STAR TELECOMMUNICATIONS INC, 10-K405/A, 2000-09-11

STAR TELECOMMUNICATIONS INC
10-K405/A, 2000-09-11
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)

<TABLE>
<C> <S>
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
or

<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>

FOR THE TRANSITION PERIOD FROM TO ______________ TO ______________.

COMMISSION FILE NUMBER 000-22581
------------------------

STAR TELECOMMUNICATIONS, INC.

(Exact name of registrant as specified in its charter)

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

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

(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 (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 31, 2000, based on the average bid and
asked prices for the Common Stock as reported by Nasdaq was approximately
$127,968,042.

As of March 31, 2000, the number of shares of the Registrant's Common Stock
outstanding was 58,626,677 shares.

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INTRODUCTORY STATEMENT

We are filing this Amendment No. 1 on Form 10-K/A for the fiscal year ended
December 31, 1999 in response to comments received by us from the Securities and
Exchange Commission regarding the Joint Proxy Statement/Prospectus on Form S-4
(Registration No. 333-37750) filed by World Access, Inc. in connection with our
proposed merger with World Access.

PART I

This Annual Report on Form 10-K for the year ended December 31, 1999 (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
our future financial performance. 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 us or any other person that our
objectives or plans will be achieved or that any of our 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 21, or elsewhere in this
Form 10-K.

ITEM 1. BUSINESS.

OVERVIEW

We are a leading facilities-based international telecommunications company.
We provide high-quality, competitively priced, long distance telecommunication
services to consumer and commercial retail customers as well as to other
telecommunications carriers located within the U.S. and Europe. In Germany, we
offer Internet service providers ("ISPs") wholesale dial-up services along with
a range of support services including data center co-location and bandwidth
provisioning. We seek to capitalize on the increasing demand for high-quality
international communications services which is being driven by the globalization
of the world's economies, the worldwide trend toward telecommunications
deregulation, and the growth of voice, data and Internet traffic.

Historically, we have focused our operations on the wholesale international
long distance market. However, we have recently undertaken a number of strategic
measures in order to diversify our revenue base and improve operating margins.
In the first quarter of 1999, we closed two acquisitions in the U.S., providing
us with consumer and commercial retail long distance operations. With the
acquisition of PT-1 Communications, Inc. ("PT-1"), we acquired the leader in the
U.S. prepaid calling card market as well as a dial around business that
leverages the branding strength of the prepaid calling card business. The
acquisition of United Digital Network, Inc. ("UDN") (now a part of our ALLSTAR
Telecom division), provided us with a U.S. commercial retail services platform
enabling us to target higher margin business customers for our long distance
voice communication services.

Additionally, in the second quarter of 1998, we commenced operations in
Germany, the third largest telecommunications market in the world, to capitalize
on the opportunities presented by the deregulation of the European
telecommunications industry. We have established several key strategic alliances
that may provide us with direct broadband access to the end user in Germany. The
German operations act as our platform to expand into other European countries as
deregulation occurs.

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We own and operate an extensive global communications network of
transoceanic cables, domestic and international fiber optic capacity and
switching facilities. We continue to expand our network through additional
investments in international fiber optic cable capacity. Our management believes
that ownership of our network is critical to providing high quality,
competitively priced telecommunications services for the following reasons:

- Transmission costs decline as we carry a larger percentage of our traffic
on-net on both domestic and international routes;

- We have the ability to meet the needs of our customers, such as ISPs, who
consistently demand large amounts of transmission capacity as well as
those of smaller enterprises, which require less capacity or need it less
frequently;

- The network increases our flexibility in introducing new products and
services, such as adding value enhancing data and Internet services to
voice offerings, in order to provide our customers with a single source
for their international and domestic voice, data and Internet needs; and

- We have the ability to sell, lease or swap network segments, further
enhancing our ability to expand the reach of our network and/or reduce
transmission costs.

MERGER WITH WORLD ACCESS

During the first quarter of 1999, our Board of Directors (the "Board") and
members of our management began searching for additional capital at a time when
our core business margins were declining as a result of additional competition.
In addition, significant capital costs were being incurred in connection with
the expansion of our business into Germany and the development of our retail
long distance operations. During this period, Goldman Sachs Credit Partners, LP.
("Goldman Sachs") Kaufman Brothers, Lehman Brothers, Morgan Stanley Dean Witter
("Morgan Stanley") and Deutsche Bank Securities, Inc. ("Deutsche Bank") were
retained to pursue a possible high yield bond offering and to provide financial
advice on potential transactions with strategic merger partners. We ultimately
concluded that a high yield bond offering was not going to be an effective means
of raising necessary capital.

During this same period, we also consulted with each of Goldman Sachs,
Kaufman Brothers, Lehman Brothers, Morgan Stanley and Deutsche Bank about the
feasibility of spinning off our European operations, the possibility of the sale
of stock of one or more of our subsidiaries and raising senior subordinated
debt. Market conditions in the telecommunications business and our capital
position made such contemplated transactions infeasible.

We received several acquisition proposals in the last quarter of 1999, but
each proposal was limited to the acquisition of our German operations. These
proposals were not considered attractive by the Board as the sale of our German
operations would have provided additional cash but did not fit with our strategy
to diversify and improve our overall business mix.

In the late fall of 1999, we were approached by World Access, Inc. ("World
Access"), a leading provider of bundled voice, data and Internet services to key
regions of the world, who was aware of our search for a strategic transaction.
We were unable to discuss a transaction with World Access at that time as we
were subject to a prior exclusive negotiating agreement with Global Crossing,
Ltd. On December 20, 1999, after the exclusive negotiating agreement had expired
we announced the execution of a letter of intent whereby World Access proposed
to acquire all of our outstanding capital stock in exchange for shares of World
Access common stock ("World Access Common Stock"), and possibly cash, valued at
approximately $10.50 per share of our common stock. The letter also called for
World Access to infuse cash in the form of a bridge loan upon the signing of the
definitive agreement. During the due diligence period contemplated by the letter
of intent, the price was renegotiated and World Access indicated that we were
free to shop for better offers from other bidders.

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On February 2, 2000, the parties announced that after World Access' due
diligence, World Access proposed a reduced price of between $7.50 and $8.00 per
share, and that World Access had agreed to provide us with significant interim
financing. During the period between December 20, 1999 and February 2, 2000, we
did not receive a superior proposal from another potential competing bidder.
Prior to signing a definitive agreement, the Board was free to and did seek
other proposals. The Board met on February 7, 2000 and considered the revised
proposal at length. Given our rising debt and cash shortage and the
unavailability of superior offers, management was instructed to continue
negotiations with World Access.

On or about February 7, 2000 and February 11, 2000, the Board met to
consider World Access' renegotiated proposal. The Board received an opinion from
Deutsche Bank that the proposal was fair from a financial point of view to us
and our stockholders. The Board also received advice from Delaware legal counsel
on its obligations with respect to its duty of care and its duty to exercise
informed business judgment. At the meeting on February 11, 2000, the Board
considered our current financial condition, the decline in margins in our core
business due to increased competition and the significant capital required to
accomplish management's program of diversification. The Board also considered
the potential benefits of the merger, including relevant business, financial,
legal and market factors. After due deliberation, the Board concluded that the
proposed transaction was in our best interest and that of our stockholders for,
among other things, the following reasons:

- The combination would potentially solve our capital problems;

- The combined company would have an enhanced and more diversified
geographic and product market position;

- The combination would provide us with significant cost savings and
synergies;

- The combined management team would enhance our capabilities;

- We lacked alternative options for additional capital requirements;

- We did not receive a superior offer and management was concerned about our
capital position and ability to diversify in the face of declining margins
in our core business; and

- The contemplated transaction offered us the opportunity to receive interim
financing from World Access.

At the Board meeting held on February 11, 2000, the Board also voted to
approve the definitive Agreement and Plan of Merger ("Merger Agreement") between
us, World Access and STI Merger Co. ("Merger Sub") and the transactions
contemplated thereby and voted to recommend that our stockholders vote for the
approval and adoption of the Merger Agreement and the transactions contemplated
thereby. Pursuant to the Merger Agreement we will be merged with and into Merger
Sub (the "Merger") and all outstanding shares of our common stock, other than
shares held by dissenting stockholders who perfect their statutory appraisal
rights under Delaware law, will be converted into the right to receive a number
of shares of World Access Common Stock equal to the Exchange Ratio (as defined
below) or, at the election of World Access, 60% of the Merger consideration
shall be paid in World Access Common Stock and 40% of the Merger consideration
shall be paid in cash. In no event will World Access pay cash for more than 45%
of the outstanding shares of our common stock, including cash paid for
fractional shares and cash paid to dissenting stockholders. The "Exchange Ratio"
will be .3905 plus a contingent feature based on the sale of certain of our
assets. The transaction is valued at approximately $500 million subject to,
among other things, certain regulatory approvals, the approval of our
stockholders and the stockholders of World Access, and the divestiture of our
dial around and prepaid calling card business segments for specified minimum net
cash proceeds.

Pursuant to the terms of the Merger Agreement, we are required to sell our
dial around and prepaid calling card operations for proceeds of $150 million or
more as a condition to the close of the Merger. On

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March 29, 2000, we entered into a letter of intent ("Letter of Intent") with a
communications subsidiary of a publicly traded company ("PT-1 Acquiror") for the
sale of all of the assets relating to our dial around and prepaid calling card
business operated by PT-1 ("PT-1 Sale"). Pursuant to the terms of the Letter of
Intent, PT-1 Acquiror will pay $150 million in cash for the assets of PT-1, less
certain liabilities and subject to a purchase price adjustment based on an audit
of PT-1 to be conducted after the close of the PT-1 Sale. The completion of the
PT-1 Sale is subject to, among other things: (1) the completion of due diligence
(which is currently in process) by PT-1 Acquiror satisfactory to PT-1 Acquiror
in its absolute discretion, (2) the negotiation and execution of a definitive
purchase agreement between us and PT-1 Acquiror, and (3) a vote in favor of the
transaction by a majority of our stockholders. Pursuant to the terms of the
Merger Agreement, if we fail to sell our dial around and prepaid calling card
business prior to the close of the Merger with World Access, then World Access
does not have to complete the Merger. In addition, under the Merger Agreement,
if we do not enter into a definitive agreement for the PT-1 Sale prior to the
close of the Merger or if we do not receive net cash proceeds of at least
$150 million from the sale of our dial around and prepaid calling card business,
then World Access (1) does not have to complete the Merger, (2) may agree to
amend the Merger Agreement or (3) may, in its sole discretion, agree to waive
this condition.

INDUSTRY BACKGROUND

INTERNATIONAL LONG DISTANCE

The international long distance telecommunications services industry, which
includes all transmissions of voice and data that originate in one country and
terminate in another, is undergoing a period of fundamental change. This change
has resulted, and is expected to continue to result, in significant growth in
the usage of international telecommunications services. According to
TeleGeography, a leading telecommunications industry source, the international
telecommunications long distance industry increased from approximately
$27.0 billion in revenues and 24 billion minutes of use in 1988 to
$66.0 billion in revenues and 82 billion minutes of use in 1997 representing a
compound annual growth rate of approximately 10% in revenues. Furthermore,
TeleGeography projects that the industry will reach approximately $80.0 billion
in revenues and 159 billion minutes of use by the year 2001.

We believe that a number of trends in the international telecommunications
market will continue to drive growth in international traffic, including:

- The globalization of the world's economies;

- The worldwide trend of continuing deregulation and privatization of
telecommunications markets driven by greater competition and resulting in
declining prices and a wider choice of products and services;

- The growth of data and Internet traffic worldwide; and

- Increased telephone accessibility resulting from technological advances
and greater investment in telecommunications infrastructure, including
deployment of wireless networks.

In many European Union ("EU") member states, the ability to provide
telecommunications services was liberalized on January 1, 1998. We believe that
regulatory liberalization in Europe and technological advancements eventually
will lead to market developments similar to those that have occurred in the U.S.
and United Kingdom following deregulation, including an increase in both
international and domestic traffic volume, reduced prices, increased service
offerings and the emergence of new entrants.

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GERMAN TELECOMMUNICATIONS MARKET

The German telecommunications market is the world's third largest and has
become one of the most competitive in Europe since the regulatory liberalization
program was adopted in 1998. Germany represents an attractive market for
telecommunications for the following reasons:

- It is one of the world's largest economies with a gross domestic product
of $2.1 trillion in 1998;

- Germany provides a liberalized telecommunications regulatory environment
that favors competition from new entrants and mandates interconnection
with the incumbent carrier on reasonable terms;

- There is a robust national infrastructure on which to build local
connections;

- Germany's population density is approximately 230 people per square
kilometer; and

- Business Internet access revenues are expected to grow at an approximate
25% compound annual growth rate through 2003.

INTERNET AND DATA SERVICES

Internet connectivity and enhanced Internet and data services represent two
of the fastest growing segments of the telecommunications services market. We
believe companies operating in these markets are particularly well positioned to
benefit from the rise of the Internet and the development of the e-commerce
industry, as they supply the critical tools and infrastructure that enable
companies to participate in the "global digital economy".

In the past three years, the number of Internet users worldwide has grown
dramatically. In the United States and Europe, businesses increasingly use the
Internet not only to offer e-commerce to consumers and other businesses, but
also for mission critical applications such as sales, customer service and
project coordination worldwide. These enterprises require high quality,
competitively priced, voice and data services, in many cases internationally,
with the flexibility to call on capacity as needed. The popularity of the
Internet with consumers has driven the rapid proliferation of the Internet as a
commercial medium. Businesses use the Internet to establish Web sites and
corporate Intranets and Extranets to expand their customer reach and improve
their communications efficiency.

Most of these businesses, and substantially all consumers in the U.S. and
Europe, obtain Internet connections from one of the large number of highly
competitive Internet service providers who are seeking to increase their share
of this market. Total ISP revenues for the United States are projected by IDC to
grow from $10.7 billion in 1998 to $37.4 billion in 2003 while total ISP
revenues for Western Europe are projected to grow from $4.3 billion in 1998 to
$17.7 billion in 2003. Furthermore, IDC estimates that corporate dedicated
access revenues in the U.S. will grow from $2.9 billion in 1998 to $12.0 billion
in 2003 and that Western European corporate dedicated access revenues will grow
from $2.2 billion to $7.7 billion over the same period. In addition to Internet
connectivity, business customers are increasingly seeking a variety of enhanced
products and applications to take full advantage of the Internet. For example, a
growing number of businesses are implementing secured virtual private networks
over the Internet as a more economical option than dedicated private networks.
IDC estimates that the ISP value-added services market in the U.S. will grow
from $3.0 billion in 1998 to over $12.9 billion in 2003 and the Western European
ISP value-added services market will grow from $528 million to $3.7 billion over
the same period.

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We believe there is substantial market opportunity to leverage our extensive
global network infrastructure by bundling Internet connectivity and enhanced
data products and services with traditional voice services as a way to satisfy
the needs of our existing customers and to attract additional customers as more
users and businesses access the Internet internationally and as individuals and
enterprises merge their voice and data traffic.

OUR APPROACH

NORTH AMERICA

We are a multinational telecommunications services company focused primarily
on the international long distance market. We offer highly reliable, low-cost
switched voice services on a wholesale basis, primarily to U.S.-based long
distance carriers. We provide 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. We have grown our revenues rapidly by capitalizing on the
deregulation of international telecommunications markets, combining
sophisticated information systems with flexible routing and leveraging
management's industry expertise.

We market our 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 1999, we provided switched international long distance
services to 241 customers and 12 of the top forty global carriers.

In the first quarter of 1999, we acquired PT-1 and UDN. With these
acquisitions, we began providing international and domestic long distance
services to individual consumers and businesses. These commercial acquisitions
provided us with a higher margin customer base and complemented our wholesale
business by enabling us to maximize the use of available capacity on our
network.

EUROPE

We commenced our European operations in August 1997, after obtaining an
operating license and activating a London-based switch earlier that year. We
targeted North America and Europe for the immediate development of our network
due to the economic stability and the rapid pace of deregulation in those
regions as compared to other areas of the world. We expect to expand our network
into additional markets within our principal service regions. In addition, we
are using our German operations as a platform to enter other major markets in
Europe in conjunction with the deregulation of the telecommunications industry
in certain EU countries, which began in 1998. This expansion commenced with our
installation of international gateway switches in Vienna, Austria and Geneva,
Switzerland.

STRATEGY

Our objective is to enhance our position as a leading facilities-based
global telecommunications company by capitalizing on our extensive global
communications network and international long distance experience in order to
provide high quality, competitively priced international and domestic voice,
data and Internet services to our customers. The key elements of our strategy to
achieve this goal include the following:

EXPAND SCOPE AND CAPABILITY OF OUR GLOBAL NETWORK. We believe that
ownership of our network is critical to providing high quality, competitively
priced communications services by enabling us to lower our transmission costs
and better manage service offerings and transmission quality. To this end, we
are continuing to pursue a flexible approach to expanding and enhancing our
network facilities by investing in network, switching and transmission
facilities upon determination that such investments would enhance

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operating efficiency or reduce transmission costs. We have taken the following
steps to expand the scope and capability of our network:

- In September 1998, we entered into a 20-year agreement with Qwest
Communications International, Inc ("Qwest") to obtain dedicated capacity
over its nationwide U.S. network, which is still being implemented; and

- Since 1998, we have added 13 national and international gateway switching
facilities including Dallas and Miami, Dusseldorf, Frankfurt, Hamburg,
Berlin, Hannover, Nuremberg, Stuttgart and Munich, Germany, Geneva,
Switzerland, and Vienna, Austria.

OFFER A PORTFOLIO OF VOICE, DATA AND INTERNET SERVICES. Historically, we
have offered primarily wholesale and commercial long distance communication
services to our customers. We intend to expand the scope of our data and
Internet service offerings in order to provide a portfolio of communications
services to our customers in selected key markets. For example, in the United
States, we currently offer data center co-location and bandwidth partitioning to
ISPs. In Europe, beginning with Germany, we currently offer data and Internet
services to ISP customers and intend to offer these services to commercial and
consumer retail customers through our own branded full service ISP. By expanding
our data and Internet service offerings and bundling them with traditional long
distance communication services, we believe we will attract and retain a strong
base of commercial customers with higher operating margins than traditional long
distance communications services alone.

CAPITALIZE ON PROJECTED INTERNATIONAL LONG DISTANCE GROWTH. We believe that
the international long distance market continues to provide attractive
opportunities due to its high revenue, gross profit per minute and projected
growth rate. We will continue to target international markets with high volumes
of traffic, relatively high rates per minute and favorable prospects for
deregulation and privatization. On an opportunistic basis, we will also target
certain overseas markets for foreign origination of minutes, using traditional
channels in markets where we are able to obtain an operating license or voice
over IP in markets where regulatory barriers remain high. We believe foreign
origination will continue to offer higher priced and higher margin minutes than
U.S. originated routes.

EXPAND OUR COMMERCIAL BUSINESSES. We recognize that the provision of
telecommunications services to commercial customers is vital to the long term
development of our business providing valuable stability and higher gross
margins that cannot be sustained from wholesale services alone. As a result, we
are expanding our commercial businesses in the U.S. and Germany, the two largest
markets in which we operate. We are focused on building a commercial customer
base with significant demand for international and domestic voice, data and
Internet services on a stand-alone or bundled basis.

LEVERAGE ESTABLISHED EUROPEAN MARKET PRESENCE AND LOCAL DISTRIBUTION
NETWORK. We were one of the first telecommunications providers to establish a
presence in Germany to capitalize on the opportunities presented by the
deregulation of the European telecommunications industry. As a result, we have
gained substantial experience in the operational, technical, financial,
logistical and marketing issues involved in operating a network and selling our
services before most other service providers in Europe. To market our products
and services, we currently have 11 European sales offices, including London,
Frankfurt, Geneva, Vienna and Berlin. In addition, we are using our German
operations as a platform to expand into other European countries as evidenced by
our recent service launches in Austria and Switzerland.

IDENTIFY AND ENTER KEY MARKETS AHEAD OF FULL DEREGULATION. We believe there
is significant market opportunity in the form of substantial growth and profit
potential in providing competitively priced international telecommunications
services as an early entrant in deregulating markets where the incumbent Post,
Telegraph and Telephone operator ("PTT") is the sole telecommunications
provider. Competitive advantages arising from early entry include: developing
multiple sales and distribution channels and customer bases, achieving name
recognition prior to widespread competition and acquiring experienced local
telecommunications professionals. We believe that the ongoing trend toward
deregulation and privatization will continue to create new opportunities for us
to increase our revenues and profitability. In

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order to speed entry into a new market, we initially emphasize providing
wholesale or facilities-based services to our customers. As we establish
ourselves in a market, we expand into commercial telecommunications services by
investing in additional infrastructure, devoting employees to commercial sales
efforts and developing products and services tailored to the local commercial
market. We will continue to target international markets with high volumes of
traffic, relatively high rates per minute and favorable prospects for
deregulation and privatization.

NETWORK

We currently operate a state-of-the-art extensive global communications
network of transoceanic cables, domestic and international fiber optic capacity
and switching facilities. The network consists of:

- A global backbone network connecting intelligent gateway switches in our
principal service regions;

- A domestic and international long distance network presence within certain
countries in our principal service regions; and

- A combination of owned and leased transmission facilities, termination
arrangements and foreign carrier agreements.

We believe that ownership of our network is critical to becoming a high
quality, competitively priced provider of communications services by enabling us
to (1) meet the needs of our customers who demand large amounts of transmission
capacity, (2) increase our flexibility in introducing new products and services
and (3) sell, lease or swap network segments which expands the reach of our
network and reduces our transmission costs. We continue to pursue a flexible
approach to expanding and enhancing our network facilities by investing in
international fiber optic cable capacity, developing a pan-German fiber optic
network and adding switching facilities worldwide.

TRANSOCEANIC FIBER OPTIC CABLE SYSTEMS

Where our customer base has developed sufficient traffic, we have purchased
and leased transoceanic fiber optic cable transmission capacity to connect to
our various switches. We either purchase lines or lease lines on a monthly or
longer-term basis at a fixed cost and acquire economic interests in transmission
capacity through minimum assignable ownership units and Indefeasible Rights of
Use ("IRU") to international traffic destinations.

OWNERSHIP INTERESTS IN TRANSOCEANIC FIBER OPTIC CABLE SYSTEMS. The
following table sets forth a listing of the transoceanic fiber optic cable
systems in which we have capacity through either ownership or IRU's:

<TABLE>
<CAPTION>
CABLE SYSTEM COUNTRIES SERVED STATUS
--------------------- ---------------- ------
<S> <C> <C> <C>
AC-1 United States--United Kingdom Existing
Americas II United States--Argentina Under Construction
APCN Japan--Indonesia Existing
CANUS United States--Canada Existing
CANTAT 3 United States--United Kingdom--
Denmark Existing
Columbus III United States--Spain Under Construction
Gemini United States--United Kingdom Existing
Maya-1 United States--Mexico--Honduras--
Cayman Islands--Panama--Costa
Rica--Columbia Under Construction
NPC United States--Japan Existing
ODIN Netherlands--Denmark Existing
Pan American U.S. Virgin Islands--Aruba--
Venezuela--Panama--Columbia--
Ecuador--Peru--Chile Under Construction
</TABLE>

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<TABLE>
<CAPTION>
CABLE SYSTEM COUNTRIES SERVED STATUS
--------------------- ---------------- ------
<S> <C> <C> <C>
PTAT-1 United Kingdom--United States Existing
RIOJA Netherlands--Belgium Existing
TAT 12/13 United States--United Kingdom Existing
TAT 14 United States--United Kingdom Existing
TPC-5 United States--Japan Existing
UK-NL 14 United Kingdom--Netherlands Existing
</TABLE>

SWITCHES AND POINTS OF PRESENCE

We have made substantial investments in switching infrastructure in the past
three years. We believe that this investment in switches provides the network
with several important benefits. First, switches help to maintain a relatively
low network cost base by reducing the need for transmission capacity between
points on the network. Second, switches substantially enhance the security and
redundancy of the network. Our network consists of 22 high capacity,
carrier-grade Nortel and Siemens Stromberg switches, including 12 international
gateway switches and 10 domestic switches. We currently operate more than 150
points of presence within our principal service regions.

The following table contains information regarding the location and type of
our existing switches:

<TABLE>
<CAPTION>
LOCATION TYPE OF SWITCH USE STATUS
-------- -------------- --- ------
<S> <C> <C> <C>
New York City, NY DMS 300-250 International Gateway Existing
New York City, NY Siemens DCO(2) International Gateway Existing
Los Angeles, CA DMS 300-250 International Gateway Existing
Los Angeles, CA Siemens DCO International Gateway Existing
Dallas, TX DMS 250 Domestic Existing
Miami, FL DMS 300-250 International Gateway Existing
Miami, FL (PT-1) DMS 250 Domestic Existing
Flushing, NY (PT-1) DMS 250 Domestic Existing
Jersey City, NJ (PT-1) DMS 250 International Gateway Existing
London, U.K. DMS 100E International Gateway Existing
Hamburg, Germany DMS 100E Domestic Existing
Dusseldorf, Germany DMS 100E Domestic Existing
Munich, Germany DMS 100E Domestic Existing
Frankfurt, Germany DMS 100E(2) International Gateway Existing
Berlin, Germany DMS 100E Domestic Existing
Hanover, Germany DMS 100E Domestic Existing
Stuttgart, Germany DMS 100E Domestic Existing
Nuremberg, Germany DMS 100E Domestic Existing
Geneva, Switzerland DMS 100E International Gateway Existing
Vienna, Austria DMS 100E International Gateway Existing
</TABLE>

TERRESTRIAL FIBER OPTIC CABLE SYSTEMS

We have made investments in terrestrial fiber networks in the U.S. and
Europe. We intend to increase our investment in direct and IRU ownership of
terrestrial cable systems in markets where we enter into operating agreements
and in situations where we determine that such an investment would enhance
operating efficiency and/or reduce transmission costs.

UNITED STATES. We have made substantial investments in our terrestrial
fiber network in the U.S. In September 1998, we entered into a 20-year agreement
with Qwest to acquire OC-48, OC-12 and OC-3 transmission capacity on their U.S.
Macro Capacity (SM) Fiber Network which is expected to serve over 130 cities in
the U.S. This network, which is still being implemented, provides connections
among our U.S. gateway switches and existing and future points of presence. As
we replace existing leased lines in the U.S.

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with this owned high-speed capacity, we are reducing our operating cost
structure and providing improved service to customers on our high traffic
routes.

EUROPE. In 1998, we signed an agreement to lease domestic German capacity
from o.tel.o Communications under a three-year contract and have recently signed
an agreement with GTS Carrier Services (Ireland) Limited for additional capacity
to augment the network. We have an agreement with Worldport Communications, Inc.
providing us with an IRU for transmission capacity on their network from London
to Frankfurt. In addition, we have leased capacity from VIAG Interkom GmbH & Co.
on their networks from Stuttgart to Geneva and from Munich to Vienna.

TERMINATION ARRANGEMENTS

We offer international long distance telecommunications services to
approximately 200 countries around the world. We seek to retain flexibility and
maximize our termination opportunities by utilizing a continuously changing mix
of routing alternatives, including alternative termination agreements, operating
agreements and resale arrangements. Due to our diversified approach, we believe
we are well positioned to take advantage of the rapidly evolving international
telecommunications market to provide high-quality, competitively priced
international long distance service to our customers.

Our strategy is based on our ability to enter into and maintain: (1)
operating agreements with PTTs in countries that have yet to become liberalized
so that we would then be permitted to terminate traffic in, and receive return
traffic from, that country, (2) operating agreements with PTTs and emerging
carriers in foreign countries whose telecommunications markets have liberalized
so we can terminate traffic in such countries, (3) resale agreements and transit
and refile agreements to terminate our traffic in countries with which we do not
have operating agreements so as to provide us with multiple options for routing
traffic and (4) interconnection agreements with the PTT in each of the countries
where we plan to have operating facilities so that we can terminate traffic in
those countries.

SALES AND MARKETING

NORTH AMERICA

We market our services on a wholesale basis to other telecommunications
companies through our experienced direct sales force and marketing/account
management team who leverage the long-term industry relationships of our senior
management. We reach our customers primarily through domestic and international
trade shows and through relationships gained from years of experience in the
telecommunications industry. We had 71 direct sales and marketing employees as
of December 31, 1999.

In the wholesale market, our sales and marketing employees utilize the
extensive, customer specific usage reports and network utilization data
generated by our sophisticated information systems to effectively negotiate
agreements with customers and prospective customers and to rapidly respond to
changing market conditions. We believe that we have 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 our expansion into the North American commercial market,
we primarily market our domestic and international long distance services
directly to individual consumers through two distinct marketing channels:
prepaid calling cards and dial around services. We believe that prepaid calling
cards and dial around services provide consumers with convenient, attractively
priced alternatives to traditional presubscribed long distance services. The
prepaid calling card market in the U.S. is estimated to be $2.0 billion and has
exhibited considerable growth over the past several years, driven primarily by
the overall decline in long distance pricing and by the need for convenient
communication tools for an increasingly mobile population. PT-1 currently
markets 40 cards, primarily to markets with major immigrant and ethnic
populations, such as New York, Los Angeles, Washington DC and Miami, that have
substantial international long distance calling requirements.

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EUROPE

We have a European carrier sales team headquartered in Zurich, Switzerland.
This team is responsible for sales to wholesale customers throughout Europe. We
also have a reseller sales team with offices in Frankfurt, Germany, Vienna,
Austria, and Geneva, Switzerland that is responsible for sales to switch-based
and switchless resellers in their respective markets.

In connection with our expansion into the European commercial market, we
market our services to small- and medium-sized enterprises through a network of
independent sales agents and utilize a direct sales force of over 67
professionals to approach larger corporate accounts. We intend to provide our
commercial retail customers with a bundled product offering local, long
distance, data and Internet services which we believe provides us with a
competitive advantage over other telecommunications carriers who have limited
ability to offer a full suite of telecommunications services. As we expand our
service offerings into other deregulating markets such as Austria and
Switzerland, we expect to hire qualified, in-country managers to oversee our
sales efforts in each market in addition to utilizing independent sales agents.

CUSTOMER SERVICE

We strive to provide personalized customer service and believe that the
quality of our customer service is one of our competitive advantages. Our
business customers are covered actively by dedicated account and service
representatives who seek to identify, prevent and solve problems. We provide
toll-free, customer service in Europe 24-hours per day seven days a week.
Furthermore, advanced Network Management Systems ("NMS") have been implemented
in order to maximize the visibility of our global switched network. In both the
U.S. and Europe, our customer service and network management departments work
closely together in order to minimize trouble resolution response time and
maximize customer satisfaction.

We also have a team of customer service representatives to handle our
prepaid calling card and dial around businesses in the U.S. We believe that
effective and convenient multilingual customer service is essential to
attracting and retaining prepaid calling card customers. Our customer service
center handles an average of 8,000 to 10,000 customer inquiries per day,
including inquiries relating to prepaid calling card balances, prepaid calling
card availability, rates, international calling service, billing and becoming a
distributor.

MANAGEMENT INFORMATION AND BILLING SYSTEMS

Our operations use advanced information systems including call data
collection and call data storage linked to a proprietary reporting system. We
also maintain redundant billing systems for rapid and accurate customer billing.
Our switching facilities are linked to a proprietary reporting system, which we
believe provides us 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. We are also able to
ensure accurate and timely billing and to reduce routing errors as a result of
our advanced information systems.

Our proprietary reporting software compiles call, price and cost data into a
variety of reports that we can use to re-program our routes on a real-time
basis. The reporting software can generate the following reports as needed:

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

- Country usage, subtotaled by vendor or customer, which assists us 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;

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- Vendor usage by minute, enabling us to verify and audit vendor bills;

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

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

We have built multiple redundancies into our 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 internally for customer service and for traffic analysis. We
maintain two independent and redundant billing systems in order to verify
billing internally and to ensure that bills are sent out on a timely basis. We
continually back up all of the call data and resulting billing data on tape
drives and redundant storage devices, and regularly transport them to an
off-site safe location.

NETWORK OPERATIONS AND TECHNICAL SUPPORT

Our switching facilities are linked to a proprietary reporting system, which
we believe provides us 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. We have
installed multiple redundancies into our switching facilities to decrease the
risk of a network failure. For example, we employ both battery and generator
power back-up and have installed hardware that automatically shifts the system
to auxiliary power during a power outage, rather than relying on manual
override. We have network control centers in Los Angeles which control our
switches and monitors our U.S. network, and Frankfurt which controls our
switches and monitors our European network. Our switching facilities are staffed
24-hours per day, seven days per week.

COMPETITION

The international telecommunications industry is intensely competitive and
subject to rapid change. Our 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 telecommunications 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. We also compete abroad
with a number of dominant telecommunications operators that previously held
various monopolies established by law over the telecommunications traffic in
their countries. 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. We are unable to predict which of
many possible future product and service offerings will be important to maintain
our competitive position or how much it will cost to develop and provide such
products and services. We believe we compete favorably on the basis of price,
transmission quality and customer service. The number of our competitors is
likely to increase as a result of the new competitive opportunities created by
the World Trade Organization Basic Telecommunications Agreement ("WTO
Agreement"). Further, under the terms of the WTO Agreement, the United States
and the other 68 countries participating in the WTO Agreement have committed to
open their telecommunications markets to competition, foreign ownership and
adopt measures to protect against anticompetitive behavior. As a result, we
believe that competition will continue to increase, placing downward pressure on
prices. This pressure could adversely affect our gross margins if we cannot
reduce our costs commensurate with these price reductions.

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COMPETITION FROM DOMESTIC AND INTERNATIONAL COMPANIES

AT&T, MCI WorldCom and Sprint currently generate a majority of the U.S.
based international telecommunications services revenue. We also compete with
other U.S. based and foreign long distance providers, including regional bell
operating companies, which presently have Federal Communications Commission
("FCC") authority to 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 we do. Our business would be materially adversely affected to the extent
that a significant number of our customers limit or cease doing business with us
for competitive or other reasons. Consolidation in the telecommunications
industry will continue to create even larger competitors with greater financial
and other resources, and could adversely affect us by reducing the number of
potential customers for our services.

COMPETITION IN THE COMMERCIAL MARKET

In the prepaid calling card market, we compete with other providers of
prepaid calling cards and with providers of commercial telecommunications
services in general. Many of the largest telecommunications providers currently
offer prepaid calling cards, in addition to other telecommunications services.
We also compete with smaller, emerging carriers in the prepaid calling card
commercial market, including IDT Corporation, RSL Communications, SmarTalk
Teleservices, Inc., Pacific Gateway Exchange, Inc., World Access, Inc. and
Primus Telecommunications. To the extent we begin providing services to
customers outside the U.S. market, we may compete with other large
telecommunications companies such as British Telecommunications in the U.K. and
Deutsche Telekom in Germany. Our ability to compete effectively in the
telecommunications services industry will depend in part upon our ability to
develop products that appeal to increasingly specialized segments of the
telecommunications services market.

GOVERNMENT REGULATION

Our U.S. interstate and international telecommunications service offerings
generally are subject to the regulatory jurisdiction of the FCC. Certain
telecommunication services offered by us in the U.S. may also be subject to the
jurisdiction of state regulatory authorities, commonly known as public utility
commissions ("PUCs"). Our 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 our 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 us. See "Risk
Factors" beginning on page 21.

U.S. REGULATION

Our business is subject to various U.S. and foreign laws, regulations,
agency actions and court decisions. Our 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. We are 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 international
private line ("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 (1) to file at the FCC and to maintain
tariffs containing the rates, terms, and conditions applicable to their
services, (2) to

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file certain reports regarding international traffic and facilities, (3) to file
certain contracts with correspondent carriers, (4) to disclose affiliations with
foreign carriers and significant foreign ownership interests, and (5) to pay
certain regulatory fees based upon, among other things, the carrier's revenues
and ownership of international transmission capacity.

INTERNATIONAL SERVICES

FCC rules require us 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 us to resell such capacity.
We hold both facilities-based and resale international authorizations, including
a "global" authorization that provides broad authority to offer switched and
private line international services. We have filed tariffs for international
services with the FCC.

FCC INTERNATIONAL PRIVATE LINE RESALE POLICY

The FCC's IPL resale policy limits the conditions under which a carrier may
connect IPLs to the public switched telephone network ("PSTN") at one or both
ends to provide switched services, commonly known as international simple resale
("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 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 the 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. Our FCC
authority currently permits us 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,
Japan, Singapore, Spain, Iceland, Poland, Israel and the Dutch Antilles. The FCC
is currently reviewing U.S. carrier applications to provide ISR to Finland and
Mexico among other routes, and upon the grant of any such ISR application to a
given country, the FCC's rules also would permit us 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 International Settlement Policies ("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, we may use IPLs to terminate international switched
telephone services where ISR has not been authorized. In such routes, therefore,
our termination arrangements may not be consistent with the FCC's ISP. On any
such route, however, to our 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, we believe our 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 our
IPL arrangements violate its ISR policy or our ISR authorization, the FCC could
order us to terminate any non-conforming arrangements. In addition, we could be
subject to a monetary forfeiture and to other penalties, including the
revocation of our FCC authorizations to operate as an international carrier. Any
such FCC action could have a material adverse effect upon our business,
operating results and financial condition.

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FCC INTERNATIONAL SETTLEMENTS POLICY

The FCC's ISP places limits on the arrangements which U.S. international
carriers may enter into with dominant foreign carriers for exchanging public
switched telecommunications traffic, which the FCC terms International Message
Telephone Service ("IMTS"). The policy does not apply to ISR services and does
not apply to U.S. carrier agreements with non-dominant foreign carriers. 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 does not apply to certain "low
cost" routes where 50% or more of the U.S. billed traffic is settled at rates
which are 25% or more below an FCC benchmark rate. FCC policies also prohibit a
U.S. carrier from offering or accepting a "special concession" from a foreign
carrier where the foreign carrier possesses 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.
It is possible that the FCC could find that certain of our arrangements with
foreign operators were or are inconsistent with the ISP and that we have not
requested prior FCC authority therefor. If the FCC were to determine by its own
actions or in response to the filing of a third party that we have violated the
ISP, the FCC could order us to terminate any non-conforming arrangement. In
addition, we could be subject to a monetary forfeiture and to other penalties,
including revocation of our FCC authorizations to operate as an international
carrier. Any such FCC action could have a material adverse effect upon our
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.

We currently have IMTS operating agreements with certain foreign
correspondents which provide for settlement rates above the FCC's prescribed
benchmarks. We will negotiate in good faith to establish IMTS settlement rates
with our foreign correspondents which satisfy the FCC's benchmarks but there can
be no assurance that such negotiations will succeed. If we are 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.
We are unable to predict the form which such intervention may take but it could
disrupt our arrangement for transmitting traffic to certain countries or require
us to suspend direct service to certain countries or require us to make
alternative termination arrangements with certain countries, all of which could
have a material adverse effect on our 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 upon, 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. We use both transit and refile arrangements to terminate
our 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

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certain of our transit or refile arrangements violate the ISP or other FCC
policies. In that event, the FCC could order us to terminate any non-conforming
transit or refile arrangements. In addition, we could be subject to a monetary
forfeiture and to other penalties, including revocation of our FCC
authorizations to operate as an international carrier. Any such FCC action could
have a material adverse effect on our business, operating results and financial
condition.

REPORTING REQUIREMENTS

International telecommunication carriers also are required by the FCC's
rules to file timely 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 a
foreign carrier if it has a 25% interest in the capital stock of the carrier, or
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. We generally have 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. The FCC by its own action or in response to the filing of a third
party could determine that we have failed to meet certain of the foregoing
filing and reporting requirements or that certain filings are deficient. In that
event, we could be directed to remedy any asserted non-compliance; we could also
be subject to a monetary forfeiture and to other penalties, and, although we
believe that it would be largely unprecedented in such circumstances, and hence
unlikely, the FCC could revoke our authorizations to operate as an international
carrier. Any such FCC action could have a material adverse effect on our
business, operating 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 and international services must
pay an annual regulatory fee based on their interstate revenues; for the 1999
filing year, the fee was 0.12% of net revenue. International carriers that own
international transmission capacity must also pay a fee for each international
64 kilobit per second equivalent circuit they operate; for the 1999 filing year,
the fee was $7 per circuit. Carriers that provide, or that have an affiliate
which provides, 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 5% of the carrier's annual end user revenues (including both
domestic and international end user revenue, unless only a small percentage of
the carrier's end-user revenues comes from domestic interstate services, in
which case only domestic revenues are counted). We generally offer our services
only to other carriers that in turn provide services to end-users. Such
carrier-to-carrier revenues are not subject to universal service fees, and thus
we generally are not liable to pay 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. The contribution rate
is approximately 0.006% of net telecommunications revenue. U.S. carriers must
pay a certain percentage of their domestic interstate revenues to support the
Telecommunications Relay Services Fund. The contribution rate is approximately
0.04% of gross revenues. U.S. carriers must pay a percentage of their end-user
revenue to support local number portability ("LNP"); that rate varies depending
on the cost of the supported services and overall revenue for all carriers in
different regions of the United States. Our LNP payments would typically be
minimal because most of our revenue comes from other carriers rather than end
users. We have routinely paid the foregoing regulatory fees; however, we may owe

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approximately $150,000 in additional fees to satisfy our TRS and annual
regulatory fee obligations for the 1996 and 1997 filing years. The foregoing
regulatory fees typically change annually. We cannot predict the future
regulatory fees for which we may be liable. Said fees could rise significantly
for us and amount to 5% or more of our gross international and interstate
revenues if we are no longer exempt from paying universal service in the event
we provide service directly to end-users, or because amendments to the
Communications Act repeal the universal service fee exemption for revenues from
connecting carriers. Because the international telecommunication services
business is highly competitive, an increase in the regulatory fees that we must
pay could impair our market position and have a material adverse effect on our
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 several industry mergers, including the Concert joint venture between
the AT&T and BritishTelecom international carrier businesses, the merger of
Global Crossing and Frontier and the merger of LCI International and Qwest.
There are also pending applications before the FCC for the merger of Sprint and
MCI WorldCom and GTE and Bell Atlantic, among others. In December 1999, the FCC
authorized Bell Atlantic to begin originating U.S. long distance service,
including international service, in New York State under Section 271 of the
Communications Act and other applications for "in region" service under Section
271 are expected to be filed and approved by the FCC in 2000. 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 us, or order such carriers to detariff their services. In that
event, we would have greater flexibility in pricing our 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 us by,
for example, requiring us to discontinue certain termination arrangements which
we now have 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 we are likely to be well positioned
to expand certain refile operations even though new opportunities may become
available to our competitors. We cannot predict the net effect of these or other
possible future FCC actions on our business, operating results and financial
condition, although the net effect could be material.

STATE REGULATION

STATE

Our intrastate long distance telecommunications operations and those of our
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 us and our
subsidiaries to apply for certification to provide intrastate telecommunications
services, or at a minimum to register or to be found to be exempt

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from regulation, prior to commencing sale of intrastate services. Additionally,
the vast majority of states require us or our subsidiaries to file and maintain
detailed tariffs setting forth rates charged by us to our end-users for
intrastate services. Many states also impose various reporting 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.

We, along with our regulated subsidiaries, believe we have made the filings
and taken the actions we believe are necessary to provide the intrastate
services we currently provide to end-users throughout the U.S. We and/or our
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. We and our 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, we 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 our acquisition of CEO Telecommunications, Inc. ("CEO"),
we 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 our acquisition of CEO, and in order to comply with the
settlements described above, we have imposed strict restrictions on certain
former CEO employees, restricting these employees with respect to California
intrastate telecommunications operations. Additionally, we have 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 us and through our
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. We have 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 us to
engage in cost-effective routing of traffic between the U.S. and the U.K. and
beyond.

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GERMANY

In Germany, telecommunications services offered by us through our 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 telecommunications networks in December 1997. Under this
license, STAR Germany has installed telecommunications switching facilities in
Dusseldorf, Frankfurt, Hamburg, Munich, Stuttgart, Berlin, Nuremberg and Hanover
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 our business, operating results and financial condition.

EMPLOYEES

As of March 1, 2000, we employed 855 full-time employees. We are not subject
to any collective bargaining agreements and we believe that our relationships
with our employees are good.

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RISK FACTORS

IN EVALUATING US, OUR 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. OUR 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.

THERE CAN BE NO ASSURANCE THAT WE WILL REALIZE THE ANTICIPATED BENEFITS FROM THE
MERGER WITH WORLD ACCESS.

We expect that our Merger with World Access will result in a combined
company that will be a leading provider of global telecommunications services,
increasing stockholder value through significant cost savings and synergies.
While the combination is expected to complement the geographic network coverage
of each company and enhance World Access' European operations through the
integration of our network assets and licenses in Germany, there can be no
assurance that our operations will be successfully integrated into World Access'
operations or that our stockholders will ultimately realize any of the
anticipated benefits of the Merger.

After due deliberation our Board concluded that the Merger was in our best
interest, and that of our stockholders for, among other things, the following
reasons:

- The combination would potentially solve our capital problems;

- The combined company would have an enhanced and more diversified
geographic and product market position;

- The combination would provide us with significant cost savings and
synergies;

- The combined management team would enhance our capabilities;

- We lacked alternative options for additional capital requirements;

- We did not receive a superior offer and management was concerned about our
capital position and ability to diversify in the face of declining margins
in our core business; and

- The contemplated transaction offered us the opportunity to receive interim
financing from World Access.

There can be no assurance that any of the expected results will be
accomplished as rapidly as currently expected or at all or that any savings or
synergies will not be offset by increases in other expenses or operating losses
incurred by World Access based on the occurrence of events or actions taken by
World Access that are out of our control.

In addition, the completion of the Merger is subject to, among other things,
certain regulatory approvals, the approval of our stockholders and the
stockholders of World Access, and the divestiture by us of certain business
segments for specified minimum net cash proceeds. Accordingly, there can be no
assurance that the Merger will be approved by our stockholders or the
stockholders of World Access, that we will obtain the necessary regulatory
approvals or that we will successfully complete the required sale of certain
assets. In the event that the Merger is not successfully completed, we may face
significant costs associated with the failed Merger, including a termination fee
of $14 million, and we may need to obtain additional capital. We are not certain
that we will be able to raise additional capital on favorable terms or at all.

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<PAGE>
IF THE PT-1 ASSET SALE IS NOT COMPLETED PRIOR TO THE CLOSING OF THE MERGER WITH
WORLD ACCESS, OR IF WE DO NOT RECEIVE NET PROCEEDS OF AT LEAST $150 MILLION
FROM THE PT-1 ASSET SALE, THE MERGER WITH WORLD ACCESS MAY NOT CLOSE OR THE
CONSIDERATION TO BE RECEIVED BY OUR STOCKHOLDERS FROM THE MERGER MAY BE
REDUCED.

On March 29, 2000, we entered into a Letter of Intent with PT-1 Acquiror for
the sale of all of the assets of PT-1. Pursuant to the terms of the Letter of
Intent, PT-1 Acquiror will pay $150 million in cash for the assets of PT-1, less
certain liabilities and subject to a purchase price adjustment based on the
results of a final audit to be conducted after the close of the PT-1 Sale. While
we expect that we will successfully complete the PT-1 Sale, there can be no
assurance that we will complete the PT-1 Sale or that we will find another
purchaser for the assets of PT-1. Further, there can be no assurance that we
will complete the sale of the assets of PT-1 to PT-1 Acquiror, or to any other
purchaser, for net cash proceeds of at least $150 million, as required by the
Merger Agreement.

Pursuant to the terms of the Merger Agreement, if we fail to sell the assets
of PT-1 prior to the close of the Merger with World Access, then World Access
does not have to complete the Merger. In addition, under the Merger Agreement,
if we do not enter into a definitive agreement for the PT-1 Sale prior to the
close of the Merger or if we do not receive net cash proceeds of at least
$150 million from the sale of the assets of PT-1, then World Access (1) does not
have to complete the Merger, (2) may agree to amend the Merger Agreement or (3)
may, in its sole discretion, agree to waive this condition. In the event that
the Merger is not completed, we may face significant costs associated with the
failed Merger, including a termination fee of $14 million, and may need to
obtain additonal capital. We are not certain that we will be able to raise
additional capital on favorable terms or at all.

While we believe we will complete the PT-1 Sale, the completion of the PT-1
Sale to PT-1 Acquiror is subject to, among other things: (1) the completion of
due diligence by PT-1 Acquiror satisfactory to PT-1 Acquiror in its absolute
discretion, (2) the negotiation and execution of a definitive purchase agreement
between us and PT-1 Acquiror, (3) a vote in favor of the transaction by a
majority of our stockholders, and (4) certain regulatory approvals. Accordingly,
there can be no assurance that PT-1 Acquiror will be satisfied with the outcome
of its due diligence, that we will reach satisfactory agreement on a definitive
purchase agreement with PT-1 Acquiror, that our stockholders will approve the
PT-1 Sale, or that we will obtain the necessary regulatory approvals. In
addition, the completion of the PT-1 Sale for net cash proceeds of at least
$150 million is dependent, in part, on the results of a final audit to be
conducted after the close of the PT-1 Sale. There can be no assurance that the
net value of the assets of PT-1 will be greater than or equal to the value of
the assets as presented to PT-1 Acquiror in the Letter of Intent, which may
result in net cash proceeds of less than $150 million for the PT-1 Sale. If we
fail to complete the PT-1 Sale prior to the close of the Merger or to sell the
assets of PT-1 for net proceeds of less than $150 million, the Merger may not
close or the consideration to be received by our stockholders from the Merger
may be reduced.

IF OUR LENDERS ACCELERATE PAYMENT OF THE AMOUNTS WE OWE THEM, WE COULD BECOME
INSOLVENT OR BE FORCED TO FILE FOR BANKRUPTCY.

We are subject to certain restrictions under our financing arrangements,
including our financing arrangements with WorldCom and RFC Capital Corporation
("RFC") and our anticipated financing arrangements with World Access. If we
violate any restrictions under our financing arrangements, our lenders may
accelerate payment of the amounts we owe them. If they accelerate payment on any
of our debt, it could force us to file for bankruptcy or reorganize our
business. Under our financing arrangements with WorldCom and our anticipated
financing arrangements with World Access, if we commit a breach of the terms of
the Merger Agreement which results in World Access having the right to terminate
the Merger Agreement, World Access and WorldCom can accelerate payment of the
outstanding balance. Our anticipated financing arrangement with World Access
will provide for a predetermined initial advance with additional advances of up
to $35 million to be made solely in World Access' discretion. There can be no
assurance that we will not breach any restrictions under our financing
arrangements, that we will not breach the terms of the Merger Agreement or that
if we enter into a financing arrangement with World

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<PAGE>
Access, World Access will agree to make additional advances to us. We cannot
predict what actions our lenders will take if we are out of compliance with any
restrictions under any of our financing arrangements or under the Merger
Agreement.

WE MAY NOT HAVE SUFFICIENT CASH FLOW FROM OUR BUSINESS TO PAY OUR DEBT.

The amount of our outstanding debt is large compared to our cash flow and
the net book value of our assets. We have substantial repayment obligations
under our outstanding debt. As of December 31, 1999 we had:

- Total consolidated debt of approximately $212.5 million, including
$99.5 million outstanding pursuant to our financing arrangements with RFC
and including our financing arrangement with WorldCom which was entered
into on April 12, 2000; and

- Stockholders' equity of approximately of $278.1 million.

The following chart shows our aggregate interest and principal payments due
on all of our currently outstanding debt for each of the next five fiscal years,
assuming our lenders do not accelerate payment of the amounts due under our
financing arrangements. Also, because the interest rates under some of our
financing arrangements. Also, because the interest rates under some of our
financing arrangements are based upon variable market rates, the amount of these
interest payments could fluctuate in the future.

<TABLE>
<CAPTION>
SCHEDULED PAYMENTS
--------------------
INTEREST PRINCIPAL
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
For the year ending December 31:
2000...................................................... $10,012 $ 75,690
2001...................................................... 6,487 107,637
2002...................................................... 1,679 20,675
2003...................................................... 1,428 8,446
2004...................................................... 0 0
</TABLE>

Due to the large amount of these principal and interest payments, we may not
generate enough cash from our operations to meet these obligations. We have
entered into a Letter of Intent with PT-1 Acquiror to sell the assets of PT-1,
less certain liabilities for cash proceeds of approximately $150 million subject
to a purchase price adjustment based on an audit of PT-1 to be conducted after
the close of the PT-1 Sale. We expect that the proceeds we receive from the sale
of PT-1 will provide us with sufficient capital to continue our operations and
service our debt. However, there can be no assurance that we will reach a
definitive agreement with PT-1 Acquiror regarding the sale of the assets of PT-1
or that the proceeds we receive from the sale will be sufficient.

WE MAY NOT BE ABLE TO OBTAIN THE ADDITIONAL CAPITAL THAT WE NEED TO FINANCE OUR
ONGOING CAPITAL REQUIREMENTS AND OUR GROWTH.

We have considerable ongoing capital requirements related to our operations
and our existing debt. In addition, we will need to continue to expand our
network to maintain our competitive position and continue to meet the increasing
demands for service quality, capacity and competitive pricing. We will need to
raise additional capital from equity or debt sources if (1) our cash flow from
operations after the end of a period is insufficient to meet our working capital
and capital expenditure requirements, (2) our cash flow from operations after
the end of a period is insufficient to service our debt, or (3) our growth
exceeds current expectations. We are not certain that we will be able to raise
this capital on favorable terms or at all. If we are unable to obtain this
additional capital, we may be unable to continue our operations or service our
debt and we may be required to reduce the scope of our anticipated expansion.
Our ability to grow depends, in part, on our ability to expand our operations
through the ownership and leasing of network capacity, which requires
significant capital expenditures, that are often incurred prior to our receipt
of the related revenue. We have entered into a Letter of Intent with PT-1
Acquiror to sell the assets of PT-1, less certain liabilities for cash proceeds
of approximately $150 million subject to a purchase price

23
<PAGE>
adjustment based on an audit of PT-1 to be conducted after the close of the PT-1
Sale. We expect that the proceeds we receive from the sale of PT-1 will provide
us with sufficient capital to meet our working capital and capital expenditure
requirements, service our debt and expand our network. However, there can be no
assurance that we will reach a definitive agreement with PT-1 Acquiror regarding
the sale of the assets of PT-1 or that the proceeds we receive from the sale
will be sufficient.

WE MAY NOT BE ABLE TO PROVIDE DATA TRANSMISSION SERVICES EFFECTIVELY.

Our experience in providing data transmission services to date has been
limited and, consequently, we can provide no assurance that we will be
successful in the data transmission business. Our ability to successfully enter
the data transmission business will depend upon, among other things, our ability
to:

- Select new equipment and software and integrate these into our network;

- Hire and train qualified personnel; and

- Enhance our billing, back-office and information systems to accommodate
data transmission services.

If we are not successful, there may be a material adverse effect on our
business, financial condition and operations.

The data transmission business is also extremely competitive and prices have
declined substantially in recent years and are expected to continue to decline.
In providing these services, we will be dependent upon vendors for assistance in
the planning and development of our data product offerings, as well as ongoing
training and support. In Europe, there are a number of different protocols for
data transmission. Our network will need to be able to handle all of these
protocols, which will pose technical difficulties.

WE CANNOT ASSURE YOU THAT OUR PLANNED ENTRY INTO THE INTERNET AND DATA BUSINESS
IN EUROPE WILL BE SUCCESSFUL.

The market for Internet connectivity and related services is extremely
competitive. Our primary competitors include other ISPs that have a significant
national or international presence. Many of these carriers have substantially
greater resources, capital and operational experience than we do. We also expect
we will experience increased competition from traditional telecommunications
carriers that expand into the market for Internet services. In addition, we will
require substantial additional capital to make investments in our Internet
operations and we may not be able to obtain that capital on favorable terms or
at all.

Further, even if we are able to establish and expand our Internet business,
we will face numerous risks that may adversely affect the operations of our
Internet business. These risks include:

- Competition in the market for Internet services;

- Our limited operating history as an ISP;

- Our ability to adapt and react to rapid changes in technology related to
our Internet business;

- Uncertainty relating to the continuation of the adoption of the Internet
as a medium of commerce and communications;

- Vulnerability to unauthorized access, computer viruses and other
disruptive problems due to the accidental or intentional actions of
others;

- Adverse regulatory developments;

- The potential liability for information disseminated over our network; and

- Our need to manage the growth of our Internet business, including the need
to enter into agreements with other providers of infrastructure capacity
and equipment and to acquire other ISPs and Internet-related businesses on
acceptable terms.

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<PAGE>
OUR QUARTERLY OPERATING RESULTS FLUCTUATE SIGNIFICANTLY DUE TO MANY FACTORS AND
ARE THEREFORE DIFFICULT TO FORECAST.

Our quarterly operating results fluctuate significantly due to a number of
factors, some of which are beyond our control, and are therefore difficult to
forecast with any degree of accuracy. Because operating results fluctuate
significantly, we believe that period-to-period comparisons of our operating
results are not necessarily meaningful and should not be relied upon as
indications of our future performance.

- Call volume fluctuations, particularly in regions with relatively high
per-minute rates;

- The addition or loss of major customers, whether through competition or
merger;

- The loss of economically beneficial routing options for the termination of
our traffic;

- Pricing pressure resulting from increased competition; and

- Technical difficulties with or failures of portions of our network that
impact our ability to provide service to or bill our customers.

Our 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 our 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 our sales incentive plans; and

- Costs associated with changes in staffing levels of sales, marketing,
technical support and administrative personnel.

In addition, our operating results can vary due to factors such as:

- Changes in routing due to variations in the quality of vendor transmission
capability;

- Our 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 our expansion in international and
commercial markets; and

- General domestic and international economic and political conditions.

Further, we obtain a substantial portion of our transmission capacity on a
variable, per minute and short term basis; therefore, we may experience
unanticipated price increases and service cancellations. Since we do 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, our gross margins may also fluctuate significantly over short periods of
time. Competitive pricing pressures may also negatively affect our gross
margins.

WE MAY NOT BE ABLE TO EFFECTIVELY CONTINUE OUR REVENUE GROWTH.

Our revenues have increased from $67.0 million in 1995 to $1,061.8 million
in 1999. You should not consider this growth indicative of our future revenue
growth or operating results. We cannot predict whether we will be able to
achieve or maintain profitability on a quarterly or annual basis in the future.
If our revenue levels fall below expectations, net loss is likely to increase
disproportionately because a proportionately smaller amount of our operating
expenses varies with our revenues. This effect will probably increase as a
greater percentage of our cost of services are associated with owned and leased

25
<PAGE>
facilities. In our first two quarters of 1999, our operating results were below
the expectations of public market analysts and investors. In future quarters we
could have similar disappointments. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

WE MAY NOT BE ABLE TO EFFECTIVELY CONTINUE TO MANAGE OUR REVENUE GROWTH.

We cannot be certain that our personnel, systems, procedures and controls
will be adequate to support our future operations. As part of our significant
revenue growth, we have expanded, and plan to continue to expand, the number of
our employees and the geographic scope of our operations. These factors create
increased responsibilities for our management personnel and place increased
demands upon our operating and financial systems, which may lead to
unanticipated costs and divert our management's attention from day-to-day
operations. We may also need 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 necessary to implement our strategy is often lengthy. We expect
that our 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.

With the acquisitions of CEO, UDN, and PT-1, we began servicing commercial
markets, which are more labor intensive than the wholesale market, and as a
result have higher overhead costs. We also may need to update and improve our
billing systems and procedures and/or hire new management personnel to handle
the demands of the commercial markets. There is a risk that we will not be able
to effectively manage the costs of and risks associated with our expansion into
the commercial markets.

WE SELL A SIGNIFICANT PERCENTAGE OF OUR COMMERCIAL PRODUCTS ON CREDIT. IF WE
HAVE DIFFICULTY COLLECTING RISING ACCOUNTS RECEIVABLE OR WE FACE SIGNIFICANT
CREDIT LOSSES IT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS,
FINANCIAL CONDITION OR RESULTS OF OPERATIONS.

We sell prepaid cards on terms ranging from cash on delivery to thirty days
credit. As accounts receivable balances grow and we extend credit to new
commercial customers, we may not be able to adequately monitor and evaluate our
accounts receivable and credit risks and we may not be able to collect all the
money we are owed. If we have difficulty collecting rising accounts receivable
or we face significant credit losses it could have a negative effect on our
business, financial condition and results of operations. We usually sell prepaid
cards that we ship with common carriers or that we sell over the counter in
smaller amounts for cash on delivery. We extend 7-to-30 day credit to
distributors who only market our prepaid cards and who introduce our products
into new markets and territories. We also sell prepaid cards wholesale to
carriers on credit, requiring them to pay us in 7-to-30 days. Customers are
billed after services are rendered for dial around and presubscribed long
distance services.

INCREASED COMPETITION IN THE PREPAID CARD BUSINESS MAY FORCE US TO LOWER OUR
PRICES AND IN TURN MAY NEGATIVELY AFFECT OUR RESULTS OF OPERATIONS.

We cannot guarantee that we will be able to continue to provide
competitively priced prepaid cards to our distributors or that lower prices in
the prepaid card marketplace will not have a negative effect on the results of
our operations. The lack of customer loyalty to any particular prepaid card
company and the increased entry into the prepaid card market by various
competitors, including companies larger than us, could cause prices to drop
throughout the prepaid card industry. Because we depend on informal
relationships with independent distributors to market and sell our products,
increased competition and lower prices could force us to further lower our
prices to continue to sell prepaid cards to these distributors.

26
<PAGE>
Our operations and the prepaid card business that we operate through PT-1
face a number of risks with respect to competition, which can be summarized to
include the following:

- The increased entry into the market by prepaid card vendors, including
vendors that are larger than us;

- The low barriers to entry for new prepaid card operators;

- Our reliance on independent distributors to place prepaid cards in
commercial outlets;

- Our inability to create exclusive phone card distribution arrangements;

- Our inability to enter into written agreements with distributors and the
lack of written agreements among our distributors and any other party in
our prepaid card chain of supply;

- The price-sensitive, fickle nature of consumer demand; and

- The lack of customer loyalty to any particular prepaid card company.

THE GROWTH OF OUR TELECOMMUNICATIONS NETWORK WILL BE COSTLY, AND WE MAY NOT BE
ABLE TO INCREASE OUR NETWORK CAPACITY AT A RATE THAT IS COMMENSURATE WITH THE
DEMANDS OF OUR CUSTOMER BASE.

We are currently in the process of expanding our network and as we expand
our network and the volume of our network traffic, our cost of revenues will
increasingly consist of fixed costs arising from the ownership and maintenance
of switches and fiber optic cables. While we believe that in the long-term these
investments will reduce our cost of service and enhance our service offerings,
in the short-term, costs may increase and our operating margins may decrease. If
our traffic volume were to decrease, or fail to increase to the extent expected
or necessary to make efficient use of our network, our costs as a percentage of
revenues would increase significantly, which could have a material adverse
effect on our business, financial condition and results of operations.
Historically, we have relied primarily on leased transmission capacity for the
delivery of our telecommunications services. Our 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.
Recently, however, we have made considerable capital expenditures to expand our
network, and intend to continue to do so. See "Business--Network." Our strategy
is to establish significant traffic volumes prior to investing in fixed-cost
facilities. At the same time, the development of these facilities entails
significant costs and prior planning, which are based in part on our
expectations concerning future revenue growth and market developments.

In addition, our business depends in part on our ability to obtain
transmission facilities on a cost-effective basis. We may not be able to obtain
sufficient transmission facilities or access to undersea fiber optic cable on
economically viable terms. Our failure to obtain telecommunications facilities
that are sufficient to support our network traffic in a manner that ensures the
reliability and quality of our telecommunications services could have a material
adverse effect on our business, financial condition and results of operations.
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, our operations are subject to the risk that we
will not adequately anticipate the amount of traffic over our network, and may
not procure sufficient cable capacity or network equipment in order to ensure
the cost-effective transmission of customer traffic. Although we participate in
the planning of undersea fiber optic transmission facilities, we do not control
the construction of these facilities and must obtain access to these facilities
through partial ownership positions. If ownership positions are not available,
we must obtain access to these facilities through lease arrangements on
negotiated terms that may vary with industry and market conditions.

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<PAGE>
THE INTERNATIONAL NATURE OF OUR OPERATIONS EXPOSES US TO REGULATORY, POLITICAL
AND ECONOMIC RISKS.

We have to date generated a substantial majority of our revenues by
providing international telecommunications services to our customers on a
wholesale basis. We send traffic to numerous countries throughout the world,
including India, Mexico and China. The international nature of our 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, a reversal in the current trend toward deregulation of
telecommunications carriers could adversely affect our business. We will
continue to encounter these risks to the extent that we proceed with the planned
expansion of our international operations.

DEPENDENCE ON FOREIGN PARTNERS. We will increasingly rely on foreign
partners to (1) terminate our traffic in foreign countries and (2) assist in
installing transmission facilities and network switches, complying with local
regulations, obtaining required licenses and assisting with customer and vendor
relationships. We may have limited recourse if our foreign partners do not
perform under their contractual arrangements with us. As a result of our
arrangements with foreign partners, we may encounter significant legal,
regulatory or economic risks.

FOREIGN GOVERNMENT CONTROL AND HIGHLY REGULATED MARKETS. Foreign government
actions in the future could have a material adverse effect on our operations.
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 our competitors or companies, such as
national telephone companies, upon which we and our foreign partners may depend
for required interconnections to local telephone networks and other services. In
highly regulated countries in which we do not deal directly with the dominant
local exchange carrier, the dominant carrier may have the ability to terminate
service to us or to our foreign partner and, if this occurs, we may have limited
or no recourse. In some countries where competition is not yet fully
established, we transact business through an alternative operator. Foreign laws
in these countries may prohibit or impede new operators, like us, from offering
services.

FOREIGN CURRENCY FLUCTUATIONS. Our revenues and cost of long distance
services are sensitive to foreign currency fluctuations. We expect that an
increasing portion of our 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 our results of operations. Although we utilize hedging
instruments to reduce the risk of foreign currency fluctuations, we 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. The FCPA generally prohibits U.S. companies,
like us, and their intermediaries from bribing foreign officials for the purpose
of obtaining or keeping business. Past or future actions taken without our
knowledge by agents, strategic partners and other intermediaries could expose us
to liability under the FCPA. This liability could have a material adverse effect
on our business, operating results and financial condition.

OUR FAILURE TO MEET CURRENT OR FUTURE GOVERNMENT REGULATIONS COULD CAUSE US TO
INCUR PENALTIES. FUTURE GOVERNMENT REGULATIONS COULD ALSO INCREASE COMPETITION
OR IMPEDE THE EXPANSION OF OUR OPERATIONS.

Our business is subject to various U.S. and foreign laws, regulations,
agency actions and court decisions. The FCC regulates our U.S. international
telecommunications service offerings. The FCC could determine, by its own
actions or in response to a third party's filing, that some of our services,
termination

28
<PAGE>
arrangements, agreements with foreign carriers, transit or refile arrangements
or reports do not or did not comply with FCC policies and rules. As a result,
the FCC could order us to terminate noncompliant arrangements, fine us or revoke
our authorizations. Any of these actions could have a material adverse effect on
our business, operating results and financial condition. Generally, 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. We must file
reports and contracts with the FCC and pay regulatory fees, which are subject to
change. The FCC policies and rules discussed below also regulate our operations.

Future FCC action may also negatively affect our operations by:

- Intensifying the competition that we face;

- Increasing our operating costs;

- Disrupting our transmission arrangements; or

- Otherwise requiring us to modify our operations.

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 our market. The FCC may increase
regulatory fees by eliminating the exemption for carrier revenues obtained from
other carriers for certain fees or through other actions, which could increase
our costs of service. See "Business--Government Regulation."

OUR PRACTICES MAY BE INCONSISTENT WITH THE FCC'S INTERNATIONAL SETTLEMENT
POLICY.

The FCC's international private line 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. We may use IPLs to terminate
international switched telephone services on a few routes where the FCC has not
yet authorized ISR. On these routes, therefore, our termination arrangements may
not be consistent with the FCC's ISP. On any of these routes, however, to our
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, we believe our actions are consistent with the ISP's underlying
purpose.

A carrier generally may only offer ISR services to a foreign country if the
FCC has found (1) 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 FCC's
benchmark settlement rate or (2) 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.
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 ISP. The ISP requires that all U.S. carriers terminate
traffic with a foreign carrier on the same terms and receive inbound traffic
only in proportion to the volume of U.S. outbound traffic which they generate.

The FCC could also find that some of our IMTS arrangements with foreign
operators are inconsistent with the ISP. The ISP limits the IMTS arrangements
between U.S. international carriers and dominant foreign carriers for exchanging
public switched telecommunications traffic. This policy does not apply to ISR
services and does not apply to U.S. carrier agreements with non-dominant foreign
carriers. 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 some foreign carriers from entering into exclusive
arrangements 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.

29
<PAGE>
We use both transit and refile arrangements to terminate our international
traffic. Some of our transit or refile arrangements may violate the ISP or other
FCC policies. The FCC routinely approves transit arrangements by U.S.
international carriers. FCC 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.

OUR FAILURE TO COMPLY WITH STATE REGULATIONS COULD RESULT IN PENALTIES,
INCLUDING REVOCATION OF ONE OF OUR CERTIFICATES OF AUTHORITY.

Various state laws and regulations impose prior certification, notification,
registration, tariff and/or other requirements on our intrastate long distance
telecommunications operations and our subsidiaries. The vast majority of states
require that we and our subsidiaries apply for certification to provide
intrastate telecommunications services. In most jurisdictions, we also must file
and obtain prior regulatory approval of tariffs for intrastate services. State
regulatory authorities can generally condition, modify or revoke certificates of
authority or impose fines and other penalties for failure to comply with state
laws and regulations.

FOREIGN REGULATIONS MAY IMPEDE OUR EXPANSION INTO RECENTLY DEREGULATED
TELECOMMUNICATIONS MARKETS OUTSIDE OF THE U.S.

Foreign countries, either independently or jointly as members of the
International Telecommunications Union or other supra-national organizations,
may have adopted or may adopt laws or regulatory requirements regarding
telecommunications services that (1) would be difficult or expensive for us to
comply with, (2) could force us to choose less cost-effective routing
alternatives and (3) could adversely affect our business, operating results and
financial condition. We are subject to regulation in foreign countries, such as
the U.K. and Germany, in connection with some of our business activities. For
example, laws or regulations in either the transited or terminating foreign
jurisdiction may affect our use of transit, ISR or other routing arrangements.

If we seek to provide telecommunications services in other non-U.S. markets,
we will be subject to the developing laws and regulations governing the
competitive provision of telecommunications services in those markets. We cannot
be certain that the regulatory regime in any such countries will provide us with
practical opportunities to compete in the near future, or at all, or that we
will be able to take advantage of any such liberalization in a timely manner. We
currently plan to provide a limited range of services in Mexico and Belgium, as
permitted by regulatory conditions in those markets, and to expand our
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 us 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. See "Business--Government Regulation."

THE FCC REQUIRES US TO PAY FEES TO PAY PHONE OWNERS WHEN OUR CUSTOMERS USE
PAY PHONES TO ACCESS OUR SERVICES. WE MAY HAVE DIFFICULTY PASSING THESE
FEES ON TO OUR CUSTOMERS.

The Communications Act requires long distance carriers to compensate pay
phone owners when a pay phone is used to make a call through a toll-free number.
We cannot be certain that we will be able to continue to pass these costs on to
our prepaid card customers or that these charges will not have a negative effect
on our business, financial condition or results of operations. A small portion
of our prepaid card customers use pay phones to access our services through our
toll-free number. Recent regulations adopted under the Communications Act
require that we pay $0.24 per call, although the grounds for this fee are being
reconsidered by the FCC pursuant to a court order. In February 1998, PT-1 began
passing these costs on to prepaid card customers who use pay phones.

30
<PAGE>
OUR CUSTOMERS ARE SUBJECT TO GOVERNMENT REGULATIONS THAT MAY MATERIALLY
AFFECT THEIR ABILITY TO DO BUSINESS WITH US.

Our customers are also subject to actions taken by domestic or foreign
regulatory authorities that may affect their ability to deliver traffic to us.
Regulatory authorities have imposed sanctions on some of our customers in the
past. While these sanctions have not adversely impacted the volume of traffic
that we receive from these 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 our business, financial
condition and results of operations.

OUR BUSINESS IS DEPENDENT UPON THE INTEGRITY AND EXPANSION OF OUR NETWORK AND
TELECOMMUNICATIONS FACILITIES WHICH PUTS OUR OPERATIONS AT RISK TO OUTSIDE
FORCES BEYOND OUR CONTROL.

Any system or network failure that interrupts our operations could have a
material adverse effect on our business, financial condition or results of
operations. Our operations are dependent on our ability to successfully expand
our network and integrate new and emerging technologies and equipment into our
network, which are likely to increase the risk of system failure and to cause
strain upon the networks. Our operations also depend on our ability to protect
our 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 we have taken a number of steps to prevent
our network from being affected by natural or man-made disasters, such as
building redundant systems for power supply to the switching equipment, we
cannot be certain that these prophylactic measures will prevent our switches
from becoming disabled in the event of an earthquake, power outage or otherwise.
If our network fails, or our telephone traffic decreases significantly as a
result of a natural or man-made disaster, this could have a material adverse
effect on our relationships with our customers and our business, operating
results and financial condition. See "Business--Network."

WE ARE DEPENDENT ON A LIMITED NUMBER OF CUSTOMERS FOR A SUBSTANTIAL PERCENTAGE
OF OUR REVENUES. THE LOSS OF A SIGNIFICANT CUSTOMER COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS.

The loss of a significant customer could have a material adverse effect on
our business. While our most significant customers vary from quarter to quarter,
our five largest customers accounted for approximately 17.4% of our revenues in
1999. We could lose a significant customer for many reasons, including:

- The entrance into the market of significant new competitors with lower
rates than us;

- Transmission quality problems;

- Changes in U.S. or foreign regulations; or

- Unexpected increases in our cost structure as a result of expenses related
to installing a global network or otherwise.

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<PAGE>
WE HAVE OBTAINED BRAND AWARENESS WITH THE USE OF THE PT-1 NAME AND OTHER NAMES
THAT WE USE TO MARKET OUR PREPAID CARDS, BUT OUR CONTINUED USE OF THOSE NAMES
MAY BE CHALLENGED IN THE FUTURE.

We believe that the prepaid card products that we market through PT-1 have
achieved significant brand awareness with distributors, commercial outlets,
ethnic communities and other consumer groups. In 1998, PT-1 changed its name
from Phonetime, Inc. and the name of one of its prepaid cards from The PTI Card
to The PT-1 Card in response to letters challenging PT-1's use of these names.
We cannot guarantee that our continued efforts to protect the proprietary rights
of our PT-1 operations will be successful or that other companies will not
challenge the PT-1 trademarks and service marks. We also intend to expand the
marketing of prepaid cards in foreign countries. This may result in the use of
PT-1 prepaid cards in countries where intellectual property protections are
limited. Our inability to protect our proprietary rights or continue to use such
marks in the U.S. and abroad could have a negative effect on our business,
financial condition and results of operations.

WE MAY NOT BE ABLE TO RETAIN KEY PERSONNEL.

Our 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 our operations; in particular,
Christopher E. Edgecomb, our Chief Executive Officer. We maintain and are the
beneficiary under a key person life insurance policy in the amount of $10
million with respect to Mr. Edgecomb. We believe that our future success will
depend in large part upon our 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 we will be successful in
attracting and retaining such personnel. The loss of the services of one or more
of our key individuals, or the failure to attract and retain other key
personnel, could materially adversely affect our business, operating results and
financial condition. See "Management."

WE MAY FACE SIGNIFICANT COMPETITION FROM INTERNATIONAL AND DOMESTIC CARRIERS.

The international telecommunications industry is intensely competitive and
subject to rapid change. We believe that competition will continue to increase,
placing downward pressure on prices. Such pressure could adversely affect our
gross margins if we are not able to reduce our costs commensurate with such
price reductions. Our 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. We
also compete 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.
We are unable to predict which technological development will challenge our
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 members of the WTO in February 1997. Under the terms of 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 anti-competitive
behavior.

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. We also compete with Pacific Gateway
Exchange, Inc., and other U.S.-based and foreign long distance providers,
including the Regional Bell Operating Companies, which presently have FCC
authority to resell and

32
<PAGE>
terminate international telecommunication services. Many of these competitors
have considerably greater financial and other resources and more extensive
domestic and international communications networks than we do. Our business
would be materially adversely affected to the extent that a significant number
of such customers limit or cease doing business with us 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 us by reducing the number of potential customers for our
services.

EXPANSION INTO COMMERCIAL MARKET. With the acquisition of CEO, we 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 we will be able to compete successfully in the commercial market.

THE PRICE OF OUR STOCK IS SUBJECT TO FLUCTUATION BASED ON FACTORS BEYOND OUR
CONTROL.

The market price of the shares of our common stock has been highly volatile
since our initial public offering in June 1997 and may be significantly affected
by factors such as:

- Actual or anticipated fluctuations in our operating results;

- The announcement of potential acquisitions by us;

- 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; and

- 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 ours. These broad market
fluctuations may adversely affect the market price of our common stock.

FORWARD-LOOKING STATEMENTS

Certain statements contained in this Form 10-K, including without
limitation, statements containing the words "believe," "anticipate," "intend,"
"expect" 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 our actual results, performance
or achievements 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: (1) general economic and business
conditions, both nationally and in the regions in which we operate,
(2) industry capacity, (3) existing government regulations and changes in, or
the failure to comply with, government regulations, (4) competition,
(5) changes in business strategy or development plans, (6) our ability to manage
growth, (7) the availability and terms of capital to fund the expansion of our
business, including the acquisition of additional businesses, and (8) 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.

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<PAGE>
ITEM 2. PROPERTIES

Our principal offices are located in Santa Barbara, California in nine
facilities providing an aggregate of approximately 45,918 square feet of office
space expiring between June 2002 and February 2007. Additionally, we have office
and switching sites in the following locations (including the offices and switch
sites for PT-1 and our ALLSTAR Telecom division):

<TABLE>
<CAPTION>
APPROXIMATE
OFFICE SITES SQUARE FEET EXPIRATION DATE
------------ ----------- -------------------------------------
<S> <C> <C>
Vienna, Virginia............................... 3,909 May 2004
New York, New York (multiple leases)........... 4,625 December 2001--November 2008
Los Angeles, California (multiple leases)...... 24,898 June 2000--July 2005
Dallas, Texas.................................. 8,000 July 2000
Chelsea, Massachusetts......................... 2,000 July 2004
West New York, New Jersey...................... 2,000 June 2003
Rio Piedras, Puerto Rico....................... 1,200 July 2000
London, England................................ 5,414 December 2003
Jersey City, New Jersey........................ 5,565 January 2008
Los Angeles, California (multiple leases)...... 38,695 April 2001--September 2008
New York, New York (multiple leases)........... 62,491 March 2002--April 2008
Dallas, Texas.................................. 6,167 April 2007
Miami, Florida (multiple leases)............... 20,853 October 2007--March 2008
Atlanta, Georgia............................... 17,300 April 2008
Seattle, Washington............................ 7,020 June 2008
London, England................................ 5,600 July 2006
Hamburg, Germany............................... 9,981 January 2008--July 2009
Dusseldorf, Germany............................ 8,831 January 2008--July 2009
Frankfurt, Germany............................. 17,579 January 2008--August 2009
Munich, Germany................................ 7,473 February 2008--July 2009
Berlin, Germany................................ 6,719 April 2009
Hannover, Germany.............................. 5,857 March 2014
Nurnberg, Germany.............................. 5,454 June 2009
Stuttgart, Germany............................. 3,396 February 2009
Geneva, Switzerland............................ 5,578 May 2004
Vienna, Austria................................ 6,467 March 2000
Zurich, Switzerland............................ 663 May 2005
</TABLE>

A number of the above-listed leases grant us the right to extend the lease term
beyond the stated expiration date. The aggregate facility lease payments we made
in 1999 were approximately $9.9 million.

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

ITEM 3. LEGAL PROCEEDINGS

On February 14, 2000 and March 1, 2000 identical class action complaints
were filed against us and directors Christopher E. Edgecomb, Mary A. Casey, Mark
Gershien, Gordon Hutchins, Jr., John R. Snedegar, Arunas A. Chesonis, and Samer
Tawfik. The complaints allege causes of action for breach of fiduciary duty
arising from approval of the merger with World Access on the ground that the
consideration to be received is unfair, unconscionable and grossly inadequate.
The complaints seek both injunctive relief and damages, despite the fact that we
have not yet published the full terms of the proposed merger in our joint proxy
statement/prospectus. We believe that the complaints have no merit, and we are
prepared to defend such claims vigorously. A demurrer to the complaint was filed
on March 29, 2000 in the Santa Barbara Superior Court and is scheduled to be
heard on April 26, 2000.

On September 24, 1998, PT-1 was named in a cause of action filed in the
Supreme Court of the State of New York by certain former partners of Samer
Tawfik, one of our directors. The plaintiffs allege that

34
<PAGE>
PT-1 is a successor corporation to a prior company owned by the plaintiffs and
Mr. Tawfik and that they are entitled to a substantial percentage of PT-1. The
cause of action seeks compensatory and punitive damages.

On March 11, 1999, a proceeding was commenced by PT-1 by notice of petition
following the election by a PT-1 shareholder to dissent from our proposed merger
with PT-1 and following a demand for payment of the fair value of the
approximately 2,731,330 shares of PT-1 held by such shareholder. The proceeding
was commenced in the Supreme Court of the State of New York. The PT-1
shareholder is seeking damages in accordance with his appraisal rights under New
York law.

On April 9, 1999, we were named, along with PT-1, as defendants in a cause
of action brought before the Superior Court of New Jersey, and thereafter
removed to the federal district court in New Jersey, by Godotsoft LLC, a
licensor of certain software code, documentation and related technology utilized
by PT-1 in on-line rating and billing and dial around services. The plaintiff is
suing for breach and anticipatory breach of the license agreement between
Godotsoft and PT-1 and for breach of the duty of good faith and fair dealing.
The plaintiff is seeking judgment against us for an unspecified amount of
damages and punitive damages and seeks preliminary and permanent injunctive
relief prohibiting us from any further use, exploitation or development of the
licensed software.

We believe that the legal proceedings listed above have no merit and we are
prepared to defend such claims vigorously. From time to time, we are party to
various legal proceedings, including billing disputes and collection matters,
and actions brought by certain terminated employees that arise in the ordinary
course of business. Although the amount of any liability that could arise with
respect to these actions cannot be accurately predicted, in our opinion, any
such liability will not have a material adverse effect on our operations.

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

None.

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<PAGE>
PART II

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

Our 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 our 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, 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

FISCAL YEAR ENDED DECEMBER 31, 1999
First Quarter............................................... 15 3/4 9 5/8
Second Quarter.............................................. 11 7/8 7 7/16
Third Quarter............................................... 8 7/16 5 1/4
Fourth Quarter.............................................. 8 51/64 4 11/16
</TABLE>

The last reported sale price of our common stock on the Nasdaq National
Market on March 31, 2000 was $6.00 per share. As of March 31, 2000, there were
approximately 269 holders of record of our common stock.

We have never paid cash dividends on our common stock and have no intention
of paying cash dividends in the foreseeable future. We anticipate that all
future earnings, if any, generated from operations will be retained by us to
develop and expand our business. Any future determination with respect to the
payment of dividends will be at the discretion of the Board and will depend
upon, among other things, our operating results, financial condition and capital
requirements, the terms of then-existing indebtedness, general business
conditions and such other factors as the Board deems relevant.

We issued and sold the following unregistered securities during 1999:

1. On February 4, 1999, we acquired PT-1, a provider of international
and domestic long-distance and local telecommunications services primarily
through the marketing of prepaid calling cards. We issued 15,050,000 shares
of common stock (valued at $153.6 million) and $19.5 million in cash or
short-term promissory notes, made a $2 million payment to a former PT-1
shareholder and incurred estimated merger costs of $10 million for all
outstanding shares of PT-1. In connection with the acquisition, we placed,
along with PT-1, 500,000 shares of our common stock in escrow for
distribution to certain PT-1 distributors for no consideration. We are
recognizing the related compensation expense of approximately $2.8 million
over a four year vesting period. As a result of subsequent negotiations, we
entered into a distribution agreement with NY Phone Card Distributors LLC
("Distribution Co."), a partnership of distributors, on March 1, 2000. The
agreement provides for a total of 400,000 shares of our common stock to be
issued to Distribution Co. under the following arrangements: (i) 228,750
shares at the date of execution, (ii) 31,250 shares at the end of May 2000,
provided that the agreement is still in effect, and (iii) 140,000 shares
contingently issuable based on certain minimum purchase requirements. We
also issued 179,973 options for outstanding PT-1 options at an exercise
price of $0.01 per share of which 50% vested on the date of the merger, and
the remaining 50% vested on October 15, 1999.

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<PAGE>
2. On March 24, 1999, we issued approximately 1,005,000 shares of our
common stock in exchange for all of the outstanding capital stock of UDN,
plus 36,142 stock options in exchange for UDN options in a transaction
valued at $9,924,000.

3. During the year ended December 31, 1999, we granted to employees and
directors options to purchase an aggregate of approximately 2,150,708 shares
of our common stock pursuant to stock option agreements and our 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 us, to information about us and our operations.

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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.

The following selected consolidated financial data should be read in
conjunction with our 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,
1997, 1998, and 1999 and the balance sheet data at December 31, 1998 and 1999
are derived from audited financial statements included elsewhere in this Form
10-K. The consolidated statement of operations data for the years ended December
31, 1995 and 1996 and the balance sheet data at December 31, 1995, 1996 and 1997
are derived from audited financial statements not included in this Form 10-K.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues...................................... $66,964 $283,450 $434,086 $619,220 $1,061,774
Operating expenses:
Cost of services............................ 50,300 244,153 374,504 523,621 925,206
Selling, general and administrative......... 13,356 41,804 48,906 66,140 160,067
Depreciation and amortization............... 952 2,343 5,650 15,054 44,236
Loss on impairment of goodwill.............. -- -- -- 2,604 --
Merger expense.............................. -- -- 286 1,026 1,878
------- -------- -------- -------- ----------
Total operating expenses.................... 64,608 288,300 429,346 608,445 1,131,387
------- -------- -------- -------- ----------
Income (loss) from operations............... 2,356 (4,850) 4,740 10,775 (69,613)
Other income (expenses):
Interest income............................. 65 138 464 4,469 2,192
Interest expense............................ (214) (1,270) (2,617) (3,386) (9,895)
Legal settlements and expenses.............. -- (100) (1,653) -- --
Other....................................... (97) 186 208 (304) 1,373
------- -------- -------- -------- ----------
Income (loss) before provision for income
taxes..................................... 2,110 (5,896) 1,142 11,554 (75,943)
Provision (benefit) for income taxes.......... 66 577 2,905 9,923 (12,096)
------- -------- -------- -------- ----------
Net income (loss)............................. $ 2,044 $ (6,473) $ (1,763) $ 1,631 $ (63,847)
======= ======== ======== ======== ==========
Pro forma net income (loss) (unaudited)(1).... $ 478 $ (7,416) $ (1,958)
======= ======== ========
Income (loss) per common share(2)
Basic and Diluted........................... $ 0.10 $ (0.27) $ (0.06) $ 0.04 $ (1.12)
======= ======== ======== ======== ==========

Pro forma income (loss) per common share
(unaudited)(2)
Basic and Diluted........................... $ 0.02 $ (0.31) $ (0.06)
======= ======== ========
Weighted average number of common shares
outstanding--basic(2)
Basic....................................... 19,916 24,076 31,101 40,833 57,036
Diluted..................................... 19,916 24,076 31,101 42,434 57,036
</TABLE>

38
<PAGE>

<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit).................. $(1,065) $(10,913) $ 4,692 $ 46,698 $(197,921)
Total assets............................... 37,169 76,250 130,382 374,651 807,754
Total long-term liabilities, net of current
portion.................................. 2,980 8,834 14,800 33,048 96,693
Accumulated deficit........................ (6,294) (12,077) (13,737) (12,106) (75,953)
Stockholders' equity....................... 6,614 9,986 40,615 195,591 278,054
</TABLE>

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT RATE PER MINUTE DATA)
<S> <C> <C> <C> <C> <C>
OTHER CONSOLIDATED FINANCIAL AND
OPERATING DATA:
Capital expenditures(3)................ $ 2,922 $ 14,810 $ 26,584 $ 147,236 $ 150,588
North American wholesale billed minutes
of use(4)............................ 38,106 479,681 1,034,187 1,657,523 2,129,296
North American wholesale revenue per
billed minute of use(5).............. $0.4102 $ 0.4288 $ 0.3612 $ 0.3145 $ 0.2084
</TABLE>

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

(1) The pro forma net income or loss per share assumes that we and CEO, which we
acquired 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, notes and vendor financing
arrangements. 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 OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 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. OUR
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.

OVERVIEW

We are a multinational telecommunications services company focused primarily
on the international long distance market. We offer highly reliable, low-cost
switched voice services on a wholesale basis, primarily to U.S.-based long
distance carriers. We provide international long distance service to
approximately 200 countries through our flexible network comprised of various
foreign termination relationships, international gateway switches, leased and
owned transmission facilities and resale arrangements with other long distance
providers.

39
<PAGE>
We installed our 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 our revenues in 1995 were generated by the
commercial operations of CEO and UDN.

REVENUES. Prior to 1999, the majority of our revenues were generated by the
sale of international long distance services on a wholesale basis to other
carriers, primarily domestic, long distance providers. Due to the acquisition of
PT-1 on February 4, 1999, our mix of wholesale and commercial traffic in 1999
reached approximately 50% wholesale and 50% commercial. We record revenues from
the sale of long distance services at the time of customer usage. Our agreements
with our 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. Our commercial business segments are a mix of
traditional "picked" retail and commercial customers, accompanied by a
significant presence in the debit card and "dial around" business primarily as a
result of the PT-1 acquisition. Additionally, revenues in 1999 include broadband
sales.

Historically, we have increased total revenues from quarter to quarter,
often times by a significant percentage. Our total revenues increased 71.5% to
$1,061.8 million in 1999 over revenues of $619.2 million for 1998. Our North
American wholesale minutes of use have also greatly increased from quarter to
quarter, generally by amounts that exceed the relative increases in revenues. In
the year ended December 31, 1999, North American wholesale revenues decreased by
12.1% over revenues for 1998. Over the same period to period comparison, North
American minutes of wholesale use increased by 28.5%. The decline in North
American wholesale revenues was offset by an increase in commercial revenues
resulting from the acquisition of PT-1. There are a variety of reasons for the
growth in our call volume, including the growth of our North American customer
base, increased usage by existing North American customers, and increased
capacity over our 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, 1999, such rates declined by 32.3% from North American
wholesale rates per minute in 1998. The decline in North American wholesale
rates can be attributed to a number of factors, including a changing country mix
that includes a growing number of minutes routed by us to lower rate 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. Our 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 we continue
to route traffic to certain destinations at attractive rates, market conditions
have forced us to reduce our overall wholesale rate per minute.

Accordingly, we believe that the growth in our revenues has been fueled
almost entirely by our ability to diversify our business into the commercial
market. The general erosion in the rates per minute for North American wholesale
traffic has partially offset the contribution to the increase of revenues made
by such increased volume of North American commercial minutes. Through our
acquisition of PT-1, we continued a high level of revenue growth in 1999.
Although commercial rate per minute erosion is not as rapid as in the wholesale
marketplace, management recognizes that similar rate per minute erosion could
impact our ability to maintain our historic revenue growth rates. In addition,
on March 29, 2000 we entered into a Letter of Intent to sell all of the assets
of our prepaid calling card and dial around business operated by PT-1.

We completed our acquisition of T-One in March 1998. Revenues from T-One's
operations for the periods set forth below were not material to our overall
results of operations during such periods. We completed our acquisition of PT-1
on February 4, 1999. Revenues for PT-1 are not included for periods previous to
this date, as the acquisition was accounted for as a purchase.

COSTS OF SERVICES (EXCLUSIVE OF DEPRECIATION AND AMORTIZATION). We have
pursued a strategy of attracting customers and building calling volume and
revenue by offering favorable rates compared to

40
<PAGE>
other long distance providers. We continue our plan to lower cost of services
(exclusive of depreciation and amortization) by (1) expanding our owned network
facilities, (2) continuing to utilize our sophisticated information systems to
route calls over the most cost-effective routes and (3) leveraging our traffic
volumes and information systems to negotiate lower variable usage-based costs
with domestic and foreign providers of transmission capacity.

Costs of services (exclusive of depreciation and amortization) include those
costs associated with the transmission and termination of domestic and
international long distance services, as well as costs relating to broadband
sales. Currently, a majority of the transmission capacity we use is obtained on
a variable, per minute basis. As a result, some of our current costs of services
(exclusive of depreciation and amortization) are variable. Our contracts with
our vendors provide that rates may fluctuate, with rate change notice periods
varying from five days to one year, with certain of our longer term arrangements
requiring us to meet minimum usage commitments in order to avoid penalties. Such
variability and the short-term nature of many of the contracts subject us to the
possibility of unanticipated cost increases and the loss of cost-effective
routing alternatives. Each quarter management reviews the network cost of
services 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.

We began providing international long distance services to commercial
customers in certain European countries, including Germany in 1998. We began
providing long distance service to commercial markets in the U.S. with the
acquisition of CEO in November 1997. We continued our commercial expansion
efforts through the acquisition of PT-1 in 1999. We believe that traffic from
commercial customers will be more profitable than wholesale traffic. We expect
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, we believe that prices are
likely to continue to decline. Additionally, we believe that the increasing
trend of deregulation of international long distance telecommunications will
result in greater competition, which could adversely affect our revenue per
minute. We believe, 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, advertising, 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 our
recent growth, accelerated expansion into Europe and investment in systems and
facilities. We expect 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 our network facilities, our sales and
marketing efforts and our expansion into commercial markets.

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

FACTORS AFFECTING FUTURE OPERATING RESULTS. Our 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, we
believe that period-to-period comparisons of our operating results are not
necessarily meaningful and should not be relied upon as indications of future
performance.

Our 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. Our revenues in any given period can vary due to factors
such as (1) call volume fluctuations, particularly in regions with relatively
high per-minute rates, (2) the addition or loss of major customers, whether
through competition, merger, consolidation or otherwise, (3) the loss of
economically beneficial routing options for the termination of our traffic,

41
<PAGE>
(4) financial difficulties of major customers, (5) pricing pressure resulting
from increased competition, and (6) technical difficulties with or failures of
portions of our network that impact our ability to provide service to or bill
our customers. Our operating expenses in any given period can vary due to
factors such as (1) fluctuations in rates charged by carriers to terminate our
traffic, (2) increases in bad debt expense and reserves, (3) the timing of
capital expenditures, and other costs associated with acquiring or obtaining
other rights to switching and other transmission facilities, (4) changes in our
sales incentive plans, and (5) costs associated with changes in staffing levels
of sales, marketing, technical support and administrative personnel. In
addition, our operating results can vary due to factors such as (1) changes in
routing due to variations in the quality of vendor transmission capability, (2)
loss of favorable routing options, (3) the amount of, and the accounting policy
for, return traffic under operating agreements, (4) actions by domestic or
foreign regulatory entities, (5) the level, timing and pace of our expansion in
international and commercial markets, and (6) general domestic and international
economic and political conditions. Further, a substantial portion of
transmission capacity we use is obtained on a variable, per minute and
short-term basis, subjecting us to the possibility of unanticipated price
increases and service cancellations. Since we do 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, our operating results
are subject to significant fluctuations over short periods of time. Our
operating results also may be negatively impacted in the longer term by
competitive pricing pressures.

RECENT ACQUISITIONS AND DEVELOPMENTS

We have recently acquired the following companies and have taken the
following actions:

- PT-1 COMMUNICATIONS, INC. On February 4, 1999, we acquired PT-1, a
provider of international and domestic long-distance and local
telecommunications services primarily through the marketing of prepaid
calling cards. We issued 15,050,000 shares of common stock (valued at
$153.6 million) and $19.5 million in cash or short-term promissory notes,
made a $2 million payment to a former PT-1 shareholder and incurred
estimated merger costs of $10 million for all outstanding shares of PT-1.
In connection with the acquisition, we placed, along with PT-1,
500,000 shares of our common stock in escrow for distribution to certain
PT-1 distributors for no consideration. We are recognizing the related
compensation expense of approximately $2.8 million over a four year
vesting period. We also issued 179,973 options for outstanding PT-1
options at an exercise price of $0.01 per share, of which 50% vested on
the date of the merger, and the remaining 50% vested on October 15, 1999.
On March 29, 2000, we entered into a Letter of Intent with PT-1 Acquiror
for the sale of all of the assets of PT-1. Pursuant to the terms of the
Letter of Intent, PT-1 Acquiror will pay $150 million in cash for the
assets, less certain liabilities, and subject to adjustment based on the
results of a final audit to be conducted after the close of the PT-1 Sale.
We will record a loss on this transaction of approximately $100 million
upon closing which is expected to occur during the second quarter of
fiscal 2000.

- UNITED DIGITAL NETWORK, INC. On March 24, 1999, we completed the
acquisition of UDN for approximately 1,005,000 shares of our 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 UDN.

- MERGER WITH WORLD ACCESS, INC. On February 14, 2000, we entered into the
Merger Agreement with World Access pursuant to which all of our
outstanding capital stock will be exchanged for World Access Common Stock.
The expected Merger with World Access complements our existing wholesale
and commercial operations. The combined company is expected to increase
stockholder value through increased cost savings and synergies. However,
there can be no assurances that the Merger will be completed, or if the
Merger is completed, that additional cost savings and synergies will be
realized in 2000 and beyond. Pursuant to the terms of the Merger
Agreement, we are required to sell PT-1. On March 29, 2000, we entered
into a Letter of Intent with PT-1 Acquiror for the sale of all of the
assets of PT-1, less certain liabilities. While we believe the PT-1 Sale
and the World Access

42
<PAGE>
Merger will be completed, the failure to complete the PT-1 Sale or the
completion of the PT-1 Sale for less than $150 million may result in the
termination of the Merger Agreement and, consequently, prevent the Merger
with World Access.

- NOTE WITH WORLDCOM. On April 12, 2000 STAR entered into a note agreement
with WorldCom which provided for the conversion of $56.0 million of trade
payables into a note payable. The note is secured by our customer base,
bears interest at 16.0% per annum and is payable at the earlier of the
close of the World Access Merger or August 1, 2000.

43
<PAGE>
RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Revenues.................................................... 100.0% 100.0% 100.0%
Operating expenses:
Cost of services.......................................... 86.3 84.6 87.1
Selling, general and administrative expenses.............. 11.3 10.7 15.1
Depreciation and amortization............................. 1.3 2.4 4.2
Loss on impairment of goodwill............................ -- 0.4 --
----- ----- -----
Total operating expenses................................ 98.9 98.3 106.6
Income (loss) from operations............................... 1.1 1.7 (6.6)
----- ----- -----
Income (loss) before provision for income taxes............. 0.3 1.9 (7.2)
Provision for income taxes.................................. 0.7 1.6 (1.1)
----- ----- -----
Net income (loss)........................................... (0.4)% 0.3% (6.0)%
===== ===== =====
</TABLE>

YEARS ENDED DECEMBER 31, 1999 AND 1998

REVENUES: Total revenues increased 71.5% to $1,061.8 million in the twelve
months ended December 31, 1999 from $619.2 million in the twelve months ended
December 31, 1998. The increase is primarily a result of the continued growth in
the North American commercial operations due to the acquisition of PT-1, which
contributed revenues from prepaid calling card and dial around programs, and the
European operations.

Revenues from North American wholesale customers decreased 12.1% to $465.8
million in the twelve months ended December 31, 1999 from $529.8 million in the
twelve months ended December 31, 1998. North American wholesale revenues for the
twelve months ended December 31, 1999 include broadband sales activity. Minutes
of use generated by North American wholesale customers increased 28.5% to
2.1 billion minutes of use in the twelve months ended December 31, 1999, as
compared to 1.7 billion minutes of use in the comparable period of the year
prior. The increase in minutes of use reflects the continued growth in the
number of North American wholesale customers to 241 at December 31, 1999, up
from 151 customers at December 31, 1998, as well as an increase in usage by
existing customers. The decrease in revenue for the twelve months ended December
31, 1999 resulted from a significant decline in rates per minute, as the average
North American wholesale rate per minute of use declined approximately 32.3% to
$0.21 for the current twelve month period as compared to $0.31 for the twelve
month period ended December 31, 1998, reflecting continued lower prices on
competitive routes. This decline is also attributable to a change in country mix
that includes a larger proportion of lower rate per minute countries such as
Mexico, Germany, the United Kingdom, Canada and Japan. The period to period
decline in rate per minute was not a significant factor in the relative increase
in minutes of use.

North American commercial revenues increased over 680% to $471.5 million in
the twelve months ended December 31, 1999 from $60.2 million in the comparable
1998 period. The growth is due primarily to the consummation of the PT-1
acquisition in the first quarter of 1999 which diversified our revenue base with
both prepaid calling card and dial around programs. Minutes of use generated by
North American commercial customers increased over 780% to 3.0 billion minutes
in the twelve months ended December 31, 1999, as compared to 337.8 million
minutes of use in the comparable twelve month period of the prior year. The
average North American commercial rate per minute decreased approximately 11.1%
to $0.16 per minute in the twelve months ended December 31, 1999 from $0.18 per
minute in the twelve

44
<PAGE>
months ended December 31, 1998, primarily due to the increase in commercial
usage from the prepaid calling card and dial around programs.

The twelve months ended December 31, 1999 also includes revenues from the
European operations which increased over 320% to $124.4 million, as compared to
$29.2 million in the comparable twelve month period of 1998. We had twelve
switches throughout Europe at December 31, 1999, as compared to five switches at
December 31, 1998. Management believes that the prospects for growth in Europe
remain strong as STAR Telecommunications Deutschland GmbH is fully utilizing its
interconnect with Deutsche Telekom AG, as well as with other European PTTs. In
addition, management expects continued growth in European revenues as we further
expand into Austria and Switzerland.

COST OF SERVICES (EXCLUSIVE OF DEPRECIATION AND AMORTIZATION): Total cost
of services (exclusive of depreciation and amortization) increased 76.7% to
$925.2 million in the twelve months ended December 31, 1999 from $523.6 million
in the twelve months ended December 31, 1998 and increased as a percentage of
revenues for the same periods to 87.1% from 84.6%.

Cost of services (exclusive of depreciation and amortization) from North
American vendors increased 66.5% to $817.0 million in the twelve months ended
December 31, 1999 from $490.7 million in the comparable 1998 period and
increased as a percentage of North American revenues to 87.2% from 83.2%,
respectively. Cost of services (exclusive of depreciation and amortization)
includes costs relating to broadband sales during the twelve months ended
December 31, 1999. The growth in cost of services (exclusive of depreciation and
amortization) reflects the increase in minutes of use from the commercial usage
generated from prepaid calling card and dial around programs offset by an
overall declining average cost per minute. The average cost per minute declined
as a result of competitive pricing pressures, a larger proportion of lower cost
per minute countries, as well as an increasing proportion of traffic routed over
our proprietary network. Management believes that the average cost per minute
will continue to decline as we expand our domestic and international network.
Cost of services (exclusive of depreciation and amortization) for the twelve
months ended December 31, 1999, were negatively impacted as a result of delays
in delivery for domestic network capacity which resulted in redundant leased
line costs. The majority of this capacity was delivered and accepted in the
fourth quarter of 1999.

The twelve months ended December 31, 1999 also includes cost of services
(exclusive of depreciation and amortization) of $108.2 million generated from
the European operations, as compared to $33.0 million in the comparable twelve
months ended December 31, 1998. The increase in cost of services (exclusive of
depreciation and amortization) from the European operations was attributable to
increased usage and increased private line costs.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: For the twelve months ended
December 31, 1999, total selling, general and administrative expenses, exclusive
of merger expenses of $1.9 million, increased over 142% to $160.1 million from
$66.1 million in the twelve months ended December 31, 1998 and increased as a
percentage of revenues to 15.1% from 10.7% over the comparable 1998 period. The
increase is primarily a result of continued growth in our North American
commercial and European operations.

North American selling, general and administrative expenses increased by
128% to $126.2 million in the twelve months ended December 31, 1999 from $55.0
million in the comparable 1998 period. North American selling, general and
administrative expenses increased as a percentage of North American revenues to
13.5% from 9.3%, respectively. The increase is primarily a result of PT-1
operating expenses subsequent to the acquisition, which include payroll,
advertising, bad debt and other related expenses in connection with the
expansion of the prepaid calling card and dial around programs. In addition, the
increase is attributable to the sales force expansion and additional back office
support personnel for ALLSTAR in the first and second quarters of 1999. The
provision for bad debt expense increased $17.5 million from $7.6 million to
$25.0 million for the twelve month period ending December 31, 1999 as compared
to the twelve month period ending December 31, 1998. As a percent of revenues
bad debt expense increased from 1.2 percent in 1998 to 2.4 percent in 1999. This
increase primarily related to a change in customer base. During 1998
approximately 90 percent of our revenue was derived from

45
<PAGE>
wholesale customers who tend to be larger telecommunications companies with
greater financial resources and therefore represent minor credit risk. During
1999, we increased our retail business, primarily through our acquisition of
PT-1 in February 1999. As a result, our retail revenues increased significantly
during 1999 and represented approximately 43 percent of total revenues for the
year. Our retail customers are smaller companies and pose greater credit risk.
Management continually reviews credit and collections to determine the adequacy
of the reserve for bad debts. As the mix of our customer base continues to move
from wholesale to retail we expect this trend to continue.

Selling, general and administrative expenses related to our European
operations increased over 205% to $33.9 million in the twelve months ended
December 31, 1999, from approximately $11.1 million in the comparable 1998
period. The increase reflects our commitment to continue expansion efforts in
Europe by adding personnel to become a carrier in additional European countries
and to expand our commercial sales force and back office support personnel in
Germany.

DEPRECIATION AND AMORTIZATION: Depreciation and amortization expense
increased by 193.8% to $44.2 million for the twelve months ended December 31,
1999 from $15.1 million for the comparable 1998 period, and increased as a
percentage of revenues to 4.2% from 2.4% over the comparable period in the prior
year. The increase is primarily due to approximately $9.3 million of goodwill
amortization expense resulting from the PT-1 acquisition. In addition,
depreciation expense increased due to significant asset additions in Europe and
the inclusion of the depreciation expense for PT-1 assets. Depreciation expense
also increased as a result of our investment in domestic broadband capacity
during 1999. Depreciation and amortization attributable to North American assets
amounted to approximately $32.9 million. European operations realized total
depreciation and amortization of approximately $11.3 million. We expect
depreciation and amortization expense to continue to increase as a percentage of
revenues as we continue to expand our global telecommunications network.

INCOME (LOSS) FROM OPERATIONS: For the twelve months ended December 31,
1999, loss from operations was $69.6 million as compared to income from
operations of $10.8 million in the comparable 1998 period. Operating margin in
the twelve months ended December 31, 1999 was a negative 6.6% as compared to a
positive 1.7% in 1998. Operating margin decreased in the twelve months ended
December 31, 1999 due primarily to significant rate compression in the wholesale
market, goodwill amortization, and a $6.7 million retroactive rate adjustment
imposed on us by a European telecommunications carrier. The $6.7 million rate
dispute arose when we were notified in April 1999 that the European carrier was
imposing a retroactive rate increase effective February 1999. We have accrued
the amount but are in the process of negotiation. We do not expect any future
retroactive rate adjustments. As previously discussed, relatively larger bad
debt reserves were required as a result of the change in our customer base. We
also experienced increases in payroll, commission, and operating expenses as a
result of our expansion into commercial programs. In addition, our completion of
two significant acquisitions in 1999 and approximately $1.9 million in merger
expense contributed to the decline in Operating margin in the twelve months
ended December 31, 1999.

OTHER INCOME (EXPENSE): We reported other expense, net, of $6.3 million for
the twelve months ended December 31, 1999 as compared to other income, net, of
approximately $779,000 for the comparable 1998 period. This increase is
primarily due to an increase in interest expense to $9.9 million during the
twelve months of 1999 from $3.4 million in the comparable period in 1998 due to
interest incurred on borrowings from our line of credit and additional capital
lease obligations for switches.

During the twelve months ended December 31, 1998, we earned a substantial
amount of interest on the proceeds from our May 1998 secondary equity offering.
Therefore, interest income decreased to $2.2 million from $4.5 million for the
periods ended December 31, 1999 and 1998, respectively.

In addition, other income of $1.4 million reflects a $9.2 million gain from
the sale of investments during the twelve month period ended December 31, 1999,
which was partially offset by $7.8 million in other expense. Of the $7.8 million
in other expense, $3.5 million related to the recognition of foreign

46
<PAGE>
currency translation losses and $2.9 million related to the amendment and
termination of our credit facility with Foothill Capital Corporation.

PROVISION (BENEFIT) FOR INCOME TAXES: We recorded a tax benefit of $12.0
million in the twelve months ended December 31, 1999 due to operating losses.
The provision for income taxes for the twelve months ended December 31, 1998 was
$9.9 million.

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
American 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 our expanding transmission capacity. The increase in revenues was
partially offset by a decline in rates per minute, as the average North American
wholesale rate per minute of use declined from $0.36 per minute in 1997 to $0.31
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 decreased from $0.26
per minute in 1997 to $0.18 per minute in 1998, reflecting the continued pricing
pressures in the international market. Commercial minutes and average rates 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 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 our cost of
services and to grow our European commercial customer base.

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 our 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 of traffic routed over our proprietary network.
We currently have routes to 51 countries on our global network, up from 24
countries in 1997. Management believes that countries will continue to be added
to our global network thereby contributing to an overall decline in cost per
minute.

47
<PAGE>
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. We expect 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 our
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. We expect overall selling,
general and administrative expenses to continue to grow as a percentage of
revenues as we add personnel to staff our 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 our continuing expansion of our proprietary
international network, which includes purchases of switches, submarine cable and
leasehold improvements associated with switch sites. We expect depreciation
expense to continue to increase as a percentage of revenues as we continue to
expand our global telecommunications network. As of July 1, 1998, we 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 we
continue to diversify our revenue base and as traffic is migrated from leased
facilities onto our 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.

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 our 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 our profitability.

LIQUIDITY AND CAPITAL RESOURCES.

We have incurred significant operating and net losses over the past twelve
months. Several factors contributed to this situation. We experienced
significant pricing pressures in the wholesale market, with deteriorating
wholesale gross margins during the last twelve months. We continue to deploy new
international direct circuits in an effort to increase the number of on-net
countries which historically have provided higher wholesale margins. Wholesale
gross margins were further affected by delayed delivery of

48
<PAGE>
North American fiber routes by one of our major vendors which significantly
increased the cost of our leased lines. Completion of our domestic broadband
network is expected to provide margin improvement in the first quarter of 2000,
though there can be no assurances in that regard.

As of December 31, 1999, we had cash and cash equivalents of approximately
$25.6 million, short-term investments of $1.5 million, and a working capital
deficit of $197.9 million.

Net cash provided by operating activities was $40.1 million for the twelve
months ended December 31, 1999 as compared to net cash used of $12.4 million for
the comparable 1998 period. This increase is due primarily to increases in
accounts payable and accrued expenses offset by increases in accounts and notes
receivable. The increase in accounts and notes receivable was due to general
increases in volume and extended payment terms for certain customers.

Our investing activities used cash of $58.3 million during the twelve months
ended December 31, 1999 as compared to $101.0 million for the comparable 1998
period. This use of cash was the result of our continued investment in capital
expenditures. Capital expenditures for the twelve months ended December 31, 1999
related primarily to the continued development of our network which included
switch expansion, and the replacement of leased line facilities with IRU's and
ownership interests on both domestic and international cable systems. On
September 29, 1999, Star Telecommunications Deutschland GmbH entered into an
agreement with Deutsche Leasing AG to finance new and pre-existing equipment
through a capital lease-financing arrangement. Under the terms of the agreement,
they had the option to finance equipment up to 80DM million or roughly $45
million. Cash generated from this arrangement was used primarily to finance
pre-existing equipment resulting in a net decrease in capital expenditures as
presented in the Consolidated Statement of Cash Flows. This use of cash was
partially offset by the sale of substantially all of our investment in a
Competitive Local Exchange Carrier ("CLEC") in 1999.

Cash used by financing activities for the twelve months ended December 31,
1999, totaled $1.0 million as compared to cash provided by financing activities
of $158.5 million for the comparable 1998 period. This reflects additional
borrowings under our line of credit offset by repayments of the line of credit,
long-term debt and capital lease obligation payments. The variance from 1999 to
1998 relates primarily to our secondary offering which generated approximately
$144.7 million in cash for us in 1998. Our indebtedness at December 31, 1999 was
approximately $156.4 million, of which $112.9 million represented long-term debt
and $43.5 million represented short-term debt. Our debt is currently a
combination of capital lease obligations, vendor financing for operating
equipment and amounts due under our existing credit facility.

On June 9, 1999, we entered into a $100 million two-year credit facility
agreement with Foothill Capital Corporation ("Foothill"). We failed to meet the
EBITDA and tangible net worth covenants in accordance with the agreement for the
period ended June 30, 1999. On October 15, 1999, we received an amendment from
the lender group which included resetting the financial covenants in accordance
with our updated financial forecast. Interest rates were adjusted to 2.75% over
the prime rate of interest for the revolving line of credit and 8.0% over the
prime rate for the term note. The interest rate on the term note increased 1.0%
per month for the remainder of the term. We also agreed to the reduction of
eligible borrowings on the revolving portion of the line of credit to $30
million from $75 million as well as the payment of a supplemental agency fee of
$500,000. The expiration date of the $25 million term loan was also modified to
January 31, 2000

On November 30, 1999, we entered into a two year receivables financing
agreement with RFC Capital Corporation ("RFC"). This facility allows us to
borrow up to $75 million based upon our eligible accounts receivable, and
replaced our facility with Foothill. The facility bears interest at the rate of
prime plus 2.75% and expires on November 30, 2001. The facility was funded on
December 23, 1999, allowing us to avoid $1 million in supplemental term loan
fees from Foothill. Additionally, the RFC facility provides the flexibility to
borrow against foreign receivables which would allow us to significantly
increase our eligible receivables available for borrowings. As of December 31,
1999, we had $43.5 million outstanding and were in compliance with all
covenants.

49
<PAGE>
On April 12, 2000, we signed a promissory note with WorldCom for
$56.0 million dollars. This balance represents the total amount due to WorldCom
for termination and leased line services provided to us through December 31,
1999. The note, secured by our customer base, bears interest at a rate of 16.0%
per annum and does not require that any payment be made by us until the earlier
of the close of World Access Merger or August 1, 2000.

On February 11, 2000, we entered into the Merger Agreement with World
Access. The agreement calls for World Access to infuse cash in the form of
bridge loan of up to $35 million with $25 million to go to our U.S. operations
and $10 million to go to STAR Germany. Our anticipated financing arrangements
with World Access will provide for predetermined initial advances with
additional advances to be made solely in World Access' discretion.

We believe that the PT-1 Sale and the Merger with World Access will be
completed as scheduled and that the WorldCom note payable will be satisfied at
maturity. We believe that our operating cash flow, World Access line of credit
availability and the proceeds from the PT-1 Sale will be adequate to meet our
operating requirements for at least fiscal 2000.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

FOREIGN CURRENCY RISK. As a global enterprise, we face exposure to adverse
movements in foreign currency exchange rates. Our foreign currency exposures may
change over time as the level of activity in foreign markets grows which could
have a material adverse impact upon our financial results.

Certain of our assets, including certain bank accounts and accounts
receivable, exist in non dollar-denominated currencies, which are sensitive to
foreign currency exchange rate fluctuations. The non dollar-denominated
currencies are principally Deutschmarks and British Pounds Sterling.
Additionally, certain of our current and long-term liabilities are denominated
principally in Deutschmarks and British Pounds Sterling, which are also
sensitive to foreign currency exchange rate fluctuations.

We employ hedges in order to mitigate foreign currency exposure and intend
to do so in the future, in appropriate circumstances. The success of this
activity depends upon the estimation of international cash flow and intercompany
balances denominated in various currencies, primarily the Deutschmark. To the
extent that these forecasts are over- or understated during periods of currency
volatility, we could experience unanticipated currency gains or losses. We had
no foreign currency contracts outstanding as of December 31, 1999.

INTEREST RATE RISK. As of December 31, 1999, we had borrowings under our
receivables financing agreement amounting to $43.5 million. The interest rate on
the receivables financing line is equal to prime plus 2.75%. At any time, a
sharp rise in interest rates could have a material adverse impact upon our cost
of working capital and interest expense. We do not currently hedge this interest
rate exposure.

In addition, we had borrowings under long-term debt for capital equipment
amounting to $486,000 at December 31, 1999. The interest rate on this long-term
debt from our two outstanding obligations is 8.0% and LIBOR plus 6.0%. At any
time, a sharp rise in interest rates could have a material adverse impact upon
our cost of working capital and interest expense. We do not currently hedge this
interest rate exposure.

The following table presents the hypothetical impact on our financial
results for changes in interest rates for the variable rate obligations we held
at December 31, 1999. The modeling technique used measures the change in our
results arising from selected potential changes in interest rates. Market rate
changes reflect immediate hypothetical parallel shifts in the yield curve of
plus or minus 50 basis points ("BPS"), 100 BPS, and 150 BPS over a twelve month
time horizon.

50
<PAGE>
INTEREST RATE EXPOSURE ANALYSIS
INCREASE OR (DECREASE) IN ANNUAL INTEREST EXPENSE DUE TO CHANGES IN INTEREST
RATES
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
DESCRIPTION 50 BPS 100 BPS 150 BPS (50) BPS (100) BPS (150) BPS
----------- -------- -------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Line of Credit.......................... $218 $435 $653 $(218) $(435) $(653)
Long Term Debt.......................... $ 2 $ 5 $ 7 $ (2) $ (5) $ (7)
</TABLE>

ITEM 8. FINANCIAL STATEMENTS.

See the Index included at "Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 10-K."

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

None.

51
<PAGE>
PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

Our officers and directors who served as officers and directors in 1999 and
their ages as of March 6, 2000 are set forth in the table below. Mark Gershein
and Arunas A. Chesonis have since resigned from their positions as directors and
their seats on the Board are currently vacant. James E. Kolsrud has since
resigned from his position as Executive Vice President--Operations and
Engineering and his position is currently vacant.

<TABLE>
<CAPTION>
NAME AGE POSITION
---- -------- --------
<S> <C> <C>
Christopher E. Edgecomb(1)................ 41 Chief Executive Officer, Chairman of the
Board and Director
Mary A. Casey(1)(2)....................... 37 President, Secretary and Director
David Vaun Crumly......................... 36 Executive Vice President--Sales and
Marketing
James E. Kolsrud.......................... 55 Executive Vice President--Operations and
Engineering
Kelly D. Enos............................. 41 Chief Financial Officer, Treasurer and
Assistant Secretary
Mark Gershien............................. 48 Director
Gordon Hutchins, Jr.(3)................... 50 Director
John R. Snedegar(2)(3).................... 50 Director
Arunas A. Chesonis........................ 37 Director
Samer Tawfik.............................. 34 Director
</TABLE>

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

(1) Member of Non-Executive Stock Option Committee

(2) Member of Audit Committee

(3) Member of Compensation Committee

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

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

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

JAMES E. KOLSRUD has served as our Executive Vice President--Operations and
Engineering since September 1996 and resigned from such position effective
February 15, 2000. Prior to joining us, Mr. Kolsrud was an international
telecommunications consultant from March 1995 to September 1996.

52
<PAGE>
Prior to that time, he was a Vice President, Corporate Engineering and
Administration of IDB Communications Group, Inc. ("IDB"), an international
communications company, from October 1989 to March 1995, and prior to that time,
he was President of the International Division of IDB.

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

MARK GERSHIEN has served as one of our directors since March 1998, and
resigned as a director effective October 20, 1999. Mr. Gershien has been the
Senior Vice President of Sales and Marketing for Level 3 Communications, a
telecommunications and information services company, since January 1998. Prior
to that time, Mr. Gershien was the Senior Vice President of National Accounts
for WorldCom, Inc., an international telecommunications company, and President
and Chief Executive Officer of MFS Telecom, a division of MFS Communications,
Inc. prior to its merger with WorldCom, Inc.

GORDON HUTCHINS, JR. has served as one of our directors since January 1996.
Mr. Hutchins has been President of GH Associates, a telecommunications
consulting firm, since July 1989. Prior to founding GH Associates, Mr. Hutchins
served as President and Chief Executive Officer of ICC Telecommunications, a
competitive access provider, and held senior management positions with several
other companies in the telecommunications industry.

JOHN R. SNEDEGAR has served as one of our directors since January 1996. Mr.
Snedegar has been the Chief Executive Officer of Micro General Corp. since April
1999. He served as Chief Executive Officer of UDN from June 1990 to April 1999.
From June 1980 to February 1992, Mr. Snedegar was the President and Chief
Executive Officer of AmeriTel Management, Inc., a provider of long distance
telecommunications and management services. Mr. Snedegar is also a director for
StarBase Corporation, a software development company, Micro General Corporation,
a full service communications service provider, and Shopnow.com, an electronic
commerce software company. Mr. Snedegar also serves as President of Kendall
Venture Funding, Ltd., a reporting company in Alberta, Canada.

ARUNAS A. CHESONIS has served as one of our directors since May 1998, and
resigned as a director effective February 22, 2000. Mr. Chesonis is presently
the Chairman and Chief Executive Officer of PaeTec Communications, Inc., a local
exchange carrier located in Fairfield, New York. From May 1987 to April 1998,
Mr. Chesonis served in various executive positions with ACC Corp. and its
subsidiaries, including most recently President of ACC Corp. and President and
Chief Operating Officer of ACC Global Corp.

SAMER TAWFIK has served as one of our directors since February 1999. Mr.
Tawfik founded PT-1 in April 1995 and served as Chief Executive Officer of PT-1
until February 3, 1999, at which time Mr. Tawfik assumed the title of President
of PT-1 Communications. Mr. Tawfik resigned his position on December 31, 1999.
From 1984 to 1994, Mr. Tawfik was principal owner and manager of three amusement
companies.

BOARD COMPOSITION

In accordance with the terms of our Certificate of Incorporation, the terms
of office of the Board are divided into three classes: Class I, whose term will
expire at the annual meeting of stockholders to be held in 2001; Class II, whose
term will expire at the annual meeting of stockholders to be held in 2002; and
Class III, whose term will expire at the annual meeting of stockholders to be
held in 2000. The Class I directors are Gordon Hutchins, Jr. and John R.
Snedegar, the Class II directors are Mary A. Casey and Samer Tawfik, and the
Class III director is Christopher E. Edgecomb. At each annual meeting of
stockholders after the initial classification, the successors to directors whose
term will then expire will be elected to serve from the time of election and
qualification until the third annual meeting following election. This
classification of the Board may have the effect of delaying or preventing
changes in control or changes in our management.

53
<PAGE>
Each officer is elected by and serves at the discretion of our Board. Each
of our officers and directors, other than nonemployee directors, devotes
substantially full time to our affairs. Our nonemployee directors devote such
time to our affairs as is necessary to discharge their duties. There are no
family relationships among any of our directors and officers.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Exchange Act ("Section 16") requires our executive
officers, directors and beneficial owners of more than 10% of our common stock
(collectively, "Insiders") to file reports of ownership and changes in ownership
of our common stock with the Securities and Exchange Commission and to furnish
us with copies of all Section 16 forms they file. We became subject to Section
16 in conjunction with the registration of our common stock under the Exchange
Act effective June 12, 1997. Based solely on our review of the copies of such
forms we received, or written representations from certain reporting persons
that no reports on Form 5 were required for those persons, we believe that our
Insiders complied with all applicable Section 16 filing requirements during
1999.

ITEM 11. EXECUTIVE COMPENSATION

EXECUTIVE COMPENSATION

The following Summary Compensation Table sets forth the compensation earned
by our Chief Executive Officer and four other executive officers who earned (or
would have earned) salary and bonus in excess of $100,000 for services rendered
in all capacities to us and our subsidiaries (the "STAR Named Officers") for
each of the fiscal years in the three-year period ended December 31, 1999.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
SECURITIES
FISCAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)
--------------------------- -------- --------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Christopher E. Edgecomb ................ 1999 305,000 95,000 -- --
Chief Executive Officer and Chairman 1998 360,000 -- -- --
of the Board 1997 360,000 -- -- 3,202(1)

1999 292,000 95,000 -- 10,413(2)
Mary A. Casey .......................... 1998 240,000 -- -- 10,413(2)
President and Secretary 1997 217,500 -- -- 13,615(2)

David Vaun Crumly ...................... 1999 338,901(4) 20,000 137,746 9,000(2)
Executive Vice President-Sales and 1998 351,005 -- 4,200 7,000(2)
Marketing 1997 380,779 253 -- 6,202(3)

James E. Kolsrud ....................... 1999 237,500 20,000 39,500 9,600(2)
Executive Vice President-Operations 1998 200,833 354 4,200 9,600(2)
and Engineering 1997 177,083 1,014 -- 5,528(6)

1999 180,000 20,000 10,000 --
Kelly D. Enos .......................... 1998 160,833 259 4,200 --
Chief Financial Officer 1997 150,000 1,014 20,500 25,924(5)
</TABLE>

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

(1) Consists of life and health insurance premiums paid by us.

(2) Consists of a car allowance paid by us.

54
<PAGE>
(3) Consists of life and health insurance premiums and a car allowance paid by
us.

(4) Includes $218,901 of sales commissions.

(5) Consists of a moving allowance of $22,721 and life and health insurance
premiums paid by us.

(6) Consists of health insurance premiums paid by us.

The following table contains information concerning the stock option grants
made to each of the STAR Named Officers named below during the year ended
December 31, 1999.

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE OF ASSUMED
ANNUAL RATES
NUMBER OF OF STOCK PRICE
SECURITIES PERCENT OF TOTAL APPRECIATION FOR
UNDERLYING OPTIONS GRANTED OPTION TERM(1)
OPTIONS TO EMPLOYEES IN EXERCISE PRICE EXPIRATION --------------------
NAME GRANTED(#) FISCAL YEAR PER SHARE($/SH) DATE 5%($) 10%($)
---- ---------- ---------------- --------------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
10,000(2) 0.5% $13.00 2/8/09 81,756 207,187
2,746(3) 0.1% $16.39 3/24/09 28,305 71,729
David Vaun Crumly ...... 125,000(4) 5.8% $ 8.88 5/28/09 698,073 1,769,054

10,000(5) 0.5% $13.00 1/31/01 81,756 207,187
James E. Kolsrud ....... 29,500(5) 1.4% $ 4.91 1/31/01 91,092 230,846

Kelly D. Enos........... 10,000(2) 0.5% $13.00 2/08/09 81,756 207,187
</TABLE>

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

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

(2) The option becomes exercisable in four equal annual installments on
February 8, 2000, 2001, 2002 and 2003.

(3) The option becomes exercisable in four equal annual installments on
March 24, 2000, 2001, 2002 and 2003.

(4) The option becomes exercisable in four equal annual installments on May 28,
2000, 2001, 2002 and 2003.

(5) The option is fully vested as of February 11, 2000.

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

<TABLE>
<CAPTION>
SHARES NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
ACQUIRED ON (#)VALUE OPTIONS AT FY-END(#) OPTIONS AT FY-END($)
NAME EXERCISE REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ----------- ----------- ------------------------- ---------------------------------
<S> <C> <C> <C> <C>
David Vaun Crumly..... -- -- 65,904/103,376 $168,514/$0
James E. Kolsrud...... -- -- 0/197,450 $0/$1,028,070
Kelly D. Enos......... -- -- 130,139/58,311 $426,158/$147,479
</TABLE>

No stock appreciation rights were exercised during 1999 nor were any outstanding
at the end of that year.

55
<PAGE>
DIRECTOR COMPENSATION

Our non-employee directors receive $2,000 for each Board meeting attended
and $1,000 for each telephonic Board meeting. In addition, each non-employee
director is reimbursed for out-of-pocket expenses incurred in connection with
attendance at meetings of the Board and its committees. In 1999, Messrs.
Hutchins, Chesonis and Gershien were each granted stock options to purchase
10,000 shares of our common stock. See "Certain Relationships and Related
Transactions--Transactions with Outside Directors."

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee of the Board (the "Compensation Committee") was
formed in May 1996, and, in 1999, the members of the Compensation Committee were
Gordon Hutchins, Jr. and John R. Snedegar. Neither of these individuals was at
any time during the year ended December 31, 1999, or at any other time, our
officer or employee. The Non-Executive Compensation Committee of the Board (the
"Non-Executive Compensation Committee") was formed in 1997, and the members are
Christopher E. Edgecomb and Mary A. Casey. No member of the Compensation
Committee or the Non-Executive Compensation Committee served at any time during
the year ended December 31, 1999 as a member of the board of directors or
compensation committee of any entity that has one or more executive officers
serving as a member of our Board, Compensation Committee or Non-Executive
Compensation Committee. The Compensation Committee and the Non-Executive
Compensation Committee shall collectively be referred to hereafter as the
"Compensation Committees." See "Certain Relationships and Related
Transactions--Transactions with Outside Directors" for information regarding the
interests of Messrs. Snedegar and Hutchins in certain transactions and
arrangements involving us.

1997 OMNIBUS STOCK INCENTIVE PLAN

Our 1997 Omnibus Stock Incentive Plan (as amended, the "Omnibus Plan") was
adopted by the Board on January 30, 1997 as the successor to our 1996
Supplemental Option Plan (the "Supplemental Plan"). We have issued and reserved
for issuance an aggregate of 4,075,000 shares under the Omnibus Plan, comprised
of (i) the 2,050,000 shares that were available for issuance under the
Supplemental Plan, plus (ii) an increase of 2,025,000 shares. As of December 31,
1999, 371,074 shares had been issued under the Supplemental and Omnibus Plans,
options for approximately 3,648,833 shares were outstanding (594,446 of which
were granted under the Supplemental Plan) and options for approximately 55,093
shares remained available for future grant. Outstanding options, including
options granted under the Supplemental Plan, which expire or terminate prior to
exercise, will be available for future issuance under the Omnibus Plan. In
addition, if stock appreciation rights ("SARs") and stock units are settled
under the Omnibus Plan, then only the number of shares actually issued in
settlement will reduce the number of shares available for future issuance under
this plan.

Under the Omnibus Plan, employees, outside directors and consultants may be
awarded options to purchase shares of our common stock, SARs, restricted shares
and stock units. Options may be incentive stock options designed to satisfy
Section 422 of the Internal Revenue Code or nonstatutory stock options not
designed to meet such requirements. SARs may be awarded in combination with
options, restricted shares or stock units, and such an award may provide that
the SARs will not be exercisable unless the related options, restricted shares
or stock units are forfeited.

The Omnibus Plan is administered by the Board or the Compensation Committees
(the "Administrator"). The Administrator has the complete discretion to
determine which eligible individuals are to receive awards; determine the award
type, number of shares subject to an award, vesting requirements and other
features and conditions of such awards; interpret the Omnibus Plan; and make all
other decisions relating to the operation of the Omnibus Plan.

56
<PAGE>
The exercise price for options granted under the Omnibus Plan may be paid in
cash or in outstanding shares of our common stock. Options may also be exercised
on a cashless basis, by a pledge of shares to a broker or by promissory note.
The payment for the award of newly issued restricted shares will be made in
cash. If an award of SARs, stock units or restricted shares from our treasury is
granted, no cash consideration is required.

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

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

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

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

1996 STOCK INCENTIVE PLAN

Our 1996 Stock Incentive Plan ("the Plan") was adopted by the Board on
January 22, 1996, and amended on March 31, 1996. We have issued and reserved for
issuance an aggregate of 1,476,000 shares under the Plan. As of December 31,
1999, 1,165,572 shares had been issued under the Plan, options for 177,790
shares were outstanding and options for 132,638 shares remained available for
future grant. Outstanding options which expire or terminate prior to exercise
will be available for future issuance under the Plan.

Under the Plan, employees, outside directors and consultants may be awarded
options to purchase shares of our common stock. These options may be incentive
stock options designed to satisfy Section 422 of the Internal Revenue Code or
nonstatutory stock options not designed to meet such requirements.

The Plan is administered by the Board or the Compensation Committees (the
"Administrator"). The Administrator has the complete discretion to determine
which eligible individuals are to receive awards; determine the award type,
number of shares subject to an award, vesting requirements and other features
and conditions of such awards; interpret the Plan; and make all other decisions
relating to the operation of the Plan.

The exercise price for options granted under the Plan may be paid in cash
or, at the discretion of the Administrator, in outstanding shares of our common
stock. Options may also be exercised by delivery of an irrevocable direction to
a broker to sell shares and deliver all or part of the sales proceeds in payment
of the exercise price to us, by the proceeds of a loan secured by the shares or,
at the discretion of the Administrator, by full recourse promissory note.

57
<PAGE>
Upon a change in control, the Board may determine that an option shall
become fully exercisable as to all shares subject to such option. A change in
control includes an acquisition of more than 50% of our stock outstanding
immediately prior to such acquisition, a merger whereby our stockholders,
immediately after consummation of such transaction, own equity securities
possessing less than 50% of the voting power of the surviving or acquiring
corporation and the sale or other disposition of all or substantially all of our
assets. In the event that we merge with or into another entity in which our
stockholders receive cash in exchange for their shares, the Board may provide
that, upon consummation of such merger, all then outstanding options shall
automatically be converted into the right to receive cash in an amount equal to
the difference, if any, between the price to be received by holders of our
common stock for their shares and the respective exercise prices of the
outstanding options. If a change in control occurs and the Board does not
determine that an option shall become fully exercisable, the exercisability of
an option granted under the Plan shall not be affected, except that any options
held by an optionee whose employment with us is terminated other than for cause
within one year of such change of control shall be deemed fully exercisable as
of the date of such termination of employment.

The Board may amend or terminate the Plan at any time. Any amendment which
increases the number of shares which may be issued under the Plan, materially
increases the benefits accruing to persons eligible to purchase shares under the
Plan or materially modifies the requirements for eligibility under the Plan
shall not become effective unless and until approved by our stockholders. The
Plan shall expire on January 22, 2006, unless sooner terminated by the Board.

1996 OUTSIDE DIRECTOR NONSTATUTORY STOCK OPTION PLAN

Our 1996 Outside Director Nonstatutory Stock Option Plan (the "Director
Plan") was ratified and approved by the Board as of May 14, 1996. We have issued
and reserved for issuance an aggregate of 410,000 shares of our common stock
under the Director Plan. As of December 31, 1999, 82,000 shares had been issued
under the Director Plan, options for 71,500 shares were outstanding and options
for 256,500 shares remained available for future grant. If an outstanding option
expires or terminates unexercised, then the shares subject to such option will
again be available for issuance under the Director Plan.

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

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

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

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

58
<PAGE>
The Board may amend or terminate the Director Plan at any time. In any
event, the Director Plan will terminate on May 14, 2006, unless sooner
terminated by the Board.

EMPLOYMENT AGREEMENTS AND CHANGE OF CONTROL ARRANGEMENTS

We have an employment agreement with Mary A. Casey, pursuant to which Ms.
Casey holds the position of President, is paid an annual salary of $20,000 per
month, subject to adjustment to reflect increases in the Consumer Price Index,
was entitled to purchase 1,677,273 shares of our common stock, and is eligible
to receive a bonus, as determined by the Chief Executive Officer and the Board.
The agreement provides that if Ms. Casey's employment is terminated without
cause, she will continue to receive the compensation provided in the agreement
until its expiration on December 31, 2000, less any amounts she earns from other
employment. Under the agreement and the other employment agreements discussed
below, cause is defined as a material act of dishonesty, fraud or
misrepresentation or any act of moral turpitude, the default in the performance
of the person's duties or if the person fails to execute the specific
instructions of the Board or management and does not correct the failure after
receiving notice from us.

In January 1996, we entered into an employment agreement with David Vaun
Crumly pursuant to which Mr. Crumly became Executive Vice President--Sales and
Marketing. The agreement provides for an annual salary of $10,000 per month with
an annual increase, plus incentive bonuses tied to our gross revenues. The
agreement also provides for a commission on certain of our accounts and an
option to purchase 369,000 shares of our common stock at an exercise price of
$0.73 per share. In addition, in the event of a Sale Transaction, Mr. Crumly
will receive a bonus payment equal to the lesser of $1,500,000 or a percentage
of the monthly gross sales of accounts relating to customers introduced to us by
Mr. Crumly. If his employment is terminated in certain circumstances, without
cause, within four months after a Sale Transaction (as defined below), Mr.
Crumly is entitled to receive the compensation provided in this agreement, minus
any compensation earned by other employment, until the expiration of the
agreement on December 31, 2000. A Sale Transaction is an acquisition of more
than 75% of our voting securities, pursuant to a tender offer or exchange offer
approved in advance by the Board.

In December 1996, we entered into an employment agreement with Kelly D.
Enos, pursuant to which Ms. Enos became Chief Financial Officer. The agreement
provides for an annual salary of $150,000 (which has been increased to $180,000)
and an option to purchase 153,750 shares of our common stock at an exercise
price of $4.00 per share. The agreement also provides that Ms. Enos will receive
a severance payment equal to the compensation which she would have received
under the remaining term of the agreement, or December 31, 2000, if terminated
without cause. The amounts Ms. Enos earns by virtue of other employment will
reduce the amounts she receives under the agreement prior to the expiration of
the term.

In September 1996, we entered into an employment agreement with James
Kolsrud, pursuant to which Mr. Kolsrud became Executive Vice
President--Operations and Engineering. The agreement provides for a monthly
salary of $20,000. The agreement also provides for Mr. Kolsrud to receive a
severance payment equal to the compensation which he would have received under
the remaining term of the agreement, or December 31, 2000, if terminated without
cause. The amounts Mr. Kolsrud earns by virtue of other employment will reduce
the amounts he receives under the agreement prior to the expiration of the term.
We accepted Mr. Kolsrud's resignation from his position as Executive Vice
President--Operations and Engineering effective February 25, 2000. We
accelerated the vesting of Mr. Kolsrud's options effective upon his resignation
and extended the period during which he may exercise such options to
January 31, 2001.

59
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information known to us regarding
beneficial ownership of our common stock as of March 31, 2000 by (i) each person
who is known by us to own beneficially more than five percent of our common
stock, (ii) each of our directors, (iii) each of the STAR Named Officers, and
(iv) all current officers and directors as a group.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED(1)
-----------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT(2)
------------------------------------ ---------- ----------
<S> <C> <C>
West Highland Capital(3).................................... 7,737,660 13.2%
Gotel Investments Ltd.(4)................................... 4,192,296 7.1%
Gordon Hutchins(5).......................................... 202,260 *
John R. Snedegar(6)......................................... 20,250 *
Mark Gershien(6)............................................ 20,250 *
Arunas A. Chesonis(6)....................................... 20,000 *
Christopher E. Edgecomb(7).................................. 13,166,265 22.4%
Mary A. Casey............................................... 1,596,613 2.7%
David Vaun Crumly(8)........................................ 803,936 1.4%
James E, Kolsrud(9)......................................... 319,197 *
Kelly D. Enos(10)........................................... 151,859 *
Samer Tawfik................................................ 9,138,717 15.6%
All directors and executive officers as a group (10
persons)(11).............................................. 25,439,347 42.9%
</TABLE>

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

* Represents beneficial ownership of less than 1% of the outstanding shares of
our common stock.

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

(2) Percentage of beneficial ownership is based on 58,693,650 shares of our
common stock outstanding as of March 31, 2000. The number of shares of our
common stock beneficially owned includes the shares issuable pursuant to
stock options and warrants that are exercisable within sixty days of
March 31, 2000.

(3) Represents 2,079,500 shares of our common stock held by West Highland
Capital, Inc., 1,789,330 shares of our common stock held by Estero Partners,
LLC, 2,079,500 shares of our common stock held by Lang H. Gerhard, 1,539,790
shares of our common stock held by West Highland Partners, L.P., and 249,540
shares of our common stock held by Buttonwood Partners, L.P., as reported by
West Highland Capital, Inc. in its Schedule 13G filed with the Securities
and Exchange Commission on February 11, 1999.

(4) Represents 1,397,432 shares of our common stock held by Gotel Investments
Ltd., 1,397,432 shares of our common stock held by Global Investments Trust,
and 1,397,432 shares of our common stock held by Intertrust (Guernsey)
Limited, as reported by Gotel Investments Ltd. in its Schedule 13G filed
with the Securities and Exchange Commission on February 9, 1999.

(5) Consists of 3,660 shares of our common stock and 198,600 shares of our
common stock issuable upon the exercise of stock options exercisable within
sixty days of March 31, 2000.

60
<PAGE>
(6) Consists entirely of shares of our common stock issuable upon the exercise
of stock options exercisable within sixty days of March 31, 2000.

(7) Mr. Edgecomb disclaims beneficial ownership with respect to 4,100 shares of
our common stock.

(8) Consists of 738,032 shares of our common stock, and 65,904 shares of our
common stock issuable upon the exercise of stock options exercisable within
sixty days of March 31, 2000.

(9) Consists of 121,747 shares of our common stock held in joint tenancy and
197,450 shares of our common stock issuable upon the exercise of stock
options exercisable within sixty days of March 31, 2000.

(10) Consists of 21,720 shares of our common stock and 130,139 shares of our
common stock issuable upon the exercise of stock options exercisable within
sixty days of March 31, 2000.

(11) Consists of 652,593 shares of our common stock issuable upon the exercise
of stock options exercisable within sixty days of March 31, 2000.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

TRANSACTIONS WITH OUTSIDE DIRECTORS

During 1998, we invested $5.1 million in the common stock of PaeTec
Communications, Inc. ("PaeTec"), a competitive local exchange carrier. Our
investment represented approximately 19% of PaeTec's equity outstanding at
December 31, 1998. Arunas Chesonis, a former director, is a majority shareholder
and the Chief Executive Officer of PaeTec. During the third and fourth quarters
of 1999, we sold substantially all of our interest for $14.3 million dollars. On
February 22, 2000, Arunas Chesonis resigned from our Board.

At December 31, 1998 and 1999, we had an obligation to John Snedegar, a
director, in the amount of $1 million with interest at 10%.

GH Associates, an affiliate of Gordon Hutchins, Jr., a director, provides
consulting services to us. For the year ended December 31, 1999, we paid
approximately $33,612 to GH Associates for general business consulting services
relating to the telecommunications industry and for the performance of other
tasks requested by our Chief Executive Officer, President and Board.

During 1999, our non-employee directors were granted nonstatutory stock
options under the Director Plan. See "Management--Director Compensation."

TRANSACTIONS WITH EXECUTIVE OFFICERS

For the year ended December 31, 1999, we provided $2.1 million in long
distance services to Pae Tec. Pae Tec is a company in which Mr. Edgecomb is a
member of the board of directors and approximately a 10% shareholder. During
1999, we purchased $43,000 in services from Pae Tec.

On April 12, 1999, we provided Kelly Enos, our Chief Financial Officer, with
a revolving line of credit in the aggregate amount of approximately $111,000 at
an annual interest rate of 8%. Approximately $120,000 of this debt was
outstanding at March 31, 2000.

On April 12, 1999, we provided James Kolsrud, our Executive Vice
President--Operations and Engineering, with a revolving line of credit in the
aggregate amount of approximately $100,000 at an annual interest rate of 8%.
Approximately $107,000 of this debt was outstanding at March 31, 2000.

Ms. Enos received incentive stock options to purchase 10,000 shares of our
common stock at an exercise price of $13.00 in February 1999.

61
<PAGE>
Mr. Crumly received incentive stock options to purchase 125,000 shares of
our common stock at an exercise price of $8.88 in May 1999, incentive stock
options to purchase 2,746 shares of our common stock at an exercise price of
$16.39 in March 1999 and incentive stock options to purchase 10,000 shares of
our common stock at an exercise price of $13.00 in January 1999.

Mr. Kolsrud received incentive stock options to purchase 29,500 shares of
our common stock at an exercise price of $4.91 in October 1999 and incentive
stock options to purchase 10,000 shares of our common stock at an exercise price
of $13.00 in February 1999.

INDEMNIFICATION OF DIRECTORS AND OFFICERS

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

Our Bylaws provide that we shall indemnify our directors and officers to the
fullest extent permitted by Delaware law, including in circumstances in which
indemnification is otherwise discretionary under Delaware law. We have also
entered into or will enter into indemnification agreements with our officers and
directors containing provisions that may require us, among other things, to
indemnify such officers and directors against certain liabilities that may arise
by reason of their status or service as directors or officers (other than
liabilities arising from willful misconduct of a culpable nature), to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified, and to obtain directors' and officers' insurance if
available on reasonable terms.

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

62
<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, 1998 and
1999...................................................... F-2

Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999.......................... F-3

Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997, 1998 and 1999.............. F-4

Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999.......................... 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>

63
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------------------- ------------------------------------------------------------
<S> <C>
4.6 Registration Rights Agreement dated as of March 10, 1998
between the Registrant and Taha Mikati.(4)
4.7 Registration Rights and Restricted Share Agreement dated as
of February 3, 1999 between the Registrant and the
shareholders named therein.(7)
10.l Form of Indemnification Agreement.(1)
10.2 1996 Amended and Restated Stock Incentive Plan.(1)
10.3 1996 Outside Director Nonstatutory Stock Option Plan.(1)
10.4 1997 Omnibus Stock Incentive Plan.(1)
10.5 Employment Agreement between the Registrant and Mary Casey
dated July 14, 1995, as amended.(1)
10.6 Employment Agreement between the Registrant and Kelly Enos
dated December 2, 1996.(1)
10.7 Employment Agreement between the Registrant and David Vaun
Crumly dated January 1, 1996.(1)
10.8 Intentionally omitted.(1)
10.9 Consulting Agreement between the Registrant and Gordon
Hutchins, Jr. dated May 1, 1996.(1)
10.10 Nonstatutory Stock Option Agreement between the Registrant
and Gordon Hutchins, Jr. dated May 15, 1996.(1)
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.(1)
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.(1)
10.13 Office Lease between the Registrant and WHUB Real Estate
Limited Partnership dated June 28, 1996, as amended.(1)
10.14 Standard Form of Office Lease between the Registrant and
Hudson Telegraph Associates dated February 28, 1996.(1)
10.15 Agreement for Lease between the Registrant and Telehouse
International Corporation of Europe Limited dated
July 16, 1996.(1)
10.16 Sublease between the Registrant and Borton, Petrini & Conron
dated March 20, 1994, as amended.(1)
10.17 Office Lease between the Registrant and One Wilshire Arcade
Imperial, Ltd. dated June 28, 1996.(1)
10.18 Lease Agreement between the Registrant and
Telecommunications Finance Group dated April 6, 1995.(1)
10.19 Lease Agreement between the Registrant and
Telecommunications Finance Group dated January 3, 1996, as
amended.(1)
10.20 Master Lease Agreement between the Registrant and NTFC
Capital Corporation dated December 20, 1996.(1)
10.21 Variable Rate Installment Note between the Registrant and
Metrobank dated October 4, 1996.(1)
10.22 Assignment of Purchase Order and Security Interest between
the Registrant and DSC Finance Corporation dated
January 1, 1996.(1)
10.23 Line of Credit Promissory Note between the Registrant and
Christopher E. Edgecomb dated November 7, 1996, as
amended.(1)
10.24 Office Lease Agreement between the Registrant and Beverly
Hills Center LLC effective as of April 1, 1997.(1)
10.25 Credit Agreement dated as of September 30, 1997 among the
Registrant, the financial institutions party thereto and
Sanwa Bank California, as amended.(4)
</TABLE>

64
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------------------- ------------------------------------------------------------
<S> <C>
10.26 Office Lease between the Registrant, Hudson Telegraph
Associates and American Communications Corp., as
amended.(4)
10.27 Amendment Number Three to Employment Agreement between the
Registrant and Mary A. Casey dated as of July 1, 1997.(4)
10.28 Amendment Number One to Employment Agreement between the
Registrant and Kelly D. Enos dated as of November 12,
1997.(4)
10.29 Amendment Number One to First Restatement of Employment
Agreement between the Registrant and James Kolsrud dated
as of June 16, 1997.(4)
10.30 Amendment Number One to Employment Agreement between the
Registrant and David Vaun Crumly dated as of November 11,
1997.(4)
10.31 First Amendment to Amended and Restated 1996 Stock Incentive
Plan.(4)
10.32 Agreement dated as of December 1, 1997 between the
Registrant and Nortel Dasa Network Systems GmbH & Co.
KG.(5)
10.33 Leasing Agreement between the Registrant and Nortel Dasa
Network Systems GmbH & Co. KG.(4)
10.34 Guarantee Agreement between the Registrant and Nortel Dasa
Network Systems GmbH & Co. KG.(4)
10.35 Note and Security Agreement dated as of December 18, 1997
between the Registrant and NationsBanc Leasing
Corporation.(4)
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).(4)
10.37 Intentionally omitted.
10.38 Lease Agreement dated July 29, 1996 between the Registrant
and Telecommunications Finance Group.(4)
10.39 Promissory Note issued by Christopher E. Edgecomb in favor
of the Registrant dated November 26, 1997.(4)
10.40 Stock Pledge Agreement dated November 26, 1997 between the
Registrant and Christopher E. Edgecomb.(4)
10.41 Commercial Lease dated October 31, 1997 between the
Registrant and Prinzenpark GbR.(4)
10.42 Commercial Lease dated October 9, 1997 between the
Registrant and WSL Weststadt Liegenschafts GmbH.(4)
10.43 Office Lease between the Registrant and Airport-Center KGHP
Gewerbeban GmbH & Cie.(4)
10.44 Lease dated November 19, 1997 between the Registrant and
DIFA Deutsche Immobilien Fonds Aktiengesellschaft.(4)
10.45 Second Restatement of Employment Agreement between the
Registrant and James Kolsrud dated as of July 9, 1998.(6)
10.46 First Amendment to 1997 Omnibus Stock Incentive Plan.(6)
10.47 Loan and Security Agreement dated as of June 9, 1999 by and
among the Registrant and certain of its subsidiaries as
the Obligors, and the financial institutions that are
identified therein as the Lenders, and Foothill Capital
Corporation ("Foothill") as Agent.(8)
10.48 Pledge Agreement dated as of June 9, 1999 by and among the
Registrant certain of its subsidiaries and Foothill, as
Agent.(8)
10.49 General Continuing Guaranty dated as of June 9, 1999
delivered by certain subsidiaries of the Registrant to
Foothill, as Agent.(8)
10.50 Suretyship Agreement dated as of June 9, 1999 among
Foothill, as Agent, the Registrant and certain of its
subsidiaries.(8)
10.51 Intercompany Subordination Agreement dated as of June 9,
1999 among the Registrant, certain of its subsidiaries and
Foothill, as Agent.(8)
</TABLE>

65
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------------------- ------------------------------------------------------------
<S> <C>
10.52 Trademark Security Agreement dated as of June 9, 1999 by the
Registrant certain of its subsidiaries and Foothill, as
Agent.(8)
10.53 Copyright Security Agreement dated as of June 9, 1999 by the
Registrant certain of its subsidiaries and Foothill, as
Agent.(8)
10.54 Receivables Sale Agreement dated as of November 30, 1999, by
and between the Registrant, the entities listed on the
signature pages thereto, and RFC Capital Corporation as
Purchaser.(9)
10.55 Amendment Number Four to Employment Agreement between the
Registrant and Mary A. Casey dated as of April 21,
1999.(9)
10.56 Amendment Number Two to Employment Agreement between the
Registrant and Kelly D. Enos dated as of April 21,
1999.(9)
10.57 Amendment Number One to Second Restatement of Employment
Agreement between the Registrant and James Kolsrud dated
as of May 5, 1999.(9)
10.58 Amendment Number Two to Employment Agreement between the
Registrant and David Vaun Crumly dated as of April 21,
1999.(9)
10.59 Amendment Number Three to Employment Agreement between the
Registrant and David Vaun Crumly dated as of November 11,
1999.(9)
10.60 Revolving Line of Credit Promissory Note dated April 12,
1999 between the Registrant and Kelly Enos.(9)
10.61 Revolving Line of Credit Promissory Note dated April 12,
1999 between the Registrant and James Kolsrud.(9)
10.62 Master Lease Purchase Agreement dated February 20, 1998, as
amended, by and among the Registrant, PT-1 and Chase
Equipment Leasing.(9)
10.63 Office and Switch Lease dated April 8, 1997 between PT-1 and
Golden Union, LLC, C/O Alma Realty Co., 28-18 31st Street,
Astoria, NY 11102.(9)
10.64 Office and Switch Lease dated October, 1997 between PT-1 and
Evergreen America Corporation.(9)
10.65 Office and Switch Lease dated July, 1997 between the
Registrant and NWT Partners, Ltd.(9)
10.66 Office Switch Lease between STAR Telecommunications
Deutschland GmbH ("STAR GmbH") and Prinzzenpark GbR
Kanzlerstr, 4.(9)
10.67 Office and Switch Lease dated April 1, 1999 between STAR
GmbH and Rentax Gesellschaft Fur Grundbesitzan-Lagen GmbH.
(English language summary of the original German language
lease is attached thereto.)(9)
10.68 Office and Switch Lease dated March 1, 1999 between STAR
GmbH and Gewerbehof Athen. (English language summary of
the original German language lease is attached
thereto.)(9)
10.69 Office and Switch Lease dated June 1, 1999 between STAR GmbH
and Hamm & Co. (English language summary of the original
German language lease is attached thereto.)(9)
10.70 Office and Switch Lease dated February 1, 1999 between STAR
GmbH and Rudolf Geray. (English language summary of the
original German language lease is attached thereto.)(9)
10.71 Office and Switch Lease dated August 1, 1999 between STAR
GmbH and Erbengemeinschaft Fiszman. (English language
summary of the original German language lease is attached
thereto.)(9)
10.72 Office and Switch Lease dated February 1, 1999 between STAR
GmbH and Kallco Projekt Projekges GmbH. (English language
summary of the original German language lease is attached
thereto.)(9)
10.73 Office and Switch Lease dated June 1, 1999 between STAR GmbH
and Comptoir Genvois Immobilier. (English language summary
of the original German language lease is attached
thereto.)(9)
</TABLE>

66
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------------------- ------------------------------------------------------------
<S> <C>
10.74 Office and Switch Lease between PT-1 and NWT Partners,
Ltd.(9)
21.1 Subsidiaries of the Registrant.(9)
23.1 Consent of Arthur Andersen LLP, Independent Public
Accountants.(X)
24.1 Power of Attorney.(9)
27.1 Financial Data Schedule.(9)
</TABLE>

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

(X) Included in this filing.

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

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

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

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

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

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

(7) Filed as an exhibit to the Registrant's Current Report on Form 8-K (File No.
000-22581) on February 19, 1999 and incorporated by reference herein.

(8) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q (File
No. 000-22851) on August 16, 1999 incorporated by reference herein.

(9) Filed as an exhibit to the Registrant's Annual Report on Form 10-K
(File No. 000-22581) on April 14, 2000 and incorporated by reference herein.

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

(a) None.
</TABLE>

67
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors 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, 1998 and 1999, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1999. 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 auditing standards generally accepted
in the United States. 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.

STAR Telecommunications, Inc. has entered into a merger agreement under which it
is required to sell certain operations prior to consummation of the merger. To
meet this requirement, STAR Telecommunications, Inc. has entered into a letter
of intent to sell certain net assets of its prepaid calling card and dial around
operations for an amount that is significantly less than the net carrying value
of the operations. See Notes 1 and 13 to the accompanying consolidated financial
statements for a description of this proposed transaction and related matters.

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, 1998 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States.

ARTHUR ANDERSEN LLP

Los Angeles, California
April 14, 2000

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

CONSOLIDATED BALANCE SHEETS

(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 47,297 $ 25,561
Short-term investments.................................... 835 1,482
Accounts and notes receivable, net of allowance of $12,561
and $46,707 at December 31, 1998 and 1999,
respectively............................................ 100,235 167,403
Receivables from related parties.......................... 762 1,390
Inventory................................................. -- 1,088
Other receivables......................................... 23,017 2,478
Prepaid expenses and other................................ 14,295 9,838
Deferred income taxes..................................... 6,269 25,846
-------- --------
Total current assets.................................. 192,710 235,086
-------- --------
PROPERTY AND EQUIPMENT:
Operating equipment....................................... 158,811 351,605
Leasehold improvements.................................... 14,853 24,744
Furniture, fixtures and equipment......................... 19,106 38,399
-------- --------
192,770 414,748
Less--Accumulated depreciation and amortization........... (21,818) (51,659)
-------- --------
170,952 363,089
-------- --------
OTHER ASSETS:
Intangible assets, net.................................... 2,497 200,582
Other..................................................... 8,492 8,997
-------- --------
10,989 209,579
-------- --------
Total assets.......................................... $374,651 $807,754
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit.................................. $ 19,330 $ 43,540
Current portion of long-term debt......................... 2,085 486
Current portion of capital lease obligations.............. 8,567 18,042
Accounts payable.......................................... 43,989 159,920
Taxes payable............................................. 1,640 3,361
Related party payable..................................... 2,267 1,133
Accrued network costs..................................... 51,262 147,672
Other accrued expenses.................................... 15,772 22,479
Deferred revenue.......................................... 1,100 36,374
-------- --------
Total current liabilities............................. 146,012 433,007
-------- --------
LONG-TERM LIABILITIES:
Capital lease obligations, net of current portion......... 29,407 49,324
Deferred income taxes..................................... 2,991 --
Other long-term liabilities............................... 650 47,369
-------- --------
Total long-term liabilities........................... 33,048 96,693
-------- --------
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--43,245 and 58,574 at
December 31, 1998 and 1999, respectively................ 43 58
Additional paid-in capital................................ 207,466 365,845
Deferred compensation..................................... -- (2,160)
Note receivable from stockholder.......................... -- (3,714)
Accumulated other comprehensive income (loss)............. 188 (6,022)
Accumulated deficit....................................... (12,106) (75,953)
-------- --------
Total stockholders' equity.............................. 195,591 278,054
-------- --------
Total liabilities and stockholders' equity............ $374,651 $807,754
======== ========
</TABLE>

See accompanying notes to 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,
--------------------------------
1997 1998 1999
-------- -------- ----------
<S> <C> <C> <C>
REVENUES.................................................... $434,086 $619,220 $1,061,774
OPERATING EXPENSES:
Cost of services (exclusive of depreciation and
amortization)........................................... 374,504 523,621 925,206
Selling, general and administrative expenses.............. 48,906 66,140 160,067
Depreciation and amortization............................. 5,650 15,054 44,236
Loss on impairment of goodwill............................ -- 2,604 --
Merger expense............................................ 286 1,026 1,878
-------- -------- ----------
429,346 608,445 1,131,387
-------- -------- ----------
Income (loss) from operations........................... 4,740 10,775 (69,613)
-------- -------- ----------
OTHER INCOME (EXPENSES):
Interest income........................................... 464 4,469 2,192
Interest expense.......................................... (2,617) (3,386) (9,895)
Legal settlements and expenses............................ (1,653) -- --
Other income (expense).................................... 208 (304) 1,373
-------- -------- ----------
(3,598) 779 (6,330)
-------- -------- ----------
Income (loss) before provision (benefit) for income
taxes................................................. 1,142 11,554 (75,943)
PROVISION (BENEFIT) FOR INCOME TAXES........................ 2,905 9,923 (12,096)
-------- -------- ----------
NET INCOME (LOSS)........................................... $ (1,763) $ 1,631 $ (63,847)
======== ======== ==========
Basic and diluted income (loss) per share................... $ (0.06) $ 0.04 $ (1.12)
======== ======== ==========
</TABLE>

See accompanying notes to these consolidated statements.

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

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER, 1997, 1998 AND 1999
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NOTE
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE
------------------- ------------------- PAID-IN DEFERRED FROM
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION SHAREHOLDER
-------- -------- -------- -------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996......... 2,802 $ 3 25,511 $26 $ 22,152 $ (118) $ --
Net loss....................... -- -- -- -- -- -- --
Effect of CEO
Telecommunications, Inc.
terminating the
S-corporation election....... -- -- -- -- (61) -- --
Effect of UDN's change in
fiscal year end.............. -- -- (37) (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 -- --
Converion of debenture......... -- -- 37 -- 500 -- --
Compensation expense relating
to stock options............. -- -- -- -- -- 88 --
Tax benefit from non-qualified
stock options................ -- -- -- -- 114 -- --
Cash distributions to
stockholders................. -- -- -- -- -- -- --
------ ---- ------ --- -------- ------- -------
Balance, December 31, 1997......... -- -- 36,028 36 54,346 (30) --
Comprehensive income:
Net income................... -- -- -- -- -- -- --
Foreign currency translation
adjustment................. -- -- -- -- -- -- --
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 options............. -- -- -- -- -- 30 --
Tax benefit from non-qualified
stock options................ -- -- -- -- 5,635 -- --
------ ---- ------ --- -------- ------- -------
Balance, December 31, 1998 -- -- 43,245 43 207,466 -- --
Comprehensive income:
Net loss..................... -- -- -- -- -- -- --
Foreign currency translation
adjustment................. -- -- -- -- -- -- --
Comprehensive loss............. -- -- -- -- -- -- --
PT-1 acquisition............... -- -- 15,050 15 153,563 -- (3,559)
Shares reserved for PT-1
distributors................. -- -- -- -- 2,803 (2,803) --
Exercise of stock options...... -- -- 279 -- 716 -- --
Compensation expense relating
to distributor shares........ -- -- -- -- -- 643 --
Interest on note receivable
from stockholder............. -- -- -- -- -- -- (155)
Tax benefit from non-qualified
stock options................ -- -- -- -- 1,297 -- --
------ ---- ------ --- -------- ------- -------
Balance, December 31, 1999......... -- $ -- 58,574 $58 $365,845 $(2,160) $(3,714)
====== ==== ====== === ======== ======= =======

<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE ACCUMULATED
INCOME DEFICIT TOTAL
------------- ----------- --------
<S> <C> <C> <C>
Balance, December 31, 1996......... -- $(12,077) $ 9,986
Net loss....................... -- (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
Converion of debenture......... -- -- 500
Compensation expense relating
to stock options............. -- -- 88
Tax benefit from non-qualified
stock options................ -- -- 114
Cash distributions to
stockholders................. -- (1,058) (1,058)
------- -------- --------
Balance, December 31, 1997......... -- (13,737) 40,615
Comprehensive income:
Net income................... -- 1,631 1,631
Foreign currency translation
adjustment................. 188 -- 188
Comprehensive income........... 188 1,631 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 options............. -- -- 30
Tax benefit from non-qualified
stock options................ -- -- 5,635
------- -------- --------
Balance, December 31, 1998 188 (12,106) 195,591
Comprehensive income:
Net loss..................... -- (63,847) (63,847)
Foreign currency translation
adjustment................. (6,210) -- (6,210)
Comprehensive loss............. (6,210) (63,847) (70,057)
PT-1 acquisition............... -- -- 150,019
Shares reserved for PT-1
distributors................. -- -- --
Exercise of stock options...... -- -- 716
Compensation expense relating
to distributor shares........ -- -- 643
Interest on note receivable
from stockholder............. -- -- (155)
Tax benefit from non-qualified
stock options................ -- -- 1,297
------- -------- --------
Balance, December 31, 1999......... $(6,022) $(75,953) $278,054
======= ======== ========
</TABLE>

See accompanying notes to 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,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $(1,763) $ 1,631 $(63,847)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization............................. 5,650 15,054 44,236
Loss on impairment of goodwill............................ -- 2,604 --
Gain on investments....................................... -- -- (9,953)
Compensation expense relating to stock options............ 88 30 643
Provision for doubtful accounts........................... 13,770 7,477 25,003
Deferred income taxes..................................... (3,699) 421 (2,014)
Proceeds from factoring of trade receivables, net......... 2,092 -- --
Other..................................................... 79 107 --
Decrease (increase) in assets, net of acquisitions:
Accounts and notes receivable............................. (24,320) (61,510) (105,573)
Related party receivable.................................. 99 (721) (79)
Other receivables......................................... (1,914) (20,428) 10,184
Prepaid expenses and other assets......................... (1,853) (8,757) 286
Deposits.................................................. (425) (558) 1,254
Increase (decrease) in liabilities, net of acquisitions:
Accounts payable.......................................... (593) 23,913 59,304
Taxes payable............................................. 2,270 5,119 (7,618)
Related party payable..................................... (269) 2,267 (2,301)
Accrued network costs..................................... 19,747 11,697 86,232
Other accrued expenses.................................... 2,353 8,440 3,574
Deferred revenue.......................................... -- 1,100 (3,120)
Other liabilities......................................... 164 (265) 3,927
------- -------- --------
Net cash provided by (used in) operating activities..... 11,476 (12,379) 40,138
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (14,674) (113,020) (60,317)
Investments............................................... 126 (5,083) (2,829)
Short-term investments.................................... (16,975) 17,796 477
Sale of investments....................................... -- -- 14,350
Purchase of PT-1, net of cash acquired.................... -- -- (4,435)
Purchase of CTN, net of cash acquired..................... (350) -- --
Other..................................................... 716 (679) (5,543)
------- -------- --------
Net cash used in investing activities................... (31,157) (100,986) (58,297)
------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Stockholders' distributions............................... (1,058) -- --
Borrowings under lines of credit.......................... 34,211 19,330 460,820
Repayments under lines of credit.......................... (42,025) -- (441,610)
Borrowings under lines of credit with stockholder......... 583 -- 2,500
Repayments under lines of credit with stockholder......... (471) (138) (2,500)
Borrowings under long-term debt........................... 193 -- --
Payments under long-term debt............................. (3,587) (1,798) (8,122)
Payments under capital lease obligations.................. (2,236) (6,360) (12,801)
Issuance of common stock.................................. 32,684 144,711 --
Stock options exercised................................... 496 2,507 716
Warrants exercised........................................ 384 274 --
Other financing activities................................ -- -- 6
------- -------- --------
Net cash provided by (used in) financing activities..... 19,174 158,526 (991)
------- -------- --------
EFFECTS OF CHANGE IN UDN'S FISCAL YEAR END.................. 54 -- --
EFFECTS OF FOREIGN CURRENCY TRANSLATION..................... -- 188 (2,586)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ (453) 45,349 (21,736)
CASH AND CASH EQUIVALENTS:
Beginning of year......................................... 2,401 1,948 47,297
------- -------- --------
End of year............................................... $ 1,948 $ 47,297 $ 25,561
======= ======== ========
</TABLE>

See accompanying notes to these consolidated statements.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1999

1. NATURE OF BUSINESS AND PROPOSED MERGER

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. STAR offers
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 1997, 1998 and 1999, the Company established several wholly-owned
foreign subsidiaries to further expand its international network. The Company
made substantial investments to install switch facilities in four of these
subsidiaries, Star Europe Limited ("SEL") which is located in London, England,
Star Telecommunications Deutschland ("GmbH") which is located in Frankfurt,
Germany, Star Telecommunications Switzerland which is located in Geneva,
Switzerland, and Star Telecommunications Austria GmbH which is located in
Vienna, Austria. 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.

In February 1999, the Company completed its acquisition of PT-1
Communications ("PT-1"). PT-1 is a provider of international and domestic long
distance and local telecommunications services primarily through the marketing
of prepaid calling cards and dial around service. The transaction constituted a
tax free reorganization and has been accounted for as a purchase under
Accounting Principles Board Opinion No. 16. Accordingly, the consolidated
financial statements presented include the results of operations, financial
position and cash flows of PT-1 subsequent to the date of acquisition.

On February 11, 2000, STAR and World Access, Inc. ("World Access") entered
into a merger agreement (the "Merger Agreement") pursuant to which World Access
will acquire all of the outstanding common stock of STAR in exchange for World
Access common stock or, at the election of World Access, a combination of cash
and common stock. Based upon the market price of World Access common stock at
the date of the Merger Agreement, the purchase price exceeds STAR's net book
value. The Merger Agreement requires that STAR sell PT-1 for minimum net cash
proceeds of $150 million.

On March 29, 2000, STAR entered into a letter of intent to sell the assets
of PT-1 to a communications subsidiary of a publicly traded company ("PT-1
Acquiror") for cash proceeds of $150 million, less certain liabilities, and
subject to a purchase price adjustment based on an audit of PT-1 to be conducted
after the close of the sale of PT-1. Due diligence is currently in process by
PT-1 Acquiror and the definitive acquisition agreement is expected to be
completed by April 21, 2000. STAR will record a loss on this transaction of
approximately $100 million at closing which is expected to occur during the
second quarter of fiscal 2000. See Note 13 for further details of this
transaction and related matters.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

1. NATURE OF BUSINESS AND PROPOSED MERGER (CONTINUED)
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. and its wholly-owned subsidiaries. All significant intercompany balances
and transactions have been eliminated.

REVENUE RECOGNITION AND DEFERRED REVENUE

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

Sales of prepaid calling cards are made to distributors with no contractual
right of return. At the time of sale, the Company becomes legally obligated to
provide such service. Such sales are initially recorded as deferred revenue upon
shipment and revenue is recognized in accordance with the terms of the card as
the ultimate card users utilize calling time and service fees for all prepaid
cards. The terms of the card refer to the rates, fees and expiration dates of
the card as well as any other provisions which govern their use. The Company
assesses a monthly service fee per card, commencing 30 days after the date a
prepaid calling card is first used to make a telephone call by reducing the
unused card balance available for calls. All prepaid calling cards sold by PT-1
expire upon the earlier to occur of (i) an expiration date printed on the
prepaid calling card or (ii) six months after the prepaid calling card is first
used. Upon expiration and cancellation of the prepaid calling card, the Company
recognizes the related deferred revenue as revenue.

In 1999, the Company began selling excess broadband fiber optic capacity
that it obtained under 20 year Indefeasable Rights of Use ("IRU") agreements,
which were accounted for as capital leases under SFAS 13. These transactions
were accounted for as direct financing leases in accordance with SFAS No. 13,
Accounting for Leases, and the related profit on sale as unearned income. The
Company recognizes unearned income using the interest method as payments are
received. During 1999, the Company realized $9.5 million of unearned income from
these transactions as the buyers fully paid for the capacity upon acceptance. At
December 31, 1999, the Company had no unearned income related to these finance
leases. The accounting for these types of transactions are evolving and may
require the Company to modify its accounting for future transactions.

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 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.

The primary costs associated with the provision of telecommunications
services to holders of prepaid calling cards and travel cards are carrier costs
for transport of traffic and switch administration fees.

Cost of services for broadband sales represents the cost capitalized under
the original IRU agreement less any accumulated depreciation applicable to the
IRU.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUES FROM FOREIGN CUSTOMERS

The Company has carrier service agreements with telecommunications 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 its switches. Revenues from
foreign customers amounted to $6,577,000, $83,998,000 and $183,768,000 for the
years ended December 31, 1997, 1998 and 1999, 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. The Company has restricted cash of $1 million as of December 31, 1999.

FINANCIAL INSTRUMENTS

The carrying amounts of lines of credit, 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, 1998
consisted of foreign currency exchange agreements. There were no off balance
sheet derivatives at December 31, 1999. During 1997, 1998 and 1999, the Company
entered 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 was
to minimize the risks and 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 is estimated by obtaining
quotes from brokers. At December 31, 1998, the Company had foreign currency
contracts outstanding with a notional and fair value of $35,000,000.
Accordingly, no gain or loss was recognized in operations. The Company had
contracts in German Marks at December 31, 1998, but none at December 31, 1999.

For the years ended December 31, 1997, 1998 and 1999, gains and losses on
foreign exchange contracts were 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, 1998 and 1999, 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 1997, the Company realized
gains from the sale of securities of approximately $48,000. The Company did not
realize any gains or losses from sale of securities during 1998 or 1999.

INVENTORY

Inventory consists of costs of production and packaging of unsold prepaid
calling cards, is valued using the average cost method, and is charged to cost
of services when the card is sold.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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:

<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 $51,738,000 and $92,405,000 at December 31, 1998 and 1999, respectively.
Accumulated amortization related to assets financed under capital leases was
$7,908,000 and $15,763,000 at December 31, 1998 and 1999, respectively.

In addition, operating equipment includes twelve and fourteen IRUs in
international cable systems amounting to $29,943,000 and $41,254,000 and eight
and ten ownership interests in international cables amounting to $3,101,000 and
$51,540,000 at December 31, 1998 and 1999, respectively. Included in ownership
interests at December 31, 1998 and 1999, is $1,508,000 and $48,684,000,
respectively, for the China-US Undersea Cable System. This capacity was not in
use as of December 31, 1999, and was reclaimed during the first quarter of
fiscal 2000. During 1999, the Company acquired two additional domestic IRUs with
major points of presence in Los Angeles, New York, Dallas and Miami, amounting
to $71,755,000 at December 31, 1999. These assets are amortized over the life of
the agreements of 5 to 20 years.

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 versus 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 cost to purchase customer lists, a
non-compete agreement and goodwill associated with the purchase of PT-1 and
other acquisitions. These intangibles are amortized using 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. These
analyses involve significant management judgment to evaluate the capacity of an
acquired business to perform within projections.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1999
-------- ---------
<S> <C> <C>
Goodwill.................................................... $5,065 $ 215,382
Customer lists and non-compete agreement.................... 1,579 3,742
------ ---------
6,644 219,124
Accumulated amortization.................................... (1,543) (15,938)
Accumulated loss on impairment.............................. (2,604) (2,604)
------ ---------
$2,497 $ 200,582
====== =========
</TABLE>

The Company amortizes goodwill over 20 years, customer lists over 4 to 7
years and the non-compete agreement over 3 years.

OTHER ASSETS

At December 31, 1998 and 1999, other assets consist primarily of investments
and deposits.

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. A
stockholder of the Company is also an investor and board member of this company.
The Company accounted for this investment under the cost method. Substantially
all of this investment was sold in 1999 for approximately $14.3 million.

The Company had investments in one and three telecommunications companies
totaling $5.1 million and $2.8 million at December 31, 1998 and 1999,
respectively. At December 31, 1998, the investment was carried at cost. At
December 31, 1999, three new investments totaling $2.0 million were accounted
for under the equity method. During 1999, STAR's share of earnings or losses
from these investments was not material.

Included in other assets are deposits of approximately $2.2 million at
December 31, 1998 and 1999, which 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.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

CONSOLIDATED STATEMENTS OF CASH FLOWS

During the years ended December 31, 1997, 1998, and 1999, cash paid for
interest was $2,357,000, $4,396,000 and $8,719,000, respectively. For the same
periods, cash paid for income taxes amounted to $3,761,000, $4,146,000 and
$1,832,000, respectively.

Non-cash investing and financing activities, which are excluded from the
consolidated statements of cash flows, are as follows (in thousands):

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1998 1999
-------- -------- ---------
<S> <C> <C> <C>
Equipment purchased through capital leases..... $10,020 $34,216 $ 27,605
Deposit applied against capital leases......... -- 4,405 --
Notes issued for asset purchases............... 1,890 -- --
Assets acquired through a vendor financing
arrangement.................................. -- -- 62,666
Operating agreement acquired through issuance
of note...................................... 350 -- --
Conversion of debenture........................ 500 -- --
Tax benefits related to stock options.......... 114 5,635 1,297
Issuance of convertible debenture and note
payable for acquisition of CTN capital
stock........................................ 1,050 -- --
Detail of PT-1 acquisition:
Fair value of assets acquired................ -- -- 299,960
Liabilities assumed.......................... -- -- (140,780)
Common stock issued.......................... -- -- (153,578)
Notes payable issued......................... -- -- (1,167)
</TABLE>

NET INCOME (LOSS) PER COMMON SHARE

The following schedule summarizes the information used to compute basic and
diluted net income or loss per common share for the years ended December 31,
1997, 1998 and 1999 (in thousands):

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Weighted average number of common shares used to
compute basic net income (loss) per common
share............................................. 31,101 40,833 57,036
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.................... 31,101 42,434 57,036
====== ====== ======
</TABLE>

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Options to purchase 4,045,723 shares of common stock at prices ranging from
$0.01 to $34.38 were outstanding at December 31, 1999, but were not included in
the computation of diluted earnings per share, as the effect would be
antidilutive due to the net loss.

CONCENTRATIONS OF RISK

At December 31, 1998 and 1999, no individual customer had an accounts
receivable balance greater than 10% of gross accounts receivable other than
PT-1, which was acquired on February 4, 1999.

The two largest customers represented approximately 15%, 11% and 11% of
revenues during the years ended December 31, 1997, 1998 and 1999, respectively.
During 1997 and 1999, no customer exceeded 10% of revenues. During 1998, no
customer, other than PT-1, exceeded 10% of revenues.

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,
1997, 1998 and 1999 amounted to 32%, 29%, and 38% of total purchases,
respectively.

Included in the Company's balance sheets at December 31, 1998 and 1999 is
approximately $85,207,000 and $121,518,000, 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

In June 1998 and June 1999, the AICPA issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," and SFAS No. 137, which delayed
the effective date of SFAS No. 133. The Company will adopt the standard in
January 2001 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, 1997 and 1998, and amounted to a loss of $3,470,000 in 1999, 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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.

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, 1999
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. Effective April 1, 1999, management
recharacterized the balance of the intercompany loan from STAR to GmbH from a
note payable to equity. As a result, the translation effect on the note balance
after April 1, 1999 is reflected as other comprehensive loss in the accompanying
financial statements.

TAXES ON PREPAID CALLING CARDS

Various jurisdictions levy taxes on telecommunications services whether
provided through prepaid cards or some other means utilizing different methods
and rates. The Company accrues for excise, sales and other usage based taxes on
telecommunication services based on the enacted method and rate for each
jurisdiction in the period usage occurs and revenue is recognized. The taxation
of prepaid calling cards is evolving and is not specifically addressed by many
of the states in which the Company does business. While the Company believes it
has adequately provided for any such taxes it may ultimately be required to pay,
certain states that enact legislation which specifically provides for taxation
of such cards or may interpret current laws in a manner resulting in additional
tax liabilities.

ADVERTISING COSTS

Advertising costs are expensed as incurred. Advertising costs for the years
ended December 31, 1997 and 1998 were not material to the consolidated financial
statements. For the year ended December 31, 1999, they amounted to
$16.8 million.

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 expired on July 1,
1999. This facility was paid in full and replaced with the Foothill facility on
June 9, 1999.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

3. LINES OF CREDIT (CONTINUED)

On June 9, 1999, the Company entered into a two year credit facility
agreement with Foothill. The Company failed to meet the EBITDA and tangible net
worth covenants in accordance with the agreement for the period ended June 30,
1999. On October 15, 1999, the Company received an amendment from the lender
group which included resetting the financial covenants in accordance with the
Company's updated financial forecast. In exchange for the amendment, the Company
agreed to pay Foothill a supplemental agency fee of $500,000, and a term loan
supplemental fee of $2 million due January 31, 2000. Interest rates were
adjusted to 2.75 percent over the prime rate of interest for the revolving line
of credit. For the term note, interest rates were adjusted to 8.0 percent over
the prime rate through the end of September and increased by 1.0 percent over
the prime rate during each month thereafter. The Company also agreed to the
reduction of eligible borrowings on the revolving portion of the line of credit
to $30 million from $75 million. The expiration date of the $25 million term
loan was also modified to January 31, 2000. The agreement with Foothill was
terminated on December 23, 1999, when a new agreement was executed with RFC
Capital Corporation ("RFC"). As such, the $2 million term loan supplemental fee
was reduced to $1 million.

On November 30, 1999, the Company entered into a two year purchase of
receivables financing agreement with RFC. This facility allows the Company to
borrow up to $75 million based upon the eligible accounts receivable of the
Company. The Company was in compliance with all covenants under this facility as
of December 31, 1999. At December 31, 1999 approximately $43.5 million was
outstanding under this facility.

The weighted average interest rate on short-term debt during the years ended
December 31, 1997, 1998 and 1999, was 9.12%, 7.75% and 13.16%, 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%. The Company recognized interest expense related to this debt of
$9,000, $4,000, and $0 for the years ended December 31, 1997, 1998 and 1999,
respectively.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

The Company finances some of its telecommunications equipment under capital
lease arrangements or through notes payable as follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Convertible debenture with interest of 7 percent due
January 1999.......................................... $ 500 $ --
Notes payable in monthly installments of principal plus
interest of 8 percent through February 2000........... -- 147
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 various dates in 2000................... 471 339
Notes payable in monthly installments of principal plus
interest at 7 percent to 9.5 percent through January
1999.................................................. 1,114 --
Obligations under capital leases........................ 37,974 67,366
-------- --------
40,059 67,852
Less current portion.................................. (10,652) (18,528)
-------- --------
$ 29,407 $ 49,324
======== ========
</TABLE>

Minimum future payments under capital lease obligations at December 31, 1999
are as follows (in thousands):

<TABLE>
<CAPTION>
CAPITAL
YEAR ENDING DECEMBER 31, LEASES
------------------------ --------
<S> <C>
2000.................................................... $22,143
2001.................................................... 21,392
2002.................................................... 22,354
2003.................................................... 9,874
-------
75,763
Less amount representing interest........................... (8,397)
-------
$67,366
=======
</TABLE>

On September 29, 1999, Star Telecommunications Deutschland GmbH entered into
an agreement with Deutsche Leasing AG to finance new and pre-existing equipment
through a capital lease financing arrangement. Under the terms of the agreement
the Company has the option to finance equipment up to 80DM million or roughly
$45 million. The contract includes provisions to increase that amount as GmbH's
equipment needs expand. The financing terms of the agreement are a minimum lease
commitment of four years with an interest rate of approximately 6%. Cash
generated from this arrangement is used to help fund the growth and operations
of the German business. At December 31, 1999, approximately $8.0 million is
available for additional borrowing under this agreement.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (CONTINUED)
OTHER LONG-TERM LIABILITIES

On September 15, 1998, STAR entered into a commitment to purchase an
$85 million IRU on the Qwest Communications US Domestic Fiber Optic Cable
System. On March 24, 1999, the agreement was amended to include the following
terms: Qwest Communications International, Inc. ("Qwest") agreed to allow the
conversion of a substantial portion of STAR's outstanding liability to a vendor
financing arrangement. The terms of this arrangement allow STAR to provide long
distance services to Qwest with the balance being offset against STAR's
liability to Qwest on a monthly basis. Additionally, STAR was given the option
to meet its obligation through the purchase of a combination of IRU's switched
services and dedicated private line services. Any remaining balance outstanding
to Qwest as of April 30, 2001 must be paid in full. The remaining balance due
under this arrangement as of December 31, 1999 was approximately $45 million.
During the year STAR sold certain portions of this capacity to other third
parties. STAR has paid these portions in full and has no further obligations to
Qwest under this agreement.

5. COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

The Company leases office space, dedicated private telephone lines,
equipment and other items under various agreements expiring through 2014. At
December 31, 1999, the minimum aggregate payments under non-cancelable operating
leases are summarized as follows (in thousands):

<TABLE>
<CAPTION>
FACILITIES AND DEDICATED
YEAR ENDING DECEMBER 31, EQUIPMENT PRIVATE LINES TOTAL
------------------------ -------------- ------------- --------
<S> <C> <C> <C>
2000................................. $10,457 $24,569 $ 35,026
2001................................. 10,023 7,984 18,007
2002................................. 9,130 1,154 10,284
2003................................. 8,102 65 8,167
2004................................. 8,631 65 8,696
Thereafter........................... 24,990 368 25,358
------- ------- --------
$71,333 $34,205 $105,538
======= ======= ========
</TABLE>

Office facility and equipment rent expense for the years ended December 31,
1997, 1998 and 1999 was approximately $3,669,000, $5,704,000, and $12,542,000
respectively. Dedicated private line expense was approximately $9,414,000,
$24,306,000 and $67,090,000, 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 up to
$1,500,000 in the event of a change in control of the Company.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company expensed $64,000, $52,000, and $0 of deferred compensation
relating to these agreements for the years ended December 31, 1997, 1998 and
1999, 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. The Company has minimum future usage
charges at December 31, 1999 of $6,747,000 payable through December 31, 2000.
The Company signed an $85 million agreement with Qwest to purchase the long-term
rights to use capacity, switched services, and dedicated private line services
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 $10 million of capacity on IXC's U.S.
based digital fiber network. As of December 31, 1999, STAR had completed its
financial commitment to both IXC and Qwest. 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.

During the third quarter of 1999, GmbH recorded a cost of services accrual
of approximately $6.7 million for a retroactive rate increase imposed by a
European telecom carrier that is currently being disputed. The outcome of this
dispute in not determinable as of December 31, 1999.

LETTERS OF CREDIT

At December 31, 1999, the Company had 17 stand by letters of credit
outstanding, which expire beginning April 28, 2000. These letters of credit,
which are secured by deposits held at the issuing financial institutions,
totaled approximately $1.9 million.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

6. RELATED PARTY TRANSACTIONS

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 1999, the chief executive officer provided a short-term
loan to the Company for $2,500,000, which was repaid in 70 days. The Company was
not charged any interest on this borrowing. During 1998 and 1999, 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 and $65,000 at
December 31, 1998 and 1999, respectively.

During 1997, 1998 and 1999, the Company provided services to a company
related to an employee of STAR in the amounts of $926,000, $289,000, and $20,000
respectively. As of December 31, 1998 and 1999, the account receivable from this
related party amounted to $11,000 and $0, respectively.

During 1997, 1998 and 1999, the Company purchased consulting services from a
company owned by a board member in the amount of $72,000, $71,000 and $27,000,
respectively. The Company has a payable to this company of $6,000 and $0 at
December 31, 1998 and 1999, respectively.

The Company purchased equipment and services from a company owned in part by
an employee of STAR in the amount of $1,114,000, $10,013,000 and $3,967,000 in
1997, 1998 and 1999, respectively. At December 31, 1998 and 1999, the Company
has a payable due to this related party of $1,261,000 and $35,000, respectively.
Additionally, the Company provided services to this company in the amount of
$543,000 and $1,351,000 in 1998 and 1999, respectively.

During 1999, the Company provided long-distance telephone service to a
company in which the founder and chief executive officer of STAR, other STAR
employees and board members are investors. Services provided were $2,139,000
during 1999. Additionally, STAR purchased services from this company in the
amount of $43,000 during 1999.

At December 31, 1998 and 1999, the Company had an obligation to a board
member in the amount of $1,000,000 with interest at a rate of 10 percent.

During 1999, the Company advanced $500,000 to a company, which is 50 percent
owned by STAR. At December 31, 1999, this advance was still outstanding.

The Company has various receivables due from other related parties,
primarily employee receivables, in the amount of $46,000 and $434,000 at
December 31, 1998 and 1999, respectively. The Company also has payables due to
other related parties in the amount of $98,000 at December 31, 1999.

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

POOLING OF INTEREST TRANSACTIONS

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.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

7. BUSINESS COMBINATIONS (CONTINUED)
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.

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.

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>
1997 1998 1999
-------- -------- ----------
<S> <C> <C> <C>
Revenues:
STAR.............................................. $348,738 $584,170 $1,056,839
CEO............................................... 27,460 -- --
T-ONE............................................. 30,438 11,788 --
UDN............................................... 30,622 29,166 7,478
Eliminations...................................... (3,172) (5,904) (2,543)
-------- -------- ----------
Total........................................... $434,086 $619,220 $1,061,774
======== ======== ==========

Net income (loss):
STAR.............................................. $ 4,464 $ 8,061 $ (60,381)
CEO............................................... (37) -- --
T-ONE............................................. 201 (88) --
UDN............................................... (6,391) (6,342) (3,466)
-------- -------- ----------
Total........................................... $ (1,763) $ 1,631 $ (63,847)
======== ======== ==========
</TABLE>

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

PURCHASE TRANSACTIONS

On February 4, 1999, the Company acquired PT-1, a provider of international
and domestic long-distance and local telecommunications services primarily
through the marketing of prepaid phone cards. The Company issued 15,050,000
shares of common stock (valued at $153.6 million) and $19.5 million in cash or
short-term promissory notes, made a $2 million payment to a former PT-1
shareholder and incurred estimated merger costs of $10 million for all
outstanding shares of PT-1. In connection with the

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

7. BUSINESS COMBINATIONS (CONTINUED)
acquisition, the Company and PT-1 placed 500,000 shares of STAR common stock in
escrow for distribution to certain PT-1 distributors for no consideration. The
Company is recognizing the related compensation expense of approximately $2.8
million over a four year vesting period. The Company also issued 179,973 options
for outstanding PT-1 options at an exercise price of $0.01 per share, of which
50 percent vested on the date of the merger, and the remaining 50 percent vested
on October 15, 1999.

The acquisition has been accounted for by the purchase method and,
accordingly, the results of operations of PT-1 have been included with those of
the Company since the date of acquisition. 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. Based on the
preliminary allocation of the purchase price over the net assets acquired,
goodwill of approximately $204 million was recorded. Such goodwill is being
amortized on a straight-line basis over 20 years.

The following summary, prepared on a pro forma basis, combines the results
of operations as if PT-1 had been acquired as of the beginning of the periods
presented. The summary includes the impact of certain adjustments such as
goodwill amortization and estimated changes in interest income because of cash
outlays associated with the transaction and the related income tax effects (in
thousands, except per-share amounts):

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1998 1999
----------- -----------
(UNAUDITED)
<S> <C> <C>
Pro forma sales............................................. $1,023,847 $1,082,623
Pro forma net loss.......................................... (26,299) (75,356)
Pro forma basic and diluted net loss per common share....... $ (0.47) $ (1.29)
</TABLE>

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

8. INCOME TAXES (CONTINUED)

The Company has recorded a net deferred tax asset of $25,846,000 at December
31, 1999. 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, 1998 and 1999
are as follows (in thousands):

<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Deferred taxes short-term:
Reserve for accounts and notes receivable................. $ 4,564 $ 17,512
Accrued network costs..................................... 1,707 1,886
Other accrued liabilities................................. 360 6,911
State income taxes........................................ 270 7
Change in tax method...................................... 41 (226)
Merger costs.............................................. (163) --
------- --------
6,779 26,090
Valuation reserve......................................... (510) (510)
------- --------
$ 6,269 $ 25,580
======= ========

Deferred taxes long-term:
Net operating loss........................................ $ 9,255 $ 34,827
Deferred rent............................................. 313 --
Depreciation and amortization............................. (3,304) (7,900)
Basis difference arising from purchase accounting......... (296) (317)
------- --------
5,968 26,610
Valuation reserve......................................... (8,959) (26,344)
------- --------
$(2,991) $ 266
======= ========
</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, 1999, T-One has deductions available
for carryforward in the amount of approximately $500,000. These NOL's will
expire through 2010. ALLSTAR has net operating loss carryforwards of
approximately $17.7 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 $44.7 million.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

8. INCOME TAXES (CONTINUED)
The provision (benefit) for income taxes for the years ended December 31,
1997, 1998 and 1999 are as follows (in thousands):

<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Current taxes:
Federal................................................ $ 4,900 $7,146 $(10,726)
State.................................................. 1,147 1,909 20
Foreign................................................ -- 447 626
------- ------ --------
6,047 9,502 (10,080)
------- ------ --------
Deferred taxes:
Federal................................................ (2,273) 278 (1,714)
State.................................................. (869) 143 (302)
------- ------ --------
(3,142) 421 (2,016)
Provision (benefit) for income taxes..................... $ 2,905 $9,923 $(12,096)
======= ====== ========
</TABLE>

Differences between the provision (benefit) for income taxes and income
taxes at the statutory federal income tax rate for the years ended December 31,
1997, 1998 and 1999 are as follows (in thousands):

<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Income taxes at the statutory federal rate................ $ 400 $4,044 $(26,580)
State income taxes, net of federal income tax effect...... 66 663 (4,557)
Foreign taxes at rates different than U.S. taxes.......... 187 (359) (1,372)
Changes in valuation reserve.............................. 862 3,455 17,385
Permanent differences..................................... 119 319 4,958
Other..................................................... 1,271 1,801 (1,930)
------ ------ --------
$2,905 $9,923 $(12,096)
====== ====== ========
</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, 1999, options of 147,600 issued under these agreements were
outstanding.

On September 23, 1996, the Company adopted the 1996 Supplemental Stock
Option Plan. This plan, which expires on August 31, 2006, has essentially the
same features as the Plan. 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.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

9. STOCK OPTIONS (CONTINUED)
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, 1999, options of 772,236 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, 1999, options of 71,500 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, 1999, options of 3,054,387 were outstanding under the Omnibus Plan.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

9. STOCK OPTIONS (CONTINUED)
Information regarding the Company's stock option plans and nonqualified
stock options as of December 31, 1997, 1998 and 1999, 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, 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
---------- ------
Granted................................................. 2,157,458 7.32
Exercised............................................... (279,472) 2.56
Forfeited............................................... (728,649) 12.14
---------- ------
December 31, 1999......................................... 4,045,723 $ 7.63
========== ======
</TABLE>

At December 31, 1997, 1998 and 1999, 1,275,645, 765,317 and 1,286,322
options were exercisable at weighted average exercise prices of $1.51, $4.28 and
$5.49 per share, respectively. The options outstanding at December 31, 1999
expire in various years through 2009.

Information about stock options outstanding at December 31, 1999 is
summarized as follows:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ----------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
------------------------ ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.01 to $1.46 474,194 7.11 $ 1.07 387,722 $ 0.98
$4.00 to $6.83 1,659,213 8.51 $ 4.82 510,860 $ 4.44
$8.11 to $12.19 1,421,687 8.65 $10.03 277,250 $ 9.18
$12.81 to $20.94 456,829 8.41 $15.67 102,040 $15.95
$27.00 to $34.38 33,800 8.32 $27.87 8,450 $27.87
--------- ---- ------ --------- ------
4,045,723 8.38 $ 7.67 1,286,322 $ 5.49
========= ==== ====== ========= ======
</TABLE>

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

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

<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Expected life (years)....................................... 6 6 6
Interest rate............................................... 6.2% 5.2% 5.8%
Volatility.................................................. 31.05% 75.49% 79.73%
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 $88,000, $30,000, and $0 in compensation
cost was recognized relating to consultant options for the years ended December
31, 1997, 1998 and 1999, 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, 1997, 1998 and 1999 would have reflected the following pro
forma amounts:

<TABLE>
<CAPTION>
1997 1998 1999
----------- -------- ------------
<S> <C> <C> <C>
Pro forma net income (loss)...................... $(2,575,000) $65,000 $(69,311,000)
Pro forma basic and diluted net income (loss) per
common share................................... $ (0.08) $ 0.00 $ (1.20)
</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.

10. CAPITAL STOCK

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.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

10. CAPITAL STOCK (CONTINUED)

On February 4, 1999, in connection with the PT-1 merger, the Company issued
approximately 15,050,000 shares of common stock, and together with PT-1, placed
500,000 shares of STAR common stock in escrow for distribution to certain PT-1
distributors for no consideration. In connection with the acquisition, the
Company acquired a stockholder note receivable issued in connection with the
exercise of stock options. The note was originally in the amount of $3.57
million, and increased to $3.71 million at December 31, 1999 due to interest
which is earned at 8%. The note is due on February 4, 2001.

On March 24, 1999, in connection with the UDN merger, the Company issued
approximately 1,005,000 shares of common stock in exchange for all outstanding
shares of UDN.

11. BUSINESS SEGMENTS

At December 31, 1999, STAR has three separately managed business segments,
North American Wholesale, North American Commercial 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, 1998, STAR evaluated performance based on
profit or loss from North American and European operations, however, with the
acquisition of PT-1, senior management began analyzing operations by its North
American Wholesale, North American Commercial and European segments.

Reportable segment information for the years ended December 31, 1997, 1998
and 1999 are as follows (in thousands):

<TABLE>
<CAPTION>
NORTH NORTH
AMERICAN AMERICAN
WHOLESALE COMMERCIAL EUROPEAN TOTAL
--------- ---------- -------- ----------
<S> <C> <C> <C> <C>
1997
Revenues from external customers................ $376,004 $ 58,082 $ -- $ 434,086
Revenue between segments........................ 1,141 -- 321 1,462
Interest income................................. 464 -- -- 464
Interest expense................................ 1,482 906 229 2,617
Depreciation and amortization................... 4,152 1,069 429 5,650
Segment net income (loss) before provision for
income taxes.................................... 10,632 (7,569) (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.................................. 99,077 19,373 11,932 130,382
Expenditures for segment assets................. 10,944 931 2,799 14,674

1998
Revenues from external customers................ $529,807 $ 60,242 $ 29,171 $ 619,220
Revenue between segments........................ 21,547 -- 34,018 55,565
</TABLE>

F-26
<PAGE>
STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

11. BUSINESS SEGMENTS (CONTINUED)

<TABLE>
<CAPTION>
NORTH NORTH
AMERICAN AMERICAN
WHOLESALE COMMERCIAL EUROPEAN TOTAL
--------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Interest income................................. 4,387 39 43 4,469
Interest expense................................ 1,518 565 1,303 3,386
Depreciation and amortization................... 8,951 2,066 4,037 15,054
Segment net income (loss) before provision for
income taxes.................................... 26,207 (12,863) (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.................................. 208,125 16,615 149,911 374,651
Expenditures for segment assets................. 59,288 837 52,895 113,020

1999
Revenues from external customers................ $465,831 $471,504 $124,439 $1,061,774
Revenue between segments........................ 214,742 15,683 33,874 264,299
Interest income................................. 1,812 261 119 2,192
Interest expense................................ (2,241) (4,783) (2,871) (9,895)
Depreciation and amortization................... 16,797 16,071 11,368 44,236
Segment net income (loss) before provision for
income taxes.................................... (13,018) (25,860) (37,065) (75,943)
Other significant non-cash items:
Capital lease additions....................... -- -- 27,605 27,605
Vendor financing arrangements................. 62,666 -- -- 62,666
Segment assets................................ 290,364 343,888 173,502 807,754
Expenditures for segment assets................. 54,797 1,481 4,039 60,317
</TABLE>

Segment information for North America represents primarily activity in the
United States. In 1999, approximately 98.1 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 for each of the Company's eight
quarters in the two-year period ended December 31, 1999 (in thousands):

<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
--------- -------- --------- --------
<S> <C> <C> <C> <C>
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)

1999
Net sales......................................... $228,209 $272,269 $279,216 $282,080
Operating loss.................................... (6,342) (33,248) (8,559) (21,464)
Net loss.......................................... (7,552) (27,932) (8,763) (19,600)
</TABLE>

F-27
<PAGE>
STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

13. SUBSEQUENT EVENTS

On January 18, 2000 STAR was notified that its capacity on the China-US
Undersea Cable System would be reclaimed, unless a payment of approximately
$47.0 million was made by February 1, 2000. The $47.0 million represents the
total amount of liabilities due to the China-US Undersea Cable System as of
December 31, 1999. STAR elected to allow reclamation of the capacity to take
place. As a result, STAR will remove the capitalized cost of $48.7 million,
which is included in operating equipment at December 31, 1999, and the related
accounts payable balance in the first quarter of 2000.

On February 11, 2000, World Access and STAR entered into a definitive
agreement to merge STAR with and into World Access. Under the terms of the
agreement, each share of STAR common stock will be converted into 0.3905 shares
of World Access common stock. World Access may, at its election, pay up to 40%
of the merger consideration in cash.

The merger is subject to, among other things, certain regulatory approvals,
the approval of the shareholders of World Access and STAR, and the divestiture
by STAR of its prepaid card and dial around businesses for minimum net cash
proceeds of $150 million. Any net proceeds in excess of the specified minimum
proceeds would be added to the merger consideration. The merger will be
accounted for as a purchase transaction. The transaction is expected to close by
the end of the second quarter of 2000.

In connection with the acquisition of PT-1 on February 4, 1999, the Company
and PT-1 placed 500,000 shares of STAR common stock into escrow for issuance to
certain PT-1 distributors for no consideration. As a result of subsequent
negotiations, the Company entered into a distribution agreement with NY Phone
Card Distributors LLC ("Distribution Co."), a partnership of distributors, on
March 1, 2000. The agreement provides for a total of 400,000 shares of STAR
common stock to be issued to Distribution Co. under the following arrangements:
(i) 228,750 shares at the date of execution, (ii) 31,250 shares at the end of
May 2000, provided that the agreement is still in effect, and (iii) 140,000
shares contingently issuable based on certain minimum purchase requirements.

Under the agreement, the accounts receivable balances totaling $1.2 million
as of March 1, 2000 were converted into interest free notes receivable due in
monthly installments through January 2001.

The agreement requires Distribution Co. to purchase a minimum of
approximately $121 million of prepaid calling cards from PT-1 during the period
from March 2000 through May 2001, with additional quarterly increases of three
percent from June 2001 through May 2002.

On March 29, 2000, STAR entered into a Letter of Intent to sell the assets
of PT-1 to PT-1 Acquiror for cash proceeds of $150 million less certain
liabilities, and subject to a purchase price adjustment based on an audit of
PT-1 to be conducted after the close of the sale of PT-1. Due diligence is
currently in process by PT-1 Acquiror and a definitive acquisition agreement is
expected to be completed by April 21, 2000. This transaction is subject to
shareholder approval. STAR expects to close this transaction during the second
quarter of fiscal 2000 and to record a loss of approximately $100 million on
this sale at closing.

On April 12, 2000, STAR entered into a note agreement with WorldCom which
provides for the conversion of $56.0 million of trade payables into a note
payable. The note is secured by the customer base of the Company, bears interest
at 16.0% per annum and is payable at the earlier of the close of the World
Access, Inc. merger or August 1, 2000. Management believes that the PT-1 asset
sale and the World Access merger will close as planned and the WorldCom note
will be satisfied at maturity.

F-28
<PAGE>
STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

13. SUBSEQUENT EVENTS (CONTINUED)
On February 14, 2000 an individual shareholder of STAR Telecommunications,
Inc., filed a lawsuit in Santa Barbara Superior Court seeking to block STAR's
pending merger with World Access. The suit alleges that STAR and its Board of
Directors failed to take actions necessary to attain a higher valuation for the
company than provided for in the World Access merger, and seeks to block the
pending merger. STAR believes the lawsuit is without merit and will defend
itself vigorously against the class action shareholder lawsuit. STAR has filed
demurrers on the grounds that the complaints are legally deficient.

On March 11, 1999, a proceeding was commenced by PT-1 by notice of petition
following the election by a PT-1 stockholder to dissent from STAR's merger with
PT-1 and following a demand for payment of the fair value of approximately
2,731,330 shares of PT-1 held by the stockholder. The proceeding was commenced
in the Supreme Court of the State of New York. Under New York law, the PT-1
stockholder has the right to receive, in cash, the fair market value of his PT-1
shares as of the time of STAR's acquisition of PT-1. The PT-1 stockholder is
seeking damages in accordance with his appraisal rights under New York law. On
July 26, 2000, the Supreme Court of the State of New York of the County of
Queens issued a temporary restraining order in favor of the stockholder which
prevents PT-1 from distributing any of the proceeds of the PT-1 asset sale to
STAR unless PT-1 has first set aside a reserve in the amount of $37.7 million in
cash to satisfy the stockholder's claim. On August 15, 2000, the temporary
restraining order was modified to reduce the required reserve to $25.0 million.
STAR is continuing to challenge the amount of this claim and has petitioned the
court to remove the temporary restraining order. STAR and World Access currently
disagree as to whether this cash restriction, if upheld by the court, should be
considered in determining whether STAR has met the closing condition requiring
at least $120.0 million of net cash proceeds from the PT-1 asset sale. The
Company expects to resolve this claim or finalize the discussions on this matter
prior to the time the joint statement/prospectus is mailed to the respective
company's stockholders.

F-29
<PAGE>
SIGNATURE

Pursuant to the requirements of 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 11, 2000.

<TABLE>
<S> <C> <C>
STAR TELECOMMUNICATIONS, INC.

By: *
-----------------------------------------
Christopher E. Edgecomb
CHIEF EXECUTIVE OFFICER
</TABLE>

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report on Form 10-K/A has been signed by the following persons on behalf of the
registrant in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Chief Executive Officer and
-------------------------------------- Director (Principal and September 11, 2000
Christopher E. Edgecomb Executive Officer)

*
-------------------------------------- President and Director September 11, 2000
Mary A. Casey

* Vice President of Finance
-------------------------------------- (Principal Accounting September 11, 2000
John J. Pasini Officer)

*
-------------------------------------- Director September 11, 2000
Gordon Hutchins, Jr.

*
-------------------------------------- Director September 11, 2000
John R. Snedegar
</TABLE>

<TABLE>
<S> <C> <C> <C>
*By: /s/ MARY A. CASEY
---------------------------------
Mary A. Casey
ATTORNEY-IN-FACT
</TABLE>

II-1
<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 April 14, 2000. Our audits were made for the purpose of forming an opinion
on the basic consolidated financial statements taken as a whole. The schedule of
valuation and qualifying accounts is the responsibility of the Company's
management and is presented for the purpose of complying with the Securities and
Exchange Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic consolidated financial statements and, in our
opinion, fairly states, in all material respects, the financial data required to
be set forth therein in relation to the basic consolidated financial statements
taken as a whole.

ARTHUR ANDERSEN LLP

Los Angeles, California
April 14, 2000

S-1
<PAGE>
SCHEDULE II

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

<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING OF END OF
PERIOD ACQUISITION PROVISION WRITE-OFF PERIOD
------------ ----------- --------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts
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
Year ended December 31, 1999............ $12,561 $37,925 $25,003 $(28,782) $46,707

Deferred tax valuation allowance
Year ended December 31, 1997............ $ 5,152 $ -- $ 862 $ -- $ 6,014
Year ended December 31, 1998............ $ 6,014 $ -- $ 3,455 $ -- $ 9,469
Year ended December 31, 1999............ $ 9,469 $ -- $17,385 $ -- $26,854
</TABLE>

S-2
<PAGE>
EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------------------- ------------------------------------------------------------
<S> <C>
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.(3)
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)
2.3 Stock Purchase Agreement dated as of January 26, 1998 by and
among the Registrant, T-One Corp. and Taha Mikati, as
amended.(4)
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. ("PT-1")
and the Stockholders listed on the signature page thereto,
(the PT-1 Merger Agreement).(6)
2.5 First Amendment to the PT-1 Merger Agreement dated
September 1, 1998.(2)
2.6 Second Amendment to the PT-1 Merger Agreement dated December
29, 1998.(2)
2.7 Agreement and Plan of Merger dated February 11, 2000, by and
among the Registrant and World Access, Inc.(9)
3.1 Amended and Restated Certificate of Incorporation of the
Registrant.(4)
3.2 Bylaws of the Registrant.(4)
4.1 Specimen Common Stock certificate.(1)
4.2 Registration Rights Agreement, dated September 24, 1996,
between the Registrant and the investors named therein.(1)
4.3 Registration Rights Agreement, dated July 12, 1996, between
the Registrant and the investor named therein.(1)
4.4 Investor Rights Agreement dated July 25, 1996, between the
Registrant and the investors named therein.(1)
4.5 Registration Rights Agreement dated as of November 30, 1997
by and among the Registrant and the shareholders listed on
the signature page thereto.(3)
4.6 Registration Rights Agreement dated as of March 10, 1998
between the Registrant and Taha Mikati.(4)
4.7 Registration Rights and Restricted Share Agreement dated as
of February 3, 1999 between the Registrant and the
shareholders named therein.(7)
10.l Form of Indemnification Agreement.(1)
10.2 1996 Amended and Restated Stock Incentive Plan.(1)
10.3 1996 Outside Director Nonstatutory Stock Option Plan.(1)
10.4 1997 Omnibus Stock Incentive Plan.(1)
10.5 Employment Agreement between the Registrant and Mary Casey
dated July 14, 1995, as amended.(1)
10.6 Employment Agreement between the Registrant and Kelly Enos
dated December 2, 1996.(1)
10.7 Employment Agreement between the Registrant and David Vaun
Crumly dated January 1, 1996.(1)
10.8 Intentionally omitted.(1)
10.9 Consulting Agreement between the Registrant and Gordon
Hutchins, Jr. dated May 1, 1996.(1)
10.10 Nonstatutory Stock Option Agreement between the Registrant
and Gordon Hutchins, Jr. dated May 15, 1996.(1)
</TABLE>

S-3
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------------------- ------------------------------------------------------------
<S> <C>
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.(1)
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.(1)
10.13 Office Lease between the Registrant and WHUB Real Estate
Limited Partnership dated June 28, 1996, as amended.(1)
10.14 Standard Form of Office Lease between the Registrant and
Hudson Telegraph Associates dated February 28, 1996.(1)
10.15 Agreement for Lease between the Registrant and Telehouse
International Corporation of Europe Limited dated
July 16, 1996.(1)
10.16 Sublease between the Registrant and Borton, Petrini & Conron
dated March 20, 1994, as amended.(1)
10.17 Office Lease between the Registrant and One Wilshire Arcade
Imperial, Ltd. dated June 28, 1996.(1)
10.18 Lease Agreement between the Registrant and
Telecommunications Finance Group dated April 6, 1995.(1)
10.19 Lease Agreement between the Registrant and
Telecommunications Finance Group dated January 3, 1996, as
amended.(1)
10.20 Master Lease Agreement between the Registrant and NTFC
Capital Corporation dated December 20, 1996.(1)
10.21 Variable Rate Installment Note between the Registrant and
Metrobank dated October 4, 1996.(1)
10.22 Assignment of Purchase Order and Security Interest between
the Registrant and DSC Finance Corporation dated
January 1, 1996.(1)
10.23 Line of Credit Promissory Note between the Registrant and
Christopher E. Edgecomb dated November 7, 1996, as
amended.(1)
10.24 Office Lease Agreement between the Registrant and Beverly
Hills Center LLC effective as of April 1, 1997.(1)
10.25 Credit Agreement dated as of September 30, 1997 among the
Registrant, the financial institutions party thereto and
Sanwa Bank California, as amended.(4)
10.26 Office Lease between the Registrant, Hudson Telegraph
Associates and American Communications Corp., as
amended.(4)
10.27 Amendment Number Three to Employment Agreement between the
Registrant and Mary A. Casey dated as of July 1, 1997.(4)
10.28 Amendment Number One to Employment Agreement between the
Registrant and Kelly D. Enos dated as of November 12,
1997.(4)
10.29 Amendment Number One to First Restatement of Employment
Agreement between the Registrant and James Kolsrud dated
as of June 16, 1997.(4)
10.30 Amendment Number One to Employment Agreement between the
Registrant and David Vaun Crumly dated as of November 11,
1997.(4)
10.31 First Amendment to Amended and Restated 1996 Stock Incentive
Plan.(4)
10.32 Agreement dated as of December 1, 1997 between the
Registrant and Nortel Dasa Network Systems GmbH & Co.
KG.(5)
10.33 Leasing Agreement between the Registrant and Nortel Dasa
Network Systems GmbH & Co. KG.(4)
</TABLE>

S-4
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------------------- ------------------------------------------------------------
<S> <C>
10.34 Guarantee Agreement between the Registrant and Nortel Dasa
Network Systems GmbH & Co. KG.(4)
10.35 Note and Security Agreement dated as of December 18, 1997
between the Registrant and NationsBanc Leasing
Corporation.(4)
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).(4)
10.37 Intentionally omitted.
10.38 Lease Agreement dated July 29, 1996 between the Registrant
and Telecommunications Finance Group.(4)
10.39 Promissory Note issued by Christopher E. Edgecomb in favor
of the Registrant dated November 26, 1997.(4)
10.40 Stock Pledge Agreement dated November 26, 1997 between the
Registrant and Christopher E. Edgecomb.(4)
10.41 Commercial Lease dated October 31, 1997 between the
Registrant and Prinzenpark GbR.(4)
10.42 Commercial Lease dated October 9, 1997 between the
Registrant and WSL Weststadt Liegenschafts GmbH.(4)
10.43 Office Lease between the Registrant and Airport-Center KGHP
Gewerbeban GmbH & Cie.(4)
10.44 Lease dated November 19, 1997 between the Registrant and
DIFA Deutsche Immobilien Fonds Aktiengesellschaft.(4)
10.45 Second Restatement of Employment Agreement between the
Registrant and James Kolsrud dated as of July 9, 1998.(6)
10.46 First Amendment to 1997 Omnibus Stock Incentive Plan.(6)
10.47 Loan and Security Agreement dated as of June 9, 1999 by and
among the Registrant and certain of its subsidiaries as
the Obligors, and the financial institutions that are
identified therein as the Lenders, and Foothill Capital
Corporation ("Foothill") as Agent.(8)
10.48 Pledge Agreement dated as of June 9, 1999 by and among the
Registrant certain of its subsidiaries and Foothill, as
Agent.(8)
10.49 General Continuing Guaranty dated as of June 9, 1999
delivered by certain subsidiaries of the Registrant to
Foothill, as Agent.(8)
10.50 Suretyship Agreement dated as of June 9, 1999 among
Foothill, as Agent, the Registrant and certain of its
subsidiaries.(8)
10.51 Intercompany Subordination Agreement dated as of June 9,
1999 among the Registrant, certain of its subsidiaries and
Foothill, as Agent.(8)
10.52 Trademark Security Agreement dated as of June 9, 1999 by the
Registrant certain of its subsidiaries and Foothill, as
Agent.(8)
10.53 Copyright Security Agreement dated as of June 9, 1999 by the
Registrant certain of its subsidiaries and Foothill, as
Agent.(8)
10.54 Receivables Sale Agreement dated as of November 30, 1999, by
and between the Registrant, the entities listed on the
signature pages thereto, and RFC Capital Corporation as
Purchaser.(9)
10.55 Amendment Number Four to Employment Agreement between the
Registrant and Mary A. Casey dated as of April 21,
1999.(9)
10.56 Amendment Number Two to Employment Agreement between the
Registrant and Kelly D. Enos dated as of April 21,
1999.(9)
10.57 Amendment Number One to Second Restatement of Employment
Agreement between the Registrant and James Kolsrud dated
as of May 5, 1999.(9)
</TABLE>

S-5
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------------------- ------------------------------------------------------------
<S> <C>
10.58 Amendment Number Two to Employment Agreement between the
Registrant and David Vaun Crumly dated as of April 21,
1999.(9)
10.59 Amendment Number Three to Employment Agreement between the
Registrant and David Vaun Crumly dated as of November 11,
1999.(9)
10.60 Revolving Line of Credit Promissory Note dated April 12,
1999 between the Registrant and Kelly Enos.(9)
10.61 Revolving Line of Credit Promissory Note dated April 12,
1999 between the Registrant and James Kolsrud.(9)
10.62 Master Lease Purchase Agreement dated February 20, 1998, as
amended, by and among the Registrant, PT-1 and Chase
Equipment Leasing.(9)
10.63 Office and Switch Lease dated April 8, 1997 between PT-1 and
Golden Union, LLC, C/O Alma Realty Co., 28-18 31st Street,
Astoria, NY 11102.(9)
10.64 Office and Switch Lease dated October, 1997 between PT-1 and
Evergreen America Corporation.(9)
10.65 Office and Switch Lease dated July, 1997 between the
Registrant and NWT Partners, Ltd.(9)
10.66 Office Switch Lease between STAR Telecommunications
Deutschland GmbH ("STAR GmbH") and Prinzzenpark GbR
Kanzlerstr, 4.(9)
10.67 Office and Switch Lease dated April 1, 1999 between STAR
GmbH and Rentax Gesellschaft Fur Grundbesitzan-Lagen GmbH.
(English language summary of the original German language
lease is attached thereto.)(9)
10.68 Office and Switch Lease dated March 1, 1999 between STAR
GmbH and Gewerbehof Athen. (English language summary of
the original German language lease is attached
thereto.)(9)
10.69 Office and Switch Lease dated June 1, 1999 between STAR GmbH
and Hamm & Co. (English language summary of the original
German language lease is attached thereto.)(9)
10.70 Office and Switch Lease dated February 1, 1999 between STAR
GmbH and Rudolf Geray. (English language summary of the
original German language lease is attached thereto.)(9)
10.71 Office and Switch Lease dated August 1, 1999 between STAR
GmbH and Erbengemeinschaft Fiszman. (English language
summary of the original German language lease is attached
thereto.)(9)
10.72 Office and Switch Lease dated February 1, 1999 between STAR
GmbH and Kallco Projekt Projekges GmbH. (English language
summary of the original German language lease is attached
thereto.)(9)
10.73 Office and Switch Lease dated June 1, 1999 between STAR GmbH
and Comptoir Genvois Immobilier. (English language summary
of the original German language lease is attached
thereto.)(9)
10.74 Office and Switch Lease between PT-1 and NWT Partners,
Ltd.(9)
21.1 Subsidiaries of the Registrant.(9)
23.1 Consent of Arthur Andersen LLP, Independent Public
Accountants.(X)
24.1 Power of Attorney.(9)
27.1 Financial Data Schedule.(9)
</TABLE>

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

(X) Included in this filing.

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

S-6
<PAGE>
(2) Filed as an exhibit to the Registrant's Registration Statement on Form S-4
(Registration No. 333-53335) and incorporated by reference herein.

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

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

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

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

(7) Filed as an exhibit to the Registrant's Current Report on Form 8-K (File No.
000-22581) on February 19, 1999 and incorporated by reference herein.

(8) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q (File
No. 000-22851) on August 16, 1999 incorporated by reference herein.

(9) Filed as an exhibit to the Registrant's Annual Report on Form 10-K
(File No. 000-22581) on April 14, 2000 and incorporated by reference herein.

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

(a) None.
</TABLE>

S-7