such statement. Landlord shall provide Tenant a statement within ninety
(90) days (or as soon thereafter as reasonably possible) after the end of each
calendar year, showing the Actual Operating Expenses Rate as compared to the
Projected Operating Expenses Rate for such

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<PAGE> 21

calendar year. If Tenant's Proportionate Share of Actual Operating Expenses
for such calendar year exceeds the aggregate of the Projected Operating
Expenses Installments collected by Landlord from Tenant, Tenant shall pay to
Landlord, within thirty (30) days following Tenant's receipt of such statement,
the amount of such excess. If Tenant's Proportionate Share of Actual Operating
Expenses for such calendar year is less than the aggregate of the Projected
Operating Expenses Installments collected by Landlord from Tenant, Landlord
shall pay to Tenant, within thirty (30) days following Tenant's receipt of such
statement, the amount of such excess. Landlord shall have the right from time
to time during each calendar year to revise the Projected Operating Expenses
Rate and provide Tenant with a revised statement thereof, and thereafter Tenant
shall pay Projected Operating Expenses Installments on the basis of the revised
statement. If the Commencement Date of this Lease is not the first day of a
calendar year, or the expiration or termination date of this Lease is not the
last day of a calendar year, then Tenant's Proportionate Share of Actual
Operating Expenses shall be prorated. The foregoing adjustment provisions
shall survive the expiration or termination of the Term of this Lease.

D. Notwithstanding any other provision herein to the
contrary, it is agreed that if the Project is not fully occupied during any
calendar year an adjustment shall be made in computing the Actual Operating
Expenses for such year so that the Actual Operating Expenses are computed as
though the Project had been fully occupied during such year.

E. Landlord agrees to keep books and records reflecting
the Operating Expenses of the Project in accordance with generally accepted
accounting principles. Tenant, at its expense, shall have the right, within
six (6) months after receiving Landlord's statement of Actual Operating
Expenses for a particular year, to audit Landlord's books and records relating
to the Operating Expenses for such year if the Actual Operating Expenses Rate
exceeds the Base Operating Expenses Rate. If conducted by Tenant, such audit
shall be conducted only during regular business hours at Landlord's office and
only after Tenant gives Landlord fourteen (14) days written notice. Tenant
shall deliver to Landlord a copy of the results of such audit within fifteen
(15) days of its receipt by Tenant. No such audit shall be conducted if any
other tenant not affiliated with Landlord has conducted an audit for the time
period Tenant intends to audit and Landlord furnishes to Tenant a copy of the
results of such audit. No audit shall be conducted at any time that Tenant is
in default of any of terms of the lease. No subtenant shall have any right to
conduct an audit and no assignee shall conduct an audit for any period during
which such assignee was not in possession of the Leased Premises. Such audit
must be conducted by an independent nationally recognized accounting firm that
is not being compensated by Tenant on a contingency fee basis. All information
obtained through the Tenant's audit with respect to financial matters
(including, without limitation, costs, expenses, income) and any other matters
pertaining to the Landlord and/or the Project as well as any compromise,
settlement, or adjustment reached between Landlord and Tenant relative to the
results of the audit shall be held in strict confidence by the Tenant and its
officers, agents, and employees; and Tenant shall cause its auditor and any of
its officers, agents, and employees to be similarly bound. As a condition
precedent to Tenant's exercise of its right to audit, Tenant must deliver to
Landlord a signed covenant from the auditor in a form reasonably satisfactory
to Landlord acknowledging that all of the results of such audit as well as any
compromise, settlement, or adjustment reached between Landlord and Tenant shall
be held in strict confidence and shall not be revealed in any manner to any
person except upon the prior written consent of Landlord, which consent may be
withheld in Landlord's sole discretion, or if required pursuant to any
litigation between Landlord

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<PAGE> 22

and Tenant materially related to the facts disclosed by such audit, or if
required by law. Tenant understands and agrees that this provision is of
material importance to Landlord and that any violation of the terms of this
provision shall result in immediate and irreparable harm to Landlord. Landlord
shall have all rights allowed by law or equity if Tenant, its officers, agents,
or employees and/or the auditor violate the terms of this provision, including,
without limitation, the right to terminate this Lease or the right to terminate
Tenant's right to audit in the future pursuant to this paragraph. Tenant shall
indemnify, defend upon request, and hold Landlord harmless from and against all
costs, damages, claims, liabilities, expenses, losses, court costs, and
attorneys' fees suffered by or claimed against Landlord, based in whole or in
part upon the breach of this paragraph by Tenant and/or its auditor, and shall
cause its auditor to be similarly bound. If within such six (6) month period
Tenant does not give Landlord written notice stating in reasonable detail any
objection to the statement of Actual Operating Expenses, Tenant shall be deemed
to have approved such statement in all respects.

F. Notwithstanding any provision of the Lease to the
contrary, for the purpose of calculating Tenant's Proportionate Share of Actual
Operating Expenses each year during the first ten (10) years of the Term of the
Lease, the items of Actual Operating Expenses which are reasonably subject to
the control of Landlord ("Controllable Expenses") shall be deemed not to
increase more than ten percent (10%) per calendar year (determined on a
cumulative compounding basis throughout the Term of the Lease) for each
calendar year from and after January 1, 1998; provided, however, that no item
of Actual Operating Expenses other than Controllable Expenses shall be subject
to the foregoing limitation. Controllable Expenses shall not include, without
limitation, (i) insurance, (ii) taxes, assessments and governmental charges, as
specified in Paragraph 14.A.(1)(vi) above, and (iii) utilities.

15. EMINENT DOMAIN. If there shall be taken by exercise of the
power of eminent domain during the Term of this Lease any part of the Leased
Premises or the Building, Landlord may elect to terminate this Lease or to
continue same in effect. If Landlord elects to continue this Lease, the rental
shall be reduced in proportion to the area of the Leased Premises so taken, and
Landlord shall repair any damage to the Leased Premises or the Building
resulting from such taking. All sums awarded or agreed upon between Landlord
and the condemning authority for the taking of the interest of Landlord or
Tenant, whether as damages or as compensation, will be the property of Landlord
without prejudice, however, to claims of Tenant against the condemning
authority on account of the unamortized cost of leasehold improvements paid for
by Tenant taken by the condemning authority. If this Lease should be
terminated under any provision of this Paragraph 15, rental shall be payable up
to the date that possession is taken by the condemning authority, and Landlord
will refund to Tenant any prepaid unaccrued rental less any sum then owing by
Tenant to Landlord.

16. ACCESS BY LANDLORD. Landlord, Landlord's agents and employees
shall have access to and the right to enter upon any and all parts of the
Leased Premises at any reasonable time after reasonable prior notice, oral or
written (except in cases of emergency, defined to be any situation in which
Landlord perceives imminent danger of injury to person and/or damage to or loss
of property, in which case Landlord may enter upon any and all parts of the
Leased Premises at any time) to examine the condition thereof, to clean, to
make any repairs, alterations or additions required to be made by Landlord
hereunder, to show the Leased Premises to prospective purchasers or mortgage
lenders (prospective or current) and for any other purpose

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<PAGE> 23

deemed reasonable by Landlord, and to show the Leased Premises to prospective
tenants during the last nine (9) months of the Term of the Lease, and Tenant
shall not be entitled to any abatement or reduction of rental by reason
thereof. Tenant may elect to have a representative present at such entries,
but the failure of Tenant's representative to be present at the time set forth
in Landlord's notice shall not prevent Landlord from exercising its rights
hereunder.

17. LANDLORD'S LIEN. In addition to the statutory landlord's
lien, Landlord shall have at all times a valid security interest to secure
payment of all rentals and other sums of money becoming due hereunder from
Tenant, and to secure payment of any damages or loss which Landlord may suffer
by reason of the breach by Tenant of any covenant, agreement or condition
contained herein, upon all goods, wares, equipment, fixtures, furniture,
improvements and other personal property of Tenant presently, or which may
hereafter be, situated in the Leased Premises, and all proceeds therefrom, and
such property shall not be removed therefrom without the consent of Landlord
until all arrearages in rental as well as any and all other sums of money then
due to Landlord hereunder shall first have been paid and discharged and all the
covenants, agreements and conditions hereof have been fully complied with and
performed by Tenant. Upon the occurrence of an Event of Default as set forth
in Paragraph 18 hereof by Tenant, Landlord may, to the extent permitted by law
and in addition to any other remedies provided herein, enter upon the Leased
Premises and take possession of any and all goods, wares, equipment, fixtures,
furniture, improvements and other personal property of Tenant situated in the
Leased Premises, without liability for trespass or conversion, and sell the
same at public or private sale, with or without having such property at the
sale, after giving Tenant reasonable notice of the time and place of any public
sale or of the time after which any private sale is to be made, at which sale
Landlord or Landlord's assigns may purchase unless otherwise prohibited by law.
Unless otherwise provided by law, and without intending to exclude any other
manner of giving Tenant reasonable notice, the requirement of reasonable notice
shall be met if such notice is given in the manner prescribed in this Lease at
least ten (10) days before the time of sale. Any sale made pursuant to the
provisions of this Paragraph 17 shall be deemed to have been a public sale
conducted in a commercially reasonable manner if held in the Leased Premises or
where the property is located after the time, place and method of sale and a
general description of the types of property to be sold have been advertised in
a daily newspaper published in the county in which the Building is located, for
five (5) consecutive days before the date of the sale. The proceeds from any
such disposition, less any and all expenses connected with the taking of
possession, holding and selling of the property (including reasonable
attorneys' fees) shall be applied as a credit against the indebtedness secured
by the security interest granted in this Paragraph 17. Any surplus shall be
paid to Tenant or as otherwise required by law; Tenant shall pay any
deficiencies forthwith. Upon request of Landlord, Tenant agrees to execute
Uniform Commercial Code financing statements relating to the aforesaid security
interest.

18. DEFAULTS.

A. Each of the following acts or omissions of Tenant or
occurrences shall constitute an "Event of Default":

(1) Failure or refusal by Tenant to pay rental or other
payments hereunder upon the expiration of a period of ten (10) days
following written notice to Tenant of such failure; provided, however,
that Landlord shall not be required to send such written notice

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to Tenant more than twice in any one calendar year and after such two
(2) written notices, Landlord shall have no obligation to give Tenant
written notice of any subsequent default during the remainder of such
calendar year and Tenant's failure or refusal to timely pay rental or
other payments hereunder when due during the remainder of such
calendar year shall constitute an Event of Default.

(2) Failure to perform or observe any covenant or
condition of this Lease by Tenant to be performed or observed upon the
expiration of a period of ten (10) days following written notice to
Tenant of such failure; provided, however, that in the event Tenant's
failure to perform a covenant or condition of this Lease cannot
reasonably be cured within ten (10) days following written notice to
Tenant, Tenant shall not be in default if Tenant commences to cure
same within the ten (10) day period and thereafter diligently
prosecutes the curing thereof, but in no event shall Tenant's cure
period exceed thirty (30) days following written notice to Tenant.

(3) Abandonment or vacating of the Leased Premises or any
significant portion thereof.

(4) The filing or execution or occurrence of any one of
the following: (i) a petition in bankruptcy or other insolvency
proceeding by or against Tenant, (ii) petition or answer seeking
relief under any provision of the Bankruptcy Act, (iii) an assignment
for the benefit of creditors, or composition, (iv) a petition or other
proceeding by or against Tenant for the appointment of a trustee,
receiver or liquidator of Tenant or any of Tenant's property, or (v) a
proceeding by any governmental authority for the dissolution or
liquidation of Tenant.

(5) Tenant shall default under that certain agreement by
and between Landlord and Tenant with respect to rooftop rights
referenced in Paragraph 32 of this Lease upon the expiration of any
cure period set forth therein.

B. This Lease and the Term and estate hereby granted and
the demise hereby made are subject to the limitation that if and whenever any
Event of Default shall occur, Landlord may, at Landlord's option, in addition
to all other rights and remedies given hereunder or by law or equity, do any
one (1) or more of the following:

(1) Terminate this Lease, in which event Tenant shall
immediately surrender possession of the Leased Premises to Landlord.

(2) Enter upon and take possession of the Leased Premises
and expel or remove Tenant and any other occupant therefrom, with or
without having terminated the Lease.

(3) Alter locks and other security devices at the Leased
Premises.

C. Exercise by Landlord of any one (1) or more remedies
hereunder granted or otherwise available shall not be deemed to be an
acceptance of surrender of the Leased Premises by Tenant, whether by agreement
or by operation of law, it being understood that such surrender can be effected
only by the written agreement of Landlord and Tenant. No such

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alteration of security devices and no removal or other exercise of dominion by
Landlord over the property of Tenant or others at the Leased Premises shall be
deemed unauthorized or constitute a conversion, Tenant hereby consenting, after
any Event of Default, to the aforesaid exercise of dominion over Tenant's
property within the Building. All claims for damages by reason of such
re-entry and/or possession and/or alteration of locks or other security devices
are hereby waived, as are all claims for damages by reason of any distress
warrant, forcible detainer proceedings, sequestration proceedings or other
legal process. Tenant agrees that any re-entry by Landlord may be pursuant to
judgment obtained in forcible detainer proceedings or other legal proceedings
or without the necessity for any legal proceedings, as Landlord may elect, and
Landlord shall not be liable in trespass or otherwise.

D. In the event that Landlord elects to terminate this
Lease by reason of an Event of Default, then, notwithstanding such termination,
Tenant shall be liable for and shall pay to Landlord, at the address specified
in Paragraph 1.C. hereof, the sum of all rental and other indebtedness accrued
to the date of such termination, plus, as damages, an amount equal to the then
present value of the rental reserved hereunder for the remaining portion of the
Term of this Lease (had such Term not been terminated by Landlord prior to the
expiration of the Term of this Lease) less the then present value of the fair
rental value of the Leased Premises for such period, the undersigned parties
hereby stipulating that such fair rental value shall in no event be deemed to
exceed sixty percent (60%) of the then present value of the rental reserved for
such period.

In the event that Landlord elects to terminate the Lease by
reason of an Event of Default, in lieu of exercising the rights of Landlord
under the preceding paragraph of this Paragraph 18.D., Landlord may instead
hold Tenant liable for all rental and other indebtedness accrued to the date of
such termination, plus such rental and other indebtedness as would otherwise
have been required to be paid by Tenant to Landlord during the period following
termination of the Term of this Lease measured from the date of such
termination by Landlord until the expiration of the Term of this Lease (had
Landlord not elected to terminate the Lease on account of such Event of
Default) diminished by any net sums thereafter received by Landlord through
reletting the Leased Premises during said period (after deducting expenses
incurred by Landlord as provided in Paragraph 18.F. hereof). Actions to
collect amounts due by Tenant provided for in this paragraph of this Paragraph
18.D. may be brought from time to time by Landlord during the aforesaid period,
on one (1) or more occasions, without the necessity of Landlord's waiting until
the expiration of such period, and in no event shall Tenant be entitled to any
excess of rental (or rental plus other sums) obtained by reletting over and
above the rental provided for in this Lease.

E. In the event that Landlord elects to repossess the
Leased Premises without terminating this Lease, then Tenant shall be liable for
and shall pay to Landlord, at the address specified in Paragraph 1.C. hereof,
all rental and other indebtedness accrued to the date of such repossession,
plus rental required to be paid by Tenant to Landlord during the remainder of
the Term of this Lease until the expiration of the Term of this Lease,
diminished by any net sums thereafter received by Landlord through reletting
the Leased Premises during said period (after deducting expenses incurred by
Landlord as provided in Paragraph 18.F. hereof). In no event shall Tenant be
entitled to any excess of any rental obtained by reletting over and above the
rental herein reserved. Actions to collect amounts due by Tenant as provided
in this

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Paragraph 18.E. may be brought from time to time, on one (1) or more occasions,
without the necessity of Landlord's waiting until the expiration of the Term of
this Lease.

F. In case of an Event of Default, Tenant shall also be
liable for and shall pay to Landlord, at the address specified in Paragraph
1.C. hereof, in addition to any sum provided to be paid above: (i) broker's
fees incurred by Landlord in connection with reletting the whole or any part of
the Leased Premises, (ii) the cost of removing and storing Tenant's or other
occupant's property, (iii) the cost of repairing, altering, remodeling or
otherwise putting the Leased Premises into condition acceptable to a new tenant
or tenants and (iv) all reasonable expenses incurred by Landlord in enforcing
Landlord's remedies, including reasonable attorneys' fees. Past due rental and
other past due payments shall bear interest from maturity at the lesser per
annum rate of (i) four percent (4%) in excess of Prime Rate (as defined in
Paragraph 1.Q. hereof), or (ii) the highest lawful rate, until paid.

G. In the event of termination or repossession of the
Leased Premises for an Event of Default, Landlord shall not have any obligation
to relet or attempt to relet the Leased Premises, or any portion thereof, or to
collect rental after reletting; but Landlord shall have the option to relet or
attempt to relet; and in the event of reletting, Landlord may relet the whole
or any portion of the Leased Premises for any period to any tenant and for any
use and purpose.

H. If Tenant should fail to make any payment or cure any
default hereunder within the time herein permitted, Landlord; without being
under any obligation to do so and without thereby waiving such default, may
make such payment and/or remedy such other default for the account of Tenant
(and enter the Leased Premises for such purpose), and thereupon Tenant shall be
obligated to, and hereby agrees to, pay Landlord, upon demand, all costs,
expenses and disbursements (including reasonable attorneys' fees) incurred by
Landlord in taking such remedial action.

I. In the event of any default by Landlord, Tenant's
exclusive remedy shall be an action for damages (Tenant hereby waiving the
benefit of any laws granting Tenant a lien upon the property of Landlord and/or
upon rental due Landlord), but prior to any such action Tenant will give
Landlord written notice specifying such default with particularity, and
Landlord shall thereupon have thirty (30) days (plus such additional reasonable
period as may be required in the exercise by Landlord of due diligence) in
which to cure any such default. Unless and until Landlord fails to so cure any
default after such notice, Tenant shall not have any remedy or cause of action
by reason thereof. All obligations of Landlord hereunder will be construed as
covenants, not conditions; and all such obligations will be binding upon
Landlord only during the period of Landlord's possession of the Building and
not thereafter.

The term "Landlord" shall mean only the owner, for the time
being, of the Building, and in the event of the transfer by such owner of its
interest in the Building, such owner shall thereupon be released and discharged
from all covenants and obligations of the Landlord thereafter accruing, but
such covenants and obligations shall be binding during the Term of this Lease
upon each new owner for the duration of such owner's ownership.

19. NONWAIVER. Neither acceptance of rental or other payments by
Landlord nor failure by Landlord to complain of any action, nonaction or
default of Tenant shall constitute a

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waiver of any of Landlord's rights hereunder. Waiver by Landlord of any right
for any default of Tenant shall not constitute a waiver of any right for either
a subsequent default of the same obligation or any other default. Receipt by
Landlord of Tenant's keys to the Leased Premises shall not constitute an
acceptance of surrender of the Leased Premises.

20. HOLDING OVER. If Tenant should remain in possession of the
Leased Premises after the expiration of the Term of this Lease, without the
execution by Landlord and Tenant of a new lease or an extension of this Lease,
then Tenant shall be deemed to be occupying the Leased Premises as a
tenant-at-sufferance, subject to all the covenants and obligations of this
Lease and at a daily rental of one hundred fifty percent (150%) of the per day
rental provided for the last month of the Term of this Lease, computed on the
basis of a thirty (30) day month. The inclusion of the preceding sentence
shall not be construed as Landlord's consent for Tenant to hold over. If any
property not belonging to Landlord remains at the Leased Premises after the
expiration of the Term of this Lease, Tenant hereby authorizes Landlord to make
such disposition of such property as Landlord may desire without liability for
compensation or damages to Tenant in the event that such property is the
property of Tenant; and in the event that such property is the property of
someone other than Tenant, Tenant agrees to indemnify and hold Landlord
harmless from all suits, actions, liability, loss, damages and expenses in
connection with or incident to any removal, exercise or dominion over and/or
disposition of such property by Landlord.

21. COMMON AREA. The Common Area, as defined in Paragraph 1.P.
hereof, shall be subject to Landlord's sole management and control and shall be
operated and maintained in such manner as Landlord in Landlord's discretion
shall determine. Landlord reserves the right to change from time to time the
dimensions and location of the Common Area, to construct additional stories on
the Building and to place, construct or erect new structures or other
improvements on any part of the Land without the consent of Tenant. Such
changes shall not materially interfere with Tenant's use of the Leased
Premises. Tenant, and Tenant's employees and invitees shall have the
nonexclusive right to use the Common Area as constituted from time to time,
such use to be in common with Landlord, other tenants of the Building and other
persons entitled to use the same, and subject to such reasonable rules and
regulations governing use as Landlord may from time to time prescribe. Tenant
shall not solicit business or display merchandise within the Common Area, or
distribute handbills therein, or take any action which would interfere with the
rights of other persons to use the Common Area. Landlord may temporarily close
any part of the Common Area for such periods of time as may be necessary to
prevent the public from obtaining prescriptive rights or to make repairs or
alterations.

22. RULES AND REGULATIONS. Tenant, and Tenant's agents, employees
and invitees shall comply fully with all requirements of the rules and
regulations of the Building which are attached hereto as Exhibit C and made a
part hereof. Landlord shall at all times have the right to change such rules
and regulations or to amend or supplement them in such manner as may be deemed
advisable for the safety, care and cleanliness of the Leased Premises and the
Building and for preservation of good order therein, all of which rules and
regulations, changes and amendments shall be forwarded to Tenant and shall be
carried out and observed by Tenant from and after ten (10) days following
delivery of notice thereof to Tenant. Such rules and regulations may not
require Tenant to pay additional rental and shall not be applied retroactively.

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Tenant shall further be responsible for the compliance with such rules and
regulations by the employees, agents and invitees of Tenant.

23. TAXES. Tenant shall be liable for the timely payment of all
taxes levied or assessed against personal property, furniture or fixtures or
equipment placed by Tenant in the Leased Premises. If any such taxes for which
Tenant is liable are levied or assessed against Landlord or Landlord's property
and if Landlord elects to pay the same, or if the assessed value of Landlord's
property is increased by inclusion of personal property, furniture or fixtures
or equipment placed by Tenant in the Leased Premises, and Landlord elects to
pay the taxes based on such increase Tenant shall pay to Landlord upon demand
that part of such taxes for which Tenant is liable hereunder.

24. INSURANCE. Tenant shall, at Tenant's expense, procure and
maintain throughout the Term of this Lease a policy or policies of
comprehensive public liability insurance, contractual liability insurance and
property damage insurance, issued by insurers of recognized responsibility,
authorized to do business in the State in which the Building is located,
insuring Tenant and Landlord against any and all liability for injury to or
death of a person or persons, occasioned by or arising out of or in connection
with the use or occupancy of the Leased Premises, the limits of such policy or
policies to be in an amount of not less than $2,000,000 combined single limit
with respect to any one (1) occurrence, and shall furnish evidence satisfactory
to Landlord of the maintenance of such insurance. Tenant shall obtain a
written obligation on the part of each insurer to notify Landlord at least
fifteen (15) days prior to modification or cancellation of such insurance. In
the event Tenant shall not have delivered to Landlord a policy or certificate
evidencing such insurance at least fifteen (15) days prior to the Commencement
Date and at least fifteen (15) days prior to the expiration dates of each
expiring policy, Landlord may obtain such insurance as Landlord may reasonably
require to protect Landlord's interest. The cost for such policies shall be
paid by Tenant to Landlord as additional rental upon demand plus an
administrative charge as determined by Landlord.

25. PARKING. Landlord hereby leases to Tenant and Tenant hereby
leases from Landlord the number of parking spaces specified in Paragraph 1.S.
hereof in the parking facility from time to time associated with the Building
at the prevailing market rental established by Landlord from time to time for
similar parking spaces in such parking facility. Tenant shall pay to Landlord
the prevailing market rental from time to time established by Landlord for such
number of parking spaces as additional rental monthly together with and in
addition to Base Rental, whether or not such number of parking spaces are in
use. Tenant may not increase or decrease such number of parking spaces without
the prior written consent of Landlord. Tenant agrees to comply with such
reasonable rules and regulations as may be promulgated from time to time for
the use of such parking facility, including, without limitation, rules and
regulations requiring the parking of vehicles in designated spaces or areas to
the exclusion of other spaces or areas. Such rules may not require Tenant to
pay additional rental and shall not be applied retroactively. Parking spaces
will be unassigned, provided that Landlord may at any time assign parking
spaces. Tenant shall, if requested by Landlord, furnish to Landlord a complete
list of the license plate numbers of all vehicles operated by Tenant, Tenant's
employees and agents. Landlord shall not be liable for any damage of any
nature whatsoever to, or any theft of, vehicles, or contents therein, in or
about such parking facility. During temporary periods of construction or
repair, Landlord shall use Landlord's best efforts to provide suitable
substitute parking

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facilities in reasonable proximity to the Building; provided, however, if for
any reason Landlord fails or is unable to provide suitable substitute parking
facilities in reasonable proximity to the Building, Landlord shall not be
deemed to be in default hereunder, but Tenant's obligation to pay the
prevailing market rental for any such parking spaces shall cease for so long as
Tenant does not have the use of such parking spaces and such abatement shall
constitute full settlement of all claims that Tenant might otherwise have
against Landlord by reason of such failure or inability to provide such parking
spaces.

26. PERSONAL LIABILITY. The liability of Landlord to Tenant for
any default by Landlord under the terms of this Lease shall be limited to the
proceeds of sale on execution of the interest of Landlord in the Building and
in the Land, and neither Landlord, nor any party comprising Landlord, shall be
personally liable for any deficiency. This clause shall not be deemed to limit
or deny any remedies which Tenant may have in the event of default by Landlord
hereunder which do not involve the personal liability of Landlord.

27. NOTICE. Any notice which may or shall be given under the
terms of this Lease shall be in writing and shall be either delivered by hand
(including commercially recognized messenger and express mail service) or sent
by United States Mail, registered or certified, return receipt requested,
postage prepaid, if for Landlord, to the Building office and at the address
specified in Paragraph 1.C. hereof, or if for Tenant, to the Leased Premises
or, if prior to the Commencement Date, at the address specified in Paragraph
1.E. hereof, or at such other addresses as either party may have theretofore
specified by written notice delivered in accordance herewith. Such address may
be changed from time to time by either party by giving notice as provided
herein. Notice shall be deemed given when delivered (if delivered by hand) or,
whether actually received or not, when postmarked (if sent by mail). If the
term "Tenant" as used in this Lease refers to more than one (1) person and/or
entity, and notice given as aforesaid to any one of such persons and/or
entities shall be deemed to have been duly given to Tenant.

28. LANDLORD'S MORTGAGEE. If the Building and/or Leased Premises
are at any time subject to a ground lease, mortgage, deed of trust or other
lien, then in any instance in which Tenant gives notice to Landlord alleging
default by Landlord hereunder, Tenant will also simultaneously give a copy of
such notice to each Landlord's Mortgagee (provided Landlord or Landlord's
Mortgagee shall have advised Tenant of the name and address of Landlord's
Mortgagee) and each Landlord's Mortgagee shall have the right (but no
obligation) to cure or remedy such default during the period that is permitted
to Landlord hereunder, plus an additional period of thirty (30) days, and
Tenant will accept such curative or remedial action (if any) taken by
Landlord's Mortgagee with the same effect as if such action had been taken by
Landlord.

29. BROKERAGE. Landlord and Tenant each represents and warrants
that it has dealt with no broker, agent or other person in connection with this
transaction and that no broker, agent or other person brought about this
transaction, other than Broker specified in Paragraph 1.R. hereof, and Landlord
and Tenant each agrees to indemnify and hold the other harmless from and
against any claims by any other broker, agent or other person claiming a
commission or other form of compensation by virtue of having dealt with the
indemnifying party with regard to this leasing transaction. The provisions of
this Paragraph 29 shall survive the termination of this Lease.

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<PAGE> 30

30. PREPAID RENTAL AND SECURITY DEPOSIT. Landlord hereby
acknowledges receipt from Tenant of the sum stated in Paragraph 1.M. hereof to
be applied to the first accruing monthly installments of rental. Landlord
further acknowledges receipt from Tenant of a Security Deposit in the amount
stated in Paragraph 1.N. hereof to be held by Landlord as security for the
performance by Tenant of Tenant's covenants and obligations under this Lease,
it being expressly understood that such deposit shall not be considered an
advance payment of rental or a measure of Landlord's damages in case of default
by Tenant. The Security Deposit shall be held by Landlord without liability to
Tenant for interest, and Landlord may commingle such deposit with any other
funds held by Landlord. If Tenant should be late in the making of any payment
of rental or other sum due under this Lease, Tenant agrees that, upon request
of Landlord, Tenant will increase forthwith the amount of the Security Deposit
to a sum double the existing amount thereof. Upon the occurrence of any Event
of Default, Landlord may, from time to time, without prejudice to any other
remedy, use such fund to the extent necessary to make good any arrears of
rental and any other damage, injury, expense or liability caused to Landlord by
such Event of Default. Following any such application of the Security Deposit,
Tenant shall pay to Landlord on demand the amount so applied in order to
restore the Security Deposit to the amount thereof immediately prior to such
application. If Tenant is not then in default hereunder, any remaining balance
of such deposit shall be returned by Landlord to Tenant upon termination of
this Lease; provided, however, Landlord shall have the right to retain and
expend such remaining balance for cleaning and repairing the Leased Premises if
Tenant shall fail to deliver up the same at the expiration or earlier
termination of this Lease in the condition required by the provisions of this
Lease. If Landlord transfers Landlord's interest in the Leased Premises during
the Term of this Lease (including any renewal thereof), Landlord may assign the
Security Deposit to the transferee and thereafter shall have no further
liability for the return of the Security Deposit.

31. SPRINKLERS. If there now is or shall be installed in the
Building a sprinkler system and such system, or any of its components shall be
damaged or injured or not in proper working order by reason of any act or
omission of Tenant, Tenant's agents servants, employees, licensees or visitors,
then Tenant shall forthwith restore the same to good working condition at
Tenant's own expense; and if the Board of Fire Underwriters or any bureau,
department or official of the state or local government require or recommend
that any changes, modifications, alterations or additional sprinkler heads or
other equipment be made or supplied by reason of Tenant's business, or the
location of partitions, trade fixtures or other contents of the Leased
Premises, or for any other reason, or if any such changes, modifications
alterations, additional sprinkler heads or other equipment become necessary to
prevent the imposition of a penalty or charge against the full allowance for a
sprinkler system in the fire insurance rate as fixed by the Board of Fire
Underwriters, or by any fire insurance company, Tenant shall, at Tenant's
expense, promptly make and supply such changes, modifications, alterations,
additional sprinkler heads or other equipment. Subject to Landlord's approval
of the plans and specifications therefor and the contractors who will perform
such work, Tenant may install a FM 200 fire suppression system in the Leased
Premises. Upon the expiration or earlier termination of the Term of this
Lease, Tenant shall remove such fire suppression system and return the
sprinkler system in the Leased Premises to the condition in which it existed on
the date Landlord delivered the Leased Premises to Tenant.

32. ROOFTOP RIGHTS.

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Landlord and Tenant contemplate entering into a separate
agreement to be negotiated with Tenant by Landlord or Landlord's roof
consultant addressing Tenant's rights with respect to the Building's rooftop.

33. INTERCONNECTION RIGHTS.

A. Landlord acknowledges that the nature of Tenant's
business may require it to interconnect with other telecommunications companies
which may also be located in the Building. Landlord agrees that Tenant may,
subject to the payment of a Riser Fee as set forth in Paragraph 1.L and
Landlord's prior written approval, which approval, subject to the following
provisions, shall not be unreasonably withheld, delayed or conditioned:

i. install, maintain and use cable, conduits,
wires, cable ducts, telephone closets and ladder racks for the conduct
of its business between the Leased Premises and other parts of the
Building; and

ii. directly connect to, interface with, or
otherwise attach to, the lines and facilities of the public utilities
supplying electrical or telephone services to the Building, for
additional electric energy and telephone connections to the Leased
Premises.

B. In the event that Tenant desires to make any of the
foregoing modifications or improvements, Tenant shall provide written notice to
Landlord describing the type, size, location and manner of such desired
modification or improvement. Landlord shall advise Tenant in writing within
five (5) business days of Landlord's receipt of such notice of Landlord's
approval or disapproval of such requested modification or improvement, or of
the requirement that Tenant submit detailed drawings and specifications of such
modification or improvement. If Landlord notifies Tenant of the requirement
that Tenant submit detailed drawings and specifications, Tenant may then elect
to withdraw its request or submit detailed drawings and specifications, at
Tenant's sole cost and expense, regarding such modification or improvement.
Tenant agrees that Landlord's disapproval of any of the foregoing modifications
and improvements shall be reasonable if any such modifications or improvements
have a material negative impact on any Building electrical, mechanical,
plumbing or other system or the structual or aesthetic integrity of the
Building or if space is not available for such installation after taking into
consideration the needs of Landlord and of other tenants in the Building.
Subject to Landlord's prior written approval, Tenant shall have access to and
use of all common areas, lines, chase ways and ways of passage in the Building
and the Leased Premises necessary to effectuate the rights set forth in this
paragraph, provided said access and use does not interfere with the operation
of the Building, the existing equipment of other tenants or Landlord's
obligations to other tenants in the Building. Any installation carried out by
Tenant pursuant to this paragraph shall be at Tenant's sole cost and expense,
shall be performed in accordance with the other provisions of this Lease, and
shall comply with all applicable federal, state and local laws and ordinances.
Tenant agrees to indemnify and hold Landlord harmless from and against any and
all loss, cost, claim and liability (including all attorneys' fees) for
injuries to all persons and for damage to or loss of all property arising or
alleged to arise from any act or omission of Tenant or Tenant's agents,
employees, or contractors relating to the installation, maintenance, operation
and removal of such improvements, installations and modifications.

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<PAGE> 32
C. Upon the expiration or earlier termination of the
Term of this Lease, Tenant shall remove any and all of the improvements
described in this Paragraph 33 in a good and workmanlike manner, and Tenant
will repair any damage occasioned by such removal. If Tenant fails to remove
such improvements within thirty (30) days after the expiration or earlier
termination of the Term of this Lease, Landlord shall have the right, but not
the obligation, to elect either (i) to remove such improvements at Tenant's
cost and expense, and Landlord shall have no liability for the return of, or
damage to, such improvements, or (ii) to treat such improvements as abandoned
by Tenant.

34. EMERGENCY POWER.

A. Tenant shall have the right, subject to Landlord's
weight stress, load bearing and ventilation requirements and at Tenant's sole
cost and expense, to install and maintain a 400 kilowatt emergency diesel
generator and associated skid fuel tank at the location set forth on Exhibit D
attached hereto and made a part hereof for all purposes. Tenant shall
maintain, at Tenant's sole cost and expense, a fence around such emergency
generator. Additionally, subject to Landlord's prior written approval of plans
and specifications relating thereto, Tenant shall have the right to install
such wire, conduits, cables and other materials as necessary to connect such
emergency generator to the Leased Premises (the emergency generator and
connecting material, being collectively referred to as the "Generator
Installation"). Tenant shall be responsible for all costs and expenses arising
from and relating to the Generator Installation. The Generator Installation
shall be in compliance with all applicable federal, state and local laws and
ordinances and Tenant shall indemnify and hold Landlord harmless from and
against any and all loss, cost, claim and liability arising from Tenant's
failure to satisfy such requirement. Landlord agrees that Tenant and
representatives designated by Tenant and approved by Landlord shall have
reasonable access to the Generator Installation in order to install, operate,
maintain inspect and remove as required, the Generator Installation, except
when reasonable safety and security requirements of Landlord preclude such
access. Landlord shall not unreasonably interfere with or impair Tenant's use,
operation, maintenance or repair of the Generator Installation. Subject to
Landlord's obligation not to unreasonably interfere with or impair Tenant's
use, operation, maintenance or repair of the Generator Installation, Landlord
reserves the right to lease space in the Project to other tenants, as Landlord
may desire, for any purpose, including the installation and operation of a
separate emergency generator. Notwithstanding any contrary provision contained
herein, Landlord shall have the right to relocate, at Landlord's sole, expense
the Generator Installation to another location in the Project, as Landlord
shall elect; provided, however, that no such relocation may result in any
additional cost or expense to Tenant or have any detrimental effect on Tenant's
use and operation of the Generator Installation.

B. Subject to the availability of a location in the
Project acceptable to Landlord and Tenant and subject to Landlord's approval of
the plans and specifications therefor and the contractors who will perform such
work, Tenant may, at Tenant's sole cost and expense install a generator plug
(the "Plug Installation") for the purpose of connecting the Leased Premises to
a portable generator.

C. Subject to Landlord's approval of the location
thereof, the plans and specifications therefor and the contractors who will
perform such work, Tenant may, at Tenant's

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sole cost and expense, install an electrical grounding system (the "Electrical
Grounding Installation") utilizing grounding rods, which system shall connect
to the Building's main telecommunications electrical grounding system.

D. The Generator Installation, the Plug Installation and
the Electrical Grounding Installation are collectively referred to herein as
the "Emergency Power Installation."

E. Tenant agrees to indemnify and hold Landlord harmless
from and against any and all loss, cost, claim and liability (including all
attorneys' fees) for injuries to all persons and for damage to or loss of all
property arising or alleged to arise from any act or omission of Tenant or
Tenant's agents, employees, or contractors relating to the installation,
maintenance, operation or removal of the Emergency Power Installation.

F. Upon the expiration or earlier termination of the
Term of this Lease, Tenant shall remove the Emergency Power Installation and
related improvements in a good and workmanlike manner, and Tenant will repair
any damage occasioned by such removal. If Tenant fails to remove the Emergency
Power Installation within thirty (30) days after the expiration or earlier
termination of the Term of this Lease, Landlord shall have the right, but not
the obligation, to elect either (i) to remove the Emergency Power Installation
at Tenant's cost and expense, and Landlord shall have no liability for the
return of, or damage to, the Emergency Power Installation, or (ii) to treat the
Emergency Power Installation as abandoned by Tenant.

35. SUPPLEMENTAL HVAC.

A. Tenant shall have the right to install and maintain,
at Tenant's sole cost and expense, at least forty (40) tons of supplemental
air-conditioning equipment at the location set forth on Exhibit D attached
hereto. Tenant shall maintain, at Tenant's sole cost and expense, a fence
around such supplemental air conditioning equipment. Additionally, subject to
Landlord's prior written approval of plans and specifications relating thereto,
Tenant shall have the right to install such wire, conduits, cables and other
materials as necessary to connect such supplemental air conditioning equipment
to the Leased Premises (the supplemental air conditioning equipment and
connecting material being collectively referred to as the "HVAC Installation").
Landlord agrees not to unreasonably withhold or delay its approval regarding
matters involving the HVAC Installation on which Landlord's approval is
required. Tenant shall be responsible for all costs and expenses arising from
and relating to the HVAC Installation. The HVAC Installation shall be in
compliance with all applicable federal, state and local laws and ordinances and
Tenant shall indemnify and hold Landlord harmless from and against any and all
loss, cost, claim and liability arising from Tenant's failure to satisfy such
requirement.

B. Tenant agrees to indemnify and hold Landlord harmless
from and against any and all loss, cost, claim and liability (including all
attorneys' fees) for injuries to all persons and for damage to or loss of all
property arising or alleged to arise from any act or omission of Tenant or
Tenant's agents, employees, or contractors relating to the installation,
maintenance, operation or removal of the Installation, except to the extent
such injury, damage or loss of property is caused by Landlord's negligence or
willful misconduct.

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C. Landlord agrees that Tenant and representatives
designated by Tenant and approved by Landlord shall have reasonable access to
the HVAC Installation in order to install, operate, maintain, inspect and
remove as required, the HVAC Installation, except when reasonable safety and
security requirements of Landlord preclude such access. Landlord shall not
unreasonably interfere with or impair Tenant's use, operation, maintenance or
repair of the HVAC Installation.

D. Subject to Landlord's obligation not to unreasonably
interfere with or impair Tenant's use, operation, maintenance or repair of the
HVAC Installation, Landlord reserves the right to lease space in the Project to
other tenants, as Landlord may desire, for any purpose, including the
installation and operation of supplemental air conditioning equipment.

E. Notwithstanding any contrary provision contained
herein, Landlord shall have the right to relocate, at Landlord's sole expense,
the HVAC Installation to another location in the Project, as Landlord shall
elect; provided, however, that no such relocation may result in any additional
cost or expense to Tenant or have any detrimental effect on Tenant's use and
operation of the HVAC Installation.

F. Upon the expiration or earlier termination of the
Term of this Lease, Tenant shall remove the HVAC Installation and related
improvements in a good and workmanlike manner, and Tenant will repair any
damage occasioned by such removal. If Tenant fails to remove the HVAC
Installation within thirty (30) days after the expiration or earlier
termination of the Term of this Lease, Landlord shall have the right, but not
the obligation, to elect either (i) to remove the HVAC Installation at Tenant's
cost and expense, and Landlord shall have no liability for the return of, or
damage to, the HVAC Installation, or (ii) to treat the HVAC Installation as
abandoned by Tenant.

36. REMOVAL OF ABOVE-CEILING ALTERATIONS. At the termination of
this Lease, Tenant shall, at Tenant's sole cost and expense, remove all
above-ceiling alterations made by or on behalf of Tenant to the Leased
Premises, including, without limitation, the initial alterations made to the
Leased Premises, and repair all damage caused thereby. In addition, Tenant
shall, at Tenant's sole cost and expense, replace all above-ceiling
improvements removed by Tenant or on behalf of Tenant from the Leased Premises
so that Tenant shall return the above-ceiling portion of the Leased Premises to
Landlord in the same condition as it exists on the date of this Lease. Such
work shall be done in a good and workmanlike manner and in accordance with the
terms and conditions of Paragraph 11 of this Lease.

37. DELIVERY OF LEASED PREMISES.

A. Prior to the execution of this Lease, Tenant has
inspected the Leased Premises and conducted such tests as Tenant, in Tenant's
sole discretion, deems appropriate. Tenant hereby leases the Leased Premises
on an "as is," "where is" basis without representation or warranty, express or
implied. Landlord shall have no obligation to construct or install leasehold
improvements in the Leased Premises.

B. Tenant shall construct or have constructed in a first
class and workmanlike manner the tenant finish improvements (the "Tenant Finish
Work") to be constructed and

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installed in the Leased Premises. The Tenant Finish Work shall be constructed
in accordance with plans and specifications prepared or caused to be prepared
by Tenant, at Tenant's sole cost and expense, and approved in advance, in
writing, by Landlord, such approval not to be unreasonably withheld or delayed;
provided, however, that Landlord shall be deemed to have reasonably withheld
its consent if Landlord withholds its consent because any proposed tenant
finish improvements negatively impacts any system of the Building including,
without limitation, the Building's floor load bearing requirements or its
mechanical, electrical, plumbing or HVAC systems. The Tenant Finish Work shall
be constructed in accordance with all applicable building laws and ordinances
and all covenants, conditions and restrictions affecting the Project. Tenant
shall obtain Landlord's written approval of Tenant's bid package prior to
delivering the bid package to prospective contractors, such approval not to be
unreasonably withheld or delayed. Tenant shall not commence the construction
of any portion of the Tenant Finish Work until Landlord has approved, in
writing, the contractors who shall perform the Tenant Finish Work, including,
without limitation, the mechanical, electrical, and plumbing contractors, such
approval not to be unreasonably withheld or delayed. Attached as Exhibit F is
a list of Landlord's approved general, electrical and mechanical contractors.
Tenant shall have the right to competitively bid the Tenant Finish Work.
Tenant shall pay Landlord's designated construction manager a construction
management fee of five percent (5%) of the cost of the Tenant Finish Work.

C. Landlord shall permit Tenant and Tenant's agents to
enter the Leased Premises after Landlord tenders possession of the Leased
Premises to Tenant and prior to the Commencement Date in order that Tenant may
perform the Tenant Finish Work through Tenant's own contractors. The foregoing
license to enter prior to the Commencement Date is conditioned upon Tenant's
workmen and mechanics working in harmony and not materially interfering with
the labor employed by Landlord, Landlord's mechanics or contractors or with any
other tenant or their contractors. Such license is further conditioned upon
workers' compensation and public liability insurance and property damage
insurance, all in amounts and with companies and on forms reasonably
satisfactory to Landlord, being provided and at all times maintained by
Tenant's contractors engaged in the performance of the Tenant Finish Work, and
certificates of such insurance being furnished to Landlord prior to proceeding
with the work and upon Tenant's workmen and mechanics complying with the rules
and regulations promulgated from time to time by Landlord for the construction
of tenant improvements. If at any time such entry shall cause material
disharmony or interference to other tenants, contractors or labor for any
reason whatsoever including, without limitation, strikes or other work
stoppages and if Tenant has not caused such disharmony or interference to
promptly cease following notice thereof to Tenant, then this license may be
revoked by Landlord until such disharmony or interference ceases. Such entry
shall be deemed to be under all of the terms, covenants, provisions and
conditions of the Lease. Landlord shall not be liable in any way for any
injury, loss or damage which may occur to any of the Tenant Finish Work prior
to or after the Commencement Date, the same being solely at Tenant's risk.

D. Tenant shall indemnify and hold Landlord harmless
from and against any and all demands liability, liens, claims, losses, costs
and expenses (including reasonable attorneys' fees) relating to or arising from
the design, construction and installation of the Tenant Finish Work.
Notwithstanding the fact that Landlord may, from time to time, review all
applicable plans and specifications and monitor the progress of the Tenant
Finish Work,

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Landlord shall have no obligation or liability to Tenant relating to or arising
from the workmanship or materials employed in the construction and preparation
of the Tenant Finish Work and the related space planning and architectural
services.

38. RENEWAL OPTIONS.

A. If there is no uncured Event of Default hereunder,
Tenant shall have the right to renew the term of this Lease for two (2)
additional periods of five (5) years each upon the same terms, conditions and
provisions applicable to the primary term of this Lease (unless otherwise
expressly provided herein), except that the Base Rental for each additional
term of five (5) years shall be the product of (i) the number of rentable
square feet then contained in the Leased Premises multiplied by (ii) an amount
equal to the then prevailing market base rental rate per rentable square foot
per annum (taking into consideration use, location and floor level, size of
space, definition of rentable area, quality, age and location of the applicable
building, Tenant's financial status, rental concessions, tenant improvements
and refurbishment allowances, expense stop, moving allowances, architectural
allowances, parking rental concessions, brokerage commissions, other
inducements, the time the particular rate under consideration becomes effective
and all other relevant factors) plus the then prevailing market riser fee
(collectively, the Market Rental") charged for comparable office space and
riser facilities in comparable buildings in the central business district of
Dallas, Texas.

B. Tenant shall evidence its intent to exercise its
right of renewal separately with respect to each renewer term by delivering to
Landlord written notice ("Tenant's Notice") of Tenant's desire to renew the
Term of this Lease as aforesaid at least nine (9) months (but not more than
twelve (12) months) prior to the expiration of the then current Term of this
Lease. Within thirty (30) days following delivery of Tenant's Notice, Landlord
shall deliver to Tenant a written notice ("Landlord's Notice") specifying the
Market Rental for the additional term of five (5) years in question. Tenant
shall have sixty (60) days following delivery of Landlord's Notice in which to
notify Landlord of Tenant's exercise of its rights to renew the Term hereof.
Failure to notify Landlord within such period or to timely deliver Tenant's
Notice shall automatically extinguish Tenant's rights to renew. Tenant shall
have no right to renew the Term of this Lease following the expiration of the
second renewal term of five (5) years detailed herein.

39. MISCELLANEOUS.

A. Provided Tenant complies with Tenant's covenants,
duties and obligations hereunder, Tenant shall quietly have, hold and enjoy the
Leased Premises subject to the terms and provisions of this Lease without
hinderance from Landlord or any person or entity claiming by, through or under
Landlord.

B. In any circumstance where Landlord is permitted to
enter upon the Leased Premises during the Term of this Lease, whether for the
purpose of curing any default of Tenant, repairing damage resulting from fire
or other casualty or an eminent domain taking or is otherwise permitted
hereunder or by law to go upon the Leased Premises, no such entry shall
constitute an eviction or disturbance of Tenant's use and possession of the
Leased Premises or a breach by Landlord of any of Landlord's obligations
hereunder or render Landlord liable for

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<PAGE> 37

damages for loss of business or otherwise or entitle Tenant to be relieved from
any of Tenant's obligations hereunder or grant Tenant any right of setoff or
recoupment or other remedy; and in connection with any such entry incident to
performance of repairs, replacements, maintenance or construction, all of the
aforesaid provisions shall be applicable notwithstanding that Landlord may
elect to take building materials in, to or upon the Leased Premises that may be
required or utilized in connection with such entry by Landlord.

C. [Intentionally Deleted.]

D. Landlord may restrain or enjoin any breach or
threatened breach of any covenant, duty or obligation of Tenant herein
contained without the necessity of proving the inadequacy of any legal remedy
or irreparable harm. The remedies of Landlord hereunder shall be deemed
cumulative, and no remedy of Landlord, whether exercised by Landlord or not,
shall be deemed to be in exclusion of any other. Except as may be otherwise
herein expressly provided, in all circumstances under this Lease where prior
consent or permission of one (1) party ("first party") is required before the
other party ("second party") is authorized to take any particular type of
action, the matter of whether to grant such consent or permission shall be
within the sole and exclusive judgment and discretion of the first party; and
it shall not constitute any nature of breach by the first party hereunder or
any defense to the performance of any covenant, duty or obligation of the
second party hereunder that the first party delayed or withheld the granting of
such consent or permission, whether or not the delay or withholding of such
consent or permission was prudent or reasonable or based on good cause.

E. In all instances where either party is required to
pay any sum or do any act at a particular indicated time or within an indicated
period, it is understood that time is of the essence.

F. The obligation of Tenant to pay all rental and other
sums hereunder provided to be paid by Tenant and the obligation of Tenant to
perform Tenant's other covenants and duties hereunder constitute independent,
unconditional obligations to be performed at all times provided for hereunder,
save and except only when an abatement thereof or reduction therein is
hereinabove expressly provided for and not otherwise. Tenant waives and
relinquishes all rights which Tenant might have to claim any nature of lien
against or withhold, or deduct from or offset against any rental and other sums
provided hereunder to be paid Landlord by Tenant. Tenant waives and
relinquishes any right to assert, either as a claim or as a defense, that
Landlord is bound to perform or is liable for the nonperformance of any implied
covenant or implied duty of Landlord not expressly herein set forth.

G. Under no circumstances whatsoever shall Landlord ever
be liable hereunder for consequential damages or special damages.

H. Landlord retains the exclusive right to create any
additional improvements to structural and/or mechanical systems, interior and
exterior walls and/or glass, which Landlord deems necessary without the prior
consent of Tenant.

I. All monetary obligations of Landlord and Tenant
(including, without limitation, any monetary obligation of Landlord or Tenant
for damages for any breach of the

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<PAGE> 38

respective convenants, duties or obligations of Landlord or Tenant hereunder)
are performable exclusively in the county in which the Building is located.

J. The laws of the State in which the Building is
located shall govern the interpretation, validity, performance and enforcement
of this Lease.

K. If any clause or provision of this Lease is or
becomes illegal, invalid, or unenforceable because of present or future laws or
any rule or regulation of any governmental body or entity, effective during the
Term of this Lease, the intention of the parties hereto is that the remaining
parts of this Lease shall not be affected thereby.

L. Tenant waives the benefits of all existing and future
rental control legislation and statutes and similar governmental rules and
regulations, whether in time of war of not, to the extent permitted by law. In
the event that any law, decision, rule or regulation of any governmental body
having jurisdiction shall have the effect of limiting for any period of time
the amount of rental or other charges payable by Tenant to any amount less than
that otherwise provided pursuant to this Lease, the following amounts shall
nevertheless be payable to Tenant: (i) throughout such period of limitation,
Tenant shall remain liable for the maximum amount of rental and other charges
which are legally payable (without regard to any limitation to the amount
thereof expressed in this Lease except that all amounts payable by reason of
this paragraph shall not in the aggregate exceed the total of all amounts which
would otherwise be payable by Tenant pursuant to the terms of this Lease for
the period of limitation), (ii) at the termination of such period of
limitation, Tenant shall pay to Landlord, on demand but only to the extent
legally collectible by Landlord, any amounts which would have been due from
Tenant during the period of limitation but which were not paid because of such
limiting law, decision, rule or regulation, and (iii) for the remainder of the
Term of this Lease following the period of limitation, Tenant shall pay to
Landlord all amounts due for such portion of the Term of this Lease in
accordance with the terms hereof calculated as though there had been no
intervening period of limitation.

M. It is mutually agreed by and between Landlord and
Tenant that the respective parties hereto shall and they hereby do waive trial
by jury in any action, proceeding or counterclaim brought by either of the
parties hereto against the other on any matters whatsoever arising out of or in
any way connected with this Lease, the relationship of landlord and tenant,
Tenant's use or occupancy of the Leased Premises, and any emergency statutory
or, any other statutory remedy.

N. [Intentionally Deleted.]

O. No receipt of money by Landlord from Tenant after the
expiration of the Term of this Lease, or after the service of any notice, or
after the commencement of any suit, or after final judgment for possession of
the Leased Premises, shall reinstate, continue or extend the Term of this Lease
or affect any such notice, demand or suit or imply consent for any action for
which Landlord's consent is required.

P. In the event of variation or discrepancy, Landlord's
original copy of the Lease shall control.

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Q. Words of any gender used in this Lease shall be held
and construed to include any other gender, and words in the singular number
shall be held to include the plural, unless the context otherwise requires.
The headings of the Paragraphs of this Lease have been inserted for convenience
only and are not to be considered in any way in the construction or
interpretation of this Lease.

R. Tenant agrees that Tenant shall from time to time
upon request by Landlord and/or Landlord's Mortgagee execute and deliver to
Landlord a statement in recordable form certifying (i) that the Lease is
unmodified and in full force and effect (or, if there have been modifications
that the same is in full force and effect as so modified), (ii) the dates to
which rental and other charges payable under this Lease have been paid, and
(iii) that Landlord is not in default hereunder (or, if Landlord is in default,
specifying the nature of such default). Tenant further agrees that Tenant
shall from time to time upon request by Landlord execute and deliver to
Landlord an instrument in recordable form acknowledging Tenant's receipt of any
notice of assignment of this Lease by Landlord.

S. In no event shall Tenant have the right to create or
permit there to be established any lien or encumbrance of any nature against
the Leased Premises or the Building for any improvement or improvements by
Tenant, and Tenant shall fully pay the cost of any improvement or improvements
made or contracted for by Tenant. Any mechanic's lien filed against the Leased
Premises or the Building for work claimed to have been done, or materials
claimed to have been furnished to Tenant, shall be duly discharged by Tenant
within ten (10) days after the filing of the lien.

T. Whenever a period of time is herein prescribed for
action to be taken by a party (other than the payment of rental), such party
shall not be liable or responsible for, and there shall be excluded from the
computation for any such period of time, any delays due to strikes, riots, acts
of God, shortages of labor or materials, war, governmental laws, regulations or
restrictions, or any other causes of any kind whatsoever which are beyond the
reasonable control of the party required to take such action.

U. This Lease shall not be recorded by either party
without the consent of the other.

V. Nothing herein contained shall be deemed or construed
by the parties hereto, nor by any third party, as creating the relationship of
principal and agent, or of partnership or of joint venture between the parties
hereto, it being understood and agreed that neither the method of the
computation of rental, nor any other provision contained herein, nor any acts
of the parties hereto, shall be deemed to create any relationship between the
parties hereto other than the relationship of landlord and tenant.

W. Whenever it is provided herein that a monetary sum
shall be due to Landlord together with interest at the highest lawful rate, if
at such time there shall be no highest rate prescribed by applicable law,
interest shall be due at the rate of two percent (2%) in excess of Prime Rate
as defined in Paragraph l.Q. hereof.

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<PAGE> 40

X. Tenant acknowledges that Landlord's agents and
employees have made no representations or promises with respect to the Leased
Premises or the Building except as herein expressly set forth, and Tenant
further acknowledges that no rights, easements or licenses are acquired by
Tenant by implication or otherwise, except as herein expressly set forth.

Y. Tenant warrants that Tenant is, and shall remain
throughout the Term of this Lease, authorized to do business and in good
standing in the State in which the Building is located if such authorization is
required by applicable law. Tenant agrees, upon request by Landlord, to
furnish Landlord satisfactory evidence of Tenant's authority for entering into
this Lease.

Z. In case it should be necessary or proper for Landlord
to bring any action under this Lease (including specifically, without
limitation, for the review of instruments evidencing a proposed assignment,
subletting or other transfer by Tenant submitted to Landlord for consent) or
the enforcement of any of Landlord's rights hereunder, Tenant agrees to pay to
Landlord reasonable attorneys' fees whether suit be brought or not.

AA. In the event Tenant requests from Landlord the
written consent of Landlord to any proposed action for which this Lease
requires such consent, Landlord may require (in addition to the payment of
reasonable attorney's fees) the payment by Tenant of a reasonable fee
representing the administrative cost incurred by Landlord in processing such
request, regardless of whether such consent is granted. Such fee shall be
payable by Tenant at the time such request is made by Tenant.

BB. Submission of this Lease for examination does not
constitute an offer, right of first refusal, reservation of, or option for, the
Leased Premises or any other premises in the Building. This Lease shall become
effective only upon execution and delivery by both Landlord and Tenant.

CC. If Tenant is composed of more than one (1) person or
entity, each person and/or entity comprising Tenant shall be jointly and
severally liable for the performance of the obligations of Tenant under this
Lease, including specifically, without limitation, the payment of rental and
all other sums payable hereunder.

DD. Landlord shall have the right at any time to change
the name or street address of the Building and to install and maintain a sign
or signs on the interior or exterior of the Building.

EE. Any charges against Tenant by Landlord for services
or for work done on the Leased Premises by order of Tenant, or otherwise
accruing under this Lease, shall be considered as rental due and shall be
included in any lien for rental.

FF. If at any time during the Term of this Lease a tax or
excise on rental, a sales tax or other tax however described (except any
inheritance, estate, gift, income or excess profit tax imposed upon Landlord)
is levied or assessed against Landlord by any taxing authority having
jurisdiction on account of Landlord's interest in this Lease, or the rentals or
other charges payable hereunder, as a substitute in whole or in part for, or in
addition to, the taxes described elsewhere in this paragraph. Tenant shall pay
to Landlord as additional rental upon demand the

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<PAGE> 41

amount of such tax or excise. In the event that any such tax or excise is
levied or assessed directly against Tenant, Tenant shall pay the same at such
times and in such manner as such taxing authority shall require.

GG. Tenant has no right to protest the real estate tax
rate assessed against the Project and/or the appraised value of the Project
determined by any appraisal review board or other taxing entity with authority
to determine tax rates and/or appraised values (each a "Taxing Authority").
Tenant hereby knowingly, voluntarily and intentionally waives and releases any
right, whether created by law or otherwise, to (a) file or otherwise protest
before any Taxing Authority any such rate or value determination even though
Landlord may elect not to file any such protest; (b) receive, or otherwise
require Landlord to deliver, a copy of any reappraisal notice received by
Landlord from any Taxing Authority; and (c) appeal any order of a Taxing
Authority which determines any such protest. The foregoing waiver and release
covers and includes any and all rights, remedies and recourse of Tenant, now or
at any time hereafter, under Section 41.413 and Section 42.015 of the Texas Tax
Code (as currently enacted or hereafter modified) together with any other or
further laws, rules or regulations covering the subject matter thereof. Tenant
acknowledges and agrees that the foregoing waiver and release was bargained for
by Landlord and Landlord would not have agreed to enter into this Lease in the
absence of this waiver and release. If, notwithstanding any such waiver and
release, Tenant files or otherwise appeals any such protest, then Tenant will
be in default under this Lease and, in addition to Landlord's other rights and
remedies, Tenant must pay or otherwise reimburse Landlord for all costs,
charges and expenses incurred by, or otherwise asserted against, Landlord as a
result of any tax protest or appeal by Tenant, including, appraisal costs, tax
consultant charges and attorneys' fees (collectively, the "Tax Protest Costs").
If, as a result of Tenant's tax protest or appeal, the appraised value for the
Project is increased above that previously determined by the Taxing Authority
(such increase, the "Value Increase") for the year covered by such tax protest
or appeal such year, the "Protest Year"), then Tenant must pay Landlord, in
addition to all Tax Protest Costs, an amount (the "Additional Taxes") equal to
the sum of the following: (i) the product of the Value Increase multiplied by
the tax rate in effect for the Protest Year; plus (ii) the amount of additional
taxes payable during the five (5) year period following the Protest Year, such
amount to be calculated based upon the Value Increase multiplied by the tax
rate estimated to be in effect for each year during such five (5) year period.
Tenant must pay all Additional Taxes -- even those in excess of Tenant's
proportionate share and which may relate to years beyond the term of this
Lease. The Additional Taxes will be conclusively determined by a tax
consultant selected by Landlord, without regard to whether and to what extent
Landlord may be able in years following the Protest Year to reduce or otherwise
eliminate any Value Increase. All Tax Protest Costs and Additional Taxes must
be paid by Tenant within five (5) days following written demand by Landlord.

40. ENTIRE AGREEMENT AND BINDING EFFECT. This Lease and any
contemporaneous workletter, addenda or exhibits signed by the parties
constitute the entire agreement between Landlord and Tenant; no prior written
or prior contemporaneous oral promises or representations shall be binding.
This Lease shall not be amended, changed or extended except by written
instrument signed by both parties hereto. The provisions of this Lease shall
be binding upon and inure to the benefit of the heirs, personal
representatives, successors and assigns of the parties, but this provision
shall in no way alter the restriction herein in connection with assignment,
subletting and other transfer by Tenant.

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EXECUTED in multiple counterparts, each of which shall have
the force and effect of an original, on the date specified in Paragraph 1.A.
hereof.

LANDLORD:

BEVERLY HILLS CENTER LLC,
a California limited liability company

By: ___________________________________
Name: _________________________________
Title: ________________________________

TENANT

STAR VENDING, INC.,
a Nevada corporation

By: ___________________________________
Name: _________________________________
Title: ________________________________

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Exhibit A

(Diagram of Leased Premises)

[GRAPHIC]

Exhibit A - Page 1 of 1

<PAGE> 44

Exhibit B

Being a tract of land situated in the City of Dallas, Dallas County, Texas; and
being all of Lot 1 and part of Lot 2 in Block 263 of Burks Addition, as
recorded in Volume W, Page 800 of the Deed Records of Dallas County, Texas; and
also being that tract of land conveyed to Louis Cerf, as recorded in Volume
2044, Page 577 of the Deed Records of Dallas County, Texas; and being all of
former Federal Street between Crockett Street and Leonard Street abandoned by
City of Dallas Ordinance No. 17025 and being part of Block 316, as conveyed to
Provident Investment Company by deed dated June 14, 1977, and recorded in
Volume 77177, Page 204 of the Deed Records of Dallas County, Texas; and being
more particularly described as follows:

BEGINNING at the intersection of the northeasterly line of Crockett Street
(variable width) and the north cut-off line between the northwesterly line of
Bryan Street and said northeasterly line of Crockett Street;

THENCE North 47[degree]10'35" West along said northeasterly line of Crockett
Street a distance of 134.10 feet to an angle point; said point being the most
westerly corner of Block 263;

THENCE North 39[degree]05'39" West a distance of 21.41 feet to an angle point;
said point being the most southerly corner of Block 316;

THENCE North 45[degree]06'53" West a distance of 70.95 feet to a point for
corner;

THENCE North 44[degree]49'25" East along the northwesterly line of said
Provident Investment Company tract and the southeasterly line of a tract of land
conveyed to the Dallas Independent School District by deed dated May 3, 1977, a
distance of 155.75 feet to a point for corner in the southwesterly line of
Leonard Street (variable width);

THENCE South 45[degree]07'10" East along said southwesterly line of Leonard
Street a distance of 234.43 feet to a point for corner; said point being the
intersection of said southwesterly line of Leonard Street and the west cut-off
line between said northwesterly line of Bryan Street and said southwesterly line
of Leonard Street;

THENCE South 20[degree]16'36" West along said west cut-off line a distance of
5.50 feet to a point for corner; said point being the intersection of said west
cut-off line and said northwesterly line of Bryan Street;

THENCE South 45[degree]00'00" West along said northwesterly line of Bryan Street
a distance of 137.84 feet to a point for corner; said point being the
intersection of said northwesterly line of Bryan Street and said north cut-off
line between said northwesterly line of Bryan Street and said northeasterly line
of Crockett Street;

THENCE South 88[degree]54'43" West along said north cut-off line a distance of
14.41 feet to the POINT OF BEGINNING and containing 36,753 square feet, or
0.8437 acres, more or less.

Exhibit B - Page 1 of 1

<PAGE> 45
Exhibit C

RULES AND REGULATIONS

1. Landlord shall provide Tenant with fifteen (15) keys.
Thereafter, Tenant shall pay a reasonable amount fixed by Landlord from time to
time for each additional key issued by Landlord to Tenant for Tenant's offices,
and upon termination of this Lease, Tenant agrees to return all keys to
Landlord.

2. Landlord shall provide and maintain in a conspicuous place in
the Building an alphabetical directory board of the tenants. No other
directories shall be permitted, unless previously consented to by Landlord in
writing.

3. Tenant shall refer all contractors, contractor's
representatives and installation technicians rendering any service to Tenant,
to Landlord for Landlord's supervision, approval and control before performance
of any contractual service. This provision shall apply to all work performed
in the Building, including, without limitation, installation of telephones,
telegraph equipment, electrical devices and attachments and installations of
any nature affecting floors, walls, woodwork, trim, windows, ceilings,
equipment or any other physical portion of the Building.

4. Movement in and out of the Building of furniture, office
equipment or other bulky materials, or movement through Building entrances or
lobby, or dispatch or receipt by Tenant of any merchandise or materials which
requires use of elevators or stairways shall be restricted to hours designated
by Landlord. All such movement shall be under supervision of Landlord and in
the manner agreed between Tenant and Landlord by prearrangement before
performance of any such movement. Such prearrangements initiated by Tenant
shall include determination by Landlord, and subject to Landlord's decision and
control, of the time, method and routing of movement, and limitations imposed
by safety or other concerns which may prohibit any article, equipment or any
other item from being brought into the Building. Tenant shall assume all risk
as to damage to articles moved and injury to persons or public engaged or not
engaged in such movement, including equipment, property and personnel of
Landlord if damaged or injured as a result of acts in connection with carrying
out this service for Tenant from the time of entering property to completion of
work; and Landlord shall not be liable for acts of any person engaged in, or
any damage or loss to any of said property or persons resulting from any act in
connection with such service performed for Tenant, and Tenant hereby agrees to
indemnify and hold Landlord harmless from and against any and all such damage,
injury or loss, including attorney's fees.

5. No signs, advertisements or notices shall be allowed in any
form on windows or doors inside or outside the Leased Premises or any other
part of the Building, and no signs except in uniform location and uniform
styles fixed by Landlord shall be permitted on exterior identification pylons,
if any, in the public corridors or on corridor doors or entrances to the Leased
Premises. All signs shall be contracted for by Landlord for Tenant at the rate
fixed by Landlord from time to time, and Tenant shall be billed and pay for
such service accordingly upon

Exhibit C - Page 1 of 3
<PAGE> 46

demand. No nails, hooks or screws shall be driven or inserted in any part of
the Building, except by the maintenance personnel of the Building, nor shall
any part be defaced by tenants.

6. No draperies, shutters, or other window covering shall be
installed on exterior windows or walls or windows and doors facing public
corridors without Landlord's written approval. Landlord shall have the right
to require installation and continued use of uniform window covering for such
windows.

7. No portion of the Leased Premises or any other part of the
Building shall at any time be used or occupied as sleeping or lodging quarters.

8. Tenant shall not place, install or operate in the Leased
Premises or in any other part of the Building any engine, stove or machinery,
or conduct mechanical operations or cook thereon or therein, or place or use in
or about the Leased Premises any explosives, gasoline, kerosene, oil, acids,
caustics or any other inflammable, explosive or hazardous materials, fluid or
substance without the prior written consent of Landlord.

9. Landlord shall not be responsible for lost or stolen personal
property, equipment, money or jewelry from the Leased Premises or public rooms
regardless of whether such loss occurs when any such area is locked against
entry or not.

10. No birds or animals shall be brought into or kept in or about
the Leased Premises or any other part of the Building.

11. Employees of Landlord shall not receive or carry messages for
or to any tenant or other person, nor contract with or render free or paid
services to any tenant or tenant's agents, employees or invitees. In the event
any of Landlord's employees perform any such services, such employee shall be
deemed to be the agent of any such tenant regardless of whether or how payment
is arranged for services, and Landlord is expressly relieved from and all
liability in connection with any such services and any associated injury or
damage to person or property.

12. Landlord shall not permit entrance to Tenant's offices by use
of pass keys controlled by Landlord to any person at any time without written
permission of Tenant, except employees contractors or service personnel
directly supervised by Landlord and employees of the United States Postal
Service.

13. None of the entries, sidewalks, vestibules, elevator shafts,
passages, doorways or hallways and similar areas shall be blocked or
obstructed, or any rubbish, litter, trash or material of any nature placed,
emptied or thrown into such areas, or such areas be used at any time for any
purpose except for ingress or egress by Tenant, Tenant's agents, employees or
invitees to and from the Leased Premises and for going from one to another part
of the Building.

14. Tenant and Tenant's employees, agents and invitees shall
observe and comply with the driving and parking signs and markers on the
premises or parking facilities surrounding the Building.

15. Landlord shall have the right to prescribe the weight and
position of safes, computers and other heavy equipment which shall, in all
cases, in order to distribute their weight,

Exhibit C - Page 2 of 3
<PAGE> 47

stand on supporting devices approved by Landlord. All damage done to the
Leased Premises or to the Building by placing in or taking out any property of
Tenant, or done by Tenant's property while in the Leased Premises or the
Building, shall be repaired immediately at the sole expense of Tenant.

16. To insure orderly operation of the Building, no ice, minerals
or other water, towels, newspapers, etc, shall be delivered to the Leased
Premises except by persons approved by Landlord in advance in writing.

17. Should Tenant require telegraphic, telephonic, annunciator or
other communication services, Landlord shall direct all service personnel where
and how wires are to be introduced and placed, and none shall be introduced or
placed except as Landlord shall direct. Electric current shall not be used for
power or heating without the prior written consent of Landlord.

18. Plumbing fixtures and appliances shall be used only for
purposes for which constructed, and no sweeping, rubbish, rags or other
unsuitable material shall be thrown or placed therein. Damage resulting to any
such fixtures or appliances from misuse by Tenant, or Tenant's agents or
employees shall be paid by Tenant, and Landlord shall not in any case be
responsible therefor.

19. Tenants shall not make or permit any improper noises in the
Building, or otherwise interfere in any way with other tenants, or persons
having business with them.

20. Landlord specifically reserves the right to refuse admittance
to the Building from 7 p.m. to 7 a.m. daily, or on Sundays or on legal
holidays, to any person or persons who cannot furnish satisfactory
identification, or to any person or persons who, for any other reason in
Landlord's reasonable judgment, should be denied access to the premises.
Landlord, for the protection of the tenants and their effects, may prescribe
hours and intervals during the night, on Sundays and holidays, when all person
entering and departing the Building shall be required to enter their names, the
offices to which they are going or from which they are leaving, and the time of
entrance or departure in a register provided for that purpose by Landlord.

21. Landlord reserves the right to rescind any of these rules and
make such other and further reasonable rules and regulations as in Landlord's
judgment shall from time to time be needful for the safety, protection, care
and cleanliness of the Building, the operation thereof, the preservation of
good order therein, and the protection and comfort of its tenants, their
agents, employees and invitees, which rules when made and notice thereof given
to a tenant shall be binding upon such tenant in like manner as if originally
prescribed.

Exhibit C - Page 3 of 3
<PAGE> 48
EXHIBIT D

[Emergency Generator and HVAC Locations]

Exhibit D - Page 1 of 1
<PAGE> 49
Exhibit E

NON-DISTURBANCE AND ATTORNMENT AGREEMENT

THIS NON-DISTURBANCE AND ATTORNMENT AGREEMENT (this "Agreement"), made
and entered into as of this ___ day of _______________, 199 _, by and between
______________ ("Mortgagee"), and _________________, ("Tenant").

W I T N E S S E T H:

WHEREAS, Tenant entered into a certain _____________ dated
_____________, with _____________ ("Landlord"), a _____________ corporation
(the "Lease Agreement"), covering certain premises more particularly described
therein (the "Demised Premises");

WHEREAS, Mortgagee is the holder of a lien and security interest
(collectively, the "Lien") upon the Demised Premises.

WHEREAS, Tenant has requested Mortgagee to agree not to disturb
Tenant's rights in the Demised Premises in the event that Mortgagee should
elect to foreclose upon the lien created under and by virtue of the Lien for
any reason, provided that Tenant is not in default under the Lease Agreement
and, provided further, that Tenant attorns to Mortgagee in any such event; and

WHEREAS, Mortgagee is willing to so agree on the terms and conditions
hereinafter set forth.

NOW, THEREFORE, for and in consideration of the recitals set forth
above, and other good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged and confessed, the parties hereto agree as
follows:

1. That the Lease Agreement and all rights of Tenant thereunder
are subject and subordinate to the Lien, and to any and all advances made on
the security thereof, and to any and all increases, renewals, modifications,
consolidations, replacements and extensions of the Lien. This provision is
hereby declared to be self-operative and no further instruments shall be
required to effect such subordination. Tenant shall, however, upon demand at
any time or times, execute acknowledge and deliver to Mortgagee any and all
instruments and certificates that in the judgment of Mortgagee may be necessary
or proper to confirm or evidence such subordination.

2. That, provided Tenant complies with this Agreement and is not
in default under the terms of the Lease Agreement or in the payment of sums due
thereunder or in the performance of any of the terms, covenants or provisions
on its part to be performed under the Lease Agreement, as of the date Mortgagee
commences a foreclosure action, or at any time thereafter, no default under the
Lien, and no proceedings to foreclose the same shall disturb or interfere with
Tenant's rights under the Lease Agreement, and the Lease Agreement shall not be
terminated, nor shall Tenant's use, possession or enjoyment of the Demised
Premises be interfered with, and notwithstanding any such foreclosure or other
acquisition of the Demised Premises by Mortgagee or any other party acquiring
the Demised Premises upon foreclosure sale, or upon sale in lieu thereof, the
Lease Agreement shall be recognized as a direct agreement from

Exhibit E - Page 1 of 4
<PAGE> 50

Mortgagee or any other party acquiring the Demised Premises upon foreclosure
sale, or upon sale in lieu thereof, except that Mortgagee, or any subsequent
owner, and their respective heirs, personal representatives, successors and
assigns, shall not be (a) liable for any act or omission of Landlord under the
Lease Agreement (b) subject to any offsets or defenses which Tenant might have
against Landlord under the Lease Agreement, (c) be liable for the return of any
security deposit or prepaid rental delivered by Tenant to Landlord under the
Lease Agreement, except to the extent same has been actually delivered to
Mortgagee, or (d) bound by any previous modification of the Lease Agreement or
by any previous payment of any sums due to Landlord thereunder for a period
greater than one (1) month in advance, unless such modification or prepayment
shall have been expressly approved in writing by Mortgagee, provided that
Mortgagee or any other party acquiring the Demised Premises upon foreclosure
sale, or upon sale in lieu thereof, shall assume the obligations of Landlord
under the Lease Agreement, provided that upon a subsequent sale or other
transfer of the Demised Premises, such parties so assuming the obligation of
Landlord shall be released and relieved of the obligations so assumed under the
Lease Agreement accruing from and after the date of such subsequent sale or
other transfer of the Demised Premises.

3. That if the interest of Landlord under the Lease Agreement
shall be transferred by reason of foreclosure or other proceedings for
enforcement of the Lien, Tenant shall be bound to Mortgagee or any purchaser at
a foreclosure sale, or upon sale in lieu thereof, under all of the terms,
covenants and conditions of the Lease Agreement for the balance of the term
therefor with the same force and effect as if the purchaser were Landlord under
the Lease Agreement, and Tenant does hereby attorn to such purchaser, as
Landlord, under the Lease Agreement, said attornment to be effective and
self-operative without the execution of any further instruments upon such
purchaser succeeding to the interest of Landlord under the Lease Agreement,
provided that from and after the date of such succession, such purchaser shall
assume the obligations of Landlord under the Lease Agreement and, provided
further, that upon the subsequent sale or other transfer of the Demised
Premises, such purchaser shall be released and relieved of the obligations of
Landlord under the Lease Agreement accruing from and after the date of such
subsequent sale or other transfer of the Demised Premises.

4. That Tenant shall from and after the date hereof furnish to
Mortgagee any notice request, demand or document of any nature whatsoever which
Tenant is obligated to furnish to Landlord under the terms of the Lease
Agreement at the same time any such notice, request, demand or document is
furnished to Landlord.

5. That Tenant hereby agrees that from and after the date hereof
in the event of any act or omission by Landlord under the Lease Agreement which
would give Tenant the right, either immediately or after the lapse of a period
of time to terminate the Lease Agreement, Tenant shall not exercise any such
right (a) until it shall have given written notice of such act or omission to
Mortgagee, and (b) (i) for monetary defaults, until thirty (30) days shall have
elapsed following such giving of notice, or (ii) for non-monetary defaults,
until a reasonable period for remedying such act or omission shall have elapsed
following such giving of notice and following the time when Mortgagee, at its
option, shall, following the giving of any such notice, have elected to remedy
such act or omission, or to cause the same to be remedied, and shall thereafter
commence to remedy such act or omission, or to cause the same to be remedied
and pursue the same with reasonable diligence to completion.

Exhibit E - Page 2 of 4
<PAGE> 51

6. In the event of the termination of the Lease Agreement, or of
any succeeding lease agreement made pursuant to the provisions of this
paragraph, prior to its stated expiration date, Tenant will enter into a new
lease agreement with Mortgagee or its designee for the remainder of the term,
effective as of the date of such termination, on the same terms, covenants and
provisions, provided that Mortgagee makes written request upon Tenant for such
new lease agreement within sixty (60) days from the date of such termination.
Notwithstanding the foregoing, to the extent Tenant exercises its right to
terminate the Lease pursuant to the express terms of the Lease, Tenant shall
not be obligated to enter into a new lease agreement with Mortgagee or its
designee.

7. That Tenant shall not modify, amend, cancel or terminate the
Lease Agreement without the prior written consent of Mortgagee, which consent
shall not be unreasonably withheld or delayed and any attempt to do so shall be
void; provided, however, Tenant may cancel or terminate the Lease Agreement for
cause in accordance with the provisions of the Lease Agreement, and subject to
the provisions of this Agreement, without the prior written consent of
Mortgagee.

8. That any notice which may or is required to be given hereunder
shall be in writing and shall be deemed given (i) when delivered (if delivered
by hand), or (ii) whether actually received or not, if orderly delivery of mail
has not been disrupted or threatened, when deposited, postage prepaid,
certified or registered mail, return receipt requested, in the United States
mail, or (iii) when delivered to the courier (if sent by recognized overnight
courier), addressed to Mortgagee or Tenant, as the case may be, at the
addresses set forth after their respective names below, or at such different
addresses as they shall have theretofore advised the other in writing in
accordance herewith.

If intended for Mortgagee:

_______________________________
_______________________________
_______________________________

If intended for Tenant:

_______________________________
_______________________________
_______________________________

9. That no modification, amendment, waiver or release of any
provision of this Agreement or any right, obligation, claim or cause of action
arising hereunder shall be valid or binding for any purposes whatsoever unless
in writing and duly executed by the party against whom the same is sought to be
asserted.

10. That this Agreement shall inure to the benefit of the parties
hereto, and their respective successors and assigns; provided, however, the
right of assignment of Tenant and its successors and assigns shall be limited
by the terms of the Lease Agreement.

Exhibit E - Page 3 of 4
<PAGE> 52

11. That Tenant agrees that this Agreement satisfies any condition
or requirement in the Lease Agreement relating to the granting of a
non-disturbance agreement.

12. This Agreement may be executed in any number of counterparts,
each of which shall be deemed to be an original and all of which shall
constitute one and the same agreement.

IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the day and year first above written.

MORTGAGEE:

_______________________________

By_____________________________
Name:__________________________
Title:_________________________

TENANT:

________________________________

By _____________________________
Name: __________________________
Title: _________________________

Landlord agrees for itself, its successors and assigns, that this
Agreement does not (a) constitute a waiver by Mortgagee of any of its rights
under the Lien, and (b) in any way release Landlord as grantor under the Lien
from its obligations to comply with the terms, covenants and provisions
thereof, and of the Lease Agreement, and that the provisions thereof and of the
Lease Agreement remain in full force and effect and must be complied with by
Landlord.

LANDLORD:

________________________________

By _____________________________
Name: __________________________
Title: _________________________

Exhibit E - Page 4 of 4

<PAGE> 1
EXHIBIT 10.25
AGREEMENT

THIS AGREEMENT is made and entered into effective as of March 1, 1997,
by and between STAR VENDING, INC., a Nevada corporation dba STAR
Telecommunications, Inc. ("STAR"), and JOHN MARSCH ("Employee"), with respect
to the following recitals of fact:

A. Commencing March 1, 1996, Employee was engaged as a consultant
to STAR with the status of an independent contractor.

B. Effective May 1, 1996, STAR and Employee entered into a
written Employment Agreement, a full, true and correct copy of which is
attached hereto as Exhibit "A" and incorporated herein by this reference as
though fully set forth.

C. STAR has advised Employee of the termination of his employment
pursuant to paragraph 7(d) of the Employment Agreement effective February 28,
1998.

D. STAR and Employee desire to enter into this Agreement to
conclude all matters as between them relating to the employment of Employee by
STAR.

NOW, THEREFORE, in consideration of the premises and mutual covenants,
terms and conditions set forth herein, the parties hereto agree as follows:

1. Employee's employment by STAR is terminated pursuant to
paragraph 7(d) of the Employment Agreement effective February 28, 1998 (the
"Effective Date"). Effective January 30, 1997, Employee's title at STAR is
Director of Special Projects.

2. On or about March 1, 1996, STAR and Employee entered into a
STAR Vending, Inc. Non-Statutory Stock Option Agreement (the "March Option
Agreement") pursuant to which Employee was granted an option to purchase shares
of STAR's common stock on the terms and conditions set forth therein. A full,
true and correct copy of the March Option Agreement is attached hereto as
Exhibit "B" and incorporated herein by this reference as though fully set
forth. Pursuant to the March Option Agreement.
<PAGE> 2
Employee's option to purchase 200,000 shares of STAR's common stock vested
immediately upon execution of the March Option Agreement. Pursuant to a stock
split, Employee now has the option to purchase 300,000 shares for $1.33 per
share pursuant to the March Option Agreement. Employee shall have the right to
exercise such option for a period of 90 days after the Effective Date in
accordance with the terms of the March Option Agreement.

3. On or about May 1, 1996, Employee entered into a STAR Vending,
Inc. Non-Statutory Stock Option Agreement (the "May Option Agreement") pursuant
to which Employee was granted an option to purchase shares of STAR's common
stock on the terms and conditions set forth therein. A full, true and correct
copy of the May Option Agreement is attached hereto as Exhibit "C" and
incorporated herein by this reference as though fully set forth. Pursuant to
the May Option Agreement, Employee's option to purchase 100,000 shares of
common stock vested effective March 1, 1997. Pursuant to a stock split,
Employee now has the option to purchase 150,000 shares for $1.33 per share
pursuant to the May Option Agreement. Employee shall have the right to
exercise such option for a period of 90 days after the Effective Date in
accordance with the terms of the May Option Agreement.

4. Pursuant to the terms of the May Option Agreement, Employee
would have an option to purchase an additional 100,000 (150,000 after
stock-split) shares of common stock vesting at the earlier of the closing of
an initial public offering by STAR or on March 1, 1998, if Employee were still
employed by STAR as of that date. In consideration for STAR's forebearing from
terminating Employee effective immediately, Employee hereby knowingly and
voluntarily waives and relinquishes his option, which is presently unvested and
which may never vest, to purchase the additional 100,000 (150,000 shares after
stock-split) shares of STAR common stock pursuant to the May Option Agreement.
The parties expressly agree and acknowledge that the total number of shares
which Employee has an option to purchase pursuant to the March Option
Agreement, the May Option Agreement, and this Agreement, is 300,000 shares
(450,000 shares after stock-split). STAR agrees, if STAR in the future goes
effective with an underwritten initial public offering of its securities, that,
within six months after the effective date of such offering, the shares for
such 450,000 (post-split) options shall be registered by STAR at STAR's expense
under a Form S-8.

5. In consideration for STAR's forebearing from exercising

-2-
<PAGE> 3
its right to terminate Employee effective immediately, Employee hereby
knowingly and voluntarily waives his right under paragraph 7 of the Employment
Agreement to receive the compensation provided in paragraph 3(a) of the
Employment Agreement and the fringe benefits provided in paragraph 3(c) for one
year after the date of his termination. The Employment Agreement is therefore
hereby amended to provide that immediately upon the Effective Date, Employee's
right to compensation and fringe benefits of any kind shall cease and
terminate. Until the Effective Date, however, Employee shall continue to
receive the compensation from STAR described at paragraphs 3(a), 3(c) and 3(d)
of the Employment Agreement. The Employment Agreement is also hereby amended to
provide that the final sentence of paragraph 7 of the Employment Agreement,
which provides that any amounts earned by Employee by virtue of other
employment (other than through his personal investment activities) during the
period in which he is receiving any compensation required under paragraph 7
shall be deducted from such compensation, shall not apply to any amount earned
by Employee by virtue of his employment by or consulting for LCR, a startup
retail telecommunications company based in London, England ("LCR").

6. If Employee makes such an election by giving STAR at least 30
days advance written notice, Employee's termination date as described in this
Agreement may be at any time after August 31, 1997, and up to and including
February 28, 1998 (the "Advanced Termination Date"). If Employee makes such a
timely written election, then the "Effective Date" as used in this Agreement
shall refer to such Advanced Termination Date, instead of to "February 28,
1998." This means without limitation: (1) no compensation of any kind,
including, but not limited to, Employment Agreement paragraph 3(a) compensation
and paragraphs 3(c) and 3(d) benefits, shall be paid to Employee for any period
after such Advanced Termination Date; and (2) the Employment Agreement solely
in the event of such election is amended to provide that the first and second
sentences of paragraph 5 shall not survive after the Advanced Termination Date.
In all respects, however, the provisions of that certain Confidentiality,
Non-Circumvention and Invention Assignment Agreement dated February 29, 1996
shall remain in full force and effect. A full, true and correct copy of the
Confidentiality Agreement is attached hereto as Exhibit "D" and incorporated
herein by this reference as though fully set forth herein.

-3-
<PAGE> 4
7. The provisions of paragraph 4, paragraph 5 and paragraph 8 of
the Employment Agreement shall survive after the Effective Date.
Notwithstanding the foregoing sentence: (1) the first and second sentences of
paragraph 5 shall not survive after the Effective Date; and (2) after March 1,
1997 the second sentence of paragraph 5 shall not prohibit Employee from being
employed by LCR.

8. STAR agrees to reimburse Employee for his legal fees to Arter
& Hadden for assisting him with the preparation and review of this Agreement,
with a maximum reimbursement of $5,000. STAR further agrees to reimburse
Employee for his ordinary and necessary business expenses in accordance with
its company-wide policies; provided, however, that Employee acknowledges that
there have been and shall be no further such expenses after Thursday, February
13, 1997. Until the Effective Date, Employee's title shall be "Director of
Special Projects."

9. To the extent, if any, that this Agreement is inconsistent
with the Employment Agreement, the March Option Agreement and/or the May Option
Agreement, the terms of this Agreement shall prevail and the Employment
Agreement, the March Option Agreement and the May Option Agreement are deemed
amended by this Agreement.

10. Except as provided in this Agreement, all obligations of
Employee and STAR pursuant to the Employment Agreement, the March Option
Agreement, and the May Option Agreement are terminated as of the Effective
Date; provided, further, that the provisions of paragraph 7 of the Employment
Agreement are terminated as of March 1, 1997.

11. It is expressly acknowledged and agreed that the releases
given pursuant to this Agreement are not made on account of any claim or right
on account of wages due, or to become due, or made as an advance on wages to be
earned, and that all wages due, or to become due, to Employee from STAR have
been or shall be paid as and when due. The releases given pursuant to this
Agreement are given in consideration of the mutual covenants, agreements and
promises of the parties hereto.

12. Subject to the rights and obligations expressly set forth in
or reserved by this Agreement, STAR and Employee, for themselves and for their
successors, assigns, heirs and

-4-
<PAGE> 5
representatives, hereby release each other, and their respective
representatives, successors, assigns, shareholders, officers, directors,
affiliates, attorneys, partners and related entities, from any and all sums of
money, accounts, claims, damages and causes of action of whatever kind or
nature, whether known or unknown, or suspected or unsuspected, which they now
own, hold, have, claim to have, or claim to be entitled to with respect to,
related to or arising out of the Employment Agreement, the March Option
Agreement, the May Option Agreement, their employment relationship, their
independent contractor relationship, and all other documents and transactions
between them related thereto, including all other employment, independent
contractor or consultant agreements and all other stock option agreements, if
any, and all matters and transactions between them through March 1, 1997,
including, without limitation, any and all claims whether based in tort or in
contract, and whether based on any federal, state or local law, statute or
regulation, including, but not limited to, the Age Discrimination and
Employment Act, as Amended, Title 7 of the Civil Rights Act of 1964, the
California Labor Code, the California Fair Employment and Housing Act, the Fair
Labor Standards Act, the Equal Pay Act, the Americans with Disabilities Act,
and the Employee Retirement Security Act of 1973.

13. The parties hereto acknowledge that after entering into this
Agreement, they may discover different or additional facts from the claims
being released hereby, but this release will remain effective in all respects.
The parties expressly waive all rights and benefits under section 1542 of the
California Civil Code which reads:

"A general release does not extend to claims which the
creditor does not know or suspect to exist in his favor at the
time of executing the release, which, if known by him, must
have materially affected his settlement with the debtor."

In this connection, the parties acknowledge that the parties
may hereafter discover facts different from or in addition to the facts the
parties now know or believe to be true with regard to the claims which are the
subject matter of this Agreement, and the parties hereto further agree that
this Agreement shall remain effective in all respects notwithstanding

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<PAGE> 6
such discovery of such new or different facts.

14. In the event that any party hereto brings any action, suit or
proceeding against any other party hereto arising out of or in any way
connected to this Agreement or any actual or asserted right or obligation
released or claimed to be released under the terms hereof, the prevailing party
in any such action, suit or proceeding shall, in addition to any such relief as
may be awarded, recover its reasonable attorneys' fees incurred in connection
therewith, including attorneys' fees incurred in connection with any appeal
from any judgment or award.

15. The parties acknowledge that no representation, promise or
inducement has been made other than as set forth in this Agreement, and that
the parties do not enter into this Agreement in reliance upon any
representation, promise, or inducement not set forth herein. This Agreement
supersedes all prior negotiations and understandings of any kind with respect
to the subject matter hereof and contains all of the terms and provisions of
the agreement between the parties hereto with respect to the subject matter
hereof. Any representation, promise or condition, whether written or oral, not
specifically incorporated herein, shall be of no binding effect upon the
parties.

16. Each party hereby represents and warrants that he, she or it
has not heretofore assigned or transferred or purported to assign or transfer
to any person, association or entity any claim which is subject to this
Agreement, and each party hereby agrees to indemnify and hold harmless the
other parties against, without any limitation, any and all rights, claims,
warranties, demands, debts, obligations, liabilities, costs, expenses, causes
of action and judgments based on, arising out of or connected with any such
transfer or assignment or purported transfer or assignment.

17. The provisions of this Agreement shall be in all respects
governed by and construed and enforced in accordance with the laws of the State
of California, including all matters of construction, validity and performance,
without regard to choice of law rules which would otherwise require reference
to the laws of some other jurisdiction. Both parties hereby consent to the
jurisdiction of the Superior Court and the Municipal Court of the State of
California for the County of Santa Barbara and

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<PAGE> 7
agree that such courts shall have exclusive jurisdiction over any suit, claim
or cause of action arising out of or related to this Agreement and any of the
matters or transactions which are the subject of this Agreement. This
Agreement is entered into in Santa Barbara, California and is to be performed
in Santa Barbara, California. Any action to enforce or interpret the terms of
this Agreement shall be instituted and maintained in the Municipal or Superior
Court of the County of Santa Barbara, State of California, in accordance with
the respective subject matter jurisdiction of those courts.

18. This Agreement may be executed in counterparts, each of which
is deemed to be an original, but such counterparts together shall constitute
one and the same instrument.

19. This Agreement may not be modified or terminated orally and no
modification, termination, or waiver shall be valid unless the same be in
writing and signed by all of the parties hereto.

20. This Agreement shall be binding on, and inure to the benefit
of, the parties and their respective successors, assigns, transferees, legal
representatives, and all other persons or entities succeeding to the rights or
obligations of the parties, and each of them.

21. The undersigned each acknowledges and represents that he or it
has read this Agreement and had the opportunity to consult with his or its
attorney regarding its contents and consequences, that this Agreement is being
executed solely in reliance on his or its judgment, belief and knowledge of the
matters set forth herein and on the advice of his or its attorney, that the
terms and conditions of this Agreement are contractual and not mere recitals,
between the settling parties, and that the undersigned has taken all actions
and obtained all authorizations, consents and approvals as are conditions
precedent to his or its authority to execute this Agreement.

22. In the event any provision of this Agreement shall be held
invalid, illegal, or unenforceable, the validity, legality and enforceability
of the remaining provisions shall not in any way be affected or impaired
thereby.

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<PAGE> 8
DATED: ________________________.

---------------------------------
JOHN MARSCH

DATED: _______________________.

STAR VENDING, INC.

By:
-------------------------------
Christopher E. Edgecomb
Chief Executive Officer

-8-

<PAGE> 1

EXHIBIT 11.1

STATEMENT REGARDING COMPUTATION OF LOSS PER SHARE

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------
1996
----------------------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C>
Net loss............................................................... $ (6,644)
========
Weighted average common shares outstanding............................. 10,575
Effect of stock options pursuant to SEC rules.......................... 1,095
Conversion of preferred stock.......................................... 528
--------
Weighted average number of common shares used to compute pro forma loss
per share............................................................ 12,198
========
Pro forma loss per common share........................................ $ (0.54)
========
</TABLE>

<PAGE> 1

EXHIBIT 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
Registration Statement on Form S-1 (File No. 333-21325).

ARTHUR ANDERSEN LLP

Los Angeles, California

May 16, 1997