STAR TELECOMMUNICATIONS INC, 10-K405/A, 1999-09-22

STAR TELECOMMUNICATIONS INC
10-K405/A, 1999-09-22
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549
------------------------

FORM 10-K/A

(AMENDMENT NO. 1)

(MARK ONE)

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO ______________ TO ______________.

COMMISSION FILE NUMBER 000-22581
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STAR TELECOMMUNICATIONS, INC.

(Exact name of registrant as specified in its charter)

DELAWARE 77-0362681
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)

223 EAST DE LA GUERRA 93101
SANTA BARBARA, CALIFORNIA (Zip Code)
(Address of Principal Executive Offices)

(805) 899-1962
(Registrant's telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act: NONE

Name of each exchange on which registered: THE NASDAQ NATIONAL MARKET

Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK
------------------------

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K /X/

The aggregate market value of the Common Stock of the Registrant held by
non-affiliates of the Registrant on March 17, 1999, based on the average bid and
asked prices for the Common Stock as reported by Nasdaq was approximately
$361,205,316.

As of March 17, 1999, the number of shares of the Registrant's Common Stock
outstanding was 57,369,000 shares.

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THE UNDERSIGNED REGISTRANT HEREBY AMENDS THE FOLLOWING ITEMS OF ITS ANNUAL
REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998, AS SET FORTH
BELOW:

PART I

This Annual Report on Form 10-K for the year ended December 31, 1998 (the
"Form 10-K") contains certain "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Forward-looking statements are statements other than historical
information or statements of current condition and relate to future events or
the future financial performance of the Company. Some forward-looking statements
may be identified by use of such terms as "expects," "anticipates," "intends,"
"estimates," "believes" and words of similar import. These forward-looking
statements relate to plans, objectives and expectations for future operations.
In light of the risks and uncertainties inherent in all such projected operation
matters, the inclusion of forward-looking statements in this Form 10-K should
not be regarded as a representation by the Company or any other person that the
objectives or plans of the Company will be achieved or that any of the Company's
operating expectations will be realized. Revenues and results of operations are
difficult to forecast and could differ materially from those projected in the
forward-looking statements contained in this Form 10-K for the reasons detailed
in the "Risk Factors" section of this Form 10-K, beginning on page 15, or
elsewhere in this Form 10-K.

ITEM 1. BUSINESS.

OVERVIEW

STAR Telecommunications, Inc. ("STAR" or the "Company") is a multinational
telecommunications services company focused primarily on the international long
distance market. STAR offers 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 approximately 200 foreign
countries through a flexible network comprised of various foreign termination
relationships, international gateway switches, leased and owned transmission
facilities and resale arrangements with long distance providers. STAR has grown
its revenues rapidly by capitalizing on the deregulation of international
telecommunications markets, combining sophisticated information systems with
flexible routing and leveraging management's industry expertise. STAR has
increased its revenues and net income from $58.9 million and $3.7 million,
respectively, in 1995 to $619.2 million and $1.6 million, respectively, in 1998.

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.

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 services rising from
approximately $14.9 billion in 1996 to approximately $16.3 billion in 1997,
according to FCC data.

STAR 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;

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- pressure to reduce international outbound long distance rates paid by end
users driven by increased competition in newly deregulated global markets;

- 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 a number 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-sized
companies need to offer their customers a full range of services, including
international long distance. 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 Corp. ("AT&T"), MCI WorldCom, Inc.
("MCI WorldCom") and Sprint Corporation ("Sprint") . In addition, these small
and medium sized companies generally have only limited capital resources to
invest in international facilities. New international carriers such as STAR
emerged to take advantage of this demand for less expensive international
bandwidth. These emerging multinational carriers acted 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 became
established and created a high quality networks, they began to carry overflow
traffic from the larger long distance providers seeking lower rates on certain
routes.

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, such as Post Telegraph & Telephone operators ("PTTs"), deregulation is
providing U.S.-based providers the opportunity to negotiate more favorable
agreements with 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. STAR believes that growth of traffic originated in markets outside of
the U.S. will be higher than the growth in traffic originated within the U.S.
due to recent deregulation in many foreign markets, relative economic growth
rates and increasing access to telecommunications facilities in emerging
markets.

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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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 WorldCom 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:

[LOGO]

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 standard
"accounting rate" with that international provider. 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 a net amount based on the difference between minutes sent and minutes
received and the settlement rate, which is generally one-half of the accounting
rate.

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 IRUs 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 IRUs
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. Such transit arrangements involve
agreement among the providers in all the countries involved and are 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.

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The resale of capacity, which was first permitted in the U.S. market in the
1980s enabled 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 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
telecommunications market has become deregulated, service providers have
developed alternative arrangements to reduce their termination costs by, for
example, routing traffic via third countries to obtain lower settlement rates or
using international private line facilities to bypass the settlement rates
applicable to traffic routed over the public switched telephone network
("PSTN"). These arrangements include international simple resale ("ISR"),
traffic refiling and the acquisition of transmission and switching facilities in
foreign countries so as to self-correspond. Refiling of traffic takes advantage
of disparities in settlement rates between different countries. An originating
operator typically refiles traffic by sending it first to a third country that
enjoys lower settlement rates with the destination country where upon it is
forwarded or refiled to the destination country thereby resulting in a lower
overall termination cost. The difference between transit and refiling is that,
with respect to transit, the operator in the destination country typically has a
direct relationship with the originating operator and is aware of the
arrangement, while with refiling, the operator in the destination country
typically is not aware that it is terminating refiled traffic originated in
another country. While the United States has taken no position with respect to
whether refile comports with international regulation, refile is illegal in many
countries. With ISR, a long distance provider completely bypasses the settlement
system by connecting an international private line ("IPL") to the PSTN on one or
both ends. While ISR currently is only sanctioned by U.S. and other regulatory
authorities on some routes, ISR services are increasing and are expected to
expand significantly as deregulation of the international telecommunications
market continues. In addition, new market access agreements, such as the WTO
Basic Telecommunications Agreement (the "WTO Agreement"), have made it possible
for many international service providers to establish their own transmission and
switching facilities in certain foreign countries, enabling them to
self-correspond and 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, invest in facilities and switches and remain
flexible enough to locate and route traffic through the most advantageous
routes.

THE STAR APPROACH

STAR is a multinational telecommunications services company focused
primarily on the international long distance market. STAR offers 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 approximately 200 foreign countries through a flexible network
comprised of various foreign termination

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relationships, international gateway switches, leased and owned transmission
facilities and resale arrangements with long distance providers. STAR has grown
its revenues rapidly by capitalizing on the deregulation of international
telecommunications markets, combining sophisticated information systems with
flexible routing and leveraging management's industry expertise.

STAR markets its services to large global carriers seeking lower rates, as
well as to small and medium-sized 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. During the
fourth quarter of 1998, STAR provided switched international long distance
services to 151 customers and currently provides these services to fourteen of
the top forty global carriers. STAR has also recently focused on building a
customer base overseas, particularly in Europe, and has opened offices in
Dusseldorf, Frankfurt, Hamburg and Munich, Germany and London, England. In
addition, STAR has begun to market its international long distance services
directly to certain commercial customers in the U.S. and overseas.

STRATEGY

STAR'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 STAR's strategy include the following:

EXPAND SWITCHING AND TRANSMISSION FACILITIES. STAR 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. STAR has expanded its international gateway switching
facilities through the addition of facilities in Dallas and Miami and
Dusseldorf, Frankfurt, Hamburg and Munich, Germany and plans to put into service
in 1999 switches in Atlanta; Paris, France; Geneva, Switzerland; Vienna,
Austria; and Tokyo, Japan. STAR's international gateway switch in London,
England went into service in April 1997 and four switches in Germany became
operational in the second quarter of 1998.

CAPITALIZE ON PROJECTED INTERNATIONAL LONG DISTANCE GROWTH. STAR 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. STAR targets
international markets with high volumes of traffic, relatively high rates per
minute and prospects for deregulation and privatization. STAR believes that the
ongoing trend toward deregulation and privatization will create new
opportunities for STAR in international markets. Although STAR has focused to
date primarily on providing services for U.S. based long distance providers,
STAR also intends to expand the international long distance services it offers
to foreign-based long distance providers.

LEVERAGE TRAFFIC VOLUME TO REDUCE COSTS. STAR continues to focus on
building its volume of international long distance traffic. Higher traffic
volumes strengthen STAR's negotiating position with vendors, customers and
potential foreign partners, which allows STAR to lower its costs of service. In
addition, higher traffic volumes on particular routes allow STAR 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.

LEVERAGE INFORMATION SYSTEMS AND SWITCHING CAPABILITIES. STAR leverages its
sophisticated information systems to analyze its routing alternatives, and
select the most cost-effective routing from among STAR owned facilities, network
of resale arrangements with other long distance providers, operating agreements
and alternative termination relationships. STAR has invested significant
resources in the development of software to track specific usage information by
customer and revenue and cost information on specific routes on a daily basis.
STAR's information systems are critical components in managing its

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customer and vendor relationships, routing traffic to the most cost-effective
alternative, and targeting its marketing efforts.

MAINTAIN HIGH QUALITY. STAR 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 and large corporate customers in selecting a
carrier for their international traffic. STAR's state-of-the-art switching
equipment is fully compliant with international C-7 and domestic SS-7 signaling
standards. STAR strives to provide a consistently high level of customer and
technical support and has technical support personnel at its switching
facilities 24 hours per day, seven days per week to assist its customers and to
continually monitor network operations.

EXPAND INTO COMMERCIAL MARKET. STAR plans to continue its expansion into
niche commercial markets in the U.S. and in other deregulating countries where
it believes it can leverage its international network and where the customer
base has a significant international calling pattern. To implement this
strategy, STAR is using its telemarketing sales force to target small commercial
customers in ethnic markets to increase traffic to Mexico and Latin America.
Additionally, STAR intends to use the network of independent sales agents of
United Digital Network, Inc. ("UDN") to target medium-sized commercial customers
with a demand for international calling services at competitive rates. Finally,
STAR targets larger commercial customers through its direct sales forces
concentrating at first on potential customers in Los Angeles and New York. With
respect to the offering of commercial services abroad, STAR has initially
focused on Germany and the U.K. and will expand its focus to selected European
cities where competition for commercial customers is less mature.

GROWTH THROUGH ACQUISITIONS. STAR actively pursues opportunities to enhance
its business through strategic and synergistic acquisitions. These acquisitions
may focus on entering new territories, enlarging STAR's presence in an existing
territory, adding capacity or expanding into new market segments, such as the
commercial market. In addition to expanding its revenue base, STAR plans to
realize operating efficiencies by integrating newly-acquired operations into
STAR's billing, tracking and other systems. STAR completed the acquisition of
UDN, a commercial long distance provider, on March 24, 1999. On November 30,
1997, STAR acquired LD Services, Inc., now known as CEO Telecommunications, Inc.
("CEO"), a long-distance provider focusing on small commercial customers
throughout the United States, for approximately 849,000 shares of Common Stock.
On March 10, 1998, STAR acquired T-One Corp. ("T-One"), an international
wholesale long distance provider, for 1,353,000 shares of Common Stock. Each of
these transactions has been accounted for as a pooling of interests. On August
20, 1998, STAR entered into an Amended and Restated Agreement and Plan of
Merger, which was amended on September 1, 1998 and on December 29, 1998 (as
amended, the "PT-1 Merger Agreement") to acquire PT-1 Communications, Inc.
("PT-1"). STAR consummated the merger of PT-1 with and into a wholly-owned
subsidiary of STAR (the "PT-1 Merger") and related transactions on February 4,
1999.

NETWORK

STAR provides international long distance services to approximately 200
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. STAR's network employs state-of-the-art digital
switching and transmission technologies and is supported by comprehensive
monitoring and technical support personnel. STAR's switching facilities are
staffed 24 hours per day, seven days per week.

TERMINATION ARRANGEMENTS

STAR 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 STAR to take

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advantage of the rapidly evolving international telecommunications market in
order to provide low-cost international long distance service to its customers.

STAR 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. STAR purchased capacity from 132 vendors in 1998. A
substantial portion of this capacity is obtained on a variable, per minute and
short-term basis, subjecting STAR to the possibility of unanticipated price
increases and service cancellations. STAR'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 STAR's longer term arrangements requiring STAR to
make minimum usage commitments in order to achieve additional volume discounts.
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 STAR does not
typically enter into long-term contracts with these providers, pricing can
change significantly over short periods of time. STAR's proprietary information
systems enable STAR to track the pricing variations in the international
telecommunications market on a daily basis, allowing STAR's management to locate
and reroute traffic to the most cost-effective alternatives. See "Risk
Factors--Operating Results Subject to Significant Fluctuations."

STAR currently has operating agreements with carriers in a number of
countries and is in the process of negotiating additional operating agreements
for other countries. STAR has been and will continue to be selective in entering
into operating agreements. STAR also has agreements with international providers
of long distance services for termination of traffic that STAR routes over its
network to such countries. STAR currently has such termination arrangements with
several carriers in a number of countries, and STAR is in the process of
expanding its coverage of such countries and entering into similar arrangements
in additional countries. The FCC or foreign regulatory agencies may take the
view that certain of STAR's termination arrangements do not comply with current
rules and policies applicable to international settlements, such as current ISR
rules. 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 actions or otherwise, could have a material adverse
effect on STAR's business, operating results and financial condition. In
addition, the FCC could impose sanctions on STAR, including forfeitures, if
certain of STAR's arrangements are found to be inconsistent with FCC rules. See
"--Government Regulation," "Risk Factors--Risks of International
Telecommunications Business," and "--Potential Adverse Effects of 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. STAR's global
network facilities include both international gateway switches and undersea
digital fiber optic cable.

STAR currently operates international gateway switches in New York, Los
Angeles, Dallas and Miami; London, England; and Dusseldorf, Frankfurt, Hamburg,
and Munich, Germany. In 1999, STAR plans to put into service international
gateway switches in Atlanta; Paris, France; and Tokyo, Japan. STAR considers any
of its switches to be international gateway switches if STAR can route
international calls across such switch.

STAR's switching facilities are linked to a proprietary reporting system,
which STAR 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. STAR has
installed multiple redundancies into its switching facilities to decrease the
risk of a network failure. For example, STAR employs both battery and generator
power back-up and has installed hardware that

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automatically shifts the system to auxiliary power during a power outage, rather
than relying on manual override. STAR is in the process of adding a network
control center in its Los Angeles facility, which is expected to be completed in
1999.

STAR currently holds ownership positions in a number of digital undersea
fiber optic cables, including TPC-5, Gemini and AC-1 and has plans to acquire
transmission capacity on additional undersea fiber optic cable systems. STAR has
recently entered into a commitment to acquire transmission capacity on the Qwest
domestic Macro Capacity (SM) Fiber Network, which is expected to serve over 130
cities in the U.S. STAR plans to increase its investment in direct and IRU
ownership of cable in situations where STAR enters into operating agreements and
in other situations in which it determines that such an investment would enhance
operating efficiency or reduce transmission costs.

Through its acquisitions of T-One and UDN, STAR has acquired additional
switching and transmission facilities. By acquiring T-One, STAR added a switch
located in the same building as STAR's New York international gateway switch and
has added a number of operating agreements to countries in Africa and the Middle
East, among other locations. In addition, T-One owns capacity on certain cable
and satellite systems. With the acquisition of UDN, STAR acquired a switch
located in the same building as STAR's Dallas switch. STAR plans to integrate
these facilities into its existing network.

SALES AND MARKETING

STAR 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 STAR's
senior management. STAR reaches its customers primarily through domestic and
international trade shows and through relationships gained from years of
experience in the telecommunications industry. STAR had 68 direct sales and
marketing employees and approximately 180 telemarketing representatives as of
December 31, 1998.

In the wholesale market, STAR's sales and marketing employees utilize the
extensive, customer specific usage reports and network utilization data
generated by STAR's sophisticated information systems to effectively negotiate
agreements with customers and prospective customers and to rapidly respond to
changing market conditions. STAR 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 its expansion into the commercial market, STAR targets
small commercial customers through CEO's existing telemarketing operation, and
plans to deliver services to medium-sized commercial customers through UDN's
network of independent sales agents and utilize a direct sales force to approach
larger commercial accounts. Establishment of a sales force capable of
effectively expanding STAR's services into the commercial market can be expected
to require substantial efforts and management and financial resources and will
increase STAR's operating costs. See "Risk Factors--Risks Associated with Growth
of Telecommunications Network and Customer Base."

INFORMATION AND BILLING SYSTEMS

STAR's operations use advanced information systems including call data
collection and call data storage linked to a proprietary reporting system. STAR
also maintains redundant billing systems for rapid and accurate customer
billing. STAR's switching facilities are linked to a proprietary reporting
system, which STAR 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. STAR's systems also enable it to ensure accurate and timely billing and
to reduce routing errors. As STAR's systems were designed for the wholesale
marketplace, STAR is currently in the process of modifying its systems in
anticipation of its entrance into the commercial marketplace.

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

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- 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 STAR 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 STAR to verify and audit vendor bills;

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

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

- LATA (Domestic Call Area) reporting by originating and terminating LATA,
allowing for accurate Local Exchange charge audits, and protecting from
Local Exchange overcharging.

STAR has built multiple redundancies into its billing and call data
collections systems. Nine call collector computers receive call information in
real-time, immediately duplicating data, sending one copy to billing, while the
other copy is used for customer service internally and for traffic analysis.
STAR 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, and are regularly transported
to an off-site safe location.

COMPETITION

The international telecommunications industry is intensely competitive and
subject to rapid change. STAR'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. STAR also competes abroad
with a number of dominant telecommunications operators that previously held
various monopolies established by law over the telecommunications traffic in
their countries. See "Risk Factors-- Significant Competition." Additionally, the
telecommunications industry is in a period of rapid technological evolution,
marked by the introduction of competitive new product and service offerings,
such as the utilization of the Internet for international voice and data
communications. STAR 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. STAR believes that it competes favorably on the basis of price,
transmission quality and customer service. The number of STAR'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 68 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
February 5, 1998. As a result, STAR believes that competition will continue to
increase, placing downward pressure on prices. Such pressure could adversely
affect STAR's gross margins if STAR is not able to reduce its costs commensurate
with such price reductions.

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resell and terminate international telecommunication services. Many of these
companies have considerably greater financial and other resources and more
extensive domestic and international communications networks than STAR. STAR's
business would be materially adversely affected to the extent that a significant
number of such customers limit or cease doing business with STAR 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 STAR by reducing the number of potential
customers for STAR's services.

EXPANSION INTO COMMERCIAL MARKET. With the acquisition of CEO, STAR began
providing long distance service to the commercial market, a market that is
subject to intense competition from a number of well capitalized companies. The
commercial market is also characterized by the lack of customer loyalty, with
commercial customers regularly changing service providers. There can be no
assurance that STAR will be able to continue to compete successfully in the
commercial market.

GOVERNMENT REGULATION

STAR's U.S. interstate and international telecommunications service
offerings generally are subject to the regulatory jurisdiction of the FCC.
Certain telecommunication services offered by STAR in the U.S. may also be
subject to the jurisdiction of state regulatory authorities, commonly known as
public utility commissions ("PUCs"). STAR's telecommunications service offerings
outside the U.S. are also generally subject to regulation by national regulatory
authorities. In addition, U.S. and foreign regulatory authorities may affect
STAR's international service offerings as a result of the termination or transit
arrangements associated therewith. U.S. or foreign regulatory authorities may
take actions or adopt regulatory requirements which could adversely affect STAR.
See "Risk Factors--Potential Adverse Effect of Government Regulation."

U.S. REGULATION

STAR's business is subject to various U.S. and foreign laws, regulations,
agency actions and court decisions. STAR's U.S. international telecommunications
service offerings are subject to regulation by the FCC. The FCC requires
international carriers to obtain authorization under Section 214 of the
Communications Act of 1934, as amended (the "Communications Act"), prior to
acquiring international facilities by purchase or lease, or providing
international service to the public. Prior FCC approval is also required to
transfer control of a certificated carrier. STAR is also subject to FCC policies
and rules that regulate the manner in which international telecommunication
services may be provided, including, for instance, the circumstances under which
a carrier may provide international switched services using IPL facilities and
under which it may route traffic through third countries to or from its final
destination.

The Communications Act and the FCC's rules and policies also impose certain
other obligations on carriers providing international telecommunication
services. These include the obligation to file at the FCC and to maintain
tariffs containing the rates, terms, and conditions applicable to their
services; to file certain reports regarding international traffic and
facilities; to file certain contracts with correspondent carriers; to disclose
affiliations with foreign carriers and significant foreign ownership interests;
to pay certain regulatory fees based, among other things, upon the carrier's
revenues and ownership of international transmission capacity.

INTERNATIONAL SERVICES. FCC rules require STAR to obtain prior FCC
authorization to acquire and operate international communication circuits in
satellites and undersea fiber optic cables; similar FCC authority is required
for STAR to resell such capacity. STAR holds both facilities-based and resale
international authorizations, including a "global" authorization that provides
broad authority to offer switched and private line international services. STAR
has filed tariffs for international services with the FCC.

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known as ISR. A carrier generally may only offer ISR services to a foreign
country if the FCC has found (a) the country is a member of the WTO and at least
50% of the U.S. billed and settled traffic to that country is settled at or
below the benchmark settlement rate adopted by the FCC in IB Docket No. 96-261;
or (b) the country is not a WTO member, but it offers U.S. carriers equivalent
opportunities to engage in ISR and at least 50% of the U.S. billed and settled
traffic is settled at or below the applicable benchmark. Settled traffic refers
to traffic subject to an accounting rate agreement between U.S. and foreign
carriers. An accounting rate is a per minute wholesale charge negotiated by
international carriers for terminating traffic in either direction. Each carrier
is paid a settlement rate for terminating traffic on its own network which
ordinarily is one-half of the accounting rate. STAR's FCC authority currently
permits it to provide ISR service to Canada, the U.K., Sweden, New Zealand,
Australia, the Netherlands, Germany, France, Belgium, Denmark, Norway, Austria,
Switzerland, Luxembourg, Italy, Ireland, Hong Kong and Japan. The FCC is
currently reviewing U.S. carrier applications to provide ISR to Finland and
Mexico among other routes, and upon grant of any such ISR application to a given
country, the FCC's rules also would permit STAR to provide ISR service to that
country. If ISR is not permitted on a route, absent prior FCC consent, U.S.
facilities based international carriers must terminate switched telephone
traffic in accordance with the ISP which is primarily intended to deter foreign
carriers with market power from discriminating amongst competing U.S. carriers
by, for example, favoring the foreign carrier's U.S. affiliate. The ISP requires
that all U.S. carriers terminate traffic with a foreign carrier on the same
terms (i.e., that settlement rates be equivalent) and receive inbound traffic
only in proportion to the volume of U.S. outbound traffic which they generate.

On a few routes, STAR may use IPLs to terminate international switched
telephone services where ISR has not been authorized. In such routes, therefore,
STAR's termination arrangements may not be consistent with the FCC's ISP. On any
such route, however, to STAR's knowledge the foreign correspondent lacks market
power, no U.S. inbound traffic is involved, and the effective settlement rate is
lower than the prevailing rate. Thus STAR believes its actions are not
inconsistent with the ISP's underlying purpose. If the FCC were to determine, by
its own actions or in response to the filing of a third party that any of STAR's
IPL arrangements violate its ISR policy or STAR's ISR authorization, the FCC
could order STAR to terminate any non-conforming arrangements. In addition, STAR
could be subject to a monetary forfeiture and to other penalties, including the
revocation of STAR's FCC authorizations to operate as an international carrier.
Any such FCC action could have a material adverse effect upon STAR's business,
operating results and financial condition.

FCC INTERNATIONAL SETTLEMENTS POLICY. The FCC's ISP places limits on the
arrangements which U.S. international carriers may enter into with foreign
carriers for exchanging public switched telecommunications traffic, which the
FCC terms International Message Telephone Service. The policy does not apply to
ISR services. The ISP is primarily intended to deter dominant foreign carriers
from discriminating amongst competing U.S. carriers by, for example, favoring
the foreign carrier's U.S. affiliate. Absent FCC consent, the ISP requires that
U.S. carriers receive an equal share of the accounting rate (i.e., that
settlement rates be equivalent) and receive inbound traffic in proportion to the
volume of U.S. outbound traffic which they generate. The ISP and other FCC
policies also prohibit a U.S. carrier from offering or accepting a "special
concession" from a foreign carrier where the foreign carrier possess sufficient
market power on the foreign end of the route to affect competition adversely in
the U.S. market. A "special concession" is defined by the FCC as an exclusive
arrangement involving services, facilities or functions on the foreign end of a
U.S. international route which are necessary for providing basic
telecommunications, and which are not offered to similarly situated U.S.
carriers authorized to serve that route. U.S. international carriers wishing to
establish settlement arrangements for IMTS which do not comply with the ISP must
obtain a waiver of the FCC's rules or a declaratory ruling from the FCC under
the FCC's "flexibility" policy that the non-standard arrangement is in the
public interest. FCC policy provides that a request by a U.S. international
carrier to establish a non-standard settlement arrangement with a foreign
carrier in a WTO member country is presumptively in the public interest, and
that said presumption generally may be overcome only by a demonstration that the
foreign carrier is not subject to competition in its home market from more

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than one facilities-based international carrier. Notwithstanding the FCC's ISP
waiver and flexibility policies, it is possible that the FCC could find that
certain of STAR's arrangements with foreign operators were or are inconsistent
with the ISP and that STAR has not requested prior FCC authority therefore. If
the FCC were to determine by its own actions or in response to the filing of a
third party that STAR has violated the ISP, the FCC could order STAR to
terminate any non-conforming arrangement. In addition, STAR could be subject to
a monetary forfeiture and to other penalties, including revocation of STAR's FCC
authorizations to operate as an international carrier. Any such FCC action could
have a material adverse effect upon STAR's business, operating results and
financial condition.

The FCC's policies also require U.S. international carriers providing IMTS
to negotiate and adopt settlement rates with foreign correspondents for IMTS
which are at or below certain benchmark rates beginning January 1, 1999 for high
income countries. Pending reconsideration, the FCC has stayed a related policy
requiring U.S. international carriers to establish IMTS settlement rates at or
below the benchmark rate with any foreign affiliate beginning April 1, 1998.
STAR expects that any IMTS operating agreement which it has or may have with a
foreign affiliate will satisfy the foregoing benchmarks requirement when
applicable.

STAR currently has IMTS operating agreements with certain foreign
correspondents which provide for settlement rates above the FCC's prescribed
benchmarks. STAR will negotiate in good faith to establish IMTS settlement rates
with its foreign correspondents which satisfy the FCC's benchmarks but there can
be no assurance that such negotiations will succeed. The FCC's order adopting
the foregoing settlement benchmarks and the timetable therefor was upheld by the
U.S. Court of Appeals, but is currently being reconsidered by the FCC. Subject
to FCC reconsideration, if STAR is unable to negotiate benchmark settlement
rates with certain foreign correspondents, the FCC may intervene on its own
action or in response to a filing by a third party. STAR is unable to predict
the form which such intervention may take but it could disrupt STAR's
arrangement for transmitting traffic to certain countries require STAR to
suspend direct service to certain countries or require STAR to make alternative
termination arrangements with certain countries all of which could have a
material adverse effect on STAR's business, operating results and financial
condition.

FCC POLICIES ON TRANSIT AND REFILE. International switched
telecommunication traffic is frequently routed indirectly via one or more third
countries to its final destination. When such arrangements are mutually agreed,
they are commonly based on a transit agreement under which settlement payments
are made to all parties. In other cases, traffic may be sent to a third country
and then forwarded or refiled for delivery to its final destination without the
knowledge or consent of the destination carrier. STAR uses both transit and
refile arrangements to terminate its international traffic. The FCC routinely
approves transit arrangements by U.S. international carriers. The FCC's rules
also permit carriers to use ISR facilities in many cases to route traffic via a
third country for refile through the public switched network. However, the
extent to which U.S. carriers may enter into refile arrangements consistent with
the ISP is currently under review by the FCC. In 1997, the FCC stated that
above-cost accounting rates had led an increasing amount of international
traffic to migrate to least cost routes through the use of practices such as
hubbing, refile and reorigination. The FCC stated that such practices are an
economically rational response to inflated settlement rates. Notwithstanding the
FCC's past rules, policies and statements regarding the scope of permissible
transit and refile arrangements, the FCC could find by its own actions or in
response to the filing of a third party, that certain of STAR's transit or
refile arrangements violate the ISP or other FCC policies. In that event, the
FCC could order STAR to terminate any non-conforming transit or refile
arrangements. In addition, STAR could be subject to a monetary forfeiture and to
other penalties, including revocation of STAR's FCC authorizations to operate as
an international carrier. Any such FCC action could have a material adverse
effect on STAR's business, operating results and financial condition.

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REPORTING REQUIREMENTS. International telecommunication carriers also are
required by the FCC's rules timely to file certain reports regarding
international traffic and revenues, the ownership and use of international
facilities; and their affiliates with foreign carriers. The FCC considers a U.S.
carrier to be affiliations a foreign carrier if it has a 25% interest in the
capital stock of the carrier or it controls the foreign carrier or is under
common ownership or control. The FCC requires these reports so that, among other
things, it may monitor the development of industry competition and the potential
for a dominant foreign carrier to discriminate amongst U.S. carriers. STAR
generally has filed said traffic, facilities and foreign affiliation reports.
The FCC's rules require international telecommunication carriers to file at the
FCC copies of their contracts with other carriers, including operating
agreements, within 30 days of execution. STAR has filed copies of its operating
agreements with the FCC. Competitive U.S. international carriers do not
routinely file other carrier-to-carrier contracts with the FCC and, consistent
with industry practice, STAR has not filed certain other carrier contracts.
Notwithstanding the foregoing FCC filings by STAR, the FCC by its own action or
in response to the filing of a third party could determine that STAR has failed
to meet certain of the foregoing filing and reporting requirements or that
certain Company filings are deficient. In that event, STAR could be directed to
remedy any asserted non-compliance; STAR could also be subject to a monetary
forfeiture and to other penalties, and, although STAR believes that it would be
largely unprecedented in such circumstances, and hence unlikely, the FCC could
revoke STAR's authorizations to operate as an international carrier. Any such
FCC action could have a material adverse effect on STAR's business, results and
financial condition.

REGULATORY FEES. The Communications Act, and FCC rules and policies, impose
certain fees upon carriers providing interstate and international
telecommunication services. These fees are levied, among other things, to defray
the FCC's operating expenses, to underwrite universal telecommunication service
(e.g., by subsidizing certain services used by schools and libraries), such as
Internet access, and by other telecommunications users in areas of the U.S.
where service costs are significantly above average), to fund the
Telecommunications Relay Service ("TRS"), which provides special options for
hearing-impaired users, and to support the administration of telephone numbering
plans.

Carriers that provide domestic interstate services must pay an annual
regulatory fee based on their interstate revenues; the fee is currently 0.11% of
net revenue. Carriers that provide domestic interstate services to end users
must pay a universal telecommunications service fee each month based upon the
total estimated demand for U.S. universal service funding. If applicable, each
carrier's share is approximately 4% of the carrier's annual end user revenues.
STAR generally offers its services only to other carriers which in turn provide
services to end-users. Such carrier-to-carrier revenues are not subject to
universal service fees, and thus STAR generally is not liable to pay universal
service fees. Carriers that only offer international service (i.e., service
between the United States and a foreign country or service between two foreign
carriers) also are not subject to the universal service fee. However, if an
international carrier has an affiliate that provides domestic interstate
services, then the carrier's international revenues are subject to said fee.
Until its acquisition of CEO, STAR did not offer domestic interstate services.
As a result of the operations of CEO, any revenue STAR receives from end users
for international services may be subject to universal service fees. U.S.
interstate and international carriers must pay a percentage of their total
revenue each year to support the North American Numbering Plan Administrator.
For the 1998 filing year, the contribution rate is less than .003% of net
telecommunications revenue. U.S. carriers must pay a certain percentage of their
domestic interstate revenues to support the TRS Fund. For the 1998 filing year,
the contribution rate was less than .04% of gross domestic interstate revenue.
STAR has routinely paid the foregoing regulatory fees; however, approximately
$150,000 in additional fees may be owed by STAR to satisfy its TRS and annual
fee obligations for the 1996 and 1997 filing years. The foregoing regulatory
fees typically change annually. STAR cannot predict the future regulatory fees
for which it may be liable. Said fees could rise significantly for STAR and
amount to four percent or more of STAR's gross international and interstate
revenues if STAR is no longer exempt from paying universal service fees as a
result of an affiliate's provision of domestic interstate services, or because
STAR provides service directly to end users, or because amendments to the
Communications Act repeal the universal service fee exemption for

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revenues from connecting carriers. Because the international telecommunication
services business is highly competitive, an increase in the regulatory fees
which STAR must pay could impair its market position and have a material adverse
effect on STAR's business, operating results and financial condition.

RECENT AND POTENTIAL FCC ACTIONS. Recent FCC rulemaking orders and other
actions have lowered the entry barriers for new facilities-based and resale
international carriers by streamlining the processing of new applications and
granting non-dominant carriers greater flexibility in establishing non-standard
settlement arrangements with non-dominant foreign carriers, including the
non-dominant U.S. affiliates of such carriers. In addition, the FCC's rules
implementing the WTO Agreement presume that competition will be advanced by the
U.S. entry of facilities-based and resale carriers from WTO member countries,
thus further increasing the number of potential competitors in the U.S. market
and the number of carriers which may also offer end-to-end services. The FCC has
recently approved the mergers of AT&T and Teleport Communications Group and LCI
International, Inc. and Qwest Communications International Inc. FCC approval and
consummation of these mergers increases concentration in the international
telecommunications service industry and the potential market power of STAR's
competitors. The FCC also recently has sought to reduce the foreign termination
costs of U.S. international carriers by prescribing maximum or benchmark
settlement rates which foreign carriers may charge U.S. carriers for terminating
switched telecommunications traffic. This FCC action may reduce STAR's
settlement costs, although the costs of other U.S. international carriers also
may be reduced in a similar fashion. The FCC has not stated how it will enforce
the new settlement benchmarks if U.S. carriers are unsuccessful in negotiating
settlement rates at or below the prescribed benchmarks, but any future FCC
intervention could disrupt STAR's transmission arrangements to certain countries
or require STAR to modify its existing arrangements; other U.S. international
carriers might be similarly affected. The 1996 amendment to the Communications
Act permits the FCC to forbear enforcement of the tariff provisions in the Act,
which apply to all interstate and international carriers, and the U.S. Court of
Appeals is currently reviewing an FCC order directing all domestic interstate
carriers to detariff their offerings. Subject to the Court's decision, the FCC
may forbear its current tariff rules for U.S. international carriers, such as
STAR, or order such carriers to detariff their services. In that event, STAR
would have greater flexibility in pricing its service offerings and to compete,
although any such FCC action likely would grant other non-dominant international
carriers equivalent freedom. The FCC routinely reviews the contribution rate for
various levels of regulatory fees, including the rate for fees levied to support
universal service, which fees may be increased in the future for various
reasons, including the need to support the universal service programs mandated
by the Communications Act, the total costs for which are still under review by
the FCC. The FCC also is reviewing the extent to which international carriers
may refile traffic using international private line facilities or otherwise.
Future FCC actions regarding refile could affect STAR by, for example, requiring
it to discontinue certain termination arrangements which it now has or to
implement alternative routing arrangements for certain countries; on the other
hand, the FCC may further liberalize its existing rules and policies regarding
refile in which case STAR is likely to be well positioned to expand certain
refile operations even though new opportunities may become available to its
competitors. STAR can not predict the net effect of these or other possible
future FCC actions on its business, operating results and financial condition,
although the net effect could be material.

STATE REGULATION

STATE. The intrastate long distance telecommunications operations of STAR
and its subsidiaries are subject to various state laws and regulations,
including prior certification, notification, registration and/or tariff
requirements. In certain states, prior regulatory approval is required for
changes in control of telecommunications services. The vast majority of states
require STAR and its subsidiaries to apply for certification to provide
intrastate telecommunications services, or at a minimum to register or to be
found to be exempt from regulation, prior to commencing sale of intrastate
services. Additionally, the vast majority of states require STAR or its
subsidiaries to file and maintain detailed tariffs setting forth rates charged
by STAR to its end-users for intrastate services. Many states also impose
various reporting

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requirements and/or require prior approval for transfers of control of
certificated carriers and assignments of carrier assets, including customer
bases, carrier stock offerings, and incurrence by carriers of significant debt.
Certificates of authority can generally be conditioned, modified, canceled,
terminated or revoked by state regulatory authorities for failure to comply with
state laws and/or rules, regulations and policies of the state regulatory
authorities. Fines and other penalties, including, for example, the return of
all monies received for intrastate traffic from residents of a state in which a
violation has occurred may be imposed.

STAR, along with its regulated subsidiaries, believes it has made the
filings and taken the actions it believes are necessary to provide the
intrastate services it currently provides to end users throughout the U.S. STAR
and/or its subsidiaries are qualified to do business as foreign corporations,
and have received certification to provide intrastate telecommunications
services in all states where certification is required, and have received
approval for changes of control where such approvals are necessary. STAR and its
subsidiaries are required to make periodic filings in order to maintain
certificated status and remain qualified as foreign corporations.

In early 1997, the FCC instituted significant changes to the current
incumbent local exchange carrier access charge structure. These changes were
meant, in part, to bring access charges closer to their actual costs. While
there has been a general trend towards access charge reductions, new primary
interexchange carrier charges (PICCs) were authorized by the FCC to be imposed
on interexchange carriers serving presubscribed access charges closer to their
actual costs. PICCs are a flat-rated, per presubscribed line, per month access
charge imposed upon all facilities-based carriers (although they may be passed
through to resellers). Facilities-based carriers were assessed interstate PICCs
effective January 1, 1998. Intrastate PICCs have also been adopted in the five
state Ameritech region (Michigan, Wisconsin, Illinois, Indiana, and Ohio), and
may be adopted elsewhere. At the same time, STAR may pursue underlying carriers
for pass throughs of any access charge reductions they may realize from
incumbent local exchange carriers.

ACTIONS AGAINST CEO. In 1997, prior to STAR's acquisition of CEO, it
settled disputes with the California PUC and with the District Attorney of
Monterey, California regarding CEO's alleged unauthorized switching of long
distance customers. As part of these settlements, CEO was subject to fines and
restrictions on its business operations in California. In addition, the FCC has
received numerous informal complaints against CEO regarding the alleged
unauthorized switching of long distance customers, which complaints currently
remain under review.

Following STAR's acquisition of CEO and in order to comply with the
settlements described above, STAR has imposed strict restrictions on certain
former CEO employees, restricting these employees with respect to California
intrastate telecommunications operations. Additionally, STAR has taken a number
of steps to reduce the risk of a repeat occurrence regarding the alleged
unauthorized switching of commercial customers in California.

FOREIGN REGULATION

UNITED KINGDOM. In the U.K., telecommunications services offered by STAR
and through its affiliate, STAR Europe Ltd. ("STAR Europe"), are subject to
regulation by various U.K. regulatory agencies. The U.K. generally permits
competition in all sectors of the telecommunications market, subject to
licensing requirements and license conditions. STAR has been granted a license
to provide international services on a resale basis and STAR Europe has been
granted a license to provide international services over its own facilities,
which licenses are subject to a number of restrictions. Implementation of these
licenses have permitted STAR to engage in cost-effective routing of traffic
between the U.S. and the U.K. and beyond.

GERMANY. In Germany, telecommunications services offered by STAR through
its affiliate, STAR Telecommunications Deutschland GmbH ("STAR Germany"), are
subject to regulation by the Regulierungsbehorde fur Telekommunikation und Post
(which is under the jurisdiction of the Ministry of Economy). Germany permits
the competitive provision of international facilities-based and resale services.
STAR Germany was granted a license for the provision of voice telephony on the
basis of self-operated

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telecommunications networks in December 1997. Under this license, STAR Germany
has installed telecommunications switching facilities in Dusseldorf, Frankfurt,
Hamburg and Munich and is leasing connection transmission facilities between
these switches and additional facilities. The network of STAR Germany will be
used primarily for routing international telecommunications traffic between the
U.S., the U.K., Germany and beyond. There can be no assurance that future
changes in regulation of the services provided by STAR Germany will not have a
material adverse effect on STAR's business, operating results and financial
condition.

OTHER COUNTRIES. STAR plans to initiate a variety of services in certain
European countries including France and Belgium. 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 STAR
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 STAR 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. STAR's inability to take advantage of
such liberalization could have a material adverse affect on STAR's ability to
expand its services as planned.

EMPLOYEES

As of March 1, 1999, STAR employed 1,152 full-time employees. STAR is not
subject to any collective bargaining agreement and it believes that its
relationships with its employees are good.

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RISK FACTORS

IN EVALUATING THE COMPANY, ITS BUSINESS, OPERATIONS AND FINANCIAL POSITION,
THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN ADDITION TO THE
OTHER INFORMATION CONTAINED IN THIS FORM 10-K. THIS FORM 10-K CONTAINS, IN
ADDITION TO HISTORICAL INFORMATION, "FORWARD-LOOKING STATEMENTS" WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT
THAT INVOLVE RISKS AND UNCERTAINTIES. STAR'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 FORM 10-K.

NO ASSURANCE THAT STAR WILL REALIZE ANTICIPATED BENEFITS FROM THE PT-1 MERGER

STAR's acquisition of PT-1 is the most significant transaction in the
history of the Company. The PT-1 Merger involves the combination of certain
aspects of two companies that have operated independently. The process of
integrating the STAR and PT-1 businesses, operations and employees will present
a significant challenge to the Company's management and may lead to
unanticipated costs. Accordingly, there can be no assurance that PT-1 can be
successfully integrated into STAR or that STAR and its stockholders (including
persons who became stockholders as a result of the PT-1 Merger) will ultimately
realize any of the anticipated benefits of the PT-1 Merger.

STAR's business has historically focused on providing switched voice
services on a wholesale basis, primarily to U.S.-based long distance carriers.
Alternatively, PT-1's operations are primarily focused on the marketing of
prepaid telephone calling cards ("Prepaid Cards") to the retail marketplace of
individual end-users. Thus, STAR and PT-1 operate in fundamentally different
business segments of the telecommunications market. These differences create
real challenges to the ability of STAR to integrate PT-1 operations and
personnel. Difficulties in the integration process may occur due to, among other
things, PT-1's emphasis on marketing of particular Prepaid Cards to specific
segments of the retail market, its need to maintain strong ties to a network of
independent distributors, PT-1's need for the continual introduction of new
products into the domestic market to achieve desired growth and the distance
between STAR's Santa Barbara headquarters and PT-1's New York-based operations.
There can be no assurance that STAR will be able to overcome these challenges to
integration.

In addition, the integration of the STAR and PT-1 accounting and personnel
administrative functions involves the risk that key employees in those
operations, who can not be easily replaced, will leave even when offered
continuing employment. The integration approach adopted by STAR with respect to
PT-1 requires the devotion of a significant amount of time by senior executives,
which may detract from business operations and the development of the combined
companies.

In considering the PT-1 Merger, the STAR Board considered, among other
things, the cost savings, operating efficiencies and other synergies expected to
result following the consummation thereof. There can be no assurance that any of
such cost savings, operating efficiencies or other synergies will be
accomplished as rapidly as currently expected or at all or that such savings and
synergies will not be offset by increases in other expenses or operating losses,
including losses due to problems arising from the integration of STAR and PT-1.

OPERATING RESULTS SUBJECT TO SIGNIFICANT FLUCTUATIONS

STAR'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, STAR 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. STAR's revenues in any given period can vary due
to factors such as call volume fluctuations, particularly in regions with
relatively

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<PAGE>
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 STAR's traffic; financial
difficulties of major customers; pricing pressure resulting from increased
competition; and technical difficulties with or failures of portions of STAR's
network that impact STAR's ability to provide service to or bill its customers.
STAR'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 STAR'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 STAR's sales
incentive plans; and costs associated with changes in staffing levels of sales,
marketing, technical support and administrative personnel. In addition, STAR'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 STAR's expansion in international and commercial
markets; and general domestic and international economic and political
conditions. Further, a substantial portion of transmission capacity used by STAR
is obtained on a variable, per minute and short term basis, subjecting STAR to
the possibility of unanticipated price increases and service cancellations.
Since STAR 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, STAR's gross margins are subject to significant
fluctuations over short periods of time. STAR's gross margins also may be
negatively impacted in the longer term by competitive pricing pressures.

ABILITY TO CONTINUE AND MANAGE GROWTH; COMMERCIAL MARKET

STAR has increased revenues from $67.0 million in 1995 to $619.2 million in
1998, with revenues increasing in each of the last fourteen 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 STAR's operating expenses varies with its revenues. This effect is likely to
increase as a greater percentage of STAR's cost of services are associated with
owned and leased facilities. There can be no assurance that STAR will be able to
achieve or maintain profitability on a quarterly or annual basis in the future.
It is likely that in some future quarter STAR'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."

As part of STAR's significant revenue growth, it has expanded, and plans to
continue to expand, the number of its employees and the geographic scope of its
operations. Additionally, an important component of STAR's strategy is to grow
and expand through acquisition. These factors have resulted, and will continue
to result, in increased responsibilities for management personnel and have
placed, and will continue to place, increased demands upon STAR's operating and
financial systems, which may lead to unanticipated costs and divert management's
attention from day-to-day operations. STAR may also be required to attract,
train and retain additional highly qualified management, technical, sales and
marketing and customer support personnel. The process of locating such personnel
with the combination of skills and attributes required to implement STAR's
strategy is often lengthy. The inability to attract and retain additional
qualified personnel could materially and adversely affect STAR. STAR 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 foreign subsidiaries and relationships with foreign
partners and expanded treasury functions to manage foreign currency risks.
STAR's accounting systems and policies have been developed as STAR has
experienced significant growth. There can be no assurance that STAR's personnel,
systems, procedures and controls will be adequate to support STAR's future
operations. See
"--Dependence on Key Personnel," "Business--Employees" and "Management."

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With the acquisition of CEO, STAR began providing service to the commercial
market, which is more labor intensive than the wholesale market, and as a result
has higher overhead costs. STAR 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 STAR will
be able to effectively manage the costs of and risks associated with its
expansion into the commercial market.

RISKS INHERENT IN ACQUISITION STRATEGY

An important component to STAR's strategy is to grow and expand through
acquisitions. This growth strategy is dependent on the continued availability of
suitable acquisition candidates and subjects the Company to a number of risks.
STAR has completed four acquisitions, CEO on November 30, 1997, T-One on March
10, 1998, PT-1 on February 4, 1999 and UDN on March 24, 1999. These acquisitions
have placed significant demands on STAR's financial and management resources, as
the process for integrating acquired operations presents a significant challenge
to STAR's management and may lead to unanticipated costs or a diversion of
management's attention from day-to-day operations. There can be no assurance
that the Company will be able to successfully integrate these acquisitions or
any other acquisitions made by STAR in the future into Company operations.
Integrating acquisitions may require integration of financial and call routing
systems, network and other physical facilities and personnel. Difficulties in
integrating these and other acquisitions can cause system degradation, added
costs and loss of personnel or customers. Additionally, STAR may incur unknown
liabilities despite management's efforts to investigate the operations of the
acquired business. The impact of these risks, and other risks arising as a
result of STAR's acquisition strategy, could adversely affect STAR's operating
results.

RISKS ASSOCIATED WITH GROWTH OF TELECOMMUNICATIONS NETWORK AND CUSTOMER BASE

Historically, STAR has relied primarily on leased transmission capacity for
the delivery of its telecommunications services. STAR's telecommunications
expenses have in the past primarily been variable, based upon minutes of use,
consisting largely of payments to other long distance carriers, customer/carrier
interconnect charges, leased fiber circuit charges and switch facility costs.
During 1997 and 1998, however, the Company made considerable capital
expenditures in order to expand its network, and intends to continue to do so in
the future. See "Business--Network." Although STAR's strategy is to seek to
establish significant traffic volumes prior to investing in fixed-cost
facilities, the development of such facilities entails significant costs and
prior planning, which are based in part on STAR's expectations concerning future
revenue growth and market developments. As STAR expands its network and the
volume of its network traffic, its cost of revenues will increasingly consist of
fixed costs arising from the ownership and maintenance of its switches and
undersea fiber optic cables. While STAR believes that in the long-term these
investments will allow it to reduce its cost of service and to enhance its
service offerings, in the short-term, cost increases and a decrease in STAR's
operating margins may occur. If STAR's traffic volume were to decrease, or fail
to increase to the extent expected or necessary to make efficient use of its
network, STAR's costs as a percentage of revenues could increase significantly,
which could have a material adverse effect on STAR's business, financial
condition or results of operations.

In addition, STAR's business depends in part on its ability to obtain
transmission facilities on a cost-effective basis. Because undersea fiber optic
cables typically take several years to plan and construct, carriers generally
make investments well in advance, based on a forecast of anticipated traffic.
Therefore, STAR's operations are subject to the risk that it will not adequately
anticipate the amount of traffic over its network, and may not procure
sufficient cable capacity or network equipment in order to ensure the cost-
effective transmission of customer traffic. Although STAR participates in the
planning of undersea fiber optic transmission facilities, it does not control
the construction of such facilities and must seek access to such facilities
through partial ownership positions. If ownership positions are not available,
STAR must seek access to such facilities through lease arrangements on
negotiated terms that may vary with industry and market conditions. There can be
no assurance that STAR will be able to continue to obtain sufficient

20
<PAGE>
transmission facilities or access to undersea fiber optic cable on economically
viable terms. The failure of STAR to obtain telecommunications facilities that
are sufficient to support its network traffic in a manner that ensures the
reliability and quality of its telecommunications services may have a material
adverse effect on its business, financial condition or results of operations.

RISKS OF INTERNATIONAL TELECOMMUNICATIONS BUSINESS

STAR has to date generated a substantial majority of its revenues by
providing international telecommunications services to its customers on a
wholesale basis. STAR sends traffic to numerous countries throughout the world,
including India, Mexico and China. The international nature of STAR'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,
STAR'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 it proceeds with the
planned expansion of its international operations.

RISK OF DEPENDENCE ON FOREIGN PARTNERS. STAR 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. STAR may have limited recourse if its foreign partners do not
perform under their contractual arrangements with STAR. STAR's arrangements with
foreign partners may expose STAR 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 STAR or
companies (such as national telephone companies) upon which STAR 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 STAR's operations. In highly regulated countries in
which STAR is not dealing directly with the dominant local exchange carrier, the
dominant carrier may have the ability to terminate service to STAR or its
foreign partner and, if this occurs, STAR may have limited or no recourse. In
countries where competition is not yet fully established and STAR is dealing
with an alternative operator, foreign laws may prohibit or impede new operators
from offering services in these markets.

RISKS ASSOCIATED WITH FOREIGN CURRENCY FLUCTUATIONS. STAR's revenues and
cost of long distance services are sensitive to foreign currency fluctuations.
STAR expects that an increasing portion of STAR's 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 STAR's results of operations. Although
STAR utilizes hedging instruments to reduce the risk of foreign currency
fluctuations, STAR will not be fully protected from these risks and the
instruments themselves involve a degree of risk. See "Quantitative and
Qualitative Disclosure About Market Risk."

FOREIGN CORRUPT PRACTICES ACT. STAR 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. STAR may be exposed to liability under the FCPA as a result of
past or future actions taken without STAR's knowledge by agents, strategic
partners and other intermediaries. Such liability could have a material adverse
effect on STAR's business, operating results and financial condition.

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<PAGE>
POTENTIAL ADVERSE EFFECTS OF GOVERNMENT REGULATION

STAR's business is subject to various U.S. and foreign laws, regulations,
agency actions and court decisions. STAR's U.S. international telecommunications
service offerings are subject to regulation by the FCC. The FCC requires
international carriers to obtain authorizations under Section 214 of the
Communications Act, prior to acquiring international facilities by purchase or
lease, or providing international service to the public. Prior FCC approval is
also required to transfer control of a certificated carrier. STAR must file
reports and contracts with the FCC and must pay regulatory fees, which are
subject to change. STAR is also subject to the FCC policies and rules discussed
below. The FCC could determine, by its own actions or in response to a third
party's filing, that certain of STAR's services, termination arrangements,
agreements with foreign carriers, transit or refile arrangements or reports do
not or did not comply with FCC policies and rules. If this occurred, the FCC
could order STAR to terminate noncompliant arrangements, fine STAR or revoke
STAR's authorizations. Any of these actions could have a material adverse effect
on STAR's business, operating results and financial condition.

FCC INTERNATIONAL PRIVATE LINE RESALE POLICY. The FCC's IPL resale policy
limits the conditions under which a carrier may connect IPLs to the PSTN at one
or both ends to provide switched services, commonly known as ISR. A carrier
generally may only offer ISR services to a foreign country if the FCC has found
(a) the country is a member of the World Trade Organization ("WTO") and at least
50% of the U.S. billed and settled traffic to that country is settled at or
below the FCC's benchmark settlement rate or (b) the country is not a WTO
member, but it offers U.S. carriers equivalent opportunities to engage in ISR
and at least 50% of the U.S. billed and settled traffic is settled at or below
the applicable benchmark. STAR's FCC authority currently permits it to provide
ISR service to Canada, the U.K., Sweden, New Zealand, Australia, the
Netherlands, Germany, France, Belgium, Denmark, Norway, Austria, Switzerland,
Luxembourg, Italy, Hong Kong and Japan. The FCC is currently reviewing U.S.
carrier applications to provide ISR to Finland and Mexico, among other routes.
Upon grant of any such ISR application to a given country, the FCC's rules also
would permit STAR to provide ISR service to that country. If ISR is not
permitted on a route, absent prior FCC consent, U.S. facilities based
international carriers must terminate switched telephone traffic in accordance
with the FCC's International Settlement Policy ("ISP") which is primarily
intended to deter foreign carriers with market power from discriminating amongst
competing U.S. carriers by, for example, favoring the foreign carrier's U.S.
affiliate. The ISP requires that all U.S. carriers terminate traffic with a
foreign carrier on the same terms (i.e., that settlement rates be equivalent)
and receive inbound traffic only in proportion to the volume of U.S. outbound
traffic which they generate.

On a few routes, STAR may use IPLs to terminate international switched
telephone services where ISR has not been authorized. On such routes, therefore,
STAR's termination arrangements may not be consistent with the FCC's ISP. On any
such route, however, to STAR's knowledge the foreign correspondent lacks market
power, no U.S. inbound traffic is involved, and the effective settlement rate is
lower than the prevailing rate. Thus, STAR believes its actions are not
inconsistent with the ISP's underlying purpose.

FCC INTERNATIONAL SETTLEMENTS POLICY. The ISP limits the arrangements which
U.S. international carriers may enter into with foreign carriers for exchanging
public switched telecommunications traffic, which the FCC terms International
Message Telephone Service ("IMTS"). This policy does not apply to ISR services.
The ISP requires that U.S. carriers receive an equal share of the accounting
rate and receive inbound traffic in proportion to the volume of U.S. outbound
traffic which they generate. The ISP and other FCC policies also prohibit a U.S.
carrier and a foreign carrier which possesses sufficient market power on the
foreign end of the route to affect competition adversely in the U.S. market from
entering into exclusive arrangement involving services, facilities or functions
on the foreign end of a U.S. international route which are necessary for
providing basic telecommunications and which are not offered to similarly
situated U.S. carriers. It is possible that the FCC could find that certain of
STAR's arrangements with foreign operators are inconsistent with the ISP.

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<PAGE>
FCC POLICIES ON TRANSIT AND REFILE. STAR uses both transit and refile
arrangements to terminate its international traffic. The FCC routinely approves
transit arrangements by U.S. international carriers. The FCC's rules also permit
carriers in many cases to use ISR facilities to route traffic via a third
country for refile through the PSTN. The extent to which U.S. carriers may enter
into refile arrangements consistent with the ISP is currently under review by
the FCC. Certain of STAR's transit or refile arrangements may violate the ISP or
other FCC policies.

RECENT AND POTENTIAL FCC ACTIONS. Regulatory action that may be taken in
the future by the FCC may intensify the competition which STAR faces, impose
additional operating costs upon STAR, disrupt certain of STAR's transmission
arrangements or otherwise require either company to modify its operations.
Future FCC action may also provide STAR additional competitive flexibility by,
for example, eliminating or substantially reducing the tariff requirements
applicable to STAR's interstate and international telecommunications services.
The FCC is encouraging new market entrants by implementing the WTO Agreement and
through other actions. The FCC may approve pending mergers which could produce
more effective competitors in STAR's market. The FCC may increase regulatory
fees charged to STAR and its competitors by eliminating the exemption for
carrier revenues obtained from other carriers for certain fees or through other
actions, which could raise STAR's costs of service without assurance that STAR
could pass such fee increases through to its customers. See
"Business--Government Regulation." In addition, the FCC has received a number
informal complaints against CEO regarding the alleged unauthorized switching of
long distance customers and other matters, some of which currently remain under
review.

STATE. The intrastate long distance telecommunications operations of STAR
and its subsidiaries are subject to various state laws and regulations,
including prior certification, notification, registration and/or tariff
requirements. The vast majority of states require that STAR and its subsidiaries
apply for certification to provide intrastate telecommunications services. In
most jurisdictions, STAR also must file and obtain prior regulatory approval of
tariffs for intrastate services. Certificates of authority can generally be
conditioned, modified or revoked by state regulatory authorities for failure to
comply with state laws and regulations. Fines and other penalties, including
revocation of a certificate of authority, may be imposed.

FOREIGN REGULATIONS. STAR is also subject to regulation in foreign
countries, such as the U.K. and Germany, in connection with certain of its
business activities. For example, STAR's use of transit, 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 International Telecommunications Union ("ITU"), or
other supra-national organizations such as the European Union or the WTO, may
have adopted or may adopt laws or regulatory requirements regarding such
services for which compliance would be difficult or expensive, that could force
STAR to choose less cost-effective routing alternatives and that could adversely
affect STAR's business, operating results and financial condition.

To the extent that STAR seeks to provide telecommunications services in
other non-U.S. markets, STAR will be subject to the developing laws and
regulations governing the competitive provision of telecommunications services
in those markets. STAR currently plans to provide a limited range of services in
Mexico and Belgium, 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. The nature,
extent and timing of the opportunity for STAR 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 the regulatory regime in these
countries will provide STAR with practical opportunities to compete in the near
future, or at all, or that STAR will be able to take advantage of any such
liberalization in a timely manner. See "Business--Government Regulation."

REGULATION OF CUSTOMERS. STAR'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 STAR. Regulatory

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<PAGE>
sanctions have been imposed on certain of STAR's customers in the past. While
such sanctions have not adversely impacted the volume of traffic received by
STAR 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 STAR's business, financial condition and
results of operations.

RISKS OF NETWORK FAILURE; DEPENDENCE ON FACILITIES AND THIRD PARTIES

Any system or network failure that causes interruptions in STAR's operations
could have a material adverse effect on its business, financial condition or
results of operations. STAR's operations are dependent on STAR's ability to
successfully expand its network and integrate new and emerging technologies and
equipment into its network, which are likely to increase the risk of system
failure and to cause strain upon the networks. STAR's operations also are
dependent on STAR's ability to protect its hardware and other equipment from
damage from natural disasters such as fires, floods, hurricanes and earthquakes,
other catastrophic events such as civil unrest, terrorism and war and other
sources of power loss and telecommunications failures. Although STAR 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 STAR's switches from becoming disabled in the event of an earthquake,
power outage or otherwise. The failure of STAR'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 STAR's relationships with its
customers and its business, operating results and financial condition. See
"Business--Network."

DEPENDENCE ON KEY PERSONNEL

STAR'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 STAR's operations, in particular,
Christopher E. Edgecomb, STAR's Chief Executive Officer. STAR maintains and is
the beneficiary under a key person life insurance policy in the amount of $10.0
million with respect to Mr. Edgecomb. STAR 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 STAR will be successful
in attracting and retaining such personnel. The loss of the services of one or
more of STAR's key individuals, or the failure to attract and retain other key
personnel, could materially adversely affect STAR's business, operating results
and financial condition. See "Management."

SIGNIFICANT COMPETITION

The international telecommunications industry is intensely competitive and
subject to rapid change. STAR's competitors in the international wholesale
switched long distance market include large, facilities-based multinational
corporations and smaller facilities-based providers in the U.S. and overseas
that have emerged as a result of deregulation, switch-based resellers of
international long distance services and international joint ventures and
alliances among such companies. STAR also competes abroad with a number of
dominant telecommunications operators that previously held various monopolies
established by law over the telecommunications traffic in their countries.
International wholesale switched service providers compete on the basis of
price, customer service, transmission quality, breadth of service offerings and
value-added services. Additionally, the telecommunications industry is in a
period of rapid technological evolution, marked by the introduction of
competitive product and service offerings, such as the utilization of the
Internet for international voice and data communications. STAR is unable to
predict which technological development will challenge its competitive position
or the amount of expenditures that will be required to respond to a rapidly
changing technological environment. Further, the number of competitors is likely
to increase as a result of the competitive opportunities created by a new Basic
Telecommunications Agreement concluded by members of the WTO in February 1997.
Under the terms of

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<PAGE>
the WTO Agreement, starting February 5, 1998, the United States and over 68
countries have committed to open their telecommunications markets to competition
and foreign ownership and to adopt measures to protect against anticompetitive
behavior. As a result, STAR believes that competition will continue to increase,
placing downward pressure on prices. Such pressure could adversely affect STAR's
gross margins if STAR is not able to reduce their costs commensurate with such
price reductions.

COMPETITION FROM DOMESTIC AND INTERNATIONAL COMPANIES. A majority of the
U.S.-based international telecommunications services revenue is currently
generated by AT&T, MCI WorldCom and Sprint. STAR also competes with Pacific
Gateway Exchange, Inc., and other U.S.-based and foreign long distance
providers, including the Regional Bell Operating Companies ("RBOCs"), which
presently have FCC authority to resell and terminate international
telecommunication services. Many of these competitors have considerably greater
financial and other resources and more extensive domestic and international
communications networks than STAR. STAR's business would be materially adversely
affected to the extent that a significant number of such customers limit or
cease doing business with STAR 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 STAR
by reducing the number of potential customers for STAR's services.

EXPANSION INTO COMMERCIAL MARKET. With the acquisition of CEO, STAR began
providing long distance service to the commercial market, a market that is
subject to intense competition from a number of well capitalized companies. The
commercial market is also characterized by the lack of customer loyalty, with
commercial customers regularly changing service providers. There can be no
assurance that STAR will be able to compete successfully in the commercial
market. See "Business--Strategy--Expansion into Commercial Market."

CUSTOMER CONCENTRATION

While the list of STAR's most significant customers varies from quarter to
quarter, STAR's five largest customers accounted for approximately 32.2% of its
revenues in 1998, with one customer, PT-1, accounting for approximately 14.5% of
revenues in such period. STAR could lose a significant customer for many
reasons, including the entrance into the market of significant new competitors
with lower rates than STAR, downward pressure on the overall costs of
transmitting international calls, transmission quality problems, changes in U.S.
or foreign regulations or unexpected increases in STAR's cost structure as a
result of expenses related to installing a global network or otherwise.

NEED FOR ADDITIONAL CAPITAL TO FINANCE GROWTH AND CAPITAL REQUIREMENTS

STAR believes that it must continue to enhance and expand its network and
build out its telecommunications network infrastructure in order to maintain its
competitive position and continue to meet the increasing demands for service
quality, capacity and competitive pricing. STAR's ability to grow depends, in
part, on its ability to expand its operations through the ownership and leasing
of network capacity, which requires significant capital expenditures, that are
often incurred prior to STAR's receipt of the related revenue. STAR believes
that, based upon its present business plan and its existing cash resources,
available financing and expected cash flow from operating activities, STAR will
have sufficient cash to meet its currently anticipated working capital and
capital expenditure requirements for at least twelve months. If STAR's growth
exceeds current expectations, if STAR obtains one or more attractive
opportunities to purchase the business or assets of another company, or if
STAR's cash flow from operations after the end of such period is insufficient to
meet its working capital and capital expenditure requirements, STAR will need to
raise additional capital from equity or debt sources. There can be no assurance
that STAR will be able to raise such capital on favorable terms or at all. If
STAR is unable to obtain such additional capital, STAR may be required to reduce
the scope of its anticipated expansion, which could have a material adverse
effect on STAR's business, financial condition or results of operations.

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<PAGE>
VOLATILITY OF STOCK PRICE

The market price of the shares of the Company's Common Stock has risen since
STAR's initial public offering in June 1997 and is trading at a high multiple of
STAR's earnings. The market price for such shares has been highly volatile and
may be significantly affected by factors such as actual or anticipated
fluctuations in STAR's operating results, the announcement of potential
acquisitions by STAR, changes in federal and international regulations,
activities of the largest domestic providers, industry consolidation and
mergers, conditions and trends in the international telecommunications market,
adoption of new accounting standards affecting the telecommunications industry,
changes in recommendations and estimates by securities analysts, general market
conditions and other factors. In addition, the stock market has from time to
time experienced significant price and volume fluctuations that have
particularly affected the market prices for the shares of emerging growth
companies like STAR. These broad market fluctuations may adversely affect the
market price of the Company's Common Stock.

YEAR 2000 COMPUTER PROGRAM FAILURE

A significant percentage of the software that runs most of the computers in
the United States relies on two-digit date codes to perform computations and
decision-making functions. Commencing on January 1, 2000, these computer
programs may fail from an inability to interpret date codes properly,
misinterpreting "00" as the year 1900 rather than 2000. STAR has implemented
Year 2000 compliance programs to ensure that its software, systems and equipment
are Year 2000 compliant and to ensure that the software and technology of its
third party vendors and customers are also Year 2000 compliant. STAR currently
anticipates that its information technology and non-information technology
systems will be Year 2000 compliant before January 1, 2000, though no assurances
can be given that its compliance testing will not detect unanticipated Year 2000
compliance problems. While STAR intends to develop contingency plans to prepare
for a Year 2000 failure, there can be no assurance that such contingency plans
will be adequate. If STAR and/or third parties are not Year 2000 compliant as of
such date and if such contingency plans are inadequate or fail to address a
particular Year 2000 risk, STAR may be required to incur unanticipated costs,
change relationships with third parties, forego revenues or be subjected to
other material adverse effects. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

FORWARD-LOOKING STATEMENTS

Certain statements contained in this Form 10-K, including without
limitation, statements containing the words "believes," "anticipates,"
"intends," "expects" and words of similar import, constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among others, the
following: general economic and business conditions, both nationally and in the
regions in which the Company operates; industry capacity; existing government
regulations and changes in, or the failure to comply with, government
regulations; competition; changes in business strategy or development plans; the
ability of the Company to manage growth; the availability and terms of capital
to fund the expansion of the Company's business, including the acquisition of
additional businesses; and other factors referenced in this Form 10-K. GIVEN
THESE UNCERTAINTIES, THE STOCKHOLDERS OF THE COMPANY ARE CAUTIONED NOT TO PLACE
UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS.

26
<PAGE>
ITEM 2. PROPERTIES

STAR's principal offices are located in Santa Barbara, California in five
facilities providing an aggregate of approximately 38,814 square feet of office
space expiring between June 1999 and October 2005. Additionally, STAR has office
and switching sites in the following locations (excluding UDN):

<TABLE>
<CAPTION>
APPROXIMATE
OFFICE SITES SQUARE FEET EXPIRATION DATE
- ---------------------------------------------- ------------- --------------------------------
<S> <C> <C>
Fairfax, Virginia 3,909 May 2004
New York, New York 2,627 December 2001
Los Angeles, CA 17,500 June 2005
Houston, Texas 847 July 2003
London, England 5,414 December 2003
</TABLE>

<TABLE>
<CAPTION>
APPROXIMATE
SWITCH SITES SQUARE FEET EXPIRATION DATE
- ---------------------------------------------- ------------- --------------------------------
<S> <C> <C>
Los Angeles, CA (multiple leases) 39,175 April 2006 - December 2008
New York, New York (multiple leases) 40,749 July 2003 - April 2008
Dallas, Texas 6,167 April 2007
Miami, Florida (multiple leases) 20,571 June 2008 - August 2008
Atlanta, Georgia 17,300 April 2008
Seattle, Washington 7,020 June 2008
London, England 8,000 July 2006
Hamburg, Germany 20,342 December 2007
Dusseldorf, Germany 20,423 December 2007
Frankfurt, Germany 30,051 December 2007
Munich, Germany 12,408 December 2007
</TABLE>

A number of the above-listed leases grant STAR the right to extend the lease
term beyond the stated expiration date. The aggregate facility lease payments
made by STAR in 1998 were approximately $5.0 million.

On February 4, 1999, STAR completed its acquisition of PT-1, which has sales
offices in Houston, Texas, Columbus and Cleveland, Ohio, Seattle, Washington,
Jackson Heights, California, New York, Staten Island and Flushing, New York and
Toronto, Canada providing an aggregate of approximately 57,497 square feet of
office space expiring between June 1999 and December 2008. PT-1 also leases
approximately 5,565 square feet of space for its switching facilities in Jersey
City, New Jersey under a lease expiring December 2008, and approximately 10,353
square feet for its switching facility in Miami, Florida under a lease expiring
April 2008.

STAR believes that all other material terms of its leases are commercially
reasonable terms that are typically found in commercial leases in each of the
respective areas in which STAR leases space. STAR believes that its facilities
are adequate to support its current needs and that additional facilities will be
available at competitive rates as needed.

ITEM 3. LEGAL PROCEEDINGS

STAR is not presently a party to any material pending litigation. From time
to time, however, STAR is party to various legal proceedings, including billing
disputes and collection matters, that arise in the ordinary course of business.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.

None.

27
<PAGE>
PART II

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

The Company's Common Stock has been traded on the Nasdaq National Market
under the symbol "STRX" since June 12, 1997. The following table sets forth, for
the fiscal periods indicated, the quarterly high and low sales prices for the
Common Stock, as reported by Nasdaq and as adjusted to reflect the Stock Split
that occurred on March 31, 1998.

<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
FISCAL YEAR ENDED DECEMBER 31, 1997
Second Quarter (from June 12, 1997)..... 7 3/8 4 41/64
Third Quarter........................... 11 53/64 6 7/32
Fourth Quarter.......................... 17 11/16 9 33/64

FISCAL YEAR ENDED DECEMBER 31, 1998
First Quarter........................... 28 3/64 13 29/32
Second Quarter.......................... 37 3/8 19 3/8
Third Quarter........................... 23 9 11/16
Fourth Quarter.......................... 18 7 1/8
</TABLE>

The last reported sale price of the Common Stock on the Nasdaq National
Market on March 17, 1999 was $10 13/16 per share. As of March 17, 1999, there
were 177 holders of record of the Company's Common Stock.

The Company has never paid cash dividends on its Common Stock and has no
intention of paying cash dividends 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 Company's
existing revolving credit facility prohibits the payment of cash dividends
without the lender's consent.

The Company issued and sold the following unregistered securities during
1998, which amounts have been adjusted to reflect the Stock Split:

1. On March 10, 1998, the Registrant issued 1,353,000 shares of its Common
Stock in exchange for all of the outstanding capital stock of T-One Corp. in a
transaction valued at $25,080,000.

2. During the year ended December 31, 1998, the Registrant granted to
employees and directors options to purchase an aggregate of approximately
1,026,925 shares of Common Stock pursuant to stock option agreements and the
Registrant's stock option plans.

The sales and issuances described above were deemed to be exempt from
registration under the Securities Act in reliance upon Section 4(2) thereof, as
transactions by an issuer not involving any public offering, Regulation S of the
Securities Act, or in reliance upon the exemption from registration provided by
Rule 701 promulgated under the Securities Act. 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.

28
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.

The following selected consolidated financial data should be read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto and with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," each of which is included elsewhere in this Form
10-K. The consolidated statements of operations data for the years ended
December 31, 1996, 1997, and 1998 and the balance sheet data at December 31,
1997 and 1998 are derived from audited financial statements included elsewhere
in this Form 10-K. The consolidated statement of operations data for the year
ended December 31, 1994 and the consolidated balance sheet data at December 31,
1994 are unaudited and are derived from unaudited financial statements not
included in this Form 10-K. The consolidated statement of operations data for
the year ended December 31, 1995 and the balance sheet data at December 31, 1995
and 1996 are derived from audited financial statements not included in this Form
10-K.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1995 1996 1997 1998
--------- ---------- ---------- ----------
1994
-----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues............................................. $ 26,850 $ 66,964 $ 283,450 $ 434,086 $ 619,220
Operating expenses:
Cost of services................................... 17,960 50,300 244,153 374,504 523,621
Selling, general and administrative................ 7,082 13,356 41,804 48,906 66,140
Depreciation and amortization...................... 379 952 2,343 5,650 15,054
Loss on impairment of goodwill..................... -- -- -- -- 2,604
Merger expense..................................... -- -- -- 286 1,026
----------- --------- ---------- ---------- ----------
Total operating expenses........................... 25,421 64,608 288,300 429,346 608,445
----------- --------- ---------- ---------- ----------
Income (loss) from operations...................... 1,429 2,356 (4,850) 4,740 10,775
Other income (expenses):
Interest income.................................... 5 65 138 464 4,469
Interest expense................................... (87) (214) (1,270) (2,617) (3,386)
Legal settlements and expenses..................... -- -- (100) (1,653) --
Other.............................................. (126) (97) 186 208 (304)
----------- --------- ---------- ---------- ----------
Income (loss) before provision for income taxes.... 1,221 2,110 (5,896) 1,142 11,554
Provision for income taxes........................... 22 66 577 2,905 9,923
----------- --------- ---------- ---------- ----------
Net income (loss).................................... $ 1,199 $ 2,044 $ (6,473) $ (1,763) $ 1,631
----------- --------- ---------- ---------- ----------
----------- --------- ---------- ---------- ----------
Pro forma net income (loss) (unaudited)(1)........... $ (130) $ 478 $ (7,416) $ (1,958)
----------- --------- ---------- ----------
----------- --------- ---------- ----------
Income (loss) per common share(2)
Basic.............................................. $ 0.06 $ 0.10 $ (0.27) $ (0.06) $ 0.04
Diluted............................................ $ 0.06 $ 0.10 $ (0.27) $ (0.06) $ 0.04
Pro forma income (loss) per common share
(unaudited)(2)
Basic.............................................. $ (0.01) $ 0.02 $ (0.31) $ (0.06)
Diluted............................................ $ (0.01) $ 0.02 $ (0.31) $ (0.06)
Weighted average number of common shares
outstanding(2)
Basic.............................................. 18,548 19,916 24,076 31,101 40,833
Diluted............................................ 18,548 19,916 24,076 31,101 42,434
</TABLE>

29
<PAGE>

<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------------
1995 1996 1997 1998
--------- ---------- ---------- ----------
1994
-----------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit)............................ $ 664 $ (1,065) $ (10,913) $ 4,692 $ 46,698
Total assets......................................... 13,603 37,169 76,250 130,382 374,651
Total long-term liabilities, net of current
portion............................................ 691 2,980 8,834 14,800 33,048
Accumulated deficit.................................. (4,121) (6,294) (12,077) (13,737) (12,106)
Stockholders' equity................................. 4,072 6,614 9,986 40,615 195,591
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1995 1996 1997 1998
--------- ---------- ------------ ------------
1994
-----------
(UNAUDITED) (IN THOUSANDS, EXCEPT MINUTE DATA)
<S> <C> <C> <C> <C> <C>
OTHER CONSOLIDATED FINANCIAL AND OPERATING DATA:
Capital expenditures(3).......................... $ 796 $ 2,922 $ 14,810 $ 26,584 $ 147,236
North American wholesale billed minutes of
use(4)......................................... -- 38,106 479,681 1,034,187 1,657,523
North American wholesale revenue per billed
minute of use(5)............................... $ -- $ 0.4102 $ 0.4288 $ 0.3612 $ 0.3145
</TABLE>

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

(1) The pro forma net income or loss per share assumes that both STAR and CEO,
which was acquired by STAR in a pooling of interests transaction on November
30, 1997, were C-corporations for all periods presented.

(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 basic
and diluted income (loss) per common share and pro forma basic and diluted
income (loss) per common share.

(3) Includes assets financed with capital leases or notes. See Note 2 of Notes
to Consolidated Financial Statements.

(4) Does not include wholesale billed minutes of use from T-One prior to the
year ended December 31, 1997. Includes wholesale billed minutes of use to
UDN for all years presented.

(5) Represents wholesale gross call usage revenue per billed minute. Amounts
exclude other revenue related items such as finance charges. This data does
not include wholesale billed minutes of use from T-One prior to the year
ended December 31, 1997.

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

THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH "SELECTED
CONSOLIDATED FINANCIAL DATA" AND THE CONSOLIDATED FINANCIAL STATEMENTS AND THE
NOTES THERETO, EACH OF WHICH IS INCLUDED ELSEWHERE IN THIS FORM 10-K. THIS
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS, AS DEFINED IN SECTION 27A OF THE
SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT, THAT INVOLVE RISKS AND
UNCERTAINTIES. STAR'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 FORM 10-K.

30
<PAGE>
OVERVIEW

STAR is a multinational telecommunications services company focused
primarily on the international long distance market. STAR offers 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 approximately 200 countries through its flexible network comprised of
various foreign termination relationships, international gateway switches,
leased and owned transmission facilities and resale arrangements with other long
distance providers.

STAR installed its first international gateway switch in Los Angeles in June
1995 and initially recognized wholesale revenues through this switch in August
1995. A significant portion of STAR's revenues in 1994 and 1995 were generated
by the commercial operations of CEO and UDN.

REVENUES. Most of STAR's revenues are generated by the sale of
international long distance services on a wholesale basis to other, primarily
domestic, long distance providers. STAR records revenues from the sale of long
distance services at the time of customer usage. STAR'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.

Historically, STAR has increased revenues from quarter to quarter, often
times by a significant percentage. STAR's North American wholesale minutes of
use have also greatly increased from quarter to quarter, generally by amounts
that exceed the relative increases in revenues. For example, in the year ended
December 31, 1998, North American wholesale revenues increased by 42.6% over
revenues for 1997. Over the same period to period comparison, North American
minutes of wholesale use increased by 60.3%. There are a variety of reasons for
the growth in STAR's call volume, including growth of STAR's North American
customer base, which increased by 43.8% from 1997 to 1998, increased usage by
existing North American customers, and increased capacity over STAR's
telecommunications network, with the addition of a number of switches and growth
in available fiber optic lines.

The growth in North American wholesale minutes has been accompanied by a
corresponding decline in North American rates per minute. For example, for the
year ended December 31, 1998, such rates declined by 12.9% from wholesale rates
per minute in 1997. The decline in wholesale rates can be attributed to a number
of factors, including a changing country mix that includes a growing number of
minutes routed by STAR to lower rates per minute countries such as Mexico,
Germany and the United Kingdom and, as the wholesale international long distance
market continues to mature and evolve, a general downward trend in rates on
competitive routes. STAR's pricing for wholesale minutes varies materially from
customer to customer and is generally based on the time of day, the day of the
week and the destination of the call. While STAR continues to route traffic to
certain destinations at attractive rates, market conditions have forced STAR to
reduce its overall wholesale rates per minute.

Accordingly, STAR believes that the growth in its revenues has been fueled
almost entirely by STAR's ability to increase the volume of North American
wholesale minutes of use, for the reasons noted above. At the same time, the
general erosion in the rates per minute for such wholesale traffic has partially
offset the contribution to the increase of revenues made by such increased
volume of minutes.

STAR completed its acquisition of T-One in March 1998. Revenues from T-One's
operations for the periods set forth below were not material to the overall
result of operations of STAR during such periods.

COSTS OF SERVICES (EXCLUSIVE OF DEPRECIATION AND AMORTIZATION). STAR has
pursued a strategy of attracting customers and building calling volume and
revenue by offering favorable rates compared to other long distance providers.
STAR continues to lower its cost of services (exclusive of depreciation and
amortization) by (i) expanding STAR's owned network facilities, (ii) continuing
to utilize STAR's sophisticated information systems to route calls over the most
cost-effective routes and (iii) leveraging STAR's traffic volumes and
information systems to negotiate lower variable usage-based costs with domestic
and foreign providers of transmission capacity.

31
<PAGE>
Costs of services (exclusive of depreciation and amortization) include those
costs associated with the transmission and termination of international long
distance services. Currently, a majority of transmission capacity used by STAR
is obtained on a variable, per minute basis. As a result, some of STAR's current
costs of services (exclusive of depreciation and amortization) are variable.
STAR'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 STAR's
longer term arrangements requiring STAR to meet minimum usage commitments in
order to avoid penalties. Such variability and the short-term nature of many of
the contracts subject STAR to the possibility of unanticipated cost increases
and the loss of cost-effective routing alternatives. Each quarter management
reviews the cost of services (exclusive of depreciation and amortization)
accrual and adjusts the balance for resolved items. Costs of services (exclusive
of depreciation and amortization) also include fixed costs associated with the
leasing of network facilities.

STAR recently began to provide international long distance services to
commercial customers in certain European countries, including Germany. STAR
began providing long distance service to commercial markets in the U.S. with its
acquisition of CEO in November 1997. STAR believes that traffic from commercial
customers will be more profitable than wholesale traffic. STAR expects that an
expansion into this market will increase the risk of bad debt exposure and lead
to higher overhead costs.

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

OTHER OPERATING EXPENSES. Selling, general and administrative expenses
consist primarily of personnel costs, tradeshow and travel expenses, commissions
and consulting fees, as well as bad debt expense. These expenses have been
increasing over the past year, which is consistent with STAR's recent growth,
accelerated expansion into Europe, and investment in systems and facilities.
STAR expects this trend to continue, and to include, among other things, a
significant increase in depreciation and amortization. Management believes that
additional selling, general and administrative expenses will be necessary to
support the expansion of STAR's network facilities, its sales and marketing
efforts and STAR's expansion into commercial markets.

FOREIGN EXCHANGE. STAR's revenues and cost of long distance services are
sensitive to foreign currency fluctuations. STAR expects that an increasing
portion of STAR's revenues and expenses will be denominated in currencies other
than U.S. dollars, and changes in exchange rates may have a significant effect
on STAR's results of operations. See "Quantitative and Qualitative Disclosures
About Market Risk."

FACTORS AFFECTING FUTURE OPERATING RESULTS. STAR'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, STAR
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.

STAR'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. STAR'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 STAR's traffic;
financial difficulties of major customers; pricing pressure resulting from
increased competition; and technical difficulties with or failures of portions
of STAR's network that impact STAR's ability to provide service to or bill its
customers. STAR's operating expenses in any given period can vary due to

32
<PAGE>
factors such as fluctuations in rates charged by carriers to terminate STAR'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 STAR's sales
incentive plans; and costs associated with changes in staffing levels of sales,
marketing, technical support and administrative personnel. In addition, STAR'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 STAR's expansion in international and commercial
markets; and general domestic and international economic and political
conditions. Further, a substantial portion of transmission capacity used by STAR
is obtained on a variable, per minute and short-term basis, subjecting STAR to
the possibility of unanticipated price increases and service cancellations.
Since STAR 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, STAR's operating results are subject to significant
fluctuations over short periods of time. STAR's operating results also may be
negatively impacted in the longer term by competitive pricing pressures.

RECENT ACQUISITIONS AND DEVELOPMENTS

STAR has recently acquired the following companies and has taken the
following actions:

- T-ONE CORP. On March 10, 1998, STAR acquired T-One for 1,353,000 shares of
Common Stock in a transaction accounted for as a pooling of interests. All
financial data presented has been restated to include the results of
operations, financial position and cash flows of T-One.

- STOCK SPLIT. On March 31, 1998, STAR effected a 2.05-for-1 stock split
with payment to the holders of the shares of Common Stock outstanding on
February 20, 1998 of a stock dividend equal to 1.05 shares of Common Stock
for each such outstanding share.

- PUBLIC OFFERING. On May 4, 1998, STAR consummated a firmly underwritten
public offering of 6,000,000 shares of Common Stock, of which 5,685,000
shares were sold by STAR and 315,000 shares were sold by a certain
stockholder of STAR. On June 4, 1998, an additional 30,900 shares of
Common Stock were sold by a certain stockholder of STAR to cover an
over-allotment option for the offering.

- PT-1 COMMUNICATIONS, INC. On August 20, 1998, the Company entered into the
PT-1 Merger Agreement. Per the agreement, the Company issued 15,050,000
shares of Common Stock and $19,500,000 in short term promissory notes for
all outstanding shares, options and warrants of PT-1, plus an additional
250,000 shares of Common Stock to certain independent distributors of
PT-1. The PT-1 Merger was consummated on February 4, 1999 and will be
accounted for as a purchase.

- UNITED DIGITAL NETWORK, INC. On March 24, 1999, STAR completed the
acquisition of UDN for approximately 1 million shares of Common Stock in a
transaction to be accounted for as a pooling of interests. All financial
data presented has been restated to include the results of operations,
financial position and cash flows of UDN.

33
<PAGE>
RESULTS OF OPERATIONS

The following table sets forth certain selected items in STAR's statements
of operations as a percentage of total revenues for the periods indicated:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1997 1998
----------- --------- ---------
<S> <C> <C> <C>
Revenues..................................................................... 100.0% 100.0% 100.0%
Operating Expenses:
Cost of services........................................................... 86.1 86.3 84.6
Selling, general and administrative expenses............................... 14.7 11.3 10.7
Depreciation and amortization.............................................. 0.8 1.3 2.4
Loss on impairment of goodwill............................................. -- -- 0.4
----- --------- ---------
Total operating expenses................................................. 101.7 98.9 98.3
Income (loss) from operations................................................ (1.7) 1.1 1.7
----- --------- ---------
Income (loss) before provision for income taxes.............................. (2.1) 0.3 1.9
Provision for income taxes................................................... 0.2 0.7 1.6
----- --------- ---------
Net income (loss)............................................................ (2.3)% (0.4)% 0.3%
----- --------- ---------
----- --------- ---------
Pro forma net loss........................................................... (2.6)% (0.5)%
----- ---------
----- ---------
</TABLE>

YEARS ENDED DECEMBER 31, 1998 AND 1997

REVENUES: Total revenues increased 42.6% to $619.2 million in 1998 from
$434.1 million in 1997 primarily as a result of the continued growth in North
America wholesale operations, as described below.

Revenues from North American wholesale customers increased 40.9% to $529.8
million in 1998 from $376.0 million in 1997. Minutes of use generated by North
American wholesale customers increased 60.3% to 1.7 billion minutes of use
(including wholesale billed minutes of use to UDN) in 1998, as compared to 1
billion minutes of use (including wholesale billed minutes of use to UDN) in
1997. The increase in revenues and minutes of use reflects the growth in the
number of North American wholesale customers from 105 in 1997 to 151 at the end
of 1998, as well as an increase in usage by existing customers, primarily
resulting from the Company's expanding transmission capacity. The increase in
revenues was partially offset by a decline in rates per minute, as average North
American wholesale rate per minute of use declined from $0.36 cents per minute
in 1997 to $0.31 cents per minute in 1998, reflecting continued lower prices on
competitive routes. The decline in rates per minute is also attributable to the
change in country mix to include a larger proportion of lower rate per minute
countries such as Mexico, Germany and the United Kingdom. The period to period
decline in rates per minute was not a significant factor in the relative
increase in minutes of use.

North American commercial revenues increased 3.6% to $60.2 million in 1998
from $58.1 million in 1997 reflecting the continued success of new international
rate plans that target ethnic markets for Latin America and the Pacific Rim. The
average North American commercial rate per minute of use increased from $0.26
cents per minute in 1997 to $0.34 cents per minute in 1998, reflecting the
continued success at targeting markets with higher rates in the international
market. Commercial minutes and average rate per minute do not include any
revenue or minutes attributable to UDN, which amounts were negligible in 1998
and 1997.

In 1998 revenues generated from the European operations totaled $29.2
million. Management believes that the prospects for growth in Germany remain
strong as Star Telecommunications Deutschland GmbH is fully utilizing its
interconnect with Deutsche Telekom, AG as well as other European PTTs, to lower
the Company's cost of services and to grow its European commercial customer
base.

34
<PAGE>
COST OF SERVICES (EXCLUSIVE OF DEPRECIATION AND AMORTIZATION): Total cost
of services (exclusive of depreciation and amortization) increased 39.8% to
$523.6 million in 1998 from $374.5 million in 1997 and decreased as a percentage
of total revenues for the same periods to 84.6% from 86.3%.

Cost of services (exclusive of depreciation and amortization) from North
American wholesale vendors increased 35.1% to $453.2 million in 1998 from $335.5
million in 1997 and decreased as a percentage of North American wholesale
revenues for the same periods to 85.5% from 89.2%. North American commercial
cost of services (exclusive of depreciation and amortization) decreased 4.1% to
$37.4 million in 1998 from $39.0 million in 1997 and decreased as a percentage
of North American commercial revenues for the same periods to 62.1% from 67.1%.
The year ended 1998 also includes cost of services (exclusive of depreciation
and amortization) of $33.0 million generated from the European operations. The
growth in cost of services (exclusive of depreciation and amortization) reflects
the increase in minutes of use as well as an increase in leased private line
cost offset by an overall declining average cost per minute. The average cost
per minute declined as a result of changes in country mix to include a larger
proportion of lower cost per minute countries, competitive pricing pressures as
well as an increasing proportion on traffic routed over the Company's
proprietary network. The Company currently routes to 51 countries on its global
network up from 24 countries in 1997. Management believes that countries will
continue to be added to the Company's global network thereby contributing to an
overall decline in cost per minute.

SELLING, GENERAL AND ADMINISTRATIVE: In 1998, total selling, general and
administrative expenses, (exclusive of merger costs of $1.0 million), increased
35.2% to $66.1 million from $48.9 million in 1997 and decreased as a percentage
of revenues to 10.7% from 11.3% over the comparable periods, due primarily to an
increased sales force, as described below. North American wholesale selling,
general and administrative expenses increased 26.8% to $32.6 million in 1998
from $25.7 million in 1997 and decreased as a percentage of North American
wholesale revenue to 6.2% from 6.8%, respectively.

North American commercial selling, general and administrative expense
increased 2.8% to $22.4 million in 1998 from $21.8 million in 1997 and remained
flat as a percentage of revenues between the two periods. The Company expects
North American commercial selling, general and administrative costs to increase
as a percentage of revenues as additions to the sales force are hired to expand
STAR's North American commercial customer base.

Selling, general and administrative expenses related to the European
operations amounted to $11.1 million in 1998 and $1.4 million in 1997 reflecting
the start up of new business efforts in Europe. The Company expects overall
selling, general and administrative expenses to continue to grow as a percentage
of revenues as the Company adds personnel to staff its German operations and to
initiate carrier operations in additional European countries.

DEPRECIATION AND AMORTIZATION: In 1998, depreciation expense attributable
to North American assets amounted to $11.1 million and European operations
realized total depreciation of $4.0 million. In 1998, total depreciation
increased as a percentage of revenues to 2.4% from 1.3% for 1997. Depreciation
expense increased as a result of STAR's continuing expansion of its proprietary
international network, which includes purchases of switches, submarine cable and
leasehold improvements associated with switch sites. STAR expects depreciation
expense to continue to increase as a percentage of revenues as it continues to
expand its global telecommunications network. As of July 1, 1998, STAR revised
the remaining lives of certain operating equipment from five to ten years. This
charge reduced depreciation expenses and increased income before income taxes by
approximately $2.0 million.

INCOME FROM OPERATIONS: Income from operations increased 127.3% to $10.8
million during 1998 from $4.7 million in 1997. Operating margin increased to
1.7% from 1.1%, respectively. Operating margin is expected to expand as STAR
continues to diversify its revenue base and as traffic is migrated from leased
facilities onto STAR's owned network. Offsetting the declining cost of services
on a per minute basis were the startup costs of launching operations in Europe
and the expansion of the North American based commercial operations.

35
<PAGE>
OTHER INCOME (EXPENSE): Other income (expense), net, increased to
approximately $779,000 in 1998 from a net expense of $3.6 million in 1997.
Interest income grew to $4.5 million in 1998 from $464,000 in 1997 as a result
of interest earned on investing proceeds from the Company's secondary equity
offering in May 1998. Interest expense increased to $3.4 million in 1998 from
$2.6 million in 1997 in response to the additional capital leases for the
financing of new switches.

PROVISION FOR INCOME TAXES: The provision for income taxes increased to
$9.9 million in 1998 from $2.9 million in 1997 primarily due to the increase in
profitability of STAR.

YEARS ENDED DECEMBER 31, 1997 AND 1996

REVENUES: Revenues increased 53.1% to $434.1 million in 1997 from $283.5
million in 1996. Wholesale revenues increased to $376.0 million from $229.6
million, with wholesale minutes of use increasing to 863.3 million minutes in
1997, as compared to 479.7 million minutes of use in the prior year. This
increase reflects an increase in the number of wholesale customers from 84 in
1996 to 105 at the end of 1997, as well as an increase in usage by existing
customers, primarily resulting from STAR's expanding transmission capacity and
improving transmission quality. The average rate per minute of usage for
wholesale customers declined from $0.43 cents per minute in 1996 to $0.40 cents
per minute in 1997, reflecting the change in country mix to include a larger
proportion of lower rate per minute countries as well as lower prices on
competitive routes. The decline in rates per wholesale minute partially offset
the increase in wholesale minutes of use. The period to period decline in rates
per minute was not a significant factor in the relative increase in minute of
use. Wholesale minutes or average rate per minute computations do not include
the revenue or minutes of T-One in 1996 and 1997; in 1997 T-One wholesale
minutes and average rate per minute were 170.9 million and $0.17, respectively.

Commercial revenues increased to $58.1 million (including approximately
$30.6 million of revenue from UDN) in 1997 from $53.9 million (including
approximately $24.0 million of revenue from UDN) in 1996, primarily due to
increased usage from the UDN customer base. These increases were partially
offset by a decrease in CEO revenues as a result of the termination of the CEO
customer base in California due to the 1997 settlement entered into by CEO with
each of the California PUC and the District Attorney of Monterey, California. In
1997, commercial revenues generated in the State of California were $10.4
million, not including UDN revenue, as compared to California-generated
commercial revenues of $14.5 million in 1996, not including UDN revenue. See
"Business of STAR--Governmental Regulation--Actions Against CEO."

COST OF SERVICES (EXCLUSIVE OF DEPRECIATION AND AMORTIZATION): Cost of
services (exclusive of depreciation and amortization) increased 53.4% to $374.5
million in 1997 from $244.2 million in 1996. Wholesale cost of services
(exclusive of depreciation and amortization) increased to $335.5 million in 1997
from $208.8 million for 1996 and as a percentage of wholesale revenues decreased
to 89.2% from 90.9%, respectively. Wholesale cost of services (exclusive of
depreciation and amortization) declined as a percentage of revenues during 1997
as traffic was increasingly routed over STAR's proprietary international
network. Commercial cost of services (exclusive of depreciation and
amortization) increased 10.2% to $39.0 million in 1997 from $35.4 million in
1996 and increased as a percentage of commercial revenue to 67.1% from 65.7%
over such periods. As STAR migrates the CEO commercial customer base onto STAR's
network, CEO's cost of commercial long distance services (exclusive of
depreciation and amortization) is expected to decline.

SELLING, GENERAL AND ADMINISTRATIVE: In 1997, selling, general and
administrative expenses (exclusive of merger related costs of $286,000)
increased 17.0% to $48.9 million, from $41.8 million in 1996. Wholesale selling,
general and administrative expenses increased to $27.1 million in 1997 from
$25.8 million in 1996, but decreased as a percentage of wholesale revenues to
7.2% from 11.2% over the comparable periods. Total expenses increased year to
year in absolute dollars as STAR expanded its proprietary international network
and employee base. Included in the 1996 selling, general and administrative
expense was $11.6 million in reserves and write-offs against deposits and
accounts receivable related to bad debts from two customers. Commercial selling,
general and administrative expenses increased to $21.8 million in 1997 from
$16.0 million in 1996 and increased as a percentage of revenues to 37.5% from

36
<PAGE>
29.7% over the comparable period. STAR expects selling, general and
administrative expenses to expand in absolute dollars and as a percentage of
revenues in fiscal year 1998, as STAR expands its network and employee base and
in connection with STAR's entry into the commercial market.

37
<PAGE>
DEPRECIATION AND AMORTIZATION: Depreciation increased to $5.7 million for
1997 from $2.3 million for 1996, and increased as a percentage of revenues to
1.3% from 0.8% in the prior period. Depreciation increased as a result of STAR's
continuing expansion of its proprietary international network which includes
purchases of switches, submarine cable and leasehold improvements associated
with switch sites. STAR expects depreciation expense to increase as STAR
continues to expand its global telecommunications network.

OTHER INCOME (EXPENSE): Other expense, net, increased to $3.6 million in
1997 from $1.0 million in 1996. This increase is primarily due to interest
expense of $2.6 million incurred under various capital leases and bank lines of
credit and a legal settlement and associated expenses of $1.7 million. The legal
settlement relates to the dispute settled by CEO with the California PUC and the
District Attorney of Monterey County. See "Business--Governmental
Regulation--Actions Against CEO." Interest income earned on short-term
investments increased to $464,000 in 1997 from $138,000 in 1996 due to interest
earned on the proceeds of STAR's June 1997 initial public offering.

PROVISION FOR INCOME TAXES: The historical provision for income taxes
increased to $2.9 million in 1997 from $577,000 in 1996 primarily due to the
increase in profitability of STAR.

LIQUIDITY AND CAPITAL RESOURCES.

As of December 31, 1998, STAR had cash and cash equivalents of approximately
$47.3 million, short-term investments of $0.8 million (as a result of STAR's
secondary stock offering), and a working capital surplus of $46.7 million.

On May 4, 1998, STAR completed a secondary offering of 6,000,000 shares of
Common Stock of which 5,685,000 shares were sold by STAR and 315,000 shares were
sold by a selling stockholder. The net proceeds to STAR (after deducting
underwriting discounts and offering expenses) from the sale of such shares of
Common Stock were approximately $145.0 million.

As of December 31, 1998, STAR had $19.3 million outstanding on its $25
million revolving line of credit, which bears interest at the bank's cost of
funds plus 175.0 basis points and expires on July 1, 1999. Available borrowing
under the line of credit is further reduced by outstanding letters of credit in
the amount of $5.5 million.

At December 31, 1998, STAR had capital lease obligations of $38.0 million,
and $2.1 million in term loans, relating to its switching facilities and
operating equipment.

STAR used net cash from operating activities of $12.4 million for the twelve
months ended December 31, 1998, primarily from net income exclusive of
depreciation and amortization, as well as increases in accounts payable and
accrued expenses offset by increases in accounts and other receivables. The
increase in accounts and other receivables were due to general increases in
volume and extended payment terms for certain customers. The Company's investing
activities used cash of $101.0 million during the twelve months ended December
31, 1998, primarily from capital expenditures, offset by the sales of short-term
investments. The Company's financing activities generated cash of approximately
$158.5 million primarily from $144.7 million net proceeds raised in the
secondary stock offering as well as stock options exercised and borrowings under
lines of credit, offset by payments under capital lease obligations.

On February 19, 1999, STAR announced that it had received a fully
underwritten commitment for $275 million in senior secured credit facilities.
The completion of the financing is subject to the execution of definitive loan
documents and customary conditions for financings of this type.

The Company also entered into a 20 year, $85 million agreement to purchase
capacity on the Qwest nationwide Macro Capacity (SM) Fiber network. Remaining
commitments under this agreement at March 31, 1999 equaled $85.0 million.

38
<PAGE>
STAR believes that the cash generated from operations, as well as funding
under its bank line of credit and the senior secured credit facility, will
satisfy STAR's current liquidity needs. Nevertheless, as STAR continues to
expand its network facilities and pursues its strategy of growth through
acquisitions, STAR's liquidity needs may increase, perhaps significantly, which
could require STAR to seek such additional financing or the expansion of its
borrowing capacity under current or new lines of credit.

As appropriate, STAR will use capital lease financing or raise additional
debt or equity capital to finance new projects or acquisitions. STAR had foreign
currency contracts outstanding at December 31, 1997 and 1998 in the notional
amount of $6.3 million and $35 million, respectively.

While the termination of the CEO customer base in California resulted in a
loss of commercial revenues from that state during 1998, management does not
believe that the loss of such revenues will have a material impact on STAR's
liquidity in the future.

YEAR 2000 COMPLIANCE.

A significant percentage of the software that runs most of the computers in
the United States relies on two-digit date codes to perform a number of
computation and decision making functions. Commencing on January 1, 2000, these
computer programs may fail from an inability to interpret date codes properly,
misreading "00" for the year 1900 instead of the year 2000.

STAR has initiated a comprehensive program to identify, evaluate and address
issues associated with the ability of its information technology and
non-information technology systems to properly recognize the Year 2000 in order
to avoid interruption of the operation of these systems and a material adverse
effect on STAR's operations as a result of the century change. Each of the
information technology software programs that STAR currently uses has either
been certified by its respective vendor as Year 2000 compliant or will be
replaced with software that is so certified prior to September 1999. STAR
intends to conduct comprehensive tests of all of its software programs for Year
2000 compliance as part of its Year 2000 readiness program. An integral part of
STAR's non-information technology systems, its telecommunications switches, is
not currently Year 2000 compliant. The respective vendors of STAR's twelve
switches are in the process of upgrading the switches and have informed STAR
that the switches will be compliant on or before September 1999. STAR does not
believe that its other non-information technology systems will be affected by
the Year 2000, but will not know definitively until STAR tests and evaluates
such equipment during 1999.

STAR's computer systems interface with the computers and technology of many
different telecommunications companies, including those of foreign companies, on
a daily basis. STAR considers the Year 2000 readiness of its foreign customers
and vendors of particular importance given the general concern that the computer
systems abroad may not be as prepared as those in domestic operations to handle
the century change. As part of its Year 2000 compliance program, STAR intends to
contact its significant vendors and customers to ascertain whether the systems
used by such third parties are Year 2000 compliant. STAR plans to have all Year
2000 compliance initial testing and any necessary conversions completed by
September 1999.

Historically, STAR has not incurred any costs to date to reprogram, replace
and test its information and non-information technology systems for Year 2000
compliance. The costs associated with STAR's Year 2000 compliance efforts will
be incurred during the remainder of 1998 and throughout 1999. STAR estimates the
costs of such efforts will be between $70,000 and $150,000 over the life of the
project; though such expenditures may increase materially following testing of
non-information technology systems and the evaluation of the Year 2000
compliance status of integral third party vendors and customers. Costs incurred
to date in connection with STAR's Year 2000 compliance efforts have been
immaterial and will be expensed as incurred.

39
<PAGE>
STAR currently anticipates that its information technology and
non-information technology systems will be Year 2000 compliant before January 1,
2000, though no assurances can be given that STAR's compliance testing will not
detect unanticipated Year 2000 compliance problems. Furthermore, STAR does not
yet know the Year 2000 compliance status of integral third parties and is
therefore currently unable to assess the likelihood or the risk to STAR of third
party system failures. However, a system failure by any of STAR's significant
customers or vendors could have a material adverse effect on STAR's operations.

The Company believes that the most reasonably likely worst case scenario
resulting from the century change will be its inability to route telephone
traffic at current rates to desired locations for an indeterminable period of
time. Such worst case scenario could have a material adverse affect on STAR's
results of operations and liquidity.

STAR intends to develop contingency plans to handle a Year 2000 system
failure experienced by its information and non-information technology systems
and to handle any necessary interactions with the computers and technology of
any integral non-complying third party.

40
<PAGE>
SIGNATURE

Pursuant to the requirements of the Section 15(d) of the Securities Act of
1934, the Registrant has duly caused this Report on Form 10-K/A to be signed on
its behalf by the undersigned, thereunto duly authorized, in Santa Barbara,
California on September 17, 1999.

<TABLE>
<S> <C> <C>
By: /s/ CHRISTOPHER E. EDGECOMB
-----------------------------------------
Christopher E. Edgecomb
CHIEF EXECUTIVE OFFICER
</TABLE>

41
<PAGE>
PART IV

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

<TABLE>
<S> <C> <C> <C>
(a) Documents filed as part of this Report:

(1) Index to Financial Statements:

Report of Independent Public Accountants................................. F-1

Consolidated Balance Sheets as of December 31, 1997 and 1998............. F-2

Consolidated Statements of Operations for the years ended December 31,
1996, 1997 and 1998.................................................... F-3

Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1997 and 1998....................................... F-4

Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1997 and 1998.................................................... F-5

Notes to Consolidated Financial Statements............................... F-6

(2) Index to Financial Statement Schedules:

Report of Independent Public Accountants on Supplemental Schedules....... S-1

Schedule II--Valuation and Qualifying Accounts........................... S-2

(3) Exhibits:
</TABLE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
2.1* Amended and Restated Stock Acquisition Agreement and Plan of Merger dated as of November 30, 1997 by
and among the Registrant, Big Dave's Acquisition Corp., LCCR, Inc., and the shareholders listed on
the signature page thereto.

2.2++ Agreement and Plan of Merger dated as of November 19, 1997 by and among the Registrant, IIWII Corp.
and United Digital Network, Inc.

2.3** Stock Purchase Agreement dated as of January 26, 1998 by and among the Registrant, T-One Corp. and
Taha Mikati, as amended.

2.4- Amended and Restated Agreement and Plan of Merger dated as of August 20, 1998 by and among the
Registrant, Sierra Acquisition Co., Inc., PT-1 Communications, Inc. and the Stockholders listed on
the signature page thereto, (the "PT-1 Merger Agreement").

2.5++ First Amendment to the PT-1 Merger Agreement dated September 1, 1998.

2.6++ Second Amendment to the PT-1 Merger Agreement dated December 29, 1998.

3.1** Amended and Restated Certificate of Incorporation of the Registrant.

3.2** Bylaws of the Registrant.

4.1+ Specimen Common Stock certificate.

4.2+ Registration Rights Agreement, dated September 24, 1996, between the Registrant and the investors
named therein.

4.3+ Registration Rights Agreement, dated July 12, 1996, between the Registrant and the investor named
therein.

4.4+ Investor Rights Agreement dated July 25, 1996, between the Registrant and the investors named
therein.
</TABLE>

42
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
4.5* Registration Rights Agreement dated as of November 30, 1997 by and among the Company and the
shareholders listed on the signature page thereto.

4.6** Registration Rights Agreement dated as of March 10, 1998 between the Registrant and Taha Mikati.

10.l+ 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+ Intentionally omitted.

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.
</TABLE>

43
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
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** Credit Agreement dated as of September 30, 1997 among the Registrant, the financial institutions
party thereto and Sanwa Bank California, as amended.

10.26** Office Lease between the Registrant, Hudson Telegraph Associates and American Communications Corp.,
as amended.

10.27** Amendment Number Three to Employment Agreement between the Registrant and Mary A. Casey dated as of
July 1, 1997.

10.28** Amendment Number One to Employment Agreement between the Registrant and Kelly D. Enos dated as of
November 12, 1997.

10.29** Amendment Number One to First Restatement of Employment Agreement between the Registrant and James
Kolsrud dated as of June 16, 1997.

10.30** Amendment Number One to Employment Agreement between the Registrant and David Vaun Crumly dated as of
November 11, 1997.

10.31** First Amendment to Amended and Restated 1996 Stock Incentive Plan.

10.32*** Agreement dated as of December 1, 1997 between the Registrant and Nortel Dasa Network Systems GmbH &
Co. KG.

10.33** Leasing Agreement between the Registrant and Nortel Dasa Network Systems GmbH & Co. KG.

10.34** Guarantee Agreement between the Registrant and Nortel Dasa Network Systems GmbH & Co. KG.

10.35** Note and Security Agreement dated as of December 18, 1997 between the Registrant and NationsBanc
Leasing Corporation.

10.36** Amendment of Lease dated as of September 30, 1997 between the Registrant and Hudson Telegraph
(reference is hereby made to Exhibit 10.14).

10.37 Intentionally omitted.

10.38** Lease Agreement dated July 29, 1996 between the Registrant and Telecommunications Finance Group.

10.39** Promissory Note issued by Christopher E. Edgecomb in favor of the Registrant dated November 26, 1997.

10.40** Stock Pledge Agreement dated November 26, 1997 between the Registrant and Christopher E. Edgecomb.

10.41** Commercial Lease dated October 31, 1997 between the Registrant and Prinzenpark GbR.

10.42** Commercial Lease dated October 9, 1997 between the Registrant and WSL Weststadt Liegenschafts GmbH.

10.43** Office Lease between the Registrant and Airport-Center KGHP Gewerbeban GmbH & Cie.

10.44** Lease dated November 19, 1997 between the Registrant and DIFA Deutsche Immobilien Fonds
Aktiengesellschaft.

10.45- Second Restatement of Employment Agreement between the Company and James Kolsrud dated as of July 9,
1998.
</TABLE>

44
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.46- First Amendment to 1997 Omnibus Stock Incentive Plan.

21.1 Subsidiaries of the Registrant.

23.1 Consent of Arthur Andersen LLP, Independent Public Accountants.

24.1 Power of Attorney (included on page 50).

27.1 Financial Data Schedule.
</TABLE>

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

+ Filed as an exhibit to the Company's Registration Statement on Form S-1
(Registration No. 333-21325) on February 7, 1997 and incorporated by
reference herein.

++ Filed as an exhibit to the Company's Registration Statement on Form S-4
(Registration No. 333-53335) and incorporated by reference herein.

* Filed on December 15, 1997 as an exhibit to the Company's Current Report on
Form 8-K (File No. 000-22581) and incorporated by reference herein.

** Filed as an exhibit to the Company's Registration Statement on Form S-1
(Registration No. 333-48559) on March 24, 1998 and incoroporated by
reference herein.

***Filed as an exhibit to the Company's Annual Report on Form 10-K (File No.
000-22581) on March 31, 1998 and incorporated by reference herein.

- Filed as an exhibit to the Company's Quarterly Report on Form 10-Q (File No.
000-22581) on November 11, 1998 and incorporated by reference herein.

<TABLE>
<S> <C> <C> <C>
(4) Reports on Form 8-K.

(a) Current Report on Form 8-K dated March 25, 1998 related to the acquisition
of T-One Corp.
</TABLE>

45
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

We have audited the accompanying consolidated balance sheets of STAR
TELECOMMUNICATIONS, INC. (a Delaware corporation) and Subsidiaries as of
December 31, 1997 and 1998, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1998. 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 Subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Los Angeles, California
February 25, 1999

F-1
<PAGE>
STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.................................................................. $ 1,948 $ 47,297
Short-term investments..................................................................... 18,631 835
Accounts receivable, net of allowance of $13,062 and $12,561 at December 31, 1997 and 1998,
respectively............................................................................. 46,332 100,235
Receivables from related parties........................................................... 41 762
Other receivables.......................................................................... 3,039 23,017
Prepaid expenses........................................................................... 5,183 14,295
Deferred income taxes...................................................................... 4,485 6,269
--------- ---------
Total current assets................................................................... 79,659 192,710
--------- ---------
PROPERTY AND EQUIPMENT:
Operating equipment........................................................................ 35,693 158,811
Leasehold improvements..................................................................... 6,534 14,853
Furniture, fixtures and equipment.......................................................... 5,502 19,106
--------- ---------
47,729 192,770
Less--Accumulated depreciation and amortization............................................ (9,732) (21,818)
--------- ---------
37,997 170,952
--------- ---------
OTHER ASSETS:
Investments................................................................................ 27 5,110
Deposits................................................................................... 6,055 2,208
Intangible assets, net..................................................................... 6,012 2,497
Other...................................................................................... 632 1,174
--------- ---------
12,726 10,989
--------- ---------
Total assets........................................................................... $ 130,382 $ 374,651
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving lines of credit.................................................................. $ -- $ 19,330
Revolving lines of credit with stockholder................................................. 138 --
Current portion of long-term debt.......................................................... 2,834 2,085
Current portion of capital lease obligations............................................... 2,866 8,567
Accounts payable........................................................................... 21,409 43,989
Taxes payable.............................................................................. 2,156 1,640
Related party payable...................................................................... -- 2,267
Accrued network costs...................................................................... 39,565 51,262
Accrued expenses........................................................................... 5,999 15,772
Deferred revenue........................................................................... -- 1,100
--------- ---------
Total current liabilities.............................................................. 74,967 146,012
--------- ---------
LONG-TERM LIABILITIES:
Long-term debt, net of current portion..................................................... 1,493 --
Capital lease obligations, net of current portion.......................................... 11,658 29,407
Deferred income taxes...................................................................... 786 2,991
Other long-term liabilities................................................................ 863 650
--------- ---------
Total long-term liabilities............................................................ 14,800 33,048
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Series A Preferred Stock, $.001 par value, authorized--5,000 shares; issued and
outstanding--none........................................................................ -- --
Common stock, $.001 par value, authorized--100,000 shares; issued and outstanding--36,028
and 43,245 at December 31, 1997 and 1998, respectively................................... 36 43
Additional paid-in capital................................................................. 54,346 207,466
Deferred compensation...................................................................... (30) --
Accumulated other comprehensive income..................................................... -- 188
Accumulated deficit........................................................................ (13,737) (12,106)
--------- ---------
Stockholders' equity..................................................................... 40,615 195,591
--------- ---------
Total liabilities and stockholders' equity............................................. $ 130,382 $ 374,651
--------- ---------
--------- ---------
</TABLE>

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

F-2
<PAGE>
STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES..................................................................... $ 283,450 $ 434,086 $ 619,220
OPERATING EXPENSES:
Cost of services........................................................... 244,153 374,504 523,621
Selling, general and administrative expenses............................... 41,804 48,906 66,140
Depreciation and amortization.............................................. 2,343 5,650 15,054
Loss on impairment of goodwill............................................. -- -- 2,604
Merger expense............................................................. -- 286 1,026
---------- ---------- ----------
288,300 429,346 608,445
---------- ---------- ----------
Income (loss) from operations............................................ (4,850) 4,740 10,775
---------- ---------- ----------
OTHER INCOME (EXPENSES):
Interest income............................................................ 138 464 4,469
Interest expense........................................................... (1,270) (2,617) (3,386)
Legal settlements and expenses............................................. (100) (1,653) --
Other income (expense)..................................................... 186 208 (304)
---------- ---------- ----------
(1,046) (3,598) 779
---------- ---------- ----------
Income (loss) before provision for income taxes.......................... (5,896) 1,142 11,554
PROVISION FOR INCOME TAXES................................................... 577 2,905 9,923
---------- ---------- ----------
NET INCOME (LOSS)............................................................ $ (6,473) $ (1,763) $ 1,631
---------- ---------- ----------
---------- ---------- ----------
Income (loss) before provision for income taxes.......................... $ (5,896) $ 1,142
PRO FORMA INCOME TAXES (UNAUDITED)........................................... 1,520 3,100
---------- ----------
PRO FORMA NET LOSS (UNAUDITED)............................................... $ (7,416) $ (1,958)
---------- ----------
---------- ----------
Income (loss) per common share:
Basic...................................................................... $ (0.27) $ (0.06) $ 0.04
---------- ---------- ----------
Diluted.................................................................... $ (0.27) $ (0.06) $ 0.04
---------- ---------- ----------
Pro forma loss per common share (unaudited):
Basic...................................................................... $ (0.31) $ (0.06)
---------- ----------
Diluted.................................................................... $ (0.31) $ (0.06)
---------- ----------
</TABLE>

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

F-3
<PAGE>
STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------------- ---------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995.......................................... -- $ -- 21,420 $ 22 $ 12,886
Net loss........................................................ -- -- -- -- --
Effect of terminating the S-Corporation election................ -- -- -- -- (690)
Conversion of capital to debt................................... -- -- -- -- (1,200)
Compensation expense relating to stock options.................. -- -- -- -- 213
Issuance of common stock........................................ -- -- 3,925 4 5,564
Issuance of preferred stock..................................... 2,802 3 -- -- 7,497
Private placement............................................... -- -- 106 -- 1,150
Exercise of warrants............................................ -- -- 23 -- 266
Conversion of debentures........................................ -- -- 37 -- 500
Cash distributions to stockholders.............................. -- -- -- -- (4,034)
--------- ----- --------- --- -----------
Balance, December 31, 1996.......................................... 2,802 3 25,511 26 22,152
Net income...................................................... -- -- -- -- --
Effect of CEO Telecommunications, Inc. terminating the
S-corporation election........................................ -- -- -- -- (61)
Effect of UDN's change in fiscal year end....................... -- -- -- -- (1,916)
Conversion of redeemable preferred stock to common stock........ (2,802) (3) 1,868 2 1
Initial public offering of common stock......................... -- -- 8,097 8 30,936
Private placement............................................... -- -- 49 -- 1,740
Exercise of stock options....................................... -- -- 493 -- 496
Exercise of warrants............................................ -- -- 10 -- 384
Conversion of debenture......................................... -- -- 37 -- 500
Compensation expense relating to stock options.................. -- -- -- -- --
Tax benefit from non-qualified stock options.................... -- -- -- 114
Cash distributions to stockholders.............................. -- -- -- -- --
--------- ----- --------- --- -----------
Balance, December 31, 1997.......................................... -- -- 36,065 36 54,346
Comprehensive income:
Net income.................................................... -- -- -- -- --
Foreign currency translation adjustment, net of taxes of
$136........................................................ -- -- -- -- --
Comprehensive income............................................ -- -- -- -- --
Secondary public offering of common stock....................... -- -- 5,685 6 144,705
Exercise of stock options....................................... -- -- 1,533 1 2,506
Exercise of warrants............................................ -- -- 25 -- 274
Cancellation of ESCROW shares................................... -- -- (26) -- --
Compensation expense relating to stock option................... -- -- -- -- --
Tax benefit from non-qualified stock options.................... -- -- -- -- 5,635
--------- ----- --------- --- -----------
Balance, December 31, 1998.......................................... -- $ -- 43,282 $ 43 $ 207,466
--------- ----- --------- --- -----------
--------- ----- --------- --- -----------

<CAPTION>
ACCUMULATED OTHER RETAINED
DEFERRED COMPREHENSIVE EARNINGS
COMPENSATION INCOME (DEFICIT) TOTAL

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

<S> <C> <C> <C> <C>
Balance, December 31, 1995.......................................... $ -- $ -- $ (6,294) $ 6,614

Net loss........................................................ -- -- (6,473) (6,473)

Effect of terminating the S-Corporation election................ -- -- 690 --

Conversion of capital to debt................................... -- -- -- (1,200)

Compensation expense relating to stock options.................. (118) -- -- 95

Issuance of common stock........................................ -- -- -- 5,568

Issuance of preferred stock..................................... -- -- -- 7,500

Private placement............................................... -- -- -- 1,150

Exercise of warrants............................................ -- -- -- 266

Conversion of debentures........................................ -- -- -- 500

Cash distributions to stockholders.............................. -- -- -- (4,034)

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

Balance, December 31, 1996.......................................... (118) -- (12,077) 9,986

Net income...................................................... -- -- (1,763) (1,763)

Effect of CEO Telecommunications, Inc. terminating the
S-corporation election........................................ -- -- 61 --

Effect of UDN's change in fiscal year end....................... -- -- 1,100 (816)

Conversion of redeemable preferred stock to common stock........ -- -- -- --

Initial public offering of common stock......................... -- -- -- 30,944

Private placement............................................... -- -- -- 1,740

Exercise of stock options....................................... -- -- -- 496

Exercise of warrants............................................ -- -- -- 384

Conversion of debenture......................................... -- -- -- 500

Compensation expense relating to stock options.................. 88 -- -- 88

Tax benefit from non-qualified stock options.................... -- -- -- 114

Cash distributions to stockholders.............................. -- -- (1,058) (1,058)

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

Balance, December 31, 1997.......................................... (30) -- (13,737) 40,615

Comprehensive income:
Net income.................................................... -- -- 1,631 1,631

Foreign currency translation adjustment, net of taxes of
$136........................................................ -- 188 -- 188

---------

Comprehensive income............................................ -- -- -- 1,819

Secondary public offering of common stock....................... -- -- -- 144,711

Exercise of stock options....................................... -- -- -- 2,507

Exercise of warrants............................................ -- -- -- 274

Cancellation of ESCROW shares................................... -- -- -- --

Compensation expense relating to stock option................... 30 -- -- 30

Tax benefit from non-qualified stock options.................... -- -- -- 5,635

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

Balance, December 31, 1998.......................................... $ -- $ 188 $ (12,106) $ 195,591

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

</TABLE>

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

F-4
<PAGE>
STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................................. $ (6,473) $ (1,763) $ 1,631
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization................................................... 2,343 5,650 15,054
Loss on impairment of goodwill.................................................. -- 2,604
Loss on disposal of equipment................................................... -- 42 --
Compensation expense relating to stock options.................................. 95 88 30
Provision for doubtful accounts................................................. 16,978 13,770 7,477
Deferred income taxes........................................................... (15) (3,699) 421
Deferred compensation........................................................... 116 (59) 52
Interest amortization of note discount.......................................... 263 216 55
Proceeds from facturing of trade receivables, net............................... 3,562 2,092 --
Other........................................................................... (139) (120) --
Decrease (increase) in assets:
Accounts receivable............................................................. (33,993) (24,320) (61,510)
Receivables from related parties, net........................................... (8) 99 (721)
Other receivables............................................................... -- (1,914) (20,428)
Prepaid expenses and other assets............................................... (2,998) (1,853) (8,757)
Deposits........................................................................ (4,948) (425) (558)
Increase (decrease) in liabilities:
Accounts payable................................................................ 925 (593) 23,913
Taxes payable................................................................... 178 2,270 5,119
Related party payable........................................................... (51) (269) 2,267
Accrued network costs........................................................... 19,342 19,747 11,697
Accrued expenses................................................................ 1,647 2,353 8,440
Deferred revenue................................................................ -- -- 1,100
Other long-term liabilities..................................................... -- 164 (265)
--------- --------- ---------
Net cash provided by (used in) operating activities........................... (3,176) 11,476 (12,379)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................................................ (9,154) (14,674) (113,020)
Investments..................................................................... (153) 126 (5,083)
Short-term investments.......................................................... (1,631) (16,975) 17,796
Purchase of CTN, net of cash acquired........................................... (350) (350) --
Other........................................................................... (63) 716 (679)
--------- --------- ---------
Net cash used in investing activities......................................... (11,351) (31,157) (100,986)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Stockholders' distributions..................................................... (4,034) (1,058) --
Borrowings under lines of credit................................................ 14,746 34,211 19,330
Repayments under lines of credit................................................ (8,262) (42,025) --
Borrowings under lines of credit with stockholder............................... 701 583 --
Repayments under lines of credit with stockholder............................... (3,073) (471) (138)
Borrowings under long-term debt................................................. 2,000 193 --
Payments under long-term debt................................................... (724) (3,587) (1,798)
Payments under capital lease obligations........................................ (358) (2,236) (6,360)
Issuance of common stock........................................................ 6,718 32,684 144,711
Warrants exercised.............................................................. 266 384 274
Stock options exercised......................................................... -- 496 2,507
Issuance of preferred stock..................................................... 7,500 -- --
--------- --------- ---------
Net cash provided by financing activities..................................... 15,480 19,174 158,526
--------- --------- ---------
EFFECTS OF CHANGE IN UDN'S FISCAL YEAR END........................................ -- 54 --
EFFECTS OF FOREIGN CURRENCY TRANSLATION........................................... -- -- 188
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................................. 953 (453) 45,349
CASH AND CASH EQUIVALENTS:
Beginning of year............................................................... 1,448 2,401 1,948
--------- --------- ---------
End of year..................................................................... $ 2,401 $ 1,948 $ 47,297
--------- --------- ---------
--------- --------- ---------
</TABLE>

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

F-5
<PAGE>
STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1998

1. NATURE OF BUSINESS

STAR Telecommunications, Inc., a Delaware Corporation, and Subsidiaries (the
"Company" or "STAR"), is a multinational telecommunications services company
focused primarily on the international long distance market. The Company offers
highly reliable low-cost switched voice services on a wholesale basis primarily
to U.S. based long distance carriers. STAR provides international long distance
services through a flexible network comprised of foreign termination
relationships, international gateway switches, leased and owned transmission
facilities and resale arrangements with other long distance providers.

During 1996, 1997 and 1998, the Company established several wholly-owned
foreign subsidiaries to further expand its international network. The Company
made substantial investments to install switch facilities in two of these
subsidiaries, Star Europe Limited ("SEL") which is located in London, England,
and Star Telecommunications Deutschland ("GmbH") which is located in Frankfurt,
Germany. The Company uses these switching facilities to decrease international
traffic termination costs and to initiate outbound calls from these local
markets.

In November 1997, the Company entered into the domestic commercial
long-distance market through the acquisition of L.D. Services Inc., now known as
CEO Telecommunications, Inc. ("CEO"). CEO is a commercial long-distance service
provider throughout the United States. In March 1998, the Company consummated a
merger with T-One Corp. ("T-One"), an international wholesale long-distance
telecommunications provider. In March 1999, the Company expanded its commercial
operations through the acquisition of United Digital Network, Inc. and its
affiliated companies ("UDN" now known as "Allstar Telecom"). The mergers
constituted tax-free reorganizations and have been accounted for as poolings of
interests. Accordingly, all prior period consolidated financial data has been
restated to include the results of operations, financial position and cash flows
of CEO, T-One and UDN (see Note 7). The pro forma results of operations and pro
forma income or loss per common share for 1996 and 1997 assumes that both STAR
and CEO had been C-Corporations for all periods presented.

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of
STAR Telecommunications, Inc. and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated.

REVENUE RECOGNITION

The Company records revenues for telecommunications sales, direct dial,
prepaid calling card, and travel card long distance services at the time of
customer usage.

COST OF SERVICES

Cost of services for wholesale long distance services represents direct
charges from vendors that the Company incurs to deliver service to its
customers. These include leasing costs for the dedicated phone

F-6
<PAGE>
STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
lines and rate-per-minute charges from other carriers that terminate traffic on
behalf of the Company. In addition, commercial long distance service costs
include billing and collection service fees, call rating services, and per
minute charges from other carriers that terminate traffic on behalf of the
Company.

REVENUES FROM FOREIGN CUSTOMERS

The Company has carrier service agreements with telecommunication carriers
in foreign countries under which international long distance traffic is both
originated and terminated on the Company's network. The Company records revenues
and related costs as the traffic is recorded in the switch. Revenues from
foreign customers amounted to $178,000, $6,577,000 and $83,998,000 for the years
ended December 31, 1996, 1997 and 1998, respectively.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of demand deposits and money market funds,
which are highly liquid short-term instruments with original maturities of three
months or less. Cash and cash equivalents are stated at cost, which approximates
market.

FINANCIAL INSTRUMENTS

The carrying amounts of long-term debt and capital lease obligations
approximate their fair value as interest rates approximate market rates for
similar instruments.

Off balance sheet derivative financial instruments at December 31, 1997 and
1998 consist of foreign currency exchange agreements. The Company enters into
currency exchange contracts in the normal course of business to manage its
exposure against foreign currency fluctuations on payable positions resulting
from fixed asset purchases and other contractual expenditures denominated in
foreign currencies. The principle objective of such contracts is to minimize the
risks and/or costs associated with financial and global operating activities.
The Company does not utilize financial instruments for trading or other
speculative purposes.

The fair value of foreign currency contracts are estimated by obtaining
quotes from brokers. At December 31, 1997 and 1998, the Company has foreign
currency contracts outstanding with the notional value of $6,305,000 and
$35,000,000. The estimated fair value of these contracts was $6,218,000 and
$35,000,000, respectively, the difference of which has been recognized in
operations. The Company had contracts in British Pounds and German Marks at
December 31, 1997 and only in German Marks at December 31, 1998.

At December 31, 1997 and 1998, gains and losses on foreign exchange
contracts are not material to the consolidated financial statements.

SHORT-TERM INVESTMENTS

Short-term investments consist of interest bearing securities with original
maturities in excess of three months. At December 31, 1997 and 1998, the fair
market value of temporary investments, classified as "available for sale
securities," approximated cost, thus no unrealized holding gains or losses were
reported in the accompanying balance sheets. During fiscal year 1997, the
Company realized gains from the sale of

F-7
<PAGE>
STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
securities of approximately $48,000. During 1996 and 1998, the Company did not
realize any gains or losses from sale of securities.

PROPERTY AND EQUIPMENT

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

<TABLE>
<CAPTION>
<S> <C>
Operating equipment........................................................... 2-25 years
Leasehold improvements........................................................ Life of lease
Furniture, fixtures and equipment............................................. 3-7 years
</TABLE>

Operating equipment includes assets financed under capital lease obligations
of $17,522,000 and $51,738,000 at December 31, 1997 and 1998, respectively.
Accumulated amortization related to assets financed under capital leases was
$2,739,000 and $7,908,000 at December 31, 1997 and 1998, respectively.

In addition, operating equipment includes twelve Indefeasible Rights of Use
("IRU") in cable systems amounting to $2,669,000 and $25,060,000 and seven
ownership interests in an international cable amounting to $1,534,000 and
$6,200,000 at December 31, 1997 and 1998, respectively. These assets are
amortized over the life of the agreements of 14 to 25 years (see Note 4).

As of July 1, 1998, the Company prospectively revised the remaining useful
lives of certain operating equipment from five to ten years. The increase in the
estimated life of these assets was based on the knowledge gained by the Company
in making the transition from a reseller of telephone services to a facility
based provider, as well as to the fact that the Company is purchasing more
sophisticated telephone switches and has transitioned from smaller Stromberg
switches to larger capacity more feature rich Nortel switches. This change
reduced depreciation expense and increased income before provision for income
taxes for the year ended December 31, 1998 by approximately $2 million. The
difference between depreciating all switch equipment over a 5-year life verses a
10-year life since acquisition would represent approximately $2.9 million for
the year ended December 31, 1998, or 4 cents per diluted share for the year then
ended.

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 operations.

INTANGIBLE ASSETS

Intangible assets consist of the acquired cost of goodwill and customer
lists. These intangibles are amortized utilizing the straight-line method over
their estimated useful lives. The realizability of goodwill and customer lists
is evaluated periodically as events or circumstances indicate a possible
inability to recover their carrying amount. Such evaluation is based on various
analyses, including cash flow and profitability projections that incorporate, as
applicable, the impact on existing company businesses. The analyses necessarily
involve significant management judgment to evaluate the capacity of an acquired

F-8
<PAGE>
STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
business to perform within projections. During the year ended December 31, 1998,
the Company recorded a loss on impairment of goodwill of approximately $2.6
million.

Intangible assets consist of:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Goodwill.................................................................. $ 5,245 $ 5,065
Customer Lists............................................................ 1,579 1,579
--------- ---------
6,824 6,644
Accumulated amortization.................................................. (812) (1,543)
Loss on impairment........................................................ -- (2,604)
--------- ---------
$ 6,012 $ 2,497
--------- ---------
--------- ---------
</TABLE>

Through December 31, 1997, the Company amortized goodwill over 25 years.
During 1998 the amortization of goodwill was reduced to 20 years. The Company
amortizes customer lists over 4 to 7 years.

OTHER ASSETS

During 1998, the Company made a $5.1 million investment in a competitive
local exchange carrier ("CLEC") for 2.9 million common shares, representing
18.97 percent of the CLEC's common shares outstanding at December 31, 1998. This
ownership interest is in the form of Class A common stock which has voting
rights significantly less than the respective ownership interest. A stockholder
of the Company is also an investor and board member of this company. The CLEC,
which is still in the start-up phase, is controlled by one of the Company's
board members. STAR accounts for this investment under the cost method.

Deposits represent payments made to long distance providers to secure lower
rates. These deposits are refunded or applied against future services.

ACCRUED NETWORK COSTS

Accrued network costs represent accruals for services to transmit and
terminate long distance telephone traffic, which has been provided to the
Company but not yet billed. It also includes differences between billings
received by the Company and the liability computed by the Company's own systems
which are being resolved by the Company and its vendors.

CONSOLIDATED STATEMENTS OF CASH FLOWS

During the years ended December 31, 1996, 1997 and 1998, cash paid for
interest was $1,261,000, $2,357,000 and $4,396,000, respectively. For the same
periods, cash paid for income taxes amounted to $1,262,000, $3,761,000 and
$4,146,000, respectively.

F-9
<PAGE>
STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Non-cash investing and financing activities, which are excluded from the
consolidated statements of cash flows, are as follows (amounts in thousands):

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Equipment purchased through capital leases.................... $ 5,656 $ 10,020 $ 34,216
Deposit applied against capital leases........................ -- -- 4,405
Notes issued for asset purchases.............................. -- 1,890 --
Operating agreement acquired through issuance of note......... -- 350 --
Conversion of debenture....................................... 500 500 --
Equity converted to debt...................................... 1,200 -- --
Tax benefits related to stock options......................... -- 114 5,635
Issuance of convertible debenture and note payable for
acquisition of CTN capital stock............................ -- 1,050 --
Accrued liability relieved through issuance of common stock... 66 -- --
</TABLE>

NET INCOME (LOSS) PER COMMON SHARE

The following schedule summarizes the information used to compute actual and
pro forma basic and diluted net income or loss per common share for the years
ended December 31, 1996, 1997 and 1998 (in thousands):

<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Weighted average number of common shares used to compute basic
net income (loss) per common share............................. 24,076 31,101 40,833
Weighted average common share equivalents........................ -- -- 1,601
--------- --------- ---------
Weighted average number of common shares and common share
equivalents used to compute diluted net income (loss) per
common share................................................... 24,076 31,101 42,434
--------- --------- ---------
--------- --------- ---------
</TABLE>

Options to purchase 238,400 shares of common stock at prices ranging from
$18.48 to $27.00 were outstanding at December 31, 1998, but were not included in
the computation of diluted earnings per share, as the exercise prices of these
options were greater than the average market price of the Company's common
stock.

No common share equivalents were included in the computation of diluted loss
per common share at December 31, 1996 and 1997, as the effect would be
antidilutive.

CONCENTRATIONS OF RISK

At December 31, 1997 and 1998, no individual customer had an account
receivable balance greater than 10 percent of gross accounts receivable other
than PT-1 Communications, Inc. ("PT-1"), which was acquired on February 4, 1999
(see Note 13).

F-10
<PAGE>
STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The two largest customers represent approximately 24 percent, 15 percent and
11 percent of revenues during the years ended December 31, 1996, 1997 and 1998,
respectively. During 1996, sales to one customer exceeded 10 percent of
revenues. During 1997, no customer exceeded 10 percent of revenues. During 1998,
no customer other than PT-1 exceeded 10 percent of revenues (see Note 13).

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 facilities 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 four largest vendors for the years ended December 31,
1996, 1997 and 1998 amounted to 41 percent, 32 percent and 29 percent of total
purchases, respectively.

Included in the Company's balance sheets at December 31, 1997 and 1998 are
approximately $7,028,000 and $85,207,000, respectively, of equipment which is
located in foreign countries.

USE OF ESTIMATES

The preparation of consolidated 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 consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.

RECENTLY ISSUED ACCOUNTING STANDARDS

On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income." For the year-end
financial statements, SFAS 130 requires that comprehensive income, which is the
total of net income and all other non-owner changes in equity, be displayed in a
financial statement that is displayed with the same prominence as other
consolidated financial statements. The Company displays the components of other
comprehensive income in the consolidated statements of stockholders' equity.

In June 1998, the AICPA issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Company will adopt the standard in
January 2000 and is currently analyzing the statement to determine the impact,
if any, on the Company's financial position or results of operations.

TRANSLATION OF FOREIGN CURRENCY

Management determined that the functional currency of its foreign
subsidiaries, excluding its German subsidiary, is the U.S. dollar. Thus, all
foreign translation gains or losses, which were immaterial for the years ended
December 31, 1996, 1997 and 1998, are reflected in the results of operations as
a component of other income (expense). On July 1, 1998, due to the fact that
GmbH became self sufficient as an operating entity, the Company changed the
functional currency from the U.S. dollar to the German mark. As a result,
translation effects of this subsidiary after July 1, 1998 are reflected as other
comprehensive income in the consolidated statements of stockholders' equity.

F-11
<PAGE>
STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The foreign subsidiaries' balance sheets, excluding the German subsidiary,
are translated into U.S. dollars using the year-end exchange rates except for
prepayments, property, other long-term assets, and stockholders' equity
accounts, which are translated at rates in effect when these balances were
originally recorded. Revenues and expenses are translated at average rates
during the year except for depreciation and amortization, which are translated
at historical rates. The German subsidiary's balance sheet at December 31, 1998
is translated into U.S. dollars using the year-end exchange rate except for
stockholders' equity accounts, which are translated at rates in effect when
these balances were originally recorded. Revenues and expenses are translated at
average rates during the year.

RECLASSIFICATIONS

Certain prior year balances have been reclassified to conform to the current
year presentation.

3. LINES OF CREDIT

REVOLVING LINES OF CREDIT

Effective September 30, 1997, the Company executed an agreement with Sanwa
Bank, California for a $25 million line of credit, which expires on July 1,
1999. The facility has certain financial and non-financial covenants that
include, among other restrictions, the maintenance of minimum levels of tangible
net worth. The Company was in compliance with these covenants at December 31,
1998. Borrowings on the facility are limited to 75 percent of eligible accounts
receivable and are secured by substantially all of the assets of the Company.
The credit facility provides for borrowings at an interest rate based upon the
bank's cost of funds plus 1.75 percent (7.75 percent at December 31, 1998). The
Company plans to use the credit facility to support letters of credit and for
working capital or other general corporate purposes. At December 31, 1998, $19.3
million was outstanding. The Company's availability under this credit facility
was further reduced by $5.5 million in letters of credit, which were outstanding
at December 31, 1998 (see Note 5).

The Company also has a $1.1 million line of credit at its German subsidiary.
The credit facility has an interest rate of 9.00 percent and may be called
without notice. No amount was outstanding under this line of credit at December
31, 1998.

The weighted average interest rate on short-term debt during the years ended
December 31, 1996, 1997 and 1998, was 9.68 percent, 9.12 percent and 7.75
percent, respectively.

REVOLVING LINES OF CREDIT WITH STOCKHOLDER

The Company had revolving lines of credit with its founder and chief
executive officer. The debt matured on March 30, 1998 with interest payable at a
rate of 9 percent. The Company recognized interest expense related to this debt
of $34,000, $9,000 and $4,000 for the years ended December 31, 1996, 1997 and
1998, respectively.

F-12
<PAGE>
STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

The Company finances some of its telecommunication equipment, acquisitions
or operations under capital lease arrangements or through notes payable as
follows (dollars in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Convertible debenture with interest of 7 percent due January 1999....... $ 500 $ 500
Bank promissory note.................................................... 904 --
Notes payable for Indefeasible Rights of Use, payable in quarterly
installments of principal plus interest at LIBOR plus 6 percent (11.1
percent at December 31, 1998) through September 1999.................. 828 471
Notes payable in monthly installments of principal plus interest at 7
percent to 9.5 percent through January 1999........................... 1,985 1,114
Notes payable in monthly installments at various interest rates......... 110 --
Obligations under capital leases........................................ 14,524 37,974
--------- ---------
18,851 40,059
Less current portion of long-term debt................................ (2,834) (2,085)
Less current portion of capital lease obligations..................... (2,866) (8,567)
--------- ---------
$ 13,151 $ 29,407
--------- ---------
--------- ---------
</TABLE>

Minimum future payments under capital lease obligations at December 31, 1998
are as follows:

<TABLE>
<CAPTION>
CAPITAL
YEAR ENDING DECEMBER 31, LEASES
- ----------------------------------------------------------------------------------- ---------
<S> <C>
1999........................................................................... $ 11,202
2000........................................................................... 10,666
2001........................................................................... 9,516
2002........................................................................... 11,049
2003........................................................................... 2,389
---------
44,822
Less Amount representing interest.................................................. (6,848)
---------
$ 37,974
---------
---------
</TABLE>

F-13
<PAGE>
STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

5. COMMITMENTS AND CONTINGENCIES (CONTINUED)

OPERATING LEASES

The Company leases office space, dedicated private telephone lines,
equipment and other items under various agreements expiring through 2008. At
December 31, 1998, the minimum aggregate payments under non-cancelable operating
leases are summarized as follows (in thousands):

<TABLE>
<CAPTION>
FACILITIES DEDICATED
AND PRIVATE
YEAR ENDING DECEMBER 31, EQUIPMENT LINES TOTAL
- -------------------------------------------------- ------------ ---------------- ---------
<S> <C> <C> <C>
1999.............................................. $ 8,087 $ 20,270 $ 28,357
2000.............................................. 7,917 604 8,521
2001.............................................. 7,534 159 7,693
2002.............................................. 7,320 -- 7,320
2003.............................................. 6,501 -- 6,501
Thereafter........................................ 22,600 -- 22,600
------------ ------- ---------
$ 59,959 $ 21,033 $ 80,992
------------ ------- ---------
------------ ------- ---------
</TABLE>

Office facility and equipment rent expense for the years ended December 31,
1996, 1997 and 1998 was approximately $1,438,000, $3,669,000 and $5,704,000,
respectively. Dedicated private line expense was approximately $7,045,000,
$9,414,000 and $24,306,000, respectively, for those same periods and is included
in cost of services in the accompanying consolidated statements of operations.

EMPLOYMENT AGREEMENTS

The Company has employment agreements through December 31, 2000 with several
employees and executives. Some of these agreements provide for a continuation of
salaries in the event of a termination, with or without cause, following a
change in control of the Company. One agreement provides for a payment of at
least $1,500,000 in the event of a change in control of the Company.

The Company expensed $116,000, $64,000 and $52,000 of deferred compensation
relating to these agreements for the years ended December 31, 1996, 1997 and
1998, respectively.

PURCHASE COMMITMENTS

The Company is obligated under various service agreements with long distance
carriers to pay minimum usage charges. The Company anticipates exceeding the
minimum usage volume with these vendors. Minimum future usage charges at
December 31, 1998 are as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- -----------------------------------------------------------------------------------
<S> <C>
1999............................................................................... $ 37,296
2000............................................................................... 19,776
2001............................................................................... 58
---------
$ 57,130
---------
---------
</TABLE>

F-14
<PAGE>
STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company signed a $85 million agreement with Qwest Communications
International, Inc. ("Qwest") to purchase the long-term rights to use capacity
over Qwest's domestic network over a twenty-year period. In addition, in
November 1998, the Company signed an IRU agreement with IXC Communication, Inc.
("IXC") and has a commitment to purchase $20 million of capacity on IXC's U.S.
based digital fiber network. These commitments are not included in the above
table.

LEGAL MATTERS

The Company is subject to litigation from time to time in the normal course
of business. Although it is not possible to predict the outcome of such
litigation, based on the facts known to the Company and after consultation with
counsel, management believes that such litigation will not have a material
adverse effect on its financial position or results of operations.

On September 4, 1997, prior to the merger between CEO and the Company, CEO
entered into a settlement agreement with the Consumer Services Division of the
California Public Utilities Commission ("PUC"). The agreement settled the
alleged unauthorized switching of long-distance customers to CEO between the
years 1995 and 1996. It included payment of $760,000 to the PUC for restitution
to affected customers as defined in the agreement. Additionally, CEO agreed to a
voluntary revocation of its operating authority in the State of California.
Under the agreement, service to all California customers had to be terminated
within 120 days after approval of the agreement by the PUC. On November 19,
1997, the PUC approved the agreement along with a transfer of control to STAR.

On November 15, 1997, CEO settled a civil suit with the District Attorney of
Monterey, California for a monetary payment of $700,000 and various non-monetary
concessions as defined in the agreement. This suit was of the same nature as the
above action of the PUC and covers complaints from the years 1994 through 1997.

LETTERS OF CREDIT

At December 31, 1998, the Company had 18 stand by letters of credit
outstanding, which expire beginning January 6, 1999. These letters of credit,
which are partially secured by the bank lines of credit, totaled approximately
$6.7 million.

6. RELATED PARTY TRANSACTIONS

The founder and chief executive officer of the Company owns 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, 1996, 1997 and 1998, the Company paid
$68,000, $171,000 and $0, respectively, in costs related to the use of Star Aero
services.

During 1997, the Company provided a short-term loan to the chief executive
officer for $8,000,000. The loan carried interest of 7 percent per annum, was
secured by $30,000,000 of the stockholder's stock in the Company, and was repaid
in seven days. During 1998, the Company paid for certain expenses for this
individual, which are to be reimbursed to the Company resulting in a receivable
due to the Company of $164,000, at December 31, 1998.

F-15
<PAGE>
STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

6. RELATED PARTY TRANSACTIONS (CONTINUED)
During 1995, the Company invested $128,000 in a company related to an
employee of STAR. During 1996, 1997 and 1998, the Company provided services to
this company in the amounts of $167,000, $926,000 and $289,000, respectively. As
of December 31, 1997 and 1998, the account receivable from this related party
amounted to $41,000 and $11,000, respectively.

During 1996, 1997 and 1998, the Company purchased consulting services from a
company owned by a board member in the amount of $154,000, $72,000 and $71,000,
respectively. The Company has a payable to this company of $6,000 at December
31, 1998.

The Company purchased equipment and services from a company owned in part by
an employee of STAR in the amount of $1,114,000 and $10,013,000 in 1997 and
1998, respectively. At December 31, 1998, the Company has a payable due to this
related party of $1,261,000.

During 1998, the Company provided long distance telephone service to a
company in which the founder and chief executive officer of STAR and other STAR
employees and board members are investors. During 1998, services provided to
this company amounted to $4,931,000. At December 31, 1998, the Company has
$541,000 in receivables from this company.

At December 31, 1998, the Company has an obligation to a board member in the
amount of $1,000,000 with interest at 10 percent payable in July 1999. The
Company recognized interest expense related to this debt of $45,000 for the year
ended December 31, 1998.

At December 31, 1998, the Company has various receivables due from other
related parties in the amount of $46,000.

STAR believes that all of the transactions set forth above were made on
terms no less favorable to STAR than could have been obtained from unaffiliated
third parties.

7. BUSINESS COMBINATIONS

In November 1997, the Company acquired CEO, a domestic commercial long
distance telecommunications provider, in a transaction that was accounted for as
a pooling of interests. The Company issued 849,298 shares of its common stock to
CEO shareholders in exchange for all outstanding CEO shares plus shares of
certain non-operating entities owned by CEO shareholders and majority ownership
in an affiliated telephone retailer controlled by CEO.

On March 10, 1998, the Company acquired T-One, an international wholesale
long distance telecommunications provider, in a transaction accounted for as a
pooling of interests. The Company issued 1,353,000 shares of its common stock to
the T-One shareholder in exchange for all outstanding T-One shares.

On March 24, 1999, the Company acquired UDN, a telephone service provider
focused on switched and dedicated local and long distance, toll free and calling
card services to multinational corporations, in a transaction that was accounted
for as a pooling of interests. The Company issued approximately 1,005,000 shares
of common stock in exchange for all outstanding shares of UDN, plus 36,142 stock
options in exchange for UDN options based on the exchange ratio of 1 to 0.1464.
Upon completion of the merger, the Company changed the name UDN to Allstar
Telecom.

F-16
<PAGE>
STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

7. BUSINESS COMBINATIONS (CONTINUED)
The accompanying consolidated financial statements have been restated to
include the financial position and results of operations of CEO, T-One and UDN
for all periods presented. The consolidated statements of operations and cash
flows for the year ended December 31, 1996 includes UDN's operations for the
year ended April 30, 1997. Thus UDN's operating results for the four months
ended April 30, 1997 are included in both the 1996 and 1997 net loss. UDN
revenue and net loss for the four months ended April 30, 1997 amounted to $9.4
million and $1.1 million, respectively.

Revenues and historical net income (loss) of STAR, CEO, T-One and UDN
through the dates of acquisitions are as follows (in thousands):

<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
STAR................................................... $ 208,086 $ 348,738 $ 584,170
CEO.................................................... 29,905 27,460 --
T-ONE.................................................. 22,432 30,438 11,788
UDN.................................................... 24,012 30,622 29,166
Eliminations........................................... (985) (3,172) (5,904)
---------- ---------- ----------
Total................................................ $ 283,450 $ 434,086 $ 619,220
---------- ---------- ----------
---------- ---------- ----------

Net income (loss):
STAR................................................... $ (6,903) $ 4,464 $ 8,061
CEO.................................................... 2,424 (37) --
T-ONE.................................................. (575) 201 (88)
UDN.................................................... (1,419) (6,391) (6,342)
---------- ---------- ----------
Total................................................ $ (6,473) $ (1,763) $ 1,631
---------- ---------- ----------
---------- ---------- ----------
</TABLE>

Revenues and net income (loss) subsequent to the dates of acquisitions are
included in the STAR balances above.

In connection with the Company's acquisitions, the Company has capitalized
approximately $4,800,000 of merger related costs which are included in prepaid
expenses in the accompanying consolidated balance sheet at December 31, 1998.

8. INCOME TAXES

The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," under which deferred assets and liabilities are
provided on differences between financial reporting and taxable income using
enacted tax rates. Deferred income tax expenses or credits are based on the
changes in deferred income tax assets or liabilities from period to period.
Under SFAS No. 109, deferred tax assets may be recognized for temporary
differences that will result in deductible amounts in future periods. A
valuation allowance is recognized if, on the weight of available evidence, it is
more likely than not that some portion or all of the deferred tax asset will not
be realized.

F-17
<PAGE>
STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

8. INCOME TAXES (CONTINUED)
The Company has recorded a net deferred tax asset of $3,278,000 at December
31, 1998. Realization is dependent on generating sufficient taxable income in
the future. Although realization is not assured, management believes it is
likely that the net deferred tax asset will be realized.

The components of the net deferred tax asset at December 31, 1997 and 1998
are as follows (in thousands):

<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Deferred taxes short-term:
Reserve for accounts and other receivables.............................. $ 5,101 $ 4,564
Accrued network costs................................................... 798 1,707
Vacation accrual........................................................ 138 157
Deferred compensation................................................... 38 --
Accrued services........................................................ 276 52
Other accrued liabilities............................................... -- 151
State income taxes...................................................... 392 270
Change in tax method.................................................... 60 41
Merger costs............................................................ -- (163)
--------- ---------
6,803 6,779
Valuation reserve....................................................... (2,318) (510)
--------- ---------
$ 4,485 $ 6,269
--------- ---------
--------- ---------

Deferred taxes long-term:
Net operating loss...................................................... $ 4,002 $ 9,255
Deferred rent........................................................... -- 313
Depreciation and amortization........................................... (723) (3,304)
Basis difference arising from purchase accounting....................... (369) (296)
--------- ---------
2,910 5,968
Valuation reserve....................................................... (3,696) (8,959)
--------- ---------
$ (786) $ (2,991)
--------- ---------
--------- ---------
</TABLE>

In prior years, T-One generated net operating losses ("NOL's") for financial
statement and income tax purposes which may be available for carryforwards
against future income. As of December 31, 1998, T-One has deductions available
for carryforward in the amount of approximately $500,000. These NOL's will
expire through 2010. UDN has net operating loss carryforwards of approximately
$18.7 million which expire through 2018. Utilization of the net operating loss
carryforwards may be limited by the separate return loss year rules and by
ownership changes which have occurred or could occur in the future. The Company
also has foreign NOL's of approximately $5,200,000.

The results of operations and provision for income taxes for CEO through
November 30, 1997 reflects CEO's status as an S-Corporation. The unaudited pro
forma income taxes, pro forma net income (loss), and pro forma earnings per
share information reflected in the consolidated statements of operations assumes
that both STAR and CEO were taxed as C-Corporations for all periods presented.

F-18
<PAGE>
STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

8. INCOME TAXES (CONTINUED)
The provision for income taxes for the years ended December 31, 1996, 1997
and 1998 are as follows (in thousands):

<TABLE>
<CAPTION>
PRO FORMA
--------------------
HISTORICAL
------------------------------- (UNAUDITED)
1996 1997 1998 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Current taxes:
Federal........................................................ $ 280 $ 4,900 $ 7,146 $ 1,118 $ 5,282
State.......................................................... 164 1,147 1,909 359 1,270
Foreign........................................................ -- -- 447 -- --
--------- --------- --------- --------- ---------
444 6,047 9,502 1,477 6,552

Deferred taxes:
Federal........................................................ 133 (2,273) 278 63 (2,512)
State.......................................................... -- (869) 143 (20) (940)
--------- --------- --------- --------- ---------
133 (3,142) 421 43 (3,452)
Provision for income taxes....................................... $ 577 $ 2,905 $ 9,923 $ 1,520 $ 3,100
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>

Differences between the provision for income taxes and income taxes at the
statutory federal income tax rate for the years ended December 31, 1996, 1997
and 1998 are as follows (in thousands):

<TABLE>
<CAPTION>
PRO FORMA
--------------------
HISTORICAL
------------------------------- (UNAUDITED)
1996 1997 1998 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Income taxes at the statutory federal rate.................... $ (2,005) $ 400 $ 4,044 $ (2,005) $ 400
State income taxes, net of federal income tax effect.......... (360) 66 663 (360) 66
Foreign taxes at rates different than U.S. taxes.............. -- 187 (359) -- 187
Changes in valuation reserve.................................. 3,633 862 3,455 3,633 862
Permanent differences......................................... 175 119 319 179 393
Effects of CEO S-Corp status until November 30, 1997.......... (958) 152 -- -- --
Other......................................................... 92 1,119 1,801 73 1,192
--------- --------- --------- --------- ---------
$ 577 $ 2,905 $ 9,923 $ 1,520 $ 3,100
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>

9. 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 1,476,000 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.

During 1996, the Company entered into three separate stock option agreements
outside the Plan to issue 1,025,000 option shares at fair market value. At
December 31, 1997 and 1998, 820,000 and 147,600 options, respectively, issued
under these agreements were outstanding.

F-19
<PAGE>
STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

9. STOCK OPTIONS (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 2,050,000 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.

In December 1996, the Company issued 174,000 options at $4.00 per share. The
Board of Directors determined the market value of the December options to be
$4.68 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.

At December 31, 1996, 1997 and 1998, 2,358,000, 1,873,000 and 1,025,403
options, respectively, were outstanding under the aggregate of the 1996 Stock
Incentive Plan and the Supplemental Stock Option Plan.

On May 14, 1996, the Company adopted the 1996 Outside Director Nonstatutory
Stock Option Plan (the "Director Plan"). The number of shares which may be
issued under this plan upon exercise of options may not exceed 410,000 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. At December 31, 1996, 1997 and 1998, 82,000, 41,000 and 71,500 options,
respectively, were outstanding under the Director Plan.

On January 30, 1997, the Board of Directors approved the 1997 Omnibus Stock
Option Incentive Plan (the "Omnibus Plan") to replace the existing 1996
Supplemental Stock Option Plan upon the effective date of the initial public
offering. 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 and terminates on January 22, 2007. The maximum number
of shares available for issuance under this plan may not exceed 4,075,000
shares, comprised of the 2,050,000 shares that were available for issuance under
the Supplemental Stock Option Plan, plus an increase of 2,025,000 shares. Under
this Plan, options granted to any one optionee may not exceed more than
1,025,000 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. At
December 31, 1997 and 1998, 763,000 and 1,651,883 options, respectively, were
outstanding under the Omnibus Plan.

F-20
<PAGE>
STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

9. STOCK OPTIONS (CONTINUED)
Information regarding the Company's stock option plans and nonqualified
stock options as of December 31, 1996, 1997 and 1998, and changes during the
years ended on those dates is summarized as follows:

<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
----------- -----------------
<S> <C> <C>
December 31, 1995............................................. -- $ --
Granted..................................................... 3,491,355 1.89
Exercised................................................... -- --
Forfeited................................................... (26,855) 1.95
----------- -----
December 31, 1996............................................. 3,464,500 1.89
----------- -----
Granted..................................................... 914,296 7.91
Exercised................................................... (488,925) 0.89
Forfeited................................................... (392,774) 2.40
----------- -----
December 31, 1997............................................. 3,497,097 3.54
----------- -----
Granted..................................................... 1,026,925 15.37
Exercised................................................... (1,522,649) 1.57
Forfeited................................................... (104,987) 10.79
----------- -----
December 31, 1998............................................. 2,896,386 $ 8.62
----------- -----
----------- -----
</TABLE>

At December 31, 1998, 765,317 options were exercisable at a weighted average
exercise price of $4.28 per share. The options outstanding at December 31, 1998
expire in various years through 2008.

In connection with the merger with UDN, the Company issued 36,142 options
for outstanding UDN options and warrants based on the exchange ratio of 0.1464
shares of STAR common stock for each share of UDN common stock.

Information about stock options outstanding at December 31, 1998 is
summarized as follows:

<TABLE>
<CAPTION>
NUMBER
NUMBER WEIGHTED AVERAGE EXERCISABLE
RANGE OF EXERCISE OUTSTANDING AT REMAINING CONTRACTED WEIGHTED AVERAGE AT WEIGHTED AVERAGE
PRICES 12/31/98 LIFE EXERCISE PRICE 12/31/98 EXERCISE PRICE
- ----------------------- -------------- ----------------------- ----------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
$1.46 497,229 7.37 $ 1.46 248,615 $ 1.46
$4.00 to $6.83 883,132 7.98 $ 4.69 378,952 $ 4.40
$8.11 to $11.94 788,000 9.02 $ 9.55 137,750 $ 9.05
$12.81 to $20.94 686,925 9.29 $ 16.66 -- $ --
$27.00 to $34.38 41,100 9.33 $ 27.72 -- $ --
-------------- --- ------ ------------- -----
2,896,386 8.49 $ 8.62 765,317 $ 4.28
-------------- --- ------ ------------- -----
-------------- --- ------ ------------- -----
</TABLE>

F-21
<PAGE>
STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

9. STOCK OPTIONS (CONTINUED)
The fair value of each STAR option grant is estimated on the date of grant
using the minimum value method of option pricing with the following assumptions
for the grants:

<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Expected life (years)................................................. 10 6 6
Interest rate......................................................... 6.4% 6.2% 5.2%
Volatility............................................................ -- 31.05% 75.49%
Dividend yield........................................................ -- -- --
</TABLE>

The Company has elected to adopt FASB No. 123 for disclosure purposes only
and applies APB Opinion No. 25 and related interpretations in accounting for its
employee stock options. Approximately $50,000, $88,000 and $30,000 in
compensation cost was recognized relating to consultant options for the years
ended December 31, 1996, 1997 and 1998, respectively. 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 income or loss and basic and diluted income or loss per share for
the years ended December 31, 1996, 1997 and 1998 would have reflected the
following pro forma amounts:

<TABLE>
<CAPTION>
1996 1997 1998
------------- ------------- ---------
<S> <C> <C> <C>
Pro forma Net Income (Loss).......................... $ (7,789,000) $ (2,575,000) $ 65,000
Pro forma Basic Net Income (Loss) Per Common Share... $ (0.32) $ (0.08) $ 0.00
Pro forma Diluted Net Income (Loss) Per Common
Share.............................................. $ (0.32) $ (0.08) $ 0.00
</TABLE>

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.

F-22
<PAGE>
STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

10. CAPITAL STOCK (CONTINUED)

On February 23, 1996, the Company sold 2,049,980 shares of common stock to
various investors for $1,500,000. On July 12, 1996, the Company sold 1,874,532
shares of common stock to an investor for $4,068,000.

On July 25, 1996, the Company sold 2,802,446 shares of Series A preferred
stock to a group of investors for $7,500,000. In connection with this
transaction, the Company and buyers of the preferred shares entered into an
investors rights agreement which obligated the Company to file up to two
registration statements to register such shares. These preferred shares
converted to common stock at a ratio of 3-for-2 as a result of the public
offering in accordance with the investors rights agreement.

In June 1997, the Company completed its Initial Public Offering ("IPO") of
9,430,000 shares of common stock of which 8,097,500 shares were sold by the
Company and 1,332,500 shares were sold by certain selling stockholders. The net
proceeds to the Company (after deducting underwriting discounts and offering
expenses of approximately $4.6 million) from the sale of shares was
approximately $30.9 million.

On November 30, 1997, the Company completed the acquisition of CEO pursuant
to the terms of the agreement and 849,298 shares were issued for all of the
outstanding shares of CEO.

On March 10, 1998, the Company completed the acquisition of T-One, and
1,353,000 shares were issued for all of the outstanding shares of T-One.

On March 31, 1998, the Company effected a 2.05 for 1 stock split in the
nature of a stock dividend. The stock split has been reflected in the
consolidated financial statements for all periods presented.

On May 4, 1998, the Company completed a secondary public offering of
6,000,000 shares of common stock of which 5,685,000 were sold by the Company and
315,000 shares were sold by a selling stockholder. On June 4, 1998, an
additional 30,900 shares of common stock were sold by a selling stockholder of
STAR. The net proceeds to the Company (after deducting underwriting discounts
and offering expenses) from the sale of such shares of common stock were
approximately $145 million.

On July 1, 1998, the Company's stockholders voted to amend and restate the
certificate of incorporation to increase the number of shares of the Company's
authorized common stock from 50 million shares to 100 million shares.

UDN issued 27,455 common shares to certain shareholders subject to an escrow
agreement dated May 19, 1988 and amended October 21, 1993. These escrow shares
were cancelled in December 1998.

11. BUSINESS SEGMENTS

At December 31, 1998, Star has two separately managed business segments,
North American and European long distance telecommunications.

The accounting policies of the segments are the same as those described in
the significant accounting policies; however, the Company evaluates performance
based on profit or loss from operations before income taxes and non-recurring
gains or losses.

For the year ended December 31, 1997, STAR evaluated performance based on
profit or loss from wholesale and commercial operations, however, the commercial
segment represents less than 10 percent of revenue, net income and assets of the
Company for the periods presented. Due to the growth of its international
operations, senior management began analyzing operations by its North American
and European segments.

F-23
<PAGE>
STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

11. BUSINESS SEGMENTS (CONTINUED)
Reportable segment information for the years ended December 31, 1996, 1997
and 1998 are as follows (in thousands):

<TABLE>
<CAPTION>
NORTH
AMERICAN EUROPEAN TOTAL
---------- ---------- ----------
<S> <C> <C> <C>
1996
Revenues from external customers........................................... $ 283,450 $ -- $ 283,450
Interest income............................................................ 138 -- 138
Interest expense........................................................... 1,270 -- 1,270
Depreciation and amortization.............................................. 2,343 -- 2,343
Segment net loss before provision for income taxes......................... (5,896) -- (5,896)
Other significant non-cash items:
Capital lease additions................................................ 5,656 -- 5,656
Debt converted to equity............................................... 1,200 -- 1,200
Segment assets............................................................. 76,250 -- 76,250
Expenditures for segment assets.............................................. 9,154 -- 9,154
1997
Revenues from external customers........................................... $ 434,086 $ -- $ 434,086
Revenue between segments................................................... -- 321 321
Interest income............................................................ 464 -- 464
Interest expense........................................................... 2,388 229 2,617
Depreciation and amortization.............................................. 5,221 429 5,650
Segment net income (loss) before provision for income taxes................ 3,063 (1,921) 1,142
Other significant non-cash items:
Capital lease additions................................................ 6,755 3,265 10,020
Property financed by notes payable..................................... 1,890 -- 1,890
Operating agreement acquired through issuance of a note................ 350 -- 350
Issuance of convertible debenture and note payable for CTN capital
stock................................................................ 1,050 -- 1,050
Segment assets............................................................. 118,450 11,932 130,382
Expenditures for segment assets............................................ 11,875 2,799 14,674
1998
Revenues from external customers........................................... $ 590,049 $ 29,171 $ 619,220
Revenue between segments................................................... 16,061 34,018 50,079
Interest income............................................................ 4,426 43 4,469
Interest expense........................................................... 2,083 1,303 3,386
Depreciation and amortization.............................................. 11,017 4,037 15,054
Segment net income (loss) before provision for income taxes................ 13,344 (1,790) 11,554
Other significant non-cash items
Capital lease additions................................................ 11,080 23,136 34,216
Deposit applied against capital leases................................. -- 4,405 4,405
Tax benefit related to stock options................................... 5,635 -- 5,635
Segment assets............................................................. 224,740 149,911 374,651
Expenditures for segment assets............................................ 60,125 52,895 113,020
</TABLE>

F-24
<PAGE>
STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

11. BUSINESS SEGMENTS (CONTINUED)
Segment information for North America represents primarily activity in the
United States. In 1998, approximately 97 percent of European revenue from
external customers was generated in Germany.

12. QUARTERLY CONSOLIDATED INFORMATION (UNAUDITED)

The following table presents unaudited quarterly operating results,
including the results of CEO, T-One and UDN or each of the Company's eight
quarters in the two-year period ended December 31, 1998 (amounts in thousands):

<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1997
Net sales.................................. $ 91,631 $ 102,659 $ 110,848 $ 128,948
Operating income (loss).................... 2,280 2,090 2,457 (2,087)
Pro forma net income (loss)................ 854 14 120 (2,946)
1998
Net sales.................................. $ 136,571 $ 138,911 $ 169,686 $ 174,052
Operating income (loss).................... 3,622 4,337 4,204 (1,388)
Net income (loss).......................... 1,343 2,365 2,356 (4,433)
</TABLE>

13. SUBSEQUENT EVENTS

Effective February 4, 1999, the Company completed its acquisition of PT-1.
PT-1 is a provider of international and domestic long distance and local
telecommunications services primarily through the marketing of prepaid phone
cards. STAR issued 15.05 million shares of STAR common stock and $19.5 million
in short-term promissory notes for all outstanding shares, options and warrants
of PT-1 plus an additional 250,000 shares to certain PT-1 distributors. The
Company will recognize the related compensation expense of approximately $2.8
million over the four year vesting period. This transaction was accounted for as
a purchase. The value assigned to the common shares issued was approximately
$156 million, based upon the average of the high and low market price from
August 31, 1998 through September 2, 1998, the dates surrounding the first
amendment to the Merger Agreement.

The Company recorded preliminary goodwill of approximately $209 million
representing the excess of fair market value over the net assets acquired, which
will be amortized over a 20-year period. The purchase price has been allocated
to assets and liabilities based on preliminary estimates of fair value as of the
date of acquisition. The final allocation of the purchase price will be
determined when appraisals and other studies are completed. For the nine months
ended December 31, 1998, PT-1 reported revenues and operating loss of $377.7
million and $1.2 million, respectively. At December 31, 1998, PT-1 reported
total assets of $124.7 million.

During 1996, 1997 and 1998, the Company provided long distance service to
PT-1. Revenue from these services amounted to approximately $8 million, $36
million and $89 million, respectively. The Company also made a $10 million loan
to PT-1 and a $3 million loan to its founder and majority stockholder. Accounts
and other receivables outstanding at December 31, 1997 and 1998 from PT-1 and
its founder amounted to approximately $1 million and $40 million, respectively.

F-25
<PAGE>
STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

14. EVENTS SUBSEQUENT TO THE DATE OF THE AUDITORS' REPORT (UNAUDITED)

In February 1999, the Company announced a transaction with WorldPort
Communications Inc. that calls for the firms to exchange as much as $55 million
worth of fiber-optic network capacity over the next three years. WorldPort will
exchange capacity on its pan-European fiber network with a capacity on STAR
Telecom Deutschland's Project Apollo network in Germany. The Company purchased
$8 million of pan-European STM-1 fiber capacity from WorldPort as part of the
agreement. The Company anticipates this capacity will be activated in April
1999.

In February 1999, the Company's subsidiary PT-1 signed a $170 million,
3-year exclusive distribution agreement with Harold Levinson Associates, Inc., a
distributor of tobacco, grocery and confectionary products with annual sales
exceeding $500 million, to distribute its New York Millionaire Phonecard.

On June 9, 1999, the Company entered into a two-year agreement with Foothill
Capital Corporation, as agent ("Foothill"), and certain lenders for a credit
facility ("the Facility") with up to $100 million in available borrowings, based
on eligibility. The Facility consists of a $75 million revolving line of credit
that is limited to eligible accounts receivable and a $25 million term loan. As
of June 30, 1999, the Company had $19.2 million outstanding on its revolving
line of credit, which bears interest at libor plus 300 basis points. Total
availability on the line of credit after outstanding letters of credit was $11.6
million on June 30, 1999. Additionally, as of June 30, 1999 the Company had $25
million outstanding on the term portion of the Facility, which bears interest at
the bank's prime rate plus 600 basis points. The Facility has certain financial
and non-financial covenants that include, among other restrictions, meeting
predetermined earnings thresholds before all interest expenses, taxes,
depreciation and amortization ("EBITDA").

On August 13, 1999, the Company entered into a letter agreement pursuant to
which Foothill and the lenders agreed to take no action under the Facility
regarding the Company's failure to meet the EBITDA and tangible net worth
covenants for the period ended June 30, 1999. In exchange for such forebearance,
the Company agreed to pay to Foothill a fee of $50,000 and additional interest
of two percent on both the term loan and the revolving credit facility. The
Company, Foothill and the lenders have agreed to review the Facility in its
entirety and to amend all appropriate provisions, including without limitation,
the EBITDA and tangible net worth convenants. Based on preliminary discussions
between the Company and Foothill, such amendment will also include the reduction
of eligible borrowings on the line of credit to $30 million from $75 million,
the provision of additional security to Foothill and a modification of the
expiration date of the term loan to January 31, 2000 from June 9, 2000. Among
other things this change would have reduced the total availability on the line
of credit to $6.4.

F-26
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

We have audited in accordance with generally accepted auditing standards the
consolidated financial statements of STAR Telecommunications, Inc. and
Subsidiaries, included in this Form 10-K, and have issued our report thereon
dated February 25, 1999. 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
February 25, 1999

S-1
<PAGE>
SCHEDULE II

STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
BALANCE AT
BEGINNING BALANCE AT
OF END OF
PERIOD PROVISION WRITE-OFF PERIOD
----------- ----------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
Year ended December 31, 1996................................... $ 521 $ 16,978 $ (10,978) $ 6,521
Year ended December 31, 1997................................... $ 6,521 $ 13,770 $ (7,229) $ 13,062
Year ended December 31, 1998................................... $ 13,062 $ 7,477 $ (7,978) $ 12,561

Deferred tax valuation allowance
Year ended December 31, 1996................................... $ 1,519 $ 3,633 $ - $ 5,152
Year ended December 31, 1997................................... $ 5,152 $ 862 $ - $ 6,014
Year ended December 31, 1998................................... $ 6,014 $ 3,455 $ - $ 9,469
</TABLE>

S-2
<PAGE>
EXHIBIT 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation by
reference of our reports dated February 25, 1999 included in this Form 10-K/A
Amendment No. 1, into the Company's previously filed Registration Statements
File No. 333-29681 and 333-32083 pertaining to STAR Telecommunications, Inc.
1997 Omnibus Stock Incentive Plan, 1996 Stock Incentive Plan, 1996 Outside
Director Non Statutory Stock Option and Employment/Consulting Agreements. It
should be noted that we have not audited any financial statements of the Company
subsequent to December 31, 1998 or performed any audit procedures subsequent to
the date of our report.

ARTHUR ANDERSEN LLP

Los Angeles, California
September 17, 1999

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED BALANCE SHEETS, CONSOLIDATED STATEMENTS OF OPERATIONS,
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND CONSOLIDATED STATEMENTS OF
CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 47,297
<SECURITIES> 835
<RECEIVABLES> 112,796
<ALLOWANCES> 12,561
<INVENTORY> 0
<CURRENT-ASSETS> 192,710
<PP&E> 192,770
<DEPRECIATION> (21,818)
<TOTAL-ASSETS> 374,651
<CURRENT-LIABILITIES> 146,012
<BONDS> 40,059
0
0
<COMMON> 43
<OTHER-SE> 195,548
<TOTAL-LIABILITY-AND-EQUITY> 374,651
<SALES> 0
<TOTAL-REVENUES> 619,220
<CGS> 0
<TOTAL-COSTS> 523,621
<OTHER-EXPENSES> (304)
<LOSS-PROVISION> 7,477
<INTEREST-EXPENSE> 3,386
<INCOME-PRETAX> 11,554
<INCOME-TAX> 9,923
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,631
<EPS-BASIC> .04
<EPS-DILUTED> .04

</TABLE>