BLUESTAR COMMUNICATIONS GROUP INC, S-1/A, 2000-03-20

BLUESTAR COMMUNICATIONS GROUP INC
S-1/A, 2000-03-20
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 20, 2000

REGISTRATION NO. 333-95699

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1

FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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BLUESTAR COMMUNICATIONS GROUP, INC.
(Exact name of registrant as specified in its certificate of incorporation)

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<S> <C> <C>
DELAWARE 4813 62-1757987
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>

414 UNION STREET, SUITE 900
NASHVILLE, TENNESSEE 37219
(615) 255-2100

(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)

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NORTON CUTLER, ESQ.
GENERAL COUNSEL
BLUESTAR COMMUNICATIONS GROUP, INC.
414 UNION STREET, SUITE 900
NASHVILLE, TENNESSEE 37219
(615) 255-2100

(Name, address, including zip code, and telephone
number, including area code, of agent for service)

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COPIES TO:

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<S> <C>
CARMELO M. GORDIAN, ESQ. KRIS F. HEINZELMAN, ESQ.
MARK T. GOGLIA, ESQ. CRAVATH, SWAINE & MOORE
BROBECK, PHLEGER & HARRISON LLP WORLDWIDE PLAZA
301 CONGRESS AVENUE, SUITE 1200 825 EIGHTH AVENUE
AUSTIN, TEXAS 78701 NEW YORK, NEW YORK 10019
(512) 477-5495 (212) 474-1000
</TABLE>

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: as soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

CALCULATION OF REGISTRATION FEE

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PROPOSED
TITLE OF EACH CLASS OF AMOUNT PROPOSED MAXIMUM MAXIMUM AMOUNT OF
SECURITIES TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE FEE
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<S> <C> <C> <C> <C>
Common stock, par value $0.01 per share 16,100,000(1) $13.50 $217,350,000 $57,380.40(2)
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(1) Includes 2,100,000 shares as to which the Registrant has granted the
Underwriters a 30-day option to cover over-allotments.

(2) Includes $52,800 previously paid.

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

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<PAGE> 2

THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO
BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.

SUBJECT TO COMPLETION, DATED , 2000

14,000,000 Shares

(BLUESTAR LOGO)

Common Stock

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Prior to this offering, there has been no public market for our common
stock. The initial public offering price of the common stock is expected to be
between $11.50 and $13.50 per share. We have applied to list our common stock on
The Nasdaq Stock Market's National Market under the symbol "BLST".

The underwriters have an option to purchase a maximum of 2,100,000
additional shares of our common stock to cover over-allotments of shares.

INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 8.

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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS BLUESTAR
----------------- ----------------- -----------------
<S> <C> <C> <C>
Per Share............................................ $ $ $
Total................................................ $ $ $
</TABLE>

Delivery of the shares of common stock will be made on or about
, 2000.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.

CREDIT SUISSE FIRST BOSTON
DEUTSCHE BANC ALEX. BROWN
DONALDSON, LUFKIN & JENRETTE
J.P.MORGAN & CO.

The date of this prospectus is , 2000.
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TABLE OF CONTENTS

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PAGE
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PROSPECTUS SUMMARY................... 2
RISK FACTORS......................... 8
NOTE REGARDING FORWARD-LOOKING
STATEMENTS......................... 18
USE OF PROCEEDS...................... 19
DIVIDEND POLICY...................... 19
CAPITALIZATION....................... 20
DILUTION............................. 21
SELECTED CONSOLIDATED FINANCIAL
DATA............................... 22
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS...................... 24
BUSINESS............................. 30
MANAGEMENT........................... 48
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PAGE
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CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS....................... 56
PRINCIPAL STOCKHOLDERS............... 59
DESCRIPTION OF CAPITAL STOCK......... 61
SHARES ELIGIBLE FOR FUTURE SALE...... 65
CERTAIN UNITED STATES FEDERAL TAX
CONSIDERATIONS FOR NON-UNITED
STATES HOLDERS..................... 67
UNDERWRITING......................... 70
NOTICE TO CANADIAN RESIDENTS......... 73
LEGAL MATTERS........................ 74
EXPERTS.............................. 74
WHERE YOU CAN FIND MORE
INFORMATION........................ 74
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS......................... F-1
</TABLE>

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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
DIFFERENT INFORMATION. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL
THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE
DATE OF THIS DOCUMENT.

DEALER PROSPECTUS DELIVERY OBLIGATION

UNTIL , 2000 (25 DAYS AFTER THE COMMENCEMENT OF THIS
OFFERING), ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR
NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN
ACTING AS AN UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE> 4

PROSPECTUS SUMMARY

The following is only a summary. You should carefully read the more
detailed information contained in this prospectus, including the consolidated
financial statements and related notes. Our business involves significant risks.
You should carefully consider the information under the heading "Risk Factors".

OUR COMPANY

We are a provider of broadband communications and Internet services to
small- and medium-sized businesses in Tier II and Tier III markets, which
encompass cities with populations less than 1.5 million. Our Internet access
services, which are packaged with Web hosting and e-mail, and our high-speed
real private networking services are provided primarily using digital subscriber
line, or DSL, technology. DSL is a data transmission technology enabling the
transmission of digital signals over ordinary copper phone lines at speeds of up
to 2.3 megabits per second instead of a maximum of 64 kilobits per second
achieved sending analog signals over copper phone lines. Broadband communication
generally means the ability to transmit data at speeds higher than 64 kilobits
per second. We have deployed a proprietary asynchronous transfer mode, or ATM,
and Internet protocol backbone network to link all of our central offices and
markets. This network allows us to lower our Internet access costs, control the
speed and quality of our broadband services and provides us with a superior
platform for the delivery of additional enhanced services.

We generally have been among the first competitive broadband communications
providers to small- and medium-sized businesses in the markets we enter,
creating an early mover advantage and allowing us to establish strong
relationships with our target customers and network professionals. In each of
our markets, we have a locally based direct sales team that builds strong
customer relationships. We also ensure a high standard of service quality by
providing our own customer premise equipment installation and customer care
services. We place, or collocate, our equipment in central offices of
traditional telephone companies that serve a high density of our target
customers, which allows us to serve more potential customers within a market and
to provide a more attractive service offering to businesses with multiple
locations or telecommuters.

We began deploying our network in the Southeast, and we are expanding into
other Tier II and Tier III markets in the Midwest in 2000. As of February 29,
2000, we were offering our services in 28 markets, representing 126 cities. We
expect to deploy our network and roll out our services to a total of 57 markets
by year-end 2000. As of February 29, 2000, we had sold 2,935 high-speed access
lines to customers, of which 1,106 were installed in the customer's business. Of
the 2,935 lines sold, 675 lines were sold as part of our real private network
service and 144 of these lines were installed in the customer's business. Our
real private network service called Fireline RPN permits a customer to transmit
data securely between fixed locations on our network without the data ever
reaching or traveling over the public Internet. As of February 29, 2000, we had
collocated our network equipment in 144 central offices and expect to be in more
than 500 central office locations by the end of 2000. When this stage of our
network build-out is completed, our network will extend to cities with
approximately 1.2 million small- and medium-sized businesses.

We have a limited operating history. We began offering our services in
September 1998 and only began rapidly deploying our network in January 2000.
Since our formation, we have incurred losses and experienced negative operating
cash flow. We anticipate that we will continue to incur significant losses and
negative operating cash flow for the foreseeable future.

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Lucent provides us up to $109.0 million in vendor financing for equipment,
installs the equipment for us in central offices we target and provides us up to
$2.0 million in funding for cooperative advertising.

OUR SOLUTION

Carrier-Class Network with ATM Backbone. We have deployed a dedicated,
high-speed local access network to provide broadband communications and Internet
services using DSL and other high bandwidth technologies. By deploying a
dedicated network rather than a shared network, we are able to manage the
quality of our services and the capacity of the network and provide more secure
data transmission.

Dense Market Coverage. As of February 29, 2000, we offered services in 28
markets and we anticipate providing service to 57 total markets in 2000. We
typically collocate our equipment in central offices that have a minimum of 800
businesses within a three mile radius or that have less than 800 businesses
within a three mile radius but are located in high growth business areas. Our
dense market coverage allows us to serve more potential customers and
cost-effectively compete with the local telephone company.

Attractive Suite of Services. We offer a wide range of broadband
communications and Internet services designed to meet the needs of both small-
and medium-sized businesses. We offer continuously connected Internet access,
primarily utilizing DSL technology, with connectivity speeds ranging from 128
kilobits per second to 2.3 megabits per second. In addition to Internet
services, we offer private networking services designed for businesses with
several locations within a market or within multiple markets, or for
telecommuters within our service area. Our broad service offering allows our
sales force to upgrade customers as their needs evolve.

OUR STRATEGY

Our goal is to become a leading provider of broadband communications and
Internet services to small- and medium-sized businesses in the United States. In
order to achieve our goal, we will:

- capitalize on our local sales presence to improve customer loyalty and
reduce customer turnover;

- focus on small- and medium-sized businesses;

- develop new core markets with the goal of creating a nationwide
footprint;

- continue to penetrate existing markets;

- leverage our unique ATM and Internet protocol network architecture to
offer a broader suite of cost-effective, secure and high-quality
services;

- offer more enhanced services to attract and retain customers; and

- enhance our brand identity.
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We were originally organized on March 7, 1997 as a Tennessee limited
liability company. On September 28, 1998, we converted from a Tennessee limited
liability company to a corporation by merging the limited liability company into
BlueStar Properties, Inc., a Tennessee corporation. On June 22, 1999, we
reincorporated in Delaware by merging the Tennessee corporation into BlueStar
Properties, Inc., a newly formed Delaware corporation. On January 28, 2000, we
changed our name to BlueStar Communications Group, Inc. We also have four
wholly-owned subsidiaries, three of which are incorporated in Tennessee and one
in Virginia. Our principal executive offices are located at 414 Union Street,
Suite 900, Nashville, Tennessee 37219. Our telephone number is (615) 255-2100.
We maintain a Website at www.bluestar.net. Information contained in our Website
does not constitute a part of this prospectus.

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THE OFFERING

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Common stock offered by BlueStar........... 14,000,000 shares
Common stock to be outstanding after this
offering................................. 85,389,222 shares
Use of proceeds............................ We intend to use the net proceeds to
continue deploying our network, and for
working capital, operating expenses and
other general corporate purposes.
Proposed Nasdaq National Market symbol..... BLST
</TABLE>

The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of February 29, 2000, and
assumes the conversion of all of our preferred stock into common stock. This
number assumes no exercise of the underwriters' over-allotment option and
excludes:

- 7,545,000 shares of common stock issuable upon exercise of options
outstanding as of February 29, 2000 with a weighted average exercise
price of $0.30 per share;

- 720,000 shares subject to outstanding warrants at a weighted-average
exercise price of $0.275; and

- 1,131,370 additional shares of common stock reserved under our option
plan as of December 31, 1999.

This offering is for 14,000,000 shares. The underwriters have a 30-day
option to purchase up to 2,100,000 additional shares from us to cover
over-allotments. Some of the disclosures in this prospectus would be different
if the underwriters exercise the over-allotment option. Unless we state
otherwise, the information in this prospectus assumes that the underwriters will
not exercise the over-allotment option.

Except where we state otherwise, the information we present in this
prospectus:

- reflects a 3-for-1 split of our common stock and preferred stock effected
as of October 29, 1999;

- reflects a 2-for-1 split of our common stock to be effected prior to this
offering;

- excludes 720,000 shares subject to outstanding warrants at a
weighted-average exercise price of $0.275; and

- reflects the conversion of all outstanding shares of preferred stock into
45,375,292 shares of common stock upon the closing of this offering.

Unless otherwise stated, all references in this prospectus to "we," "us,"
"our" and "BlueStar" include BlueStar Communications Group, Inc., our
wholly-owned subsidiaries, and our predecessors BlueStar Properties, Inc., a
Tennessee corporation, and BlueStar Communications, LLC., a Tennessee limited
liability company.

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SUMMARY CONSOLIDATED FINANCIAL INFORMATION

The following tables summarize our financial data. For a more detailed
explanation of our financial condition and operating results, you should read
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", and our consolidated financial statements and the notes to those
statements included in this prospectus. Unaudited pro forma net loss per share
and weighted average shares have been calculated assuming the conversion of all
outstanding preferred stock into common stock as if the shares had converted
immediately upon their issuance. EBITDA consists of net loss excluding net
interest, taxes, depreciation and amortization. We have presented data related
to EBITDA because it is a measure of performance commonly used in the
telecommunications industry to enhance an understanding of operating results. We
believe that EBITDA may be used by investors as supplemental information to
evaluate a company's financial performance, including its ability to incur
and/or service debt. However, EBITDA may be needed to make other payments prior
to servicing debt. Negative EBITDA implies that a company is not currently
generating sufficient income to fund its operations or service its debt. Our
calculation of EBITDA may not be comparable to that of other companies.

EBITDA is not a measure of performance under generally accepted accounting
principles and should not be used as a substitute for net income, net cash
provided by operating activities or other operating or cash flow statement data
prepared in accordance with generally accepted accounting principles.

EBITDA and cash flows from operating activities reflected in the statement
of cash flows differ significantly. Cash from operating activities is net of
interest and taxes paid and is a more comprehensive determination of periodic
income on a cash (rather than accrual) basis, exclusive of non-cash items of
income and expenses such as depreciation and amortization. In contrast, EBITDA
is derived from accrual basis income and is not reduced by cash invested in
working capital. Consequently, EBITDA is not affected by the timing of
receivable collections or when accrued expenses are paid.

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YEAR ENDED DECEMBER 31,
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1998 1999
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CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues.................................................... $ 12,101 $ 771,109
Loss from operations........................................ $ (718,096) $(19,346,582)
Net loss.................................................... $ (717,629) $(18,804,868)
Net loss per share:
Basic and diluted......................................... $ (0.04) $ (1.05)
=========== ============
Weighted average shares................................... 20,308,020 17,906,332
=========== ============
Pro forma net loss per share:
Per share amount.......................................... $ (0.52)
============
Weighted average shares................................... 36,218,507
============
OTHER DATA:
EBITDA...................................................... $ (689,694) $(19,082,610)
Net cash used in operating activities....................... (496,606) (12,842,434)
Net cash used in investing activities....................... (89,556) (12,023,658)
Net cash provided by financing activities................... 1,087,773 37,266,188
</TABLE>

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The following table contains a summary of our balance sheet:

- on an actual basis as of December 31, 1999;

- on a pro forma basis to give effect to the issuance of 2,165,603 shares
of Series C preferred stock, the repurchase of 3,569,870 shares of common
stock by us related to the resignation of one of our officers at a
purchase price of $0.025 per share and the exercise of options to
purchase 6,158,000 shares of our common stock at a weighted average
exercise price of $0.13 per share of which we received $122,665 in cash
proceeds and made $705,570 in loans to employees for the remaining
exercise price after December 31, 1999; and

- on a pro forma as adjusted basis to give effect to this offering,
including conversion of the existing Series A, Series B and Series C
preferred stock into 45,375,292 shares of our common stock upon
completion of this offering.

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<CAPTION>
DECEMBER 31, 1999
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PRO FORMA AS
ACTUAL PRO FORMA ADJUSTED
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<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................... $ 12,901,707 $ 46,921,878 $208,671,878
Working capital, excluding cash and cash
equivalents................................... (7,294,784) (7,294,284) (7,294,284)
Total assets.................................... 26,506,367 60,526,538 222,276,538
Redeemable convertible preferred stock.......... 37,016,697 71,001,665 --
Total stockholders' (deficit) equity............ (18,882,097) (18,846,894) 213,904,771
</TABLE>

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RISK FACTORS

An investment in our common stock involves a high degree of risk. You
should carefully consider the risks and uncertainties described below and the
other information in this prospectus before deciding to purchase shares of our
common stock. The risks and uncertainties described below are not the only risks
facing our company.

RISKS RELATED TO OUR BUSINESS

OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT FOR YOU TO EVALUATE OUR PAST
PERFORMANCE AND PROSPECTS.

We were formed on March 7, 1997, began offering our services in September
1998 and only began to rapidly deploy our network in January 2000. There are
less than two years of material operating history for you to review in
evaluating and analyzing our business. We have limited historical financial and
operating data upon which you can evaluate our business and prospects. Our
limited operating history makes it very difficult for you to evaluate or predict
our ability to, among other things, retain customers, generate and sustain a
revenue base sufficient to meet our operating expenses, and achieve
profitability.

WE CANNOT PREDICT THE GROWTH OR ULTIMATE SIZE OF THE MARKET FOR BROADBAND
COMMUNICATIONS AND INTERNET SERVICES BECAUSE IT IS NEW AND RAPIDLY EVOLVING.

The broadband communications industry is in the early stages of development
and is subject to rapid and significant technological change. Since the industry
is new and because the technologies available for broadband communications
services are rapidly evolving, we cannot accurately predict the rate at which
the market for our services will grow, if at all, or whether emerging
technologies will render our services less competitive or obsolete. If the
market for our services fails to develop or grows more slowly than we currently
anticipate, our business, prospects, financial condition and results of
operations could face material adverse effects.

OUR BUSINESS MODEL IS UNPROVEN.

Our business model and strategy may not be successful. If the assumptions
underlying our business model are not valid or we are unable to implement our
business plan, achieve predicted levels of market penetration or obtain the
desired level of pricing of our services for sustained periods, our business may
not succeed. We focus on selling directly to small- and medium-sized businesses
in Tier II and Tier III markets. Many other DSL providers sell their services
primarily to Internet service providers and others who, in turn, resell these
services to their customers through their sales forces. Moreover, many other DSL
providers currently offer their services primarily in large metropolitan areas.
If their business model proves to be superior to our own, we will not be able to
compete effectively against these providers. We also are deploying our own
network rather than buying network time from other providers. As a result, we
must obtain a sufficient number of customers and generate revenues to meet our
fixed network deployment expense. If we fail to generate enough revenue, we will
not achieve profitability. We only recently began to deploy our services in nine
states. We may never be able to deploy our network as we have planned or achieve
significant market acceptance, favorable operating results or profitability.

OUR LOSSES WILL CONTINUE FOR THE FORESEEABLE FUTURE.

We have incurred losses and experienced negative operating cash flow for
each month since our formation. We expect to continue to incur significant
losses and negative operating cash flow for the foreseeable future. If our
revenue does not grow as we expect or if our capital and operating

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expenditures exceed our plans, then our business, prospects, financial condition
and results of operations will face materially adverse effects. As of December
31, 1999, we had total stockholders' deficit of $18.9 million.

THE PRICE FOR DIGITAL COMMUNICATIONS SERVICES MAY DECREASE TO LEVELS THAT MAKE
IT IMPOSSIBLE FOR US TO ACHIEVE PROFITABILITY OR POSITIVE CASH FLOW.

Prices for digital communications services have historically decreased over
time. We expect this trend to continue. We may have to reduce our prices in
order to remain competitive, and we may not be able to sustain our current
pricing schedules and profit margins. We may be unable to sell our services at
desired pricing levels which would significantly impair our ability to achieve
profitability or positive cash flow.

OUR DEPENDENCE ON TRADITIONAL TELEPHONE COMPANIES FOR TRANSMISSION FACILITIES
AND THE AVAILABILITY AND CONDITION OF COPPER TELEPHONE LINES MAY DELAY OUR
NETWORK DEPLOYMENT AND PROVISION OF SERVICE TO CUSTOMERS.

Our ability to provide DSL-based services to potential customers depends on
the quality, physical condition, availability and maintenance of copper
telephone lines, which is within the control of traditional telephone companies.
We also depend on the traditional telephone companies to provision and maintain
the quality of the copper telephone lines that we use. We have experienced, on
average, a five business day delay from the time the traditional telephone
company is contractually required to test and release a copper phone line to us
and when they actually release the copper lines to us. We may continue to
experience delays in the future. We cannot assure you that cost related to these
future delays will not be material. We have not established a history of leasing
large volumes of copper telephone lines from, or working with, traditional
telephone companies.

OUR BUSINESS IS DEPENDENT ON OUR ABILITY TO NEGOTIATE AND ENTER INTO
INTERCONNECTION AGREEMENTS WITH TRADITIONAL TELEPHONE COMPANIES.

We must negotiate and enter into interconnection agreements with each
traditional telephone company in whose service area we wish to do business.
Interconnection agreements address the price and terms for the collocation of
our equipment in the traditional telephone company's central office and our
lease of copper telephone lines. We have negotiated interconnection agreements
with Ameritech, BellSouth, GTE, Southwestern Bell, Sprint and U S West. These
interconnection agreements generally are two to three years in duration. If the
interconnection agreement terminates, legal procedures require that the
traditional telephone company provide us continued interconnection though not
necessarily on terms favorable to us. We have experienced immaterial breaches of
these agreements in the past and expect to continue to experience breaches in
the future. We cannot assure you that future breaches will not be material.
Delays in obtaining interconnection agreements may delay our entry into new
markets. In addition, disputes may arise between us and traditional telephone
companies with respect to interconnection agreements, and we may be unable to
resolve those disputes in our favor or in a timely manner. If we are unable to
enter into, or experience a delay in obtaining, interconnection agreements, our
business could be adversely affected.

FAILURE TO OBTAIN SPACE FOR OUR DSL EQUIPMENT IN THE TRADITIONAL TELEPHONE
COMPANIES' CENTRAL OFFICES IN OUR TARGET MARKETS COULD ADVERSELY AFFECT OUR
BUSINESS.

Our strategy requires us to obtain space to install our DSL equipment in
central offices of traditional local telephone companies. Failure to obtain
space in those central offices, known as collocation space, on a timely or
economic basis could have a material adverse effect on our business. We must
negotiate and enter into collocation agreements for each central office in which
we collocate equipment. We may not be able to secure collocation space in the
central offices of our choice on a

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timely basis. We expect that central office space will become increasingly
scarce as demand for collocation space increases. The terms of our collocation
agreements are generally one to two years and are subject to renegotiation,
renewal and termination provisions. Failure to renew a collocation agreement
would prohibit us from providing continued service to customers formerly served
from the central office specified in the collocation agreement and limit our
ability to obtain new customers in that service area. If a collocation agreement
is terminated, legal procedures require that the traditional telephone company
provide us continued access to the central office though not necessarily on
terms favorable to us.

WE COMPETE WITH THE TRADITIONAL TELEPHONE COMPANIES ON WHOM WE DEPEND.

Many of the traditional telephone companies are testing or have begun
deploying DSL-based services. BellSouth, the dominant traditional telephone
company in our current main region of operation, is offering a DSL product
primarily to residential subscribers. In addition, these companies also
currently offer high-speed data communications services that use other
technologies. Consequently, traditional telephone companies have strong
incentives to delay entering into interconnection and collocation agreements
with us or providing us access to components of their networks on which our
business is dependent. For example, the traditional telephone companies may
delay:

- our access to their central offices to install our equipment and provide
our services; and

- our access to acceptable transmission facilities and copper telephone
lines.

Any delays would negatively affect our ability to deploy our network and provide
services to our customers.

OUR SERVICES ARE SUBJECT TO FEDERAL, STATE AND LOCAL LAWS AND REGULATIONS AND
CHANGES IN THESE LAWS AND REGULATIONS COULD ADVERSELY AFFECT THE WAY WE OPERATE
OUR BUSINESS.

The facilities we use and the services we offer are subject to varying
degrees of regulation at the federal, state and local levels. Changes in
applicable laws and regulations could, among other things, increase our costs,
restrict our access to the central offices of traditional telephone companies or
restrict our ability to provide our services. For example, the
Telecommunications Act of 1996, which, among other things, requires traditional
telephone companies to unbundle network elements and to allow competitors to
collocate their equipment in the telephone companies' central offices, is the
subject of ongoing proceedings, litigation and legislation at the federal, state
and local levels. In addition, the Federal Communications Commission, or FCC,
rules governing pricing standards for access to the networks of the traditional
telephone companies currently are being challenged in federal court. We cannot
predict the outcome of the various proceedings, litigation and legislation or
whether, or to what extent, these proceedings, litigation and legislation may
adversely affect our business and operations. In addition, decisions by the FCC
and state telecommunications regulators will determine some of the terms of our
relationships with traditional telephone companies, including the terms and
prices of interconnection agreements, and access fees and surcharges on gross
revenue from interstate and intrastate services. State telecommunications
regulators determine whether and on what terms we will be authorized to operate
as a competitive local exchange carrier in their state. In addition, local
municipalities may require us to obtain various permits or to pay franchise
fees, which could increase the cost of services or delay development of our
network. Future federal, state and local regulations and legislation may be less
favorable to us than current regulations and legislation and may adversely
affect our business and operations.

10
<PAGE> 13

THE MARKET IN WHICH WE OPERATE IS HIGHLY COMPETITIVE, AND WE MAY NOT BE ABLE TO
COMPETE EFFECTIVELY.

The market for broadband communications and Internet access services for
small- and medium-sized businesses is extremely competitive. We face competition
on price and quality of service from traditional and new communications
companies with longer operating histories, more established customer
relationships, greater financial, technical and marketing resources, larger
customer bases and greater brand or name recognition than we have. These
competitors include:

- traditional telephone companies;

- long distance carriers;

- cable modem service providers;

- wireless and satellite data service providers;

- internet service providers; and

- other competitive telecommunications providers.

Furthermore, the numerous companies that may seek to enter our markets may
expose us to severe price competition for our services. Our competitors also may
be able to respond more quickly to technological developments and changes in
customers' needs. Any of these factors may limit our ability to compete
effectively.

WE DEPEND ON ONE SUPPLIER FOR A SIGNIFICANT AMOUNT OF OUR TELECOMMUNICATIONS
EQUIPMENT, ROUTERS AND DSL-READY MODEMS.

Lucent Technologies is our primary supplier of telecommunications
equipment. Lucent supplies nearly all of the telecommunications equipment we
deploy in traditional telephone companies' central offices and supplies all of
our routers and other customer premises equipment. There is no manufacturing
standard for DSL equipment. DSL equipment manufactured by different vendors is
not compatible with Lucent's equipment. In the event Lucent ceases to
manufacture competitive equipment, or in the event we are unable to obtain this
equipment, we would be unable to deploy our network in a timely manner, which
would significantly reduce our ability to compete.

WE DEPEND ON CONTRACTORS TO INSTALL THE EQUIPMENT AND WIRING NECESSARY TO
PROVIDE OUR SERVICE IN TRADITIONAL TELEPHONE COMPANIES' CENTRAL OFFICES.

We primarily utilize contractors to install the necessary equipment and
wiring in the central offices of traditional telephone companies, which reduces
our control over the build-out of central offices. Failure to retain experienced
and certified contractors to install the equipment and wiring on a timely,
cost-efficient basis could significantly delay the deployment of our network,
lengthen our installation time and materially damage our reputation and
business. If we are unable to retain contractors to provide these services, we
will have to complete these installations ourselves, most likely at increased
cost and with significant delay. We may be required to utilize numerous
contractors as we expand our operations, which may result in installation
delays, increased costs and lower overall quality of service.

WE WILL NEED ADDITIONAL FUNDS IN THE FUTURE IN ORDER TO CONTINUE TO GROW OUR
BUSINESS.

We believe our current capital resources combined with the proceeds of this
offering will be sufficient for our funding and working capital requirements for
the deployment and operation of our network into 2001. Thereafter, we will be
required to raise additional capital through the issuance of

11
<PAGE> 14

debt or equity securities. We may choose to raise additional capital sooner,
depending on market conditions. The actual amount and timing of our future
capital requirements will depend upon a number of factors, including:

- the number of new markets we enter and the timing of entry;

- network deployment schedules and associated costs;

- the rate and price at which customers purchase our services;

- the level of marketing required to attract and retain customers in new
and existing markets; and

- opportunities to invest in or acquire complementary businesses.

The value of your investment may be diluted by our future capital raising
transactions. We also may be unsuccessful in raising sufficient capital, at all
or on terms that we consider acceptable, which would impair our ability to
continue to expand our business or respond to competitive developments.

OUR FAILURE TO MANAGE OUR GROWTH COULD HAVE A DETRIMENTAL EFFECT ON OUR BUSINESS
RESULTS.

We anticipate that we will add service in a significant number of new
cities and add a substantial number of new employees in geographically dispersed
areas. This rapid growth will continue to place a significant strain on our
management, financial controls, operations, personnel and other resources. If we
fail to manage our anticipated rapid growth, our business will be harmed. If we
are unable to provision the lines we have sold to our customers or if we do not
institute adequate financial and reporting systems, managerial controls and
procedures to operate from geographically dispersed locations, our financial
condition will be adversely affected. We are currently implementing operational
support systems to bill customers, process customer orders and coordinate with
vendors and contractors. Implementation of each of these systems and subsequent
enhancements and integration of these systems could be delayed or, when
implemented, could cause disruptions in service or billing. To manage our growth
effectively, we must successfully implement these systems on a timely basis and
continually expand and upgrade these systems as our operations expand.

OUR SUCCESS DEPENDS ON OUR RETENTION OF EXECUTIVE OFFICERS.

We are managed by a small number of executive officers. Competition for
qualified executives in the telecommunications industry is intense, and there
are a limited number of persons with comparable experience. We depend upon our
executive officers, and in particular Robert E. Dupuis, our Chairman, President
and Chief Executive Officer, to execute our business strategy and manage
employees located in geographically dispersed areas. We do not have employment
agreements with any of our executive officers, so any of these individuals may
terminate his or her employment at any time. We do not have "key person" life
insurance policies on any of our executive officers. The loss of these key
individuals would have a material adverse effect on our business.

OUR MANAGEMENT TEAM HAS LITTLE EXPERIENCE WORKING TOGETHER.

We have recently hired a number of new officers, including our Chief
Executive Officer, who joined us in April 1999. In addition, most of our senior
management team has been with us for less than six months. To integrate into our
company, these individuals must spend a significant amount of time learning our
business model and management system, in addition to performing their regular
duties. Accordingly, the integration of the executive officers may result in
some disruption to our ongoing operations.

12
<PAGE> 15

IF WE FAIL TO RECRUIT AND HIRE QUALIFIED PERSONNEL IN A TIMELY MANNER AND RETAIN
OUR EMPLOYEES, WE WILL NOT BE ABLE TO EXECUTE OUR BUSINESS STRATEGY.

Our strategy is to continue expanding our presence in the Southeast and to
expand into adjacent states beginning in the Midwest. In order to execute this
strategy we must identify, hire, train and retain highly qualified technical,
sales, marketing and customer service personnel. If we cannot hire and retain a
sufficient number of employees, we will not be able to expand our geographic
presence as planned. Many parts of the country, and specifically Nashville and
the rest of the Southeast, are experiencing extremely low unemployment levels.
As a result, we may be unable to identify, hire or retain employees with
experience in the telecommunications industry. Moreover, the telecommunications
industry has a high level of employee mobility and aggressive recruiting of
skilled personnel. Failure to attract or to retain experienced employees will
result in delays in deploying our network. In order to attract and retain
experienced employees, we are increasing expenditures associated with employee
retention, including compensation, relocation expenses, employee loans and
buyouts of employment contracts. Any failure to successfully address these
issues could adversely affect our business.

A NETWORK FAILURE COULD CAUSE DELAYS OR INTERRUPTIONS OF SERVICE TO OUR
CUSTOMERS AND COULD RESULT IN A LOSS OF CUSTOMERS.

If a natural or man-made disaster reduces or eliminates the flow of
electricity to our network operations center in Nashville, Tennessee, we do not
have a sufficient emergency power supply to maintain the network operations
center. Our current facilities prevent us from adequately providing emergency
power.

In December 1999, we experienced a network disruption that interrupted
services intermittently to some of our customers for up to two days due to an
equipment software problem. As a result, we have issued our customers
approximately $9,000 in total credits toward services and lost six customers. A
future interruption could result in substantial customer dissatisfaction or
loss. Additionally, if a traditional telephone company or other service provider
fails to provide the communications capacity we require as a result of a natural
disaster, operational disruption or for any other reason, our services would be
interrupted.

A BREACH OF NETWORK SECURITY COULD RESULT IN LIABILITY TO US AND DETER CUSTOMERS
FROM USING OUR SERVICES.

Our network is vulnerable to unauthorized access, computer viruses and
other disruptive problems. Corporate networks and Internet service providers
have experienced in the past, and probably will experience in the future,
interruptions in service as a result of accidental or intentional security
breaches by Internet users, current and former employees and others.
Unauthorized access could also jeopardize the security of confidential
information stored in the computer systems of our customers, which might make us
liable to these customers, and also might deter potential customers from
contracting for services. Eliminating computer viruses and alleviating other
security problems may require interruptions, delays or cessation of service to
our customers, cause us to incur significant costs to remedy the problems and
divert the attention of management. We have implemented security measures that
could be circumvented. Any failure of these measures could have a material
adverse effect on our ability to attract and retain customers.

13
<PAGE> 16

INTERFERENCE WITH VOICE TRAFFIC CAUSED BY OUR NETWORK COULD RESULT IN A DELAY OR
LOSS OF SERVICES.

Certain technical laboratory tests and field experience indicate that some
types of DSL may cause interference with and be interfered by other signals
carried over a traditional telephone company's copper wires. Citing this
potential interference, some traditional telephone companies have imposed
restrictions on the use of asymmetrical DSL technology over their copper lines.
If traditional telephone companies were to restrict our use of DSL technology or
equipment in the future, our business could be materially adversely affected.

WE MAY NOT BE ABLE TO LEASE FIBER OPTIC TRANSPORT FACILITIES FROM THIRD PARTIES.

We lease fiber optic transport facilities from third parties to connect our
equipment within and between metropolitan areas. These third party fiber optic
carriers include long distance carriers, traditional telephone companies and
other competitive telecommunications providers. Many of these entities are, or
may become, our competitors. We may be unable to negotiate or renew favorable
leases with these fiber optic carriers. Further, we depend on the timeliness of
these companies to process our orders for customers who seek to use our
services. We have in the past experienced supply problems with certain of our
fiber optic suppliers, and they may be unable or unwilling to meet our needs on
a timely basis in the future. Moreover, the fiber optic transport providers
whose networks we lease may be unable to obtain or maintain permits and
rights-of-way necessary to develop and operate existing and future networks.

OUR INTELLECTUAL PROPERTY PROTECTION MAY BE INADEQUATE TO PROTECT OUR
PROPRIETARY RIGHTS, AND WE MAY BE SUBJECT TO INFRINGEMENT CLAIMS.

We have applied for trademarks and servicemarks on terms, logos and symbols
that we believe are important to our business and the branding of our services.
We currently have no patents or patent applications pending. We rely on a
combination of licenses, confidentiality agreements and other contracts to
establish and to protect our technology and other intellectual property rights.
The steps we have taken may be inadequate to protect our technology or other
intellectual property. In the event of an unfavorable ruling on any claim, we
may be unable to obtain a license or similar agreement to use technology we rely
upon to conduct our business or may be required to pay a substantial sum as
damages. In addition, our competitors may otherwise learn or discover our trade
secrets.

WE MAY MAKE ACQUISITIONS OF COMPLEMENTARY TECHNOLOGIES OR BUSINESSES IN THE
FUTURE, WHICH MAY DISRUPT OUR BUSINESS AND BE DILUTIVE TO EXISTING STOCKHOLDERS.

We intend to consider acquisitions of businesses and technologies in the
future. Acquisitions of businesses and technologies involve numerous risks,
including the diversion of the attention of management, difficulties in
assimilating the acquired operations, loss of key employees from the acquired
company and difficulties in transitioning key customer relationships. In
addition, these acquisitions may result in dilutive issuances of equity
securities, the incurrence of additional debt, large one-time expenses and the
creation of goodwill or other intangible assets that result in significant
amortization expense. Any of these factors could materially harm our business or
our operating results in a given period or could cause our stock price to
decline.

14
<PAGE> 17

OUR QUARTERLY OPERATING RESULTS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY, CAUSING
OUR STOCK PRICE TO BE VOLATILE OR DECLINE.

We cannot accurately forecast our quarterly revenue and operating results,
which may fluctuate significantly from quarter to quarter. If our quarterly
revenue or operating results fall below the expectations of investors or
securities analysts, the price of our common stock could fall substantially. Our
quarterly revenue and operating results may fluctuate as a result of a variety
of factors, many of which are outside our control, including:

- the amount and timing of expenditures relating to the rollout of our
network and services;

- our ability to obtain necessary regulatory approvals in a timely fashion;

- the rate at which we are able to attract customers within our target
markets and our ability to retain those customers;

- our ability to deploy our network on a timely basis;

- the availability of future financing to continue our expansion;

- technical difficulties or network downtime;

- the availability of collocation space in traditional telephone companies'
central offices and the timing of the installation of our equipment in
those spaces; and

- the introduction of new services or technologies by our competitors and
the resulting pressures on the pricing of our services.

RISKS RELATED TO INVESTING IN OUR COMMON STOCK

OUR STOCK PRICE MAY BE VOLATILE AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES AT
OR ABOVE THE INITIAL PUBLIC OFFERING PRICE.

There has been no public market for our common stock prior to this
offering. The initial public offering price for our common stock will be
determined through negotiations between the underwriters and us. This initial
public offering price may vary from the market price of our common stock after
the offering. If you purchase shares of common stock, you may not be able to
resell those shares at or above the initial public offering price. The market
price of our common stock may fluctuate significantly in response to factors,
some of which are beyond our control, including the following:

- actual or anticipated fluctuations in our annual and quarterly operating
results;

- changes in financial estimates by securities analysts;

- increased competition among DSL providers, including announcements by us
or our competitors of significant technical innovations, contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;

- announcements by traditional telephone companies about their new
competitive offerings;

- additions or departures of key personnel;

- future sale of our equity or debt securities;

- unfavorable regulatory rulings; and

- general economic, industry and market conditions.

15
<PAGE> 18

In addition, the stock prices of companies providing DSL have been
extremely volatile. Our stock price may reflect our industry's performance and
fall regardless of our performance. Moreover, companies that have experienced
volatility in the market price of their stock have been the object of securities
class action litigation. If we were the object of securities class action
litigation, we could suffer substantial costs and a diversion of management's
attention and resources regardless of the lawsuit's merits.

THE MARKET PRICE OF OUR COMMON STOCK MAY DROP SIGNIFICANTLY WHEN THE
RESTRICTIONS ON RESALE BY OUR EXISTING STOCKHOLDERS LAPSE.

Following this offering, we will have approximately 85,389,222 shares of
our common stock outstanding based upon our shares outstanding as of February
29, 2000. Approximately 71,389,222 shares, or 83.6%, of our outstanding common
stock will be subject to restrictions on resale under U.S. securities laws.
Holders of substantially all of these shares have agreed not to sell these
shares for at least 180 days following the date of this prospectus, although
Credit Suisse First Boston Corporation can waive this restriction at any time.
As these restrictions on resale end, the market price of our common stock could
drop significantly if holders of these shares sell them or are perceived by the
market as intending to sell them. These sales also may make it difficult for us
to raise additional funds by selling equity securities in the future at a time
and price that we deem appropriate.

OUR PRINCIPAL STOCKHOLDERS AND MANAGEMENT OWN A SIGNIFICANT PERCENTAGE OF OUR
CAPITAL STOCK AND WILL BE ABLE TO EXERCISE SIGNIFICANT INFLUENCE OVER OUR
COMPANY.

Following this offering, our executive officers and directors and principal
stockholders together will beneficially own approximately 69.6% of the total
voting power of our company. Accordingly, these stockholders, as a group, will
be able to determine the composition of our board of directors, will retain the
voting power to approve all matters requiring stockholder approval and will
continue to have significant influence over our affairs. This concentration of
ownership could have the effect of delaying or preventing a change in control of
our company or otherwise discouraging a potential acquirer from attempting to
obtain control of our company, which in turn could have a material and adverse
effect on the market price of the common stock or prevent our stockholders from
realizing a premium over the market prices for their shares of common stock.

PROVISIONS OF OUR CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW COULD
DELAY OR DETER A CHANGE IN CONTROL.

Our corporate documents and Delaware law contain provisions that might
enable our management to resist a change in control of our company. These
provisions include a staggered board of directors, limitations on persons
authorized to call a special meeting of stockholders, prohibitions on
stockholder action by written consent and advance notice procedures required for
stockholders to make nominations of candidates for election as directors or to
bring matters before an annual meeting of stockholders. These provisions might
discourage, delay or prevent a change in our management. These provisions could
also discourage proxy contests and make it more difficult for you and other
stockholders to elect directors and take other corporate actions. The existence
of these provisions could limit the price that investors might be willing to pay
in the future for shares of common stock and could deprive you of an opportunity
to receive a premium for your common stock as part of a sale.

OUR MANAGEMENT HAS DISCRETION OVER THE USE OF THE PROCEEDS OF THIS OFFERING,
WHICH WE MAY NOT USE EFFECTIVELY.

We have not committed the net proceeds of this offering to any particular
purpose. As a result, our management will have significant flexibility in
applying the net proceeds of this offering and could

16
<PAGE> 19

apply them in ways with which stockholders may disagree. If we do not apply the
funds we receive effectively, our accumulated deficit will increase and we may
lose significant business opportunities.

YOU WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION IN THE BOOK VALUE OF YOUR
INVESTMENT.

If you purchase shares of our common stock in this offering, you will
experience immediate and substantial dilution because the price you pay will be
substantially greater than the net tangible book value per share of the shares
you acquire. This dilution is due, in large part, to the fact that our current
investors paid substantially less than the public offering price when they
purchased their shares of common stock. You will experience additional dilution
upon the exercise of outstanding stock options and warrants to purchase common
stock.

17
<PAGE> 20

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains "forward-looking statements." All forward-looking
statements involve substantial risk and uncertainty and you should not place
undue reliance on such forward-looking statements. You can identify these
statements by forward-looking words such as "may," "will," "expect," "intend,"
"anticipate," "believe," "estimate," "continue," "future" or similar
terminology. You should read statements that contain these words carefully
because they discuss our future expectations, make projections of our future
results of operations or financial condition or state other "forward-looking"
information. We can give no assurance that the expectations reflected in the
forward-looking statements will prove to have been correct. Our actual results
could differ materially from those mentioned in the forward-looking statements
contained in this prospectus for a variety of reasons, including the risks
described in the sections captioned "Risk Factors" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations," and elsewhere in
this prospectus. Except as otherwise required by federal securities laws, we
undertake no obligation to update publicly or revise any forward-looking
statements.

18
<PAGE> 21

USE OF PROCEEDS

Assuming an initial public offering price of $12.50 per share, we will
receive approximately $161.8 million from our sale of 14,000,000 shares of
common stock, net of offering expenses and underwriting discounts and
commissions payable by us. If the underwriters exercise their over-allotment
option in full, we will receive an additional $24.3 million in net proceeds. We
intend to use the net proceeds of this offering for general corporate purposes,
including funding:

- the continuing deployment of network services in our existing markets;

- our planned expansion into additional markets;

- working capital;

- selling and marketing activities; and

- operating expenses.

We also may use a portion of the net proceeds to acquire or invest in
complementary businesses. Pending use of such net proceeds, we intend to invest
the net proceeds in short-term, investment grade securities to the extent
permitted by law.

The actual amounts we spend will vary significantly depending upon a number
of factors, including future revenue growth, if any, capital expenditures, the
amount of cash generated by our operations and other factors, many of which are
beyond our control. Additionally, we may modify the number, selection and timing
of our entry with respect to any or all of our targeted markets. Accordingly,
our management will retain broad discretion in the allocation of the net
proceeds.

DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock, and
we do not intend to pay cash dividends on our common stock in the foreseeable
future. We currently expect to retain future earnings, if any, to fund the
operation and expansion of our business. Our ability to declare and pay cash
dividends on our common stock could be further limited by agreements governing
indebtedness that we may incur in the future.

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<PAGE> 22

CAPITALIZATION

The following table sets forth our capitalization at December 31, 1999:

- on an actual basis;

- on a pro forma as adjusted basis to give effect to this offering,
including conversion of the existing Series A, Series B and Series C
preferred stock into 45,375,292 shares of common stock upon completion of
this offering.

You should read the following table in conjunction with our consolidated
financial statements and the notes to those statements that are included in this
prospectus.

<TABLE>
<CAPTION>
DECEMBER 31, 1999
------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------------ ------------ ------------
<S> <C> <C> <C>
Cash and cash equivalents................................... $ 12,901,707 $ 46,921,878 $208,671,878
============ ============ ============
Long-term debt, net of current portion...................... 503,174 503,174 503,174
Redeemable convertible preferred stock:
Series A -- 12,345,003 issued and outstanding, actual and
pro forma; and none issued and outstanding pro forma as
adjusted................................................ 5,936,688 5,936,688 --
Series B -- 8,177,040 issued and outstanding, actual and
pro forma; and none issued and outstanding pro forma as
adjusted................................................ 31,080,009 31,080,009 --
Series C -- none issued and outstanding, actual; 2,165,603
issued and outstanding pro forma and none issued and
outstanding pro forma as adjusted....................... -- 33,984,968 --
------------ ------------ ------------
Total redeemable convertible preferred stock............ 37,016,697 71,001,665 --
------------ ------------ ------------
Stockholders' (deficit) equity:
Common Stock, $0.01 par value, 60,000,000 shares authorized,
23,425,800 shares issued and outstanding, actual;
60,000,000 shares authorized, 26,013,930 shares issued and
outstanding, pro forma; 150,000,000 shares authorized,
85,389,222 shares issued and outstanding, pro forma as
adjusted.................................................. 234,258 260,139 853,892
Additional paid-in capital.................................. 279,685 1,046,340 233,204,252
Loans receivable for exercised options...................... -- (705,570) (705,570)
Deferred compensation....................................... (51,687) (51,687) (51,687)
Accumulated deficit......................................... (19,344,363) (19,396,116) (19,396,116)
------------ ------------ ------------
Total stockholders' (deficit) equity.................... $(18,882,097) $(18,846,894) 213,904,771
------------ ------------ ------------
Total capitalization.................................... $ 18,637,774 $ 52,657,945 $214,407,945
============ ============ ============
</TABLE>

The share information set forth above excludes:

- 7,545,000 shares subject to outstanding options under our stock option
plan with a weighted average exercise price of $0.30 per share;

- 1,131,370 additional shares of common stock reserved for issuance under
our stock option plan; and

- 720,000 shares subject to outstanding warrants with a weighted average
exercise price of $0.275.

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<PAGE> 23

DILUTION

Our pro forma net tangible book value on December 31, 1999 was
$(18,846,894) million, or $(0.26) per share of common stock. Pro forma net
tangible book value per share represents the amount of our total tangible assets
reduced by the amount of our total liabilities, divided by the pro forma number
of shares of common stock outstanding as of December 31, 1999, after giving
effect to the conversion of all outstanding shares of our preferred stock into
45,375,292 shares of common stock, the repurchase of 3,569,870 shares of common
stock by us related to the resignation of one of our officers and the exercise
of options to purchase 6,158,000 shares of our common stock, all occurring after
December 31, 1999.

Dilution in pro forma net tangible book value per share represents the
difference between the amount per share paid by purchasers of shares of common
stock in this offering and the pro forma net tangible book value per share of
common stock immediately after the completion of this offering. After giving
effect to our sale of 14 million shares of common stock in this offering at an
assumed initial public offering price of $12.50 per share and after deducting
underwriting discounts and commissions and estimated offering expenses payable
by us, our adjusted pro forma net tangible book value at December 31, 1999 would
have been $213,904,771 million, or $2.51 per share. This amount represents an
immediate increase in pro forma net tangible book value to our existing
stockholders of $2.77 per share and an immediate dilution to new investors of
$9.99 per share. The following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $ 12.50
--------
Pro forma net tangible book value per share at December
31, 1999............................................... $ (0.26)
--------
Increase in pro forma net tangible book value per share
attributable to new investors.......................... 2.77
--------
Pro forma net tangible book value per share after this
offering.................................................. 2.51
--------
Dilution per share to new investors......................... $ 9.99
========
</TABLE>

If the underwriters exercise their over-allotment option in full, our
adjusted pro forma net tangible book value at December 31, 1999 would have been
$238,217,271 million, or $2.72 per share, representing an immediate increase in
pro forma net tangible book value to our existing stockholders of $2.98 per
share and an immediate dilution to new investors of $9.78 per share.

The following table summarizes, on a pro forma basis, as of December 31,
1999, after giving effect to the pro forma adjustments described above, the
differences between the number of shares of common stock purchased from us, the
aggregate cash consideration paid to us and the average price per share paid by
our existing stockholders and by new investors purchasing shares of common stock
in this offering. The calculation below is based on an assumed initial public
offering price of $12.50 per share, before deducting underwriting discounts and
commissions and estimated offering expenses payable by us:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------------- ------------------------- PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
---------- ---------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing
stockholders....... 71,389,222 83.6% $ 72,271,381 29.2% $ 1.01
New investors........ 14,000,000 16.4% $175,000,000 70.8% 12.50
---------- ----- ------------ ------
Total.............. 85,389,222 100.0% $247,271,381 100.0%
========== ===== ============ ======
</TABLE>

This discussion and table assume no exercise of any stock options
outstanding on December 31, 1999. On December 31, 1999, there were options
outstanding under our stock option plan to purchase a total of 7,545,000 shares
of common stock with a weighted average exercise price of $0.30 per share. To
the extent that any of these options are exercised, there will be further
dilution to new investors.

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<PAGE> 24

SELECTED CONSOLIDATED FINANCIAL DATA

The selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and the notes to those
statements included in this prospectus. The consolidated balance sheet data at
December 31, 1998 and 1999 and the consolidated statements of operations data
for the years ended December 31, 1998 and 1999 have been derived from audited
consolidated financial statements included in this prospectus. We have not
presented any financial information prior to January 1, 1998, due to our limited
revenues, expenses and cash flow for the period from inception (March 7, 1997)
to December 31, 1997. See Notes to the audited consolidated financial statements
for additional information.

EBITDA consists of net loss excluding net interest, taxes, depreciation and
amortization. We have presented data related to EBITDA because it is a measure
of performance commonly used in the telecommunications industry to enhance an
understanding of operating results. We believe that EBITDA may be used by
investors as supplemental information to evaluate a company's financial
performance, including its ability to incur and/or service debt. However, EBITDA
may be needed to make other payments prior to servicing debt. Negative EBITDA
implies that a company is not currently generating sufficient income to fund its
operations or service its debt. Our calculation of EBITDA may not be comparable
to that of other companies.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1998 1999
----------- ------------
<S> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues.................................................... $ 12,101 $ 771,109
Operating expenses:
Network and product costs................................. 199,973 8,082,759
Selling and marketing..................................... 75,572 4,809,590
General and administrative................................ 426,250 6,961,370
Depreciation and amortization............................. 28,402 263,972
----------- ------------
Total operating expenses............................... 730,197 20,117,691
----------- ------------
Loss from operations........................................ (718,096) (19,346,582)
Net interest income......................................... 467 541,714
----------- ------------
Net loss.................................................... $ (717,629) $(18,804,868)
=========== ============
Net loss per share:
Basic and diluted......................................... $ (0.04) $ (1.05)
=========== ============
Weighted average shares................................... 20,308,020 17,906,332
=========== ============
</TABLE>

22
<PAGE> 25

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1998 1999
----------- ------------
<S> <C> <C>
OTHER DATA:
EBITDA...................................................... $ (689,694) $(19,082,610)
Net cash used in operating activities....................... (496,606) (12,842,434)
Net cash used in investing activities....................... (89,556) (12,023,658)
Net cash provided by financing activities................... 1,087,773 37,266,188
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
-------- ------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $501,611 $ 12,901,707
Working capital............................................. (347,621) (7,294,784)
Total assets................................................ 671,246 26,506,367
Redeemable convertible preferred stock...................... -- 37,016,697
Total stockholders' deficit................................. (29,048) (18,882,097)
</TABLE>

23
<PAGE> 26

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

You should read the following discussion together with the consolidated
financial statements and related notes which appear elsewhere in this
prospectus. The following discussion contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those discussed below and elsewhere in this prospectus,
particularly under the heading "Risk Factors".

OVERVIEW

We provide broadband communications and Internet access services to small-
and medium-sized businesses in Tier II and Tier III markets. We initiated our
service in September 1998 and rapidly began to deploy our network in October
1999. As of February 29, 2000, we provided services in 28 markets, representing
126 cities. We intend to expand our services into a total of 57 markets by the
end of 2000.

When we enter a new market, we establish a local market presence, incurring
significant selling and marketing and general and administrative expenses. As
part of entering a new market, we lease equipment from Lucent and contract with
it or another third party to install the equipment into targeted central
offices. These operating leases and central office installation expenses are
expensed as network and product costs. Once we have deployed our network in a
market, additional expenditures primarily include leasing costs associated with
DSL line cards and customer premise equipment. In addition to the initial
expenditures required to enter a market, we fund each market's initial cash flow
deficit as we build our customer base. On average, each new market generates a
cash flow deficit for approximately 12 months of approximately $1 million for
each market.

We derive a majority of our revenues from Internet access and broadband
communications services, including real private networking (RPN) services. We
offer our services directly to customers at retail prices. We bill our customers
monthly for recurring charges based on the data transfer speeds selected by the
customer. We currently offer flat rate plans at prices that include our fully
bundled Internet services and our high-speed access and connectivity services on
contracts with terms generally ranging from one to three years. In addition to
monthly service fees, we bill customers for nonrecurring service activation,
equipment and installation charges. On occasion, we reduce or waive equipment or
installation charges to encourage potential customers to enter into multi-year
contracts. During 1999, waiver of equipment or installation charges represented
approximately 2% of total revenues. We expect that prices for our services will
decline over time as a result of competition and changes in our product mix.

Our expenses are recognized as incurred and consist of the following
principal categories:

- network and product costs, which consist primarily of equipment costs,
access charges and technical salaries;

- selling and marketing expenses, which consist primarily of advertising
costs, compensation and related expenses;

- general and administrative expenses, which consist primarily of
corporate, management and administrative salaries and corporate office
expenses; and

- depreciation and amortization expenses, which include non-cash charges
related to property and equipment and collocation fees.

24
<PAGE> 27

We have incurred operating losses, net losses and negative earnings before
interest, taxes, depreciation and amortization, or EBITDA. As of December 31,
1999 and December 31, 1998, we had total stockholders' deficit of $18.9 million
and $29,048, respectively. We intend to incur materially higher operating
expenses as we continue to rapidly deploy our network and introduce services in
2000. We expect to incur substantial operating losses, net losses and negative
EBITDA for the foreseeable future as we expand our operations.

Our consolidated financial statements include the activity of BlueStar
Communications, LLC and BlueStar Properties, Inc., a Tennessee corporation, as
our predecessors. Revenue, expense and cash flow information for the period from
inception (March 7, 1997) to December 31, 1997 were all less than $6,700, and,
as a result, we have not included a full set of consolidated financial
statements for 1997.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

Revenues

We recorded revenues of $771,109 for the year ended December 31, 1999 and
$12,101 for the year ended December 31, 1998. This increase is attributable to
growth in the number of customers resulting from our increased sales and
marketing efforts and the expansion of our networks in the Southeast. As of
December 31, 1999 and December 31, 1998, we had sold 1,224 and five lines,
respectively. We had installed 428 and five lines at December 31, 1999 and
December 31, 1998, respectively. Average recurring revenues per installed line
for 1999 were approximately $330 per month.

Lines sold convert to installed lines on average within 45 to 60 days of
date sold, at which time we record installation revenues. Revenue is only billed
and recognized upon installation. Customer payments are due upon receipt of our
bill once installation is complete. Cash is received on average within 25 days
of the invoice date. We earn revenues from recurring monthly service and non-
recurring equipment sales and installation charges. During 1999, approximately
45% of total revenues was non-recurring. We expect that as our business
continues to grow the non-recurring portion of our revenues will decline. We
recognize expenses related to non-recurring revenues in the same period as we
recognize the revenue.

Network and Product Expenses

Network and product expenses were $8.1 million for the year ended December
31, 1999 and $199,973 for the year ended December 31, 1998. This increase is
attributable to the increased operational needs of our networks and increased
orders resulting from our sales and marketing efforts. Operating lease expenses
for network equipment were $2.9 million for 1999 and $128,896 for 1998. The
remainder of the increase is primarily attributable to network circuit backhaul
and Internet access costs and salaries and wage expense.

Selling and Marketing Expenses

We recorded selling and marketing expenses of $4.8 million for the year
ended December 31, 1999 and $75,572 for the year ended December 31, 1998. This
increase is attributable to a $2.3 million increase in salaries and wage
expense, a $0.9 million increase in advertising, a $0.6 million increase in
recruiting expense and a $0.5 million increase in sales commission expense.

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<PAGE> 28

General and Administrative Expenses

General and administrative expenses increased to $7.0 million for the year
ended December 31, 1999 from $426,250 for the year ended December 31, 1998. This
increase is attributable to a $2.4 million increase in salaries, wages and
consulting expense, a $1.1 million increase in recruiting and relocation expense
and a $0.4 million increase in office rent.

Depreciation and Amortization

Depreciation and amortization expenses were $263,972 for the year ended
December 31, 1999 and $28,402 for the year ended December 31, 1998. The increase
was due to an increase in equipment and facilities placed in service throughout
the period and the installation of our internal hardware and software systems.

Income Taxes

For the years ended December 31, 1999 and December 31, 1998, we recognized
no tax benefits with regards to operating losses due to the uncertainty of
future taxable income sufficient to utilize the losses during the periods.

SELECTED QUARTERLY RESULTS OF OPERATIONS

The following tables set forth our unaudited consolidated statements of
operations data for the four fiscal quarters ended December 31, 1999. This
unaudited quarterly information has been prepared on the same basis as our
audited consolidated financial statements and, in the opinion of our management,
reflects all normal recurring adjustments that we consider necessary for a fair
presentation of the information for the periods presented. Operating results for
any quarter are not necessarily indicative of results for any future period.

<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1999 1999 1999 1999
--------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues................................ $ 34,534 $ 101,677 $ 208,481 $ 426,417
Operating expenses:
Network and product costs............... 245,683 704,976 1,840,033 5,292,067
Selling and marketing................... 85,166 238,415 905,480 3,580,529
General and administrative.............. 241,990 625,131 1,911,659 4,182,590
Depreciation and amortization........... 6,858 17,635 18,666 220,813
--------- ----------- ----------- ------------
Total operating expenses.............. 579,697 1,586,157 4,675,838 13,275,999
--------- ----------- ----------- ------------
Loss from operations.................... (545,163) (1,484,480) (4,467,357) (12,849,582)
Net interest (expense) income........... (187) 40,197 185,439 316,265
--------- ----------- ----------- ------------
Net loss................................ $(545,350) $(1,444,283) $(4,281,918) $(12,533,317)
========= =========== =========== ============
</TABLE>

We have increased revenues in each of the last four quarters, reflecting
increases in the number of our installed customer base. Our network and product
costs have increased in every quarter, reflecting costs associated with customer
growth and the deployment of our network in existing and new markets. The
expenses related to network operating leases was $149,802, $378,020, $847,501
and $1,535,080 for the first, second, third and fourth quarters of 1999,
respectively. Our selling and marketing expenses have increased in every
quarter, reflecting sales and marketing costs associated with the acquisition of
customers, including sales commissions. General and administrative expenses

26
<PAGE> 29

have increased in every quarter and reflect costs associated with the
development of regional and corporate infrastructures. Depreciation and
amortization has increased in each quarter, primarily reflecting the purchase of
equipment associated with the deployment of our network. We have experienced
increasing net losses on a quarterly basis as we increased operating expenses
and incurred network build-out costs. We expect to sustain increasing quarterly
losses for the foreseeable future.

Our quarterly revenue and operating results are difficult to predict and
may fluctuate significantly from quarter to quarter. Our quarterly revenue and
operating results may fluctuate as a result of a variety of factors, many of
which are outside our control, including:

- amount and timing of expenditures relating to the rollout of our network
and services;

- ability to obtain and the timing of necessary regulatory approvals;

- rate at which we are able to attract customers within our target markets
and our ability to retain these customers at sufficient aggregate revenue
levels;

- ability to deploy our network on a timely basis;

- availability of financing to continue our expansion;

- technical difficulties or network downtime;

- availability of collocation space in traditional telephone companies'
central offices and timing of the installation of our equipment in those
spaces; and

- introduction of new services or technologies by our competitors and
resulting pressures on the pricing of our services.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 1999, we had a stockholders' deficit of $18.9 million
and cash and cash equivalents of approximately $12.9 million. During 1999 and
1998, the net cash used in our operating activities was approximately $12.8
million and $496,606, respectively. This cash was used for a variety of
operating purposes, including personnel costs, consulting and legal expenses,
network operations and other administrative expenses. The net cash used in
investing activities during 1999 and 1998 was approximately $12.0 million and
$89,556, respectively, and primarily resulted from collocation costs and the
purchase of networking and other equipment. Net cash provided by financing
activities in 1999 and 1998 was approximately $37.3 million and $1.1 million,
respectively, and primarily resulted from the sale of common and preferred stock
and borrowings against the Lucent working capital line of credit.

During 1998, we sold 3,450,000 shares of common stock to an initial round
of investors at a price of $0.165 per share, resulting in net proceeds to us of
$575,000.

In March 1999, we issued 12,345,003 shares of Series A preferred stock for
$0.49 per share. In August 1999, we issued 8,177,040 shares of redeemable,
convertible, voting preferred stock designated as Series B preferred stock for
$3.80 per share. We received $37,149,060 in total net proceeds from the sale of
Series A and Series B preferred stock. The Series A and Series B preferred stock
will convert into 41,044,086 shares of common stock upon completion of this
offering.

During 1999, we repurchased 4,042,050 shares of common stock from one of
our founders for $.025 per share. The cost to us was $99,030.

27
<PAGE> 30

In January and February 2000, we issued 2,165,603 shares of Series C
preferred stock for $15.70 per share. We received $33,984,967 in total net
proceeds from the sale of the Series C preferred stock. The Series C preferred
stock is convertible into 4,331,206 shares of common stock upon completion of
this offering.

In 1998 and 1999, we borrowed a total of $1.0 million from Lucent under a
credit agreement, which bears interest at 8.5% for the first $500,000 and 7.75%
for the second $500,000, and which mature in August 2001 and February 2002,
respectively. The credit agreement provides for maximum borrowing of $1.0
million. This credit agreement is secured by substantially all of our assets.

In December 1999, we issued a short-term note to a vendor to finance
certain software. The note bears interest at an annual rate of 15% with equal
monthly principal and interest payments of $58,704 through October 2000.

In May 1999, we entered into an equipment operating lease facility with
Ascend, which later merged with Lucent, that provides up to $109.0 million of
equipment and network services provided by Lucent and other third party vendor
equipment utilized in our central office and multi-tenant building
installations. Under the terms of the Lucent facility, we are required to use
Lucent as a vendor if its equipment meets competitive price and performance
standards. If we fail to make required payments under the facility, Lucent may
terminate the facility and take back its equipment. The first tranche of $30.0
million is available to us through July 2001. We may utilize up to $30.0 million
under the equipment lease facility without restriction. We may utilize up to
$50.0 million under this facility upon meeting certain equity requirements,
which we have satisfied. Utilization of amounts in excess of $50.0 million
require that we maintain a minimum of $10.0 million of unrestricted cash. The
lease line has a stated interest rate of 7.75% and allows for lease repayment
over 36 months. As of December 31, 1999, we had utilized $16.2 million of the
facility and had $92.8 million available under the Lucent equipment lease
facility. The lease payments are due through 2002.

The development and expansion of our business requires significant capital
expenditures. The principal capital expenditures incurred to enter each market
include the procurement, design and construction of collocation space. In
addition, we enter into significant operating lease obligations with Lucent to
acquire and install necessary telecommunications equipment. The number of
central offices that we expect to target in a given market will vary, as will
the average capital cost to enter a market. During 2000, we expect to enter into
additional operating leases for equipment with a market value of approximately
$50.0 million under the Lucent equipment lease facility, primarily for equipment
and network services. In addition, we expect to make capital expenditures of
approximately $12.0 million during 2000 that will be used primarily for
software, furniture and fixtures for our corporate and regional offices.

We believe that the net proceeds from this offering, together with our
existing cash balances, cash from preferred stock issuances and amounts
available under our credit facility, will be sufficient to fund our operating
losses, capital expenditures, lease payments and working capital requirements
into 2001. Other than the sale of shares pursuant to this offering, we do not
anticipate the need to raise additional funds in the next 12 months. We expect
our operating losses and capital expenditures to increase substantially as we
expand our network. We will require additional financing to complete the
deployment of our network. We may attempt to finance our future capital needs
through a combination of commercial bank borrowings, leasing, vendor financing
and the sale of equity or debt securities.

28
<PAGE> 31

Our capital requirements will vary based upon the timing and the success of
our business plan and as a result of regulatory, technological and competitive
developments or if:

- demand for our services or our cash flow from operations varies from our
projections;

- our development plans or projections change or prove to be inaccurate;

- we make any acquisitions; or

- we accelerate deployment of our network or otherwise alter the schedule
or targets of our business plan implementation.

We cannot assure you that additional capital will be available on terms
acceptable to us, or at all. If we were unable to obtain financing on acceptable
terms, our business, financial condition and results of operations would be
materially adversely affected.

YEAR 2000 COMPLIANCE

Prior to January 1, 2000, there was a great deal of concern regarding the
ability of computers to adequately distinguish 21st century dates from 20th
century dates due to the two-digit date fields used by many systems. Most
reports to date, however, are that computer systems are functioning normally and
the compliance and remediation work accomplished leading up to 2000 was
effective to prevent any problems. Computer experts have warned that there may
still be residual consequences of the change in centuries. Any such difficulties
could result in a decrease in sales of our services, an increase in allocation
of resources to address Year 2000 problems of our customers without additional
revenue commensurate with such dedication of resources, or an increase in
litigation costs relating to losses suffered by our customers due to Year 2000
problems.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards for hedging and derivative activities. Among other things,
this statement requires that an entity recognize all derivative instruments on
the balance sheet as either an asset or liability, and to account for these
instruments at fair value. The adoption of SFAS 133 is not expected to have a
material impact on our results of operations or financial position.

QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK

Due to the nature of our short-term investments, we have concluded that we
have no material market risk exposure.

29
<PAGE> 32

BUSINESS

OVERVIEW

We are a provider of broadband communications and Internet services to
small- and medium-sized businesses in Tier II and Tier III markets. Our Internet
access services, which are packaged with Web hosting and e-mail, and our
high-speed real private networking services are provided primarily using digital
subscriber line, or DSL, technology. We have deployed a proprietary asynchronous
transfer mode, or ATM, and Internet protocol backbone network that links all of
our central offices and markets. This network allows us to lower our Internet
access costs, control speed and quality of our broadband services and provides
us with a superior platform for the delivery of additional enhanced services.

Our strategy is to be among the first competitive broadband communications
providers to small-and medium-sized businesses in the markets we enter, creating
an early mover advantage and allowing us to establish strong relationships with
our target customers and network professionals. In each of our markets, we have
a locally based, dedicated and experienced team that builds personalized
customer relationships through direct selling. We also ensure a high standard of
service quality by providing our own customer premise equipment installation and
customer care services. We collocate our equipment in central offices that serve
a high density of our target customers, which allows us to service more
potential customers within a market and to provide a more attractive service
offering to businesses with multiple locations or telecommuters.

We began deploying our network in the Southeast, and we are expanding into
Tier II and Tier III markets in the Midwest in 2000. As of February 29, 2000, we
were offering our services in 28 markets, representing 126 cities. We expect to
deploy our network and roll out our services to a total of 57 markets by
year-end 2000. As of February 29, 2000, we had sold 2,935 high-speed access
lines, of which 1,106 were installed in the customer's business. Of the 2,935
lines sold, 675 lines were sold as part of our real private network service and
144 of these lines were in service. As of February 29, 2000, we had collocated
our network equipment in 144 central offices and expect to be in more than 500
central office locations by the end of 2000. When this stage of our network
deployment is completed, our network will extend to cities with approximately
1.2 million small- and medium-sized businesses.

Although we believe that the FCC does not require us to be certified as a
competitive carrier to provide DSL services, we have obtained competitive
carrier certification in 26 states and have applied or will apply for
competitive carrier certification in 21 additional states. We believe we will
receive certification in all of those states by the end of the second quarter of
2001. In addition, we have successfully negotiated interconnection agreements
with Ameritech, BellSouth, GTE, Southwestern Bell, Sprint and U S West. We are
currently pursuing interconnection agreements with other traditional telephone
companies.

We have entered into a strategic alliance with Lucent Technologies. Lucent
provides us up to $109.0 million in vendor financing for equipment purchases,
installs the equipment for us in central offices we target and provides us up to
$2.0 million in funding for cooperative advertising.

30
<PAGE> 33

INDUSTRY BACKGROUND

We believe that a substantial business opportunity has been created by the
convergence of several factors:

- growth in demand for business data services;

- increased demand for high-speed Internet access and broadband solutions
by small- and medium-sized businesses;

- limitations of existing telecommunications networks to meet these
demands; and

- emergence of low-cost, DSL-based solutions.

Growth in Data Communications. Data communications is the fastest growing
segment of the telecommunications industry. Forrester Research projects that the
total market for business Internet services will grow from $7.7 billion in 1999
to approximately $56.6 billion by 2003. To remain competitive, businesses
require high-speed connections to maintain complex Internet sites, to access
critical information and business applications, and to communicate more
efficiently with employees, customers and suppliers. Businesses also
increasingly use the Internet to market and sell their products and services.

Increased Demand for High-Speed Internet Access by Small- and Medium-Sized
Businesses. Small- and medium-sized businesses increasingly are using the
Internet to enable them to compete more effectively with larger organizations.
According to International Data Corporation, the number of DSL lines installed
for small- and medium-sized businesses is expected to increase from 269,800 in
1999 to approximately 3.0 million in 2003. Currently, many small- and
medium-sized businesses use the Internet to exchange e-mails and files with
customers, suppliers and other business partners and to disseminate and obtain
industry, product and market information. Many of these businesses also have
begun to use the Internet to market and sell their products and services, to
make purchases from suppliers and for other commerce-related activities. To take
full advantage of electronic commerce applications and the Internet, these
businesses would benefit from high-speed, secure and affordable digital data
communications connections.

Limitations of Existing Telecommunications Network. The growing demand for
high-speed Internet access and data communications services is straining the
capacity of the existing telecommunications network, particularly the local
access portion. The long distance portion of the network typically consists of
fiber-optic cables and other equipment that enable high-speed connections
between the offices of the traditional telephone companies from which local
telephone service is provided, known as central offices. In contrast, the local
access portion of the network, also known as the last mile, typically consists
of copper telephone wire that connects end users' locations to the nearest
central office. This last mile of copper telephone wire was not originally
designed for the transmission of high-speed digital signals, but has been
historically used for the transmission of low-speed, analog voice signals. Most
data transmission solutions to the last mile problem are relatively slow, hard
to obtain or cost prohibitive for small- and medium-sized businesses. For
instance, dial-up modems convert digital signals to analog at a maximum speed of
64 kilobits per second; ISDN sends both voice and data over the same line at
speeds of up to 128 kilobits per second; T-1 lines carry digital signals at 1.5
megabits per second but cost on average between $1,200 and $2,000 per month; and
frame relay sends digital signals at speeds of up to 43 megabits per second,
over loops and ATM switches, but costs more than T-1 lines. Dial-up modems and
ISDN are slower than DSL while T-1 lines and frame relay offer equivalent speeds
at up to three times the cost. All these services run over copper phone lines.
Dial-up modems, ISDN, IDSL, T-1 lines and frame relay can run over fiber optic
cable.

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<PAGE> 34

Emergence of DSL-based Solutions. As a result of technological
developments and regulatory changes, DSL technology has emerged as a
commercially available, cost-effective means of providing high-speed data
transmission using existing copper telephone lines. DSL technology enables the
transmission of packets of data over an existing telecommunications network,
including the last mile of copper wire, which allows multiple users to
simultaneously transmit and receive data over a single connection. DSL
equipment, when deployed at each end of a standard copper telephone line,
increases the data carrying capacity of the line to speeds to and from the user
of up to 2.3 megabits per second, depending on the distance between the user and
the central office and the quality of the copper telephone line.

Under the Telecommunications Act of 1996, traditional telephone companies
must lease telephone lines to competitive telecommunications companies below
retail prices and allow these competitive telecommunications companies to
collocate certain of their equipment in the traditional telephone companies'
central offices. Using existing copper lines allows DSL providers to avoid the
significant fixed costs necessary to deploy alternative networks. A significant
portion of the expense in providing DSL service is incurred only as customers
order the service. In addition, we anticipate that continued advances in DSL
transmission speeds and equipment will further reduce the cost of deploying a
DSL-based network and expand the scope of coverage.

THE BLUESTAR SOLUTION

We provide our customers with broadband communications and "always on"
high-speed Internet access services. Key elements of our solution are:

Carrier-Class Network with ATM Backbone. We have deployed a dedicated,
high-speed local access network to provide broadband communications and Internet
access services using DSL and other high bandwidth technologies. We have
constructed our own proprietary ATM and Internet protocol network, which enables
our customers to communicate and send data without paying the high prices
charged by traditional telephone companies to lease private networks, dedicated
high-speed telephone lines or frame relay products. By deploying a dedicated
network rather than a shared network, we are able to manage the quality of our
services and the capacity of the network and provide more secure data
transmission. ATM technology enables us to provide faster Internet access by
avoiding multiple Internet protocol routers and gives us flexibility to offer a
wide range of enhanced service offerings. Our Internet protocol technology
allows us to connect with the public Internet to offer Internet access services.

Local Sales, Installation and Customer Service Presence. We offer
potential customers turnkey broadband communications and Internet access
solutions by providing them with a local point of contact for sales,
installation and customer service. Because of our local office presence, our
salespeople are familiar with the local business environment, know which
businesses are serviceable from the local phone company's central offices and
understand the data and Internet access needs of potential customers. This
knowledge allows them to target appropriate services to each business. Many of
our customers are small- to medium-sized businesses that do not have their own
information technology personnel. Consequently, our local salespeople often
employ a consultative approach with the customer and assess the customer's
technology requirements and capabilities in order to suggest an appropriate
service package. Throughout the life of the customer relationship, the
salesperson analyzes the customer's changing needs and suggests new products or
faster connection speeds, as appropriate.

During the installation process, we dedicate an account consultant to give
customers timely updates on the status of the customers' service installation.
Our own technicians install the equipment at customers' locations, allowing us
to ensure high quality and timely service. When installation is

32
<PAGE> 35

complete, we provide customers with a local customer service contact should
questions or problems arise. We believe that having a local team that is
knowledgeable about our services and our customers' needs provides significant
value to our customers and builds customer loyalty.

Dense Market Coverage. As of February 29, 2000, we offered services in 28
markets and we anticipate providing service to 57 total markets in 2000. We
typically collocate our equipment in central offices that have a minimum of 800
businesses within a three mile radius or that have less than 800 businesses
within a three mile radius but are located in high growth areas. Our dense
market coverage allows us to serve more potential customers and cost-effectively
compete with the local telephone company. All of our markets and central offices
are connected to one another by our ATM backbone network, expanding both the
capabilities and attractiveness of our FireLine RPN service.

Attractive Suite of Services. We offer a wide range of broadband
communications and Internet access services designed to meet the needs of both
small- and medium-sized businesses. We offer "always on" Internet access
primarily utilizing DSL technology with connectivity speeds ranging from 128
kilobits per second to 2.3 megabits per second. The always on feature allows our
customers to remain continuously connected to the Internet rather than requiring
the customer to dial-up each time for connection. In addition to Internet
access, we offer real private networking services designed for businesses with
several locations within a market or within multiple markets, or for
telecommuters within our service area. Our broad product offering allows our
sales force to upgrade customers as their needs evolve. FireLine RPN, one of our
offered services, enables customers to transmit data securely to multiple
locations on our network, including a corporate local area network. Unlike
virtual private network products provided by other telecommunications companies,
FireLine RPN bypasses the public Internet, eliminating the need for customers to
install expensive firewalls to protect transmitted data. We believe our FireLine
RPN service provides higher access speeds, and better security at a lower price
than a virtual private network.

BUSINESS STRATEGY

Our goal is to become a leading provider of broadband communications and
Internet services to small- and medium-sized businesses in the United States. In
order to achieve this goal, we:

Capitalize on Local Sales Presence. We will continue to capitalize on our
local sales presence and will seek to increase the number of customers who enter
into long-term, fixed rate contracts with us. We believe that the resulting
long-term, direct customer relationships give us the opportunity to better
understand our customers' needs and preferences, allowing us to sell more
services initially and to cross-sell existing and new service offerings in the
future. We believe that our direct customer relationships, our consultative
sales approach and our high-quality installation and customer service improve
customer loyalty and reduce customer turnover.

Focus on Small- and Medium-Sized Business Customers. An increasing number
of businesses are using Internet services and data communications in order to
grow and compete in the marketplace. We believe small- and medium-sized
businesses, and especially those businesses in Tier II and Tier III markets,
have been underserved by traditional telephone companies, forcing them to meet
their Internet and data communications needs with inefficient dial-up analog
modems or T1 lines. We have designed our broadband communications and Internet
services to offer small- and medium-sized business customers cost-effective
solutions at speeds better than or competitive with existing connectivity
solutions.

Develop New Core Markets. We seek to be the first DSL service provider in
select Tier II and Tier III markets throughout the United States. We intend to
expand from the Southeast to adjacent

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<PAGE> 36

states in the Midwest, with the goal of creating a nationwide footprint. When
entering a new market, we use the same strategic model we have employed during
our initial build-out. Through our centralized network management and
standardized equipment configuration and installation procedure, we believe we
can deploy our network in new core markets quickly and cost effectively.

Continue to Penetrate Existing Markets. We will continue to install DSL
equipment in more central offices within our existing markets. Increasing the
density of our market coverage will allow us to serve more potential customers
within a market using our existing local sales team and to increase the
attractiveness of our real private network service by enabling us to serve more
sites of multi-location businesses. Our installed network and local presence in
our existing markets allow us to increase our customer base at little
incremental cost, thereby improving our profitability. In addition, as we
continue to penetrate our existing markets and reach a critical mass of
customers, we believe we will be able to retain customers and compete more
effectively with late market entrants because of our strong customer
relationships.

Leverage Network Architecture. We have designed our network to
cost-effectively deliver our services to our customers and to expand with our
business. Because DSL technology uses existing copper telephone lines,
implementing a DSL-based local access network generally requires a lower initial
capital investment than that needed for alternative technologies. Our backbone
network utilizes both Internet protocol and ATM-based technologies. This
architecture allows us to offer a broader suite of services with a shorter
product development cycle than typical for a pure Internet protocol network.
Additionally, our ATM network allows us to offer a more cost-effective and
secure real private networking service as well as a guaranteed quality of
service.

Offer Enhanced Services. We intend to offer additional services in order
to attract and retain customers. To complement our focus on small- and
medium-sized businesses and maximize the growth of business-to-business
applications, we intend to offer new services, such as additional Web hosting
options to allow access to software through Web sites. We plan to facilitate the
delivery of software by application services providers through localized servers
and the secure high speeds of our FireLine RPN service. We intend to provide
voice service over DSL and four digit dialing that offers the same features at a
user's home as those available in the office, such as internal dialing, voice
messaging, conferencing, speed dialing and call waiting.

Invest in Brand Building. We believe that building a brand such as
"BlueStar" or "FireLine" attracts new customers and enhances our relationships
with existing customers. We intend to build our brands through a variety of
strategies, including direct marketing, focused advertising campaigns, public
relations campaigns and customer marketing initiatives. In addition, Lucent has
granted us the right to use its "red circle" logo and trademarks on our
marketing material. We believe our co-marketing agreement with Lucent provides
us with additional credibility as we deploy new technologies and allows us to
identify BlueStar with an established company.

SERVICES

We offer our customers several solutions for their broadband communications
and Internet needs. Our primary service is high-speed "always-on" Internet
access, utilizing DSL technology and, for customers located outside the range
for DSL, utilizing an unbundled network element T1, or UNE T1, connection. We
provide the customer a turnkey solution, installing all hardware and software
necessary to establish and maintain a digital connection. As part of our high
speed Internet access bundle, we offer Web hosting and e-mail accounts. We also
provide real private networking services.

High-Speed Internet Access Bundle. When customers contract for our
Internet access service, they receive a high-speed, "always on" Internet
connection, typically using our DSL connectivity.

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<PAGE> 37

They also receive a Web hosting service, Internet domain name service, network
address translation and a fixed number of e-mail accounts. The number of e-mail
accounts a customer receives depends upon the connection speed ordered, with
more e-mail accounts packaged with faster connection speeds. Customers may
purchase additional e-mail accounts for an additional charge. In conjunction
with our e-mail service, we also provide mail bagging services, which stores
e-mails in the event a customer's network is unable to receive e-mail and then
forwards the customer's e-mails once the network is functioning.

SDSL Connectivity. Offered under the FireLine DSL brand, our DSL
connectivity ranges in speed from 144 kilobits per second to 2.3 megabits per
second. We utilize Lucent's symmetrical DSL, or SDSL, equipment to provide a
wide range of connectivity speeds and data transfer enhancements. SDSL allows
the customer to send and receive data at the same transmission speed. Our SDSL
equipment allows customers to achieve up to 2.3 megabits per second speeds both
upstream and downstream, depending on the quality of the copper line.

The following chart compares the performance and range for our DSL
connectivity services as of February 29, 2000. We provide service at higher
connection speeds at the request of a customer.

<TABLE>
<CAPTION>
DISTANCE
SPEED TO AND FROM CUSTOMER RANGE (FEET)*
- -------------------------- -------------
<S> <C>
144 Kbps................................................... 23,000
256 Kbps................................................... 18,000
384 Kbps................................................... 18,000
512 Kbps................................................... 15,000
768 Kbps................................................... 13,500
1.0 Mbps................................................... 12,000
1.5 Mbps................................................... 12,000
2.3 Mbps................................................... 12,000
</TABLE>

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

* Estimated maximum distance from the customer to the central office.

IDSL. We provide an IDSL solution for customers unable to receive our SDSL
service because of distance limitations. IDSL, or ISDN-like digital subscriber
line, operates at a connectivity speed of 128 kilobits per second. It can be
delivered over copper telephone lines or fiber optic cable. With IDSL, there is
no theoretical distance limitation, provided our customer is served from a
central office in which we have collocated our equipment.

UNE T1 Connectivity. In the event a customer is beyond the range of a DSL
connection, we provide high-speed connectivity by leasing a UNE T1 from the
local telephone company. When providing high-speed connectivity using a UNE T1,
there is no distance limitation, provided we have collocated our
telecommunications equipment in the central office serving that particular
customer.

The following chart sets forth the products available using a UNE T1
connection as of February 29, 2000.

<TABLE>
<CAPTION>
DISTANCE
SPEED TO AND FROM CUSTOMER RANGE
- -------------------------- ---------
<S> <C>
384 Kbps.................................................... Unlimited
768 Kbps.................................................... Unlimited
1.0 Mbps.................................................... Unlimited
1.5 Mbps.................................................... Unlimited
</TABLE>

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<PAGE> 38

Real Private Networking Services. We offer a host of private networking
services under the brand "FireLine RPN." Our real private network service
permits a customer to transmit data securely between fixed locations on our
network without the data ever reaching or traveling over the public Internet.
Our real private network products offer a solution to the networking needs of
customers with multiple locations within our service area. Using our real
private network service, customers can transport their data across our dedicated
ATM backbone without acquiring expensive firewalls or building their own
expensive private network. Unlike frame relay networks, FireLine RPN provides
guaranteed and less expensive bandwidth between a remote office and the home or
origination point of presence. Using FireLine RPN, a customer is able to connect
various remote offices to one another through a DSL line without suffering any
degradation in transmission speed or quality due to the amount of traffic
reaching the originating point of presence.

The following chart sets forth the products available for FireLine RPN as
of February 29, 2000.

<TABLE>
<CAPTION>
REMOTE BANDWIDTH CIRCUIT TYPE
- ---------------- ---------------
<S> <C>
144 Kbps.......................................... SDSL
256 Kbps.......................................... SDSL
384 Kpbs.......................................... SDSL and UNE T1
768 Kbps.......................................... SDSL and UNE T1
1.5 Mbps.......................................... SDSL and UNE T1
2.3 Mbps.......................................... SDSL
3.0 Mbps.......................................... 2x UNE T1
4.5 Mbps.......................................... 3x UNE T1
4.6 Mbps.......................................... 2x SDSL
6.0 Mbps.......................................... 4x UNE T1
6.9 Mbps.......................................... 3x SDSL
9.2 Mbps.......................................... 4x SDSL
</TABLE>

Telecommuting. We offer a service aimed at employees and businesses who
desire to implement telecommuting. Our FireLine Telecommute service provides a
connectivity solution to connect home offices to an employer's local area
network. Like our FireLine RPN, data is transmitted over our proprietary ATM
network without the data ever reaching or traveling over the Internet. Data is
transmitted at speeds ranging from 128 kilobits per second to 768 kilobits per
second depending on the distance the home office is located from the central
office.

FUTURE SERVICES

We believe that there is a great demand for enhanced services from small-
and medium-sized businesses. We are currently developing a suite of applications
services intended for these customers, including managed firewall service,
on-line backup, enhanced Web hosting, video streaming and conferencing and
enhanced voice over DSL services. We believe that we will have an advantage in
selling and delivering enhanced solutions due to our highly trained direct sales
force and technicians.

SALES AND MARKETING

Direct Sales. We generally market our services to businesses through our
direct sales force. As of February 29, 2000, we employed 202 salespeople. Our
target customer is a small- to medium-sized business with multiple end users
and/or multiple locations. We have divided our current markets into six
geographic regions, and we appoint a regional vice president to manage each
region. We employ a general manager and a sales team in each of the markets in
which we offer our services. We attempt to hire between four and ten
knowledgeable salespeople in each market, depending on the number of

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<PAGE> 39

local businesses, the number of central offices in which we collocate our
equipment and the population of a particular market. The sales team is supported
by technical personnel who oversee the installation of the customer premises
equipment and provide ongoing customer support.

Salespeople receive salaries supplemented by sales commissions. We also
offer incentives to our salespeople to encourage sales of multi-year contracts.
We train each of our salespeople and provide them with sales leads, printed
marketing materials, advertising, branding, promotions and press announcements.
We also engage telemarketers and networking professionals to provide our
salespeople with additional leads.

During the sales cycle, our sales team educates the customer on the
advantages of having Internet-based business operations or data transfer through
DSL technology and develops a working relationship with the customer. As part of
our consultative sales approach, we present marketing information to customers
using an interactive sales package.

Indirect Sales Channels. We are utilizing select authorized agents to sell
FireLine DSL and FireLine RPN. These agents are typically information technology
service companies. Our contracts with these agents are short-term, lasting less
than one year. We pay our agents commissions ranging from one month of the
recurring revenue generated from the service sold to one and one-half months of
the recurring revenue, depending on the number of unique DSL circuits sold by
the agent and installed in a calendar month. Agents receive their commission
upon installation of the service rather than a monthly residual. These agents
have significant contacts, customers and reputations in the networking
communities. We compensate our agents comparably with our direct sales force. In
the markets where we employ agents, we also intend to employ agent managers to
ensure the agents have the resources, training and information necessary to
optimize their sales of our services. Any customers identified by our sales
agents become BlueStar customers and sign contracts with us.

Marketing. We have created and implemented a localized marketing strategy.
Our brand identification is supported in new markets through the use of external
media involving grass roots public relations efforts, print advertising, outdoor
advertising and radio campaigns to deliver a strategic marketing message to our
target customer. We employ aggressive strategies, including targeted direct mail
and regular promotions as well as local event sponsorship to maximize brand
awareness and sales penetration on a market-by-market basis.

We have a co-marketing relationship with Lucent that permits the use of its
"red circle" logo and trademarks. We believe that the use of the Lucent logo and
trademark provides us with additional credibility as we deploy a new technology
and allows us to identify with an established company.

CUSTOMERS

We generally offer our services to small- and medium-sized businesses,
rather than large Fortune 500 businesses. As of February 29, 2000, we provided
broadband communications and Internet access service to approximately 1,050
customers with approximately 1,600 customers awaiting installation.
Approximately 43% of our customers had signed one year contracts and
approximately 57% had signed multi-year contracts.

Businesses with a small number of employees accessing the Internet or
transferring limited amounts of data have generally entered into contracts for
our 144 through 384 kilobits per second service. Small businesses are migrating
away from ISDN lines, which have proven to be more costly on a per kilobit
basis. Medium-sized businesses often contract for our 512 through 768 kilobits
per second connection to facilitate data communications, Web site hosting or
greater employee

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<PAGE> 40

productivity and efficiency. Many of these customers have traditionally leased a
costly fractional T1 from the local telephone company and incurred additional
costs from their Internet service provider.

We offer a full service solution for the configuration, provisioning, and
installation of local access connections at the customer's location. Customers
pay a one-time installation charge. The installation charge does not vary
according to the number of end-users or amount of usage. The monthly fee
includes charges for line, Internet service, e-mail services and any
administrative fees associated with registration of Web sites and e-mail
addresses.

CUSTOMER SUPPORT

Installation. We locally manage the installation of our services for each
customer. We order connections and loops, install equipment on the customer
premises, contract for service, monitor the network, make repairs and provide
customer support. Once a sale has been made, our technical personnel visit the
customer's location and, in conjunction with the customer, devise a strategy for
installing a DSL line.

Account Consultants. In each region in which we have operations, we have
hired account consultants to communicate with customers from the time the sales
contract is signed to installation of the DSL modem. We believe that we build
stronger customer relationships by remaining in contact with our customers and
providing them with up-to-date information regarding the status of their
installation. Account consultants allow our direct sales force to spend more
time contacting prospects and generating leads for additional sales.

Operational Support System. We are implementing an operational support
system that tracks each step in the sales, provisioning and installation
process. This system provides our personnel with up-to-date information
regarding the status of each customer's installation. The system also provides
specific dates by which steps in the installation process must be completed in
order to meet a target installation date.

Network Operations Center. Once a customer is installed and is
functioning, our network operations center in Nashville, Tennessee monitors the
network 24 hours a day, seven days a week. We monitor our network from the
network operations center to detect and, when feasible, remotely correct a
customer's maintenance problems.

Customer Service Department. In the event we are unable to correct a
customer's network problems prior to the customer contacting the customer
service center, our customer service representatives communicate customer
maintenance problems to our engineers. We provide customers a toll-free
telephone number for our customer service department in the event customers have
questions regarding their bill.

NETWORK ARCHITECTURE AND FEATURES

Our network contains the following key design features:

Network Reliability. Our core network is designed to be redundant and
fault tolerant. We can monitor our entire network from our network operations
center. We provide our customers with service level agreements that guarantee
specific levels of network performance. We have found that by offering service
level agreements, we are better able to convince businesses to move their
mission-critical applications onto our network. Generally, our service level
agreements require us to credit a customer's invoice upon a lengthy service
outage caused by us.

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<PAGE> 41

Scalable Support Systems. We use industry standard, off-the-shelf software
to support preordering, ordering, provisioning, billing, network monitoring and
trouble management. We have implemented these systems using a distributed
client-server systems architecture that operates using a single, integrated
database. This approach allows us to grow customer support and network
management capabilities as customer demand increases by giving our personnel
faster, more accurate access to a fully integrated business information system.

Network Security. Connection to the public Internet poses security risks
for business customers. We are able to use our ATM network to offer our
customers private connections that never traverse the public Internet, thereby
providing a high level of security.

NETWORK COMPONENTS

Our network is comprised of local access copper lines leased from local
telephone companies, intra-city fiber leased from local telephone companies or
competitive telecommunications providers and long-distance backbone fiber leased
from long distance carriers. Our network is designed to switch and route traffic
within each metropolitan area, keeping local traffic local and only sending
non-local traffic over the inter-city network, thereby improving overall network
efficiency, increasing reliability and reducing costs. The primary components of
our network are customer premise equipment, local access lines, central office
collocations, regional switching centers, high-speed intra-city networks,
backbone trunk facilities and our network operations center. The following
diagram illustrates our network.

(HIGH-SPEED INTRA-CITY NETWORK DIAGRAM)

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<PAGE> 42

Customer Premise Equipment. As part of our turnkey services, we provide
customer premise equipment, which is generally a DSL modem or router. We
configure and install the equipment for the customer's computer, local area
network or enterprise router and provide any required on-site wiring needed to
connect the equipment to the telephone line leased from the local telephone
company.

Local Access Lines. Our local access lines are usually copper lines leased
from local telephone companies pursuant to an interconnection agreement. The
copper line connects customer premise equipment to our equipment collocated in a
central office.

Central Office Collocations. We secure collocation space within central
offices of traditional telephone companies. In our collocation space we install
our DSL multiplexing equipment, which we then connect to our DSL-qualified
copper lines. Our collocation space is designed to be to the same standards as
local telephone companies' own central office space.

High-Speed Intra-City Network. In each of our target markets, we deploy a
dedicated intra-city network. This intra-city network carries data from our
central office collocations to our regional switching center, and to our other
central office collocations.

Regional Switching Centers. A regional switching center is a physical
point of presence within a metropolitan area where local access traffic is
aggregated from our central office collocations over our high-speed intra-city
network. Although we generally expect to have one regional switching center in
each of our target markets, we may have two or more in larger metropolitan
areas. Our regional switching centers house our ATM and frame relay switches in
addition to our Internet protocol routers. We also place applications servers in
some of the regional switching centers to support network-enabled features and
applications. We design our regional switching centers with battery backup
power, redundant equipment and active network monitoring.

Backbone Trunk Facilities. Our backbone trunk facilities interconnect our
regional switching centers. Currently, we lease private line circuits from AT&T
and MCI WorldCom and use the ATM capabilities of our regional switching center
to carry network traffic to the proper destination.

Internet Peering Points. We interconnect to other Internet service
providers to access the public Internet at Internet peering points. We currently
have four Internet peering points and expect to add more as we expand into other
markets.

Network Operations Center. We manage our entire network from our network
operations center in Nashville, Tennessee. From the network operations center,
we monitor our network 24 hours a day, seven days a week and resolve most
network and customer service faults.

INTERCONNECTION AGREEMENTS

Interconnection agreements with traditional telephone companies are
critical to our business. Interconnection agreements govern our relationship
with the traditional telephone company. Interconnection agreements control:

- the price paid to lease and the access we have to the telephone company's
copper lines or loops;

- the special conditioning the telephone company provides on certain of
these lines to enable the transmission of DSL signals;

- the price and terms for collocation of our equipment in the telephone
company's central offices and for transport facilities;

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<PAGE> 43

- the ability we have to access conduits and other rights of way the
telephone company has to construct its own network facilities; and

- the operational support systems and interfaces that we can use to place
orders and report and monitor the telephone company's response to our
requests.

We have signed interconnection agreements with Ameritech, BellSouth, GTE,
Southwestern Bell, Sprint and U S West. These interconnection agreements
generally have terms of one to three years. We will need to negotiate
interconnection agreements with other telephone companies as we extend our
network into other geographic regions.

COMPETITION

We face and will continue to face significant competition from many
competitors, some with significantly greater financial resources,
well-established brand names and large, existing installed customer bases.
Moreover, we expect the level of competition to intensify in the future. If we
fail to compete effectively, our business prospects would be significantly
impaired. We expect significant competition from:

Traditional Telephone Companies. Most traditional telephone companies have
begun offering DSL services on a limited basis. In addition, most traditional
telephone companies are combining their DSL and Internet access services.
BellSouth, for example, has begun offering its DSL service to residential
consumers. We believe that traditional telephone companies have the potential to
quickly deploy DSL services. Traditional telephone companies have an established
brand name in their service areas, possess sufficient capital to deploy DSL
services rapidly and are in a position to offer service from central offices
where we may be unable to secure collocation space. In addition, the traditional
telephone companies have a large and established customer base. Traditional
telephone companies, such as BellSouth and GTE, are leasing wide area
connections from long distance carriers and already have the copper wire
infrastructure and circuit switched local access networks to reach a large
number of potential customers. In addition, traditional telephone companies are
able to offer their DSL services at prices that may cause us to lower the price
of our DSL services.

Long Distance Carriers. Many of the leading long distance telephone
companies, such as AT&T, MCI WorldCom, Qwest and Sprint, are expanding their
capabilities to support high-speed, end-to-end networking services. Many of
these companies have strong brand name recognition and significant financial
resources. In many metropolitan areas, long distance carriers are providing
high-speed data and voice communications to large companies. They could deploy
DSL services over their current networks. Long distance carriers have
established relationships with traditional telephone companies and access to
their central offices. They have negotiated interconnection agreements with many
of the traditional telephone companies and have secured collocation spaces from
which they could begin to offer competitive DSL services.

Cable Modem Service Providers. Cable modem service providers, like
Excite@Home, Road Runner and High Speed Access, along with their cable partners,
offer high-speed Internet access at speeds sometimes greater than we can
provide. Cable modem service providers provide Internet access over hybrid fiber
coaxial cable networks. These companies provide local access services similar to
our services. Moreover, they typically offer their services at lower prices than
our services.

Wireless and Satellite Data Service Providers. Several new companies are
offering wireless and satellite-based data services. These companies use a
variety of emerging technologies, such as terrestrial wireless services,
point-to-point and point-to-multipoint fixed wireless services, satellite-based
networking and high-speed wireless digital communications. We expect to face
competition from these providers because of the faster speed at which they can
transmit data.

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<PAGE> 44

Internet Service Providers. Internet service providers provide Internet
access to residential and business customers. These companies generally provide
Internet access over the traditional telephone companies' telephone lines.
However, some national and regional Internet service providers have begun
offering DSL-based services, or are reselling DSL services offered by
traditional telephone companies or other DSL-based competitive
telecommunications providers. Some Internet service providers, like Mindspring
and America Online, have a nationwide presence and alliances with DSL-based
competitive telecommunications providers.

Competitive Telecommunications Providers. A number of competitive
telecommunications providers, including Covad Communications Group, Rhythms
NetConnections, NorthPoint Communications, Network Access Solutions and DSL.net
have begun offering DSL-based data services. Other competitive
telecommunications providers are likely to do so in the future. The
Telecommunications Act of 1996 specifically grants competitive
telecommunications providers the right to negotiate interconnection agreements
with traditional telephone companies, some of which may be identical in all
respects to our agreement with BellSouth.

GOVERNMENT REGULATION

The following summary of regulatory developments and legislation describes
material telecommunications regulations and legislation directly affecting our
industry in general.

The facilities and services that we obtain from BellSouth and other local
telephone companies in order to provide FireLine DSL and FireLine RPN are
regulated extensively by the FCC and state telecommunications regulatory
agencies. To a lesser extent, the FCC and state telecommunications regulators
exercise direct regulatory control over the terms under which we provide our
services to the public. Municipalities also regulate limited aspects of our
telecommunications business by imposing zoning requirements, permits or
right-of-way procedures or fees, among other regulations. The FCC and state
regulatory agencies generally have the authority to condition, modify, cancel,
terminate or revoke operating authority for failure to comply with applicable
laws, or rules, regulations or policies. Fines or other penalties also may be
imposed for such violations.

We cannot assure you that regulators or third parties would not raise
issues regarding our compliance or non-compliance with applicable laws and
regulations. We believe that we operate our business in compliance with
applicable laws and regulations of the various jurisdictions in which we operate
and that we possess the approvals necessary to conduct our current operations.

Federal Regulation. The Telecommunications Act of 1996 (the
"Telecommunications Act") departs significantly from prior legislation in the
telecommunications industry by establishing competition as a national policy in
all telecommunications markets. The Telecommunications Act removes many state
regulatory barriers to competition in telecommunications markets dominated by
traditional telephone companies and directs the FCC to preempt, after notice and
an opportunity to comment, state and local laws restricting competition in those
markets. Among other things, the Telecommunications Act also greatly expands the
interconnection requirements applicable to traditional telephone companies. It
requires the traditional telephone companies to:

- provide interconnection at any technically feasible point;

- provide collocation, which allows competitive telecommunications
companies to install and maintain their own network termination equipment
in telephone company central offices;

- unbundle and provide access to components of their service networks to
other providers of telecommunications services;

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<PAGE> 45

- establish "wholesale" rates for the services they offer at retail prices
to promote resale by competitive telecommunications companies; and

- provide nondiscriminatory access to telephone poles, ducts, conduits and
rights of way.

Traditional telephone companies also are required by the Telecommunications
Act to negotiate interconnection agreements in good faith with carriers
requesting any or all of the above arrangements. If a requesting carrier cannot
reach an agreement within the prescribed time, either carrier may request
binding arbitration by the state telecommunications regulatory agency.

The FCC and state telecommunications regulators also are instructed by the
Telecommunications Act to fulfill certain duties to implement the regulatory
policy changes prescribed by the Telecommunications Act. The outcome of various
ongoing proceedings to carry out these responsibilities, or judicial appeals of
these proceedings, could materially affect our business, operating results and
financial condition.

In July 1997, the United States Court of Appeals for the Eighth Circuit
overruled some of the rules initially adopted by the FCC to implement the
Telecommunications Act, including rules:

- requiring traditional telephone companies to combine network elements and
make them available for use by competitive telecommunication companies;

- providing the detailed standard that state telecommunications regulators
must use in prescribing the price that traditional telephone companies
charge for collocation and for the copper telephone lines and other
network elements that competitive telecommunications companies must
obtain from traditional telephone companies in order to provide service;
and

- giving competitive telecommunications companies the right to
"pick-and-choose" interconnection provisions by requiring that a
traditional telephone company enter into interconnection agreements with
competitive telecommunications companies that combine provisions from a
variety of interconnection agreements between that traditional telephone
company and other competitive telecommunications companies.

The FCC and others appealed this decision to the U.S. Supreme Court. In
January 1999, the U.S. Supreme Court reversed much of the Eighth Circuit's
decision, finding that the FCC has broad authority to interpret the
Telecommunications Act and issue rules for its implementation, including
authority to establish the methodology that state telecommunications regulators
must use in setting the price that traditional telephone companies charge
competitive telecommunications companies for collocation, copper telephone lines
and other network elements. The Supreme Court also reversed the Eighth Circuit's
holding invalidating the FCC's "pick-and-choose" rule. However, the Supreme
Court found that the FCC was not adequately justified under the
Telecommunications Act in defining the individual network elements traditional
telephone companies must make available to competitive telecommunications
companies, and required the FCC to reconsider its delineation of these elements.
It sent the matter back to the FCC with instructions to consider further the
question of which parts of a traditional telephone company's network must be
provided to competitors. The FCC released an order on November 5, 1999 that
sought to follow the Supreme Court's instructions in delineating the particular
network elements that traditional telephone companies must make available to
competitors. The FCC's November decision reaffirms its earlier holding that
traditional telephone companies must make available the particular inputs that
we need in order to provide our services (including, but not limited to, copper
telephone lines, transmission facilities between local telephone company central
offices and various back-office support services). In addition, the FCC's
November order requires, upon the request of competitive telecommunications
companies like us, that traditional telephone companies provide competitive
carriers with certain other inputs (such as "subloops" and, in limited

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<PAGE> 46

cases, packet switching) that may prove useful as we expand our services into
new geographic areas, especially into more suburban areas.

The Supreme Court's determination in its January 1999 order that the FCC,
rather than state telecommunications regulators, has jurisdiction to determine
pricing methodology also could be helpful to us since the FCC has adopted a
pricing standard that appears to be more beneficial to competitive
telecommunications companies in some respects than the pricing standards that
some state telecommunications regulators have employed. However, it remains
unclear whether the particular pricing methodology prescribed by the FCC will be
fully implemented because some parties have challenged the lawfulness of that
methodology in the U.S. Court of Appeals for the Eighth Circuit. That litigation
is still pending.

In an order released March 31, 1999, the FCC adopted new regulations that
are designed to clarify the obligations of a traditional telephone company in
providing space inside its central offices to competitors like us so that they
can access the telephone company's copper telephone lines and connect those
lines to the competitor's electronic equipment located inside that telephone
company's central office. Another rule adopted in that order is intended to help
ensure that the customers of companies who provide services like our Internet
access services do not receive harmful interference from other users of the
traditional telephone company network on which the service is provided. On March
17, 2000, U.S. Court Appeals for the D.C. Circuit upheld cageless collocation,
the cost allocation rules and the definition of premises but remanded parts of
this order addressing the type of equipment that can be collocated in a central
office, cross connections between collocated competitive telecommunications
carriers and where in a central office a competitive telecommunications carrier
can collocate its equipment. The exact effect of this remand remains uncertain,
pending the outcome future FCC proceedings on remand.

An FCC order released on December 9, 1999 is designed to make it easier for
companies like ours to market high-speed data services like ours to residential
customers. Under this "line-sharing" order, traditional telephone companies are
required to let a competitor use the same copper telephone line for providing
the customer with data service that the telephone company uses for providing the
same customer with local telephone service. At present, the traditional
telephone companies provide residential customers with local phone service and
high-speed Internet access service over a single phone line, but the traditional
telephone companies require competitors like us to lease a separate phone line
to provide high-speed Internet access to any residential customer when that
customer obtains local phone service from the traditional telephone company. The
FCC's December 9, 1999 order is designed to make it easier for companies like
ours to compete with the traditional telephone companies in the residential
high-speed Internet access market by permitting competitors to reduce
significantly their costs to serve this market. However, it is not yet clear
that the FCC's order will achieve its intended objective since it will take
several months before the traditional telephone companies put in place the
policies and procedures necessary to implement the order. It also is possible
that the order will be appealed to the courts on grounds that the FCC's new line
sharing requirements are unlawful. If appealed, we have no way of determining
whether the FCC's requirements will be affirmed.

The FCC made another potentially favorable ruling for competitive carriers
in another recent case. That case involved the question of whether a
telecommunications service like our Fireline DSL and FireLine RPN that provide
high-speed dedicated connection to the Internet is an interstate service or an
intrastate service. An interstate service must be provided subject to FCC
regulatory controls, whereas an intrastate service must be provided subject to
regulatory controls of the telecommunications regulatory agency of the state
where the service is offered. In its decision, the FCC held that such services
are predominantly interstate from a jurisdictional standpoint and therefore must
be provided on terms and conditions set by the FCC rather than state

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<PAGE> 47

telecommunications regulators. This ruling is potentially advantageous to us
because it could reduce the number of telecommunications regulatory agencies
that control the terms under which we can provide our primary services. It also
is potentially advantageous because FCC regulatory controls in many respects are
less burdensome than state regulatory controls. For example, the
Telecommunications Act authorizes the FCC to forbear from regulating the terms
under which carriers classified as "non-dominant" provide interstate
telecommunications service. The FCC has exercised its forbearance authority by
issuing rulings that exempt non-dominant domestic carriers like us from
obtaining a certificate from the FCC prior to providing any interstate service
or from filing a tariff setting forth the terms under which they provide any
interstate access service. Because we believe that our services constitute
predominantly interstate service, we believe that we may not need a certificate
from state telecommunications regulatory agencies to provide them. However, we
have generally filed tariffs with state authorities for our high-speed Internet
services where requested by those agencies.

Many of these FCC decisions have been appealed. We do not know how the
courts will decide these appeals, but any decision that invalidates one or more
of these rules could adversely affect our Internet access business.

On May 8, 1997, in compliance with the requirements of the
Telecommunications Act, the FCC released an order establishing a new federal
universal service support fund, which provides support to carriers that provide
service to customers in high-cost or low-income areas and to companies that
provide telecommunications services for schools and libraries and to rural
health care providers. We are required to contribute to the universal service
fund and also may be required to contribute to state universal service funds.
The new universal service rules are administered jointly by the FCC, the fund
administrator, and state regulatory authorities, many of which are still in the
process of establishing their administrative rules. We cannot determine the net
revenue effect of these regulations at this time.

On November 2, 1999, the FCC determined that a statute requiring that
traditional local telephone companies offer their retail services at a wholesale
price to competitors like us does not apply when these traditional telephone
companies provide a discounted DSL service directed to Internet service
providers. In that case, while competitors may purchase the traditional
telephone companies' Internet service provider-directed DSL offering on the same
terms as the Internet service providers, the FCC ruled that competitors have no
legal right to a wholesale discount off the price paid by Internet service
providers. This ruling could adversely affect us if it gives Internet service
providers an economic incentive to meet all of their DSL needs by subscribing to
the traditional telephone companies' Internet service provider-directed
discounted DSL offerings rather than by subscribing to DSL services offered by
competitors like us.

Various traditional telephone companies have requested that the FCC
substantially deregulate the retail price it charges for various types of
telecommunications services, including high-speed data services. The FCC
recently issued a decision in response that establishes a procedure by which
traditional telephone companies may apply for certain pricing flexibility. We
cannot yet determine the precise extent to which traditional telephone companies
will qualify for this pricing flexibility. The ultimate impact of the FCC's
order also is uncertain because the order has been appealed to the U.S. Court of
Appeals. If the FCC were to substantially eliminate price regulation of the
high-speed data services that traditional telephone companies provide in
competition with us, our business could be adversely affected.

The FCC also has proposed to permit traditional telephone companies to
provide advanced services like DSL through separate affiliates or subsidiaries
on a deregulated basis. This proposal could permit the separate affiliates to
provide advanced services free of the requirements relating to

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<PAGE> 48

interconnection, unbundling, resale and collocation imposed by the
Telecommunications Act. Bills have been introduced in Congress that would grant
regional Bell operating companies regulatory relief to provide data services in
areas where they are currently restricted from doing so.

State Regulation. While it is clear from the January 1999 Supreme Court
decision that the FCC has broad authority to implement provisions in the
Telecommunications Act that are intended to open all telecommunications markets
to competition, state telecommunications regulators also have substantial
authority in this area. For example, although the Supreme Court's decision
validated the FCC's jurisdiction to prescribe the methodology traditional
telephone companies must use in setting the price of copper telephone wires and
other network elements, the FCC has exercised that jurisdiction by adopting a
pricing standard and has given state regulators substantial authority to apply
that standard in order to determine actual prices. Many states have set only
temporary prices for some network elements that are critical to the provision of
DSL services because they have not yet completed the regulatory proceedings
necessary to determine permanent prices. Other states have begun proceedings to
set new permanent prices based on more current data. The results of these
proceedings will determine the price we pay for, and whether it is economically
attractive for us to use, these network elements and services.

The Telecommunications Act also gives state telecommunications regulators
broad authority to approve or reject interconnection agreements that competitive
telecommunications companies enter into with traditional telephone companies and
broad authority to resolve disputes that arise under these interconnection
agreements. Under the Telecommunications Act, if we request, traditional
telephone companies have a statutory duty to negotiate in good faith with us for
agreements for interconnection and access to unbundled network elements. A
separate agreement is signed for each of the states in which we operate. During
these negotiations either the traditional telephone company or we may submit
disputes to the state regulatory commissions for mediation and, after the
expiration of the statutory negotiation period provided in the
Telecommunications Act, we may submit outstanding disputes to the states for
arbitration. The Telecommunications Act also allows state regulators to
supplement FCC regulations as long as the state regulations are not inconsistent
with FCC requirements.

In addition, FireLine DSL and FireLine RPN may, as to some customers, be
classified as intrastate service subject to state regulation. All of the states
where we operate, or will operate, require some degree of state regulatory
commission approval to provide certain intrastate services. We have obtained
non-expiring state authorizations to provide intrastate services from the state
regulatory agency in all states where we currently provide our service. We also
have obtained non-expiring certificates to provide intrastate service in many of
the states where we may provide our services in the future. In most states,
intrastate tariffs are also required for various intrastate services, although
non-dominant carriers like us are not typically subject to price or rate of
return regulation for tariffed intrastate services. In some states, pursuant to
state statutes and regulations, regulated telecommunications carriers such as
our company may be required to obtain prior approval for certain actions, such
as issuing stock, incurring indebtedness, or transferring control of the company
holding a state certification. We may be required to obtain approvals in
connection with this offering. Actions by state telecommunications regulatory
agencies could cause us to incur substantial legal and administrative expenses.
It is possible that laws and regulations could be adopted that address other
matters that affect our business. We are unable to predict what laws or
regulations may be adopted in the future, to what extent existing laws and
regulations may be found applicable to our business, or the impact such new or
existing laws or regulations may have on our business. In addition, laws or
regulations could be adopted in the future that may decrease the growth and
expansion of the Internet's use, thereby decreasing demand for our services.

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<PAGE> 49

Local Government Regulation. In certain instances, we may be required to
obtain various permits and authorizations, including the payment of certain fees
to certain local municipalities, from municipalities in which we operate our own
facilities. The extent to which such actions by local governments pose barriers
to entry for competitive telecommunications companies that may be preempted by
the FCC is the subject of litigation. Although our network consists primarily of
unbundled network elements of the traditional telephone companies, in certain
instances we may deploy our own facilities and therefore may need to obtain
certain municipal permits or other authorizations. The actions of municipal
governments in imposing conditions on the grant of permits or other
authorizations or their failure to act in granting such permits or other
authorizations could have a material adverse effect on our business, operating
results and financial condition.

INTELLECTUAL PROPERTY

We regard some aspects of our products and services as proprietary and
attempt to protect them with copyrights, trademarks, trade secret laws,
restrictions on disclosure and other methods. We have obtained a trademark for
"BlueStar Communications" and have filed trademark applications to register
"BlueStar.net" and "Fireline." These methods may not be sufficient to protect
our technology. We pay Lucent and other suppliers of hardware and software
license fees for the use of these products. Despite these precautions, it may be
possible for a third party to copy or otherwise obtain and use our products,
services or technology without authorization, or to develop similar technology
independently.

Effective patent, copyright, trademark and trade secret protection may be
unavailable or limited in certain foreign countries. The global nature of the
Internet makes it virtually impossible to control the ultimate destination of
our proprietary information. Steps taken by us may not prevent misappropriation
or infringement of our technology. In addition, litigation may be necessary in
the future to enforce our intellectual property rights, to protect our trade
secrets or to determine the validity and scope of the proprietary rights of
others. Such litigation could result in substantial costs and diversion of
resources. In addition, we may be sued by others with respect to infringement of
their intellectual property rights.

EMPLOYEES

As of February 29, 2000, we employed approximately 500 employees. We
believe that our relationship with our employees is satisfactory. We believe
that our future success will depend in part on our continued ability to attract,
hire and retain qualified personnel. None of our employees are represented by a
labor union or are the subject of a collective bargaining agreement. We have
never experienced a work stoppage.

PROPERTIES

We currently sublease approximately 13,247 square feet in Nashville,
Tennessee, which serves as our corporate headquarters. We also lease
approximately 15,000 square feet in Nashville, Tennessee, which serves as our
network operations center and customer service center. We have executed a lease
for approximately 46,000 square feet in a facility located in Franklin,
Tennessee, which we expect to be completed in April 2000. We expect to relocate
all of our corporate, network operations, customer service and marketing
departments to this new facility in May 2000. We lease from 2,500 to 8,000
square feet for our sales offices in almost every market in which we employ our
direct sales force.

LEGAL PROCEEDINGS

We are subject to routine legal and administrative proceedings which arise
in the ordinary course of our business, none of which will have a material
adverse effect.

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<PAGE> 50

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth, as of February 29, 2000, the names, ages
and positions of our executive officers and directors:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Robert E. Dupuis......................... 45 President, Chief Executive Officer and
Chairman of the Board
Richard L. Burtner....................... 43 Chief Financial Officer and Secretary
W. Clifton Duffey........................ 29 Chief Technology Officer
Tye R. Schriever......................... 38 Chief Information Officer
James W. Price........................... 42 Senior Vice President, Sales and
Marketing
Norton Cutler, Esq....................... 47 Vice President, Regulatory Affairs and
General Counsel
John W. Gerdelman........................ 47 Director
Fredjoseph Goldner....................... 32 Director
Charles J. McMinn........................ 48 Director
Richard A. Shapero....................... 51 Director
</TABLE>

ROBERT E. DUPUIS has served as our President, Chief Executive Officer and
as a director since April 1999. Mr. Dupuis was elected Chairman of the Board in
December 1999. From February 1999 to April 1999, Mr. Dupuis was an executive on
staff with Crosspoint Venture Partners, a venture capital firm with substantial
investments in us and in the telecommunications industry. In August 1998, Mr.
Dupuis was the President and Chief Executive Officer of Able Telecom, a
construction company specializing in telecommunications. From May 1996 to
January 1998, Mr. Dupuis served as Chief Executive Officer and President of RMD
Americas, a wireless communications company with international operations. From
June 1992 through April 1996, Mr. Dupuis served as Vice President and General
Manager of Comsat International.

RICHARD L. BURTNER, one of our founders, has served as our Chief Financial
Officer and Secretary since March 1999. Mr. Burtner served as our Treasurer from
March 1999 to February 2000. From March 1998 to March 1999, Mr. Burtner was
self-employed as a consultant specializing in financial management for start-up
companies, including serving as our Chief Financial Officer. From April 1997 to
March 1998, Mr. Burtner served as the Chief Financial Officer for Medical
Information Management Systems, Inc., an information technology and
Internet-based medical records software company. From April 1996 to March 1997,
Mr. Burtner was the Chief Financial Officer for Biomed International, a start-up
healthcare company. From March 1995 to April 1996, Mr. Burtner served as the
Vice President of Finance for Dover Elevator Company, a $400 million
distribution, construction and service business with approximately 70 branch
offices around the United States. Prior to joining Dover, Mr. Burtner served as
Chief Financial Officer at Spatco, Inc., a Southeastern regional distribution,
service and environmental company, from January 1991 to February 1995. Mr.
Burtner spent the first eight years of his career employed by Deloitte Haskins &
Sells, now Deloitte & Touche LLP.

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<PAGE> 51

W. CLIFTON DUFFEY has served as our Chief Technology Officer since November
1999. Mr. Duffey joined us in July 1999 as our Vice President of Engineering.
From July 1998 to July 1999, Mr. Duffey was a senior network consultant for
Ascend Professional Services, the consulting division of Ascend Communications,
Inc., a major manufacturer of networking equipment that was recently acquired by
Lucent Technologies, Inc. From March 1996 to July 1998, Mr. Duffey was a Senior
Manager responsible for government account services with Intermedia
Communications, a telecommunications provider. From May 1995 to March 1996, Mr.
Duffey worked as a software engineer for Harris Corporation, a defense
contractor.

TYE R. SCHRIEVER has served as our Chief Information Officer since October
1999. From June 1998 to October 1999, Mr. Schriever served as the Vice President
of Information Technology responsible for the strategic planning and
architecture for Broadwing, Inc., an international telecommunications provider.
From October 1995 to June 1998, Mr. Schriever served as the Vice President of
Information Technology Planning and Administration and Director of Information
Technology Operations and Administration for Sprint PCS, the largest wireless
network company in the United States. From November 1993 to October 1995, Mr.
Schriever was a manager for Sprint Corporation, a telecommunications provider.

JAMES W. PRICE has served as our Senior Vice President of Sales and
Marketing since November 1999. From July 1996 to October 1999, Mr. Price served
as the Regional Vice President (Southeast) for Winstar Communications, a
provider of wireless telecommunications services. From October 1994 to July
1996, Mr. Price was a partner with HCTC, a cellular phone company.

NORTON CUTLER, ESQ. has served as Vice President of Regulatory Affairs and
General Counsel since July 1999. From September 1993 to June 1999, Mr. Cutler
was an attorney and most recently an associate general counsel with U S West, an
incumbent local exchange carrier covering a 14-state region west of the
Mississippi River, where he was responsible for complex civil and regulatory
litigation.

JOHN W. GERDELMAN has served as a director since January 2000. From April
1999 to December 1999, Mr. Gerdelman served as Chief Executive Officer of
USA.net, a provider of e-mail services. From April 1986 to April 1999, Mr.
Gerdelman was an executive, serving most recently as President of MCI Services,
where he developed and implemented MCI's network and infrastructure technology
strategy. Mr. Gerdelman serves on the board of directors of Sycamore Networks, a
publicly-traded network solutions company, and several privately held companies.

FREDJOSEPH GOLDNER, one of our founders, has served as a director since
September 1998 and served as our Chief Operating Officer from April 1999 to
January 2000. From September 1998 to April 1999, Mr. Goldner served as our
President and Chief Executive Officer. From March 1998 to September 1998, Mr.
Goldner was Chief Manager of our predecessor limited liability company. From
December 1997 until February 1998, Mr. Goldner was employed by KPMG Peat Marwick
to develop its electronic commerce and consulting practice. From October 1996 to
December 1997, Mr. Goldner was the Director of Internet Operations for Medical
Information Management, Inc., an information technology and Internet-based
medical records software company. From September 1995 to October 1996, Mr.
Goldner developed electronic commerce solutions for B.A. Pargh, Inc., a supplier
of office supplies to businesses.

CHARLES J. MCMINN has served as a director since January 2000. Mr. McMinn
has over 22 years of experience in creating, financing, operating and advising
technology companies. Mr. McMinn is currently the Chairman of the Board of
Directors, Chief Executive Officer and founder of Certive Corporation, a
provider of out-sourced services to small businesses. He was a founder of Covad
Communications Group, a publicly traded national provider of DSL services. From
July 1998 to

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<PAGE> 52

October 1999, he served as Chairman of the Board of Directors of Covad and from
Covad's inception in October 1996 until July 1998, he served as Covad's
President, Chief Executive Officer and a member of its board of directors from
October 1996 to July 1998. From July 1995 to October 1996, and from August 1993
to June 1994, Mr. McMinn managed his own consulting firm, Cefac Consulting,
which focused on strategic development for information technology and
communications businesses. Mr. McMinn was the product manager for the 8086
microprocessor at Intel.

RICHARD A. SHAPERO has served as a member of our board of directors since
March 1999. Mr. Shapero has been a general partner of Crosspoint Venture
Partners, L.P., a venture capital investment firm, since April 1993. From
January 1991 to June 1992, he served as Chief Operating Officer of Shiva
Corporation, a computer network company. Previously, he was a Vice President of
Sun Microsystems, Senior Director of Marketing at AST, and held marketing and
sales positions at Informatics General Corporation and UNIVAC's Communications
Division. Mr. Shapero serves as a member of the board of directors of Sagent
Technology, Inc., Covad Communications Group, Inc. and several privately held
companies.

CLASSIFIED BOARD OF DIRECTORS

At the first annual meeting of stockholders following the closing of our
initial public offering, our board of directors will be divided into three
classes, as nearly equal in size as is practicable, to serve staggered
three-year terms:

- Class I, whose term will expire at the annual meeting of stockholders to
be held in 2002;

- Class II, whose term will expire at the annual meeting of stockholders to
be held in 2003; and

- Class III, whose term will expire at the annual meeting of stockholders
to be held in 2004.

The board of directors will determine which directors serve in each class prior
to the annual meeting. Upon expiration of the term of a class of directors, the
directors for that class will be elected for three-year terms at the annual
meeting of stockholders in the year in which their term expires. Each director's
term is subject to the election and qualification of his or her successor, or
his or her earlier death, resignation or removal.

COMMITTEES OF THE BOARD OF DIRECTORS

Our board of directors has established an audit committee and a
compensation committee.

Audit Committee. The audit committee reports to the board of directors
with regard to the selection of our independent auditors, the scope of our
annual audits, fees to be paid to the auditors, the performance of our
independent auditors, compliance with our accounting and financial policies and
management's procedures and policies relative to the adequacy of our internal
accounting controls. The members of the audit committee are Messrs. McMinn,
Gerdelman and Shapero.

Compensation Committee. The compensation committee reviews and makes
recommendations to the board regarding our compensation policies and all forms
of compensation to be provided to our directors, executive officers and certain
other employees. In addition, the compensation committee reviews bonus and stock
compensation arrangements for all of our other employees. The compensation
committee also administers our stock option and stock purchase plans. The
members of the compensation committee are Messrs. McMinn and Shapero.

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<PAGE> 53

DIRECTOR COMPENSATION

All directors are reimbursed for their out-of-pocket expenses in serving on
our board of directors. In January 2000, we granted each of Messrs. Gerdelman
and McMinn an option to purchase 40,000 shares of our common stock at an
exercise price of $3.93 per share.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

None of our executive officers serves as a member of the board of directors
or compensation committee of any entity that has one or more of its executive
officers serving as a member of our board of directors or compensation
committee. Our compensation committee currently consists of Messrs. McMinn and
Shapero, neither of whom currently serves or has previously served as an officer
or employee of our company. During the past year, the full board of directors
performed the functions generally performed by the compensation committee of the
board.

LIMITATION OF LIABILITY AND INDEMNIFICATION

Our certificate of incorporation limits the liability of our directors to
us or our stockholders for breaches of the directors' fiduciary duties to the
fullest extent permitted by Delaware law. In addition, our certificate of
incorporation and bylaws provide for mandatory indemnification of directors and
officers to the fullest extent permitted by Delaware law. We also maintain
directors' and officers' liability insurance and enter into indemnification
agreements with all of our directors and executive officers.

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<PAGE> 54

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table provides the total compensation paid during 1999 to our
chief executive officers and our other executive officers whose compensation
(salary and bonus) exceeded $100,000. Mr. Goldner served as our chief executive
officer until April 13, 1999.

<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
-------------------- ------------ ALL
SECURITIES OTHER
UNDERLYING COMPEN-
NAME AND PRINCIPAL POSITION(S) YEAR SALARY($) BONUS($) OPTIONS(#) SATION($)
- ------------------------------ ---- --------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Robert E. Dupuis................................... 1999 178,000 -- 3,960,000 95,258(1)
President and Chief
Executive Officer
Fredjoseph Goldner................................. 1999 104,618 -- -- --
Chief Operating Officer
Richard L. Burtner................................. 1999 121,861 -- -- --
Chief Financial Officer,
and Secretary
</TABLE>

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

(1) Relocation expenses.

OPTION GRANTS IN 1999

The exercise prices represent our board's estimate of the fair market value
of the common stock on the grant date. In establishing these prices, our board
considered many factors, including our financial condition and operating
results, recent transactions and the market for comparable stocks.

The amount shown as potential realizable value represents hypothetical
gains that could be achieved for the respective options if exercised at the end
of the option term. These amounts represent certain assumed rates of
appreciation in the value of our common stock. The 5% and 10% assumed annual
rate of compounded stock price appreciation are mandated by rules of the
Securities and Exchange Commission and do not represent our estimate or
projection of the future price of our common stock. The potential realizable
value is calculated based on the ten-year term of the option at its time of
grant. It is calculated based on the assumption that our initial public offering
price of $12.50 per share appreciates at the indicated annual rate compounded
annually for the entire term of the option and that the option is exercised and
sold on the last day of its term for the appreciated stock price. Actual gains,
if any, on stock option exercises depend on the future performance of our common
stock. The amounts reflected in the table may not necessarily be achieved.

We granted these options under our 1999 Stock Option Plan. Each option has
a maximum term of ten years, subject to earlier termination if the optionee's
services are terminated. Except as otherwise noted, these options are
immediately exercisable, but we have the right to repurchase, at the exercise
price, any shares that have not vested at the time the optionee terminates
employment with us. The percentage of total options granted to our employees in
the last fiscal year is based on options to purchase an aggregate of 13,000,530
shares of common stock granted during 1999. The

52
<PAGE> 55

following table sets forth information concerning the individual grants of stock
options to each of our named executive officers in 1999.

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
INDIVIDUAL GRANTS OF ASSUMED ANNUAL RATES
--------------------------------------------------------------- OF STOCK PRICE
PERCENT OF TOTAL EXERCISE APPRECIATION
NUMBER OF SECURITIES OPTIONS GRANTED PRICE FOR OPTION TERM
UNDERLYING OPTIONS TO EMPLOYEES PER EXPIRATION --------------------------
NAME GRANTED(1)(#) IN 1999 SHARE($) DATE 5% 10%
- ---- -------------------- ---------------- -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Robert Dupuis(2)............ 3,960,000 30.5 $0.025 04/13/09 $ 62,260 $ 157,779
Fredjoseph Goldner.......... -- -- -- -- -- --
Richard Burtner............. -- -- -- -- -- --
</TABLE>

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

(1) These options are fully exercisable but if Mr. Dupuis leaves us before all
of his option shares vest, we have the right to repurchase, at the exercise
price, any shares that have not vested.

(2) These options vested as to 12.5% on October 13, 1999 and vest as to the
remaining 87.5% in equal monthly installments over the following 42 months.

FISCAL YEAR-END OPTION VALUES

The following table sets forth information concerning option exercises and
option holdings for the fiscal year ended December 31, 1999 with respect to each
of our executive officers named in the Summary Compensation Table. We have never
granted any stock appreciation rights. There was no public trading market for
our common stock as of December 31, 1999. Accordingly we have based the market
price value of shares and the value of the unexercised in-the-money options at
December 31, 1999 on an assumed initial public offering price of $12.50 per
share, less the applicable exercise price per share, multiplied by the number of
shares underlying the option. Actual gains on exercise, if any, will depend on
the value of our common stock on the date on which the shares are sold.

<TABLE>
<CAPTION>
VALUE REALIZED NUMBER OF SECURITIES VALUE OF UNEXERCISED
NUMBER (MARKET PRICE UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OF SHARES AT EXERCISE OPTIONS AT DECEMBER 31, 1999 DECEMBER 31, 1999
ACQUIRED ON LESS EXERCISE ---------------------------- ---------------------------
NAME EXERCISE PRICE) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert Dupuis(1)...... 150,000 $1,871,250 3,810,000 -- $47,529,750 --
Fredjoseph Goldner.... -- -- -- -- -- --
Richard Burtner....... -- -- -- -- -- --
</TABLE>

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

(1) As of December 31, 1999, Mr. Dupuis' options were exercisable as to all
3,810,000 shares, 510,000 of which were vested and 3,300,000 of which were
unvested. If Mr. Dupuis leaves us before all of his option shares vest, we
have the right to repurchase the unvested option shares at the exercise
price paid per share.

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<PAGE> 56

1999 STOCK OPTION PLAN

Predecessor Stock Option Plan. Our board of directors has adopted and our
stockholders have approved the 1999 Incentive Stock Option Plan. This stock
option plan provides for the awards of incentive stock options to our directors,
officers and employees. Our board of directors administers this option plan.
Employee options generally vest ratably over a four-year period commencing with
the date of grant and expiring ten years after the date of grant, unless
terminated earlier.

1999 Stock Option/Stock Issuance Plan. The 1999 Stock Option/Stock
Issuance Plan is intended to serve as the successor equity incentive plan to our
prior plan. The new plan became effective on October 26, 1999, upon adoption by
the board and approval by the stockholders. Common stock has been authorized for
issuance under the plan in the amount of 15,231,000. This share reserve is
comprised of the 11,931,000 shares which remained available for issuance under
the predecessor plan on the date of issuance plus an additional increase of
3,300,000 shares.

Outstanding options under our prior plan have been incorporated into the
new plan, and no further option grants will be made under this plan. The
incorporated options will continue to be governed by their existing terms,
unless the plan administrator elects to extend one or more features of the new
plan to those options. However, except as otherwise noted, the outstanding
options under the predecessor plan contain substantially the terms and
conditions summarized below for the option grant program in effect under the new
plan.

The option grant program is administered by the compensation committee of
the board. The compensation committee, as plan administrator, has complete
discretion to determine which eligible individuals are to receive option grants,
the time or times when such option grants are to be made, the number of shares
subject to each such grant or issuance, the status of any granted option as
either an incentive stock option or a non-statutory stock option under the U.S.
federal tax laws, the vesting schedule to be in effect for the option grant and
the maximum term for which any granted option is to remain outstanding. The
exercise price for the shares of common stock subject to option grants made
under the plan may be paid in cash or in shares of common stock valued at fair
market value on the exercise date. The option may also be exercised through a
same-day sale program without any cash outlay by the optionee. In addition, the
plan administrator may provide financial assistance to one or more participants
in the plan in connection with their acquisition of shares, by allowing such
individuals to deliver a full-recourse, interest-bearing promissory note in
payment of the option exercise price plus any associated withholding taxes
incurred in connection with such acquisition. In the event of an acquisition of
BlueStar, whether by merger or asset sale or a sale by the stockholders of more
than 50% of the total combined voting power of BlueStar's stock recommended by
the board, each outstanding option under the option grant program which is not
to be assumed by the successor corporation or otherwise continued will
automatically accelerate in full, and all unvested shares under the
discretionary option grant and stock issuance programs will immediately vest,
except to the extent our repurchase rights with respect to those shares are to
be assigned to the successor corporation or otherwise continued in effect. The
plan administrator will have the authority under the option grant program to
provide that the shares subject to options granted under that program will
automatically vest:

1. upon an acquisition of BlueStar, whether or not those options are
assumed or continued;

2. upon a hostile change in control of BlueStar effected through a
successful tender offer for more than 50% of our shares;

3. in the event the individual's service is terminated, whether
involuntarily or through a resignation for good reason, within a
designated period, not to exceed 18 months, following an acquisition in
which those options are assumed or otherwise continued in effect or a
hostile

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change in control. Options currently outstanding under the predecessor
plans will accelerate either at the time of an acquisition or a change
in control.

EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS

Mr. Burtner is a party to a stock restriction and special payment agreement
entered into on March 17, 1999. Under the terms of this agreement, Mr. Burtner
was required to place in escrow 65% of his common stock holdings. On the last
day of each month on which he is employed beginning in April 1999, he is
entitled to receive 2.0883% of his common stock holdings from escrow. In the
event Mr. Burtner is terminated without cause (as defined in the agreements), he
is entitled to receive from escrow a number of shares equal to 25% of the shares
remaining in escrow. We must repurchase the shares remaining in escrow at a
price of $0.025 per share. Mr. Burtner retains the voting rights associated with
his shares of common stock held in escrow. The escrow agent for the escrowed
shares is our corporate secretary. Mr. Burtner is and has been our corporate
secretary since these agreements were executed. Mr. Burtner is entitled to
receive 50% of his escrowed shares upon a change in control.

On April 5, 1999, we entered into an agreement with Robert E. Dupuis
appointing him President and Chief Executive Officer. The agreement provides for
a monthly base salary of $20,833 and a bonus in 1999 of at least $75,000. Either
of us can terminate Mr. Dupuis' employment at any time. However, if we terminate
Mr. Dupuis' employment without cause, he will be entitled to receive 12 months'
salary and additional vesting. We have agreed to reimburse certain relocation
expenses of Mr. Dupuis associated with his move to Nashville. The agreement also
provides that 50% of Mr. Dupuis' unvested options shall vest upon a change in
control. In the event Mr. Dupuis involuntarily loses his job within six months
following a change in control, the remaining balance of his unvested options
become vested.

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

PRIVATE PLACEMENTS OF EQUITY

Common Stock. In connection with our founding, we issued 1,642,500
membership units of BlueStar Communications, LLC to each of Fredjoseph Goldner
and Scott Kozicki in exchange for their contribution of services and 140,000
membership units to Richard Burtner pursuant to a personal services agreement.
These membership units were subsequently converted into shares of our common
stock.

On December 18, 1998, we issued 374,562 shares of common stock to Mr.
Burtner upon his achievement of milestones established by our directors and set
forth in his personal services agreement. In March 1999, we issued an additional
2,780,034 shares of common stock to Mr. Burtner primarily upon his becoming a
full-time employee.

Series A Preferred Stock. In March 1999, we issued a total of 12,345,003
shares of Series A preferred stock for aggregate consideration of approximately
$6.0 million. Of the 12,345,003 shares, we sold the following number of shares
to a 5% stockholder and entities affiliated with our officers:

- 11,020,410 shares of Series A preferred stock to affiliates of Crosspoint
Venture Partners; and

- 100,104 shares of Series A preferred stock to the Profit Sharing (Keogh)
Plan of Richard Burtner, Tim Burtner, the brother of Richard Burtner and
Dr. Fred Goldner, the father of Fredjoseph Goldner.

Series B Preferred Stock. In August 1999, we issued a total of 8,177,040
shares of Series B preferred stock for an aggregate consideration of
approximately $31.1 million. Of the 8,177,040 shares, we sold the following
number of shares to our 5% stockholders:

- 3,943,914 shares of Series B preferred stock to affiliates of Crosspoint
Venture Partners; and

- 2,629,272 shares of Series B preferred stock to Gramercy BlueStar, L.P.

Series C Preferred Stock. In January 2000, we issued a total of 318,471
shares of Series C preferred stock to Charles J. McMinn, one of our directors,
for aggregate consideration of approximately $5.0 million. In February 2000, we
issued a total of 1,847,132 shares of Series C preferred stock for an aggregate
consideration of approximately $29 million. Of the 1,847,132 shares, we sold
573,248 shares to Crosspoint Venture Partners, one of our 5% stockholders.

At the time the Series B and Series C preferred stock financings were
negotiated and consummated, Mr. Shapero, a general partner of Crosspoint Venture
Partners, served on our board of directors pursuant to a voting agreement among
the preferred stock purchasers, our founders and us.

The preferred stock will convert to common stock on a two-for-one basis
upon consummation of this offering.

Registration Rights. We have granted the holders of our preferred stock
the right to require us to register or include their shares in a registered
offering of our securities. Please see "Description of Capital
Stock -- Registration Rights" for a description of these registration rights.

STOCK RESTRICTION AND SPECIAL PAYMENT AGREEMENTS

Messrs. Burtner, Goldner and Kozicki are parties to stock restriction and
special payment agreements entered into on March 17, 1999. Under the terms of
these agreements, Messrs. Burtner, Goldner and Kozicki were required to place in
escrow 65% of their common stock holdings.

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<PAGE> 59

Messrs. Burtner, Goldner and Kozicki are entitled to receive approximately two
percent of their respective escrowed shares per month beginning in April 1999.
In the event of their termination without cause, they are entitled to receive
from escrow the number of shares that would have vested if they had remained
with us for 12 additional months. We may then repurchase the shares remaining in
escrow at a price of $0.025 per share.

On September 7, 1999, Mr. Kozicki left our employ. Before his departure,
Mr. Kozicki served as Chief Technology Officer. Under the terms of his stock
restriction and special payment agreement, Mr. Kozicki retained ownership of
5,729,574 shares of our common stock, and we repurchased 4,041,942 shares from
him at a cost of $0.025 per share. We also were required to pay Mr. Kozicki's
salary, totaling $55,000 for a period of six months. We paid the cost of Mr.
Kozicki's health insurance premiums at a cost of $2,600 and have agreed to
indemnify him for claims arising from his activities as an officer of BlueStar
and to release him from any claims we might have against him. This transaction
was unanimously approved by our board of directors.

On January 7, 2000, Mr. Goldner left our employ. Mr. Goldner served as
Chief Operating Officer immediately prior to leaving the company. Under the
terms of a stock restriction and special payment agreement we entered into with
Mr. Goldner, Mr. Goldner retained ownership of 6,285,130 shares of our common
stock and we repurchased 3,569,870 shares from him at a cost of $0.025 per
share. We also are required to pay Mr. Goldner's annual salary of $110,000 and
health and life insurance premiums totaling $5,520 (subject to increases in
premiums) until January 2001. In addition, we paid Mr. Goldner a bonus of
$33,000 for 1999. We also agreed to indemnify him for claims arising from his
activities as an officer of BlueStar, and to release him from any claims we
might have against him. This transaction was approved by a majority of the
non-interested members of our board of directors. Mr. Goldner remains a member
of our board of directors.

Buyback of Certain Shares. In December 1998, we repurchased from Mr.
Kozicki 83,376 shares of our common stock held by him in exchange for a payment
by us of $13,896 to cover expenses incurred by Mr. Kozicki in connection with
his purchase of telecommunications equipment he contributed to us. We also
repurchased shares owned by Messrs. Goldner and Kozicki in connection with their
departure from the company as required by stock restriction and special payments
agreements we entered into with each of Messrs. Goldner and Kozicki.

GRANT OF OPTIONS

On January 26, 2000, at a meeting of our board of directors, we issued
40,000 non-qualified options to each of Messrs. McMinn and Gerdelman, our
non-employee directors who hold less than 5% of our shares. The exercise price
of each option is $3.93 and vest ratably each month over four years. The options
are immediately exercisable, subject to our right to repurchase the shares.

LOANS TO EMPLOYEES

In January 2000, the Company loaned a total of $705,570 to ten employees.
These employees are Karin Baisden, Larry Baugher, Norton Cutler, W. Clifton
Duffey, Andrew Morin, James W. Price, Tye Schriever, Tom Spear, John Tompkins
and Trent Wilson. The proceeds of these loans were used to exercise options for
a total of 3,670,000 shares. These loans earn interest at an annual rate of
seven percent, compounded and payable annually, and the principal is due five
years from the date of the loans. In the event this offering is consummated,
each of the loans accelerates and becomes due two months after the termination
of that borrower's lock-up agreement with the underwriters. These recourse loans
are also secured by the shares.

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PERSONAL SERVICES AGREEMENT

On September 22, 1998, we entered into a personal services agreement with
Mr. Burtner, then a consultant to BlueStar. Under the terms of the agreement, we
initially granted Mr. Burtner 3.5% of our stock ownership at that time. As of
December 31, 1998, we had granted Mr. Burtner additional stock ownership,
bringing his ownership to 5% of our outstanding common stock at that time. On
March 18, 1999, we granted Mr. Burtner 2,780,034 additional shares per the terms
of the agreement. Upon Mr. Burtner's receipt of the shares, he became an
employee and the personal services agreement terminated.

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PRINCIPAL STOCKHOLDERS

The following table sets forth information regarding the beneficial
ownership of our common stock as of February 29, 2000, as adjusted to reflect
the sale of common stock offered by us in the offering for:

- each person known by us to beneficially own more than 5% of our common
stock;

- each executive director named in the Summary Compensation Table on page
51;

- each of our directors; and

- all of our executive officers and directors as a group.

Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting and investment power with
respect to the securities. Except as indicated by footnote, and subject to
applicable community property laws, the persons named in the table have sole
voting and investment power with respect to all shares of common stock shown as
beneficially owned by them. The numbers of shares of common stock used to
calculate the percentage ownership of each listed person include the shares of
common stock underlying options or warrants held by such persons that are
exercisable within 60 days of this offering. The percentage of beneficial
ownership before the offering is based on 71,389,222 shares, consisting of
26,013,930 shares of common stock outstanding as of February 29, 2000, and
45,375,292 shares issuable upon the conversion of the Series A, Series B and
Series C preferred stock. Percentage of beneficial ownership after the offering
is based on 85,389,222 shares, including 14,000,000 shares to be sold in this
offering. The post-offering ownership percentages in the table below do not take
into account any exercise of the underwriters' over-allotment option.

<TABLE>
<CAPTION>
PERCENTAGE OF
COMMON STOCK
BENEFICIALLY OWNED
-------------------
SHARES BEFORE AFTER
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING OFFERING
- ------------------------ ------------------ -------- --------
<S> <C> <C> <C>
Executive Officers and Directors:
Robert E. Dupuis...................................... 3,960,000 5.4% 4.5
Richard L. Burtner.................................... 4,039,596 5.7 4.7
Richard A. Shapero.................................... 29,928,648 41.9 35.0
Fredjoseph Goldner.................................... 9,855,000 13.8 11.5
Charles J. McMinn..................................... 636,942 * *
John W. Gerdelman..................................... 40,000 * *
All directors and executive officers as a group (10
persons)............................................ 48,410,186 68.8 56.1
Other 5% Stockholders:
Crosspoint Venture Partners........................... 29,928,648 41.9% 35.0
Gramercy BlueStar, L.P................................ 5,258,544 7.4 6.2
Scott E. Kozicki...................................... 5,729,574 8.0 6.7
</TABLE>

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

* Indicates beneficial ownership of less than one percent of the total
outstanding common stock.

Executive Officers and Directors. Additional information regarding the
beneficial ownership of shares held by our executive officers and directors is
contained below. Except as indicated below, the address for each executive
officer and directors is 414 Union Street, Suite 900, Nashville, Tennessee
37219.

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- Robert E. Dupuis. Includes 1,960,000 shares issuable upon exercise of
immediately exercisable stock options. Of the 2,000,000 shares held by
Mr. Dupuis, 1,010,000 are subject to right of repurchase.

- Richard L. Burtner. Includes 1,893,268 shares that are subject to our
right to repurchase if Mr. Burtner's services are terminated with cause
prior to vesting, or 1,244,150 shares if Mr. Burtner's services are
terminated without cause prior to vesting, 80,000 shares owned by Mr.
Burtner's spouse and 45,000 shares held in Mr. Burtner's profit sharing
(Keogh) plan. Includes 280,000 shares, of which Mr. Burtner disclaims
beneficial ownership, held in irrevocable trusts for his children.

- Richard A. Shapero. All shares indicated as owned by Mr. Shapero are
included due to his affiliation with funds affiliated with Crosspoint
Venture Partners. Mr. Shapero's address is c/o Crosspoint Venture
Partners, The Pioneer Hotel, 2925 Woodside Road, Woodside, California
94062.

- Fredjoseph Goldner. Excludes 25,974 shares, of which Mr. Goldner
disclaims beneficial ownership, held in irrevocable trusts for his child.

- Charles J. McMinn. Includes 40,000 shares issuable upon exercise of
immediately exercisable stock options.

- John W. Gerdelman. Includes 40,000 shares issuable upon exercise of
immediately exercisable stock options.

- All directors and officers as a group. In addition to the shares held by
the individuals listed above, includes 600,000 shares held by Mr. Duffy,
600,000 shares held by Mr. Price and 300,000 shares held by Mr.
Schriever, of which 475,000, 525,000 and 237,500 shares, respectively,
are subject to our right of repurchase. Also includes 600,000 shares held
by Mr. Cutler, all of which are subject to our right of repurchase, and
150,000 shares issuable upon exercise of immediately exercisable options.

Other 5% Stockholders. Information regarding the beneficial ownership of
5% or more of our stock is set forth below:

- Crosspoint Venture Partners. Includes (a) 25,143,366 shares held by
Crosspoint Venture Partners 1997; (b) 2,156,010 shares held by Crosspoint
Venture Partners LS 1997; and (c) 2,629,272 shares held by Crosspoint
Venture Partners LS 1999. The general partner of Crosspoint Venture
Partners 1997 and Crosspoint Venture Partners LS 1997 is Crosspoint
Associates 1997. The general partner of Crosspoint Venture Partners LS
1999 is Crosspoint Associates 1999. The general partners of Crosspoint
Associates 1997 and Crosspoint Associates 1999 are John Mumford, Rich
Shapero, one of our directors, Robert Hoff, Don Milder and Seth Neiman.
Each of the general partners of Crosspoint Associates 1997 and Crosspoint
Associates 1999 disclaim beneficial ownership of the shares held by
Crosspoint Venture Partners 1997 and Crosspoint Venture Partners LS 1999,
except to the extent of his pecuniary interest in these shares. The
address of the investment funds affiliated with Crosspoint Venture
Partners is The Pioneer Hotel, 2925 Woodside Road, Woodside, California
94062.

- Scott E. Kozicki Mr. Kozicki's address is 409 Pebble Creek, Antioch,
Tennessee 37013.

- Gramercy BlueStar, L.P. The address of Gramercy BlueStar, L.P. is 712
5th Avenue, 43rd Floor, New York, New York 10019.

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DESCRIPTION OF CAPITAL STOCK

Upon completion of this offering, our authorized capital stock will consist
of 150,000,000 shares of common stock, par value $0.01 per share, and 25,000,000
shares of preferred stock, par value $0.01 per share. The rights and preferences
of the authorized preferred stock may be designated from time to time by our
board of directors. The following summary is qualified by reference to our
certificate of incorporation which will become effective upon consummation of
this offering and our bylaws, forms of which have been filed as exhibits to the
registration statement of which this prospectus is a part.

COMMON STOCK

As of February 29, 2000, there were 26,013,930 shares of common stock
outstanding that were held of record by 61 stockholders. Holders of our common
stock are entitled to one vote per share on all matters to be voted upon by the
stockholders. The holders of common stock are not entitled to cumulative voting
rights with respect to election of directors, and as a result, minority
stockholders will not be able to elect directors on the basis of their votes
alone. Subject to limitations under Delaware law and preferences that may apply
to any outstanding shares of preferred stock, holders of common stock are
entitled to receive ratably such dividends or other distributions, if any, as
may be declared by our board of directors out of funds legally available
therefor. In the event of our liquidation, dissolution or winding up, holders of
common stock are entitled to share ratably in all assets remaining after payment
of liabilities, subject to the liquidation preference of any outstanding
preferred stock. The common stock has no preemptive, conversion or other rights
to subscribe for additional securities issued by us. There are no redemption of
sinking fund provisions applicable to the common stock. All outstanding shares
of common stock are, and all shares of common stock to be outstanding upon
completion of the offering will be, validly issued, fully paid and
nonassessable. The rights, preferences and privileges of holders of common stock
are subject to, and may be adversely affected by, the rights of the holders of
shares of any series of preferred stock that we may designate and issue in the
future.

PREFERRED STOCK

As of February 29, 2000, there were 22,687,646 shares of preferred stock
outstanding. Upon the closing of this offering, all outstanding shares of
preferred stock outstanding as of February 29, 2000 will automatically convert
into 45,375,292 shares of common stock. Our board of directors will have the
authority, without further action by the stockholders, to issue up to 25,000,000
shares of preferred stock in one or more series, to fix the rights, preferences,
privileges and restrictions of the authorized preferred stock and to issue
shares of each such series. The issuance of preferred stock could have the
effect of restricting dividends on the common stock, diluting the voting power
for the common stock, impairing the liquidation rights of the common stock or
delaying or preventing our change in control without further action by the
stockholders. At present, we have no plans to issue any shares of preferred
stock.

WARRANTS

In connection with the funding of a $1,000,000 working capital line of
credit from Ascend Communications (now a part of Lucent) in August 1998 and
February 1999, we issued warrants to purchase up to 600,000 shares of our common
stock with an exercise price of $0.165 per share. These warrants are exercisable
currently. These warrants automatically convert to shares of our common stock if
not exercised by August 8, 2008.

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In July 1999, in connection with services provided to us, we agreed to
issue to Boyle Consolidated Communications, LLC, a warrant to purchase 120,000
shares of common stock with an exercise price of $0.834 per share. This warrant
is immediately exercisable, subject to certain repurchase rights, and expires on
the earlier of July 28, 2004 or a breach of our telecommunications access
agreement with Boyle.

REGISTRATION RIGHTS

According to the terms of a registration rights agreement, beginning 180
days after the closing of this offering, our Series A, Series B and Series C
stockholders who will hold in the aggregate 45,375,292 shares of common stock
upon conversion of their preferred stock, may require us to file two
registration statements under the Securities Act of 1933 with respect to the
resale of their shares. To demand such registration, investors holding an
aggregate of at least 12,345,003 shares of common stock if previously a Series A
holder, 8,177,040 shares of common stock if previously a Series B holder or
2,165,603 shares of common stock if previously a Series C holder shares must
request the registration statement be filed.

Additionally, our Series A, Series B and Series C stockholders of
45,375,292 shares have piggyback registration rights with respect to the future
registration of our shares of common stock under the Securities Act. If we
propose to register any shares of common stock under the Securities Act, the
holders of shares having piggyback registration rights are entitled to receive
notice of such registration and are entitled to include their shares in the
registration.

At any time after we become eligible to file a registration statement on
Form S-3 under the Securities Act, holders of demand registration rights may
require us to file an unlimited number of registration statements on Form S-3
with respect to their shares of common stock, subject to certain exceptions.

These registration rights are subject to conditions and limitations,
including the right of the underwriters of an offering to limit the number of
shares of common stock to be included in the registration. We are generally
required to bear all of the expenses of all registrations under the registration
rights agreement, except underwriting discounts and commissions. The
registration rights agreement also contains our commitment to indemnify the
holders of registration rights for losses they incur in connection with
registrations under the agreement. Registration of any of the shares of common
stock held by security holders with registration rights would result in those
shares becoming freely tradeable without restriction under the Securities Act.

ANTI-TAKEOVER EFFECTS

Provisions of Delaware law, our certificate of incorporation, our bylaws
and certain contracts to which we are a party, could have the effect of delaying
or preventing a third party from acquiring us, even if the acquisition would
benefit our stockholders. These provisions are intended to enhance the
likelihood of continuity and stability in the composition of our board of
directors and in the policies formulated by the board of directors and to
discourage certain types of transactions that may involve an actual or
threatened change of control of BlueStar. These provisions are designed to
reduce our vulnerability to an unsolicited proposal for a takeover that does not
contemplate the acquisition of all of our outstanding shares, or an unsolicited
proposal for the restructuring or sale of all or part of BlueStar.

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Delaware anti-takeover statute. We are subject to the provisions of
Section 203 of the Delaware General Corporation Law, an anti-takeover law.
Subject to certain exceptions, the statute prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the time of the transaction in
which the person became an interested stockholder, unless:

- prior to such time, the board of directors of the corporation approved
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder;

- upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding, for purposes of determining the
number of shares outstanding, those shares owned (1) by persons who are
directors and also officers and (2) by employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or

- at or subsequent to such time, the business combination is approved by
the board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least 66 2/3% of the outstanding voting stock which is not owned by the
interested stockholder.

For purposes of Section 203, a "business combination" includes a merger,
asset sale or other transaction resulting in a financial benefit to the
interested stockholder, and an "interested stockholder" is a person who,
together with affiliates and associates, owns, or within three years prior to
the date of determination whether the person is an "interested stockholder," did
own, 15% or more of the corporation's voting stock.

In addition, provisions of our certificate of incorporation and bylaws
which will take effect upon the closing of this offering may have an
anti-takeover effect. These provisions may delay, defer or prevent a tender
offer or takeover attempt of our company that a stockholder might consider in
his or her best interest, including attempts that might result in a premium over
the market price for the shares held by our stockholders. The following
summarizes these provisions:

Classified board of directors. Our certificate of incorporation will
provide that at the first annual meeting following the closing of our initial
public offering, our board of directors will be divided into three classes of
directors, as nearly equal in size as is practicable, serving staggered
three-year terms. As a result, approximately one-third of the board of directors
will be elected each year. These provisions, when coupled with the provisions of
our certificate of incorporation and bylaws authorizing our board of directors
to fill vacant directorships or increase the size of our board, may deter a
stockholder from removing incumbent directors and simultaneously gaining control
of the board of directors.

Stockholder action; special meeting of stockholders. Our certificate of
incorporation will eliminate the ability of stockholders to act by written
consent. Our bylaws provide that special meetings of our stockholders may be
called only by a majority of our board of directors.

Advance notice requirements for stockholders proposals and directors
nominations. Our bylaws will provide that stockholders seeking to bring
business before an annual meeting of stockholders, or to nominate candidates for
election as directors at an annual meeting of stockholders, must provide us with
timely written notice of their proposal. To be timely, a stockholder's notice
must be delivered to or mailed and received at our principal executive offices
not less than 120 days before the date we

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released the notice of annual meeting to stockholders in connection with the
previous year's annual meeting. If, however, no meeting was held in the prior
year or the date of the annual meeting has been changed by more than 30 days
from the date contemplated in the notice of annual meeting, notice by the
stockholder, in order to be timely, must be received a reasonable time before we
release the notice of annual meeting to stockholders. Our bylaws also specify
certain requirements as to the form and content of a stockholder's notice. These
provisions may preclude stockholders from bringing matters before an annual
meeting of stockholders or from making nominations for directors at an annual
meeting of stockholders.

Authorized but unissued shares. Our authorized but unissued shares of
common stock and preferred stock are available for our board to issue without
stockholder approval. We may use these additional shares for a variety of
corporate purposes, including future public offerings to raise additional
capital, corporate acquisitions and employee benefit plans. The existence of our
authorized but unissued shares of common stock and preferred stock could render
it more difficult or discourage an attempt to obtain control of our company by
means of a proxy context, tender offer, merger or other transaction.

Supermajority vote provisions. The Delaware General Corporation Law
provides generally that the affirmative vote of a majority of the shares
entitled to vote on any matter is required to amend a corporation's certificate
of incorporation or bylaws, unless a corporation's certificate of incorporation
or bylaws, as the case may be, requires a greater percentage. Our certificate of
incorporation will impose supermajority voting requirements in connection with
the amendment of certain provisions of our certificate of incorporation,
including the provisions relating to the classified board of directors and
action by written consent of stockholders.

Indemnification. We will indemnify our directors and officers to the
fullest extent permitted by Delaware law. We intend to enter into indemnity
agreements with all of our directors and officers and to purchase directors' and
officers' liability insurance. In addition, our certificate of incorporation
limits the personal liability of our board members for breaches by the directors
of their fiduciary duties where permitted under Delaware law.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for our common stock is UMB, N.A.

NASDAQ NATIONAL MARKET LISTING

We have applied to list our stock on The Nasdaq National Market under the
trading symbol "BLST".

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SHARES ELIGIBLE FOR FUTURE SALE

If our stockholders sell substantial amounts of our common stock in the
public market following this offering, the prevailing market price of our common
stock could decline. Furthermore, because we do not expect any shares will be
available for sale for 180 days after this offering as a result of the
contractual and legal restrictions on resale described below, sales of
substantial amounts of our common stock in the public market after these
restrictions lapse could adversely affect the prevailing market price of the
common stock and our ability to raise equity capital in the future.

Upon the closing of this offering, we will have outstanding an aggregate of
85,389,222 shares of our common stock, based upon the number of shares
outstanding at February 29, 2000 and assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options or warrants. Of
these shares, all shares sold in this offering will be freely tradeable without
restriction or further registration under the Securities Act unless they are
purchased by our "affiliates," as that term is defined in Rule 144 under the
Securities Act. The remaining shares will be eligible for sale in the public
market as follows:

<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
- ---------------- ----
<S> <C>
14,000,000............................. After the date of this prospectus,
freely tradeable shares sold in this
offering and shares saleable under Rule
144(k) that are not subject to the
180-day lock-up.
63,000,000............................. After 180 days from the date of this
prospectus, the 180-day lock-up is
released and these shares are eligible
for sale on the public markets under
Rule 144 (subject, in some cases, to
volume limitations), Rule 144(k) or
Rule 701.
8,389,222.............................. After 180 days from the date of this
prospectus, restricted securities that
are held for less than one year and are
not eligible for sale on the public
markets under Rule 144.
</TABLE>

Lock-up agreements. All of our directors and officers and substantially
all of our stockholders and option holders have signed or are otherwise subject
to lock-up agreements under which they agreed not to transfer or dispose of,
directly or indirectly, any shares of our common stock or any securities
convertible into or exercisable or exchangeable for shares of our common stock
for 180 days after the date of this prospectus. Transfers or dispositions can be
made sooner: (a) with the prior written consent of Credit Suisse First Boston
Corporation, in the case of certain transfers to affiliates who sign identical
lock-up agreements or (b) if the transfer is a bona fide gift and the donee
signs an identical lock-up agreement.

Rule 144. In general, under Rule 144 as currently in effect, beginning 90
days after the date of this prospectus, a person who has beneficially owned
shares of our common stock for at least one year, including the holding period
of certain prior owners other than affiliates, is entitled to sell within any
three-month period a number of shares that does not exceed the greater of (a) 1%
of the number of shares of our common stock then outstanding, which will equal
approximately 853,892 shares immediately after the offering, or (b) the average
weekly trading volume of our common stock on the Nasdaq National Market during
the four calendar weeks preceding the filing of a notice on Form 144

65
<PAGE> 68

with respect to that sale. Sales under Rule 144 are also subject to certain
manner-of-sale provisions, notice requirements and the availability of current
public information about us.

Rule 144(k). Under Rule 144(k), a person who is not deemed to have been
one of our affiliates at any time during the three months preceding a sale and
who has beneficially owned shares for at least two years, including the holding
period of certain prior owners other than affiliates, is entitled to sell those
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144. Therefore, unless otherwise
restricted, Rule 144(k) shares may be sold immediately upon the closing of this
offering.

Rule 701. In general, under Rule 701 of the Securities Act as currently in
effect, each of our directors, officers, employees, consultants or advisors who
purchased shares from us before the date of this prospectus in connection with a
compensatory stock plan or other written compensatory agreement is eligible to
resell such shares 90 days after the effective date of this offering in reliance
on Rule 144, but without compliance with certain restrictions, including the
holding period, contained in Rule 144.

Registration rights. After this offering, the holders of shares of our
common stock will be entitled to certain rights with respect to the registration
of those shares under the Securities Act. See "Description of Capital
Stock--Registration Rights." After any such registration of these shares, such
shares will be freely tradeable without restriction under the Securities Act.
These sales could cause the market price of our common stock to decline.

Stock plans. After this offering, we intend to file one or more Form S-8
registration statements under the Securities Act covering 15,231,000 shares of
common stock issued or reserved for issuance under our 1999 Stock Incentive
Plan. We expect these registration statements to become effective as soon as
practicable after the effective date of this offering.

As of February 29, 2000, options to purchase 7,545,000 shares of our common
stock were issued and outstanding. All of these shares will be eligible for sale
in the public market from time to time, subject to vesting provisions, Rule 144
volume limitations applicable to our affiliates and the expiration of lock-up
agreements.

66
<PAGE> 69

CERTAIN UNITED STATES FEDERAL TAX
CONSIDERATIONS FOR NON-UNITED STATES HOLDERS

GENERAL

This section summarizes the material U.S. federal tax consequences to
holders of common stock that are "non-U.S. holders." In general, you are a
non-U.S. holder if you are:

- an individual that is a nonresident alien of the U.S.;

- a corporation organized or created under non-U.S. law;

- an estate that is not taxable in the U.S. on its worldwide income; or

- a trust that is either not subject to primary supervision over its
administration by a U.S. court or not subject to the control of a U.S.
person with respect to substantial trust decisions.

If a partnership holds common stock, the tax treatment of a partner will
generally depend upon the status of the partner and upon the activities of the
partnership. If you are a partner of a partnership holding common stock, we
suggest that you consult your tax advisor.

This discussion does not address all aspects of U.S. federal taxation, and
in particular is limited in the following ways:

- The discussion only covers you if you hold your common stock as a capital
asset (that is, for investment purposes), and if you do not have a
special tax status.

- The discussion does not cover tax consequences that depend upon your
particular tax situation in addition to your ownership of the common
stock.

- The discussion is based on current law. Changes in the law may change the
tax treatment of the common stock.

- The discussion does not cover state, local or foreign law.

- We have not requested a ruling from the IRS on the tax consequences of
owning the common stock. As a result, the IRS could disagree with
portions of this discussion.

IF YOU ARE CONSIDERING BUYING COMMON STOCK, WE SUGGEST THAT YOU CONSULT
YOUR TAX ADVISOR ABOUT THE TAX CONSEQUENCES OF HOLDING THE COMMON STOCK IN YOUR
PARTICULAR SITUATION.

DISTRIBUTIONS

Distributions paid on the shares of common stock generally will constitute
dividends for U.S. federal income tax purposes to the extent paid from our
current or accumulated earnings and profits, as determined under U.S. federal
income tax principles. Dividends paid to you generally will be subject to United
States withholding tax at a 30% rate or, if a tax treaty applies, a lower rate
specified by the treaty, unless you receive the dividends in connection with a
trade or business you conduct in the United States. To receive a reduced treaty
rate, you must furnish to us or our paying agent a duly completed Form 1001 or
Form W-8BEN (or substitute form) certifying to your qualification for the
reduced rate.

Currently, withholding generally is imposed on the gross amount of a
distribution, regardless of whether we have sufficient earnings and profits to
cause the distribution to be a dividend for U.S. federal income tax purposes.
However, withholding on distributions made after December 31, 2000,

67
<PAGE> 70

may be on less than the gross amount of the distribution if the distribution
exceeds a reasonable estimate of our accumulated and current earnings and
profits.

In order to claim an exemption from withholding on the ground that the
dividends are effectively connected with a U.S. trade or business, you must
provide to us or our paying agent a duly completed Form 4224 or Form W-8ECI (or
substitute form) certifying your exemption. However, dividends exempt from U.S.
withholding because they are effectively connected generally are subject to U.S.
federal income tax on a net income basis at the regular graduated tax rates.
These rules might be altered by an applicable tax treaty. If you are a
corporation, any effectively connected dividends received by you may, under
certain circumstances, be subject to an additional "branch profits tax" at a 30%
rate or a lower rate specified by an applicable income tax treaty.

Under current U.S. Treasury regulations, dividends paid before January 1,
2001 to an address outside the United States are presumed to be paid to a
resident of the country of address, unless the payor has knowledge to the
contrary, for purposes of the withholding discussed above and for purposes of
determining the applicability of a tax treaty rate. However, U.S. Treasury
regulations applicable to dividends paid after December 31, 2000 eliminate this
presumption, subject to certain transition rules.

For dividends paid after December 31, 2000, you generally will be subject
to U.S. backup withholding tax at a 31% rate under the backup withholding rules
described below, rather than at the 30% or reduced tax treaty rate, as described
above, unless you comply with certain IRS certification or documentary evidence
procedures. Certain changes to these rules apply to dividend payments made after
December 31, 2000 to certain non-U.S. holders or foreign intermediaries. You
should consult your own tax advisor concerning the effect, if any, of the rules
affecting post-December 31, 2000 dividends on your possible investment in common
stock.

You may obtain a refund of any excess amounts withheld by filing an
appropriate claim for refund along with the required information with the IRS.

GAIN ON DISPOSITION OF COMMON STOCK

You generally will not be subject to U.S. federal income tax on a sale or
other disposition of the common stock unless one of the following apply:

- If the gain is effectively connected with a trade or business you conduct
in the United States you will, unless an applicable treaty provides
otherwise, be taxed on your net gain on the sale under regular graduated
U.S. federal income tax rates. If you are a foreign corporation, you may
be subject to an additional branch profits tax at a 30% rate, unless an
applicable income tax treaty provides for a lower rate.

- If you are an individual and are present in the United States for 183 or
more days in the taxable year of the disposition and certain other
conditions are met, you will be subject to a flat 30% tax on your gain
from the sale, which may be offset by certain U.S. capital losses.

- If we are or have been a "U.S. real property holding corporation" for
U.S. federal income tax purposes at any time during the shorter of the
five-year period ending on the date of the disposition or the period
during which you held the common stock, and certain other conditions
apply, you may be taxed in the U.S. on your gain from a sale of the
common stock pursuant to the effectively connected rules described above.
We believe that we never have been, are not currently and are not likely
in the future to become a U.S. real property holding corporation for U.S.
federal income tax purposes.

68
<PAGE> 71

FEDERAL ESTATE TAX

If you are an individual, common stock held by you at the time of your
death will be included in your gross estate for U.S. federal estate tax
purposes, unless an applicable estate tax treaty provides otherwise.

INFORMATION REPORTING AND BACKUP WITHHOLDING TAX

We must report annually to the IRS the amount of dividends paid to you and
the tax withheld with respect to the dividends. These requirements apply even if
withholding was not required on payments to you. Pursuant to an applicable tax
treaty, that information may also be made available to the tax authorities in
your country of residence.

Backup withholding tax generally may be imposed at the rate of 31% on
certain payments to persons that fail to furnish certain required information.
Backup withholding generally will not apply to dividends paid before January 1,
2001 to non-U.S. holders. See the discussion under "Distributions" above for
rules regarding reporting requirements to avoid backup withholding on dividends
paid after December 31, 2000.

As a general matter, information reporting and backup withholding will not
apply to a payment to you by or through a foreign office of a foreign broker of
the proceeds of a sale of common stock effected outside the U.S. However,
information reporting requirements, but not backup withholding, will apply to
such a payment if the broker:

- is a U.S. person;

- is a foreign person that derives 50% or more of its gross income for
certain periods from the conduct of a trade or business in the U.S.;

- is a "controlled foreign corporation" as defined in the Code; or

- is a foreign partnership with certain U.S. connections (for payments made
after December 31, 2000).

Information reporting requirements will not apply in the above cases if the
broker has documentary evidence in its records that you are a non-U.S. holder
and certain conditions are met or you otherwise establish an exemption.

Payment of the proceeds of a sale of common stock by or through a U.S.
office of a broker is subject to both backup withholding and information
reporting unless you certify to the payor in the manner required as to your
non-U.S. status under penalties of perjury or otherwise establish an exemption.

Amounts withheld under the backup withholding rules do not constitute a
separate U.S. federal income tax. Rather, any amounts withheld under the backup
withholding rules will be refunded or allowed as a credit against your U.S.
federal income tax liability, if any, provided the required information or
appropriate claim for refund is filed with the IRS.

THE FOREGOING DISCUSSION IS ONLY A SUMMARY OF CERTAIN U.S. FEDERAL INCOME
AND ESTATE TAX CONSEQUENCES OF THE OWNERSHIP, SALE OR OTHER DISPOSITION OF
COMMON STOCK BY NON-U.S. HOLDERS. YOU ARE URGED TO CONSULT YOUR OWN TAX ADVISOR
WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO YOU OF OWNERSHIP AND
DISPOSITION OF COMMON STOCK, INCLUDING THE EFFECT OF ANY STATE, LOCAL, FOREIGN
OR OTHER TAX LAWS AND ANY APPLICABLE INCOME OR ESTATE TAX TREATIES.

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<PAGE> 72

UNDERWRITING

Under the terms and subject to the conditions contained in an underwriting
agreement dated , 2000, we have agreed to sell to the underwriters
named below, for whom Credit Suisse First Boston Corporation, Deutsche Bank
Securities Inc., Donaldson, Lufkin & Jenrette Securities Corporation and J.P.
Morgan Securities Inc. are acting as representatives, the following respective
numbers of shares of our common stock:

<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ----------
<S> <C>
Credit Suisse First Boston Corporation......................
Deutsche Bank Securities Inc................................
Donaldson, Lufkin & Jenrette Securities Corporation.........
J.P. Morgan Securities Inc..................................

Total.............................................
----------
14,000,000
==========
</TABLE>

The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.

We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to 2,100,000 additional shares of our common stock at the initial
public offering price less the underwriting discounts and commissions. The
option may be exercised only to cover any over-allotments of common stock.

The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per
share on sales to other broker/dealers. After the initial public offering, the
public offering price and concession and discount to dealers may be changed by
the representatives.

The following table summarizes the compensation and estimated expenses we
will pay.

<TABLE>
<CAPTION>
PER SHARE TOTAL
------------------------------- -------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting Discounts and
Commissions paid by us................... $ $ $ $
Expenses payable by us................... $0.07 $0.07 $1,000,000 $1,100,000
</TABLE>

The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.

We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement

70
<PAGE> 73

under the Securities Act relating to, any shares of our common stock or
securities convertible into or exchangeable or exercisable for any shares of our
common stock, or publicly disclose the intention to make any such offer, sale,
pledge, disposition or filing, without the prior written consent of Credit
Suisse First Boston Corporation for a period of 180 days after the date of this
prospectus.

Our officers and directors have agreed that they will not offer, sell,
contract to sell, pledge or otherwise dispose of, directly or indirectly, any
shares of our common stock or securities convertible into or exchangeable or
exercisable for any shares of our common stock, enter into a transaction which
would have the same effect, or enter into any swap, hedge or other arrangement
that transfers, in whole or in part, any of the economic consequences of
ownership of our common stock, whether any such aforementioned transaction is to
be settled by delivery of our common stock or such other securities, in cash or
otherwise, or publicly disclose the intention to make any such offer, sale,
pledge or disposition, or to enter into any such transaction, swap, hedge or
other arrangement, without, in each case, the prior written consent of Credit
Suisse First Boston Corporation for a period of 180 days after the date of this
prospectus.

The underwriters have reserved for sale, at the initial public offering
price, up to 700,000 shares of the common stock for some of our vendors,
customers and other people and entities with whom we maintain business
relationships who have expressed an interest in purchasing common stock in the
offering. The number of shares available for sale to the general public in the
offering will be reduced to the extent these persons purchase these reserved
shares. Any reserved shares not purchased will be offered by the underwriters to
the general public on the same terms as the other shares.

We have agreed to indemnify the underwriters against liabilities under the
Securities Act or contribute to payments the underwriters may be required to
make in that respect.

We have applied to have our common stock listed on The Nasdaq National
Market under the symbol "BLST".

Prior to this offering, there has been no public market for our common
stock. The initial public offering price will be determined by negotiation
between us and the representatives, and does not reflect the market price for
our common stock that may prevail following this offering. The principal factors
to be considered in determining the public offering price will include:

- the information set forth in this prospectus and otherwise available to
the representatives;

- the history and the prospects for the industry in which we will compete;

- the ability of our management;

- the prospects for our future earnings;

- the present state of our development and our current financial condition;

- the general condition of the securities markets at the time of this
offering; and

- the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies.

We can offer no assurance that the initial public offering price will
correspond to the price at which our common stock will trade in the public
market subsequent to this offering or that an active trading market for our
common stock will develop and continue after this offering.

71
<PAGE> 74

The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, penalty bids and "passive" market making in
accordance with Regulation M under the Exchange Act.

- Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.

- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum

- Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.

- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by that
syndicate member is purchased in a syndicate covering transaction to
cover syndicate short positions.

- In "passive" market making, market makers in the common stock who are
underwriters or prospective underwriters may, subject to certain
limitations, make bids for or purchases of the common stock until the
time, if any, at which a stabilizing bid is made.

These stabilizing transactions, syndicate covering transactions and penalty bids
may cause the price of our common stock to be higher than it would otherwise be
in the absence of these transactions. These transactions may be effected on The
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.

72
<PAGE> 75

NOTICE TO CANADIAN RESIDENTS

RESALE RESTRICTIONS

The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common stock
in Canada must be made in accordance with applicable securities laws which will
vary depending on the relevant jurisdiction, and which may require resales to be
made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
the common stock.

REPRESENTATIONS OF PURCHASERS

Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that (i)such purchaser is entitled under
applicable provincial securities laws to purchase such common stock without the
benefit of a prospectus qualified under such securities laws, (ii) where
required by law, that such purchaser is purchasing as principal and not as
agent, and (iii) such purchaser has reviewed the text above under "Resale
Restrictions".

RIGHTS OF ACTION (ONTARIO PURCHASERS)

The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.

ENFORCEMENT OF LEGAL RIGHTS

All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada, and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.

NOTICE TO BRITISH COLUMBIA RESIDENTS

A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from us. Only one such report
must be filed in respect of common stock acquired on the same date and under the
same prospectus exemption.

73
<PAGE> 76

TAXATION AND ELIGIBILITY FOR INVESTMENT

Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.

LEGAL MATTERS

Brobeck, Phleger & Harrison LLP, Austin, Texas, will pass upon the validity
of the issuance of the shares of common stock offered hereby for us. Cravath,
Swaine & Moore, New York, New York, has represented the underwriters in this
offering.

EXPERTS

The consolidated financial statements of the Company as of December 31,
1998 and 1999 and for the years ended December 31, 1998 and December 31, 1999
included in this prospectus and the Registration Statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the Securities and Exchange Commission a registration
statement on Form S-1, including exhibits and schedules, under the Securities
Act of 1933 with respect to the shares of common stock to be sold in this
offering. This prospectus does not contain all the information included in the
registration statement and the exhibits thereto. For further information about
us and the shares of our common stock to be sold in this offering, please refer
to this registration statement. Complete exhibits have been filed with our
registration statement on Form S-1.

You may read and copy any contract, agreement or other document referred to
in this prospectus and any portion of our registration statement or any other
information from our filings at the Securities and Exchange Commission's public
reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can
request copies of these documents, upon payment of a duplicating fee, by writing
to the Securities and Exchange Commission. Please call the Securities and
Exchange Commission at 1-800-SEC-0330 for further information about the public
reference rooms. Our filings with the Securities and Exchange Commission,
including our registration statement, are also available to you without charge
at the Securities and Exchange Commission's Web site, http://www.sec.gov.

As a result of this offering, we are subject to the information and
reporting requirements of the Securities Exchange Act of 1934, and will file and
furnish to our stockholders annual reports containing unaudited financial data
for the first three quarters of each fiscal year, proxy statements and other
information with the Securities and Exchange Commission.

You may read and copy any reports, statements or other information on file
at the public reference rooms or at the Securities and Exchange Commission's Web
site referred to above. You can also request copies of these documents, for a
copying fee, by writing to the Commission.

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<PAGE> 77

BLUESTAR COMMUNICATIONS GROUP, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of December 31, 1998 and
December 31, 1999......................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1998 and 1999................................ F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1998 and 1999.................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998 and 1999................................ F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>

F-1
<PAGE> 78

The following report is in the form that will be signed upon the final
approval of the stock split to occur just prior to completion of the Company's
anticipated initial public offering as described in Note 12 to the financial
statements.

ARTHUR ANDERSEN LLP

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To BlueStar Communications Group, Inc.:

We have audited the accompanying consolidated balance sheets of BlueStar
Communications Group, 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 each of the two years in the
period ended December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of BlueStar
Communications Group, Inc. and subsidiaries as of December 31, 1998 and 1999,
and the consolidated results of their operations and their cash flows for each
of the two years in the period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States.

Nashville, Tennessee

January 14, 2000, except for Note 12,

as to which the date is , 2000

F-2
<PAGE> 79

BLUESTAR COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 1998 AND 1999

<TABLE>
<CAPTION>
1998 1999
--------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 501,611 $ 12,901,707
Accounts receivable....................................... 1,142 140,115
Inventories............................................... -- 108,051
Prepaid expenses and other current assets................. 6,531 325,643
--------- ------------
Total current assets................................... 509,284 13,475,516
--------- ------------
Property and equipment, net................................. 142,712 5,017,500
Collocation fees, net....................................... 19,250 7,445,674
Other assets................................................ -- 567,677
--------- ------------
Total assets........................................... $ 671,246 $ 26,506,367
========= ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable.......................................... $ 30,978 $ 2,360,369
Accrued liabilities....................................... 169,316 4,645,776
Note payable.............................................. -- 541,526
Current portion of long-term debt......................... 155,000 320,922
--------- ------------
Total current liabilities.............................. 355,294 7,868,593
--------- ------------
Long-term debt, net of current portion...................... 345,000 503,174
--------- ------------
Total liabilities...................................... 700,294 8,371,767
Commitments and Contingencies:
Redeemable Convertible Preferred Stock, $.01 par value;
25,000,000 shares authorized
Series A 12,345,003 shares outstanding.................... -- 5,936,688
Series B 8,177,040 shares outstanding..................... -- 31,080,009
Stockholders' Deficit:
Common stock, $.0025 and $.01 par value at December 31, 1998
and 1999, respectively; 50,000,000 and 60,000,000 shares
authorized at December 31, 1998 and 1999, respectively;
24,291,186 and 23,425,800 shares issued and outstanding at
December 31, 1998 and 1999, respectively.................. 60,728 234,258
Additional paid-in capital.................................. 391,099 279,685
Deferred compensation....................................... -- (51,687)
Accumulated deficit......................................... (480,875) (19,344,353)
--------- ------------
Total stockholders' deficit............................ (29,048) (18,882,097)
--------- ------------
Total liabilities, redeemable convertible preferred
stock and stockholders' deficit....................... $ 671,246 $ 26,506,367
========= ============
</TABLE>

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

F-3
<PAGE> 80

BLUESTAR COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999

<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
Revenues.................................................... $ 12,101 $ 771,109
Operating Expenses:
Network and product costs................................. 199,973 8,082,759
Selling and marketing..................................... 75,572 4,809,590
General and administrative................................ 426,250 6,961,370
Depreciation and amortization............................. 28,402 263,972
------------ ------------
Total operating expenses............................... 730,197 20,117,691
------------ ------------
Loss From Operations........................................ (718,096) (19,346,582)
Interest Income (Expense):
Interest income........................................... 14,633 607,200
Interest expense.......................................... (14,166) (65,486)
------------ ------------
Net interest income.................................... 467 541,714
------------ ------------
Net loss.................................................... $ (717,629) $(18,804,868)
============ ============
Net loss per common share, basic and diluted................ $ (0.04) $ (1.05)
============ ============
Weighted average number of common shares outstanding........ 20,308,020 17,906,332
============ ============
</TABLE>

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

F-4
<PAGE> 81

BLUESTAR COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------- PAID-IN DEFERRED MEMBER ACCUMULATED
SHARES AMOUNT CAPITAL COMPENSATION CAPITAL DEFICIT TOTAL
---------- -------- ---------- ------------ --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1 ,1998...... -- $ -- $ -- $ -- $ 100,808 $ -- $ 100,808
Member contributions.......... -- -- -- -- 20,314 -- 20,314
Net loss of LLC............... -- -- -- -- -- (236,754) (236,754)
Issuance of common stock and
reorganization from LLC to
Corporation................. 19,710,000 49,275 (164,907) -- (121,122) 236,754 --
Common stock issued........... 4,664,562 11,661 569,694 -- -- -- 581,355
Common stock redemption....... (83,376) (208) (13,688) -- -- -- (13,896)
Net loss since
reorganization.............. -- -- -- -- -- (480,875) (480,875)
---------- -------- --------- -------- --------- ------------ ------------
Balance at December 31, 1998.... 24,291,186 60,728 391,099 -- -- (480,875) (29,048)
Change of par value of common
stock from $.0025 to $.01
per share................... -- 182,184 (182,184) -- -- -- --
Shares issued to employee
(2,596,488 shares restricted
and deferred compensation at
$.0245 per share)........... 2,780,034 27,800 40,311 (63,615) -- -- 4,496
Amortization of deferred stock
compensation -- restricted
stock....................... -- -- -- 11,928 -- -- 11,928
Compensation expense related
to non-employee warrant and
stock options granted....... -- -- 10,000 -- -- -- 10,000
Exercise of common stock
options..................... 396,630 3,966 20,459 -- -- -- 24,425
Repurchase of common stock.... (4,042,050) (40,420) -- -- -- (58,610) (99,030)
Net loss...................... -- -- -- -- -- (18,804,868) (18,804,868)
---------- -------- --------- -------- --------- ------------ ------------
Balance at December 31, 1999.... 23,425,800 $234,258 $ 279,685 $(51,687) $ -- $(19,344,353) $(18,882,097)
========== ======== ========= ======== ========= ============ ============
</TABLE>

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

F-5
<PAGE> 82

BLUESTAR COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999

<TABLE>
<CAPTION>
1998 1999
Cash Flows From Operating Activities: --------- ------------
<S> <C> <C>
Net loss.................................................. $(717,629) $(18,804,868)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation of property and equipment................. 28,402 224,548
Amortization of collocation fees....................... -- 39,424
Amortization of deferred compensation.................. -- 11,928
Non-cash compensation expense.......................... 6,073 14,496
Changes in operating assets and liabilities:
Accounts receivable.................................. (1,142) (138,973)
Inventories.......................................... -- (108,051)
Prepaid expenses and other current assets............ (6,531) (319,112)
Other assets......................................... -- (567,677)
Accounts payable..................................... 30,978 2,329,391
Accrued liabilities.................................. 163,243 4,476,460
--------- ------------
Net cash used in operating activities............. (496,606) (12,842,434)
--------- ------------
Cash Flows From Investing Activities:
Purchase of property and equipment........................ (70,306) (4,557,810)
Payments of collocation fees.............................. (19,250) (7,465,848)
--------- ------------
Net cash used in investing activities............. (89,556) (12,023,658)
--------- ------------
Cash Flows From Financing Activities:
Proceeds from issuance of common stock.................... 575,000 24,425
Repurchase of common stock................................ -- (99,030)
Proceeds from issuance of preferred stock................. -- 37,016,697
Proceeds from long-term debt.............................. 500,000 500,000
Repayments on long-term debt.............................. -- (175,904)
Other equity transactions, net............................ 12,773 --
--------- ------------
Net cash provided by financing activities......... 1,087,773 37,266,188
--------- ------------
</TABLE>

<TABLE>
<CAPTION>
Net Increase in Cash and Cash Equivalents. 501,611 12,400,096
<S> <C> <C>
Cash and Cash Equivalents, beginning of year................ -- 501,611
--------- ------------
Cash and Cash Equivalents, end of year...................... $ 501,611 $ 12,901,707
========= ============
Supplemental Cash Flow Information:
Interest paid............................................. $ 14,166 $ 65,486
========= ============
Supplemental Non-Cash Financing Activities:
Software purchased through short-term note payable........ $ -- $ 541,526
========= ============
</TABLE>

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

F-6
<PAGE> 83

BLUESTAR COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1999 AND 1998

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BlueStar Properties, Inc., a Tennessee corporation, was incorporated on
September 28, 1998. On the same date, subsequent to incorporation, all assets
and liabilities of BlueStar Communications, LLC, which was organized on March 7,
1997, were merged with and into BlueStar Properties, Inc., a Tennessee
corporation, in a common control reorganization. On June 21, 1999, we
reincorporated in Delaware by merging BlueStar Properties, Inc., a Tennessee
corporation, into BlueStar Properties, Inc., a Delaware corporation, with
BlueStar Properties, Inc., a Delaware corporation, surviving. The Delaware
corporation subsequently changed its name to BlueStar Communications Group, Inc.
(collectively, including all predecessors, the Company).

The Company has four wholly owned subsidiaries, BlueStar Communications,
Inc., the operating business, BlueStar Networks, Inc. and BlueStar Networks of
Virginia, Inc., both of which maintain certain regulatory licenses, and Bluestar
Communications of the Southeast, Inc.

The Company is a provider of broadband communications and Internet services
to small- and medium-sized businesses in Tier II and Tier III cities. Our
Internet services, which are packaged with Web hosting and e-mail, and our
high-speed real private networking services are primarily provided using DSL
technology. In addition to DSL technology, the Company also offers other low-
cost broadband solutions, including unbundled network element T1, or UNE T1, in
order to meet its customers' needs and maximize its network footprint.

The consolidated financial statements include the activity of BlueStar
Communications, LLC and BlueStar Properties, Inc., a Tennessee corporation, as
the predecessors to the Company. Revenue, expense and cash flow information for
the period from inception (March 7, 1997) to December 31, 1997 were all less
than $6,700, and, as a result, a full set of consolidated financial statements
for 1997 have not been included.

To date, the Company has incurred cash losses from operations and projects
that it will continue to incur losses in the near future, resulting in the need
for additional cash. The Company could incur additional losses as it continues
to expand its operating network. The Company intends to obtain cash from
strategic partners, existing and/or new stockholders or other resources. If such
resources are not obtained by the Company, then it could adversely affect the
Company's ability to operate at its current level.

(a) Basis of Presentation

The consolidated financial statements of the Company include the accounts
of its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.

(b) Revenue Recognition

Revenue related to service, installation and sale of customer premise
equipment is recognized when equipment is delivered and installation is
completed. Revenue from monthly recurring service is recognized in the month the
service is provided. Although not material at December 31, 1998 or December 31,
1999, payments received in advance of providing services are recorded as
unearned revenue until such services are provided.

F-7
<PAGE> 84
BLUESTAR COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company considers highly liquid investments with initial maturities of
less than three months to be cash equivalents.

The Company had $8,994 in cash balance subject to withdrawal restrictions
as a condition of its $75,000 equipment leasing line of credit with its bank at
December 31, 1998 and no restrictions at December 31, 1999.

(d) Inventories

Inventories consist of telecommunications equipment that will be installed
at customer locations. Inventory is accounted for on a FIFO basis at the lower
of cost or market.

(e) Property and Equipment

Property and equipment are recorded at cost and depreciated using the
straight-line method over the following estimated useful lives:

<TABLE>
<S> <C>
Furniture and fixtures...................................... 7 years
Network equipment........................................... 5 years
Software.................................................... 3 years
Leasehold improvements...................................... Life of the lease
</TABLE>

Expenditures for maintenance and repairs are charged to expense as
incurred, whereas expenditures for renewals and betterments are capitalized. The
Company accounts for software costs in accordance with the American Institute of
Certified Public Accountants' Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." The
statement requires capitalization of certain costs incurred in the development
of internal-use software, including external direct material and service costs.

(f) Collocation Fees

Collocation fees represent nonrecurring fees paid to traditional telephone
companies to secure central office space for location of certain Company
equipment. The fees are amortized over their estimated useful lives of five
years.

(g) Long-Lived Assets

Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
requires that companies consider whether indicators of impairment of long-lived
assets held for use are present. If such indicators are present, companies
determine whether the sum of the estimated undiscounted future cash flows
attributable to such assets are less than their carrying amount, and if so,
companies recognize an impairment loss based on the excess of the carrying
amount of the assets over fair value. Accordingly, management periodically
evaluates the ongoing value of property and equipment and has determined that
there were no indications of impairment as of December 31, 1998 and 1999.

F-8
<PAGE> 85
BLUESTAR COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(h) Advertising

The Company expenses the cost of advertising as incurred. Advertising
expense was approximately $30,192 and $898,653 for the years ended December 31,
1998 and 1999, respectively.

(i) Income Taxes

Prior to becoming BlueStar Properties, Inc., a Tennessee C corporation, on
September 28, 1998, the Company operated as a limited liability company under
the provisions of the Internal Revenue Code. Under these provisions, income or
losses of BlueStar Communications, LLC were reported by the members on their
individual federal and state income tax returns, and BlueStar Communications,
LLC did not pay income taxes or receive income tax benefits. The year-to-date
loss of the LLC through September 28, 1998, of $236,754 was netted against
paid-in capital upon the dissolution of the LLC on that date.

The Company accounts for income taxes under Statements of Financial
Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS 109). Under the
asset and liability method of SFAS 109, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax basis of
assets and liabilities and are measured using the enacted tax rates and laws
that are expected to be in effect when the differences are expected to reverse.
Under SFAS 109, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date.

(j) Stock-Based Compensation

The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations, as permitted under Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (SFAS 123).

(k) Net Loss Per Share

Net loss per share is presented in accordance with the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS
128). SFAS 128 requires the presentation of basic and diluted earnings per share
(EPS). Under the provisions of SFAS 128, basic net loss per share is computed by
dividing the net loss for the period by the weighted average number of shares of
common stock outstanding during the period.

Shares issued to employees subject to repurchase by the Company are not
included in the weighted average number of common shares outstanding for the
period.

Diluted EPS is the same as basic EPS as all potentially dilutive securities
are antidilutive. Potential dilutive securities include common stock that would
be issued for the exercise of stock options and warrants (13,708,900 shares) the
expiration of restrictions on shares (7,314,314 shares) and the conversion of
preferred shares (41,044,086 common shares).

(l) Use of Estimates

The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the

F-9
<PAGE> 86
BLUESTAR COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

reported amounts of assets and liabilities and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those
estimates and such differences may be material to the financial statements.

(m) Fair Value of Financial Instruments

The carrying amounts reported in the balance sheet for cash and cash
equivalents, restricted cash, accounts receivable, accounts payable, and debt
approximate fair value.

(n) Start-up Costs

In accordance with Statement of Position 98-5, "Reporting on the Costs of
Start-up Activities" (SOP 98-5), the Company has expensed all start-up costs to
date.

(o) Comprehensive Loss

The Company's comprehensive loss as defined by Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" has been the same
as reported losses since inception.

(p) Segment Information

The Company has adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS
131). SFAS 131 supersedes SFAS 14, "Financial Reporting for Segments of a
Business Enterprise", replacing the "industry segment" approach with the
"management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments. The
Company operates in one segment: high-speed Internet access and data
communications services.

(q) Newly Issued Accounting Standards

In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS
133). SFAS 133 establishes accounting and reporting standards requiring that
every derivative instrument be recorded in the balance sheet as either an asset
or liability measured at its fair value. SFAS 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS 133 is effective for fiscal quarters
beginning after June 15, 2000. The impact of the adoption of SFAS 133 is not
expected to have a material impact on the Company's results of operations or
financial position.

(r) Concentration of Risk

Under a master operating lease agreement with Ascend Communications, now
Lucent, the Company had leased equipment valued at $16,213,932 as of December
31, 1999. Lucent is the primary supplier of the Company's network equipment.
Lucent also provided the Company with a $1,000,000 line of working capital in a
transaction separate from the lease agreements.

F-10
<PAGE> 87
BLUESTAR COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of cash, cash equivalents and accounts
receivable. Concentrations of credit risk with respect to trade receivables are
limited due to the large number of customers comprising the Company's customer
base.

2. PROPERTY AND EQUIPMENT

Property and equipment, at cost, as of December 31, consisted of the
following:

<TABLE>
<CAPTION>
1998 1999
-------- ----------
<S> <C> <C>
Furniture and fixtures................................... $ 2,815 $ 375,094
Network equipment........................................ 166,493 2,358,357
Software................................................. -- 2,434,854
Leasehold improvements................................... 1,806 102,145
Less accumulated depreciation............................ (28,402) (252,950)
-------- ----------
Property and equipment, net.............................. $142,712 $5,017,500
======== ==========
</TABLE>

3. LEASE COMMITMENTS

The Company leases its office facilities and certain equipment from various
sources and leases its DSL equipment from Lucent as part of its $109.0 million
equipment lease line. The payment terms for each of the individual leases under
the Lucent Master Lease Agreement escalate during the first year and then remain
constant over the remaining life of the lease. Under the Master Lease Agreement,
the Company may lease equipment with a fair market value up to $30.0 million
immediately. The Company may lease additional equipment up to the full $109.0
million value so long as it maintains certain financial ratios and covenants
defined in the Master Lease Agreement. Once the Company has leased equipment
with a fair market value greater than $50.0 million, it must maintain $10.0
million of restricted cash or cash equivalents on hand at all times. The total
amount of the base rent for all leases and subleases is being charged to expense
on the straight-line method over the terms of the leases. Rental expense for all
operating leases and subleases was $128,896 and $3,566,838 for the years ended
December 31, 1998 and 1999, respectively. Future minimum commitments under
noncancellable operating lease agreements and building office space lease
agreements outstanding at December 31, 1999 are as follows:

<TABLE>
<CAPTION>
OPERATING
LEASE
PAYMENTS
-----------
<S> <C>
2000........................................................ $ 9,219,241
2001........................................................ 9,689,065
2002........................................................ 5,427,773
2003........................................................ 490,726
2004........................................................ 205,572
-----------
Total minimum lease payments................................ $25,032,377
===========
</TABLE>

F-11
<PAGE> 88
BLUESTAR COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. ACCRUED LIABILITIES

At December 31, 1998 and 1999, accrued liabilities consisted of the
following:

<TABLE>
<CAPTION>
1998 1999
-------- ----------
<S> <C> <C>
Accrued software payments.................................. $ -- $ 995,537
Accrued compensation expenses.............................. -- 764,482
Deferred lease payments.................................... 80,251 1,824,962
Other accruals............................................. 89,065 1,060,795
-------- ----------
Accrued liabilities........................................ $169,316 $4,645,776
======== ==========
</TABLE>

Deferred lease payments, within accrued liabilities, are caused by the
difference between the recognition of lease expense under generally accepted
accounting principles and the payment terms required by the Lucent Master Lease
Agreement. The payment terms for each of the individual leases under the Lucent
Master Lease Agreement escalates during the first year and then remains constant
over the remaining life of the lease. Accordingly, the base rent for the lease
is being charged to expense using the straight line method over the life of the
lease (36 months).

5. NOTE PAYABLE

In December 1999, the Company entered into a short-term note payable to an
equipment vendor in the amount of $541,526. Interest accrues at an annual rate
of 15%. Principal and interest payments of $58,704 are due monthly for the first
10 months of the year ended December 31, 2000.

6. LONG-TERM DEBT

At December 31, 1998 and 1999, long-term debt consists of:

<TABLE>
<CAPTION>
INTEREST RATE 1998 1999
------------- --------- ---------
<S> <C> <C> <C>
Lucent loan dated August 1998.................. 8.50% $ 500,000 $ 373,891
Lucent loan dated February 1999................ 7.75 -- 450,205
Less current portion........................... (155,000) (320,922)
--------- ---------
Long-term debt................................. $ 345,000 $ 503,174
========= =========
</TABLE>

The Company has a working capital line of credit agreement (Credit Line)
with Lucent allowing for borrowings up to $1,000,000. The balance is secured by
all of the assets of the Company. The line of credit is available in two
tranches of $500,000 each. Each tranche is payable over thirty-six months with
interest only payments for the first six months and principal and interest due
over the remaining thirty months. The August 1998 tranche matures in August 2001
and the February 1999 tranche matures in February 2002. Amounts charged to
interest expense for both loans was $14,166 and $65,486 during the years ended
December 31, 1999 and 1998, respectively.

7. REDEEMABLE CONVERTIBLE PREFERRED STOCK

The Company's certificate of incorporation, as amended, authorizes the
issuance of up to 25,000,000 shares of Redeemable Convertible Preferred Stock
(Preferred Stock), of which 12,345,003 and 8,177,040 shares are designated
Series A and Series B, respectively. In March 1999, the

F-12
<PAGE> 89
BLUESTAR COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Company issued 12,345,003 shares of redeemable convertible voting preferred
stock designated as Series A Preferred Stock at $0.49 per share. In August 1999
the Company issued 8,177,040 shares of redeemable convertible voting Preferred
Stock designated as Series B Preferred Stock at $3.80 per share.

The rights with respect to voting, dividends, liquidation and conversion of
the Preferred Stock are as follows:

Each share of Series A and B Preferred Stock has the same number of votes
as the number of shares of Common Stock into which that Series of Preferred
Stock is convertible.

Holders of Series A and B Preferred Stock are entitled to receive dividends
at the annual rate of $0.04 and $0.30 per share, respectively, when, as and if
declared by the Board of Directors. Such dividends are non-cumulative and are
payable prior and in preference to any dividends payable for Common Stock
declared by the Board of Directors. There have been no dividends declared to
date. As of December 31, 1999, the preferred stock holders have a priority right
on dividends of $1,296,000.

In the event of any liquidation or winding up of the Company, including a
merger or sale of significant assets, the holders of Series A and B Preferred
Stock shall be entitled to receive prior and in preference to any distribution
of any of the assets of the Company to the holders of Common Stock an amount of
$0.49, the original Series A liquidation amount, and $3.80, the original Series
B liquidation amount, per share for each share of Series A and B Preferred
Stock, respectively, plus all declared but unpaid dividends, if any. If assets
are insufficient to permit payment in full of a particular series, then
distribution would occur in proportion to the original issue price of the
respective series of Preferred Stock held by such holders.

After paying the amounts due the holders of shares of Preferred Stock, the
remaining assets available for distribution shall be distributed pro rata among
the holders of Common Stock and all Preferred Stock.

Each share of Preferred Stock is convertible into Common Stock at the
option of the holder or upon the consent of a majority of the aggregate votes of
the number of preferred shares then outstanding. The number of fully paid and
nonassessable shares of common stock into which each share of Series A and
Series B Preferred Stock may be converted shall be determined by dividing the
gross issue proceeds plus any declared but unpaid dividends by the original
issue price, adjusted for the effect of any stock splits, dividends or other
distribution payable that entitles a holder of Common Stock to receive
additional shares without payment of any consideration for the additional
shares. The conversion price was $0.49 and $3.80 for each share of Series A and
Series B Preferred Stock, respectfully, at December 31, 1999.

Such conversion is automatic upon the effective date of an initial public
offering of Common Stock for which the gross proceeds to the Company are at
least $20,000,000 and the offering price per share is at least $1.90 per share.
A total of 41,044,086 shares of Common Stock have been reserved for issuance
upon the conversion of the Series A and Series B Preferred Stock.

F-13
<PAGE> 90
BLUESTAR COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Each holder of Series A or Series B Preferred Stock may require the Company
to redeem on the dates specified below, by giving not less than 60 days written
notice, up to a cumulative total of that percentage of the shares held by such
requesting holder as set forth below.

<TABLE>
<CAPTION>
CUMULATIVE PERCENTAGE OF
REDEMPTION DATE SHARES WHICH MAY BE REDEEMED
- --------------- ----------------------------
<S> <C>
March 17, 2006......................................... 25%
March 17, 2007......................................... 50
March 17, 2008......................................... 75
March 17, 2009......................................... 100
</TABLE>

8. STOCKHOLDERS' DEFICIT

On October 29, 1999, the Company effected a 3-for-1 stock split in the form
of a stock dividend. The accompanying consolidated financial statements and all
references to Common Stock shares and per share amounts including options and
warrants to purchase Common Stock have been retroactively restated to reflect
the stock split. Membership units in the LLC were not effected by the stock
split as it was not an organized entity at the time of the stock dividend.
During 1999 the Company enacted a change in the par value of its common stock
from $0.0025 to $.01 per share.

As a condition of the Series A Preferred Stock agreement entered into on
March 17, 1999, three employees of the Company entered into Stock Restriction
and Special Payment Agreements with the Company. The agreements require tenure
conditions for the respective employees in order to fully vest in a portion of
their shares owned as of the date of the funding of the Series A Preferred
Stock. Restricted shares are subject to a right of repurchase by the Company, at
a price of $.0245 per share, if the employee leaves the Company or is terminated
prior to vesting. This right of repurchase lapses ratably over a 48-month period
and an additional 25% of the original amount of restricted shares automatically
accelerates vesting for termination without cause. In addition, the agreements
also include provisions which accelerate vesting upon a change in control of the
Company. In connection with the termination of employment of one of these
employees subject to such agreements, the Company exercised its right of
repurchase of 4,042,050 shares of Common Stock at a price of $.0245 per share
and immediately retired these shares.

On September 22, 1998, the Company entered into a Personal Services
Agreement (PSA) with a consultant for the Company. Under the terms of the
agreement, the consultant was granted 3.5% stock ownership in the Company and
ultimately received additional ownership interest under the agreement. As of
December 31, 1998, the consultant had received ownership in 5% of the
outstanding Common Stock. Compensation expense was recorded based on the 5%
ownership for the year ending December 31, 1998. On March 18, 1999, the
consultant received 2,780,034 additional shares per the terms of the PSA.
Immediately subsequent to receipt of the shares, the consultant became an
officer and employee of the Company and the PSA was terminated. As a condition
of the Series A Preferred Stock Purchase Agreement, a portion of his shares of
Common Stock are restricted and subject to repurchase by the Company.
Compensation expense related to the unrestricted shares was recognized upon
issuance. The value related to the 2,596,488 restricted shares was recorded as
deferred compensation and is being amortized over the 48-month vesting period.

On August 8, 1998, the Company entered into a Warrant Agreement with Lucent
in relation to the working capital note payable. In consideration of this
commitment with a ten-year term, a

F-14
<PAGE> 91
BLUESTAR COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

warrant was issued to purchase shares of Common Stock at an exercise price of
$0.165 per share. The number of shares available to be exercised per the terms
of the note equaled the total principal amount advanced to the Company divided
by ten, adjusted for any stock splits. At December 31, 1998, the Company had
borrowed $500,000 and thus 300,000 shares were available to be issued under the
warrant. In February 1999, the Company borrowed an additional $500,000 on the
note and the number of shares available to be issued under the warrant was
increased to 600,000. As of December 31, 1999, there have been no exercises
under the warrant.

In July 1999, the Company entered into a Warrant Agreement with Boyle
Consolidated Communications, LLC (Boyle) as consideration for an exclusivity
license to install access equipment in certain Boyle properties. The Company
issued to Boyle a warrant to purchase 120,000 shares of Common Stock with an
exercise price of $0.834 per share. This warrant is immediately exercisable and
expires on the earlier of July 2004 or a breach of the agreement. The Company
may exercise the option to repurchase any unvested shares at a price of $0.834
per share. The shares vest ratably over a 36-month period. As of December 31,
1999, there have been no exercises under the warrant.

The Company accounted for the warrants based on their fair value at the
grant date utilizing the Black Scholes economic model. The value of the warrants
was expensed.

9. STOCK OPTION PLAN

During 1998, the Company issued 720,000 non-qualified stock options to
certain initial employees and consultants of the Company. From January 1999 to
March 1999, the Company issued an additional 732,000 non-qualified stock options
to certain employees and three consultants of the Company. All initial employee
or consultant options were issued at exercise prices greater than market value
as determined by the Board of Directors of the Company. The options expire in
2006. The Company recognized compensation expense for the value of the 720,000
options issued to non-employees.

<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Outstanding at January 1, 1998
Granted................................................... 720,000 $0.17
Exercised................................................. -- --
Cancelled................................................. -- --
-------- -----
Outstanding at December 31, 1998............................ 720,000 0.17
Granted................................................... 732,000 0.19
Exercised................................................. (90,000) 0.17
Cancelled................................................. (270,000) 0.17
-------- -----
Outstanding at December 31, 1999............................ 1,092,000 $0.18
======== =====
Exercisable at December 31, 1999............................ 612,000 $0.18
======== =====
</TABLE>

In March 1999, the Company's Board of Directors (Board) adopted the 1999
Incentive Stock Option Plan (Plan). The Plan provides for the granting of stock
options to employees, directors or consultants of the Company. The Plan is
administered by the Compensation Committee of the Board and allows for the
granting of non-qualified (NQOs) and incentive stock options (ISOs) for purchase

F-15
<PAGE> 92
BLUESTAR COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

up to an aggregate of 6,519,000 shares of Common Stock. The options are
exercisable at the discretion of the plan administrator, but generally are
exercisable upon vesting. Options generally vest over a four year period at a
rate of 25% after the first year of service, then ratably over the next
thirty-six months. Certain employees of the Company have been granted ISOs which
vest at a rate of 12.5% after the first six months of service and then ratably
over the next forty-two months. Options expire within 10 years after the date of
grant. In the event of a change of control of the Company, the Plan provides for
accelerated vesting based upon the terms evidenced in the Option grant,
generally 50.0% of the unvested options of the employee. All options under the
Plan have a ten year term.

In October 1999, the Board approved and adopted the 1999 Stock Option/Stock
Issuance Plan (New Plan). The New Plan provides for the granting of stock
options and stock purchase rights to employees, non-employee members of the
Board and consultants who provide services to the Company. At December 31, 1999,
15,231,000 shares of Common Stock were reserved for issuance under the Plan. The
Plan is administered by the Board and allows for the granting of non-statutory
options (NSOs) and incentive stock options (ISOs). The plan administrator
establishes exercise provisions for options, but generally options are
immediately exercisable upon grant. In the event that options are exercised
prior to vesting, the shares issued pursuant to unvested options will be subject
to repurchase by the Company. Options generally vest over a four year period at
a rate of 25% after the first year of service, then ratably over the next
thirty-six months. Certain employees of the Company have been granted options
which vest at a rate of 12.5% after the first six months of service and then
ratably over the next forty-two months. Options expire within 10 years after the
date of grant.

All grants under the Plan will be issued new certificates under the New
Plan. Grants issued above the amount authorized by the Plan have been approved
by the Board and are considered issued under the New Plan.

The Company accounts for options issued to employees under APB Opinion 25.
The options have been granted with exercise prices greater than or equal to the
market value of the common stock as determined by the Board of Directors of the
Company. The Company recognized compensation expense related to non-qualified
options issued to consultants under the Plan.

Plan and New Plan activity is as follows:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
---------- --------
<S> <C> <C>
Outstanding at January 1, 1999........................... -- $ --
Granted................................................ 12,268,530 0.19
Exercised.............................................. (306,630) 0.03
Cancelled.............................................. (65,000) 0.29
---------- -----
Outstanding at December 31, 1999......................... 11,896,900 $0.19
========== =====
Exercisable at December 31, 1999......................... 617,086 $0.04
========== =====
</TABLE>

F-16
<PAGE> 93
BLUESTAR COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes information about initial employee, Plan and
New Plan options outstanding at December 31, 1999:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- ----------------------
WEIGHTED AVERAGE
------------------------ WEIGHTED
REMAINING AVERAGE
AT CONTRACTUAL EXERCISE AT EXERCISE
EXERCISE PRICES 12/31/99 LIFE IN YEARS PRICE 12/31/99 PRICE
- --------------- ----------- ------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.025-0.05............. 5,878,500 4.50 $0.04 598,086 $0.03
0.10-0.25............... 2,016,000 3.71 0.15 612,000 0.18
0.39.................... 5,094,400 5.00 0.39 18,000 0.39
---------- ---- ----- --------- -----
12,988,900 4.60 $0.19 1,228,086 $0.11
========== ==== ===== ========= =====
</TABLE>

SFAS 123 established new financial and reporting standards for stock-based
compensation plans. As the Company has adopted the disclosure-only provision of
SFAS 123, no compensation cost has been recognized for the Company's option plan
based on the fair value method. If the Company had recognized compensation cost
for the option grants based on the fair value method prescribed by SFAS 123, the
effects for the year ended December 31, 1998 would have been immaterial and the
Company's net loss would have increased by approximately $44,000 or less than
$0.01 per share for the year ended December 31, 1999. The weighted average fair
value of options granted during 1999 was $0.05. The above tables include 75,000
non-qualified options issued under the plan that are subject to repurchase by
the Company. The Company did not repurchase any of these shares as of December
31, 1999.

The fair value for these options was estimated at the date of grant using
the minimum value method allowed under SFAS 123. Under this method, the expected
life of the options used in this calculation was 2, 3, 5 and 6 years for options
vesting in 1, 2, 3 and 4 years, respectively, from the date of grant; the risk
free interest rate used ranged from 4.62% to 6.38%; and a volatility factor of
nil.

10. INCOME TAXES

The components of the net deferred income tax asset (liability), at an
effective rate of 39%, as of December 31, 1998 and 1999 are as follows:

<TABLE>
<CAPTION>
1998 1999
--------- -----------
<S> <C> <C>
Non-current asset (liability):
Net operating loss carryforward........................ $ 186,811 $ 7,906,389
Tax over book depreciation............................. (9,008) (265,253)
Compensation accrual................................... -- 77,728
Other nondeductible accruals........................... -- 143,500
Capitalized start-up costs............................. 9,576 7,912
Long-term accrued liability............................ 34,735 --
--------- -----------
Total non-current asset............................. 222,114 7,870,276
Less valuation allowance............................... (222,114) (7,870,276)
--------- -----------
Net deferred tax asset.............................. $ -- $ --
========= ===========
</TABLE>

SFAS 109 requires the Company to record a valuation allowance when it is
"more likely than not that some portion or all of the deferred tax assets will
not be realized." It further states that

F-17
<PAGE> 94
BLUESTAR COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

"forming a conclusion that a valuation allowance is not needed is difficult when
there is negative evidence such as cumulative losses in recent years." The
ultimate realization of the deferred income tax assets depends on the Company's
ability to generate sufficient taxable income in the future. The Company has
provided a valuation allowance at December 31, 1998 and December 31, 1999. If
the Company achieves sufficient profitability in future years to use all of the
deferred income tax asset, the valuation allowance will be reduced through a
credit to expense (increasing retained earnings).

As of December 31, 1999, the Company had federal net operating loss
carryforwards of approximately $479,002 which expire in 2013 and $18,804,874
which expire in 2014.

11. COMMITMENTS AND CONTINGENCIES

The Company is involved in various litigation that arise through the normal
course of business. Management believes that the resolution of these matters
will not have a material adverse effect on the Company's financial position or
results of operations.

On April 5, 1999, the Company entered into an agreement with the President
and Chief Executive Officer. The agreement provides for a monthly base salary
and 12 months' salary and additional vesting of options if terminated.

12. EVENTS SUBSEQUENT TO DECEMBER 31, 1999

In January 2000, one of the employees subject to a Stock Restriction and
Special Payment Agreement resigned. The Company exercised its right to
repurchase the related outstanding restricted shares of 3,569,870 at a purchase
price of $0.025 per share. The total cost of repurchased options and severance
to the Company under the resignation agreement was approximately $231,000.

From January 1, 2000 to January 26, 2000, the Company granted to certain
employees options to purchase an aggregate of 783,000 shares of common stock at
an exercise price of $0.77 per share.

On January 26, 2000, the Company granted each of two board members options
to purchase 40,000 shares of the Company's common stock at exercise prices of
$3.93 per share. The options are nonqualified and vest ratably over a 48-month
period.

On January 28, 2000, the Company issued 318,471 shares of Series C
Preferred Stock for a total consideration of $5,000,000. Then, on February 14,
2000, the Company issued an additional 1,847,132 shares of Series C Preferred
Stock for net proceeds of $28,984,968. The rights and preferences of the Series
C preferred stock are similar to Series A and B preferred stock, except that
Series C preferred stock contains antidilution provisions.

From January 1, 2000 to March 17, 2000, certain employees of the Company
exercised options for 6,158,000 shares at a weighted average exercise price of
$0.13 per share. Some of these employees were issued recourse loans by the
Company valued at $705,570 in order for the employees to purchase their
respective shares. The loans accrue interest at an annual rate of 7%. The loans
are also secured by a pledge of the Common Stock purchased by the loan proceeds.
Of the shares exercised through March 17, 2000, 4,698,000 shares have not vested
and are subject to repurchase by the Company at a weighted average exercise
price of $0.06 per share.

In connection with its anticipated initial public offering of common stock,
the Company has decided to effect a 2-for-1 common stock split (in the form of a
dividend) that will be effective immediately prior to completion of the
offering. The applicable share and per share amounts included in the financial
statements and notes have been restated.

F-18
<PAGE> 95

(BLUESTAR LOGO)
<PAGE> 96

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth all expenses, other than underwriting
discounts and commissions, payable by Registrant in connection with the sale of
the common stock being registered hereby. All the amounts shown are estimates,
except the SEC registration fee and the NASD filing fee.

<TABLE>
<CAPTION>
<S> <C>
SEC registration fee........................................ $ 57,380
NASD fee.................................................... 22,235
Nasdaq National Market listing fee.......................... *
Blue sky fees and expenses.................................. *
Printing and engraving expenses............................. *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Transfer agent fees......................................... *
Miscellaneous............................................... *
----------
Total..................................................... $1,000,000
==========
</TABLE>

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

* To be provided by amendment.

ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS

Section 145 of the Delaware General Corporation Law (the "DGCL") provides,
in effect, that any persons made a party to any action by reason of the fact
that he is or was a director, officer, employee or agent of Registrant may and,
in certain cases, must be indemnified by Registrant against, in the case of a
non-derivative action, judgments, fines, amounts paid in settlement and
reasonable expenses (including attorneys' fees) incurred by him as a result of
such action, and in the case of a derivative action, against expenses (including
attorneys' fees), if in either type of action, he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
Registrant. This indemnification does not apply, in a derivative action, to
matters which it is adjudged that the director, officer, employee or agent is
liable to Registrant, unless upon court order it is determined that, despite
such adjudication of liability, but in view of all the circumstances of the
case, he is fairly and reasonably entitled to indemnity for expenses, and, in a
non-derivative action, to any criminal proceeding in which such person had
reasonable cause to believe his conduct was unlawful.

Article VI of our Third Amended and Restated Certificate of Incorporation
provides that no director shall be liable to Registrant or its stockholders for
monetary damages for breach of fiduciary duty as a director to the fullest
extent permitted by the DGCL.

Reference is made to Section 7(b) of the underwriting agreement to be filed
as Exhibit 1.1 hereto, pursuant to which the underwriters have agreed to
indemnify Registrant's officers and directors against certain liabilities under
the Securities Act of 1933.

Registrant intends to enter into Indemnification Agreements with each
director, a form of which is filed as Exhibit 10.1 to this registration
statement. Pursuant to such agreements, we will be obligated, to the extent
permitted by applicable law, to indemnify such directors against all expenses,
judgments, fines and penalties incurred in connection with the defense or
settlement of any actions brought against them by reason of the fact that they
were directors of Registrant or assumed certain

II-1
<PAGE> 97

responsibilities at the direction of Registrant. Registrant has purchased
directors and officers liability insurance to limit its exposure to liability
for indemnification of directors and officers.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

Since March 17, 1997, Registrant has issued unregistered securities to a
limited number of entities as described below. These issuances were deemed
exempt from registration under the Securities Act in reliance on Rule 701 or
Section 4(2) promulgated thereunder. The following share and dollar amounts are
adjusted to reflect the Registrant's 3-for-1 split of the common stock and
preferred stock effective October 29, 1999 and the two-for-one split of the
common stock to be effected prior to this offering.

1. In August 1998, BlueStar Properties, Inc., a Tennessee corporation,
issued a warrant to purchase up to 600,000 shares of its common
stock at an exercise price of $0.165 to Ascend Communications, Inc.

2. In June 1999, Registrant issued 11,810,610 shares of common stock to
its founders, Fredjoseph Goldner, Scott Kozicki and Richard Burtner,
upon the merger of Registrant with and into its predecessor,
BlueStar Properties, Inc., a Tennessee corporation. These shares
were issued upon the conversion of Messrs. Goldner, Kozicki and
Burtner's shares in BlueStar Properties, Inc., a Tennessee
corporation, into shares of Registrant's common stock.

3. In July 1999, Registrant issued a warrant to purchase up to 120,000
shares of common stock at an exercise price of $0.835 to Boyle
Consolidated Communications, LLC.

4. In March 1999, Registrant issued 12,345,003 shares of Series A
Convertible Preferred Stock for $0.49 per share, for an aggregate
purchase price of $6,000,000.51. The following stockholders
purchased our Series A Preferred Stock: Crosspoint Venture Partners
1997, BSY Associates, LLC, Tim Burtner, the Richard L. Burtner
Profit Sharing (Keogh) Plan and Fred Goldner, M.D.

5. In August 1999, Registrant issued 8,177,040 shares of Series B
Convertible Preferred Stock for $3.80 per share, for an aggregate
purchase price of $31,100,008.20. The following stockholders
purchased our Series B Preferred Stock: Crosspoint Venture Partners
1997, Crosspoint Venture Partners LS 1997, Crosspoint Venture
Partners LS 1999, Gramercy BlueStar LLC, ATGF II, Vertex Capital II,
LLC, Christopher Lord, William Slattery, Ralph H. Cechettini 1995
Trust, Pivotal Partners, L.P., James Stableford, BSP Associates II,
LLC, TY Investments, L.P. and Robert Hawk.

6. In January and February 2000, Registrant issued 2,165,603 shares of
Series C Preferred Stock for $15.70 per share, for an aggregate
purchase price of $33,999,967.10. The following stockholders
purchased our Series C Preferred Stock: Charles J. McMinn, Lucent,
Intel Corporation and Crosspoint Venture Partners LS 1999.

7. Through February 29, 2000, Registrant has issued and sold 6,158,000
shares of its Common Stock to directors, employees and consultants
upon the exercise of options granted under its 1999 Stock Option
Plan at a weighted average exercise price of $0.13.

8. From time to time Registrant has granted stock options to employees,
directors and consultants.

II-2
<PAGE> 98

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
1.1* -- Underwriting Agreement
3.1 -- Third Amended and Restated Certificate of Incorporation of
BlueStar Communications Group, Inc.
3.2+ -- Amended and Restated Bylaws of BlueStar Communications
Group, Inc.
4.1+ -- Specimen certificate for shares of common stock.
4.2+ -- Warrant Agreement, dated as of August 8, 1998, by and
between BlueStar Properties, Inc. and Ascend Communications,
Inc.
4.3+ -- Warrant to Purchase Shares of Common Stock, dated as of July
28, 1999, by and between BlueStar Properties, Inc. and Boyle
Consolidated Communications, Inc.
5.1 -- Opinion of Brobeck, Phleger & Harrison LLP.
10.1 -- Form of Indemnity Agreement between BlueStar Communications
Group, Inc. and each of its directors and executive
officers.
10.2 -- Second Amended and Restated Registration Rights Agreement,
as amended, dated February 14, 2000, by and among Registrant
and the Investors named therein.
10.3+ -- Stock Restriction and Special Payment Agreement dated March
17, 1999 between Richard Burtner and BlueStar Properties,
Inc.
10.4+ -- Stock Restriction and Special Payment Agreement dated March
17, 1999 between Fredjoseph Goldner and BlueStar Properties,
Inc.
10.5+ -- Master Lease Agreement No. 2, dated May 28, 1999 between
BlueStar Communications, Inc. and Ascend Credit Corporation.
10.6+ -- Master Lease Agreement No. 1, dated as of July 29, 1998
between BlueStar Communications, LLC and Ascend Credit
Corporation.
10.7+ -- Secured Promissory Note dated August 8, 1998, from BlueStar
Communications, LLC in favor of Ascend Communications, Inc.
10.8+ -- Lease of corporate offices dated December 31, 1999, by and
between BlueStar Properties, Inc. and Crescent Resources,
Inc.
10.9+ -- Lease of corporate offices dated April 16, 1999 by and
between LC Tower, L.L.C. and BlueStar Communications, Inc.
10.10+ -- Sublease of corporate offices dated December 1, 1999 by and
between Bank of America National Association and BlueStar
Communications, Inc.
10.11 -- Offer Letter to Robert E. Dupuis.
10.12 -- Form of 1999 Stock Option/Stock Issuance Plan.
10.13 -- Stock Restriction and Special Payment Agreement dated March
17, 1999 between Scott E. Kozicki and BlueStar Properties,
Inc.
10.14 -- Settlement Agreement dated September 7, 1999 between Scott
E. Kozicki and BlueStar Communications, Inc.
10.15 -- Settlement Agreement dated January 7, 2000 between
Fredjoseph Goldner and BlueStar Communications, Inc.
23.1 -- Consent of Brobeck, Phleger & Harrison LLP (filed with
Exhibit 5.1).
23.2 -- Consent of Arthur Andersen LLP.
24.1+ -- Powers of Attorney (included on signature page).
27.1+ -- Financial Data Schedule (for SEC use only).
</TABLE>

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

* To be filed by amendment.

+ Previously filed.

II-3
<PAGE> 99

(b) Financial Statement Schedules.

All schedules have been omitted because they are inapplicable or the
information is provided in the Registrant's financial statements, including the
notes thereto.

ITEM 17. UNDERTAKINGS

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

The undersigned registrant hereby undertakes that:

1. For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.

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

II-4
<PAGE> 100

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this registration statement to be signed on our behalf by the
undersigned, thereunto duly authorized, in Nashville, Tennessee, on March 20,
2000.

BLUESTAR COMMUNICATIONS GROUP, INC.

By: /s/ ROBERT E. DUPUIS
---------------------------------------
Robert E. Dupuis
President, Chief Executive Officer and
Chairman of the Board

Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>

/s/ ROBERT E. DUPUIS President, Chief Executive Officer March 20, 2000
- --------------------------------------------- and Chairman of the Board
Robert E. Dupuis (principal executive officer)

/s/ RICHARD L. BURTNER Chief Financial Officer (principal March 20, 2000
- --------------------------------------------- financial and accounting officer)
Richard L. Burtner

/s/ JOHN W. GERDELMAN* Director March 20, 2000
- ---------------------------------------------
John W. Gerdelman

/s/ FREDJOSEPH GOLDNER* Director March 20, 2000
- ---------------------------------------------
Fredjoseph Goldner

/s/ CHARLES J. MCMINN* Director March 20, 2000
- ---------------------------------------------
Charles J. McMinn

/s/ RICHARD A. SHAPERO* Director March 20, 2000
- ---------------------------------------------
Richard A. Shapero

*By /s/ ROBERT E. DUPUIS
- ---------------------------------------------
Robert E. Dupuis
Attorney-in-fact
</TABLE>

II-5
<PAGE> 101

EXHIBIT INDEX

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

* To be filed by amendment.

+ Previously filed.

<PAGE> 1
EXHIBIT 3.1

THIRD AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
BLUESTAR COMMUNICATIONS GROUP, INC.
A DELAWARE CORPORATION

(PURSUANT TO SECTIONS 228, 242 AND 245 OF THE
GENERAL CORPORATION LAW OF THE STATE OF DELAWARE)

BlueStar Communications Group, Inc., a corporation organized
and existing under and by virtue of the provisions of the General Corporation
Law of the State of Delaware (the "General Corporation Law").

DOES HEREBY CERTIFY:

FIRST: The original Certificate of Incorporation of this
corporation was filed with the Secretary of State on June 10, 1999 under the
name "BlueStar Properties, Inc."

SECOND: The Third Amended and Restated Certificate of
Incorporation of BlueStar Communications Group, Inc. in the form attached hereto
as Annex A has been duly adopted in accordance with the provisions of Sections
228, 242 and 245 of the General Corporation Law by the directors and
stockholders of the Corporation.

THIRD: The Third Amended and Restated Certificate of
Incorporation of this corporation so adopted reads in full as set forth in Annex
A attached hereto and is hereby incorporated herein by this reference.

IN WITNESS WHEREOF, BlueStar Communications Group, Inc. has
caused this Third Amended and Restated Certificate to be signed by its duly
authorized and elected President this 10th day of February, 2000.

BLUESTAR COMMUNICATIONS GROUP, INC

By: /s/ Robert Dupuis
------------------------------
Robert Dupuis
President

[SIGNATURE PAGE TO AMENDED AND RESTATED CERTIFICATE OF INCORPORATION]

<PAGE> 2
ANNEX A

THIRD AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
BLUESTAR COMMUNICATIONS GROUP, INC.
A DELAWARE CORPORATION

ARTICLE I

The name of the Corporation is BlueStar Communications Group, Inc.
(the "Corporation")

ARTICLE II

The address of the Corporation's registered office in the State of
Delaware is 9 East Loockerman Street, in the City of Dover, County of Kent,
19901. The name of its registered agent at such address is National Registered
Agents, Inc.

ARTICLE III

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

ARTICLE IV

4.1 Prior to a Qualified Offering (as defined in Section 4(b) of
Article V below), the Corporation's capital stock shall be comprised as set
forth in this Section 4.1 and Article V as follows:

A. Classes of Stock. The Corporation is authorized to issue two classes
of capital stock to be designated, respectively, "Common Stock" and "Preferred
Stock." The total number of shares of capital stock authorized to be issued is
82,689,584 shares, of which 60,000,000 shares shall be Common Stock, par value
$0.01 per share, and 22,689,584 shares shall be Preferred Stock, par value $0.01
per share (the "Preferred Stock"). Of the Preferred Stock, 12,346,941 shall be
designated as "Series A Convertible Preferred Stock" (the "Series A Preferred
Stock"), 8,177,040 shares shall be designated as "Series B Convertible Preferred
Stock" (the "Series B Preferred Stock"), and 2,165,603 shares shall be
designated "Series C Convertible Preferred Stock" (the "Series C Preferred
Stock").

B. Rights, Preferences and Restrictions of Preferred Stock.
Undesignated Preferred Stock may be issued from time to time in one or more
series. The Corporation's Board of Directors (the "Board of Directors") is
hereby authorized to fix or alter the rights, preferences, privileges and
restrictions granted to or imposed upon additional series of Preferred Stock,
and the number of shares constituting any such series and the designation
thereof, or of any of them.

<PAGE> 3

Subject to compliance with applicable protective voting rights which may be
granted to the Preferred Stock or series thereof in Certificates of Designation
or the Corporation's Certificate of Incorporation and as hereafter may be
amended ("Protective Provisions"), but notwithstanding any other rights of the
Preferred Stock or any series thereof, the rights, privileges, preferences and
restrictions of any such additional series may be subordinated to, pari passu
with (including, without limitation, inclusion in provisions with respect to
liquidation and acquisition preferences, redemption and/or approval of matters
by vote or written consent), or senior to any of those of any present or future
class of series of Preferred Stock or Common Stock. Subject to compliance with
applicable Protective Provisions, the Board of Directors is also authorized to
increase or decrease the number of shares of any series, prior or subsequent to
the issue of that series, but not below the number of shares of such series then
outstanding. In case the number of shares of any series shall be so decreased,
the shares constituting such decrease shall resume the status that they had
prior to the adoption of the resolution originally fixing the number of share of
such series. The rights, preferences, privileges and restrictions granted to and
imposed on the Series A Preferred Stock, the Series B Preferred Stock and Series
C Preferred Stock are as set forth below in this Article IV(B).

C. Common Stock.

1. Dividend Rights. Subject to the provisions of Section 1 of
Paragraph B of this Article IV, the holders of the Common Stock shall be
entitled to receive, when and as declared by the Board of Directors, out of any
assets of the Corporation legally available therefor, such dividends as may be
declared from time to time by the Board of Directors.

2. Liquidation Rights. Upon the liquidation, dissolution or winding
up of the Corporation, the assets of the Corporation shall be distributed as
provided in Section 2 of Paragraph B of this Article IV.

3. Redemption. The Common Stock is not redeemable.

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

4.2 Effective as of a Qualified Offering (as defined in Section 4(b) of
Article V below), the Corporation's capital stock shall be comprised as follows:

A. Authorized Shares. The aggregate number of shares that the
Corporation shall have authority to issue is 175,000,000, (a) 150,000,000 shares
of which shall be Common Stock, par value $0.01 per share, and (b) 25,000,000 of
which shall be Preferred Stock, par value $0.01 per share.

B. Common Stock. Each share of Common Stock shall have one vote on each
matter submitted to a vote of the stockholders of the Corporation. Subject to
the provisions of

2
<PAGE> 4

applicable law and the rights of the holders of the outstanding shares of
Preferred Stock, if any, the holders of the Common Stock shall be entitled to
receive, when and as declared by the Board of Directors of the Corporation, out
of the assets of the Corporation legally available therefor, dividends or other
distributions, whether payable in cash, property or securities of the
Corporation. The holders of shares of Common Stock shall be entitled to receive,
in proportion to the number of shares of Common Stock held, the net assets of
the Corporation upon dissolution after any preferential amounts required to be
paid or distributed to holders of outstanding shares of Preferred Stock, in any,
are so paid or distributed.

C. Preferred Stock.

1. Series. The Preferred Stock may be issued from time to time by
the Board of Directors as shares of one or more series. The description of
shares of each additional series of Preferred Stock, including any designations,
preferences, conversions and other rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemption shall be as set forth in resolutions by the Board of Directors.

2. Rights and Preferences. The Board of Directors is expressly
authorized, at any time, by adopting resolutions providing for the issuance of,
or providing for a change in the number of any particular series of Preferred
Stock and, if and to the extent from time to time required by law, by filing
certificates of amendment or designation which are effective without stockholder
action, to increase or decrease the number of shares included in each series of
Preferred Stock, but not below the number of shares then issued, and to set in
any one or more respects the designations, preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications, or terms and conditions of redemption relating to the shares of
each such series. The authority of the Board of Directors with respect to each
series of Preferred Stock shall include, but not be limited to, setting and
changing the following:

(a) the dividend rate, if any, on shares of such series, the
times of payment and the date from which dividends shall be accumulated, if
dividends are to be cumulative;

(b) whether the shares of such series shall be redeemable and, if
so, the redemption price and the terms and conditions of such redemption;

(d) whether shares of such series shall be convertible into, or
exchangeable for, shares of stock of any other class or classes and, if so, the
terms and conditions of such conversion or exchange, including the price or
prices of the rate or rates of conversion or exchange and the terms of
adjustment, if any;

(e) whether the shares of such series shall have voting rights,
in addition to the voting rights provided by law, and, if so, the extent of such
voting rights;

3
<PAGE> 5

(f) the rights of the shares of such series in the event of
voluntary or involuntary liquidation, dissolution or winding-up of the
Corporation; and

(g) any other relative rights, powers, preferences,
qualifications, limitations or restrictions thereof relating to such series.

ARTICLE V

The respective rights, preferences, privileges and restrictions granted
to and imposed upon the Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock of the Corporation are as set forth below in this
Article V.

1. Dividend Provisions.

(a) Subject to the rights of Preferred Stock which may hereafter
come into existence, the holders of shares of Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock shall be entitled to receive
dividends, out of any assets legally available therefor, when, as and if
declared by the Board of Directors.

(b) Subject to the rights of Preferred Stock which may hereafter
come into existence, and continuing thereafter, the holders of shares of Series
A Preferred Stock shall be entitled to receive dividends, out of any assets
legally available therefore, at the rate of $0.1176 (as adjusted to reflect
stock dividends, stock splits, combinations, recapitalizations or the like with
respect to such series after March 17, 1999 (the "Initial Series A Issue Date"))
per share of Series A Preferred Stock per annum, payable when, as and if
declared by the Board of Directors. Subject to the rights of Preferred Stock
which may hereafter come into existence, and continuing thereafter, the holders
of shares of Series B Preferred Stock shall be entitled to receive dividends,
out of any assets legally available therefore, at the rate of $0.9128 (as
adjusted to reflect stock dividends, stock splits, combinations,
recapitalizations or the like with respect to such series after August 19, 1999
(the "Initial Series B Issue Date")) per share of Series B Preferred Stock per
annum, payable when, as and if declared by the Board of Directors. Subject to
the rights of Preferred Stock which may hereafter come into existence, and
continuing thereafter, the holders of shares of Series C Preferred Stock shall
be entitled to receive dividends, out of any assets legally available therefore,
at the rate of $3.77 (as adjusted to reflect stock dividends, stock splits,
combinations, recapitalizations or the like with respect to such series after
the date upon which shares of Series C Preferred Stock were first issued (the
"Initial Series C Issue Date")) per share of Series C Preferred Stock per annum,
payable when, as and if declared by the Board of Directors. Such dividends shall
not be cumulative. In the event of the conversion of any shares of Series A
Preferred Stock, Series B Preferred Stock or Series C Preferred Stock pursuant
to Section 4 below, all accrued and unpaid dividends on such shares of Series A
Preferred Stock, Series B Preferred Stock or Series C Preferred Stock shall be
paid in cash unless any holder thereof, by written notice to the Corporation,
requests that such dividends be converted into Common Stock, in which case in
lieu of payment, such accrued and unpaid dividends on such shares of Series A
Preferred Stock, Series B Preferred Stock or Series C Preferred Stock shall be
included in determining the number of shares of Common Stock into

4
<PAGE> 6

which such shares of Series A Preferred Stock, Series B Preferred Stock or
Series C Preferred Stock are convertible, as provided in Section 4(c) below.

(c) Each share of Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock shall rank equally in all respects with
respect to dividends; provided, however, that the Corporation shall not declare
or pay dividends which are sufficient to pay all accrued dividends on each
series of Preferred Stock outstanding unless such dividends are declared and
paid to each series of Preferred Stock pro rata based on the accrued dividends
with respect to such series as a percentage of accrued dividends for all series
of Preferred Stock.

(d) No dividend of cash or other property or other distribution
(other than a stock dividend giving rise to an adjustment under Section 4(e)
below and made in accordance with the provisions of Section 6 below) shall be
paid, or declared and set apart for payment, on any share of Common Stock, prior
to the payment of all accrued and unpaid dividends on all outstanding shares of
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock.

(e) Any dividend or distribution which is declared by the
Corporation and payable with assets of the Corporation, other than cash, shall
be deemed to have such value as determined by the Board of Directors.

2. Liquidation Preference.

(a) In the event of any liquidation, dissolution or winding up of
the Corporation, either voluntary or involuntary, (A) each holder of Series A
Preferred Stock shall be entitled to receive, prior and in preference to any
payment or distribution and setting apart for payment or distribution of any of
the assets or surplus funds of the Corporation to the holders of the Common
Stock, an amount per share (the "Series A Liquidation Amount") equal to the sum
of (i) $0.49 (as adjusted to reflect stock dividends, stock splits,
combinations, recapitalizations or the like) for each outstanding share of
Series A Preferred Stock (the "Original Series A Issue Price") held by such
holder and (ii) an amount equal to all accrued but unpaid dividends on the
Series A Preferred Stock held by such holder, (B) each holder of Series B
Preferred Stock shall be entitled to receive, prior and in preference to any
payment or distribution and setting apart for payment or distribution of any of
the assets or surplus funds of the Corporation to the holders of the Common
Stock, an amount per share (the "Series B Liquidation Amount") equal to the sum
of (i) $3.80 (as adjusted to reflect stock dividends, stock splits,
combinations, recapitalizations or the like) for each outstanding share of
Series B Preferred Stock (the "Original Series B Issue Price") held by such
holder and (ii) an amount equal to all accrued but unpaid dividends on the
Series B Preferred Stock held by such holder and (C) each holder of Series C
Preferred Stock shall be entitled to receive, prior and in preference to any
payment or distribution and setting apart for payment or distribution of any of
the assets or surplus funds of the Corporation to the holders of the Common
Stock, an amount per share (the "Series C Liquidation Amount") equal to the sum
of (i) $15.70 (as adjusted to reflect stock dividends, stock splits,
combinations, recapitalizations or the like) for each outstanding share of
Series C Preferred Stock (the "Original Series C Issue Price") held by such
holder and (ii) an amount equal to all accrued but unpaid

5
<PAGE> 7

dividends on the Series C Preferred Stock held by such holder. If upon the
occurrence of such event, the assets and funds thus distributed among the
holders of Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock shall be insufficient to permit the payment to such holders of
the full aforesaid preferential amount, then the entire assets and funds of the
Corporation legally available for distribution shall be distributed ratably
among the holders of the Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock in proportion to the relative liquidation preference of
the shares of Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock then held by them.

(b) After the distribution in Subsection 2(a) above has been
paid, the remaining assets of the Corporation available for distribution to
stockholders shall be distributed among the holders of Common Stock, Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock pro rata
based on the number of shares of Common Stock held by each (determined on an
as-converted basis with respect to outstanding shares of Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock).

(c) (i) For purposes of this Section 2, a liquidation,
dissolution or winding up of the Corporation shall be deemed to be occasioned
by, or to include, (A) the acquisition of the Corporation by another entity by
means of any transaction or series of related transactions (including, without
limitation, any reorganization, merger or consolidation); or (B) a sale of all
or substantially all of the assets of the Corporation; unless in each of the
cases of clauses (A) and (B) above, the Corporation's stockholders of record as
constituted immediately prior to such acquisition or sale will, immediately
after such acquisition or sale (by virtue of securities issued as consideration
for the Corporation's acquisition or sale or otherwise) hold more than 50% of
the voting power of the surviving or acquiring entity.

(ii) In any of such events, if the consideration received by
the Corporation is other than cash, its value will be deemed its fair market
value as determined by the Board of Directors. Any securities to be delivered to
the holders of the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock or Common Stock, as the case may be, shall be valued as follows:

(A) If traded on a securities exchange or through the
Nasdaq National Market, the value shall be deemed the average of the closing
prices of the securities on such exchange over the thirty-day period ending
three (3) days prior to closing;

(B) If actively traded over-the-counter, the value shall
be deemed to be the average of the closing bid or sale price (whichever is
applicable) over the thirty-day period ending three (3) days prior to closing;

(C) If there is no active public market, the value shall
be the fair market value thereof, as mutually determined by the Corporation and
the holders of at least a majority of the then outstanding shares of Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, voting
together as a single class.

6
<PAGE> 8

(iii) In the event the requirements of this
Subsection 2(c) are not complied with, the Corporation shall forthwith either:

(A) cause such closing to be postponed until
such time as the requirements of this Section 2 have been complied with; or

(B) cancel such transaction, in which event
the respective rights, preferences and privileges of the holders of the Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall
revert to and be the same as such rights, preferences and privileges existing
immediately prior to the date of the first notice referred to in Subsection
2(c)(iv) below.

(iv) The Corporation shall give each holder of
record of Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock written notice of such impending transaction not later than ten
(10) days prior to the stockholders' meeting called to approve such transaction,
or ten (10) days prior to the closing of such transaction, whichever is earlier,
and shall notify such holders in writing of the final approval of such
transaction. The first of such notices shall describe the material terms and
conditions of the impending transaction and the provisions of this Section 2,
and the Corporation shall thereafter give such holders prompt notice of any
material changes. The transaction shall in no event take place sooner than
twenty (20) days after the Corporation has given the first notice provided for
herein or sooner than ten (10) days after the Corporation has given notice of
any material changes provided for herein; provided, however, that such periods
may be shortened upon the Corporation's receipt of written consent of the
holders of at least a majority of the Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock, voting together as a single class,
entitled to such notice rights or similar notice rights.

3. Redemption.

(a) Subject to the rights of series of Preferred
Stock that may from time to time come into existence, any holder of then
outstanding Series A Preferred Stock, Series B Preferred Stock or Series C
Preferred Stock may elect to require the Corporation to redeem (a "Redemption
Request") on the dates specified below, by giving not less than sixty (60) days
written notice ("Required Notice") prior to any Redemption Date to the
corporation, up to a cumulative total of that percentage of the shares of Series
A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock held by
such requesting holder as set forth below opposite such Redemption Date, less
the number of shares of Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock redeemed by the Corporation pursuant to this Subsection
3(a) from such holder (or its predecessor) prior to the date of such election:

7
<PAGE> 9

<TABLE>
<CAPTION>
Redemption Cumulative Percentage of Shares
Date Which May be Redeemed
------------------------ --------------------------------------
<S> <C>
March 17, 2006 25%
March 17, 2007 50%
March 17, 2008 75%
March 17, 2009 100%
</TABLE>

In each such event, the Corporation shall, to the
extent it may lawfully do so, redeem the shares specified in such Redemption
Request on the applicable Redemption Date, upon surrender by the requesting
holders of the certificates representing such shares by paying a sum per share
of Series A Preferred Stock equal to the Series A Liquidation Amount, a sum per
share of Series B Preferred Stock equal to the Series B Liquidation Amount and a
sum per share of Series C Preferred Stock equal to the Series C Liquidation
Amount (such sums being the respective "Redemption Price" for the Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock). If any
date fixed for redemption of shares pursuant to this Subsection 3(a) is a
Saturday, Sunday or legal holiday, then such redemption shall occur on the first
business day thereafter.

(b) As used herein and in Subsections (3)(a) above
and (3)(c) and (3)(d) below, the term "Redemption Date" shall refer to each date
on which share of Series A Preferred Stock, Series B Preferred Stock or Series C
Preferred Stock are requested to be redeemed as provided in Subsection 3(a).
Subject to the rights of series of Preferred Stock that may from time to time
come into existence, at least fifteen (15) but no more than thirty (30) days
prior to each Redemption Date, written notice shall be mailed, first class
postage prepaid, to each holder of record (at the close of business on the
business day next preceding the day on which notice is given) of the Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, at the
address last shown on the records of the Corporation for such holder, notifying
such holder of the redemption to be effected, specifying the number of shares to
be redeemed in each Redemption Request, the Redemption Date, the applicable
Redemption Price, the place at which payment may be obtained and giving the
holder the option to surrender to the Corporation on the Redemption Date, in the
manner and at the place designated, his, her or its certificate or certificates
representing the shares of Series A Preferred Stock, Series B Preferred Stock
and Series C Preferred Stock requested to be redeemed (the "Redemption Notice").
Except as provided in Subsection (3)(c) below, on or after the Redemption Date,
each holder of Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock to be redeemed shall surrender to the Corporation the
certificate or certificates representing such shares, free and clear of all
claims, liens and encumbrances, in the manner and at the place designated in the
Redemption Notice, and thereupon the Redemption Price of such shares shall be
payable to the order of the person whose name appears of such certificate or
certificates as the owner thereof and each surrendered certificate shall be
cancelled. In the event less than all the shares

8
<PAGE> 10

represented by any such certificate are redeemed, a new certificate shall be
issued representing the unredeemed shares.

(c) From and after the Redemption Date, unless there
shall have been a default in payment of the Redemption Price, all rights of the
holders of shares of Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock designated for redemption in the Redemption Notice as
holders of such shares of Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock (except the right to receive the applicable Redemption
Price without interest upon surrender of their certificate or certificates)
shall cease with respect to such shares, and such shares shall not thereafter be
transferred on the books of the Corporation or be deemed to be outstanding for
any purposes whatsoever. Subject to the rights of Preferred Stock that may from
time to time come into existence, if the funds of the Corporation legally
available for redemption of shares of Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock on any Redemption Date are
insufficient to redeem the total number of shares of Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock to be redeemed on such
date, those funds which are legally available will be used to redeem the maximum
possible number of such shares ratably among the holders of such shares to be
redeemed on the basis of the relative Redemption Prices of the shares of Series
A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock to be
redeemed. The shares of Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock not redeemed shall remain outstanding and entitled to
all the rights and preferences provided herein. Subject to the rights of
Preferred Stock that may from time to time come into existence, at any time
thereafter when additional funds of the Corporation are legally available for
the redemption of shares of Series A Preferred Stock, Series B Preferred Stock
and Series C Preferred Stock, such funds will immediately be used to redeem the
balance of the shares which the Corporation has become obliged to redeem on any
Redemption Date but which it has not redeemed, allocated in the manner provided
in this subsection 3(c).

(d) On or prior to each Redemption Date, the
Corporation shall deposit the Redemption Price of all shares of Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock
designated for redemption in the Redemption Notice, and not yet redeemed or
converted, with a bank or trust corporation having aggregate capital and surplus
in excess of $100,000,000 as a trust fund for the benefit of the respective
holders of the shares designated for redemption and not yet redeemed, with
irrevocable instructions and authority to the bank or trust corporation to
publish the notice of redemption thereof and pay the applicable Redemption Price
for such shares to their respective holders on or after the Redemption Date,
upon receipt of notification from the Corporation that such holder has
surrendered his, her or its certificate to the Corporation pursuant to
Subsection (3)(b) above. As of the date of such deposit (even if prior to the
Redemption Date), the deposit shall constitute full payment of the shares to
their holders. From and after the date of such deposit the shares so called for
redemption shall be redeemed and shall be deemed to be no longer outstanding,
and the holders thereof shall cease to be stockholders with respect to such
shares and shall have no rights with respect thereto, except the rights to
receive from the bank or trust corporation payment of the Redemption Price of
the shares, without interest, upon surrender of their certificates therefor and
the right to convert such shares as provided in Article IV(B)(4) below. Such
instructions shall also provide that any

9
<PAGE> 11

monies deposited by the Corporation pursuant to this Subsection (3)(d) for the
redemption of shares thereafter converted into shares of the Corporation's
Common Stock pursuant to Article IV(B)(4) below prior to the Redemption Date
shall be returned to the Corporation forthwith upon such conversion. The balance
of any monies deposited by the Corporation pursuant to this Subsection (3)(d)
remaining unclaimed at the expiration of two (2) years following the final
Redemption Date shall thereafter be returned to the Corporation upon its request
expressed in a resolution of its Board of Directors.

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

(a) Right to Convert. Each share of Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock shall be
convertible, at the option of the holder thereof, at any time after the date of
issuance of such share, at the offices of the Corporation or any transfer agent
for such stock, into such number of fully paid and nonassessable shares of
Common Stock as is determined, (i) with respect to each share of Series A
Preferred Stock, by dividing the Original Series A Issue Price plus any accrued
but unpaid dividends by the "Series A Conversion Price" in effect on the date
the certificate is surrendered for conversion, (ii) with respect to each share
of Series B Preferred Stock, by dividing the Original Series B Issue Price plus
any accrued but unpaid dividends by the "Series B Conversion Price" in effect on
the date the certificate is surrendered for conversion, and (iii) with respect
to each share of Series C Preferred Stock, by dividing the Original Series C
Issue Price plus any accrued but unpaid dividends by the "Series C Conversion
Price" in effect on the date the certificate is surrendered for conversion. The
initial Series A Conversion Price per share for the Series A Preferred Stock
shall be the Original Series A Issue Price, the initial Series B Conversion
Price per share for the Series B Preferred Stock shall be the Original Series B
Issue Price and the initial Series C Conversion Price per share for the Series C
Preferred Stock shall be the Original Series C Issue Price; provided, however,
that such Series A Conversion Price, Series B Conversion Price and Series C
Conversion Price shall be subject to adjustment as set forth in Subsections
4(d), (e) and (f) below.

(b) Automatic Conversion. Each share of Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock shall automatically
be converted into shares of Common Stock at the Conversion Price for such series
at the time in effect immediately upon, except as provided below in Subsection
4(c), the sale of Common Stock in a firm commitment underwritten public offering
pursuant to an effective registration statement under the Securities Act of
1933, as amended (the "Securities Act"), the public offering price per share of
which is not less than $15.70 per share (as adjusted to reflect stock dividends,
stock splits, combinations, recapitalizations or the like with respect to the
Common Stock after the Initial Series C Issue Date) and with gross proceeds to
the Corporation of at least $50,000,000 in the aggregate (a "Qualified
Offering").

(c) Mechanics of Conversion. Before any holder of Series A
Preferred Stock, Series B Preferred Stock or Series C Preferred Stock shall be
entitled to convert the same

<PAGE> 12

into shares of Common Stock pursuant to Subsection 4(a) above, such holder shall
surrender the certificate or certificates therefor, duly endorsed, at the office
of the Corporation or of any transfer agent for the Series A Preferred Stock,
Series B Preferred Stock or Series C Preferred Stock, as the case may be, and
shall give written notice to the Corporation at its principal corporate office,
of the election to convert the same and shall state therein the name or names in
which the certificate or certificates for shares of Common Stock are to be
issued. The Corporation shall, as soon as practicable after an automatic
conversion pursuant to Subsection 4(b) or the compliance with the procedures set
forth in the previous sentence in the case of optional conversions pursuant to
Subsection 4(a) above, issue and deliver to such holder of Series A Preferred
Stock, Series B Preferred Stock or Series C Preferred Stock, as the case may be,
or to the nominee or nominees of such holder, a certificate or certificates for
the number of shares of Common Stock to which such holder shall be entitled as
aforesaid. Such conversion shall be deemed to have been made immediately prior
to the close of business on the date of such surrender of the shares of Series A
Preferred Stock, Series B Preferred Stock or Series C Preferred Stock to be
converted in the case of an optional conversion pursuant to Subsection 4(a) and
immediately prior to a Qualified Offering in the case of a mandatory conversion
pursuant to Subsection 4(b), and the person or persons entitled to receive the
shares of Common Stock issuable upon such conversion shall be treated for all
purposes as the record holder or holders of such shares of Common Stock as of
such date. If the conversion is in connection with an underwritten public
offering of securities registered pursuant to the Securities Act, the conversion
shall be conditioned upon the closing with the underwriters of the sale of
securities pursuant to such offering, in which event the person(s) entitled to
receive the Common Stock upon conversion of the Series A Preferred Stock, Series
B Preferred Stock and Series C Preferred Stock shall not be deemed to have
converted such Series A Preferred Stock, Series B Preferred Stock or Series C
Preferred Stock until immediately prior to the closing of such sale of
securities.

(d) Series A, Series B and Series C Conversion Price
Adjustments. The Conversion Price of the Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock shall be subject to adjustment from
time to time as follows:

(i) (A) Subject to the application of paragraph (B)
below in the case of the Series C Conversion Price, if the Corporation
shall issue, after the Initial Series C Issue Date, any Additional
Stock (as defined below) without consideration or for a consideration
price per share less than the Series A Conversion Price, Series B
Conversion Price or Series C Conversion Price in effect immediately
prior to the issuance of such Additional Stock, the Series A Conversion
Price, Series B Conversion Price or Series C Conversion Price, as the
case may be, in effect immediately prior to each such issuance shall
forthwith be adjusted to a price determined by multiplying such Series
A Conversion Price, Series B Conversion Price or Series C Conversion
Price, as the case may be, by the following fraction:

11
<PAGE> 13

Common Stock + (New Money/OP)
Outstanding
---------------------------------------------------------------
Common Stock + Additional Stock
Outstanding

where:

<TABLE>
<S> <C>
Common = The number of shares of Common Stock deemed
Stock Outstanding outstanding immediately before the issuance
of the dilutive securities.

New Money = The dollar amount raised in the dilutive financing.

OP = Old Conversion Price prior to the price-based
adjustment.

Additional Stock = the number of shares issued in the dilutive
financing. Additional Stock is defined in
Subsection 4(d)(i)(F).
</TABLE>

For the purposes of this subsection, the number of shares of Common Stock
outstanding immediately prior to such issuance shall be calculated on a fully
diluted basis, as if all shares of Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock and all Convertible Securities (as defined
below) had been fully exercised immediately prior to such issuance (and the
resulting securities fully converted into shares of Common Stock, if so
convertible) as of such date, but not including in such calculation any
additional shares of Common Stock issuable with respect to shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and
Convertible Securities or Options, solely as a result of the adjustment of the
Series A Conversion Price, Series B Conversion Price and Series C Conversion
Price resulting from the issuance of Additional Stock causing such adjustment.
"Options" shall mean rights, options or warrants to subscribe for, purchase or
otherwise acquire either Common Stock or Convertible Securities. "Convertible
Securities" shall mean any evidence of indebtedness, share (other than Common
Stock, Series A Preferred Stock, Series B Preferred Stock and Series C Preferred
Stock) or other securities convertible into or exchangeable for Common Stock.

(B) If at any time during which the Series C Conversion
Price is greater than $3.80 the Corporation shall issue Additional Stock without
consideration or for a consideration per share less than the Series C Conversion
Price in effect on the date of, and immediately prior to, such issue, then and
in such event, such Series C Conversion Price shall be reduced, concurrently
with such issue, to a price equal to the greater of (i) the price equal to the

12
<PAGE> 14

price per share for such Additional Stock or (ii) $3.80. In the event the price
per share of such Additional Stock is lower than $3.80, then the Series C
Conversion Price shall first be adjusted to $3.80 pursuant to this paragraph (B)
and any additional adjustment shall be made pursuant to the provisions of
paragraph (A) above. For example, if 1,000,000 shares of Additional Stock are
issued at a price per share of $3.00 at a time when the Series C Conversion
Price is $15.70, then (X) the Series C Conversion Price shall first be reduced
to $3.80 pursuant to the application of this paragraph (B), then (Y) the Series
C Conversion Price (as so adjusted) shall be subject to further adjustment under
paragraph (A) above, assuming an initial Series C Conversion Price of $3.80 for
the purposes of applying the formula required thereby. All per share prices in
this Subsection shall be appropriately adjusted to reflect any stock dividends,
combinations or splits with respect to such shares.

(C) No adjustment of the Series A Conversion Price,
Series B Conversion Price or Series C Conversion Price shall be made in an
amount less than one cent per share, provided that any adjustments that are not
required to be made by reason of this sentence shall be carried forward and
shall be either taken into account in any subsequent adjustment made prior to
three (3) years from the date of the event giving rise to the adjustment being
carried forward, or shall be made at the end of three (3) years from the date of
the event giving rise to the adjustment being carried forward. Except to the
limited extent provided for in Subsections 4(d)(i)(F)(3) and 4(d)(i)(F)(4)
below, no adjustment of such Series A Conversion Price, Series B Conversion
Price or Series C Conversion Price pursuant to this Subsection 4(d)(i) shall
have the effect of increasing the Series A Conversion Price above the Series A
Conversion Price in effect immediately prior to such adjustment, no adjustment
of such Series B Conversion Price or Series C Conversion Price pursuant to this
Subsection 4(d)(i) shall have the effect of increasing the Series B Conversion
Price above the Series B Conversion Price in effect immediately prior to such
adjustment and no adjustment of such Series C Conversion Price pursuant to this
Section 4(d)(i) shall have the effect of increasing the Series C Conversion
Price above the Series C Conversion Price in effect immediately prior to such
adjustment.

(D) In the case of the issuance of Common Stock for
cash, the consideration shall be deemed to be the amount of cash paid therefor
before deducting any reasonable discounts, commissions or other expenses
allowed, paid or incurred by the Corporation for any underwriting or otherwise
in connection with the issuance and sale thereof.

(E) In the case of the issuance of the Common Stock for
a consideration in whole or in part other than cash, the consideration other
than cash shall be deemed to be the fair value thereof as determined pursuant to
Subsection 2(c)(ii) above.

(F) In the case of the issuance (whether before, on or
after the applicable Initial Series A Issue Date, Initial Series B Issue Date or
Initial Series C Issue Date) of options to purchase or rights to subscribe for
Common Stock, securities by their terms convertible into or exchangeable for
Common Stock or options to purchase or rights to subscribe for such convertible
or exchangeable securities, the following provisions shall apply for all
purposes of this Subsection 4(d)(i):

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<PAGE> 15

(1) The aggregate maximum number of shares of
Common Stock deliverable upon exercise (to the extent then exercisable)
of such options to purchase or rights to subscribe for Common Stock
shall be deemed to have been issued at the time such options or rights
were issued and for a consideration equal to the consideration
(determined in the manner provided in Subsections 4(d)(i)(D) and
4(d)(i)(E)), if any, received by the Corporation upon the issuance of
such options or rights plus the minimum exercise price provided in such
options or rights for the Common Stock covered thereby.

(2) The aggregate maximum number of shares of
Common Stock deliverable upon conversion of, or in exchange (to the
extent then convertible or exchangeable) for, any such convertible or
exchangeable securities or upon the exercise of options to purchase or
rights to subscribe for such convertible or exchangeable securities and
subsequent conversion or exchange thereof shall be deemed to have been
issued at the time such securities were issued or such options or
rights were issued and for a consideration equal to the consideration,
if any, received by the Corporation for any such securities and related
options or rights (excluding any cash received on account of accrued
interest or accrued dividends), plus the minimum additional
consideration, if any, to be received by the Corporation upon the
conversion or exchange of such securities or the exercise of any
related options or rights (the consideration in each case to be
determined in the manner provided in Subsections 4(d)(i)(D) and
4(d)(i)(E)).

(3) In the event of any change in the number of
shares of Common Stock deliverable or in the consideration payable to
the Corporation upon exercise of such options or rights or upon
conversion of or in exchange for such convertible or exchangeable
securities, including, but not limited to, a change resulting from the
antidilution provisions thereof, the Series A Conversion Price, the
Series B Conversion Price and the Series C Conversion Price, to the
extent in any way affected by or computed using such options, rights or
securities, shall be recomputed to reflect such change, but no further
adjustment shall be made for the actual issuance of Common Stock or any
payment of such consideration upon the exercise of any such options or
rights or the conversion or exchange of such securities.

(4) Upon the expiration of any such options or
rights, the termination of any such rights to convert or exchange or
the expiration of any options or rights related to such convertible or
exchangeable securities, the Series A Conversion Price, the Series B
Conversion Price and the Series C Conversion Price, to the extent in
any way affected by or computed using such options, rights or
securities or options or rights related to such securities, shall be
recomputed to reflect the issuance of only the number of shares of
Common Stock (and convertible or exchangeable securities that remain in
effect) actually issued upon the exercise of such options or rights,
upon the conversion or exchange of

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<PAGE> 16

such securities or upon the exercise of the options or rights related
to such securities.

(5) The number of shares of Common Stock deemed
issued and the consideration deemed paid therefor pursuant to
Subsections 4(d)(i)(E)(1) and (2) shall be appropriately adjusted to
reflect any change, termination or expiration of the type described in
either Subsection 4(d)(i)(F)(3) or (4).

(G) "Additional Stock" shall mean any shares of Common
Stock issued (or deemed to have been issued pursuant to Subsection 4(d)(i)(F))
by the Corporation after the Initial Series A Issue Date with respect to the
Series A Conversion Price, after the Initial Series B Issue Date with respect to
the Series B Conversion Price or after the Initial Series C Issue Date with
respect to the Series C Conversion Price, other than:

(1) Common Stock issued pursuant to a transaction
described in subsection 4(d)(ii) hereof;

(2) Common Stock (excluding shares repurchased at
cost by the Corporation in connection with the termination of service)
issuable or issued to employees, consultants or directors of the
Corporation directly or pursuant to any stock option or equity
incentive plan approved by the Board of Directors, and with respect to
any such Common Stock that represents in excess of 20% of the number of
shares of Common Stock outstanding calculated on a fully diluted basis,
only if approved by the director of the Corporation elected pursuant to
Subsection 5(b);

(3) Common Stock issuable or issued in connection
with lease lines, bank financings, acquisitions of companies, assets or
product lines approved by the Board of Directors, and with respect to
any such Common Stock that represents in excess of 5% of the number of
shares of Common Stock outstanding calculated on a fully diluted basis,
only if approved by the director of the Corporation elected pursuant to
Subsection 5(b);

(4) Common Stock issued upon conversion of
Preferred Stock; or

(5) Common Stock issued or issuable: (i) in a
public offering before or in connection with which all outstanding
shares of Series A Preferred Stock, Series B Preferred Stock and Series
C Preferred will be converted to Common Stock or (ii) upon exercise of
warrants or rights granted to underwriters in connection with such a
public offering.

(ii) In the event the Corporation should at any time or from time
to time after the Initial Series C Issue Date fix a record date for the
effectuation of a split or a subdivision of the outstanding shares of Common
Stock or the determination of holders of

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<PAGE> 17

Common Stock entitled to receive a dividend or other distribution payable in
additional shares of Common Stock or other securities or rights convertible
into, or entitling the holder thereof to receive directly or indirectly,
additional shares of Common Stock (hereinafter referred to as "Common Stock
Equivalents") without payment of any consideration by such holder for the
additional shares of Common Stock or the Common Stock Equivalents (including the
additional shares of Common Stock issuable upon conversion or exercise thereof),
then, as of such record date (or the date of such dividend distribution, split
or subdivision if no record date is fixed), the Series A Conversion Price and
Series B Conversion Price shall be appropriately decreased so that the number of
shares of Common Stock issuable on conversion of each share of Series A
Preferred Stock and Series B Preferred Stock shall be increased in proportion to
such increase of the aggregate of shares of Common Stock outstanding and those
issuable with respect to such Common Stock Equivalents.

(iii) If the number of shares of Common Stock outstanding at
any time after the Initial Series C Issue Date is decreased by a combination of
the outstanding shares of Common Stock, then, following the record date of such
combination, the Series A Conversion Price, Series B Conversion Price and Series
C Conversion Price shall be appropriately increased so that the number of shares
of Common Stock issuable on conversion of each share of such series shall be
decreased in proportion to such decrease in outstanding shares.

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

(f) Recapitalizations. If at any time or from time to time after
the Initial Series B Issue Date, there shall be a recapitalization of the Common
Stock (other than a subdivision, combination or merger or sale of assets
transaction provided for elsewhere in this Section 4 or Section 2) provision
shall be made so that the holders of the Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock shall thereafter be entitled to
receive upon conversion of their respective shares of Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock, the number of shares of
stock or other securities or property of the Corporation or otherwise, to which
a holder of Common Stock deliverable upon conversion would have been entitled on
such recapitalization. In any such case, appropriate adjustment shall be made in
the application of the provisions of this Section 4 with respect to the rights
of the holders of the Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock after the recapitalization to the end that the
provisions of this Section 4 (including adjustment of the Series A Conversion
Price, Series B Conversion Price and Series C Conversion Price then in effect
and the number of shares purchasable upon conversion of the

16
<PAGE> 18

Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock)
shall be applicable after that event as nearly equivalent as may be practicable.

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

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

(i) No fractional shares shall be issued upon, or in the case
of the additional shares of Common Stock issuable in connection with a Qualified
Offering pursuant to Subsection 4(b) above, in connection with, the conversion
of any share or shares of the Series A Preferred Stock, Series B Preferred Stock
or Series C Preferred Stock. The number of shares of Common Stock to be issued
instead shall be rounded to the nearest whole share (with 0.5 being rounded up).
Whether or not fractional shares are issuable upon such conversion shall be
determined on the basis of the total number of shares of Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock (after aggregating
all shares into which shares of Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock held by each holder could be converted or
which are issuable with respect to such Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock in the case of the additional
shares of Common Stock issuable in connection with a Qualified Offering pursuant
to Subsection 4(b) above) the holder is at the time converting into Common Stock
issuable upon such aggregate conversion.

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

(i) Notices of Record Date. In the event of any taking by the
Corporation of a record of the holders of any class of securities for the
purpose of determining

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<PAGE> 19

the holders thereof who are entitled to receive any dividend (other than a cash
dividend) or other distribution, any right to subscribe for, purchase or
otherwise acquire any shares of stock of any class or any other securities or
property, or to receive any other right, the Corporation shall mail to each
holder of Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock, at lease twenty (20) days prior to the date specified therein,
a notice specifying the date on which any such record is to be taken for the
purpose of such dividend, distribution or right, and the amount and character of
such dividend, distribution or right.

(j) Reservation of Stock Issuable Upon Conversion. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock, such number of its shares of Common Stock as
shall from time to time be sufficient to effect the conversion of all
outstanding shares of the Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock. If at any time the number of authorized but unissued
shares of Common Stock shall not be sufficient to effect the conversion of all
then outstanding shares of the Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock (including the additional shares of Common
Stock issuable pursuant to Subsection 4(b) above), in addition to such other
remedies as shall be available to the holder of such Preferred Stock, the
Corporation will take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purposes,
including, without limitation, engaging in best efforts to obtain the requisite
stockholder approval of any necessary amendment to its Certificate of
Incorporation, as amended.

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

5. Voting Rights.

(a) The holder of shares of Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock shall have the right to one (1)
vote for each share of Common Stock into which such holder's shares of Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock could
then be converted, with full voting rights and powers equal to the voting rights
and powers of the holders of Common Stock, except as required by law or as
expressly provided herein, including the Protective Provisions in Section 6
below; shall be entitled, notwithstanding any provisions hereof, to notice of
any stockholders' meeting in accordance with the Bylaws of the Corporation; and
shall be entitled to vote, together with holders of Common Stock, with respect
to any question upon which holders of Common Stock have the right to vote.
Fractional votes shall not, however, be permitted and any fractional voting
rights available on an as-converted basis (after aggregating all shares into
which shares of Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock held by each

18
<PAGE> 20

holder could be converted) shall be rounded to the nearest whole number (with
0.5 being rounded up).

(b) The holders of Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock, voting together as a class, shall be
entitled to vote as a single class separately from all other classes and series
of capital stock of the Corporation in any election of directors of the
Corporation, and shall be entitled to elect by a majority of such class vote one
(1) director, so long as 2,100,000 shares of Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock remain outstanding (as adjusted to
reflect stock dividends, stock splits, combinations, recapitalizations or the
like with respect to the Common Stock after the Initial Series C Issue Date).
Any director of the Corporation elected pursuant to this Subsection 5(b) may be
removed before the expiration of his term of office, with or without cause, and
any vacancy caused by the death, incapacity, resignation, removal, or other
termination of service of any director, may be filled, by, and only by, the
affirmative vote of the holders of at least a majority of the shares of Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, voting
as a single class.

6. Protective Provisions. So long as at least 2,100,000 shares
of Series A Preferred Stock, Series B Preferred Stock or Series C Preferred
Stock are outstanding, the Corporation shall not, without first obtaining the
approval (by vote or written consent, as permitted by law) of the holders of at
least a majority of the then outstanding shares of Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock, voting or acting, as the
case may be, as a single class:

(a) Authorize or issue any additional class(es) or series of
capital stock senior to, or on parity with, the Series A Preferred Stock, Series
B Preferred Stock and Series C Preferred Stock as to liquidation preference or
dividends ("Senior Shares") or issue, grant or sell any options, warrants or
other rights to acquire any Senior Shares.

(b) Amend the Corporation's Amended and Restated Charter or
by-laws so as to adversely affect or change the rights and preferences of the
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock
(it being understood that the authorization and/or issuance of any Senior Shares
shall be deemed to affect adversely the rights and preferences of the Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock).

(c) Repurchase any shares of the Corporation's Common Stock for
consideration in excess of $25,000 in any twelve month period except (i) in
connection with the termination of any director, officer, employee, agent or
consultant of the Corporation, the terms of which termination are or have been
approved by the Board of Directors of the Corporation, or (ii) as permitted by
the 1999 Incentive Stock Option Plan or any other stock option or equity
incentive plan approved by the Board of Directors of the Corporation.

(d) Merge or consolidate with any other corporation or entity or
the sale or exchange (for cash, shares of stock, securities or other
consideration) of all or

19
<PAGE> 21

substantially all of its assets or authorize or effect any reorganization,
dissolution, liquidation or winding-up of the Corporation.

(e) Declare or pay any dividends or make any distributions upon
any of its shares of Common Stock in violation of the terms of this Certificate
of Incorporation, as amended.

(f) Repurchase or redeem any shares of Series A Preferred Stock,
Series B Preferred Stock or Series C Preferred Stock, which if approved shall be
made in the manner required by Subsection 3 above.

(g) Increase or decrease the number of authorized shares of
Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock.

(h) Permit a wholly-owned subsidiary to sell shares of its
capital stock to a third party.

(i) Adopt any new stock option plan or amend any existing plan to
increase the authorized number of shares under such plan.

7. Registration of Transfer. The Corporation will keep at its
principal office a register for the registration of shares of Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock. Upon the surrender
of any certificate representing shares of Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock at such place, the Corporation will,
at the request of the record holder of such certificate, execute and deliver (at
the Corporation's expense) a new certificate or certificates in exchange
therefor representing in the aggregate the number of shares of Series A
Preferred Stock, Series B Preferred Stock or Series C Preferred Stock
represented by the surrendered certificate. Each such new certificate will be
registered in such name and will represent such number of shares of Series A
Preferred Stock, Series B Preferred Stock or Series C Preferred Stock as is
requested by the holder of the surrendered certificate and will be substantially
identical in form to the surrendered certificate, and dividends will accrue on
the shares of Series A Preferred Stock, Series B Preferred Stock or Series C
Preferred Stock represented by such new certificate from the date to which
dividends have been fully paid on such shares of Series A Preferred Stock,
Series B Preferred Stock or Series C Preferred Stock represented by the
surrendered certificate.

8. Replacement. Upon receipt of evidence reasonably satisfactory to
the Corporation (an affidavit of the registered holder will be satisfactory) of
the ownership and the loss, theft, destruction or mutilation of any certificate
evidencing shares of Series A Preferred Stock, Series B Preferred Stock or
Series C Preferred Stock and in the case of any such loss, theft or destruction,
upon receipt of indemnity reasonably satisfactory to the Corporation or, in the
case of any mutilation, upon surrender of such certificate and in the absence of
notice to the Corporation that such stock has been acquired by a bona fide
purchaser the Corporation will (at its expense) execute and deliver in lieu of
such certificate a new certificate of like kind representing the number of
shares of Series A Preferred Stock, Series B Preferred Stock or Series C
Preferred Stock represented by such lost, stolen, destroyed or mutilated
certificate, and

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<PAGE> 22

dividends will accrue on the shares of Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock represented by such new certificate
from the date to which dividends have been fully paid on such lost, stolen,
destroyed or mutilated certificate.

9. Definitions.

"Subsidiary" means any corporation of which more than 50% of
the outstanding voting securities are owned by the Corporation or any
Subsidiary, directly or indirectly, or a partnership or limited liability
company in which the Corporation or any Subsidiary is a general partner or
manager or holds interests entitling it to receive more than 50% of the profits
or losses of the partnership or limited liability company.

10. Status of Converted or Redeemed Stock. In the event any
shares of Series A Preferred Stock, Series B Preferred Stock or Series C
Preferred Stock shall be converted pursuant to Subsection 4 above, or in the
event any shares of Series A Preferred Stock, Series B Preferred Stock or Series
C Preferred Stock shall be redeemed pursuant to Subsection 3 above, the shares
so converted or redeemed shall be cancelled and shall not be issuable by the
Corporation. The Restated Certificate shall be amended at such time or times as
the Corporation deems it reasonably practicable to effect the corresponding
reduction in the Corporation's authorized capital stock.

ARTICLE VI

A director of this Corporation shall, to the fullest extent
permitted by the General Corporation Law as it now exists or as it may hereafter
be amended, not be personally liable to this Corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to this
Corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the General Corporation Law, or (iv) for any transaction from
which the director derived any improper personal benefit. If the General
Corporation Law is amended, after approval by the stockholders of this Article
VI, to authorize corporate action further eliminating or limiting the personal
liability of directors, then the liability of a director of this Corporation
shall be eliminated or limited to the fullest extent permitted by the General
Corporation Law, as so amended.

ARTICLE VII

The management of the business and the conduct of the affairs
of the Corporation shall be vested in its Board of Directors. The number of
directors shall constitute the whole Board of Directors of the Corporation shall
be fixed by, or in the manner provided in, the Bylaws of the Corporation.

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<PAGE> 23

ARTICLE VIII

Meetings of stockholders may be held within or without the
State of Delaware, as the Bylaws may provide. The books of the Corporation may
be kept (subject to any provision contained in the statutes) outside the State
of Delaware at such place or places as may be designated from time to time by
the Board of Directors or in the Bylaws of the Corporation.

ARTICLE IX

Election of directors at an annual or special meeting of
stockholders need not be by written ballot unless the Bylaws of the Corporation
shall so provide.

ARTICLE X

Election of directors at an annual or special meeting of
stockholders need not be by written ballot unless the Bylaws of the Corporation
shall so provide.

A. At each annual meeting of stockholders, directors of the
Corporation shall be elected to hold office until the expiration of the term for
which they are elected, and until their successors have been elected and duly
qualified. At the first annual meeting of stockholders following the closing of
the initial public offering (the "First Public Company Annual Meeting") of the
Corporation's capital stock pursuant to an effective registration statement
filed under the Securities Act of 1933, as amended (the "Initial Public
Offering"), the directors of the Corporation shall be divided into three classes
as nearly equal in size as practicable, hereby designated as Class I, Class II
and Class III. The term of office of the initial Class I directors shall expire
at the next succeeding annual meeting of stockholders, the term of office of the
initial Class II directors shall expire at the second succeeding annual meeting
of stockholders and the term of office of the initial Class III directors shall
expire at the third succeeding annual meeting of stockholders. For the purposes
hereof, the initial Class I, Class II and Class III directors shall be those
directors designated and elected at the First Public Company Annual Meeting. At
each annual meeting after the First Public Company Annual Meeting, directors to
replace those of a Class whose term expires at such annual meeting shall be
elected to hold office until the third succeeding annual meeting and until their
respective successors shall have been duly elected and qualified. If the number
of directors is hereafter changed, any newly created directorships or decrease
in directorships shall be so apportioned among the classes as to make all
classes as nearly equal in number as is practicable.

B. Vacancies occurring on the Board of Directors for any
reason may be filled by vote of a majority of the remaining members of the Board
of Directors, although less than a quorum, at a meeting of the Board of
Directors. A person so elected by the Board of Directors to fill a vacancy shall
hold office until the next succeeding annual meeting of stockholders of the
Corporation and until his or her successor shall have been duly elected and
qualified.

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<PAGE> 24

ARTICLE XI

In furtherance and not in limitation of the powers conferred
by statute, the Board of Directors is expressly authorized to make, alter, amend
or repeal the Bylaws of the Corporation.

ARTICLE XII

Effective upon the closing of the Initial Public Offering,
stockholders of the Corporation may not take action by written consent in lieu
of a meeting but must take any actions at a duly called annual or special
meeting.

ARTICLE XIII

Notwithstanding any other provisions of this Certificate of
Incorporation or any provision of law which might otherwise permit a lesser vote
or no vote, but in addition to any affirmative vote of the holders of the
capital stock required by law of this Certificate of Incorporation, the
affirmative vote of the holders of at least two-thirds (2/3) of the combined
voting power of all the then-outstanding shares of the Corporation entitled to
vote shall be required to alter, amend or repeal Articles X, XII or XIII, or any
provision thereof.

ARTICLE XIV

The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred on
stockholders herein are granted subject to this reservation.

<PAGE> 1
EXHIBIT 5.1

BlueStar Communications Group, Inc.
414 Union Street, Suite 900
Nashville, Tennessee 37219

Re: BlueStar Communications Group, Inc.
Registration Statement on Form S-1
for [14,000,000] Shares of Common Stock

Ladies and Gentlemen:

We have acted as counsel to BlueStar Communications Group,
Inc., a Delaware corporation (the "Company"), in connection with the proposed
issuance and sale by the Company of up to [14,000,000] shares of the Company's
Common Stock (the "Shares") pursuant to the Company's Registration Statement
(No. __________) on Form S-1 (the "Registration Statement") filed with the
Securities and Exchange Commission under the Securities Act of 1933, as amended
(the "Act").

This opinion is being furnished in accordance with the
requirements of Item 16(a) of Form S-1 and Item 601(b)(5)(i) of Regulation S-K.

We have reviewed the Company's charter documents and the
corporate proceedings taken by the Company in connection with the issuance and
sale of the Shares. Based on such review, we are of the opinion that the Shares
have been duly authorized, and if, as and when issued in accordance with the
Registration Statement and the related prospectus (as amended and supplemented
through the date of issuance) will be legally issued, fully paid and
nonassessable.

We consent to the filing of this opinion letter as Exhibit 5.1
to the Registration Statement and to the reference to this firm under the
caption "Legal Matters" in the prospectus which is part of the Registration
Statement. In giving this consent, we do not thereby admit that we are within
the category of persons whose consent is required under Section 7 of the Act,
the rules and regulations of the Securities and Exchange Commission promulgated
thereunder, or Item 509 of Regulation S-K.

<PAGE> 2
BlueStar Communications Group, Inc.
Page 2

This opinion letter is rendered as of the date first written
above and we disclaim any obligation to advise you of facts, circumstances,
events or developments which hereafter may be brought to our attention and which
may alter, affect or modify the opinion expressed herein. Our opinion is
expressly limited to the matters set forth above and we render no opinion,
whether by implication or otherwise, as to any other matters relating to the
Company or the Shares.

Very truly yours,

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

BROBECK, PHLEGER & HARRISON LLP

<PAGE> 1

EXHIBIT 10.1

INDEMNITY AGREEMENT

THIS INDEMNITY AGREEMENT dated as of ____________ ____, ______
(the "Agreement"), is entered into by and between BlueStar Communications Group,
Inc., a Delaware corporation (the "Company"), and _____________________
("Indemnitee").

RECITALS

A. The Company is aware that competent and experienced persons
are increasingly reluctant to serve as directors, officers or agents of
corporations unless they are protected by comprehensive liability insurance or
indemnification, due to increased exposure to litigation costs and risks
resulting from their service to such corporations, and due to the fact that the
exposure frequently bears no reasonable relationship to the compensation of such
directors, officers and other agents.

B. The statutes and judicial decisions regarding the duties of
directors and officers are often difficult to apply, ambiguous, or conflicting,
and therefore fail to provide such directors, officers and agents with adequate,
reliable knowledge of legal risks to which they are exposed or information
regarding the proper course of action to take.

C. Plaintiffs often seek damages in such large amounts and the
costs of litigation may be so enormous (whether or not the case is meritorious),
that the defense and/or settlement of such litigation is often beyond the
personal resources of directors, officers and other agents.

D. The Company believes that it is unfair for its directors,
officers and agents and the directors, officers and agents of its subsidiaries
to assume the risk of huge judgments and other expenses which may occur in cases
in which the director, officer or agent received no personal profit and in cases
where the director, officer or agent was not culpable.

E. The Company recognizes that the issues in controversy in
litigation against a director, officer or agent of a corporation such as the
Company or its subsidiaries are often related to the knowledge, motives and
intent of such director, officer or agent, that he is usually the only witness
with knowledge of the essential facts and exculpating circumstances regarding
such matters, and that the long period of time which usually elapses before the
trial or other disposition of such litigation often extends beyond the time that
the director, officer or agent can reasonably recall such matters; and may
extend beyond the normal time for retirement for such director, officer or agent
with the result that he, after retirement or in the event of his death, his
spouse, heirs, executors or administrators, may be faced with limited ability
and undue hardship in maintaining an adequate defense, which may discourage such
a director, officer or agent from serving in that position.

F. Based upon their experience as business managers, the Board
of Directors of the Company (the "Board") has concluded that, to retain and
attract talented and experienced

1
<PAGE> 2

individuals to serve as directors, officers and agents of the Company and its
subsidiaries and to encourage such individuals to take the business risks
necessary for the success of the Company and its subsidiaries, it is necessary
for the Company to contractually indemnify its directors, officers and agents
and the directors, officers and agents of its subsidiaries, and to assume for
itself maximum liability for expenses and damages in connection with claims
against such directors, officers and agents in connection with their service to
the Company and its subsidiaries, and has further concluded that the failure to
provide such contractual indemnification could result in great harm to the
Company and its subsidiaries and the Company's stockholders.

G. Section 145 of the General Corporation Law of Delaware,
under which the Company is organized ("Section 145"), empowers the Company to
indemnify its directors, officers, employees and agents by agreement and to
indemnify persons who serve, at the request of the Company, as the directors,
officers, employees or agents of other corporations or enterprises, and
expressly provides that the indemnification provided by Section 145 is not
exclusive.

H. The Company desires and has requested the Indemnitee to
serve or continue to serve as a director, officer or agent of the Company and/or
one or more subsidiaries of the Company free from undue concern for claims for
damages arising out of or related to such services to the Company and/or one or
more subsidiaries of the Company.

I. Indemnitee is willing to serve, or to continue to serve,
the Company and/or one or more subsidiaries of the Company, provided that he is
furnished the indemnity provided for herein.

AGREEMENT

NOW, THEREFORE, the parties hereto, intending to be legally
bound, hereby agree as follows:

1. Definitions.

(a) Agent. For the purposes of this Agreement, "agent" of the
Company means any person who is or was a director, officer, employee or other
agent of the Company or a subsidiary of the Company; or is or was serving at the
request of, for the convenience of, or to represent the interests of the Company
or a subsidiary of the Company as a director, officer, employee or agent of
another foreign or domestic corporation, partnership, joint venture, trust or
other enterprise; or was a director, officer, employee or agent of a foreign or
domestic corporation which was a predecessor corporation of the Company or a
subsidiary of the Company, or was a director, officer, employee or agent of
another enterprise at the request of, for the convenience of, or to represent
the interests of such predecessor corporation.

(b) Expenses. For purposes of this Agreement, "expenses"
include all out-of-pocket costs of any type or nature whatsoever (including,
without limitation, all attorneys' fees and related disbursements), actually and
reasonably incurred by the Indemnitee in connection with either the
investigation, defense or appeal of a proceeding or establishing or enforcing a
right to indemnification under this Agreement or Section 145 or otherwise;
provided, however,

<PAGE> 3

that "expenses" shall not include any judgments, fines, ERISA excise taxes or
penalties, or amounts paid in settlement of a proceeding.

(c) Proceeding. For the purposes of this Agreement,
"proceeding" means any threatened, pending, or completed action, suit or other
proceeding, whether civil, criminal, administrative, or investigative.

(d) Subsidiary. For purposes of this Agreement, "subsidiary"
means any corporation of which more than 50% of the outstanding voting
securities is owned directly or indirectly by the Company, by the Company and
one or more other subsidiaries, or by one or more other subsidiaries.

2. Agreement to Serve. The Indemnitee agrees to serve and/or continue
to serve as agent of the Company, at its will (or under separate agreement, if
such agreement exists), in the capacity Indemnitee currently serves as an agent
of the Company, so long as he is duly appointed or elected and qualified in
accordance with the applicable provisions of the Bylaws of the Company or any
subsidiary of the Company or until such time as he tenders his resignation in
writing; provided, however, that nothing contained in this Agreement is intended
to create any right to continued employment by Indemnitee.

3. Liability Insurance.

(a) Maintenance of D&O Insurance. At such time as the Board of
Directors deems it appropriate to obtain such insurance but not before such
time, the Company hereby covenants and agrees that, so long as the Indemnitee
shall continue to serve as an agent of the Company and thereafter so long as the
Indemnitee shall be subject to any possible proceeding by reason of the fact
that the Indemnitee was an agent of the Company, the Company, subject to Section
3(c), shall promptly obtain and maintain in full force and effect directors' and
officers' liability insurance ("D&O Insurance") in reasonable amounts from
established and reputable insurers.

(b) Rights and Benefits. In all policies of D&O Insurance, the
Indemnitee shall be named as an insured in such a manner as to provide the
Indemnitee the same rights and benefits as are accorded to the most favorably
insured of the Company's directors, if the Indemnitee is a director; or of the
Company's officers, if the Indemnitee is not a director of the Company but is an
officer; or of the Company's key employees, if the Indemnitee is not a director
or officer but is a key employee.

(c) Limitation on Required Maintenance of D&O Insurance.
Notwithstanding the foregoing, the Company shall have no obligation to obtain or
maintain D&O Insurance if the Company determines in good faith that such
insurance is not reasonably available, the premium costs for such insurance are
disproportionate to the amount of coverage provided, the coverage provided by
such insurance is limited by exclusions so as to provide an insufficient
benefit, or the Indemnitee is covered by similar insurance maintained by a
subsidiary of the Company.

4. Mandatory Indemnification. Subject to Section 9 below, the Company
shall indemnify the Indemnitee as follows:

<PAGE> 4

(a) Successful Defense. To the extent the Indemnitee has been
successful on the merits or otherwise in defense of any proceeding (including,
without limitation, an action by or in the right of the Company) to which the
Indemnitee was a party by reason of the fact that he is or was an Agent of the
Company at any time, against all expenses of any type whatsoever actually and
reasonably incurred by him in connection with the investigation, defense or
appeal of such proceeding.

(b) Third Party Actions. If the Indemnitee is a person who
was or is a party or is threatened to be made a party to any proceeding (other
than an action by or in the right of the Company) by reason of the fact that he
is or was an agent of the Company, or by reason of anything done or not done by
him in any such capacity, the Company shall indemnify the Indemnitee against any
and all expenses and liabilities of any type whatsoever (including, but not
limited to, judgments, fines, ERISA excise taxes and penalties, and amounts paid
in settlement) actually and reasonably incurred by him in connection with the
investigation, defense, settlement or appeal of such proceeding, provided the
Indemnitee acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the Company and its stockholders, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful.

(c) Derivative Actions. If the Indemnitee is a person who was
or is a party or is threatened to be made a party to any proceeding by or in the
right of the Company by reason of the fact that he is or was an agent of the
Company, or by reason of anything done or not done by him in any such capacity,
the Company shall indemnify the Indemnitee against all expenses actually and
reasonably incurred by him in connection with the investigation, defense,
settlement, or appeal of such proceeding, provided the Indemnitee acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the Company and its stockholders; except that no indemnification
under this subsection 4(c) shall be made in respect to any claim, issue or
matter as to which such person shall have been finally adjudged to be liable to
the Company by a court of competent jurisdiction unless and only to the extent
that the court in which such proceeding was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such amounts which the court shall deem proper.

(d) Actions where Indemnitee is Deceased. If the Indemnitee
is a person who was or is a party or is threatened to be made a party to any
proceeding by reason of the fact that he is or was an agent of the Company, or
by reason of anything done or not done by him in any such capacity, and if prior
to, during the pendency of after completion of such proceeding Indemnitee
becomes deceased, the Company shall indemnify the Indemnitee's heirs, executors
and administrators against any and all expenses and liabilities of any type
whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes
and penalties, and amounts paid in settlement) actually and reasonably incurred
to the extent Indemnitee would have been entitled to indemnification pursuant to
Sections 4(a), 4(b), or 4(c) above were Indemnitee still alive.

(e) Notwithstanding the foregoing, the Company shall not be
obligated to indemnify the Indemnitee for expenses or liabilities of any type
whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes
and penalties, and amounts paid in settlement) for which payment is actually
made to or on behalf of Indemnitee under a valid and collectible

4
<PAGE> 5

insurance policy of D&O Insurance, or under a valid and enforceable indemnity
clause, by-law or agreement.

5. Partial Indemnification. If the Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company for some or a
portion of any expenses or liabilities of any type whatsoever (including, but
not limited to, judgments, fines, ERISA excise taxes and penalties, and amounts
paid in settlement) incurred by him in the investigation, defense, settlement or
appeal of a proceeding, but not entitled, however, to indemnification for all of
the total amount hereof, the Company shall nevertheless indemnify the Indemnitee
for such total amount except as to the portion hereof to which the Indemnitee is
not entitled.

6. Mandatory Advancement of Expenses. Subject to Section 8(a) below,
the Company shall advance all expenses incurred by the Indemnitee in connection
with the investigation, defense, settlement or appeal of any proceeding to which
the Indemnitee is a party or is threatened to be made a party by reason of the
fact that the Indemnitee is or was an agent of the Company. Indemnitee hereby
undertakes to repay such amounts advanced only if, and to the extent that, it
shall be determined ultimately that the Indemnitee is not entitled to be
indemnified by the Company as authorized hereby. The advances to be made
hereunder shall be paid by the Company to the Indemnitee within twenty (20) days
following delivery of a written request therefor by the Indemnitee to the
Company.

7. Notice and Other Indemnification Procedures.

(a) Promptly after receipt by the Indemnitee of notice of the
commencement of or the threat of commencement of any proceeding, the Indemnitee
shall, if the Indemnitee believes that indemnification with respect thereto may
be sought from the Company under this Agreement, notify the Company of the
commencement or threat of commencement thereof.

(b) If, at the time of the receipt of a notice of the
commencement of a proceeding pursuant to Section 7(a) hereof, the Company has
D&O Insurance in effect, the Company shall give prompt notice of the
commencement of such proceeding to the insurers in accordance with the
procedures set forth in the respective policies. The Company shall thereafter
take all necessary or desirable action to cause such insurers to pay, on behalf
of the Indemnitee, all amounts payable as a result of such proceeding in
accordance with the terms of such policies.

(c) In the event the Company shall be obligated to pay the
expenses of any proceeding against the Indemnitee, the Company, if appropriate,
shall be entitled to assume the defense of such proceeding, with counsel
approved by the Indemnitee, upon the delivery to the Indemnitee of written
notice of its election so to do. After delivery of such notice, approval of such
counsel by the Indemnitee and the retention of such counsel by the Company, the
Company will not be liable to the Indemnitee under this Agreement for any fees
of counsel subsequently incurred by the Indemnitee with respect to the same
proceeding, provided that (i) the Indemnitee shall have the right to employ his
counsel in any such proceeding at the Indemnitee's expense; and (ii) if (A) the
employment of counsel by the Indemnitee has been previously authorized by the
Company, (B) the Indemnitee shall have reasonably concluded that there may be a
conflict of interest between the Company and the Indemnitee in the conduct of
any such defense, or (C) the

5
<PAGE> 6

Company shall not, in fact, have employed counsel to assume the defense of such
proceeding, then the fees and expenses of Indemnitee's counsel shall be at the
expense of the Company.

8. Exceptions. Any other provision herein to the contrary
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:

(a) Claims Initiated by Indemnitee. To indemnify or advance
expenses to the Indemnitee with respect to proceedings or claims initiated or
brought voluntarily by the Indemnitee and not by way of defense, unless (i) such
indemnification is expressly required to be made by law, (ii) the proceeding was
authorized by the Board, (iii) such indemnification is provided by the Company,
in its sole discretion, pursuant to the powers vested in the Company under the
General Corporation Law of Delaware or (iv) the proceeding is brought to
establish or enforce a right to indemnification under this Agreement or any
other statute or law or otherwise as required under Section 145.

(b) Lack of Good Faith. To indemnify the Indemnitee for any
expenses incurred by the Indemnitee with respect to any proceeding instituted by
the Indemnitee to enforce or interpret this Agreement, if a court of competent
jurisdiction determines that each of the material assertions made by the
Indemnitee in such proceeding was not made in good faith or was frivolous; or

(c) Unauthorized Settlements. To indemnify the Indemnitee
under this Agreement for any amounts paid in settlement of a proceeding unless
the Company consents to such settlement, which consent shall not be unreasonably
withheld.

9. Non-exclusivity. The provisions for indemnification and advancement
of expenses set forth in this Agreement shall not be deemed exclusive of any
other rights which the Indemnitee may have under any provision of law, the
Company's Certificate of Incorporation or Bylaws, the vote of the Company's
stockholders or disinterested directors, other agreements, or otherwise, both as
to action in his official capacity and to action in another capacity while
occupying his position as an agent of the Company, and the Indemnitee's rights
hereunder shall continue after the Indemnitee has ceased acting as an agent of
the Company and shall inure to the benefit of the heirs, executors and
administrators of the Indemnitee.

10. Enforcement. Any right to indemnification or advances granted by
this Agreement to Indemnitee shall be enforceable by or on behalf of Indemnitee
in any court of competent jurisdiction if (i) the claim for indemnification or
advances is denied, in whole or in part, or (ii) no disposition of such claim is
made within ninety (90) days of request therefor. Indemnitee, in such
enforcement action, if successful in whole or in part, shall be entitled to be
paid also the expense of prosecuting his claim. It shall be a defense to any
action for which a claim for indemnification is made under this Agreement (other
than an action brought to enforce a claim for expenses pursuant to Section 6
hereof, provided that the required undertaking has been tendered to the Company)
that Indemnitee is not entitled to indemnification because of the limitations
set forth in Sections 4 and 8 hereof. Neither the failure of the Company
(including its Board of Directors or its stockholders) to have made a
determination prior to the commencement of such enforcement action that
indemnification of Indemnitee is proper in the circumstances, nor an actual
determination by the Company (including its Board of Directors or its

6
<PAGE> 7

stockholders) that such indemnification is improper, shall be a defense to the
action or create a presumption that Indemnitee is not entitled to
indemnification under this Agreement or otherwise.

11. Subrogation. In the event of payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.

12. Survival of Rights.

(a) All agreements and obligations of the Company contained
herein shall continue during the period Indemnitee is an agent of the Company
and shall continue thereafter so long as Indemnitee shall be subject to any
possible claim or threatened, pending or completed action, suit or proceeding,
whether civil, criminal, arbitrational, administrative or investigative, by
reason of the fact that Indemnitee was serving in the capacity referred to
herein.

(b) The Company shall require any successor(s) to the Company
(whether direct or indirect, by purchase, merger, consolidation or otherwise) or
to all or substantially all of the business or assets of the Company, expressly
to assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform if no such succession had
taken place.

13. Interpretation of Agreement. It is understood that the parties
hereto intend this Agreement to be interpreted and enforced so as to provide
indemnification to the Indemnitee to the fullest extent permitted by law
including those circumstances in which indemnification would otherwise be
discretionary.

14. Severability. If any provision or provisions of this Agreement
shall be held to be invalid, illegal or unenforceable for any reason whatsoever,
(i) the validity, legality and enforceability of the remaining provisions of the
Agreement (including without limitation, all portions of any paragraphs of this
Agreement containing any such provision held to be invalid, illegal or
unenforceable, that are not themselves invalid, illegal or unenforceable) shall
not in any way be affected or impaired thereby, and (ii) to the fullest extent
possible, the provisions of this Agreement (including, without limitation, all
portions of any paragraph of this Agreement containing any such provision held
to be invalid, illegal or unenforceable, that are not themselves invalid,
illegal or unenforceable) shall be construed so as to give effect to the intent
manifested by the provision held invalid, illegal or unenforceable and to give
effect to Section 13 hereof.

15. Modification and Waiver. No supplement, modification or amendment
of this Agreement shall be binding unless executed in writing by both of the
parties hereto. No waiver of any of the provisions of this Agreement shall be
deemed or shall constitute a waiver of any other provisions hereof (whether or
not similar) nor shall such waiver constitute a continuing waiver.

16. Notice. All notices, requests, demands and other communications
under this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and receipted for by the party addressee, on the date of
delivery, or (ii) if mailed by certified or

<PAGE> 8

registered mail with postage prepaid, on the third business day after the
mailing date. Addresses for notice to either party are as shown on the signature
page of this Agreement, or as subsequently modified by written notice.

17. Governing Law. This Agreement shall be governed exclusively by and
construed according to the laws of the State of Delaware, without giving effect
to conflicts of law principles.

IN WITNESS WHEREOF, the parties hereto have entered into this
Indemnity Agreement effective as of the date first above written.

THE COMPANY:

BLUESTAR COMMUNICATIONS, GROUP, INC.

By:
------------------------------------------
Title:
---------------------------------------
Date:
---------------------------------------

INDEMNITEE:

Name:
---------------------------------------
Address:
------------------------------------

<PAGE> 1

EXHIBIT 10.2

SECOND AMENDED AND RESTATED

REGISTRATION RIGHTS AGREEMENT

BY AND AMONG

BLUESTAR COMMUNICATIONS GROUP, INC.

AND

THE SEVERAL INVESTORS NAMED IN EXHIBIT A

DATED AS OF

FEBRUARY 14, 2000

<PAGE> 2

TABLE OF CONTENTS

1. DEFINITIONS.............................................................1

2. DEMAND REGISTRATION RIGHTS..............................................3

2.1 Registration Upon Request........................................3
2.2 No Right to Underwritten Offering................................3
2.3 Priority of Demand Registrations.................................4
2.4 Limitation on Number of Requests.................................4
2.5 Limitation on Timing of Requests.................................4
2.6 Limitation on Corporation's Obligation...........................4
2.7 Deferral.........................................................5

3. PIGGYBACK REGISTRATION RIGHTS...........................................5

3.1 Piggyback Registration...........................................5
3.2 Underwriting Requirements........................................5
3.3 Reduction of Shares to be Included in a Registration.............5

4. FORM S-3 REGISTRATION...................................................6

4.1 Registration Upon Request........................................6
4.2 No Right to Underwritten Offering................................6
4.3 Priority of Shelf Registrations..................................7
4.4 Limitation on Timing of Requests.................................7
4.5 Limitation on Corporation's Obligation...........................7
4.6 Deferral.........................................................8

5. ADDITIONAL OBLIGATIONS OF THE COMPANY...................................8

6. FURNISH INFORMATION....................................................10

7. EXPENSES OF REGISTRATION...............................................10

8. DELAY OF REGISTRATION..................................................10

9. "MARKET STAND-OFF AGREEMENT"...........................................10

10. INDEMNIFICATION........................................................11

11. TERMINATION; RULE 144..................................................12

12. GENERAL................................................................13

12.1 Investor Transferees............................................13
12.2 Binding Effect..................................................13
12.3 Assignment......................................................13
12.4 Entire Agreement................................................13
12.5 Notices.........................................................13
12.6 Amendments and Waivers..........................................14

</TABLE>

<PAGE> 3

<TABLE>

<S> <C>
12.7 Severability....................................................14
12.8 No Inconsistent Agreements......................................14
12.9 No Waiver of Future Breach.....................................15
12.10 No Implied Rights or Remedies; Third Party Beneficiaries........15
12.11 Headings........................................................15
12.12 Nouns and Pronouns..............................................15
12.13 Governing Law...................................................15
12.14 Counterparts....................................................15
12.15 Equitable Relief................................................15
</TABLE>

<PAGE> 4

SECOND AMENDED AND RESTATED
REGISTRATION RIGHTS AGREEMENT

THIS SECOND AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT (the
"Agreement") is entered into as of this 14th day of February, 2000, by and among
BlueStar Communications Group, Inc., a Delaware corporation (the "Corporation"),
the holders of the Corporation's Series A Convertible Preferred Stock (the
"Series A Preferred Stock"), Series B Convertible Preferred Stock (the "Series B
Preferred Stock") and Series C Convertible Preferred Stock (the "Series C
Preferred Stock") listed on Exhibit A hereto (the "Investors").

RECITALS

WHEREAS, the Corporation and certain of the Investors are parties to a
certain Amended and Restated Registration Rights Agreement dated as of August
19, 1999 (the "Original Registration Rights Agreement");

WHEREAS, the Corporation and certain of the Investors are parties to a
certain Series C Preferred Stock Purchase Agreement of even date herewith (the
"Series C Purchase Agreement");

WHEREAS, in order to induce the Corporation to enter into the Series C
Purchase Agreement and to induce certain Investors to invest funds in the
Corporation pursuant to the Series C Purchase Agreement, the Investors and the
Corporation hereby amend and restate the Original Registration Rights Agreement
and agree that this Agreement shall govern the rights of the Investors to cause
the Corporation to register shares of capital stock issued and issuable to the
Investors and certain other matters as set forth herein.

AGREEMENT

NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:

1. DEFINITIONS. The following terms as used herein shall have the
following meanings:

"Commission" shall mean the Securities and Exchange Commission.

"Common Stock" shall mean the Corporation's common stock, $0.01 par
value per share.

<PAGE> 5

"Conversion Shares" shall mean the shares of Common Stock issued
and/or issuable upon conversion of the Series A Preferred Shares, the Series B
Preferred Shares or Series C Preferred Shares.

"Excluded Transfer" shall mean (A) the sale of Series A Preferred
Shares, Series B Preferred Shares, Series C Preferred Shares or Conversion
Shares pursuant to any public offering registered under the Securities Act, (B)
the sale of Preferred Shares or Conversion Shares pursuant to a "broker's
transaction" (as defined in Rule 144) at any time after the Corporation's
initial public offering, or (C) any offer, sale, assignment, transfer,
endorsement, pledge, mortgage, hypothecation, or other conveyance or disposition
of Series A Preferred Shares, Series B Preferred Shares, Series C Preferred
Shares or Conversion Shares to the Corporation.

"Investors Transferee" shall have the meaning set forth in Section
11.1.

"Majority Investors" shall mean Investors which, at any given time,
hold more than fifty percent of the combined voting power of the Series A
Preferred Shares, Series B Preferred Shares, Series C Preferred Shares and the
Conversion Shares that are then issued and outstanding and held by the Investors
with each Investor being entitled, with respect to those Series A Preferred
Shares, Series B Preferred Shares and Series C Preferred Shares owned by such
Investor, to the number of votes as is equal to the number of shares of Common
Stock into which such Investor's Series A Preferred Shares, Series B Preferred
Shares and Series C Preferred Shares are then convertible (without taking into
account or giving effect to any fractional shares).

"Person" shall mean an individual, partnership, corporation,
association, limited liability company, trust, joint venture, unincorporated
organization, and any government, governmental department or agency or political
subdivision thereof.

"Registrable Shares" shall mean the shares of Common Stock issued
and/or issuable upon conversion of the Series A Preferred Shares, Series B
Preferred Shares and Series C Preferred Shares; provided, however, that the term
"Registrable Shares" shall not include any of such shares of Common Stock that
become eligible for resale pursuant to Rule 144.

"Required Investors" shall mean, at the relevant time of reference
thereto, those Investors then holding and/or having the right to acquire, as the
case may be, at least fifty percent (50%) of the Series A Conversion Shares, at
least fifty percent (50%) of the Series B Conversion Shares or at least fifty
percent (50%) of the Series C Conversion Shares.

"Rule 144" shall mean Rule 144 promulgated under the Securities Act
and any successor or substitute rule, law or provision.

"Securities Act" shall mean the Securities Act of 1933, as amended.

"Series A Preferred Shares" shall mean an aggregate of 12,346,941
shares of Series A Preferred Stock purchased by the Investors pursuant to the
Series A Purchase Agreement.

<PAGE> 6

"Series B Preferred Shares" shall mean an aggregate of 8,177,040
shares of Series B Preferred Stock purchased by the Investors pursuant to the
Series B Purchase Agreement.

"Series C Preferred Shares" shall mean an aggregate of up to
2,165,603 shares of Series C Preferred Stock purchased by the Investors pursuant
to the Series B Purchase Agreement.

2. DEMAND REGISTRATION RIGHTS.

2.1 Registration Upon Request. Subject to the conditions,
limitations, restrictions and provisions set forth in Sections 2.2, 2.4 and 2.5
hereof, the Required Investors may, at any time or from time to time from and
after the earlier to occur of (a) the closing of the Corporation's initial
public offering and (b) March 17, 2002, notify the Corporation in writing that
such Required Investors desire the Corporation to cause all or any number of the
Registrable Shares held by such Required Investors to be registered under the
Securities Act, pursuant to this Section 2.1, for sale to the public. Such
written notice by the Required Investors shall specify the intended method of
disposition of such Registrable Shares. Upon receipt of such written notice from
the Required Investors, the Corporation shall promptly notify in writing all
other Investors that it has received such written notice from the Required
Investors, and such other Investors shall have a period of twenty (20) business
days following receipt of such written notice from the Corporation to notify the
Corporation in writing whether such other Investors, or any of them, desire to
have any of their Registrable Shares registered under the Securities Act,
pursuant to this Section 2.1, for sale to the public. Thereafter, subject to the
conditions, limitations, restrictions and provisions set forth below in Sections
2.3, 2.6 and 2.7 hereof and subject to compliance by the Required Investors with
the conditions, limitations, restrictions and provisions of Sections 2.2, 2.4
and 2.5 hereof in making any request pursuant to this Section 2.1, the
Corporation shall, promptly following the expiration of such twenty (20)
business day period, prepare and file, and use best efforts to prosecute to
effectiveness, an appropriate filing with the Commission of a registration
statement covering all of those Registrable Shares that the Required Investors
and such other Investors (collectively, with the Required Investors who gave
notice under this Section 2.1, the "Requesting Investors") have requested to be
registered under the Securities Act pursuant to this Section 2.1. Subject to the
provisions of Section 2.3 hereof, the Corporation may include in any
registration pursuant to this Section 2.1 additional shares of Common Stock for
sale for its own account or for the account of any other Person.

2.2 No Right to Underwritten Offering. Neither the Required
Investors nor any of the other Requesting Investors shall have the right to
request that the offering, sale, disposition or distribution of any Registrable
Shares to be registered under the Securities Act pursuant to Section 2.1 hereof
be effected pursuant to an underwritten offering. The Corporation may, in its
sole and absolute discretion, decide or determine that any Registrable Shares to
be registered under the Securities Act pursuant to Section 2.1 hereof shall be
offered, sold, disposed of or distributed in an underwritten offering; provided,
however, that a registration pursuant to Section 2.1 hereof shall be
underwritten if (i) those Requesting Investors that hold a majority of the
Registrable Shares to be registered under the Securities Act pursuant to such
registration so decide or determine and the total number of Registrable Shares
to be so registered pursuant to such registration is at least 1,000,000 shares
(subject to proportionate adjustment upon any stock

3
<PAGE> 7

split, stock dividend, reverse stock split or like event of the Common Stock)
and (ii) such registration, together with all prior underwritten registrations
pursuant to Section 2.1 and/or Section 4.1 hereof, do not exceed a maximum of
two (2) underwritten registrations. If a registration pursuant to Section 2.1
hereof involves an underwritten offering, the underwriter or underwriters
thereof shall be selected by the Corporation, subject to the reasonable approval
of the Requesting Investors, and each of the Requesting Investors shall be
required to accept and agree to the terms of the underwriting as agreed upon
between the Corporation and such underwriter or underwriters.

2.3 Priority of Demand Registrations. If a registration pursuant to
Section 2.1 hereof involves an underwritten offering, and the managing
underwriter shall advise the Corporation in writing that, in its opinion, the
number of shares of Common Stock requested to be included in such registration
exceeds the number which can be sold in such offering, then, notwithstanding
anything in Section 2.1 to the contrary, the Corporation shall only be required
to include in such registration, to the extent of the number of shares of Common
Stock which the Corporation is so advised can be sold in such offering, (i)
first, the number of Registrable Shares requested to be included in such
registration by the Requesting Investors, pro rata among the Requesting
Investors on the basis of the number of Registrable Shares that each of them
requested to be included in such registration and (ii) second, the other shares
of Common Stock proposed to be included in such registration, in accordance with
the priorities, if any, then existing among the Corporation and/or the holders
of such other shares of Common Stock, or as the Corporation may otherwise
determine.

2.4 Limitation on Number of Requests. Subject to the provisions set
forth below in this Section 2.4, the Required Investors shall not be entitled to
request more than two (2) registrations, in the aggregate, pursuant to the
provisions of Section 2.1 hereof. Notwithstanding anything in this Section 2.4
to the contrary, in no event shall the Required Investors be entitled to request
more than one (1) registration pursuant to Section 2.1 hereof within any 180-day
period.

2.5 Limitation on Timing of Requests. Notwithstanding anything
expressed or implied in this Section 2 to the contrary, the Required Investors
may not request a registration pursuant to Section 2.1 hereof (i) at any time
during the 180-day period following the closing of the Corporation's initial
public offering, (ii) at any time during the period commencing on the date that
any other request for registration has been made pursuant to, and in accordance
with, Section 2.1, Section 3.1 or Section 4.1 hereof and ending on the 180th day
following the effective date of any registration statement filed by the
Corporation with the Commission in connection with such other request, (iii) at
any time during the period commencing on the date that any registration
statement has been filed by the Corporation with the Commission in which the
Investors have had the right to participate in connection with an underwritten
offering and ending on the 180th day following the effective date of such
registration statement, and/or (iv) at any time when the Corporation is eligible
to file registration statements with the Commission on Form S-3 (or any
successor Form).

2.6 Limitation on Corporation's Obligation. Notwithstanding anything
in this Section 2 to the contrary, the Corporation shall not be obligated to
effect any registration pursuant to Section 2.1 hereof:

<PAGE> 8

(i) if, within fifteen (15) days after the Corporation receives
written notice from the Required Investors requesting any registration pursuant
to Section 2.1 hereof, the Corporation gives written notice to the Required
Investors that the Corporation intends to file a registration statement with the
Commission within 90 days in connection with a public offering of the
Corporation's securities; or

(ii) if the number of Registrable Shares that the Required
Investors request to be included in a registration pursuant to Section 2.1
hereof is less than twenty five percent (25%) of all of the Conversion Shares,
unless the aggregate offering price of such number of Registrable Shares is
$8,000,000 or more.

2.7 Deferral. Notwithstanding anything in this Section 2 to the
contrary, if the Corporation shall furnish to the Required Investors a
certificate signed by the President or Chief Executive Officer of the
Corporation stating that the Board of Directors of the Corporation has made the
good faith determination that any registration requested by the Required
Investors pursuant to Section 2.1 hereof would require premature disclosure of
information which would materially interfere with any pending or proposed
acquisition, corporate reorganization or other material transaction involving
the Corporation and that it is therefore essential to defer such registration,
then the Corporation shall have the right to defer such registration for a
period of not more than 120 days after receipt of the request from the Required
Investors; provided that the Corporation can only effect such deferral once
during any consecutive twelve (12) month period.

3. PIGGYBACK REGISTRATION RIGHTS.

3.1 Piggyback Registration. If, at any time after the Corporation's
initial public offering, the Corporation proposes to register any of its Common
Stock under the Securities Act, whether for its own account or for the account
of any stockholder of the Corporation or pursuant to registration rights granted
to holders of other securities of the Corporation (but excluding in all cases
any registrations pursuant to Sections 2 or 4 hereof or any registrations to be
effected on Forms S-4 or S-8 or other applicable successor Forms), the
Corporation shall, each such time, give to the Investors written notice of its
intent to do so. Upon the written request of any Investor (each a "Piggyback
Requesting Investor") given within twenty (20) days after the giving of any such
notice by the Corporation, the Corporation shall use best efforts to cause to be
included in such registration the Registrable Shares of such Piggyback
Requesting Investor, to the extent requested to be registered; provided,
however, that the obligations of the Corporation under this Section 3.1 shall be
subject to the terms, conditions and limitations set forth in Section 3.2 and
Section 3.3 below.

3.2 Underwriting Requirements. In connection with any offering
involving an underwriting of shares being issued by the Corporation, the
Corporation shall not be required under Section 3.1 hereof to include the
Registrable Shares of any Investor therein unless such Investor accepts and
agrees to the terms of the underwriting in substantially the same form of
agreement between the Corporation and the underwriters selected by the
Corporation.

3.3 Reduction of Shares to be Included in a Registration. If a
registration pursuant to Section 3.1 hereof involves an underwritten offering,
and the managing underwriter shall advise the Corporation in writing that, in
its opinion, the number of shares of Common

<PAGE> 9

Stock requested to be included in such registration exceeds the number which can
be sold in such offering, then, notwithstanding anything in Section 3.1 to the
contrary, the Corporation shall only be required to include in such
registration, to the extent of the number of shares of Common Stock which the
Corporation is so advised can be sold in such offering, (i) first, the number of
shares of Common Stock proposed to be included in such registration for the
account of the Corporation and/or any stockholders of the Corporation (other
than the Investors) that have exercised demand registration rights, in
accordance with the priorities, if any, then existing among the Corporation
and/or such stockholders of the Corporation (other than the Investors), and (ii)
second, the shares of Common Stock requested to be included in such registration
by all other stockholders of the Corporation (including, without limitation, the
Piggyback Requesting Investors), pro rata among such other stockholders
(including, without limitation, the Piggyback Requesting Investors) on the basis
of the number of shares of Common Stock that each of them requested to be
included in such registration.

4. FORM S-3 REGISTRATION.

4.1 Registration Upon Request. Subject to the conditions,
limitations, restrictions and provisions set forth in Sections 4.2 and 4.4
hereof, the Required Investors may, at any time or from time to time from and
after the first anniversary of the closing of the Corporation's initial public
offering, notify the Corporation in writing that such Required Investors desire
that the Corporation effect, pursuant to this Section 4.1, a registration on
Form S-3 with respect to all or any number of the Registrable Shares owned by
such Required Investors. Such written notice by such Required Investors shall
specify the intended method of disposition of such Registrable Shares. Upon
receipt of such written notice from the Required Investors the Corporation shall
promptly notify in writing all other Investors that it has received such written
notice, and such other Investors shall have a period of twenty (20) business
days following receipt of such written notice from the Corporation to notify the
Corporation in writing whether such other Investors, or any of them, desire to
have any of their Registrable Shares included in such registration on Form S-3
pursuant to this Section 4.1 (those of such other Investors that desire to have
any of their Registrable Shares included in such registration on Form S-3 being
hereinafter referred to, collectively, with the Required Investors who gave
notice under this Section 4.1, as the "Shelf Requesting Investors"). Thereafter,
subject to the conditions, limitations, restrictions and provisions set forth
below in Sections 4.3, 4.5 and 4.6 hereof and subject to compliance by the
Required Investors with the conditions, limitations, restrictions and provisions
of Sections 4.2 and 4.4 hereof in making any request pursuant to this Section
4.1 hereof, the Corporation shall, promptly following the expiration of such
twenty (20) business day period, prepare and file with the Commission, and use
best efforts to prosecute to effectiveness, a registration statement on Form S-3
covering all of those Registrable Shares that the Shelf Requesting Investors
have requested to be registered under the Securities Act on Form S-3 pursuant to
this Section 4.1. Subject to the provisions of Section 4.3 hereof, the
Corporation may include in any registration on Form S-3 pursuant to this Section
4.1 additional shares of Common Stock for sale for its own account or for the
account of any other Person.

4.2 No Right to Underwritten Offering. Subject to the provisions set
forth below in this Section 4.2, the Shelf Requesting Investors shall not have
the right to request that the offering, sale, disposition or distribution of any
Registrable Shares to be registered under the Securities Act on Form S-3
pursuant to Section 4.1 hereof be effected pursuant to an

6
<PAGE> 10

underwritten offering. The Corporation may, in its sole and absolute discretion,
decide or determine that any Registrable Shares to be registered under the
Securities Act on Form S-3 pursuant to Section 4.1 hereof shall be offered,
sold, disposed of or distributed in an underwritten offering; provided, however,
that a registration on Form S-3 pursuant to Section 4.1 hereof shall be
underwritten if (i) those Shelf Requesting Investors that hold a majority of the
Registrable Shares to be registered under the Securities Act pursuant to such
registration on Form S-3 so decide or determine and the total number of
Registrable Shares to be so registered pursuant to such registration is at least
1,000,000 shares (subject to proportionate adjustment upon any stock split,
stock dividend, reverse stock split or like event of the Common Stock) and (ii)
such registration on Form S-3, together with all prior underwritten
registrations pursuant to Section 2.1 and/or Section 4.1 hereof, do not exceed a
maximum of three underwritten registrations. If a registration on Form S-3
pursuant to Section 4.1 hereof involves an underwritten offering, the
underwriter or underwriters thereof shall be selected by the Corporation,
subject to the reasonable approval of the Shelf Requesting Investors, and each
of the Shelf Requesting Investors shall be required to accept and agree to the
terms of the underwriting as agreed upon between the Corporation and such
underwriter or underwriters.

4.3 Priority of Shelf Registrations. If a registration on Form S-3
pursuant to Section 4.1 hereof involves an underwritten offering, and the
managing underwriter shall advise the Corporation in writing that, in its
opinion, the number of shares of Common Stock requested to be included in such
registration exceeds the number which can be sold in such offering, then,
notwithstanding anything in Section 4.1 to the contrary, the Corporation shall
only be required to include in such registration, to the extent of the number of
shares of Common Stock which the Corporation is so advised can be sold in such
offering, (i) first, the number of Registrable Shares requested to be included
in such registration by the Shelf Requesting Investors, pro rata among the Shelf
Requesting Investors on the basis of the number of Registrable Shares that each
of them requested to be included in such registration and (ii) second, the other
shares of Common Stock proposed to be included in such registration, in
accordance with the priorities, if any, then existing among the Corporation
and/or the holders of such other shares of Common Stock, or as the Corporation
may otherwise determine.

4.4 Limitation on Timing of Requests. Notwithstanding anything
expressed or implied in this Section 4 to the contrary, the Required Investors
may not request a registration on Form S-3 pursuant to Section 4.1 hereof (i)
more than once during any 180-day period, (ii) at any time during the period
commencing on the date that any other request for registration has been made
pursuant to, and in accordance with, Section 2.1, Section 3.1 or Section 4.1
hereof and ending on the 180th day following the effective date of any
registration statement filed by the Corporation with the Commission in
connection with such other request and (iii) at any time during the period
commencing on the date that any registration statement has been filed by the
Corporation with the Commission in which the Investors have had the right to
participate in connection with an underwritten offering and ending on the 180th
day following the effective date of such registration statement.

4.5 Limitation on Corporation's Obligation. Notwithstanding anything
in this Section 4 to the contrary, the Corporation shall not be obligated to
effect any registration on Form S-3 pursuant to Section 4.1 hereof:

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<PAGE> 11

(i) if, within fifteen (15) days after the Corporation receives
written notice from the Required Investors requesting any registration on Form
S-3 pursuant to Section 4.1 hereof, the Corporation gives written notice to the
Required Investors that the Corporation intends to file a registration statement
with the Commission within 90 days in connection with a public offering of the
Corporation's securities; or

(ii) if the aggregate offering price of the number of
Registrable Shares that the Required Investors request to be included in a
registration on Form S-3 pursuant to Section 4.1 hereof is less than twenty-five
percent (25%) of all of the Conversion Shares, unless the aggregate offering
price of such number of Registrable Share is $2,000,000 or more.

4.6 Deferral. Notwithstanding anything in this Section 4 to the
contrary, if the Corporation shall furnish to the Required Investors a
certificate signed by the President or Chief Executive Officer of the
Corporation stating that the Board of Directors of the Corporation has made the
good faith determination that any registration on Form S-3 requested by such
Required Investors pursuant to Section 4.1 hereof would require premature
disclosure of information which would materially interfere with any pending or
proposed acquisition, corporate reorganization or other material transaction
involving the Corporation and that it is therefore essential to defer such
registration, then the Corporation shall have the right to defer such
registration for a period of not more than 120 days after receipt of the request
from such Initial Section 4.1 Requesting Investors; provided that the
Corporation can only effect such deferral once during any consecutive twelve
(12) month period.

5. ADDITIONAL OBLIGATIONS OF THE COMPANY. Whenever the Corporation is
required under Section 2, 3 or 4 hereof to use best efforts to effect the
registration of any of the Registrable Shares of the Investors, the Corporation
shall, as expeditiously as possible:

(a) prepare and file with the Commission a registration statement
with respect to such Registrable Shares and use best efforts to cause such
registration statement to become and remain effective; provided, however, that
the Corporation shall in no event be obligated to cause any such registration
statement to remain effective for more than 90 days; and provided, further,
that, notwithstanding anything in this Section 5(a) to the contrary, before
filing a registration statement or prospectus or any amendments or supplements
thereto, including documents incorporated by reference after the initial filing
of the registration statement and prior to effectiveness thereof, the
Corporation shall furnish to counsel to the Selling Investors (if there is one,
or counsel to each Selling Investor, if there is more than one), as such term is
defined below, copies of all such documents in the form substantially as
proposed to be filed with the Commission prior to filing for review and comment
by such counsel;

(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to comply with the provisions of the Securities
Act with respect to the disposition of all Registrable Shares covered by such
registration statement, provided that if the registration is for an underwritten
offering, the Corporation shall amend the registration statement or supplement
the prospectus whenever required by the terms of the underwriting agreement
entered into in connection with such offering;

8
<PAGE> 12

(c) furnish to each Investor whose Registrable Shares are being
registered under the Securities Act pursuant to Section 2, 3 or 4 hereof
(individually, a "Selling Investor" and, collectively, the "Selling Investors")
such number of copies of a prospectus, including a preliminary prospectus, in
conformity with the requirements of the Securities Act, and such other documents
(including, without limitation, prospectus amendments and supplements as are
prepared by the Corporation in accordance with Section 5(d) below) as such
Selling Investor may reasonably request in order to facilitate the disposition
of the Registrable Shares of such Selling Investor that are being so registered;

(d) notify each Selling Investor, at any time when a prospectus
relating to any registration statement filed by the Corporation pursuant to
Section 2, 3 or 4 hereof is required to be delivered under the Securities Act,
of the happening of any event as a result of which such prospectus contains an
untrue statement of a material fact or omits any fact necessary to make the
statements therein not misleading; and, thereafter, the Corporation will
promptly prepare (and, when completed, give notice to each Selling Investor) a
supplement or amendment to such prospectus so that, as thereafter delivered to
the purchasers of any Registrable Shares offered pursuant to such prospectus,
such prospectus will not contain an untrue statement of a material fact or omit
to state any fact necessary to make the statements therein not misleading;
provided that upon notification by the Corporation that such prospectus contains
an untrue statement of a material fact or omits any fact necessary to make the
statements therein not misleading, no Selling Investor will offer or sell
Registrable Shares pursuant to such prospectus until the Corporation has
notified such Selling Investor that the Corporation has prepared a supplement or
amendment to such prospectus and has promptly delivered copies of such
supplement or amendment to such Selling Investor;

(e) use the Corporations' best efforts (i) to register and qualify
the securities covered by such registration statement under such other
securities or Blue Sky laws of such states or jurisdictions as shall be
reasonably requested by the Underwriter's Representative or Agent (as
applicable, or if inapplicable, a majority of the Selling Investors), and (ii)
to obtain the withdrawal of any order suspending the effectiveness of a
registration statement, or the lifting of any suspension of the qualification
(or exemption from qualification) of the offer and transfer of any of the
Registrable Securities in any jurisdiction at the earliest possible moment;
provided, however, that the Corporation shall not be required in connection
therewith or as a condition thereto to qualify to do business or to file a
general consent to service of process in any such states or jurisdictions;

(f) in the event of any underwritten or agent offering, enter into
and perform the Corporation's obligations under an underwriting or agency
agreement (including indemnification and contribution obligations of
underwriters or agents), in usual and customary form, with the managing
underwriter or underwriters of or agents for such offering;

(g) reasonably cooperate with the Selling Investors and the
Underwriters' Representative or Agent for such offering in the marketing of the
Registrable Shares, including making reasonably available the Corporation's
officers, accountants, counsel, premises, books and records for such purpose;

9
<PAGE> 13

(h) promptly notify each Selling Investor of any stop order issued
or threatened to be issued by the Commission in connection therewith (and take
all reasonable actions required to prevent the entry of such stop order or to
remove it if entered);

(i) provide and cause to be maintained a transfer agent and
registrar for all Registrable Securities covered by such registration statement
from and after a date not later than the effective date of such registration
statement;

(j) use all reasonable efforts to cause the Registrable Securities
covered by such registration statement (i) if the Common Stock is then listed on
a securities exchange or included for quotation in a recognized trading market,
to continue to be so listed or included for a reasonable period of time after
the offering, and (ii) to be registered with or approved by such other United
States or state governmental agencies or authorities as may be necessary by
virtue of the business and operations of the Corporation to enable the Selling
Investors of Registrable Securities to consummate the disposition of such
Registrable Securities;

(k) use the Corporation's reasonable efforts to provide a CUSIP
number for the Registrable Securities prior to the effective date of the first
registration statement including Registrable Securities; and

(l) take such other actions as are reasonably required in order to
expedite or facilitate the disposition of Registrable Securities included in
each such registration.

6. FURNISH INFORMATION. It shall be a condition precedent to the
obligations of the Corporation to take any action pursuant to this Agreement
that the Investors shall furnish to the Corporation such information regarding
them and the securities of the Corporation held by them as the Corporation shall
reasonably request and as shall be required in order to effect any registration
by the Corporation pursuant to this Agreement.

7. EXPENSES OF REGISTRATION. All expenses incurred by the Corporation
in connection with a registration pursuant to this Agreement, including, without
limitation, all registration and qualification fees, printing fees and fees and
disbursements of counsel for the Corporation, shall be borne by the Corporation.
Without limiting the generality of the foregoing, it is hereby understood and
agreed that none of the underwriting commissions and discounts and counsel fees
(except for one counsel and not in excess of $10,000) incurred by any of the
Selling Investors shall be borne by the Corporation.

8. DELAY OF REGISTRATION. No Investor shall take any action to
restrain, enjoin or otherwise delay any registration by the Corporation as the
result of any controversy which might arise with respect to the interpretation
or implementation of this Agreement.

9. "MARKET STAND-OFF AGREEMENT". Each Investor hereby agrees that it
will not, without the prior written consent of the managing underwriter, during
the period commencing on the date of the final prospectus relating to the
Corporation's initial public offering and ending on the date specified by the
Corporation and the managing underwriter (such period not to exceed one hundred
eighty (180) days) (i) lend, offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase, or otherwise transfer or dispose of,
directly or indirectly, any shares

<PAGE> 14
of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock (whether such shares or any such securities are
then owned by the Investor or are thereafter acquired), or (ii) enter into any
swap or other arrangement that transfers to anther, in whole or in part, any of
the economic consequences of ownership of the Common Stock, whether any such
transaction described in clause (i) or (ii) above is to be settled otherwise.
The foregoing provisions of this Section 9 shall apply only to the Corporation's
initial public offering of equity securities, shall not apply to the sale of any
shares to an underwriter pursuant to an underwriting agreement, and shall only
be applicable to the Investors if all officers and directors and greater than
five percent (5%) stockholders of the Corporation enter into similar agreements.
The underwriters in connection with the Corporation's initial public offering
are intended third party beneficiaries of this Section 9 and shall have the
right, power and authority to enforce the provisions hereof as though they were
a party hereto.

10. INDEMNIFICATION. In the event that any Registrable Shares are
included in a registration statement pursuant to this Agreement:

(a) To the extent permitted by law, the Corporation will indemnify
and hold harmless the Selling Investor or the Selling Investors, as the case may
be, that hold such Registrable Shares, against any losses, claims, damages or
liabilities, joint or several, to which any such Selling Investor may become
subject under the Securities Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement of any material fact contained in such registration
statement, including any preliminary prospectus or final prospectus contained
therein or any amendments or supplements thereto, or arise out of or are based
upon the omission in such registration statement, including any preliminary
prospectus or final prospectus contained therein or any amendments or
supplements thereto, of any material fact required to be stated therein or
necessary to make the statements therein not misleading; and the Corporation
will reimburse any such Selling Investor for any legal or other expenses
reasonably incurred by any such Selling Investor in connection with
investigating or defending any such loss, claim, damage, liability or action if
it is judicially determined that there were material misstatements or omissions.
Notwithstanding anything in the foregoing provisions of this Section 10(a) to
the contrary, (i) the indemnity agreement contained in this Section 10(a) shall
not apply to amounts paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the consent of the
Corporation (which consent shall not be unreasonably withheld), and (ii) the
Corporation shall not be liable under this Section 10(a) for or in connection
with any such loss, claim, damage, liability or action to the extent that it
arises out of or is based upon an untrue statement or alleged untrue statement
or omission made in connection with such registration statement, preliminary
prospectus, final prospectus, or amendments or supplements thereto, in reliance
upon and in conformity with written information furnished expressly for use in
connection with such registration statement, preliminary prospectus, final
prospectus, or amendments or supplements thereto by any such Selling Investor.

(b) To the extent permitted by law, each Selling Investor
severally, but not jointly, will indemnify and hold harmless the Corporation and
each of its directors and officers, against any losses, claims, damages or
liabilities to which the Corporation or any such director or officer may become
subject to, under the Securities Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereto) arise out of or
are based upon any

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<PAGE> 15

untrue statement of any material fact contained in such registration statement,
including any preliminary prospectus contained therein or any amendments or
supplements thereto, or arise out of or are based upon the omission in such
registration statement, including any preliminary prospectus contained therein
or any amendments or supplements thereto, of any material fact required to be
stated therein or necessary to make the statements therein not misleading, in
each case to the extent that such untrue statement or omission was made in such
registration statement, preliminary prospectus, final prospectus, or amendments
or supplements thereto, in reliance upon and in conformity with written
information furnished by such Selling Investor expressly for use in connection
with such registration statement, preliminary prospectus, final prospectus
and/or amendments or supplements thereto; and such Selling Investor will
reimburse any legal or other expenses reasonably incurred by the Corporation or
any such director or officer in connection with investigating or defending any
such loss, claim, damage, liability or action if it is judicially determined
that there were material misstatements or omissions. Notwithstanding anything in
the foregoing provisions of this Section 10(b) to the contrary, (i) the
liability of such Selling Investor under this Section 10(b) shall be limited to
the proceeds (net of underwriting discounts and commissions, if any) received by
such Selling Investor from the sale of any Registrable Shares of such Selling
Investor included in such registration statement, and (ii) the indemnity
agreement contained in this Section 10(b) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of such Selling Investor (which
consent shall not be unreasonably withheld).

(c) Promptly after receipt by an indemnified party under this
Section 10 of notice of the commencement of any action against such indemnified
party, such indemnified party will, if a claim in respect thereof is to be made
against the indemnifying party under this Section 10, notify the indemnifying
party in writing of the commencement thereof and the indemnifying party shall
have the right to participate in and, to the extent the indemnifying party
desires, to assume at its expense the defense thereof with counsel mutually
satisfactory to the parties. The failure to notify an indemnifying party
promptly of the commencement of any such action, if prejudicial to its ability
to defend such action, shall relieve such indemnifying party of any liability to
the indemnified party under this Section 10.

(d) Notwithstanding anything in this Section 10 to the contrary,
if, in connection with an underwritten public offering, the Corporation, the
Selling Investors and the underwriters enter into an underwriting or purchase
agreement relating to such offering which contains provisions covering
indemnification among the parties, then the indemnification provision of this
Section 10 shall be deemed inoperative for purposes of such offering.

11. TERMINATION; RULE 144. The rights and obligations of any Investor
under this Agreement shall terminate on the earlier of (i) the date on which
such Investor becomes eligible to sell Registrable Shares pursuant to Rule 144
or (ii) the date on which such Investor shall cease to own any Registrable
Shares. The Corporation will file the reports required to be filed by it under
the Securities Act and the Exchange Act in a timely manner, and will cooperate
with any holder of Registrable Shares (including without limitation by make such
representations as any such holder may reasonably request), all to the extent
required from time to time to enable such holder to sell Registrable Shares
without registration under the Securities Act within the limitations of the
exemptions provided by Rules 144 and 144A (including without limitation the
requirements of Rule 144A(d)(4).)

<PAGE> 16

12. GENERAL.

12.1 Investor Transferees. Any Person (other than the Corporation)
(i) that is not already an Investor, (ii) that acquires Series A Preferred
Shares, Series B Preferred Shares or Conversion Shares pursuant to a transfer
that is not an Excluded Transfer and that does not violate any other applicable
restrictions on transfer, (iii) that, as a result of such transfer, holds or has
the right to acquire at least 400,000 (subject to proportionate adjustment upon
any stock split, stock dividend, reverse stock split or similar event involving
the Common Stock after the date of this Agreement) of the Registrable Shares,
and (iv) that executes an Instrument of Adherence in the form of Exhibit B
attached hereto (which Instrument of Adherence shall thereupon become a part of
this Agreement), shall become an Investor Transferee party to this Agreement,
shall become entitled to all of the benefits that inure or apply to Investors
under this Agreement, shall become bound by all of the terms, provisions,
restrictions and limitations that apply to Investors under this Agreement and
shall be treated as an Investor for all purposes of this Agreement.

12.2 Binding Effect. This Agreement shall be binding upon each
party hereto and his, her or its heirs, legal representatives, successors and
permitted assigns. This Agreement shall also be binding upon any Person that is
a transferee of any Series A Preferred Shares, Series B Preferred Shares, Series
C Preferred Shares or Conversion Shares, regardless of whether such Person
acquires or has acquired such Series A Preferred Shares, Series B Preferred
Shares, Series C Preferred Shares or Conversion Shares directly from an Investor
or indirectly from some other transferee of such Series A Preferred Shares,
Series B Preferred Shares, Series C Preferred Shares or Conversion Shares and
regardless also of whether such Person becomes or has become a party to this
Agreement pursuant to Section 12.1 hereof or whether or not any express
delegation of this Agreement or any obligations hereunder is or has been
otherwise effected by the transferor of such Series A Preferred Shares, Series B
Preferred Shares, Series C Preferred Shares or Conversion Shares to such Person.
This Agreement shall inure to the benefit of each party hereto and his, her or
its heirs, legal representatives and permitted assigns, provided that, in the
case of such heirs, legal representatives and permitted assigns, such heirs,
legal representatives and permitted assigns become Investor Transferees parties
to this Agreement pursuant to, and in the manner provided in, Section 12.1
hereof (regardless of whether such heirs, legal representatives or permitted
assigns meet any or all of the criteria or conditions of clause (iii) of Section
12.1 hereof). This Agreement shall also inure to the benefit of any and all
other Investor Transferees.

12.3 Assignment. Subject to the provisions of Sections 12.1 and
12.2 hereof, none of the parties to this Agreement shall assign or delegate any
of their respective rights or obligations under this Agreement without the prior
written consent of the Corporation and the Majority Investors.

12.4 Entire Agreement. This Agreement contains the entire agreement
among the parties with respect to the subject matter hereof and supersedes all
prior and contemporaneous arrangements or understandings with respect thereto,
including, but not limited to, the Original Registration Rights Agreement.

12.5 Notices. All notices, requests, consents and other
communications hereunder to any party shall be deemed to be sufficient if
contained in a written instrument

13
<PAGE> 17

delivered in person or duly sent by first class, registered, certified or
overnight mail, postage prepaid, or facsimile with a confirmation copy by
regular mail, addressed or facsimilied, as the case may be, to such party at the
address or facsimile number, as the case may be, set forth below or such other
address or facsimile number, as the case may be, as may hereafter be designated
in writing by the addressee to the addressor listing all parties:

(i) If to the Corporation to:

BlueStar Communications Group, Inc.
401 Church Street, 24th Floor
Nashville, TN 37219
Attn: Richard Burtner
Facsimile No: (615) 346-3875

with a copy to:

Brobeck Phleger & Harrison, LLP
301 Congress Avenue, Suite 1200
Austin, TX 78701
Attention: Mark T. Goglia
Facsimile: (512) 453-7702

(ii) If to any Investor, to such Investor's address as set forth
in the books and records of the Corporation.

Any notice or other communication pursuant to this Agreement shall be
deemed to have been duly given or made and to have become effective (i) when
delivered in hand to the party to which it was directed, (ii) if sent by telex,
telecopier, facsimile machine or telegraph and properly addressed in accordance
with the foregoing provisions of this Section 12.5, when received by the
addressee, (iii) if sent by commercial courier guaranteeing next business day
delivery, on the business day following the date of delivery to such courier, or
(iii) if sent by first-class mail, postage prepaid, and properly addressed in
accordance with the foregoing provisions of this Section 12.5, (A) when received
by the addressee, or (B) on the seventh business day following the day of
dispatch thereof, whichever of (A) or (B) shall be the earlier.

12.6 Amendments and Waivers. Any provision of this Agreement may
be amended, modified or terminated, and the observance of any provision of this
Agreement may be waived (either generally or in a particular instance and either
retrospectively or prospectively), with, but only with, the written consent of
the Corporation and the Majority Investors.

12.7 Severability. Any provision of this Agreement that is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.

12.8 No Inconsistent Agreements. The Corporation has not, as of the
date hereof, and will not, on or after the date hereof, enter into any agreement
with respect to its

14
<PAGE> 18

securities which is inconsistent with the rights granted to the holders of
Registrable Shares in this Agreement of otherwise conflicts with the provisions
hereof.

12.9 No Waiver of Future Breach. No failure or delay on the part of
any party to this Agreement in exercising any right, power or remedy hereunder
shall operate as a waiver thereof. No assent, express or implied, by any party
hereto to any breach in or default of any agreement or condition herein
contained on the part of any other party hereto shall constitute a waiver of or
assent to any succeeding breach in or default of the same or any other agreement
or condition hereof by such other party.

12.10 No Implied Rights or Remedies; Third Party Beneficiaries.
Except as otherwise expressly provided in this Agreement, nothing herein
expressed or implied is intended or shall be construed to confer upon or to give
any Person, firm or corporation, other than the Corporation or the Investors,
any rights or remedies under or by reason of this Agreement. Except as otherwise
expressly provided in this Agreement, there are no intended third party
beneficiaries under or by reason of this Agreement.

12.11 Headings. The headings of the various sections of this
Agreement have been inserted for convenience of reference only and shall not be
deemed to be a part of this Agreement.

12.12 Nouns and Pronouns. Whenever the context may require, any
pronouns used herein shall include the corresponding masculine, feminine or
neuter forms, and the singular form of names and pronouns shall include the
plural and vice-versa.

12.13 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware, excluding choice
of law rules thereof.

12.14 Counterparts. This Agreement may be executed in any number of
counterparts, and each such counterpart shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
agreement.

12.15 Equitable Relief. Each of the parties acknowledges that any
breach by such party of his, her, or its obligations under this Agreement would
cause substantial and irreparable damage to one or more of the other parties and
that money damages would be an inadequate remedy therefor. Accordingly, each
party agrees that the other parties or any of them will be entitled to an
injunction, specific performance, and/or other equitable relief to prevent the
breach of such obligations.

[SIGNATURE PAGE IMMEDIATELY FOLLOWS]

15
<PAGE> 19

IN WITNESS WHEREOF, this Amended and Restated Registration
Rights Agreement has been executed by the parties hereto as of the day and year
first above written.

COMPANY: BLUESTAR COMMUNICATIONS GROUP, INC.

By: /s/ Richard Burtner
-------------------------------------
Richard Burtner
Chief Financial Officer

INVESTORS: CROSSPOINT VENTURE PARTNERS 1997

By:
-------------------------------------
Name:
Title:

CROSSPOINT VENTURE PARTNERS LS 1997

By:
-------------------------------------
Name:
Title:

CROSSPOINT VENTURE PARTNERS LS 1999

By:
-------------------------------------
Name:
Title:

GRAMERCY BLUESTAR L.P.

By: /s/ Laurence S. Grafstein
-------------------------------------
Laurence S. Grafstein
Director

[SIGNATURE PAGE TO BLUESTAR COMMUNICATIONS GROUP, INC.
SECOND AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT]

<PAGE> 20

ATGF II

By:
-------------------------------------
Name:
Title:

PIVOTAL PARTNERS, L.P.

By:
-------------------------------------
Name:
Title:

BSY ASSOCIATES LLC

By: /S/ Andrew W. Byrd
-------------------------------------
Andrew W. Byrd
Chief Manager

BSP ASSOCIATES II, LLC

By: /s/ Andrew W. Byrd
-------------------------------------
Andrew W. Byrd
Chief Manager

TY INVESTMENTS, L.P.

By: /s/ Tuff Yen
-------------------------------------
Tuff Yen,
its General Partner

/s/ Robert C. Hawk
----------------------------------------
ROBERT C. HAWK

[SIGNATURE PAGE TO BLUESTAR COMMUNICATIONS GROUP, INC.
SECOND AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT]

<PAGE> 21

/s/ Christopher G. Hawk
---------------------------------------
CHRISTOPHER G. HAWK

/s/ Stephanie G. Hawk
---------------------------------------
STEPHANIE G. HAWK

/s/ R. Casey Hawk
---------------------------------------
R. CASEY HAWK

/s/ Sharon Vanalstine
---------------------------------------
SHARON VANALSTINE

/s/ Connie Williams
---------------------------------------
CONNIE WILLIAMS

/s/ Michael E. Hawk
---------------------------------------
MICHAEL E. HAWK

/s/ James Stableford
---------------------------------------
JAMES STABLEFORD

/s/ William Slattery
---------------------------------------
WILLIAM SLATTERY

VERTEX CAPITAL II LLC

By:
------------------------------------
Name:
Title:

[SIGNATURE PAGE TO BLUESTAR COMMUNICATIONS GROUP, INC.
SECOND AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT]

<PAGE> 22

RALPH H. CECHETTINI 1995 TRUST

By:
------------------------------------
Name:
Title:

/s/ Christopher Lord
---------------------------------------
CHRISTOPHER LORD

[SIGNATURE PAGE TO BLUESTAR COMMUNICATIONS GROUP, INC.
SECOND AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT]

<PAGE> 23

/s/ Tim Burtner
----------------------------------------
TIM BURTNER

RICHARD BURTNER PROFIT SHARING
(KEOUGH) PLAN

By:
-------------------------------------
Name:
Title:

/s/ Dr. Fred Goldner
----------------------------------------
DR. FRED GOLDNER

[SIGNATURE PAGE TO BLUESTAR COMMUNICATIONS GROUP, INC.
SECOND AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT]

<PAGE> 24

/s/ Charles J. McMinn
-------------------------------------
CHARLES J. MCMINN

INTEL CORPORATION

By:
----------------------------------
Name:
Title:

LUCENT TECHNOLOGIES INC.

By:
----------------------------------
Name:
Title:

[SIGNATURE PAGE TO BLUESTAR COMMUNICATIONS GROUP, INC.
SECOND AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT]

<PAGE> 25

EXHIBIT A

INVESTOR SCHEDULE

NUMBER OF NUMBER OF NUMBER OF
SHARES OF SHARES OF SHARES OF
INVESTOR SERIES A SERIES B SERIES C
--------- PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
--------------- --------------- ---------------
<S> <C> <C> <C>
Crosspoint Venture Partners 1997 11,020,410 1,551,273 --
The Pioneer Hotel Building
2925 Woodside Road
Woodside, CA 94062

Crosspoint Venture Partners LS 1997 -- 1,078,005 --
The Pioneer Hotel Building
2925 Woodside Road
Woodside, CA 94062

Crosspoint Venture Partners LS 1999 -- 1,314,636 573,248
The Pioneer Hotel Building
2925 Woodside Road
Woodside, CA 94062

Gramercy BlueStar LLC -- 2,629,272 --
c/o Jones, Day, Reavis & Pogue
599 Lexington Avenue
New York, NY 10022
Attn: Harry J. Carrel

ATGF II -- 657,318 --
c/o Amerindo Investment Advisors Inc.
399 Park Avenue, 22nd Floor
New York, NY 10022
Attn: Jessica Caruso

Vertex Capital II LLC -- 30,000 --
1771 James Avenue South
Minneapolis, MN 55403
Attn: Matthew Fitzmaurice

Christopher Lord
c/o Amerindo Investment Advisors Inc. -- 46,110 --
One Embarcadero Center, Suite 2300
San Francisco, CA 94111
</TABLE>

<PAGE> 26

William Slattery
c/o Amerindo Investment Advisors Inc.
399 Park Avenue, 22nd Floor
New York, NY 10022 -- 780 --

Ralph H. Cechettini 1995 Trust -- 30,000 --
c/o Amerindo Investment Advisors Inc.
One Embarcadero Center, Suite 2300
San Francisco, CA 94111
Attn: Diana Mah

Pivotal Partners, L.P. -- 622,260 --
c/o Amerindo Investment Advisors Inc.
One Embarcadero Center, Suite 2300
San Francisco, CA 94111
Attn: Diana Mah

James Stableford -- 7,500 --
c/o Amerindo Investment Advisors Inc.
43 Upper Grosvenor Street
London W1X 9PG
England

BSY Associates LLC 1,224,489 -- --
Sun Trust Bank Building
201 Fourth Avenue, North
Suite 1250
Nashville, TN 37219

BSP Associates II, LLC -- 131,463 --
Sun Trust Bank Building
201 Fourth Avenue, North
Suite 1250
Nashville, TN 37219

TY Investments, L.P. -- 131,463 --
2828 Old Hickory Boulevard
No. 109
Nashville, TN 37221

Robert C. Hawk
7585 South Biscay Street -- 26,292 --
Aurora, CO 80016

</TABLE>

<PAGE> 27

Tim Burtner 22,500 -- --
c/o BlueStar Communications Group, Inc.
401 Church Street, 24th Floor
Nashville, TN 37219

Richard Burtner Profit Sharing 22,500 -- --
(Keogh) Plan
c/o BlueStar Communications Group, Inc.
401 Church Street, 24th Floor
Nashville, TN 37219

Dr. Fred Goldner 55,104 -- --
c/o BlueStar Communications Group, Inc.
401 Church Street, 24th Floor
Nashville, TN 37219

Charles J. McMinn -- -- 318,471
c/o BlueStar Communications Group, Inc.
401 Church Street, 24th Floor
Nashville, TN 37219

Intel Corporation -- -- 636,942
2200 Mission College Blvd.
Santa Clara, CA 95052
Attn: M & A Portfolio Manager -
M/S RN6-46

with Copies to:

Intel Corporation
2200 Mission College Blvd.
Santa Clara, CA 95052
Attn: General Counsel

Lucent Technologies Inc. -- -- 636,942
c/o Corporate Counsel
Room 6G-212
600 Mountain Avenue
Murray Hill, NJ 07974
Attn: Peter Rokkos

TOTAL: 12,345,003 8,177,040 2,165,603
- ------

</TABLE>

<PAGE> 28

EXHIBIT B

INSTRUMENT OF ADHERENCE

Reference is made to that certain Second Amended and Restated
Registration Rights Agreement dated as of February 14, 2000, a copy of which is
attached hereto (as amended and in effect from time to time, the "Registration
Rights Agreement"), among BlueStar Communications Group, Inc., a Delaware
corporation (the "Corporation"), and the Investors parties thereto. Capitalized
terms used herein without definition shall have the respective meanings ascribed
thereto in the Registration Rights Agreement.

The undersigned, , in order to become the owner or holder of
shares (the "Acquired Shares") of [Series A Convertible Preferred Stock]
[Series B Convertible Preferred Stock] [Series C Convertible Preferred Stock]
[Preferred Stock] [Common Stock], hereby agrees that, from and after the date
hereof, (i) the undersigned has become an Investor Transferee party to the
Registration Rights Agreement and is entitled to all of the benefits under, and
is subject to all of the obligations, restrictions and limitations set forth in,
the Registration Rights Agreement that are applicable to the Investors, and (ii)
all of the Acquired Shares are entitled to all of the benefits, and are subject
to all of the obligations, restrictions, limitations, provisions and conditions,
under the Registration Rights Agreement that are applicable to the Series A
Preferred Shares, Series B Preferred Shares, Series C Preferred Shares and/or
Conversion Shares held or that may be acquired by the Investors. This Instrument
of Adherence shall take effect and shall become a part of the Registration
Rights Agreement immediately upon execution.

Executed as of the date set forth below under the domestic substantive
laws of the State of Tennessee without giving effect to any choice or conflict
of law provision or rule that would cause the application of the domestic
substantive laws of any other state.

Signature:
------------------------
Address:
--------------------------

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

Date:
-----------------------------

Accepted:

BLUESTAR COMMUNICATIONS GROUP, INC.

By:
--------------------------------
Name:
---------------------------
Title:
--------------------------

Date:
------------------------------

<PAGE> 1
EXHIBIT 10.11

April 5, 1999

Dear Bob,

I am pleased to offer you a position with Blue Star Properties, Inc. ("the
Company") as its President and Chief Executive Officer, reporting to the Board
of Directors. During the term of your employment, you shall devote your full
time, skill and attention to your duties and responsibilities and shall perform
them faithfully, diligently and competently. In addition, you shall comply with
and be bound by the operating policies, procedures and practices of the Company
in effect from time to time during your employment.

Your initial base salary will be $20,833.33 per month. In addition, you will be
eligible in the Company's incentive bonus program. You will work with the Board
to develop the goals and objectives connected with the incentive bonus award.
Based on the achievement of these goals and objectives, you will be eligible to
receive an annual bonus in the first year of at least $75,000. As a Company
employee you are also eligible to receive medical insurance and other employee
benefits generally available to employees of the Company.

Also, in connection with your employment, the Company will grant you an option
for 660,000 shares of Common Stock. Your option shall be issued at an exercise
price per share equal to the value of the Common Stock as determined by the
Board at its first meeting, and pursuant to the terms and conditions contained
in a stock option agreement which includes the following terms (i) a forty-eight
month vesting period with a six month cliff and (ii) upon a change of control,
these options will vest 50% of the unvested remaining portion. In addition, if
you are involuntarily terminated through job elimination within six months after
a change of control the remainder of your unvested options will vest.

Further, you agree that you will relocate to Nashville, TN by September 30,
1999. In connection with your move to Nashville, the Company will pay for
relocation costs incurred by you, including the transaction costs of buying and
selling a home (realtor fees, etc.) and will engage a professional relocation
service to assist in this process. In

1
<PAGE> 2

addition, the Company will pay for temporary living costs in Nashville incurred
by you through September 30, 1999.

You should be aware, and acknowledge and agree, that your employment with the
Company is for no specified period of time and constitutes at will employment.
As a result, you are free to resign at any time, for any reason, or for no
reason. Similarly, the Company is free to conclude its employment relationship
with you at any time, for any reason, or for no reason. However, if the Company
elects to terminate its employment relationship with you for any reason other
than breach of your fiduciary duty to the Company or acts of gross negligence
or willful misconduct, you and the Company agree that you will sign a standard
form of settlement and release agreement, and that in consideration therefore
the Company will provide you a settlement of (i) twelve months of additional
vesting and (ii) twelve months' salary and benefits plus a pro rata calculation
of any bonus.

As an employee you will have access to certain Company confidential information
and you may, during the course of your employment, develop certain information
or inventions which will be the property of the company. To protect the
interests of the Company, you will be required to sign the Company's standard
Confidentiality and Non-Compete agreement as a condition of your employment.

Your start date on our Nashville office will be no later than Thursday, April
15, 1999. To indicate your acceptance of the Company's offer, please sign and
date this letter in the space provided below and return it to me by 5PM EST,
Wednesday, April 7, 1999 or otherwise this offer will automatically lapse. This
letter agreement may not be modified or amended except by a written agreement,
signed by a duly authorized officer of the Company and by you.

On Behalf of the Board of Directors,

/s/ Rich Shapero
- ------------------------------
Rich Shapero

Agreed: /s/ Robert E. Dupuis 4/17/99
------------------------
Bob Dupuis

<PAGE> 1

BLUESTAR PROPERTIES, INC.
1999 STOCK OPTION/STOCK ISSUANCE PLAN

ARTICLE ONE

GENERAL PROVISIONS

I. PURPOSE OF THE PLAN

This 1999 Stock Option/Stock Issuance Plan is intended to promote the
interests of BlueStar Properties, Inc., a Delaware corporation, by providing
eligible persons in the Corporation's employ or service with the opportunity to
acquire a proprietary interest, or otherwise increase their proprietary
interest, in the Corporation as an incentive for them to continue in such employ
or service.

Capitalized terms shall have the meanings assigned to such terms in the
attached Appendix.

II. STRUCTURE OF THE PLAN

A. The Plan shall be divided into two (2) separate equity programs:

(i) the Option Grant Program under which eligible persons may,
at the discretion of the Plan Administrator, be granted options to
purchase shares of Common Stock, and

(ii) the Stock Issuance Program under which eligible persons
may, at the discretion of the Plan Administrator, be issued shares of Common
Stock directly, either through the immediate purchase of such shares or as a
bonus for services rendered the Corporation (or any Parent or Subsidiary).

B. The provisions of Articles One and Four shall apply to both equity
programs under the Plan and shall accordingly govern the interests of all
persons under the Plan.

III. ADMINISTRATION OF THE PLAN

A. The Plan shall be administered by the Board. However, any or all
administrative functions otherwise exercisable by the Board may be delegated to
the Committee. Members of the Committee shall serve for such period of time as
the Board may determine and shall be subject to removal by the Board at any
time. The Board may also at any time terminate the functions of the Committee
and reassume all powers and authority previously delegated to the Committee.

B. The Plan Administrator shall have full power and authority (subject
to the provisions of the Plan) to establish such rules and regulations as it may
deem appropriate for proper administration of the Plan and to make such
determinations under, and issue such interpretations of, the Plan and any
outstanding options or stock issuances thereunder as it may

<PAGE> 2

deem necessary or advisable. Decisions of the Plan Administrator shall be final
and binding on all parties who have an interest in the Plan or any option or
stock issuance thereunder.

IV. ELIGIBILITY

A. The persons eligible to participate in the Plan are as follows:

(i) Employees,

(ii) non-employee members of the Board or the non-employee
members of the board of directors of any Parent or Subsidiary, and

(iii) consultants and other independent advisors who provide
services to the Corporation (or any Parent or Subsidiary).

B. The Plan Administrator shall have full authority to determine, (i)
with respect to the grants made under the Option Grant Program, which eligible
persons are to receive the option grants, the time or times when those grants
are to be made, the number of shares to be covered by each such grant, the
status of the granted option as either an Incentive Option or a Non-Statutory
Option, the time or times when each option is to become exercisable, the vesting
schedule (if any) applicable to the option shares and the maximum term for which
the option is to remain outstanding and (ii) with respect to stock issuances
made under the Stock Issuance Program, which eligible persons are to receive
stock issuances, the time or times when those issuances are to be made, the
number of shares to be issued to each Participant, the vesting schedule (if any)
applicable to the issued shares and the consideration to be paid by the
Participant for such shares.

C. The Plan Administrator shall have the absolute discretion either to
grant options in accordance with the Option Grant Program or to effect stock
issuances in accordance with the Stock Issuance Program.

V. STOCK SUBJECT TO THE PLAN

A. The stock issuable under the Plan shall be shares of authorized but
unissued or reacquired Common Stock. The maximum number of shares of Common
Stock which may be issued over the term of the Plan shall be 7,615,5001 shares.
Such share reserve is comprised of (i) the number of shares which remained
available for issuance, as of the Plan Effective Date, under the Predecessor
Plan, including shares subject to the outstanding options incorporated into this
plan and any other shares which would have been available for future option
grant under the Predecessor Plan (5,965,500 shares in the aggregate) and (ii) an
increase of 1,650,000 shares adopted by the Board and approved by the
stockholders in October 1999.

B. Shares of Common Stock subject to outstanding options (including any
options incorporated from the Predecessor Plan) shall be available for
subsequent issuance under

- ---------------------
(1) Reflects the stock split effected by the Corporation on October 26, 1999
through a 2-for-1 stock dividend.

<PAGE> 3

the Plan to the extent (i) the options expire or terminate for any reason prior
to exercise in full or (ii) the options are cancelled in accordance with the
cancellation-regrant provisions of Article Two. Unvested shares issued under the
Plan (including shares issued upon exercise of options incorporated from the
Predecessor Plan) and subsequently repurchased by the Corporation, at the option
exercise or direct issue price paid per share, pursuant to the Corporation's
repurchase rights under the Plan shall be added back to the number of shares of
Common Stock reserved for issuance under the Plan and shall accordingly be
available for reissuance through one or more subsequent option grants or direct
stock issuances under the Plan.

C. Should any change be made to the Common Stock by reason of any stock
split, stock dividend, recapitalization, combination of shares, exchange of
shares or other change affecting the outstanding Common Stock as a class without
the Corporation's receipt of consideration, appropriate adjustments shall be
made to (i) the maximum number and/or class of securities issuable under the
Plan and (ii) the number and/or class of securities and the exercise price per
share in effect under each outstanding option (including any option incorporated
from the Predecessor Plan) in order to prevent the dilution or enlargement of
benefits thereunder. The adjustments determined by the Plan Administrator shall
be final, binding and conclusive. In no event shall any such adjustments be made
in connection with the conversion of one or more outstanding shares of the
Corporation's preferred stock into shares of Common Stock.

3.
<PAGE> 4

ARTICLE TWO

OPTION GRANT PROGRAM

I. OPTION TERMS

Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.

A. EXERCISE PRICE.

1. The exercise price per share shall be fixed by the Plan
Administrator and may be less than, equal to or greater than the Fair Market
Value per share of Common Stock on the option grant date.

2. The exercise price shall become immediately due upon
exercise of the option and shall, subject to the provisions of Section I of
Article Four and the documents evidencing the option, be payable in cash or
check made payable to the Corporation. Should the Common Stock be registered
under Section 12 of the 1934 Act at the time the option is exercised, then the
exercise price may also be paid as follows:

(i) in shares of Common Stock held for the requisite period
necessary to avoid a charge to the Corporation's earnings for financial
reporting purposes and valued at Fair Market Value on the Exercise
Date, or

(ii) to the extent the option is exercised for vested
shares, through a special sale and remittance procedure pursuant to
which the Optionee shall concurrently provide irrevocable instructions
(a) to a Corporation-designated brokerage firm to effect the immediate
sale of the purchased shares and remit to the Corporation, out of the
sale proceeds available on the settlement date, sufficient funds to
cover the aggregate exercise price payable for the purchased shares
plus all applicable Federal, state and local income and employment
taxes required to be withheld by the Corporation by reason of such
exercise and (b) to the Corporation to deliver the certificates for the
purchased shares directly to such brokerage firm in order to complete
the sale.

Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.

B. EXERCISE AND TERM OF OPTIONS. Each option shall be exercisable at
such time or times, during such period and for such number of shares as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option grant. However, no option shall have a term in excess of ten (10)
years measured from the option grant date.

<PAGE> 5

C. EFFECT OF TERMINATION OF SERVICE.

1. Unless otherwise provided by the Plan Administrator at the
time an option is granted and recorded in the agreements evidencing the option,
the following provisions shall govern the exercise of any options held by the
Optionee at the time of his or her cessation of Service:

(i) Should the Optionee cease to remain in Service for any
reason other than death, Permanent Disability or Misconduct, then the
Optionee shall have a period of three (3) months following the date of
such cessation of Service during which to exercise each outstanding
option held by such Optionee. During such period, the option may not be
exercised in the aggregate for more than the number of vested shares for
which the option is exercisable on the date of the Optionee's cessation
of Service. Upon the expiration of the three (3)-month period, the option
shall terminate and cease to be outstanding for any vested shares for
which the option has not been exercised. However, the option shall,
immediately upon the Optionee's cessation of Service, terminate and
cease to be outstanding with respect to any and all option shares for
which the option is not otherwise at the time exercisable or in which the
Optionee is not otherwise at that time vested.

(ii) Should the Optionee's Service terminate by reason of
Optionee's death, then, as of the effective date of the Optionee's
termination of Service, the shares subject to the Optionee's outstanding
options which are unvested as of such date shall immediately accelerate
in full, and the Corporation's repurchase rights with respect to such
unvested shares shall immediately terminate, so that each such option
shall become exercisable for all of the option shares as fully vested
shares of Common Stock. The personal representative of the Optionee's
estate or the person or persons to whom the option is transferred
pursuant to the Optionee's will or the laws of inheritance shall have a
twelve (12)-month period following the date of the Optionee's death
during which to exercise such option. Upon the expiration of the twelve
(12)-month period, the option shall terminate and cease to be outstanding
for any option shares for which the option has not been exercised.

(iii) Should the Optionee's Service terminate by reason of
Permanent Disability, then, as of the effective date of the Optionee's
termination of Service, the shares subject to the Optionee's
outstanding options which are unvested as of such date shall immediately
accelerate in full, and the Corporation's repurchase rights with respect
to such unvested shares shall immediately terminate, so that each such
option shall become exercisable for all of the option shares as fully
vested shares of Common Stock. The Optionee shall have a period of twelve
(12) months following the date of such cessation of Service during which
to exercise such option. Upon the expiration of the twelve (12)-month
period, the option shall terminate and cease to be outstanding for any
option shares for which the option has not been exercised.

<PAGE> 6

(iv) Under no circumstances, however, shall any option be
exercisable after the specified expiration of the option term.

(v) Should the Optionee's Service be terminated for
Misconduct, then all outstanding options held by the Optionee shall
terminate immediately and cease to remain outstanding.

2. The Plan Administrator shall have the discretion, exercisable either
at the time an option is granted or at any time while the option remains
outstanding, to:

(i) extend the period of time for which the option is to
remain exercisable following the Optionee's cessation of Service or
death from the limited period otherwise in effect for that option to
such greater period of time as the Plan Administrator shall deem
appropriate, but in no event beyond the expiration of the option term,
and/or

(ii) permit the option to be exercised, during the
applicable post-Service exercise period, not only with respect to the
number of vested shares of Common Stock for which such option is
exercisable at the time of the Optionee's cessation of Service but also
with respect to one or more additional installments in which the Optionee
would have vested under the option had the Optionee continued in Service.

D. STOCKHOLDER RIGHTS. The holder of an option shall have no
stockholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become the
recordholder of the purchased shares.

E. REPURCHASE RIGHTS. The Plan Administrator shall have the discretion
to grant options which are exercisable for unvested shares of Common Stock.
Should the Optionee cease Service while holding such unvested shares, the
Corporation shall have the right to repurchase, at the exercise price paid per
share, any or all of those unvested shares. The terms upon which such repurchase
right shall be exercisable (including the period and procedure for exercise and
the appropriate vesting schedule for the purchased shares) shall be established
by the Plan Administrator and set forth in the document evidencing such
repurchase right.

F. FIRST REFUSAL RIGHTS. Until such time as the Common Stock is first
registered under Section 12 of the 1934 Act, the Corporation shall have the
right of first refusal with respect to any proposed disposition by the Optionee
(or any successor in interest) of any shares of Common Stock issued under the
Option Grant Program. Such right of first refusal shall be exercisable in
accordance with the terms established by the Plan Administrator and set forth in
the document evidencing such right.

G. LIMITED TRANSFERABILITY OF OPTIONS. During the lifetime of the
Optionee, Incentive Options shall be exercisable only by the Optionee and shall
not be assignable or transferable other than by will or by the laws of descent
and distribution following the Optionee's death. Non-Statutory Options shall be
subject to the same restrictions, except that a Non-Statutory Option may, to the
extent permitted by the Plan Administrator, be assigned in whole or in part
during the Optionee's lifetime (i) as a gift to one or more members of the

<PAGE> 7

Optionee's immediate family, to a trust in which Optionee and/or one or more
such family members hold more than fifty percent (50%) of the beneficial
interest or to an entity in which more than fifty percent (50%) of the voting
interests are owned by one or more such family members or (ii) pursuant to a
domestic relations order. The terms applicable to the assigned portion shall be
the same as those in effect for the option immediately prior to such assignment
and shall be set forth in such documents issued to the assignee as the Plan
Administrator may deem appropriate.

H. WITHHOLDING. The Corporation's obligation to deliver shares of
Common Stock upon the exercise of any options granted under the Plan shall be
subject to the satisfaction of all applicable Federal, state and local income
and employment tax withholding requirements.

II. INCENTIVE OPTIONS

The terms specified below shall be applicable to all Incentive Options.
Except as modified by the provisions of this Section II, all the provisions of
Articles One, Two and Four shall be applicable to Incentive Options. Options
which are specifically designated as Non-Statutory Options shall not be subject
to the terms of this Section II.

A. ELIGIBILITY. Incentive Options may only be granted to Employees.

B. EXERCISE PRICE. The exercise price per share shall not be less than
one hundred percent (100%) of the Fair Market Value per share of Common Stock on
the option grant date.

C. DOLLAR LIMITATION. The aggregate Fair Market Value of the shares of
Common Stock (determined as of the respective date or dates of grant) for which
one or more options granted to any Employee under the Plan (or any other option
plan of the Corporation or any Parent or Subsidiary) may for the first time
become exercisable as Incentive Options during any one (1) calendar year shall
not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the
Employee holds two (2) or more such options which become exercisable for the
first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.

D. 10% STOCKHOLDER. If any Employee to whom an Incentive Option is
granted is a 10% Stockholder, then the exercise price per share shall not be
less than one hundred ten percent (110%) of the Fair Market Value per share of
Common Stock on the option grant date and the option term shall not exceed five
(5) years measured from the option grant date.

III. CORPORATE TRANSACTION

A. The shares subject to each option outstanding under the Plan at the
time of a Corporate Transaction shall automatically vest in full so that each
such option shall, immediately prior to the effective date of the Corporate
Transaction, become fully exercisable for all of the shares of Common Stock at
the time subject to that option and may be exercised for any or all of those
shares as fully-vested shares of Common Stock. However, the shares subject to an
outstanding option shall NOT vest on such an accelerated basis if and to the
extent: (i) such

<PAGE> 8

option is assumed by the successor corporation (or parent thereof) in the
Corporate Transaction and the Corporation's repurchase rights with respect to
the unvested option shares are concurrently assigned to such successor
corporation (or parent thereof) or (ii) such option is to be replaced with a
cash incentive program of the successor corporation which preserves the spread
existing on the unvested option shares at the time of the Corporate Transaction
and provides for subsequent payout in accordance with the same vesting schedule
applicable to those unvested option shares or (iii) the acceleration of such
option is subject to other limitations imposed by the Plan Administrator at the
time of the option grant.

B. All outstanding repurchase rights shall also terminate
automatically, and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, in the event of any Corporate Transaction,
except to the extent: (i) those repurchase rights are assigned to the successor
corporation (or parent thereof) in connection with such Corporate Transaction or
(ii) such accelerated vesting is precluded by other limitations imposed by the
Plan Administrator at the time the repurchase right is issued.

C. Immediately following the consummation of the Corporate Transaction,
all outstanding options shall terminate and cease to be outstanding, except to
the extent assumed by the successor corporation (or parent thereof).

D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction, had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to (i) the number and class of
securities available for issuance under the Plan following the consummation of
such Corporate Transaction and (ii) the exercise price payable per share under
each outstanding option, provided the aggregate exercise price payable for such
securities shall remain the same.

E. The Plan Administrator shall have the discretion, exercisable either
at the time the option is granted or at any time while the option remains
outstanding, to provide for the automatic acceleration (in whole or in part) of
one or more outstanding options (and the immediate termination of the
Corporation's repurchase rights with respect to the shares subject to those
options) upon the occurrence of a Corporate Transaction, whether or not those
options are to be assumed in the Corporate Transaction.

F. The Plan Administrator shall also have full power and authority,
exercisable either at the time the option is granted or at any time while the
option remains outstanding, to structure such option so that the shares subject
to that option will automatically vest on an accelerated basis should the
Optionee's Service terminate by reason of an Involuntary Termination within a
designated period (not to exceed eighteen (18) months) following the effective
date of any Corporate Transaction in which the option is assumed and the
repurchase rights applicable to those shares do not otherwise terminate. Any
option so accelerated shall remain exercisable for the fully-vested option
shares until the earlier of (i) the expiration of the option term or (ii) the
expiration of the one (1)-year period measured from the effective date of the
Involuntary Termination. In addition, the Plan Administrator may provide that
one or more of the Corporation's outstanding repurchase rights with respect to
shares held by the Optionee at

8.
<PAGE> 9

the time of such Involuntary Termination shall immediately terminate on an
accelerated basis, and the shares subject to those terminated rights shall
accordingly vest at that time.

G. The portion of any Incentive Option accelerated in connection with a
Corporate Transaction shall remain exercisable as an Incentive Option only to
the extent the applicable One Hundred Thousand Dollar limitation is not
exceeded. To the extent such dollar limitation is exceeded, the accelerated
portion of such option shall be exercisable as a Non-Statutory Option under the
Federal tax laws.

H. The grant of options under the Plan shall in no way affect the right
of the Corporation to adjust, reclassify, reorganize or otherwise change its
capital or business structure or to merge, consolidate, dissolve, liquidate or
sell or transfer all or any part of its business or assets.

IV. CANCELLATION AND REGRANT OF OPTIONS

The Plan Administrator shall have the authority to effect, at any time
and from time to time, with the consent of the affected option holders, the
cancellation of any or all outstanding options under the Option Grant Program
(including options incorporated from the Predecessor Plan) and to grant in
substitution new options covering the same or different number of shares of
Common Stock but with an exercise price per share based on the Fair Market Value
per share of Common Stock on the new grant date.

<PAGE> 10

ARTICLE THREE

STOCK ISSUANCE PROGRAM

I. STOCK ISSUANCE TERMS

Shares of Common Stock may be issued under the Stock Issuance Program
through direct and immediate issuances without any intervening option grants.
Each such stock issuance shall be evidenced by a Stock Issuance Agreement which
complies with the terms specified below.

A. PURCHASE PRICE.

1. The purchase price per share shall be fixed by the Plan
Administrator and may be less than, equal to or greater than the Fair Market
Value per share of Common Stock on the issue date.

2. Subject to the provisions of Section I of Article Four,
shares of Common Stock may be issued under the Stock Issuance Program for any of
the following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:

(i) cash or check made payable to the Corporation, or

(ii) past services rendered to the Corporation (or
any Parent or Subsidiary).

B. VESTING PROVISIONS.

1. Shares of Common Stock issued under the Stock Issuance
Program may, in the discretion of the Plan Administrator, be fully and
immediately vested upon issuance or may vest in one or more installments over
the Participant's period of Service or upon attainment of specified performance
objectives.

2. Any new, substituted or additional securities or other
property (including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to the Participant's
unvested shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration shall be issued subject to (i) the same vesting
requirements applicable to the Participant's unvested shares of Common Stock and
(ii) such escrow arrangements as the Plan Administrator shall deem appropriate.

3. The Participant shall have full stockholder rights with
respect to any shares of Common Stock issued to the Participant under the Stock
Issuance Program, whether or not the Participant's interest in those shares is
vested. Accordingly, the Participant shall have the right to vote such shares
and to receive any regular cash dividends paid on such shares.

10.
<PAGE> 11

4. Should the Participant cease to remain in Service while
holding one or more unvested shares of Common Stock issued under the Stock
Issuance Program or should the performance objectives not be attained with
respect to one or more such unvested shares of Common Stock, then those shares
shall be immediately surrendered to the Corporation for cancellation, and the
Participant shall have no further stockholder rights with respect to those
shares. To the extent the surrendered shares were previously issued to the
Participant for consideration paid in cash or cash equivalent (including the
Participant's purchase-money indebtedness), the Corporation shall repay to the
Participant the cash consideration paid for the surrendered shares and shall
cancel the unpaid principal balance of any outstanding purchase-money note of
the Participant attributable to the surrendered shares.

5. The Plan Administrator may in its discretion waive the
surrender and cancellation of one or more unvested shares of Common Stock (or
other assets attributable thereto) which would otherwise occur upon the
non-completion of the vesting schedule applicable to such shares. Such waiver
shall result in the immediate vesting of the Participant's interest in the
shares of Common Stock as to which the waiver applies. Such waiver may be
effected at any time, whether before or after the Participant's cessation of
Service or the attainment or non-attainment of the applicable performance
objectives.

C. FIRST REFUSAL RIGHTS. Until such time as the Common Stock is first
registered under Section 12 of the 1934 Act, the Corporation shall have the
right of first refusal with respect to any proposed disposition by the
Participant (or any successor in interest) of any shares of Common Stock issued
under the Stock Issuance Program. Such right of first refusal shall be
exercisable in accordance with the terms established by the Plan Administrator
and set forth in the document evidencing such right.

II. CORPORATE TRANSACTION

A. All of the outstanding repurchase rights under the Stock Issuance
Program shall terminate automatically, and all the shares of Common Stock
subject to those terminated rights shall immediately vest in full, in the event
of any Corporate Transaction, except to the extent: (i) those repurchase rights
are assigned to the successor corporation (or parent thereof) in connection with
such Corporate Transaction or (ii) such accelerated vesting is precluded by
other limitations imposed by the Plan Administrator at the time the repurchase
right is issued.

B. The Plan Administrator shall have the discretionary authority,
exercisable either at the time the unvested shares are issued or any time while
the Corporation's repurchase rights with respect to those shares remain
outstanding, to provide that those rights shall automatically terminate on an
accelerated basis, and the shares of Common Stock subject to those terminated
rights shall immediately vest, in the event the Participant's Service should
subsequently terminate by reason of an Involuntary Termination within a
designated period (not to exceed eighteen (18) months) following the effective
date of any Corporate Transaction in which those repurchase rights are assigned
to the successor corporation (or parent thereof).

11.

<PAGE> 12

III. SHARE ESCROW/LEGENDS

Unvested shares may, in the Plan Administrator's discretion, be held in
escrow by the Corporation until the Participant's interest in such shares vests
or may be issued directly to the Participant with restrictive legends on the
certificates evidencing those unvested shares.

12.
<PAGE> 13

ARTICLE FOUR

MISCELLANEOUS

I. FINANCING

The Plan Administrator may permit any Optionee (including the holder of
an option granted under the Predecessor Plan) or Participant to pay the option
exercise price under the Option Grant Program or the purchase price for shares
issued under the Stock Issuance program by delivering a full recourse, interest
bearing promissory note payable in one or more installments and secured by the
purchased shares. The terms of any such promissory note (including the interest
rate and the terms of repayment) shall be established by the Plan Administrator
in its sole discretion. In no event shall the maximum credit available to the
Optionee or Participant exceed the sum of (i) the aggregate option exercise
price or purchase price payable for the purchased shares plus (ii) any Federal,
state and local income and employment tax liability incurred by the Optionee or
the Participant in connection with the option exercise or share purchase.

II. EFFECTIVE DATE AND TERM OF THE PLAN

A. The Plan shall become effective when adopted by the Board, but no
option granted under the Plan may be exercised, and no shares shall be issued
under the Plan, until the Plan is approved by the Corporation's stockholders. If
such stockholder approval is not obtained within twelve (12) months after the
date of the Board's adoption of the Plan, then all options previously granted
under the Plan shall terminate and cease to be outstanding, and no further
options shall be granted and no shares shall be issued under the Plan. Subject
to such limitation, the Plan Administrator may grant options and issue shares
under the Plan at any time after the effective date of the Plan and before the
date fixed herein for termination of the Plan.

B. The Plan shall serve as the successor to the Predecessor Plan, and
no further option grants or other stock awards shall be made under the
Predecessor Plan after the Plan Effective Date. All options outstanding under
the Predecessor Plan on the Plan Effective Date shall be incorporated into the
Plan at that time and shall be treated as outstanding options under the Plan.
However, each outstanding option so incorporated shall continue to be governed
solely by the terms of the documents evidencing such option, and no provision of
the Plan shall be deemed to affect or otherwise modify the rights or obligations
of the holders of such incorporated options with respect to their acquisition of
shares of Common Stock.

C. One or more provisions of the Plan, including (without limitation)
the option/vesting acceleration provisions of Article Two relating to Corporate
Transactions, may, in the Plan Administrator's discretion, be extended to one or
more options incorporated from the Predecessor Plan which do not otherwise
contain such provisions.

D. The Plan shall terminate upon the earliest of (i) the expiration of
the ten (10)-year period measured from the Plan Effective Date, (ii) the date on
which all shares available for issuance under the Plan shall have been issued as
fully-vested shares or (iii) the termination of all outstanding options in
connection with an Corporate Transaction. All options

13.
<PAGE> 14

and unvested stock issuances outstanding at the time of a clause (i) termination
event shall continue to have full force and effect in accordance with the
provisions of the documents evidencing such options or issuances.

III. AMENDMENT OF THE PLAN

A. The Board shall have complete and exclusive power and authority to
amend or modify the Plan in any or all respects. However, no such amendment or
modification shall adversely affect any rights and obligations with respect to
options or unvested stock issuances at the time outstanding under the Plan,
unless the Optionee or the Participant consents to such amendment or
modification. In addition, certain amendments may require stockholder approval
pursuant to applicable laws or regulations.

B. Options to purchase shares of Common Stock may be granted under the
Option Grant Program and shares of Common Stock may be issued under the Stock
Issuance Program which are in each instance in excess of the number of shares
then available for issuance under the Plan, provided any excess shares actually
issued under those programs shall be held in escrow until there is obtained
stockholder approval of an amendment sufficiently increasing the number of
shares of Common Stock available for issuance under the Plan. If such
stockholder approval is not obtained within twelve (12) months after the date
the first such excess grants or issuances are made, then (i) any unexercised
options granted on the basis of such excess shares shall terminate and cease to
be outstanding and (ii) the Corporation shall promptly refund to the Optionees
and the Participants the exercise or purchase price paid for any excess shares
issued under the Plan and held in escrow, together with interest (at the
applicable Short-Term Federal Rate) for the period the shares were held in
escrow, and such shares shall thereupon be automatically cancelled and cease to
be outstanding.

IV. USE OF PROCEEDS

Any cash proceeds received by the Corporation from the sale of shares
of Common Stock under the Plan shall be used for general corporate purposes.

V. WITHHOLDING

The Corporation's obligation to deliver shares of Common Stock upon the
exercise of any options or upon the issuance or vesting of any shares issued
under the Plan shall be subject to the satisfaction of all applicable Federal,
state and local income and employment tax withholding requirements.

VI. REGULATORY APPROVALS

The implementation of the Plan, the granting of any option under the
Plan and the issuance of any shares of Common Stock (i) upon the exercise of any
option or (ii) under the Stock Issuance Program shall be subject to the
Corporation's procurement of all approvals and permits required by regulatory
authorities having jurisdiction over the Plan, the options granted under it and
the shares of Common Stock issued pursuant to it.

14.
<PAGE> 15

VII. NO EMPLOYMENT OR SERVICE RIGHTS

Nothing in the Plan shall confer upon the Optionee or the Participant
any right to continue in Service for any period of specific duration or
interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by each,
to terminate such person's Service at any time for any reason, with or without
cause.

15.

<PAGE> 16

APPENDIX

The following definitions shall be in effect under the Plan:

A. BOARD shall mean the Corporation's Board of Directors.

B. CODE shall mean the Internal Revenue Code of 1986, as amended.

C. COMMITTEE shall mean a committee of one (1) or more Board members
appointed by the Board to exercise one or more administrative functions under
the Plan.

D. COMMON STOCK shall mean the Corporation's common stock.

E. CORPORATE TRANSACTION shall mean either of the following
stockholder-approved transactions to which the Corporation is a party:

(i) a merger or consolidation in which securities possessing
more than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or persons
different from the persons holding those securities immediately prior to
such transaction, or

(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation or
dissolution of the Corporation.

F. CORPORATION shall mean BlueStar Properties, Inc., a Delaware
corporation, and any successor corporation to all or substantially all of the
assets or voting stock of BlueStar Properties, Inc. which shall by appropriate
action adopt the Plan.

G. EMPLOYEE shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.

H. EXERCISE DATE shall mean the date on which the Corporation shall
have received written notice of the option exercise.

I. FAIR MARKET VALUE per share of Common Stock on any relevant date
shall be determined in accordance with the following provisions:

(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question, as such price is
reported by the National Association of Securities Dealers on the Nasdaq
National Market. If there is no closing selling price for the Common Stock
on the date in question, then the Fair Market Value shall be the closing
selling price on the last preceding date for which such quotation exists.

A-1.
<PAGE> 17

(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price
per share of Common Stock on the date in question on the Stock Exchange
determined by the Plan Administrator to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling price for
the Common Stock on the date in question, then the Fair Market Value shall
be the closing selling price on the last preceding date for which such
quotation exists.

(iii) If the Common Stock is at the time neither listed on any
Stock Exchange nor traded on the Nasdaq National Market, then the Fair
Market Value shall be determined by the Plan Administrator after taking into
account such factors as the Plan Administrator shall deem appropriate.

J. INCENTIVE OPTION shall mean an option which satisfies the
requirements of Code Section 422.

K. INVOLUNTARY TERMINATION shall mean the termination of the Service of
any individual which occurs by reason of:

(i) such individual's involuntary dismissal or discharge by
the Corporation for reasons other than Misconduct, or

(ii) such individual's voluntary resignation following (A) a
change in his or her position with the Corporation which materially reduces
his or her duties and responsibilities or the level of management to which
he or she reports, (B) a reduction in his or her level of compensation
(including base salary, fringe benefits and target bonuses under any
corporate-performance based bonus or incentive programs) by more than
fifteen percent (15%) or (C) a relocation of such individual's place of
employment by more than fifty (50) miles, provided and only if such change,
reduction or relocation is effected without the individual's consent.

L. MISCONDUCT shall mean the commission of any act of fraud,
embezzlement or dishonesty by the Optionee or Participant, any unauthorized use
or disclosure by such person of confidential information or trade secrets of the
Corporation (or any Parent or Subsidiary), or any other intentional misconduct
by such person adversely affecting the business or affairs of the Corporation
(or any Parent or Subsidiary) in a material manner. The foregoing definition
shall not be deemed to be inclusive of all the acts or omissions which the
Corporation (or any Parent or Subsidiary) may consider as grounds for the
dismissal or discharge of any Optionee, Participant or other person in the
Service of the Corporation (or any Parent or Subsidiary).

M. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended.

N. NON-STATUTORY OPTION shall mean an option not intended to satisfy
the requirements of Code Section 422.

A-2.
<PAGE> 18

O. OPTION GRANT PROGRAM shall mean the option grant program in effect
under the Plan.

P. OPTIONEE shall mean any person to whom an option is granted under
the Option Grant Program.

Q. PARENT shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.

R. PARTICIPANT shall mean any person who is issued shares of Common
Stock under the Stock Issuance Program.

S. PERMANENT DISABILITY shall mean the inability of the Optionee or the
Participant to engage in any substantial gainful activity by reason of any
medically determinable physical or mental impairment which is expected to result
in such person's death or to continue for a period of twelve (12) consecutive
months or more.

T. PLAN shall mean the Corporation's 1999 Stock Option/Stock Issuance
Plan, as set forth in this document.

U. PLAN ADMINISTRATOR shall mean either the Board or the Committee
acting in its capacity as administrator of the Plan.

V. PLAN EFFECTIVE DATE shall mean October 26, 1999, the date on which
the Plan was adopted by the Board.

W. PREDECESSOR PLAN shall mean the Corporation's 1999 Incentive Stock
Option Plan.

X. SERVICE shall mean the provision of services to the Corporation (or
any Parent or Subsidiary) by a person in the capacity of an Employee, a
non-employee member of the board of directors or a consultant or independent
advisor, except to the extent otherwise specifically provided in the documents
evidencing the option grant or stock issuance.

Y. STOCK EXCHANGE shall mean either the American Stock Exchange or the
New York Stock Exchange.

Z. STOCK ISSUANCE AGREEMENT shall mean the agreement entered into by
the Corporation and the Participant at the time of issuance of shares of Common
Stock under the Stock Issuance Program.

AA. STOCK ISSUANCE PROGRAM shall mean the stock issuance program in
effect under the Plan.

A-3.

<PAGE> 19

BB. SUBSIDIARY shall mean any corporation (other than the Corporation)
in an unbroken chain of corporations beginning with the Corporation, provided
each corporation (other than the last corporation) in the unbroken chain owns,
at the time of the determination, stock possessing fifty percent (50%) or more
of the total combined voting power of all classes of stock in one of the other
corporations in such chain.

CC. 10% STOCKHOLDER shall mean the owner of stock (as determined under
Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).

A-4.
<PAGE> 20

BLUESTAR PROPERTIES, INC.
STOCK PURCHASE AGREEMENT

AGREEMENT made as of this __ day of _________, 20__, by and between
BlueStar Properties, Inc., a ________________ corporation and
_____________________________, Optionee under the Corporation's 1999 Stock
Option/Stock Issuance Plan.

All capitalized terms in this Agreement shall have the meaning assigned
to them in this Agreement or in the attached Appendix.

A. EXERCISE OF OPTION

1. EXERCISE. Optionee hereby purchases ___________ shares of Common
Stock (the "Purchased Shares") pursuant to that certain option (the "Option")
granted Optionee on ____________________, 199__ (the "Grant Date") to purchase
up to _______________ shares of Common Stock under the Plan at the exercise
price of $______ per share (the "Exercise Price").

2. PAYMENT. Concurrently with the delivery of this Agreement to the
Corporation, Optionee shall pay the Exercise Price for the Purchased Shares in
accordance with the provisions of the Option Agreement and shall deliver
whatever additional documents may be required by the Option Agreement as a
condition for exercise.

3. STOCKHOLDER RIGHTS. Until such time as the Corporation exercises the
First Refusal Right, Optionee (or any successor in interest) shall have all the
rights of a stockholder (including voting, dividend and liquidation rights) with
respect to the Purchased Shares, subject, however, to the transfer restrictions
of Articles B and C.

B. SECURITIES LAW COMPLIANCE

1. RESTRICTED SECURITIES. The Purchased Shares have not been registered
under the 1933 Act and are being issued to Optionee in reliance upon the
exemption from such registration provided by SEC Rule 701 for stock issuances
under compensatory benefit plans such as the Plan. Optionee hereby confirms that
Optionee has been informed that the Purchased Shares are restricted securities
under the 1933 Act and may not be resold or transferred unless the Purchased
Shares are first registered under the Federal securities laws or unless an
exemption from such registration is available. Accordingly, Optionee hereby
acknowledges that Optionee is prepared to hold the Purchased Shares for an
indefinite period and that Optionee is aware that SEC Rule 144 issued under the
1933 Act which exempts certain resales of unrestricted securities is not
presently available to exempt the resale of the Purchased Shares from the
registration requirements of the 1933 Act.

<PAGE> 21

2. RESTRICTIONS ON DISPOSITION OF PURCHASED SHARES. Optionee shall make
no disposition of the Purchased Shares (other than a Permitted Transfer) unless
and until there is compliance with all of the following requirements:

(i) Optionee shall have provided the Corporation with a
written summary of the terms and conditions of the proposed disposition.

(ii) Optionee shall have complied with all requirements of
this Agreement applicable to the disposition of the Purchased Shares.

(iii) Optionee shall have provided the Corporation with
written assurances, in form and substance satisfactory to the Corporation,
that (a) the proposed disposition does not require registration of the
Purchased Shares under the 1933 Act or (b) all appropriate action necessary
for compliance with the registration requirements of the 1933 Act or any
exemption from registration available under the 1933 Act (including Rule
144) has been taken.

The Corporation shall not be required (i) to transfer on its books any
Purchased Shares which have been sold or transferred in violation of the
provisions of this Agreement or (ii) to treat as the owner of the Purchased
Shares, or otherwise to accord voting, dividend or liquidation rights to, any
transferee to whom the Purchased Shares have been transferred in contravention
of this Agreement.

3. RESTRICTIVE LEGENDS. The stock certificates for the Purchased Shares
shall be endorsed with the following restrictive legends:

(i) "The shares represented by this certificate have not been
registered under the Securities Act of 1933. The shares may not be sold
or offered for sale in the absence of (a) an effective registration
statement for the shares under such Act, (b) a `no action' letter of the
Securities and Exchange Commission with respect to such sale or offer or (c)
satisfactory assurances to the Corporation that registration under such Act
is not required with respect to such sale or offer."

(ii) "The shares represented by this certificate are subject
to certain transfer restrictions and accordingly may not be sold, assigned,
transferred, encumbered, or in any manner disposed of except in conformity
with the terms of a written agreement dated ____________, 199__ between
the Corporation and the registered holder of the shares (or the predecessor
in interest to the shares). A copy of such agreement is maintained at the
Corporation's principal corporate offices."

C. TRANSFER RESTRICTIONS

1. RESTRICTION ON TRANSFER. Except for any Permitted Transfer, Optionee
shall not transfer, assign, encumber or otherwise dispose of any of the
Purchased Shares in contravention of the First Refusal Right or the Market
Stand-Off.

<PAGE> 22

2. TRANSFEREE OBLIGATIONS. Each person (other than the Corporation) to
whom the Purchased Shares are transferred by means of a Permitted Transfer must,
as a condition precedent to the validity of such transfer, acknowledge in
writing to the Corporation that such person is bound by the provisions of this
Agreement and that the transferred shares are subject to (i) the First Refusal
Right and (ii) the Market Stand-Off, to the same extent such shares would be so
subject if retained by Optionee.

3. MARKET STAND-OFF.

(a) In connection with any underwritten public offering by the
Corporation of its equity securities pursuant to an effective registration
statement filed under the 1933 Act, including the Corporation's initial public
offering, Owner shall not sell, make any short sale of, loan, hypothecate,
pledge, grant any option for the purchase of, or otherwise dispose or transfer
for value or otherwise agree to engage in any of the foregoing transactions with
respect to, any Purchased Shares without the prior written consent of the
Corporation or its underwriters. Such restriction (the "Market Stand-Off") shall
be in effect for such period of time from and after the effective date of the
final prospectus for the offering as may be requested by the Corporation or such
underwriters. In no event, however, shall such period exceed one hundred eighty
(180) days and the Market Stand-Off shall in all events terminate two (2) years
after the effective date of the Corporation's initial public offering.

(b) Owner shall be subject to the Market Stand-Off provided
and only if the officers and directors of the Corporation are also subject to
similar restrictions.

(c) Any new, substituted or additional securities which are by
reason of any Recapitalization or Reorganization distributed with respect to the
Purchased Shares shall be immediately subject to the Market Stand-Off, to the
same extent the Purchased Shares are at such time covered by such provisions.

(d) In order to enforce the Market Stand-Off, the Corporation
may impose stop-transfer instructions with respect to the Purchased Shares until
the end of the applicable stand-off period.

D. RIGHT OF FIRST REFUSAL

1. GRANT. The Corporation is hereby granted the right of first refusal
(the "First Refusal Right"), exercisable in connection with any proposed
transfer of the Purchased Shares. For purposes of this Article D, the term
"transfer" shall include any sale, assignment, pledge, encumbrance or other
disposition of the Purchased Shares intended to be made by Owner, but shall not
include any Permitted Transfer.

2. NOTICE OF INTENDED DISPOSITION. In the event any Owner of Purchased
Shares desires to accept a bona fide third-party offer for the transfer of any
or all of such shares (the Purchased Shares subject to such offer to be
hereinafter referred to as the "Target Shares"), Owner shall promptly (i)
deliver to the Corporation written notice (the "Disposition Notice") of the
terms of the offer, including the purchase price and the identity of the
third-party offeror, and (ii) provide satisfactory proof that the disposition of
the Target Shares to such third-party offeror would not be in contravention of
the provisions set forth in Articles B and C.

<PAGE> 23

3. EXERCISE OF THE FIRST REFUSAL RIGHT. The Corporation shall, for a
period of forty-five (45) days following receipt of the Disposition Notice, have
the right to repurchase any or all of the Target Shares subject to the
Disposition Notice upon the same terms as those specified therein or upon such
other terms (not materially different from those specified in the Disposition
Notice) to which Owner consents. Such right shall be exercisable by delivery of
written notice (the "Exercise Notice") to Owner prior to the expiration of the
forty-five (45)-day exercise period. If such right is exercised with respect to
all the Target Shares, then the Corporation shall effect the repurchase of such
shares, including payment of the purchase price, not more than fifteen (15)
business days after delivery of the Exercise Notice; and at such time the
certificates representing the Target Shares shall be delivered to the
Corporation.

Should the purchase price specified in the Disposition Notice be
payable in property other than cash or evidences of indebtedness, the
Corporation shall have the right to pay the purchase price in the form of cash
equal in amount to the value of such property. If Owner and the Corporation
cannot agree on such cash value within thirty (30) days after the Corporation's
receipt of the Disposition Notice, the valuation shall be made by an appraiser
of recognized standing selected by Owner and the Corporation or, if they cannot
agree on an appraiser within forty-five (45) days after the Corporation's
receipt of the Disposition Notice, each shall select an appraiser of recognized
standing and the two (2) appraisers shall designate a third appraiser of
recognized standing, whose appraisal shall be determinative of such value. The
cost of such appraisal shall be shared equally by Owner and the Corporation. The
closing shall then be held on the later of (i) the fifteenth (15th) business day
following delivery of the Exercise Notice or (ii) the fifteenth (15th) business
day after such valuation shall have been made.

4. NON-EXERCISE OF THE FIRST REFUSAL RIGHT. In the event the Exercise
Notice is not given to Owner prior to the expiration of the forty-five (45)-day
exercise period, Owner shall have a period of thirty (30) days thereafter in
which to sell or otherwise dispose of the Target Shares to the third-party
offeror identified in the Disposition Notice upon terms (including the purchase
price) no more favorable to such third-party offeror than those specified in the
Disposition Notice; provided, however, that any such sale or disposition must
not be effected in contravention of the provisions of Article B and Paragraph
C.3. The third-party offeror shall acquire the Target Shares free and clear of
the First Refusal Right, but the acquired shares shall remain subject to Article
B and Paragraph C.3. In the event Owner does not effect such sale or disposition
of the Target Shares within the specified thirty (30)-day period, the First
Refusal Right shall continue to be applicable to any subsequent disposition of
the Target Shares by Owner until such right lapses.

5. PARTIAL EXERCISE OF THE FIRST REFUSAL RIGHT. In the event the
Corporation makes a timely exercise of the First Refusal Right with respect to a
portion, but not all, of the Target Shares specified in the Disposition Notice,
Owner shall have the option, exercisable by written notice to the Corporation
delivered within fifteen (15) business days after Owner's receipt of the
Exercise Notice, to effect the sale of the Target Shares pursuant to either of
the following alternatives:

(i) sale or other disposition of all the Target Shares to the
third-party offeror identified in the Disposition Notice, but in full
compliance with

4
<PAGE> 24

the requirements of Paragraph D.4, as if the Corporation did not exercise
the First Refusal Right; or

(ii) sale to the Corporation of the portion of the Target
Shares which the Corporation has elected to purchase, such sale to be
effected in substantial conformity with the provisions of Paragraph D.3. The
First Refusal Right shall continue to be applicable to any subsequent
disposition of the remaining Target Shares until such right lapses.

Failure of Owner to deliver timely notification to the Corporation
shall be deemed to be an election by Owner to sell the Target Shares pursuant to
alternative (i) above.

6. RECAPITALIZATION/REORGANIZATION.

(a) Any new, substituted or additional securities or other property
which is by reason of any Recapitalization distributed with respect to the
Purchased Shares shall be immediately subject to the First Refusal Right, but
only to the extent the Purchased Shares are at the time covered by such right.

(b) In the event of a Reorganization, the First Refusal Right shall
remain in full force and effect and shall apply to the new capital stock or
other property received in exchange for the Purchased Shares in consummation of
the Reorganization, but only to the extent the Purchased Shares are at the time
covered by such right.

7. LAPSE. The First Refusal Right shall lapse upon the earliest to
occur of (i) the first date on which shares of the Common Stock are held of
record by more than five hundred (500) persons, (ii) a determination is made by
the Board that a public market exists for the outstanding shares of Common Stock
or (iii) a firm commitment underwritten public offering, pursuant to an
effective registration statement under the 1933 Act, covering the offer and sale
of the Common Stock in the aggregate amount of at least ten million dollars
($10,000,000). However, the Market Stand-Off shall continue to remain in full
force and effect following the lapse of the First Refusal Right.

E. GENERAL PROVISIONS

1. ASSIGNMENT. The Corporation may assign the First Refusal Right to
any person or entity selected by the Board, including (without limitation) one
or more stockholders of the Corporation.

2. NO EMPLOYMENT OR SERVICE CONTRACT. Nothing in this Agreement or in
the Plan shall confer upon Optionee any right to continue in Service for any
period of specific duration or interfere with or otherwise restrict in any way
the rights of the Corporation (or any Parent or Subsidiary employing or
retaining Optionee) or of Optionee, which rights are hereby expressly reserved
by each, to terminate Optionee's Service at any time for any reason, with or
without cause.

3. NOTICES. Any notice required to be given under this Agreement shall
be in writing and shall be deemed effective upon personal delivery or upon
deposit in the U.S. mail,

5
<PAGE> 25

registered or certified, postage prepaid and properly addressed to the party
entitled to such notice at the address indicated below such party's signature
line on this Agreement or at such other address as such party may designate by
ten (10) days advance written notice under this paragraph to all other parties
to this Agreement.

4. NO WAIVER. The failure of the Corporation in any instance to
exercise the First Refusal Right shall not constitute a waiver of any other
repurchase rights and/or rights of first refusal that may subsequently arise
under the provisions of this Agreement or any other agreement between the
Corporation and Optionee. No waiver of any breach or condition of this Agreement
shall be deemed to be a waiver of any other or subsequent breach or condition,
whether of like or different nature.

5. CANCELLATION OF SHARES. If the Corporation shall make available, at
the time and place and in the amount and form provided in this Agreement, the
consideration for the Purchased Shares to be repurchased in accordance with the
provisions of this Agreement, then from and after such time, the person from
whom such shares are to be repurchased shall no longer have any rights as a
holder of such shares (other than the right to receive payment of such
consideration in accordance with this Agreement). Such shares shall be deemed
purchased in accordance with the applicable provisions hereof, and the
Corporation shall be deemed the owner and holder of such shares, whether or not
the certificates therefor have been delivered as required by this Agreement.

6. OPTIONEE UNDERTAKING. Optionee hereby agrees to take whatever
additional action and execute whatever additional documents the Corporation may
deem necessary or advisable in order to carry out or effect one or more of the
obligations or restrictions imposed on either Optionee or the Purchased Shares
pursuant to the provisions of this Agreement.

7. GOVERNING LAW. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Tennessee without resort to that
State's conflict-of-laws rules.

8. SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall inure
to the benefit of, and be binding upon, the Corporation and its successors and
assigns and upon Optionee, Optionee's permitted assigns and the legal
representatives, heirs and legatees of Optionee's estate, whether or not any
such person shall have become a party to this Agreement and have agreed in
writing to join herein and be bound by the terms hereof.

<PAGE> 26

IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year first indicated above.

BLUESTAR PROPERTIES, INC.

By:
----------------------------------
Title:
-------------------------------
Address:
-----------------------------

-------------------------------------
OPTIONEE

Address:
-----------------------------

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

7
<PAGE> 27

APPENDIX

The following definitions shall be in effect under the Agreement:

A. AGREEMENT shall mean this Stock Purchase Agreement.

B. BOARD shall mean the Corporation's Board of Directors.

C. COMMON STOCK shall mean the Corporation's common stock.

D. CORPORATION shall mean BlueStar Properties, Inc., a Delaware
corporation.

E. DISPOSITION NOTICE shall have the meaning assigned to such term in
Paragraph D.2.

F. EXERCISE NOTICE shall have the meaning assigned to such term in
Paragraph D.3.

G. EXERCISE PRICE shall have the meaning assigned to such term in
Paragraph A.1.

H. FAIR MARKET VALUE of a share of Common Stock on any relevant date,
prior to the initial public offering of the Common Stock, shall be determined by
the Plan Administrator after taking into account such factors as it shall deem
appropriate.

I. FIRST REFUSAL RIGHT shall mean the right granted to the Corporation
in accordance with Article D.

J. GRANT DATE shall have the meaning assigned to such term in Paragraph
A.1.

K. GRANT NOTICE shall mean the Notice of Grant of Stock Option pursuant
to which Optionee has been informed of the basic terms of the Option.

L. MARKET STAND-OFF shall mean the market stand-off restriction
specified in Paragraph C.3.

M. 1933 ACT shall mean the Securities Act of 1933, as amended.

N. OPTION shall have the meaning assigned to such term in Paragraph
A.1.

O. OPTION AGREEMENT shall mean all agreements and other documents
evidencing the Option.

P. OPTIONEE shall mean the person to whom the Option is granted under
the Plan.

Q. OWNER shall mean Optionee and all subsequent holders of the
Purchased Shares who derive their chain of ownership through a Permitted
Transfer from Optionee.

<PAGE> 28

R. PARENT shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.

S. PERMITTED TRANSFER shall mean (i) a gratuitous transfer of the
Purchased Shares, provided and only if Optionee obtains the Corporation's prior
written consent to such transfer, (ii) a transfer of title to the Purchased
Shares effected pursuant to Optionee's will or the laws of intestate succession
following Optionee's death or (iii) a transfer to the Corporation in pledge as
security for any purchase-money indebtedness incurred by Optionee in connection
with the acquisition of the Purchased Shares.

T. PLAN shall mean the Corporation's 1999 Stock Option/Stock Issuance
Plan.

U. PLAN ADMINISTRATOR shall mean either the Board or a committee of
Board members, to the extent the committee is at the time responsible for
administration of the Plan.

V. PURCHASED SHARES shall have the meaning assigned to such term in
Paragraph A.1.

W. RECAPITALIZATION shall mean any stock split, stock dividend,
recapitalization, combination of shares, exchange of shares or other change
affecting the Corporation's outstanding Common Stock as a class without the
Corporation's receipt of consideration.

X. REORGANIZATION shall mean any of the following transactions:

(i) a merger or consolidation in which the Corporation is not
the surviving entity,

(ii) a sale, transfer or other disposition of all or
substantially all of the Corporation's assets,

(iii) a reverse merger in which the Corporation is the
surviving entity but in which the Corporation's outstanding voting
securities are transferred in whole or in part to a person or persons
different from the persons holding those securities immediately prior
to the merger, or

(iv) any transaction effected primarily to change the state in
which the Corporation is incorporated or to create a holding company
structure.

Y. SEC shall mean the Securities and Exchange Commission.

Z. SERVICE shall mean Optionee's provision of services to the
Corporation (or any Parent or Subsidiary) in the capacity of an employee,
subject to the control and direction of the employer entity as to both the work
to be performed and the manner and method of performance, a non-employee member
of the board of directors or a consultant or independent advisor.

A-2.
<PAGE> 29

AA. SUBSIDIARY shall mean any corporation (other than the Corporation)
in an unbroken chain of corporations beginning with the Corporation, provided
each corporation (other than the last corporation) in the unbroken chain owns,
at the time of the determination, stock possessing fifty percent (50%) or more
of the total combined voting power of all classes of stock in one of the other
corporations in such chain.

BB. TARGET SHARES shall have the meaning assigned to such term in
Paragraph D.2.

A-3.

<PAGE> 30

BLUESTAR PROPERTIES, INC.
STOCK OPTION AGREEMENT

RECITALS

A. The Board has adopted the Plan for the purpose of retaining the
services of selected Employees, non-employee members of the Board or the board
of directors of any Parent or Subsidiary and consultants and other independent
advisors in the service of the Corporation (or any Parent or Subsidiary).

B. Optionee is to render valuable services to the Corporation (or a
Parent or Subsidiary), and this Agreement is executed pursuant to, and is
intended to carry out the purposes of, the Plan in connection with the
Corporation's grant of an option to Optionee.

C. All capitalized terms in this Agreement shall have the meaning
assigned to them in the attached Appendix.

NOW, THEREFORE, it is hereby agreed as follows:

1. GRANT OF OPTION. The Corporation hereby grants to Optionee, as of
the Grant Date, an option to purchase up to the number of Option Shares
specified in the Grant Notice. The Option Shares shall be purchasable from time
to time during the option term specified in Paragraph 2 at the Exercise Price.

2. OPTION TERM. This option shall have a term of ten (10) years
measured from the Grant Date and shall accordingly expire at the close of
business on the Expiration Date, unless sooner terminated in accordance with
Paragraph 5 or 6.

3. LIMITED TRANSFERABILITY. This option shall be neither
transferable nor assignable by Optionee other than by will or by the laws of
descent and distribution following Optionee's death and may be exercised, during
Optionee's lifetime, only by Optionee. However, if this option is designated a
Non-Statutory Option in the Grant Notice, then this option may be assigned in
whole or in part during Optionee's lifetime either as (i) as a gift to one or
more members of Optionee's Immediate Family, to a trust in which Optionee and/or
one or more such family members hold more than fifty percent (50%) of the
beneficial interest or an entity in which more than fifty percent (50%) of the
voting interests are owned by Optionee and/or one or more such family members,
or (ii) pursuant to a domestic relations order. The assigned portion shall be
exercisable only by the person or persons who acquire a proprietary interest in
the option pursuant to such assignment. The terms applicable to the assigned
portion shall be the same as those in effect for this option immediately prior
to such assignment and shall be set forth in such documents issued to the
assignee as the Plan Administrator may deem appropriate.

<PAGE> 31

4. EXERCISABILITY. This option shall become exercisable for the
Option Shares in one or more installments as specified in the Grant Notice. As
the option becomes exercisable for such installments, those installments shall
accumulate, and the option shall remain exercisable for the accumulated
installments until the Expiration Date or sooner termination of the option term
under Paragraph 5 or 6.

5. CESSATION OF SERVICE. The option term specified in Paragraph 2
shall terminate (and this option shall cease to be outstanding) prior to the
Expiration Date should any of the following provisions become applicable:

(i) Should Optionee cease to remain in Service for any reason,
other than death, Permanent Disability, Misconduct or an Involuntary
Termination pursuant to Paragraph 6, while this option is outstanding,
then the period for exercising this option shall be limited to a three
(3)-month period measured from the date of such cessation of Service but in
no event shall this option be exercisable at any time after the Expiration
Date. During such period, this option may not be exercised in the aggregate
for more than the number of Option Shares for which this option is, at the
time of Optionee's cessation of Service, exercisable in accordance with the
Exercise Schedule specified in the Grant Notice. Upon the expiration of
such three (3)-month exercise period or (if earlier) upon the Expiration
Date, this option shall terminate and cease to be outstanding for any
Option Shares for which the option has not been exercised. To the extent
this option is not exercisable for Option Shares, in accordance with the
Exercise Schedule specified in the Grant Notice, as of the date of
Optionee's cessation of Service pursuant to this Paragraph 5(i), then this
option shall immediately terminate as of such date and cease to be
outstanding with respect to such unexercisable Option Shares.

(ii) Should Optionee's Service cease by reason of his or her
death, then, as of the date of Optionee's cessation of Service, this
option shall immediately accelerate in full and become exercisable for all
of the Option Shares as fully vested shares of Common Stock. The personal
representative of Optionee's estate or the person or persons to whom the
option is transferred pursuant to Optionee's will or in accordance with
the laws of descent and distribution shall have the right to exercise this
option for all of such Option Shares. Such right shall lapse, and this
option shall cease to be outstanding, upon the earlier of (i) the
expiration of the twelve (12)-month period measured from the date of
Optionee's termination of Service or (ii) the Expiration Date.

(iii) Should Optionee cease Service by reason of Permanent
Disability while this option is outstanding, then, as of the effective
date of Optionee's termination of Service, this option shall immediately
accelerate in full and become exercisable for all of the Option Shares as
fully vested shares of Common Stock. The Optionee shall have a period of
twelve (12) months following the date of such cessation of Service during
which to exercise this option. Upon the expiration of the twelve (12)-month
period, the option shall terminate and cease to be outstanding for any
Option Shares for which the option

2.
<PAGE> 32

has not been exercised. In no event, however, shall this option be
exercisable at any time after the Expiration Date.

(iv) Should Optionee's Service be terminated for Misconduct,
then this option shall terminate immediately and cease to remain
outstanding.

(v) In the event of an Involuntary Termination of Optionee's
Service following a Corporate Transaction, the provisions of Paragraph 6
shall govern the period for which this option is to remain exercisable
following Optionee's cessation of Service and shall supersede any
provisions to the contrary in this Paragraph.

6. CORPORATE TRANSACTION.

(a) Immediately prior to the effective date of a Corporate
Transaction, the exercisability of this option shall automatically accelerate so
that this option shall become exercisable for all of the Option Shares as
fully-vested shares of Common Stock and may be exercised for any or all of those
Option Shares. No such accelerated exercisability of this option, however, shall
occur if and to the extent: (i) this option is, in connection with the Corporate
Transaction, either to be assumed by the successor corporation (or parent
thereof) in the Corporate Transaction or (ii) this option is to be replaced with
a cash incentive program of the successor corporation which preserves the spread
existing on the Option Shares for which this option is exercisable at the time
of the Corporate Transaction (the excess of the Fair Market Value of those
Option Shares over the Exercise Price payable for such shares) and provides for
subsequent payout in accordance with the Exercise Schedule.

(b) Immediately following the Corporate Transaction, this option
shall terminate and cease to be outstanding, except to the extent assumed by the
successor corporation (or parent thereof) in connection with the Corporate
Transaction.

(c) If this option is assumed in connection with a Corporate
Transaction, then this option shall be appropriately adjusted, immediately after
such Corporate Transaction, to apply to the number and class of securities which
would have been issuable to Optionee in consummation of such Corporate
Transaction had the option been exercised immediately prior to such Corporate
Transaction, and appropriate adjustments shall also be made to the Exercise
Price, provided the aggregate Exercise Price shall remain the same.

(d) Should there occur an Involuntary Termination of Optionee's
Service within twelve (12) months following a Corporate Transaction in which
this option is assumed, this option shall automatically accelerate as of the
date of Optionee's Involuntary Termination and shall immediately become
exercisable for an additional number of Option Shares equal to the greater of
(i) fifty percent (50%) of the total number of Option Shares which have not yet,
as of such date, become exercisable in accordance with the Exercise Schedule, or
(ii) the number of Option Shares which would otherwise have become exercisable,
in accordance with the Exercise Schedule, during the one (1)-year period
following the effective date of the Corporate Transaction, had Optionee remained
in Service through such period. This option may

3.
<PAGE> 33

be exercised for any or all of the exercisable Option Shares at any time prior
to the earlier of (i) the Expiration Date or (ii) the expiration of the one
(l)-year period measured from the date of Optionee's Involuntary Termination.

(e) This Agreement shall not in any way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise change its capital or
business structure or to merge, consolidate, dissolve, liquidate or sell or
transfer all or any part of its business or assets.

7. ADJUSTMENT IN OPTION SHARES. Should any change be made to the Common
Stock by reason of any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without the Corporation's receipt of
consideration, appropriate adjustments shall be made to (i) the total number
and/or class of securities subject to this option and (ii) the Exercise Price in
order to reflect such change and thereby preclude a dilution or enlargement of
benefits hereunder.

8. STOCKHOLDER RIGHTS. The holder of this option shall not have any
stockholder rights with respect to the Option Shares until such person shall
have exercised the option, paid the Exercise Price and become the record holder
of the purchased shares.

9. MANNER OF EXERCISING OPTION.

(a) In order to exercise this option with respect to all or any
part of the Option Shares for which this option is at the time exercisable,
Optionee (or any other person or persons exercising the option) must take the
following actions:

(i) Execute and deliver to the Corporation a Purchase
Agreement for the Option Shares for which the option is exercised.

(ii) Pay the aggregate Exercise Price for the purchased shares
in one or more of the following forms:

(A) cash or check made payable to the Corporation; or

(B) a promissory note payable to the Corporation, but
only to the extent authorized by the Plan Administrator in
accordance with Paragraph 14.

Should the Common Stock be registered under Section 12 of
the 1934 Act at the time the option is exercised, then
the Exercise Price may also be paid as follows:

(C) in shares of Common Stock held by Optionee (or
any other person or persons exercising the option) for the
requisite period necessary to avoid a charge to the Corporation's
earnings

4.
<PAGE> 34

for financial reporting purposes and valued at Fair Market Value
on the Exercise Date; or

(D) through a special sale and remittance procedure
pursuant to which Optionee (or any other person or persons
exercising the option) shall concurrently provide irrevocable
instructions to a Corporation-designated brokerage firm to effect
the immediate sale of the purchased shares and remit to the
Corporation, out of the sale proceeds available on the settlement
date, sufficient funds to cover the aggregate Exercise Price
payable for the purchased shares plus all applicable Federal,
state and local income and employment taxes required to be
withheld by the Corporation by reason of such exercise and to the
Corporation to deliver the certificates for the purchased shares
directly to such brokerage firm in order to complete the sale.

Except to the extent the sale and remittance procedure
is utilized in connection with the option exercise, payment of the
Exercise Price must accompany the Purchase Agreement delivered to
the Corporation in connection with the option exercise.

(iii) Furnish to the Corporation appropriate
documentation that the person or persons exercising the option (if
other than Optionee) have the right to exercise this option.

(iv) Execute and deliver to the Corporation such
written representations as may be requested by the Corporation in order
for it to comply with the applicable requirements of Federal and state
securities laws.

(v) Make appropriate arrangements with the
Corporation (or Parent or Subsidiary employing or retaining Optionee)
for the satisfaction of all Federal, state and local income and
employment tax withholding requirements applicable to the option
exercise.

(b) As soon as practical after the Exercise Date, the
Corporation shall issue to or on behalf of Optionee (or any other person or
persons exercising this option) a certificate for the purchased Option Shares,
with the appropriate legends affixed thereto.

10. TRANSFER RESTRICTIONS. ALL OPTION SHARES ACQUIRED UPON THE EXERCISE
OF THIS OPTION SHALL BE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER IN
ACCORDANCE WITH THE TERMS SPECIFIED IN THE PURCHASE AGREEMENT.

11. COMPLIANCE WITH LAWS AND REGULATIONS.

(a) The exercise of this option and the issuance of the Option
Shares upon such exercise shall be subject to compliance by the Corporation and
Optionee with all

5.
<PAGE> 35

applicable requirements of law relating thereto and with all applicable
regulations of any stock exchange (or the Nasdaq National Market, if applicable)
on which the Common Stock may be listed for trading at the time of such exercise
and issuance.

(b) The inability of the Corporation to obtain approval from
any regulatory body having authority deemed by the Corporation to be necessary
to the lawful issuance and sale of any Common Stock pursuant to this option
shall relieve the Corporation of any liability with respect to the non-issuance
or sale of the Common Stock as to which such approval shall not have been
obtained. The Corporation, however, shall use its best efforts to obtain all
such approvals.

12. SUCCESSORS AND ASSIGNS. Except to the extent otherwise provided in
Paragraphs 3 and 6, the provisions of this Agreement shall inure to the benefit
of, and be binding upon, the Corporation and its successors and assigns and
Optionee, Optionee's assigns and the legal representatives, heirs and legatees
of Optionee's estate.

13. NOTICES. Any notice required to be given or delivered to the
Corporation under the terms of this Agreement shall be in writing and addressed
to the Corporation at its principal corporate offices. Any notice required to be
given or delivered to Optionee shall be in writing and addressed to Optionee at
the address indicated below Optionee's signature line on the Grant Notice. All
notices shall be deemed effective upon personal delivery or upon deposit in the
U.S. mail, postage prepaid and properly addressed to the party to be notified.

14. FINANCING. The Plan Administrator may, in its absolute discretion
and without any obligation to do so, permit Optionee to pay the Exercise Price
for the purchased Option Shares by delivering a full-recourse, interest-bearing
promissory note secured by those Option Shares. The payment schedule in effect
for any such promissory note shall be established by the Plan Administrator in
its sole discretion.

15. CONSTRUCTION. This Agreement and the option evidenced hereby are
made and granted pursuant to the Plan and are in all respects limited by and
subject to the terms of the Plan. All decisions of the Plan Administrator with
respect to any question or issue arising under the Plan or this Agreement shall
be conclusive and binding on all persons having an interest in this option.

16. GOVERNING LAW. The interpretation, performance and enforcement of
this Agreement shall be governed by the laws of the State of Tennessee without
resort to that State's conflict-of-laws rules.

17. STOCKHOLDER APPROVAL. If the Option Shares covered by this
Agreement exceed, as of the Grant Date, the number of shares of Common Stock
which may without stockholder approval be issued under the Plan, then this
option shall be void with respect to such excess shares, unless stockholder
approval of an amendment sufficiently increasing the number of shares of Common
Stock issuable under the Plan is obtained in accordance with the provisions of
the Plan.

<PAGE> 36

18. ADDITIONAL TERMS APPLICABLE TO AN INCENTIVE OPTION. In the event
this option is designated an Incentive Option in the Grant Notice, the following
terms and conditions shall also apply to the grant:

(a) This option shall cease to qualify for favorable tax
treatment as an Incentive Option if (and to the extent) this option is exercised
for one or more Option Shares: more than three (3) months after the date
Optionee ceases to be an Employee for any reason other than death or Permanent
Disability or more than twelve (12) months after the date Optionee ceases to be
an Employee by reason of Permanent Disability.

(b) No installment under this option shall qualify for
favorable tax treatment as an Incentive Option if (and to the extent) the
aggregate Fair Market Value (determined at the Grant Date) of the Common Stock
for which such installment first becomes exercisable hereunder would, when added
to the aggregate value (determined as of the respective date or dates of grant)
of any earlier installments of the Common Stock and any other securities for
which this option or any other Incentive Options granted to Optionee prior to
the Grant Date (whether under the Plan or any other option plan of the
Corporation or any Parent or Subsidiary) first become exercisable during the
same calendar year, exceed One Hundred Thousand Dollars ($100,000) in the
aggregate. Should such One Hundred Thousand Dollar ($100,000) limitation be
exceeded in any calendar year, this option shall nevertheless become exercisable
for the excess shares in such calendar year as a Non-Statutory Option.

(c) Should the exercisability of this option be accelerated
upon a Corporate Transaction or Involuntary Termination, then this option shall
qualify for favorable tax treatment as an Incentive Option only to the extent
the aggregate Fair Market Value (determined at the Grant Date) of the Common
Stock for which this option first becomes exercisable in the calendar year in
which such acceleration event occurs does not, when added to the aggregate value
(determined as of the respective date or dates of grant) of the Common Stock or
other securities for which this option or one or more other Incentive Options
granted to Optionee prior to the Grant Date (whether under the Plan or any other
option plan of the Corporation or any Parent or Subsidiary) first become
exercisable during the same calendar year, exceed One Hundred Thousand Dollars
($100,000) in the aggregate. Should the applicable One Hundred Thousand Dollar
($100,000) limitation be exceeded in the calendar year of such Corporate
Transaction or Involuntary Termination, the option may nevertheless be exercised
for the excess shares in such calendar year as a Non-Statutory Option.

(d) Should Optionee hold, in addition to this option, one or
more other options to purchase Common Stock which become exercisable for the
first time in the same calendar year as this option, then the foregoing
limitations on the exercisability of such options as Incentive Options shall be
applied on the basis of the order in which such options are granted.

7.
<PAGE> 37

APPENDIX

The following definitions shall be in effect under the Agreement:

A. AGREEMENT shall mean this Stock Option Agreement.

B. BOARD shall mean the Corporation's Board of Directors.

C. CODE shall mean the Internal Revenue Code of 1986, as amended.

D. COMMON STOCK shall mean the Corporation's common stock.

E. CORPORATE TRANSACTION shall mean either of the following
stockholder-approved transactions to which the Corporation is a party:

(i) a merger or consolidation in which securities possessing
more than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or
persons different from the persons holding those securities immediately
prior to such transaction, or

(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation
or dissolution of the Corporation.

H. EXERCISE DATE shall mean the date on which the option shall have
been exercised in accordance with Paragraph 9 of the Agreement.

I. EXERCISE PRICE shall mean the exercise price payable per Option
Share as specified in the Grant Notice.

J. EXERCISE SCHEDULE shall mean the exercise schedule specified in the
Grant Notice pursuant to which this option is to become exercisable in a series
of installments over Optionee's period of Service.

K. EXPIRATION DATE shall mean the date on which the option expires as
specified in the Grant Notice.

L. FAIR MARKET VALUE per share of Common Stock on any relevant date
shall be determined in accordance with the following provisions:

A-1.
<PAGE> 38

(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing
selling price per share of Common Stock on the date in question, as the
price is reported by the National Association of Securities Dealers on
the Nasdaq National Market. If there is no closing selling price for
the Common Stock on the date in question, then the Fair Market Value
shall be the closing selling price on the last preceding date for which
such quotation exists.

(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price
per share of Common Stock on the date in question on the Stock Exchange
determined by the Plan Administrator to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape
of transactions on such exchange. If there is no closing selling price
for the Common Stock on the date in question, then the Fair Market
Value shall be the closing selling price on the last preceding date for
which such quotation exists.

(iii) If the Common Stock is at the time neither listed on any
Stock Exchange nor traded on the Nasdaq National Market, then the Fair
Market Value shall be determined by the Plan Administrator after taking
into account such factors as the Plan Administrator shall deem
appropriate.

M. GRANT DATE shall mean the date of grant of the option as specified
in the Grant Notice.

N. GRANT NOTICE shall mean the Notice of Grant of Stock Option
accompanying the Agreement, pursuant to which Optionee has been informed of the
basic terms of the option evidenced hereby.

O. IMMEDIATE FAMILY of Optionee shall mean Optionee's child, stepchild,
grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling,
niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law,
brother-in-law or sister-in-law, including adoptive relationships.

P. INCENTIVE OPTION shall mean an option which satisfies the
requirements of Code Section 422.

Q. INVOLUNTARY TERMINATION shall mean the termination of Optionee's
Service which occurs by reason of:

(i) Optionee's involuntary dismissal or discharge by the
Corporation for reasons other than Misconduct, or

(ii) Optionee's voluntary resignation following (A) a change
in Optionee's position with the Corporation (or Parent or Subsidiary
employing Optionee) which materially reduces Optionee's duties and
responsibilities or the level of management to which he or she reports
(B) a reduction in Optionee's level of compensation (including base
salary, fringe benefits and target bonus

A-2.
<PAGE> 39

under any corporate performance-based bonus or incentive programs) by
more than fifteen percent (15%) or (C) a relocation of Optionee's place
of employment by more than fifty (50) miles, provided and only if such
change, reduction or relocation is effected without Optionee's consent.

R. MISCONDUCT shall mean the commission of any act of fraud,
embezzlement or dishonesty by Optionee, any unauthorized use or disclosure by
Optionee of confidential information or trade secrets of the Corporation (or any
Parent or Subsidiary), or any other intentional misconduct by Optionee adversely
affecting the business or affairs of the Corporation (or any Parent or
Subsidiary) in a material manner. The foregoing definition shall not be deemed
to be inclusive of all the acts or omissions which the Corporation (or any
Parent or Subsidiary) may consider as grounds for the dismissal or discharge of
Optionee or any other individual in the Service of the Corporation (or any
Parent or Subsidiary).

S. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended.

T. NON-STATUTORY OPTION shall mean an option not intended to satisfy
the requirements of Code Section 422.

U. OPTION SHARES shall mean the number of shares of Common Stock
subject to the option as specified in the Grant Notice.

V. OPTIONEE shall mean the person to whom the option is granted as
specified in the Grant Notice.

W. PARENT shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.

X. PERMANENT DISABILITY shall mean the inability of Optionee to engage
in any substantial gainful activity by reason of any medically determinable
physical or mental impairment which is expected to result in death or has lasted
or can be expected to last for a continuous period of twelve (12) months or
more.

Y. PLAN shall mean the Corporation's 1999 Stock Option/Stock Issuance
Plan.

Z. PLAN ADMINISTRATOR shall mean either the Board or a committee of the
Board acting in its capacity as administrator of the Plan.

AA. PURCHASE AGREEMENT shall mean the stock purchase agreement in
substantially the form of Exhibit B to the Grant Notice.

AA. SERVICE shall mean Optionee's performance of services for the
Corporation (or any Parent or Subsidiary) in the capacity of an Employee, a
non-employee member of the board of directors or a consultant or independent
advisor.

A-3.

<PAGE> 40

AB. STOCK EXCHANGE shall mean the American Stock Exchange or the New
York Stock Exchange.

AC. SUBSIDIARY shall mean any corporation (other than the Corporation)
in an unbroken chain of corporations beginning with the Corporation, provided
each corporation (other than the last corporation) in the unbroken chain owns,
at the time of the determination, stock possessing fifty percent (50%) or more
of the total combined voting power of all classes of stock in one of the other
corporations in such chain.

A-4.

<PAGE> 1
EXHIBIT 10.13

STOCK RESTRICTION
AND SPECIAL PAYMENT AGREEMENT
SCOTT KOZICKI

This Stock Restriction and Special Payment Agreement (this "Agreement"),
dated as of March 17, 1999, is by and between BlueStar Properties, Inc., a
Tennessee corporation (the "Company"), with its principal executive offices at
131 Second Avenue North, Nashville, Tennessee 37201, and Scott Kozicki (the
"Stockholder"), and individual residing at 409 Pebble Creek Circle, Antioch,
Tennessee 37013.

The Company proposes to enter into a Series A Preferred Stock Purchase
Agreement with certain investors, of even date herewith (the "Series A Purchase
Agreement"), pursuant to which such investors will purchase certain securities
from the Company. The execution and delivery of this Agreement by the Company
and the Stockholder is a condition precedent to the transactions contemplated by
the Series A Purchase Agreement, which the Company and the Stockholder believe
will benefit the Company and will also benefit the Stockholder, in his capacity
as a stockholder of the Company.

Accordingly, to induce the Company and the proposed investors to enter into
and consummate the transactions contemplated by the Series A Purchase Agreement,
the Company and the Stockholder agree as follows:

1. REPURCHASE RIGHTS OF THE COMPANY. The Stockholder currently holds an
aggregate of 1,628,604 shares (including any shares issued in respect thereof by
reason of any stock dividend, stock split, recapitalization, or other similar
event affecting such shares occurring after the date hereof) (the "Total
Shares") of the Company's Common Stock, $0.01 par value per share ("Common
Stock"). The Stockholder hereby grants to the Company certain repurchase rights
with respect to 65% of the Total Shares (i.e., 1,058,592 shares of Common Stock)
(the "Restricted Shares"), as set forth in this Section 1.

(a) ESCROW. To ensure the availability for delivery of the
Stockholder's Repurchaseable Shares (as defined below in Section 1(c) hereof)
upon repurchase by the Company pursuant to the Repurchase Option (as defined
below in Section 1(b) hereof), the Stockholder shall, upon execution of this
Agreement, deliver and deposit with the corporate secretary of the Company as
escrow agent (the "Escrow Holder") the share certificate(s) representing the
Repurchaseable Shares, together with a stock assignment duly endorsed in blank,
in the form attached hereto as Exhibit A-1. The Repurchaseable Shares and stock
assignment shall be held by the Escrow Holder, pursuant to the Joint Escrow
Instructions of the Company and Stockholder in the form attached hereto as
Exhibit A-2, until such time as the number of Repurchaseable Shares is zero. [As
a further condition to the Company's obligations under this Agreement, the
Company may require the spouse of Stockholder,
<PAGE> 2
if any, to execute and deliver to the Company a Consent of Spouse in the form
attached hereto as Exhibit A-3.]

Subject to the terms hereof, the Stockbroker shall have all the rights
of a shareholder with respect to the Restricted Shares while they are held in
escrow, including without limitation, the right to vote the Restricted Shares
and to receive any cash dividends declared thereon. If, from time to time during
the period of time in which there are Repurchaseable Shares, there is (i) any
stock dividend, stock split, combination of shares or other similar event
affecting the Restricted Shares, or (ii) any merger or sale of all or
substantially all of the assets or other acquisition of the Company, any and all
new, substituted or additional securities to which the Stockholder is entitled
by reason of the Stockholder's ownership of the Restricted Shares shall be
immediately subject to this escrow, deposited with the Escrow Holder and
included thereafter as "Restricted Shares," "Repurchaseable Shares" and
"Non-Repurchaseable Shares," as the case may be and as applicable, for purposes
of this Agreement and the Repurchase Option.

(b) RIGHT TO REPURCHASE RESTRICTED SHARES. Following termination of the
Stockholder's employment with the Company, the Company will have the right and
option (the "Repurchase Option"), but not the obligation, to repurchase all or
any portion of the Repurchaseable Shares (as defined in Section 1(c) hereof), at
a purchase price per Share equal to $0.147. The Stockholder will not sell,
pledge, or otherwise transfer any Repurchaseable Shares or any interest therein,
and all certificates representing Repurchaseable Shares will bear appropriate
restrictive legends referring to the restrictions on transfer and repurchase
rights of the Company under this Agreement.

(c) NON-REPURCHASEABLE SHARES. For purposes of this Agreement, and subject
to the following provisions, 2.0833% of the Restricted Shares will become
"Non-Repurchaseable Shares" on the last day of each calendar month beginning
with April 1999, provided, in each case, that as of the relevant date the
Stockholder remains employed by the Company. All Restricted Shares that are not
Non-Repurchaseable Shares as of any particular time of reference are referred to
in this Agreement as "Repurchaseable Shares."

In addition to the foregoing: (1) in the even of a Business Combination, as
defined below, the greater of (a) 50% of the then remaining Repurchaseable
Shares or (b) 25% of the Restricted Shares, will automatically and without
further action become Non-Repurchaseable Shares; and (2) in addition to the
provision of the foregoing clause (1), in the event of an involuntary
termination of the Stockholder's employment with the Company for any reason or
no reason other than for Cause (as defined below), then 264,649 Shares of the
Restricted Shares will automatically and without further action become
Non-Repurchaseable Shares.

For purposes of this Section 1, "Business Combination" shall mean (i) the
sale, lease or exchange (for cash, shares of stock, securities or other
consideration) of all or substantially all the property and assets of the
Company or (ii) the merger or consolidation of the Company into or with any
other corporation or entity or the merger or consolidation of any other
corporation into or with the Company (except for a merger or consolidation in
which the holders of the voting capital stock
<PAGE> 3
of the Company hold more than 50% of the voting rights of the surviving
entity). For purposes of this Section 1 and Section 2 below, an involuntary
termination of employment shall include a reduction in the authorities, duties
or responsibilities of the Stockholder to a level significantly below his then
existing authorities, duties or responsibilities. A termination shall be for
"Cause" if the Board of Directors of the Company shall determine in good faith
that any one or more of the following has occurred: (i) the Stockholder shall
have committed a material act of theft, dishonesty, gross dereliction of duty,
fraud, embezzlement, misappropriation, or material breach of fiduciary duty
against the Company, or has committed any other act of grave misconduct against
the Company, or (ii) the Stockholder shall have been convicted by a court of
competent jurisdiction of, or pleaded guilty or nolo contendere to, any felony
or any crime involving moral turpitude or dishonesty.

(d) EXERCISE OF REPURCHASE RIGHTS. The Company may exercise its
repurchase rights under this Section 1 by giving written notice (a "Repurchase
Notice") to the Stockholder and the Escrow Holder, specifying the number of
Repurchasable Shares that the Company desires to repurchase and setting a date
(not later than 30 days after the date of such Repurchase Notice) for the
closing of such repurchase. A Repurchase Notice may be given at any time within
90 days following the date of termination of the Stockholder's employment
hereunder, whereupon, if such time period for giving such Repurchase Notice
shall lapse without the Company having given such Repurchase Notice, the
Repurchase Option shall automatically expire.

Upon the giving of a Repurchase Notice, the Stockholder will be obligated
to sell to the Company, and the Company will be obligated to purchase, the
number of Repurchasable Shares specified in the Repurchase Notice, with the
closing of the purchase and sale to take place at the principal office of the
Company or its counsel on the date specified in the Repurchase Notice. At the
closing, the Escrow Holder will deliver to the Company the certificates
representing the Repurchasable Shares to be repurchased, together with duly
executed stock powers sufficient effectively to transfer ownership of such
Repurchasable Shares to the Company, free and clear of all liens, security
interests, and other encumbrances, and the Company will pay for such
Repurchasable Shares by check or wire transfer (and will issue to the
Stockholder a new stock certificate representing any Restricted Shares
represented by the certificate delivered to the Company that are not
repurchased by the Company). In the event that the Company fails to give a
Repurchase Notice or if the Repurchase Option expires unexercised, all of the
then Repurchasable Shares shall automatically and without further action become
Non-Repurchasable Shares.

2. SPECIAL PAYMENT/EFFECT OF TERMINATION. In the event that at any time
the Stockholder's employment with the Company is terminated for any reason or
no reason other than for Cause, the Company shall pay to the Stockholder (a)
within fourteen (14) days after the effective date of such termination, a cash
payment equal to six months' of such Stockholder's then base salary, plus (b)
such Stockholder's pro rata portion (based upon the number of days actually
worked by such Stockholder) of any bonus pursuant to any such then existing
bonus plan or arrangements.
<PAGE> 4
3. "LOCK-UP" AGREEMENT. The Stockholder agrees that if the Company at
any time or from time to time deems it necessary or desirable to make any
registered public offering(s) of shares of Common Stock, then upon the
Company's request, the Stockholder will not sell, make any short sale of,
loan, grant any option for the purchase of, pledge, or otherwise encumber or
otherwise dispose of any of the Restricted Shares during such period (not to
exceed 180 days) commencing on the effective date of the registration statement
relating to any such offering as the Company may request, except with the prior
written consent of the Company. The Stockholder agrees that he will enter into
an agreement with the Company's underwriters for a registered public offering
if requested by such underwriter, with respect to the foregoing agreements in
this Section 3 and on customary terms and conditions.

4. NO ASSIGNMENTS; BENEFITS OF AGREEMENT. Neither party will assign any
rights or delegate any obligations hereunder without the consent of the other
party (except that the Company may assign its rights and delegate its
obligations hereunder to any successor to its business, whether by merger or
consolidation, sale of stock or of all or substantially all of assets, or
otherwise), and any attempt to do so will be void. This Agreement will bind and
inure to the benefit of the parties hereto and their respective heirs,
successors, and permitted assigns.

5. NO THIRD-PARTY BENEFICIARIES. Nothing in this Agreement is intended
to or will confer any rights or remedies on any Person other than the parties
hereto, their respective heirs, successors, and permitted assigns.

6. NOTICES. All notices, requests, payments, instructions, or other
documents to be given hereunder will be in writing or by written
telecommunication, and will be deemed to have been duly given if (i) delivered
personally (effective upon delivery), (ii) mailed by registered or certified
mail, return receipt requested, postage prepaid (effective three business days
after dispatch), (iii) sent by a reputable, established courier service that
guarantees next business day delivery (effective the next business day), or
(iv) sent by telecopier followed within 24 hours by confirmation by one of the
foregoing methods (effective upon receipt of the telecopy in complete, readable
form), addressed to the recipient party at his or its address set forth in the
first paragraph hereof (or to such other address as the recipient party may
have furnished to the sending party for the purpose pursuant to this section).

7. COUNTERPARTS. This Agreement may be executed by the parties in
separate counterparts, each of which when so executed and delivered will be an
original, but all of which together will constitute one and the same agreement.
In pleading or proving this Agreement, it will not be necessary to produce or
account for more than one such counterpart.

8. CAPTIONS. The captions of sections or subsections of this Agreement
are for reference only and will not affect the interpretation or construction
of this Agreement.

<PAGE> 5
9. CONSTRUCTION. The language used in this Agreement is the language
chosen by the parties to express their mutual intent, and no rule of strict
construction will be applied against either party.

10. WAIVERS; AMENDMENTS. No waiver of any breach or default hereunder
will be valid unless in a writing signed by the waiving party. No failure or
other delay by any party exercising any right, power, or privilege hereunder
will be or operate as a waiver thereof, nor will any single or partial exercise
thereof preclude any other or further exercise thereof or the exercise of any
other right, power, or privilege. This Agreement may be amended only with the
prior written consent of the parties hereto.

11. ENTIRE AGREEMENT. This Agreement contains the entire understanding
and agreement between the parties, and supersedes any and all prior and/or
contemporaneous understandings or agreements between them, with respect to the
subject matter hereof.

12. EQUITABLE RELIEF. The Stockholder acknowledges that any breach by
him of his obligations under this Agreement would cause substantial and
irreparable damage to the Company, and that money damages would be an
inadequate remedy therefor. Accordingly, the Stockholder agrees that the
Company will be entitled to an injunction, specific performance, and/or other
equitable relief to prevent the breach of such obligations.

13. GOVERNING LAW. This Agreement will be governed by and interpreted and
construed in accordance with the internal laws of the State of Tennessee
(without reference to principles of conflicts or choice of law).

14. LEGENDS. The share certificate evidencing the Restricted Shares, if
any, shall be endorsed with the following legend (in addition to any legend
required under applicable state securities laws):

THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS UPON TRANSFER AND RIGHTS OF REPURCHASE AS SET FORTH IN A STOCK
RESTRICTION AND SPECIAL PAYMENT AGREEMENT BETWEEN THE COMPANY AND THE
SHAREHOLDER, DATED AS OF MARCH 17, 1999, A COPY OF WHICH IS ON FILE WITH THE
SECRETARY OF THE COMPANY AND WILL BE PROVIDED UPON WRITTEN REQUEST.

[The rest of this page is intentionally left blank.]

<PAGE> 6
IN WITNESS WHEREOF, each of the Company and the Stockholder has executed
and delivered this Stock Restriction and Special Payment Agreement as of the
date first above written.

COMPANY: BLUESTAR PROPERTIES, INC.

By /s/ Fredjoseph Goldner
------------------------
Name: Fredjoseph Goldner
Title: President/CEO

STOCKHOLDER: /s/ Scott Kozicki
------------------------
Name: Scott Kozicki

<PAGE> 7
EXHIBIT A-1

ASSIGNMENT SEPARATE FROM CERTIFICATE

FOR VALUE RECEIVED I, _____________________________, hereby sell, assign
and transfer unto _______________________________________ (________) shares of
the Common Stock of BlueStar Properties, Inc. (the "Company") standing in my
name of the books of said corporation represented by Certificate No. ____
herewith and do hereby irrevocably constitute and appoint _____________________
to transfer the said stock on the books of the within named corporation with
full power of substitution in the premises.

This Stock Assignment may be used only in accordance with the Stock
Restriction and Special Payment Agreement (the "Agreement") between the Company
and the undersigned dated March __, 1999.

Dated: _________, 1999

Signature:______________________________

INSTRUCTIONS: Please do not fill in any blanks other than the signature line.
The purpose of this assignment is to enable the Company to exercise the
Repurchase Option, as set forth in the Agreement, without requiring additional
signatures on the part of the Stockholder.

<PAGE> 8
EXHIBIT A-2
JOINT ESCROW INSTRUCTIONS

March , 1999
Corporate Secretary
BlueStar Properties, Inc.
131 Second Avenue North
Nashville, TN 37201

Dear Sir/Madam;

As Escrow Agent for both BlueStar Properties, Inc., a Tennessee corporation
(the "Company"), and the undersigned stockholder of the Company (the
"Stockholder"), you are hereby authorized and directed to hold the documents
delivered to you pursuant to Section 1(a) of that certain Stock Restriction and
Special Payment Agreement ("Agreement") between the Company and the undersigned,
dated as of March , 1999, in accordance with the following instructions:

1. In the event the Company exercises the Company's Repurchase Option set
forth in the Agreement, the Company and the Stockholder shall give to you a
written notice from both of them specifying the number of Repurchaseable Shares
to be purchased, the purchase price, and the time for a closing hereunder at the
principal office of the Company (the "Joint Written Instructions"). Stockholder
and the Company hereby irrevocably authorize and direct you to close the
transaction contemplated by such notice in accordance with the terms of said
notice.

2. At the closing, you are directed (a) to date the stock assignments
necessary for the transfer in question, (b) to fill in the number of shares
being transferred, and (c) to deliver same, together with the certificate
evidencing the shares of stock to be transferred, to the Company, against the
simultaneous delivery to you of the purchase price (by cash, a check, or some
combination thereof) for the number of shares of stock being purchased, each of
the foregoing pursuant to the Joint Written Instructions.

3. Stockholder irrevocably authorizes the Company to deposit with you any
certificates evidencing Repurchaseable Shares to be held by you hereunder and
any additions, substitutions and/or subtractions to said Repurchaseable Shares
as defined in the Agreement. Stockholder does hereby irrevocably constitute and
appoint you as Stockholder's attorney-in-fact and agent for the term of this
escrow to execute with respect to such securities all documents necessary or
appropriate to make such securities negotiable and to complete any transaction
herein contemplated, including but not limited to the filing with any applicable
state blue sky authority of any required applications for consent to, or notice
of transfer of, the securities. Subject to the provisions of this paragraph 3,
<PAGE> 9

Stockholder shall exercise all rights and privileges of a shareholder of the
Company while the stock is held by you.

4. Upon written request of the Stockholder, but no more than twice per
calendar year, unless the Company's Repurchase Option has been exercised, you
shall deliver to Stockholder a certificate or certificates representing so many
of the Restricted Shares as are not then subject to the Company's Repurchase
Option. Simultaneously with the closing of a Business Combination, or within
ninety (90) days after Stockholder ceases to be an employee of the Company (and
consistent with the provisions pertaining to the termination of employment of
the Stockholder as more fully set forth in the Agreement), you shall deliver to
Stockholder a certificate or certificates representing the aggregate number of
Non-Repurchaseable Shares held by you and all Repurchaseable Shares not
purchased by the Company under its Repurchase Option.

5. If at the time of termination of this escrow you should have in your
possession any documents, securities, or other property belonging to
Stockholder, you shall deliver all of the same to Stockholder and shall be
discharged of all further obligations hereunder.

6. Your duties hereunder may be altered, amended, modified or revoked
only by a writing signed by all of the parties hereto.

7. You shall be obligated only for the performance of such duties as are
specifically set forth herein and may rely and shall be protected in relying or
refraining from acting on any instrument reasonably believed by you to be
genuine and to have been signed or presented by the proper party or parties.
You shall not be personally liable for any act you may do or omit to do
hereunder as Escrow Agent or as attorney-in-fact for Stockholder while acting
in good faith, and any act done or omitted by you pursuant to the advice of
your own attorneys shall be conclusive evidence of such good faith.

8. You are hereby expressly authorized to disregard any and all warnings
given by any of the parties hereto or by any other person or corporation,
excepting only orders or process of courts of law, and are hereby expressly
authorized to comply with and obey orders, judgments or decrees of any court.
In case you obey or comply with any such order, judgment or decree, you shall
not be liable to any of the parties hereto or to any other person, firm or
corporation by reason of such compliance, notwithstanding any such order,
judgment or decree being subsequently reversed, modified, annulled, set aside,
vacated or found to have been entered without jurisdiction.

9. You shall not be liable in any respect on account of the identity,
authorities or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or called
for hereunder.

10. You shall not be liable for the outlawing of any rights under the
statute of limitations with respect to these Joint Escrow Instructions or any
documents deposited with you.
<PAGE> 10
11. You shall be entitled to employ such legal counsel and other experts
as you may deem necessary properly to advise you in connection with your
obligations hereunder, may rely upon the advice of such counsel, and may pay
such counsel reasonable compensation therefor to be reimbursed by the Company.

12. Your responsibilities as Escrow Agent hereunder shall terminate if you
shall cease to be an officer or agent of the Company or if you shall resign by
written notice to each party. In the event of any such termination, the Company
shall appoint a successor Escrow Agent.

13. If you reasonably require other or further instruments in connection
with these Joint Escrow Instructions or obligations in respect hereto, the
necessary parties hereto shall join in furnishing such instruments.

14. It is understood and agreed that should any dispute arise with respect
to the delivery and/or ownership or right of possession of the securities held
by you hereunder, you are authorized and directed to retain in your possession
without liability to anyone all or any part of said securities until such
disputes shall have been settled either by mutual written agreement of the
parties concerned or by a final order, decree or judgment of a court of
competent jurisdiction after the time for appeal has expired and no appeal has
been perfected, but you shall be under no duty whatsoever to institute or defend
any such proceedings.

15. Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given upon personal delivery or upon deposit in
the United States Post Office, by registered or certified mail with postage and
fees prepaid, addressed to each of the other parties thereunto entitled at the
following addresses or at such other addresses as a party may designate by ten
days' advance written notice to each of the other parties hereto.

<PAGE> 11
COMPANY: BlueStar Properties, Inc.
131 Second Avenue North
Nashville, TN 37201
Attention: Corporate Secretary

STOCKHOLDER:

ESCROW AGENT: BlueStar Properties, Inc.
131 Second Avenue North
Nashville, TN 37201
Attention: Corporate Secretary

16. By signing these Joint Escrow Instructions, you become a party hereto
only for the purpose of said Joint Escrow Instructions; you do not become a
party to the Agreement.

17. This instrument shall be binding upon and inure to the benefit of the
parties hereto, and their respective successors and permitted assigns.

18. These Joint Escrow Instructions shall be governed by, and construed
and enforced in accordance with, the internal substantive laws, but not the
choice of law rules, of Tennessee.

19. Capitalized terms used herein without definition shall have the
respective meanings for such terms set forth in the Agreement.

20. This letter agreement shall automatically terminate upon the earlier
to occur of: (a) the date on which the number of Repurchaseable Shares,
pursuant to the Agreement, equals zero; and (b) ninety days after the date on
which the Stockholder ceases to be an employee of the Company or simultaneously
with the closing of a Business Combination, as the case may be (in which case
the securities held by you shall be delivered to the Stockholder as set forth
in Section 4).
<PAGE> 12
Very truly yours,

BLUESTAR PROPERTIES, INC.

----------------------------------------
By

----------------------------------------
Title
---------------------------------------------

STOCKHOLDER:
---------------------------------------------

----------------------------------------
Signature
---------------------------------------------

----------------------------------------
Print Name

ESCROW AGENT:

- -----------------------------
Corporate Secretary
<PAGE> 13
EXHIBIT A-3

CONSENT OF SPOUSE

I, ______________________, spouse of ______________________, have read and
approve the foregoing Stock Restriction and Special Payment Agreement (the
"Agreement"). In consideration of the Company's grant to my spouse of the right
to purchase/receive shares of BlueStar Properties, Inc., I hereby appoint my
spouse as my attorney-in-fact in respect to the exercise of any rights under
the Agreement and agree to be bound by the provisions of the Agreement insofar
as I may have any rights in said Agreement or any shares issued pursuant
thereto under the community property laws or similar laws relating to marital
property in effect in the state of our residence as of the date of the signing
of the foregoing Agreement.

Dated:________________, 19

________________________________________
Signature of Spouse

<PAGE> 1
EXHIBIT 10.14

[BLUESTAR COMMUNICATIONS LETTERHEAD]

September 7, 1999

/BY HAND

Scott Kozicki
409 Pebble Creek Circle
Antioch, Tennessee 37013

Dear Scott:

As we discussed, your employment with the Company will terminate effective
today, September 7, 1999 (the "Separation Date").

1. YOUR CURRENT RIGHTS UPON TERMINATION.

a. PAY AND BENEFITS

At the time your employment terminates, you will receive pay for all work
performed for the Company during the last payroll period, through the
Separation Date and pay for all hours of vacation time you have accrued but not
used as of that date if any, as reflected on the books of the Company. You will
not continue to earn vacation or other paid time off after the Separation Date,
and, except as expressly provided in Section 3.a. below with respect to the
Company's health, vision, and dental plans, your participation in all of the
Company's employee benefit plans will end as of the Separation Date, in
accordance with the terms of those plans. You may have a right to convert your
group life insurance to an individual policy, at your cost. For further
information on benefit matters, please contact RICK BURTNER.

b. THE STOCK RESTRICTION AND SPECIAL PAYMENT AGREEMENT OF MARCH 17, 1999
(THE "STOCK AGREEMENT").

Under the Stock Agreement you are entitled to the following:
(i) You retained 570,012 of common stock without repurchase
restrictions upon entering the Stock Agreement.

(ii) 120,268 additional shares will vest by the Separation Date
(2.0833% of 1,058,592 Restricted Shares x 5 months, plus the prorated month;
Stock Agreement, Section 1(c)).

(iii) 264,649 shares will vest upon termination of your employment
without cause (Stock Agreement, Section 1(c)(2)).

<PAGE> 2
Scott Kozicki
September 7, 1999
Page 2

(iv) You will be entitled to a gross payment equal to 6 months of base
salary ($55,000.00) (Stock Agreement, Section 2(a)) which will be paid as a
bi-monthly salary for six months.

In addition, the Company hereby notifies you that it will exercise its
right to repurchase your Repurchasable Shares at $.147 per share (Stock
Agreement, Section 1(b)), for a payment to you of $99,030.23 (1,058,592
Restricted Shares - 120,268 shares which will have vested by 8/31/99 plus a pro
ration for September - 264,649 shares vested upon termination without cause =
673,675 Repurchasable Shares x $.147 = $99,030.23).

2. YOUR CONTINUING CONTRACTUAL OBLIGATIONS.

Under the Confidentiality, Developments, and Non-Competition Agreement of
March 17, 1999 (the "Confidentiality Agreement"), you have certain contractual
obligations which will continue after your employment ends and which are
summarized below. The specific details of those obligations are set forth in
the Confidentiality Agreement.

a. You must maintain the confidentiality of Confidential Information
(Confidentiality Agreement, Section 1).

b. Any Developments or contracts entered into personally on behalf of
the company such as the BlueStar.net listing made during your employment [or
any consulting] with the Company are assigned to the Company (Confidentiality
Agreement, Section 2).

c. You may not compete with the Company for one year following the end
of your employment [and/or consulting period] (the "Restricted Period";
Confidentiality Agreement, Section 3(a)).

d. You may not solicit Company employees or consultants during the
Restricted Period (Confidentiality Agreement, Section 3(b)).

e. You may not solicit any actual or potential Company customers,
clients, accounts, vendors or suppliers during the Restricted Period
(Confidentiality Agreement Section 3(c)).

The Voting Agreement dated 17 March, 1999 will also remain in effect.

3. OFFER OF ADDITIONAL SEVERANCE BENEFITS.

To assist you through this transition and in consideration of your
acceptance of this Agreement, the Company is offering you the following
Additional Severance Benefits:

<PAGE> 3
Scott Kozicki
September 7, 1999
Page 3

a. If you elect to continue your participation and that of your eligible
dependents in the Company's health, vision, and dental plans under the federal
law known as "COBRA," by signing and returning the election form that will be
provided to you then, until the end of the Restricted Period or until your COBRA
continuation coverage ends (for example because you become eligible for coverage
under the health plan of another employer), whichever occurs first, the Company
will pay the COBRA premium cost of your participation in its plans.

b. The Company agrees to restrict your non-competition obligations under
Section 3(c) of the Confidentiality Agreement referenced above to the geographic
area described in Exhibit A attached to this letter.

c. In return for you agreeing to serve as a consultant for six months,
BlueStar will provide at no cost to you up to ten dial up E-mail accounts (which
will be converted to DSL if available from BlueStar at your home address) with
the same addresses currently used by you and your family and your current cell
phone with 1000 minutes per month (you will pay all roaming charges,
international calls, and all minutes above 1000 per month). These benefits will
expire on March 30, 2001. Your consulting duties will consist of responding to
questions from the Vice President of Network operations or his/her designee. The
provisions of your Confidentiality Agreement with BlueStar will apply to any
information discussed pursuant to this consulting agreement. By agreeing to
serve as a consultant you will not vest in any additional shares of BlueStar and
all issues regarding the number of shares held by you are covered by the
Separation Agreement.

You and BlueStar may respond to requests for information about your employment
and other roles at BlueStar by reading from or supplying a copy of the
announcement agreed on between you and BlueStar (attached hereto). Each party
agrees not to make any further comments about your tenure at BlueStar. BlueStar
will pay your reasonable outstanding expenses incurred on behalf of the Company.

All payments by the Company described in this Agreement will be reduced by all
taxes and other amounts that the Company is required to withhold under
applicable law and all other deductions authorized by you and by any amounts you
owe the Company.

d. INDEMNIFICATION

To the maximum extent permitted by law, the Company will indemnify and hold
you harmless against any losses, claims, damages or liabilities, joint or
several, to which you may become subject insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of, are related to or

<PAGE> 4
Scott Kozicki
September 7, 1999
Page 4

are based upon activities undertaken as part of your employment at BlueStar.
The Company will defend you against any actions brought seeking damages and
appoint and pay your counsel, including separate counsel if a conflict arises
between you and the Company in defending the action. Notwithstanding anything
in the foregoing provisions of this Section to the contrary, (i) the indemnity
agreement contained in this Section shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Corporation (which consent
shall not be unreasonably withheld), and (ii) indemnification shall not be made
with respect to any loss, claim, damage, liability or action if you are finally
adjudged to be liable based upon an untrue statement made by you or based upon
your own willful and intentional misconduct, unless and to the extent the court
in which such action was heard determines that you are entitled to
indemnification for such amounts as the court deems proper.

Promptly after receipt by you of notice of the commencement of any claim
or action against you for which you are entitled to indemnification from the
Company, you shall notify the Company in writing of the commencement thereof
and the Company shall have the obligation to assume at its expense the defense
thereof with counsel mutually satisfactory to the Company and to you. The
failure to notify the Company promptly of the commencement of any such action,
if materially prejudicial to its ability to defend such action, shall relieve
the Company of any liability to you under this Section.

4. YOUR UNDERTAKINGS.

a. FINAL SETTLEMENT

You agree that payment by the Company as described in this Agreement shall
be in full and complete satisfaction of any and all sums which are now or might
hereafter have become owing to you for services rendered by you during your
employment or in connection with your termination of employment.

b. CONFIDENTIALITY

(i) You acknowledge that during the course of your employment with
the Company, you have had access to information concerning the Company, its
clients, and its affiliates, and the Company's, its client's, and its
affiliates' respective businesses and operations, which is confidential or
proprietary in nature (the "Confidential Information") and covered by your
Confidentiality Agreement with the Company, referenced in Section 2.a. You
agree that you will continue to protect Confidential Information and that you
will not, directly or indirectly, use or disclose it for any purpose or to any
person except where expressly authorized by the Company.

<PAGE> 5
Scott Kozicki
September 7, 1999
Page 5

(ii) You and BlueStar agree to keep the terms of this Agreement in
strict confidence, except as required by law and consultation with legal
counsel or for tax and accounting reasons. You may also disclose the Agreement
to direct family members. BlueStar may also disclose the Agreement to its
officers, members of its Board of Directors, and to its employees who have a
reasonable business need to know its information.

You agree that you will continue to comply with all the terms of the
Confidentiality Agreement referenced in Section 2.a. above, as modified by
Section 3.b. of this Agreement with respect to the geographic scope of your
non-compete obligations.

(d) NON-DISPARAGEMENT

You and BlueStar agree that both will not disparage you or the Company or
any of the people or organizations associated with it; and that you will not
otherwise do or say anything that is intended to or reasonably calculated to
disrupt the good morale of the employees of the Company or otherwise harm its
business or reputation.

(e) RETURN OF PROPERTY

In signing this Agreement, you give the Company assurance that you have
returned to it any and all documents, materials and information, no matter how
maintained (e.g., documents, electronic media, or otherwise), related to the
business, whether present or otherwise, of the Company and its affiliates, and
all copies, and all keys and other property of the Company and its affiliates,
in your possession or control. You also agree to transfer all tangible and
intellectual property owned by you but acquired and used for company purposes
to the Company. Recognizing that your regular employment with the Company has
terminated, you agree that you will not, for any purpose, attempt to access or
use any computer or computer network or system of the Company or any of its
affiliates, except your current E-mail accounts.

(f) FUTURE COOPERATION

You agree to use reasonable efforts to cooperate with the Company
hereafter with respect to all matters arising during or related to your
employment, including but not limited to all matters in connection with any
governmental investigation, litigation or regulatory or other proceeding which
may have risen or which may arise following the signing of this Agreement.
<PAGE> 6
Scott Kozicki
September 7, 1999
Page 6

g. MUTUAL RELEASE OF CLAIMS

This offer is made without prejudice and without any admission of
liability. This is an important legal document, and you may wish to consult
with counsel of your own choice in deciding whether to accept this offer. The
Company wants to be certain that this Agreement will resolve any and all
concerns that you might have and therefore requests that you carefully consider
the terms of this Agreement, including the release of claims set forth below.

Except as specifically described in this letter, this letter constitutes
the entire Agreement between you and the Company and replaces all prior and
contemporaneous agreements, communications and understandings, whether written
or oral, with respect to your employment and its termination and all related
matters. You agree and recognize that your employment relationship with the
Company will be permanently and irrevocably severed as of September 7, 1999,
that you will not apply for or otherwise seek reemployment with the Company,
and that the Company and its affiliates have no obligation to reemploy, recall,
or otherwise hire you in the future.

In exchange for the Additional Benefits to be provided you under this
Agreement, which you acknowledge are in excess of what you are otherwise
entitled to receive, you agree that these benefits shall be in complete and
final settlement of, and release the Company and its affiliates, and all of
their respective past and present directors, trustees, officers, shareholders,
employees, agents, successors and assigns, and all others connected with any of
them, both individually and in their official capacities, from any and all
causes of action, rights or claims that you have had in the past, now have or
might have, in any way related to, connected with or arising out of your
employment with the Company and its termination. This release includes all
statutory and common law claims, including, without limitation, claims under
Title VII for the Civil Rights Act, the Americans with Disabilities Act, or any
other federal, state or local employment law, regulation or other requirement,
or pursuant to any written or oral contract, agreement or understanding between
you and the Company and its affiliates.

In exchange for the foregoing release and the other consideration to be
provided the Company under this agreement, which the Company acknowledges is in
excess of what it is otherwise entitled to receive, the Company agrees that
this consideration shall be in complete and final settlement of, and releases
you from any and all causes of action, rights or claims that it had in the
past, now has or might have in any way related to, connected with or arising
out of your employment with the Company except for fraud and other willful,
intentional misconduct. You and the Company also agree to arbitrate any dispute
between you, on the one hand, and the company, its officers, employees or
directors, on

<PAGE> 7

Scott Kozicki
September 7, 1999
Page 7

the other hand, under the auspices and rules of American Arbitration
Association.

5. ACKNOWLEDGMENTS; RETURN DATE.

In signing this Agreement, you give the Company assurance that you have
had a full and reasonable opportunity to consider its terms; that you have read
and understood all of those terms; and that your acceptance of this Agreement
is freely and voluntarily given.
If the terms of this Agreement are acceptable to you, please sign and return
this letter to me no later than Saturday, September 25, 1999. The enclosed copy
of this letter, which you should also sign and date, is for your records.
FORMALITIES ASIDE, I WANT TO TAKE THIS OPPORTUNITY TO THANK YOU FOR ALL OF YOUR
EFFORTS ON BEHALF OF THE COMPANY AND TO WISH YOU WELL IN YOUR FUTURE ENDEAVORS.
IF YOU SHOULD HAVE ANY QUESTIONS, PLEASE CALL ME.

Sincerely,

/s/ Robert E. Dupuis
---------------------
Robert E. Dupuis
President/CEO

I the undersigned, having had the time to reflect, freely accept the above
settlement. I acknowledge and agree that no Company representative has made any
representation to or agreement with me relating to this Agreement which is not
contained in the express terms of this Agreement. I acknowledge and agree that
my execution and delivery of this Agreement is based upon my independent review
of this Agreement, and I hereby expressly waive any and all claims or defenses
by me against the enforcement of this Agreement which are based upon
allegations or representations, projections, estimates, understandings or
agreements by the Company or any of its representatives that are not contained
in the express terms of this Agreement.

/s/ Scott Kozicki 9/25/99
- ------------------- ----------
SCOTT KOZICKI DATE

<PAGE> 1
[BLUE STAR EXHIBIT 10.15
COMMUNICATIONS LOGO]

January 3, 2000

BY HAND

Fredjoseph Goldner
912 Gale Lane
Nashville, TN 37201

Dear Fredjoseph:

We have reached a mutual decision that you will resign your position in
BlueStar Properties, Inc. (the "Company"). As a result, your employment with
the Company will terminate effective Friday, January 7, 2000, (the "Separation
Date").

1. YOUR CURRENT RIGHTS UPON TERMINATION.

a. PAY AND BENEFITS

At the time your employment terminates, you will receive pay for all work
performed for the Company during the last payroll period, through the
Separation Date and pay for all hours of vacation time you have accrued but not
used as of that date if any, as reflected on the books of the Company. You will
not continue to earn vacation or other paid time off after the Separation Date,
and, except as expressly provided in Section 3.a. below with respect to the
Company's health, vision, life insurance, and dental plans, your participation
in all of the Company's employee benefit plans will end as of the Separation
Date, in accordance with the terms of those plans. For further information on
benefit matters, please contact RICK BURTNER OR MICHAEL HACKETT.

b. THE STOCK RESTRICTION AND SPECIAL PAYMENT AGREEMENT OF MARCH 17, 1999
(THE "STOCK AGREEMENT").

Under the Stock Agreement you are entitled to the following:

(i) You retained 1,724,625 (pre-split 574,875 X 3:1 stock split) of
common stock upon entering the Stock Agreement.

(ii) 617,221 additional shares will vest by the Separation Date
(2.0833% of 1,067,625 Restricted Shares x 9.25 mos. x 3 (stock split) Stock
Agreement, Section 1(c)).

(iii) 800,719 shares will vest upon termination of your employment
without cause (Stock Agreement, Section 1(c)(2)).

401 Church Street, 24th Floor
Nashville, Tennessee 37219
615-255-2100 Fax: 615-255-2102
Toll Free: 877-888-8580
www.bluestar.net
<PAGE> 2
[BLUESTAR COMMUNICATIONS LOGO]

Fredjoseph Goldner
January 3, 2000
Page 2

(iv) You will be entitled to a gross payment equal to 12 months of
base salary ($110,000.00)(Stock Agreement, Section 2(a)).

(v) You will receive a gross payment of your 1999 bonus equal to
$33,000 ($110,000 x 30%).

In addition, the Company hereby notifies you that it will exercise its
right to repurchase your Repurchasable Shares at $.049 per share (Stock
Agreement, Section 1(b)), for a payment to you of $87,461.82 (3,202,875
Restricted Shares - 617,221 shares which will have vested by 1/7/00 - 800,719
shares vested upon termination without cause = 1,784,935 Repurchasable Shares x
$.049 = $87,461.82). Thus the total gross payment to you will be $230,461.82
upon execution of this agreement.

2. YOUR CONTINUING CONTRACTUAL OBLIGATIONS.

a. You must maintain the confidentiality of Confidential Information
(Confidentiality Agreement, Section 1).

b. You may not compete with the Company for one year following the end
of your employment (the "Restricted Period"; Confidentiality Agreement, Section
3(a)).

c. You may not solicit Company employees or consultants during the
Restricted Period (Confidentiality Agreement, Section 3(b)).

d. You may not solicit any actual or potential Company customers,
clients, accounts, vendors or suppliers during the Restricted Period
(Confidentiality Agreement Section 3(c)).

3. OFFER OF ADDITIONAL SEVERANCE AND OTHER BENEFITS.

To assist you through this transition and in consideration of your
acceptance of this Agreement, the Company is offering you the following
additional Severance and Other Benefits:

a. We will continue health, dental, and life insurance coverage for one
year from the effective date of this agreement (January 7, 2000) at no cost to
you. Thereafter, if you elect to continue your participation and that of your

<PAGE> 3
[BLUESTAR COMMUNICATIONS LOGO]

Fredjoseph Goldner
January 3, 2000
Page 3

eligible dependents in the Company's health, dental, and life insurance plans
under the federal law known as "COBRA," by signing and returning the election
form that will be provided to you then, until the end of the Restricted Period
or until your COBRA continuation coverage ends (for example because you become
eligible for coverage under the health plan of another employer), whichever
occurs first, the Company will reimburse the COBRA premium cost of your family
participation in its plans.

b. The Company agrees to restrict your non-competition obligations under
Section 3(c) of the Confidentiality Agreement referenced above to the nine state
BellSouth geographic area.

All payments by the Company described in this Agreement will be reduced by
all taxes and other amounts that the Company is required to withhold under
applicable law and all other deductions authorized by you and by any amounts you
owe the Company.

c. We will make best efforts to maintain stock certificate No. 1 for you
as is currently the case.

d. Should there be any opportunity through a program offered to Senior
Management by underwriters to liquidate a portion of stock for liquidity
purposes sooner than the 6 month lock up period, we will make the same benefit
available to you.

e. You have requested that we allocate to your close family and friends,
$500,000 of the Friends and Family round upon an IPO. Given the uncertainty of
the amount of the Friends and Family pool and in fairness to other Executives,
we will use our best efforts to carve out the lesser of $500,000 or 10% of any
total dollar amount of the Friends of Company Executives portion of the Friends
and Family round for your Friends and Family.

4. YOUR UNDERTAKINGS.

a. FINAL SETTLEMENT

Fredjoseph Goldner
January 3, 2000
Page 4

b. CONFIDENTIALITY

(i) You acknowledge that during the course of your employment with the
Company, you have had access to information concerning the Company, its clients,
and its affiliates, and the Company's, its client's, and its affiliates'
respective businesses and operations, which is confidential or proprietary in
nature (the "Confidential Information") and covered by your Confidentiality
Agreement with the Company, referenced in Section 2.a. You agree that you will
continue to protect Confidential Information and that you will not, directly or
indirectly, use or disclose it for any purpose or to any person except where
expressly authorized by the Company.

(ii) You and BlueStar agree to keep the terms of this Agreement in
strict confidence, except as required by law and consultation with legal counsel
or for tax and accounting reasons. You may also disclose the Agreement to direct
family members. BlueStar may also disclose the Agreement to its officers,
members of its Board of Directors, and to its employees who have a reasonable
business need to know its information.

c. CONFIDENTIALITY, DEVELOPMENTS, AND NON-COMPETE AGREEMENT OF MARCH 17,
1999

d. NON-DISPARAGEMENT

e. PROPERTY

We have agreed that a DSL line with router to your house and an email
account will be established at no cost to you. Additionally, you may keep, with
clear title, your laptop computer. You are welcome to continue use of your
cellular phone and utilize the company discounts; however, charges in excess of
the basic monthly service will be your responsibility to pay. We encourage you
to call and visit regularly. We will make an office available for you at
BlueStar. Should you wish to maintain an outside office, please plan on
utilizing your own funds for this purpose.

<PAGE> 5
[BLUESTAR COMMUNICATIONS LOGO]

Fredjoseph Goldner
January 3, 2000
Page 5

f. FUTURE COOPERATION

g. RELEASE OF CLAIMS

Except as specifically described in this letter, this letter constitutes
the entire Agreement between you and the Company and replaces all prior and
contemporaneous agreements, communications and understandings, whether written
or oral, with respect to your employment and its termination and all related
matters. You agree and recognize that your employment relationship with the
Company will be permanently and irrevocably severed as of January 7, 2000, that
you will not apply for or otherwise seek reemployment with the Company, and
that the Company and its affiliates have no obligation to reemploy, recall, or
otherwise hire you in the future.

In exchange for the Additional Benefits to be provided you under this
Agreement, which you acknowledge are in excess of what you are otherwise
entitled to receive, you agree that these benefits shall be in complete and
final settlement of, and release the Company and its affiliates, and all of
their respective past and present directors, trustees, officers, shareholders,
employees, agents, successors and assigns, and all others connected with any of
them, both individually and in their official capacities, from any and all
causes of action, rights or claims that you have had in the past, now have or
might have, in any way related to, connected with or arising out of your
employment with the Company and its termination. This release includes all
statutory and common law claims, including, without limitation, claims under
Title VII of the Civil Rights Act, the Americans with Disabilities Act, or any
other federal, state or local employment law, regulation or other requirement,
or pursuant to any written or oral contract, agreement or understanding between
you and the Company and its affiliates.
<PAGE> 6
[BLUESTAR
COMMUNICATIONS LOGO]

Fredjoseph Goldner
January 3, 2000
Page 6

5. ACKNOWLEDGMENTS; RETURN DATE.

If the terms of this Agreement are acceptable to you, please sign and
return this letter to me no later than Friday, January 10, 2000. The enclosed
copy of this letter, which you should also sign and date, is for your records.

FORMALITIES ASIDE, I WANT TO TAKE THIS OPPORTUNITY TO THANK YOU FOR ALL OF
YOUR EFFORTS ON BEHALF OF THE COMPANY AND TO WISH YOU WELL IN YOUR FUTURE
ENDEAVORS. IF YOU SHOULD HAVE ANY QUESTIONS, PLEASE CALL ME.

Sincerely,

/s/ ROBERT E. DUPUIS
--------------------
Robert E. Dupuis
President/CEO
<PAGE> 7
[BLUESTAR COMMUNICATIONS LOGO]

Fredjoseph Goldner
January 3, 2000
Page 7

I the undersigned, having had the time to reflect, freely accept the above
settlement. I acknowledge and agree that no Company representative has made any
representation to or agreement with me relating to this Agreement which is not
contained in the express terms of this Agreement. I acknowledge and agree that
my execution and delivery of this Agreement is based upon my independent review
of this Agreement, and I hereby expressly waive any and all claims or defenses
by me against the enforcement of this Agreement which are based upon allegations
or representations, projections, estimates, understandings or agreements by the
Company or any of its representatives that are not contained in the express
terms of this Agreement.

/S/ Fredjoseph Goldner 1/7/00
- -------------------------------------- ------------------------
FREDJOSEPH GOLDNER DATE

<PAGE> 1
EXHIBIT 23.2

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our report
dated January 14, 2000 included in or made a part of Amendment No. 1 to the
BlueStar Communications Group, Inc. registration statement, and to all
references made to our Firm.

ARTHUR ANDERSEN LLP

Nashville, Tennessee
March 17, 2000