<PAGE>
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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
 
                            ------------------------
 
                                  FORM 10-K/A
                               (AMENDMENT NO. 2)
 
(MARK ONE)
 
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934
 
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
 
                                       OR
 
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM               TO
 
                        COMMISSION FILE NUMBER 000-22581
 
                            ------------------------
 
                         STAR TELECOMMUNICATIONS, INC.
 
             (Exact name of registrant as specified in its charter)
 
<TABLE>
<S>                                                  <C>
                     DELAWARE                             77-0362681
          (State or other jurisdiction of              (I.R.S. Employer
          incorporation or organization)              Identification No.)
 
           223 EAST DE LA GUERRA STREET,                     93101
             SANTA BARBARA, CALIFORNIA                    (Zip code)
     (Address of principal executive offices)
</TABLE>
 
                                 (805) 899-1962
               (Registrant's telephone no., including area code)
 
 Securities registered pursuant to Section 12(b) of the Act: Common Stock, par
                             value $0.001 per share
       Name of each exchange on which registered: Nasdaq National Market
 
        Securities registered pursuant to Section 12(g) of the Act: None
 
    Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES _X_ NO ____
 
    Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
 
    The aggregate market value of the Common Stock of the Registrant held by
non-affiliates of the Registrant on January 13, 1999, based on the average bid
and asked prices for the Common Stock as reported by Nasdaq was approximately
$381,247,423.
 
    The number of shares of the Registrant's Common Stock outstanding as of
January 13, 1999 was approximately 42,246,521 shares.
 
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
    The undersigned Registrant hereby amends the following items of its Annual
Report on Form 10-K for the fiscal year ended December 31, 1997, as set forth
below:
 
                                    PART II
 
ITEM 6.  SELECTED FINANCIAL DATA.
 
    The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and Notes thereto of STAR
Telecommunications, Inc. ("STAR" or the "Company") and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," filed
as part of this Form 10-K. The consolidated statements of operations data for
the years ended December 31, 1995, 1996 and 1997, and the balance sheet data at
December 31, 1996 and 1997 are derived from the Company's audited financial
statements. The consolidated statement of operations data for the year ended
December 31, 1994 and the consolidated balance sheet data at December 31, 1994
are unaudited and are derived from unaudited financial statements not included
in this Form 10-K. The consolidated balance sheet data at December 31, 1995 is
derived from audited financial statements not included in this Form 10-K.
Although incorporated in 1993, the Company did not commence business until 1994.
 
<TABLE>
<CAPTION>
                                                                                YEAR ENDED DECEMBER 31,
                                                                     ----------------------------------------------
                                                                        1994        1995        1996        1997
                                                                     -----------  ---------  ----------  ----------
                                                                     (UNAUDITED)
                                                                         (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                                  <C>          <C>        <C>         <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:(1)
Revenues...........................................................   $  20,915   $  46,283  $  237,991  $  376,198
Operating expenses:
  Cost of services.................................................      12,775      31,897     205,585     325,237
  Selling, general and administrative..............................       4,782      10,086      34,331      35,381
  Depreciation and amortization....................................          30         186       1,151       4,245
  Merger expense...................................................          --          --          --         286
                                                                     -----------  ---------  ----------  ----------
  Total operating expenses.........................................      17,587      42,169     241,067     365,149
                                                                     -----------  ---------  ----------  ----------
  Income (loss) from operations....................................       3,328       4,114      (3,076)     11,049
Other income (expense):
  Interest income..................................................           3          22         110         492
  Interest expense.................................................          --         (64)       (601)     (1,633)
  Legal settlements and expenses...................................          --          --        (100)     (1,653)
  Other............................................................          (7)        (33)         39         208
                                                                     -----------  ---------  ----------  ----------
  Income (loss) before provision for income taxes..................       3,324       4,039      (3,628)      8,463
Provision for income taxes.........................................           1          66         592       2,895
                                                                     -----------  ---------  ----------  ----------
Net income (loss)..................................................   $   3,323   $   3,973  $   (4,220) $    5,568
                                                                     -----------  ---------  ----------  ----------
                                                                     -----------  ---------  ----------  ----------
Pro forma net income (loss) (unaudited)(2).........................   $   1,994   $   2,407  $   (5,163) $    5,373
                                                                     -----------  ---------  ----------  ----------
                                                                     -----------  ---------  ----------  ----------
Income per share(3)................................................   $    0.20   $    0.22  $    (0.19) $     0.19
                                                                     -----------  ---------  ----------  ----------
                                                                     -----------  ---------  ----------  ----------
Diluted income per share(3)........................................   $    0.20   $    0.22  $    (0.19) $     0.18
                                                                     -----------  ---------  ----------  ----------
                                                                     -----------  ---------  ----------  ----------
Pro forma income (loss) per share (unaudited)(2)(3)................   $    0.12   $    0.13  $    (0.24) $     0.19
                                                                     -----------  ---------  ----------  ----------
                                                                     -----------  ---------  ----------  ----------
Pro forma diluted income (loss) per share (unaudited)(2)(3)........   $    0.12   $    0.13  $    (0.24) $     0.17
                                                                     -----------  ---------  ----------  ----------
                                                                     -----------  ---------  ----------  ----------
Weighted average number of common shares outstanding(3)............      16,865      18,020      21,939      28,868
Weighted average number of diluted common shares outstanding(3)....      16,865      18,020      21,939      31,625
</TABLE>
 
                                       2
<PAGE>
 
<TABLE>
<CAPTION>
                                                                  AS OF DECEMBER 31,
                                                     --------------------------------------------
                                                        1994        1995       1996       1997
                                                     -----------  ---------  ---------  ---------
<S>                                                  <C>          <C>        <C>        <C>
                                                     (UNAUDITED)
                                                                    (IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit)..........................   $   2,007   $   1,222  $  (6,342) $  15,846
Total assets.......................................       5,105      18,316     54,000    113,553
Total long-term liabilities, net of current
  portion..........................................      --             904      5,870     12,271
Retained earnings (deficit)........................       1,839       1,596     (5,968)    (1,397)
Stockholders' equity...............................       2,197       3,047      7,911     44,014
</TABLE>
 
<TABLE>
<CAPTION>
                                                                                YEAR ENDED DECEMBER 31,
                                                                    -----------------------------------------------
                                                                       1994         1995        1996        1997
                                                                    -----------  ----------  ----------  ----------
                                                                    (UNAUDITED)
                                                                        (IN THOUSANDS, EXCEPT PER MINUTE DATA)
<S>                                                                 <C>          <C>         <C>         <C>
 
OTHER CONSOLIDATED FINANCIAL AND OPERATING DATA:
Capital expenditures(4)...........................................   $      57   $    2,175  $   13,018  $   24,732
Wholesale billed minutes of use...................................          --       38,106     479,681     863,295
Wholesale revenue per billed minute of use(5).....................   $      --   $   0.4102  $   0.4288  $   0.3997
</TABLE>
 
------------------------
 
(1) Does not reflect the acquisition of T-One Corp. ("T-One"), which was
    consummated on March 10, 1998, or the acquisition of United Digital Network
    ("UDN"), which remains subject to the approval of UDN's stockholders and to
    various regulatory approvals. If the Company's financial statements had been
    restated to include the combined operating results of the Company and T-One
    at the beginning of the audited periods presented, revenues would have been
    $58.9 million, $259.7 million and $404.6 million, income (loss) from
    operations would have been $3.8 million, $(3.7) million and $11.4 million
    and pro forma net income (loss) would have been $2.1 million, $(5.7) million
    and $5.6 million for the years ended December 31, 1995, 1996 and 1997,
    respectively. See Note 14 of Notes to Consolidated Financial Statements.
 
(2) The pro forma net income or loss per share assumes that both STAR and L.D.
    Services, Inc. ("LDS") had been C-Corporations for all periods presented.
 
(3) See Note 2 of Notes to Consolidated Financial Statements for an explanation
    of the method used to determine the number of shares used in computing pro
    forma net income (loss) per share.
 
(4) Includes assets financed with capital leases or notes. See Note 2 of Notes
    to Consolidated Financial Statements.
 
(5) Represents wholesale gross call usage revenue per billed minute. Amounts
    exclude other revenue related items such as finance charges.
 
                                       3
<PAGE>
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
  OF OPERATIONS.
 
    THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH "SELECTED
CONSOLIDATED FINANCIAL DATA" AND THE CONSOLIDATED FINANCIAL STATEMENTS AND THE
NOTES THERETO CONTAINED ELSEWHERE IN THIS FORM 10-K. THIS DISCUSSION CONTAINS
FORWARD-LOOKING STATEMENTS, AS DEFINED IN SECTION 27A OF THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT") AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"), THAT INVOLVE RISKS AND
UNCERTAINTIES. STAR'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS,
INCLUDING, BUT NOT LIMITED TO THOSE DISCUSSED IN "RISK FACTORS" IN THE COMPANY'S
ANNUAL REPORT ON FORM 10-K.
 
OVERVIEW
 
    The Company is an emerging multinational carrier focused primarily on the
international long distance market. The Company offers highly reliable, low-cost
switched voice services on a wholesale basis, primarily to U.S.-based long
distance carriers. STAR provides international long distance service to
approximately 220 countries through its flexible network comprised of various
foreign termination relationships, international gateway switches, leased and
owned transmission facilities and resale arrangements with other long distance
providers.
 
    The Company installed its first international gateway switch in Los Angeles
in June 1995 and initially recognized wholesale revenues in August 1995. A
significant portion of the Company's revenues in 1994 and 1995 were generated by
the commercial operations of LDS.
 
    REVENUES.  Most of the Company's revenues are generated by the sale of
international long distance services on a wholesale basis to other, primarily
domestic, long distance providers. The Company records revenues from the sale of
long distance services at the time of customer usage. The Company's agreements
with its wholesale customers are short-term in duration and the rates charged to
customers are subject to change from time to time, generally with five days
notice to the customer.
 
    COSTS OF SERVICES (EXCLUSIVE OF DEPRECIATION AND AMORTIZATION).  The Company
has pursued a strategy of attracting customers and building calling volume and
revenue by offering favorable rates compared to other long distance providers.
The Company continues to lower its costs of services (exclusive of depreciation
and amortization) by (i) expanding the Company's owned network facilities, (ii)
continuing to utilize the Company's sophisticated information systems to route
calls over the most cost-effective routes and (iii) leveraging the Company's
traffic volumes and information systems to negotiate lower variable usage-based
costs with domestic and foreign providers of transmission capacity.
 
    Costs of services (exclusive of depreciation and amortization) include those
costs associated with the transmission and termination of international long
distance services and does not include depreciation or amortization expense.
Currently, a majority of transmission capacity used by the Company is obtained
on a variable, per minute basis. As a result, some of the Company's current
costs of services (exclusive of depreciation and amortization) is variable. The
Company's contracts with its vendors provide that rates may fluctuate, with rate
change notice periods varying from five days to one year, with certain of the
Company's longer term arrangements requiring the Company to meet minimum usage
commitments in order to avoid penalties. Such variability and the short-term
nature of many of the contracts subject the Company to the possibility of
unanticipated cost increases and the loss of cost-effective routing
alternatives. Each quarter management reviews the cost of services (exclusive of
depreciation and amortization) accrual and adjusts the balance for resolved
items. Cost of services (exclusive of depreciation and amortization) also
include fixed costs associated with the leasing of network facilities.
 
    The Company intends to begin providing international long distance services
to commercial customers in certain European countries in the second half of
1998. STAR began providing long distance service to commercial markets in the
U.S. with its acquisition of LDS in November 1997. STAR believes that traffic
 
                                       4
<PAGE>
from commercial customers will be more profitable than wholesale traffic. STAR
also expects, however, that an expansion into this market will also increase the
risk of bad debt exposure and lead to higher overhead costs. Information related
to wholesale and commercial revenues and operations will be reported in future
Exchange Act filings made by STAR in accordance with Financial Accounting
Standards Board Statement No. 131.
 
    Prices in the international long distance market have declined in recent
years and, as competition continues to increase, STAR believes that prices are
likely to continue to decline. Additionally, STAR believes that the increasing
trend of deregulation of international long distance telecommunications will
result in greater competition, which could adversely affect STAR's revenue per
minute. STAR believes, however, that the effect of such decreases in prices will
be offset by increased calling volumes and decreased costs.
 
    OPERATING EXPENSES.  Selling, general and administrative expenses consist
primarily of personnel costs, depreciation and amortization, tradeshow and
travel expenses and commissions and consulting fees, as well as an accrual for
bad debt expense. These expenses have been increasing over the past year, which
is consistent with STAR's recent growth, accelerated expansion into Europe, and
investment in systems and facilities. The Company expects this trend to
continue, and to include, among other things, a significant increase in
depreciation and amortization. Management believes that additional selling,
general and administrative expenses will be necessary to support the expansion
of the Company's network facilities, its sales and marketing efforts and STAR's
expansion into commercial markets.
 
    FOREIGN EXCHANGE.  The Company's revenues and cost of long distance services
are sensitive to foreign currency fluctuations. The Company expects that an
increasing portion of the Company's revenues and expenses will be denominated in
currencies other than U.S. dollars, and changes in exchange rates may have a
significant effect on the Company's results of operations.
 
    FACTORS AFFECTING FUTURE OPERATING RESULTS.  The Company's quarterly
operating results are difficult to forecast with any degree of accuracy because
a number of factors subject these results to significant fluctuations. As a
result, STAR believes that period-to-period comparisons of its operating results
are not necessarily meaningful and should not be relied upon as indications of
future performance.
 
    The Company's revenues, costs and expenses have fluctuated significantly in
the past and are likely to continue to fluctuate significantly in the future as
a result of numerous factors. The Company's revenues in any given period can
vary due to factors such as call volume fluctuations, particularly in regions
with relatively high per-minute rates; the addition or loss of major customers,
whether through competition, merger, consolidation or otherwise; the loss of
economically beneficial routing options for the termination of STAR's traffic;
financial difficulties of major customers; pricing pressure resulting from
increased competition; and technical difficulties with or failures of portions
of STAR's network that impact STAR's ability to provide service to or bill its
customers. STAR's operating expenses in any given period can vary due to factors
such as fluctuations in rates charged by carriers to terminate STAR's traffic;
increases in bad debt expense and reserves; the timing of capital expenditures,
and other costs associated with acquiring or obtaining other rights to switching
and other transmission facilities; changes in STAR's sales incentive plans; and
costs associated with changes in staffing levels of sales, marketing, technical
support and administrative personnel. In addition, STAR's operating results can
vary due to factors such as changes in routing due to variations in the quality
of vendor transmission capability; loss of favorable routing options; the amount
of, and the accounting policy for, return traffic under operating agreements;
actions by domestic or foreign regulatory entities; the level, timing and pace
of STAR's expansion in international and commercial markets; and general
domestic and international economic and political conditions. Further, a
substantial portion of transmission capacity used by the Company is obtained on
a variable, per minute and short term basis, subjecting the Company to the
possibility of unanticipated price increases and service cancellations. Since
STAR does not generally have long term arrangements for the purchase or resale
of long distance services, and since rates fluctuate significantly over short
periods of time, STAR's operating
 
                                       5
<PAGE>
results are subject to significant fluctuations over short periods of time. The
Company's operating results also may be negatively impacted in the longer term
by competitive pricing pressures.
 
RECENT ACQUISITIONS AND DEVELOPMENTS
 
    The Company has recently acquired or entered into agreements to acquire the
following companies and has taken the following actions:
 
    - L.D. SERVICES, INC. On November 30, 1997, the Company acquired LDS,
      certain non-operating entities and majority ownership in another entity
      for approximately 849,000 shares of Common Stock in a transaction
      accounted for as a pooling of interests. The Company's audited financial
      statements have been restated to include LDS' historical performance for
      all periods presented. The commercial business of LDS has historically had
      higher revenue per minute and higher selling, general and administrative
      expenses and operating costs than the Company's wholesale operations. As
      the Company integrates and expands the commercial accounts of LDS, such
      increase in operations may affect the Company's future operating margins.
      In 1997, LDS settled disputes with the California PUC and with the
      District Attorney of Monterey, California. The resulting payments and
      restrictions on LDS' activities adversely affected its 1997 operating
      results.
 
    - T-ONE CORP. On March 10, 1998, the Company acquired T-One for 1,353,000
      shares of Common Stock in a transaction accounted for as a pooling of
      interests. The Company's audited financial statements included in this
      document have not been restated to include T-One's historical performance.
      For the fiscal year ended December 31, 1997, T-One had revenues of $30.4
      million, gross profit of $1.8 million, selling, general and administrative
      expenses of $1.5 million and net income of $0.2 million. See Note 14 of
      Notes to Consolidated Financial Statements.
 
    - UNITED DIGITAL NETWORK, INC. On November 19, 1997, STAR entered into an
      agreement to acquire UDN for approximately 650,000 shares of STAR Common
      Stock. The acquisition of UDN is subject to the approval of UDN's
      stockholders and to various regulatory approvals, and STAR may not
      complete this acquisition.
 
    - On March 24, 1998, the Company filed a Registration Statement on Form S-1
      (Registration No. 333-48559) registering 6,670,000 shares of Common Stock
      to be sold by the Company (the "Offering"). The Company also granted the
      Underwriters a 30-day option to purchase up to 1,050,000 additional shares
      of Common Stock solely to cover over-allotments, if any. The Company
      intends to use the proceeds from the Offering for capital expenditures,
      working capital and general corporate purposes.
 
    - STOCK SPLIT. On March 31, 1998, the Company will give effect to the Stock
      Split with payment to the holders of the shares of Common Stock
      outstanding on February 20, 1998 a stock dividend equal to 1.05 shares of
      Common Stock for each such outstanding share.
 
                                       6
<PAGE>
RESULTS OF OPERATIONS
 
    The following table sets forth certain selected items in the Company's
statements of operations as a percentage of total revenues for the periods
indicated:
 
<TABLE>
<CAPTION>
                                                        YEARS ENDED DECEMBER 31,
                                                      ----------------------------
                                                       1995       1996       1997
                                                      ------     ------     ------
<S>                                                   <C>        <C>        <C>
Revenues..........................................     100.0%     100.0%     100.0%
Operating Expenses:
  Cost of services................................      68.9       86.4       86.5
  Selling, general and administrative expenses....      21.8       14.4        9.4
  Depreciation and amortization...................       0.4        0.5        1.1
                                                      ------     ------     ------
      Total operating expenses....................      91.1      101.3       97.1
Income (loss) from operations.....................       8.9       (1.3)       2.9
                                                      ------     ------     ------
Income (loss) before provision for income taxes...       8.7       (1.5)       2.3
Provision for income taxes........................       0.1        0.3        0.8
                                                      ------     ------     ------
Net income (loss).................................       8.6%      (1.8)%      1.5%
                                                      ------     ------     ------
                                                      ------     ------     ------
</TABLE>
 
YEARS ENDED DECEMBER 31, 1997 AND 1996
 
    REVENUES:  Revenues increased 58.1% to $376.2 million in 1997 from $238.0
million in 1996. Wholesale revenues increased to $348.7 million from $208.1
million, with wholesale minutes of use increasing to 863.3 million minutes in
1997, as compared to 479.7 million minutes of use in the prior year. This
increase reflects an increase in the number of wholesale customers from 84 in
1996 to 105 at the end of 1997, as well as an increase in usage by existing
customers, primarily resulting from STAR's expanding transmission capacity and
improving transmission quality. The average rate per minute of usage for
wholesale customers declined from $0.43 cents per minute in 1996 to $0.40 cents
per minute in 1997, reflecting the change in country mix to include a larger
proportion of lower rate per minute countries as well as lower prices on
competitive routes. The decline in rates per wholesale minute partially offset
the increase in wholesale minutes of use. The period to period decline in rates
per minute was not a significant factor in the relative increase in minutes of
use. Taking into account the acquisition of T-One, on a pro forma basis revenues
in 1997 would have been $404.6 million, an increase of 55.8% from 259.7 million
in 1996.
 
    Commercial revenues decreased to $27.5 million in 1997 from $29.9 million in
1996 reflecting the termination of the LDS customer base in California due to
the 1997 settlement entered into by LDS with each of the California PUC and the
District Attorney of Monterey, California. In 1997, commercial revenues
generated in the State of California was $10.4 million, as compared to
California-generated commercial revenues of $14.5 million in 1996.
 
    COST OF SERVICES (EXCLUSIVE OF DEPRECIATION AND AMORTIZATION):  Cost of
services (exclusive of depreciation and amortization) increased 58.2% to $325.2
million in 1997 from $205.6 million in 1996. Wholesale cost of services
(exclusive of depreciation and amortization) increased to $308.9 million in 1997
from $188.4 million for 1996 and as a percentage of wholesale revenues decreased
to 88.6% from 90.6%, respectively. Wholesale cost of services (exclusive of
depreciation and amortization) declined during 1997 as traffic was increasingly
routed over STAR's proprietary international network. Commercial cost of
services (exclusive of depreciation and amortization) decreased 5.2% to $16.3
million in 1997 from $17.2 million in 1996 and as a percentage of commercial
revenue increased to 59.3% from 57.4% over such periods, reflecting declining
prices in the competitive long distance market. As STAR migrates the LDS
commercial customer base onto STAR's network, LDS's cost of commercial long
distance services (exclusive of depreciation and amortization) is expected to
decline.
 
                                       7
<PAGE>
    SELLING, GENERAL AND ADMINISTRATIVE:  In 1997, selling, general and
administrative expenses increased 3.1% to $35.4 million, from $34.3 million in
1996. Wholesale selling, general and administrative expenses increased to $26.0
million in 1997 from $24.1 million in 1996, but decreased as a percentage of
wholesale revenues to 7.5% from 11.6% over the comparable periods. Total
expenses increased year to year in absolute dollars as STAR expanded its
proprietary international network and employee base. Included in the 1996
selling, general and administrative expense was $11.6 million in reserves and
write-offs against deposits and accounts receivable related to bad debts from
two customers. Commercial selling, general and administrative expenses decreased
to $9.4 million in 1997 from $10.2 million in 1996 and remained flat as a
percentage of commercial revenues at approximately 34.1%. STAR expects selling,
general and administrative expenses to expand in absolute dollars and as a
percentage of revenues in fiscal year 1998, as STAR expands its network and
employee base and in connection with STAR's entry into the commercial market.
 
    DEPRECIATION AND AMORTIZATION:  Depreciation increased to $4.2 million for
1997 from $1.2 million for 1996, and increased as a percentage of revenues to
1.1% from 0.5% in the prior period. Depreciation increased as a result of STAR's
continuing expansion of its proprietary international network which includes
purchases of switches, submarine cable and leasehold improvements associated
with switch sites. STAR expects depreciation expense to increase as STAR
continues to expand its global telecommunications network.
 
    OTHER INCOME (EXPENSE):  Other expense, net, increased to $2.6 million in
1997 from $552,000 in 1996. This increase is primarily due to interest expense
of $1.6 million incurred under various capital leases and bank lines of credit
and a legal settlement and associated expenses of $1.7 million. The legal
settlement relates to the dispute settled by LDS with the California PUC and the
District Attorney of Monterey County. See "Business of STAR--Governmental
Regulation--Actions Against LDS." Interest income earned on short-term
investments increased to $492,000 in 1997 from $110,000 in 1996 due to interest
earned on the proceeds of STAR's June 1997 initial public offering.
 
    PROVISION FOR INCOME TAXES:  The historical provision for income taxes
increased to $2.9 million in 1997 from $592,000 in 1996 primarily due to the
increase in profitability of STAR.
 
YEARS ENDED DECEMBER 31, 1996 AND 1995.
 
    REVENUES:  Revenues increased 414.2% to $238.0 million in 1996 from $46.3
million 1995. Wholesale revenues increased to $208.1 million in 1996 from $16.1
million in 1995, with minutes of use increasing to 479.7 million in 1996, as
compared to 38.1 million minutes of use in the prior year. The increase in
wholesale revenue resulted from STAR's commencement of operations as an
international long distance carrier, an increase in the number of customers as
compared to the prior year and an increase in minutes of wholesale traffic from
new and existing customers. The increase in traffic is also attributable to an
increase in the number of routes with favorable rates that STAR was able to
offer to customers. Commercial revenues decreased to $29.9 million in 1996 from
$30.2 million in 1995 due to a decrease in the rate per minute charged, which
was partially offset by an increase in the number of minutes sold. In 1996,
commercial revenue generated in the State of California was $14.5 million, as
compared to California-generated commercial revenues of $15.4 million in 1995.
Taking into account the acquisition of T-One, on a pro forma basis revenues
would have been $259.7 million in 1996, an increase of 340.6% from $58.9 million
in 1995.
 
    COST OF SERVICES (EXCLUSIVE OF DEPRECIATION AND AMORTIZATION):  Cost of
services (exclusive of depreciation and amortization) increased 544.5% to $205.6
million for 1996 from $31.9 million in 1995. Wholesale cost of services
(exclusive of depreciation and amortization) increased to $188.4 million in 1996
from $14.3 million for 1995. Wholesale cost of services (exclusive of
depreciation and amortization) as a percentage of wholesale revenues decreased
to 90.6% in 1996 from 89.0% in 1995, reflecting the change from STAR's prior
consulting business to operating as an international long distance carrier. Cost
of
 
                                       8
<PAGE>
services (exclusive of depreciation and amortization) was positively impacted
during 1996 by the negotiation of lower rates on routes with significant
traffic, and negatively impacted by increases in traffic on routes with lower
margins. Commercial cost of services (exclusive of depreciation and
amortization) decreased to $17.2 million in 1996 from $17.6 million in 1995
representing 57.4% and 58.2% of commercial revenues, respectively. Cost of
services (exclusive of depreciation and amortization) from commercial services
declined as costs associated with the local exchange carriers declined.
 
    SELLING, GENERAL AND ADMINISTRATIVE:  Selling, general and administrative
expenses increased 240.4% to $34.3 million in 1996 from $10.1 million in 1995.
Wholesale selling, general and administrative expenses increased to $24.1
million in 1996 from $2.1 million in 1995, and increased as a percentage of
revenues to 11.6% from 12.8% in the prior period. Selling, general and
administrative expenses increased between periods as STAR increased its employee
base and incurred payroll, employee benefits, commission and related expenses.
 
    STAR also established a reserve for doubtful accounts to reflect its
significantly higher revenue levels and invested in sales and marketing
activities, including tradeshows and travel. Hi-Rim and CCI, two of STAR's major
customers in 1996, informed STAR that they were experiencing financial
difficulties and would be unable to pay in full outstanding accounts receivable.
As a result, the full amount of the approximately $10.8 million owed to STAR by
Hi-Rim and CCI as of December 31, 1996 which was not subsequently collected or
for which no offsetting value was received, was written off or reserved in 1996.
In addition, STAR wrote-off $820,000 of intangible assets relating to CCI.
Commercial selling, general and administrative expenses increased to $10.2
million in 1996 from $8.0 million in 1995 reflecting higher operating costs.
 
    DEPRECIATION:  Depreciation increased to $1.2 million for 1996 from $186,000
for 1995, an increase as a percentage of revenues to 0.5% from 0.4% in the prior
period. Depreciation increased as a result of STAR's purchase of switches and of
the operating equipment and leasehold improvements associated with its Los
Angeles and New York switching facilities. Depreciation expense will increase as
STAR expands its ownership of switching and transmission facilities through
purchase or use of capital leases.
 
    OTHER INCOME (EXPENSE):  Other expense, net, increased to $552,000 in 1996
from $75,000 in 1995. This increase is primarily due to a $100,000 legal
settlement in the second quarter of 1996 as well as $601,000 in interest expense
incurred under various bank and stockholder lines of credit. This increase was
offset by $110,000 in interest income on short-term investments and cash
equivalents primarily from funds raised in private placements of equity
securities during the first three quarters of 1996.
 
    PROVISION FOR INCOME TAXES:  Through December 31, 1995, STAR had elected to
be taxed as an S-Corporation for both federal and state income tax purposes and
thus was only subject to 1.5% tax on taxable income for state purposes. LDS was
an S-Corporation through the date of the merger on November 30, 1997. The pro
forma provision for income taxes, assumes that both STAR and LDS were
C-Corporations for all periods presented. During 1996, the historical provision
for income taxes increased to $592,000 as a result of the reserve of $2.9
million of the net deferred tax asset.
 
LIQUIDITY AND CAPITAL RESOURCES
 
    As of December 31, 1997, STAR had cash and cash equivalents of approximately
$1.5 million, short-term investments of $18.6 million and a working capital
surplus of $15.8 million. In June 1997, the Company completed an initial public
offering of 9.4 million shares of Common Stock of which approximately 8.1
million shares were sold by the Company and approximately 1.3 million shares
were sold by certain selling stockholders. The net proceeds to the Company
(after deducting underwriting discounts and offering expenses) from the sale of
such shares of Common Stock were approximately $30.9 million. As of December 31,
1997, the Company had used the proceeds from the offering to repay indebtedness
of $14.2
 
                                       9
<PAGE>
million, to purchase switching and transmission related equipment and to finance
the Company's operations in the U.K.
 
    As of December 31, 1997, STAR had no funds outstanding on its $25 million
revolving line of credit, which bears interest at a rate of the bank's cost of
funds plus 175 basis points and expires on July 1, 1999. However, the line of
credit is reduced by outstanding letters of credit in the amount of $4.9
million.
 
    STAR generated net cash from operating activities of $10.1 million in 1997,
primarily from net income plus depreciation and amortization, while using $3.4
million in 1996. The Company's investing activities used cash of approximately
$29.6 million during 1997 primarily resulting from capital expenditures and the
investment of the proceeds from the initial public offering in marketable
securities, while using $9.8 million in 1996. The Company's financing activities
provided cash of approximately $19.3 million during 1997 primarily from the sale
of Common Stock and borrowings under lines of credit, offset by repayments under
various lines of credit, while providing $14.7 million in 1996.
 
    STAR had capital lease obligations of $13.6 million, and $0.8 million in
term loans, relating to its switching facilities and operating equipment. STAR
anticipates making capital expenditures of approximately $80.0 million over the
next 12 months to expand its global network. STAR believes that the proceeds
from the Offering and cash generated from operations, as well as funding under
its bank line of credit, will satisfy STAR's current liquidity needs.
Nevertheless, as the Company continues to expand its network facilities and
pursues its strategy of growth through acquisition, the Company's liquidity
needs may increase, perhaps significantly, which could require the Company to
seek such additional financing or the expansion of its borrowing capacity under
current or new lines of credit. As appropriate, STAR will use capital lease
financing or raise additional debt or equity capital to finance new projects or
acquisitions. The Company had foreign currency contracts outstanding at December
31, 1997 in the notional amount of $6.3 million. See Note 2 of Notes to
Consolidated Financial Statements.
 
    YEAR 2000 COMPLIANCE.  A significant percentage of the software that runs
most of the computers in the United States relies on two-digit date codes to
perform a number of computation and decision making functions. Commencing on
January 1, 2000, these computer programs may fail from an inability to interpret
date codes properly, misreading "00" for the year 1900 instead of the year 2000.
 
    STAR has initiated a comprehensive program to identify, evaluate and address
issues associated with the ability of its information technology and
non-information technology systems to properly recognize the Year 2000 in order
to avoid interruption of the operation of these systems and a material adverse
effect on STAR's operations as a result of the century change. Each of the
information technology software programs that STAR currently uses has either
been certified by its respective vendor as Year 2000 compliant or will be
replaced with software that is so certified prior to January 1, 1999. STAR
intends to conduct comprehensive tests of all of its software programs for Year
2000 compliance as part of its Year 2000 readiness program. An integral part of
STAR's non-information technology systems, its telecommunications switches, is
not currently Year 2000 compliant. The respective vendors of STAR's twelve
switches are in the process of upgrading the switches and have informed STAR
that the switches will be compliant on or before February 28, 1999. STAR does
not believe that its other non-information technology systems will be affected
by the Year 2000, but will not know definitively until STAR tests and evaluates
such equipment during January 1999.
 
    STAR's computer systems interface with the computers and technology of many
different telecommunications companies, including those of foreign companies, on
a daily basis. STAR considers the Year 2000 readiness of its foreign customers
and vendors of particular importance given the general concern that the computer
systems abroad may not be as prepared as those in domestic operations to handle
the century change. As part of its Year 2000 compliance program, STAR intends to
contact its significant vendors and customers to ascertain whether the systems
used by such third parties are Year 2000 compliant. STAR plans to have all Year
2000 compliance initial testing and any necessary conversions completed by July
1999.
 
                                       10
<PAGE>
    Historically, STAR has not incurred any costs to date to reprogram, replace
and test its information and non-information technology systems for Year 2000
compliance. The costs associated with STAR's Year 2000 compliance efforts will
be incurred during 1998 and 1999. STAR estimates the costs of the efforts will
be between $70,000 and $150,000 over the life of the project; though such
expenditures may increase materially following testing of non-information
technology systems and evaluation of the Year 2000 compliance status of integral
third party vendors and customers. Costs incurred in connection with STAR's Year
2000 compliance efforts will be expensed as incurred.
 
    STAR currently anticipates that its information technology and
non-information technology systems will be Year 2000 compliant before January 1,
2000, though no assurances can be given that STAR's compliance testing will not
detect unanticipated Year 2000 compliance problems. Furthermore, STAR does not
yet know the Year 2000 compliance status of integral third parties and is
therefore currently unable to assess the likelihood or the risk to STAR of third
party system failures. However, a system failure by any of STAR's significant
customers or vendors could have a material adverse effect on STAR's operations.
 
    The Company believes that the most reasonably likely worst case scenario
resulting from the century change will be its inability to route telephone
traffic at current rates to desired locations for an indeterminable period of
time. Such worst case scenario could have a material adverse affect on STAR's
results of operations and liquidity.
 
    STAR intends to develop contingency plans to handle a Year 2000 system
failure experienced by its information and non-information technology systems
and to handle any necessary interactions with the computers and technology of
any integral non-complying third party.
 
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
    See the Index included at "Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K."
 
                                       11
<PAGE>
                                    PART IV
 
ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
 
    (a) Documents filed as part of this Report:
 
       (1) Index to Financial Statements:
 
<TABLE>
<CAPTION>
                                                                                                      PAGE
                                                                                                      -----
<S>                                                                                                   <C>
Report of Independent Public Accountants                                                               F-1
Consolidated Balance Sheets as of December 31, 1996 and 1997                                           F-2
Consolidated Statements of Operations for the years ended December 31, 1995, 1996 and 1997             F-3
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995, 1996 and 1997   F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997             F-5
Notes to Consolidated Financial Statements                                                             F-7
</TABLE>
 
       (2) Index to Financial Statement Schedules:
 
<TABLE>
<S>                                                                                                   <C>
Report of Independent Public Accountants                                                               S-1
Schedule II--Valuation and Qualifying Accounts                                                         S-2
</TABLE>
 
       (3)(a) Exhibits:
 
<TABLE>
<C>        <S>
   2.1*    Amended and Restated Stock Acquisition Agreement and Plan of Merger dated as of
           November 30, 1997 by and among the Registrant, Big Dave's Acquisition Corp., LCCR,
           Inc., and the shareholders listed on the signature page thereto.
   2.2**   Agreement and Plan of Merger dated as of November 19, 1997 by and among the
           Registrant, IIWII Corp. and United Digital Network, Inc. (the "UDN Merger
           Agreement").
   2.3**   First Amendment to the UDN Merger Agreement dated as of January 30, 1998.
   2.4**   Stock Purchase Agreement dated as of January 26, 1998 by and among the Registrant,
           T-One Corp. and Taha Mikati, as amended.
   3.1**   Amended and Restated Certificate of Incorporation of the Registrant.
   3.2**   Bylaws of the Registrant.
   4.1+++  Specimen Common Stock certificate.
   4.2+    Registration Rights Agreement, dated September 24, 1996, between the Registrant
           and the investors named therein.
   4.3+    Registration Rights Agreement, dated July 12, 1996, between the Registrant and the
           investor named therein.
   4.4+    Investor Rights Agreement dated July 25, 1996, between the Registrant and the
           investors named therein.
   4.5*    Registration Rights Agreement dated as of November 30, 1997 by and among the
           Company and the shareholders listed on the signature page thereto.
   4.6**   Registration Rights Agreement dated as of March 10, 1998 between the Registrant
           and Taha Mikati.
  10.1+    Form of Indemnification Agreement.
  10.2+    1996 Amended and Restated Stock Incentive Plan.
  10.3+    1996 Outside Director Nonstatutory Stock Option Plan.
  10.4++   1997 Omnibus Stock Incentive Plan.
  10.5+    Employment Agreement between the Registrant and Mary Casey dated July 14, 1995, as
           amended.
  10.6+    Employment Agreement between the Registrant and Kelly Enos dated December 2, 1996.
</TABLE>
 
                                       12
<PAGE>
<TABLE>
<C>        <S>
  10.7+    Employment Agreement between the Registrant and David Vaun Crumly dated January 1,
           1996.
  10.8+    Employment Agreement between the Registrant and James Kolsrud dated December 18,
           1996.
  10.9+    Consulting Agreement between the Registrant and Gordon Hutchins, Jr. dated May 1,
           1996.
  10.10+   Nonstatutory Stock Option Agreement between the Registrant and Gordon Hutchins,
           Jr. dated May 15, 1996.
  10.11+   Free Standing Commercial Building Lease between the Registrant and Thomas M.
           Spear, as receiver for De La Guerra Court Investments, dated for reference
           purposes as of March 1, 1996.
  10.12+   Standard Office Lease--Gross between the Registrant and De La Guerra Partners,
           L.P. dated for reference purposes as of July 9, 1996.
  10.13+   Office Lease between the Registrant and WHUB Real Estate Limited Partnership dated
           June 28, 1996, as amended.
  10.14+   Standard Form of Office Lease between the Registrant and Hudson Telegraph
           Associates dated February 28, 1996.
  10.15+   Agreement for Lease between the Registrant and Telehouse International Corporation
           of Europe Limited dated July 16, 1996.
  10.16+   Sublease between the Registrant and Borton, Petrini & Conron dated March 20, 1994,
           as amended.
  10.17+   Office Lease between the Registrant and One Wilshire Arcade Imperial, Ltd. dated
           June 28, 1996.
  10.18+   Lease Agreement between the Registrant and Telecommunications Finance Group dated
           April 6, 1995.
  10.19+   Lease Agreement between the Registrant and Telecommunications Finance Group dated
           January 3, 1996, as amended.
  10.20++  Master Lease Agreement between the Registrant and NTFC Capital Corporation dated
           December 20, 1996.
  10.21+   Variable Rate Installment Note between the Registrant and Metrobank dated October
           4, 1996.
  10.22+   Assignment of Purchase Order and Security Interest between the Registrant and DSC
           Finance Corporation dated January 1, 1996.
  10.23++  Line of Credit Promissory Note between the Registrant and Christopher E. Edgecomb
           dated November 7, 1996, as amended.
  10.24++  Office Lease Agreement between the Registrant and Beverly Hills Center LLC
           effective as of April 1, 1997.
  10.25**  Credit Agreement dated as of September 30, 1997 among the Registrant, the
           financial institutions party thereto and Sanwa Bank California, as amended.
  10.26**  Office Lease between the Registrant, Hudson Telegraph Associates and American
           Communications Corp., as amended.
  10.27**  Amendment Number Three to Employment Agreement between the Registrant and Mary A.
           Casey dated as of July 1, 1997.
  10.28**  Amendment Number One to Employment Agreement between the Registrant and Kelly D.
           Enos dated as of November 12, 1997.
  10.29**  Amendment Number One to First Restatement of Employment Agreement between the
           Registrant and James Kolsrud dated as of June 16, 1997.
  10.30**  Amendment Number One to Employment Agreement between the Registrant and David Vaun
           Crumly dated as of November 11, 1997.
  10.31**  First Amendment to Amended and Restated 1996 Stock Incentive Plan.
 10.32***  Agreement dated as of December 1, 1997 between the Registrant and Nortel Dasa
           Network Systems GmbH & Co. KG.
  10.33**  Leasing Agreement between the Registrant and Nortel Dasa Network Systems GmbH &
           Co. KG.
</TABLE>
 
                                       13
<PAGE>
<TABLE>
<C>        <S>
  10.34**  Guarantee Agreement between the Registrant and Nortel Dasa Network Systems GmbH &
           Co. KG.
  10.35**  Note and Security Agreement dated as of December 18, 1997 between the Registrant
           and NationsBanc Leasing Corporation.
  10.36**  Amendment of Lease dated as of September 30, 1997 between the Registrant and
           Hudson Telegraph (reference is hereby made to Exhibit 10.14).
  10.37    Intentionally omitted.
  10.38**  Lease Agreement dated July 29, 1996 between the Registrant and Telecommunications
           Finance Group.
  10.39**  Promissory Note issued by Christopher E. Edgecomb in favor of the Registrant dated
           November 26, 1997.
  10.40**  Stock Pledge Agreement dated November 26, 1997 between the Registrant and
           Christopher E. Edgecomb.
  10.41**  Commercial Lease dated October 31, 1997 between the Registrant and Prinzenpark
           GbR.
  10.42**  Commercial Lease dated October 9, 1997 between the Registrant and WSL Weststadt
           Liegenschafts GmbH.
  10.43**  Office Lease between the Registrant and Airport-Center KGHP Gewerbeban GmbH & Cie.
  10.44**  Lease dated November 19, 1997 between the Registrant and DIFA Deutsche Immobilien
           Fonds Aktiengesellschaft.
  21.1***  Subsidiaries of the Registrant.
  23.1     Consent of Arthur Andersen LLP, Independent Accountants.
  24.1***  Power of Attorney.
  27.1     Financial Data Schedule.
</TABLE>
 
------------------------
  + Filed as an exhibit to the Company's Registration Statement on Form S-1
    (Registration No. 333-21325) on February 7, 1997 and incorporated by
    reference herein.
 
 ++ Filed as an exhibit to Amendment No. 1 to the Company's Registration
    Statement on Form S-1 (Registration No. 333-21325) on May 16, 1997 and
    incorporated by reference herein.
 
+++ Filed as an exhibit to Amendment No. 2 to the Company's Registration
    Statement on Form S-1 (Registration No. 333-21325) on May 29, 1997 and
    incorporated by reference herein.
 
  * Filed as an exhibit to the Company's Current Report on Form 8-K (File No.
    000-22581) on December 15, 1997 and incorporated by reference herein.
 
 ** Filed as an exhibit to the Company's Registration Statement on Form S-1
    (Registration No. 333-48559) on March 24, 1998 and incorporated by reference
    herein.
 
*** Filed as an exhibit to the Company's Annual Report on Form 10-K on March 31,
    1998 and incorporated by reference herein.
 
    (b) Reports on Form 8-K:
 
       Current Report on Form 8-K, dated November 30, 1997, reporting under Item
       2: (i) the acquisition by STAR of all of the outstanding shares of the
       capital stock of LCCR, Inc. ("LCCR"); (ii) the Audited Financial
       Statements of LCCR; (iii) Pro Forma Combined Balance Sheet of STAR and
       LCCR as of September 30, 1997; (iv) Pro Forma Combined Statements of
       Operations of STAR and LCCR for the year ended December 31, 1996 and for
       the nine-month period ended September 30, 1997; and (v) Notes to Pro
       Forma Combined Statements of STAR and LCCR.
 
                                       14
<PAGE>
                 STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                                                                                          PAGE
                                                                                                                          -----
<S>                                                                                                                       <C>
Report of Independent Public Accountants................................................................................   F-2
 
Consolidated Balance Sheets as of December 31, 1996 and 1997............................................................   F-3
 
Consolidated Statements of Operations for the years ended December 31, 1995, 1996 and 1997..............................   F-4
 
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995, 1996 and 1997....................   F-5
 
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997..............................   F-6
 
Notes to Consolidated Financial Statements..............................................................................   F-8
</TABLE>
 
                                      F-1
<PAGE>
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To the Board of Directors and Stockholders
  of STAR Telecommunications, Inc. and Subsidiaries:
 
    We have audited the accompanying consolidated balance sheets of STAR
TELECOMMUNICATIONS, INC. (a Delaware corporation) AND SUBSIDIARIES, as of
December 31, 1996 and 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
 
    We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
    In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of STAR Telecommunications,
Inc. and Subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
 
                                          ARTHUR ANDERSEN LLP
 
Los Angeles, California
February 12, 1998
(except with respect
to the stock split discussed in
Note 14 as to which the
date is March 31, 1998)
 
                                      F-2
<PAGE>
                 STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                                                              DECEMBER 31,
                                                                                         -----------------------
                                                                                            1996        1997
                                                                                         ----------  -----------
<S>                                                                                      <C>         <C>
CURRENT ASSETS:
 
  Cash and cash equivalents............................................................  $1,726,000  $ 1,458,000
  Short-term investments...............................................................   1,630,000   18,579,000
  Accounts receivable, net of allowance of $6,202,000 and $7,745,000 at December 31,
    1996 and 1997, respectively........................................................  27,660,000   42,407,000
  Receivable from related parties......................................................     115,000           --
  Other receivables....................................................................     284,000    2,198,000
  Prepaid expenses.....................................................................     960,000    4,712,000
  Prepaid taxes........................................................................     677,000           --
  Deferred income taxes................................................................          --    3,699,000
  Other current assets.................................................................     825,000       61,000
                                                                                         ----------  -----------
    Total current assets...............................................................  33,877,000   73,114,000
                                                                                         ----------  -----------
PROPERTY AND EQUIPMENT:
  Operating equipment..................................................................   8,653,000   29,142,000
  Leasehold improvements...............................................................   4,248,000    6,289,000
  Furniture, fixtures and equipment....................................................   2,418,000    4,564,000
                                                                                         ----------  -----------
                                                                                         15,319,000   39,995,000
  Less-Accumulated depreciation and amortization.......................................  (1,407,000)  (5,638,000)
                                                                                         ----------  -----------
                                                                                         13,912,000   34,357,000
                                                                                         ----------  -----------
OTHER ASSETS:
  Investments..........................................................................     153,000       27,000
  Deposits.............................................................................   5,630,000    6,055,000
  Other................................................................................     428,000           --
                                                                                         ----------  -----------
                                                                                          6,211,000    6,082,000
                                                                                         ----------  -----------
    Total assets.......................................................................  $54,000,000 $113,553,000
                                                                                         ----------  -----------
                                                                                         ----------  -----------
                                      LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Revolving lines of credit............................................................  $7,814,000  $        --
  Revolving lines of credit with stockholder...........................................      26,000      138,000
  Current portion of long-term debt....................................................     267,000      480,000
  Current portion of obligations under capital leases..................................     872,000    2,495,000
  Accounts payable.....................................................................   9,391,000    7,987,000
  Taxes payable........................................................................          --    2,156,000
  Related party payable................................................................     269,000           --
  Accrued line costs...................................................................  19,494,000   38,403,000
  Accrued expenses.....................................................................   2,086,000    5,609,000
                                                                                         ----------  -----------
    Total current liabilities..........................................................  40,219,000   57,268,000
                                                                                         ----------  -----------
LONG-TERM LIABILITIES:
  Long-term debt, net of current portion...............................................     466,000      348,000
  Capital lease obligations, net of current portion....................................   4,936,000   11,139,000
  Deferred compensation................................................................     116,000       57,000
  Deposits.............................................................................          --      164,000
  Other long-term liabilities..........................................................     352,000      563,000
                                                                                         ----------  -----------
    Total long-term liabilities........................................................   5,870,000   12,271,000
                                                                                         ----------  -----------
STOCKHOLDERS' EQUITY:
  Series A Preferred Stock, $.001 par value, authorized-- 5,000,000 shares
    Issued and outstanding-- 2,802,446 at December 31, 1996 and none at December 31,
    1997...............................................................................       3,000           --
  Common Stock, $.001 par value, authorized - 50,000,000 shares
    Issued and outstanding-- 23,223,810 and 33,678,519 at December 31, 1996 and 1997,
    respectively.......................................................................      23,000       34,000
  Additional paid-in capital...........................................................   9,937,000   41,373,000
  Deferred compensation................................................................    (118,000)     (30,000)
  Retained earnings (deficit)..........................................................  (1,934,000)  (2,637,000)
                                                                                         ----------  -----------
    Stockholders' equity...............................................................   7,911,000   44,014,000
                                                                                         ----------  -----------
      Total liabilities and stockholders' equity.......................................  $54,000,000 $113,553,000
                                                                                         ----------  -----------
                                                                                         ----------  -----------
</TABLE>
 
   The accompanying notes are an integral part of these consolidated balance
                                    sheets.
 
                                      F-3
<PAGE>
                 STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                                             YEARS ENDED DECEMBER 31,
                                                                   ---------------------------------------------
                                                                       1995            1996            1997
                                                                   -------------  --------------  --------------
<S>                                                                <C>            <C>             <C>
REVENUES.........................................................  $  46,283,000  $  237,991,000  $  376,198,000
                                                                   -------------  --------------  --------------
OPERATING EXPENSES:
  Cost of services...............................................     31,897,000     205,585,000     325,237,000
  Selling, general and administrative expenses...................     10,086,000      34,331,000      35,381,000
  Depreciation and amortization..................................        186,000       1,151,000       4,245,000
  Merger expense.................................................             --              --         286,000
                                                                   -------------  --------------  --------------
                                                                      42,169,000     241,067,000     365,149,000
                                                                   -------------  --------------  --------------
    Income (loss) from operations................................      4,114,000      (3,076,000)     11,049,000
                                                                   -------------  --------------  --------------
OTHER INCOME (EXPENSES):
  Interest income................................................         22,000         110,000         492,000
  Interest expense...............................................        (64,000)       (601,000)     (1,633,000)
  Legal settlement and expenses..................................             --        (100,000)     (1,653,000)
  Other income (expense).........................................        (33,000)         39,000         208,000
                                                                   -------------  --------------  --------------
                                                                         (75,000)       (552,000)     (2,586,000)
                                                                   -------------  --------------  --------------
    Income (loss) before provision for income taxes..............      4,039,000      (3,628,000)      8,463,000
 
PROVISION FOR INCOME TAXES.......................................         66,000         592,000       2,895,000
                                                                   -------------  --------------  --------------
NET INCOME (LOSS)................................................  $   3,973,000  $   (4,220,000) $    5,568,000
                                                                   -------------  --------------  --------------
                                                                   -------------  --------------  --------------
    Income (loss) before provision for income taxes..............      4,039,000      (3,628,000)      8,463,000
PRO FORMA INCOME TAXES (UNAUDITED)...............................      1,632,000       1,535,000       3,090,000
                                                                   -------------  --------------  --------------
PRO FORMA NET INCOME (LOSS) (UNAUDITED)..........................  $   2,407,000  $   (5,163,000) $    5,373,000
                                                                   -------------  --------------  --------------
                                                                   -------------  --------------  --------------
 
Income (loss) per common share...................................  $        0.22  $        (0.19) $         0.19
                                                                   -------------  --------------  --------------
                                                                   -------------  --------------  --------------
 
Diluted income (loss) per common share...........................  $        0.22  $        (0.19) $         0.18
                                                                   -------------  --------------  --------------
                                                                   -------------  --------------  --------------
Pro forma basic income (loss) per common share (unaudited).......  $        0.13  $        (0.24) $         0.19
                                                                   -------------  --------------  --------------
                                                                   -------------  --------------  --------------
Pro forma diluted income (loss) per common share (unaudited).....  $        0.13  $        (0.24) $         0.17
                                                                   -------------  --------------  --------------
                                                                   -------------  --------------  --------------
</TABLE>
 
 The accompanying notes are an integral part of these consolidated statements.
 
                                      F-4
<PAGE>
                 STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
                                                             PREFERRED STOCK           COMMON STOCK       ADDITIONAL
                                                          ----------------------  ----------------------   PAID-IN      DEFERRED
                                                           SHARES      AMOUNT      SHARES      AMOUNT      CAPITAL    COMPENSATION
                                                          ---------  -----------  ---------  -----------  ----------  -------------
<S>                                                       <C>        <C>          <C>        <C>          <C>         <C>
Balance, December 31, 1994..............................         --   $      --   17,455,959  $  17,000   $  341,000    $      --
 
Issuance of common stock................................         --          --   1,843,339       2,000      101,000           --
Conversion of debt to equity............................         --          --          --          --      990,000           --
Net income..............................................         --          --          --          --           --           --
Cash distributions to stockholders......................         --          --          --          --           --           --
                                                          ---------  -----------  ---------  -----------  ----------  -------------
Balance, December 31, 1995..............................         --          --   19,299,298     19,000    1,432,000           --
 
Effect of terminating the S-corporation election........         --          --          --          --     (690,000)          --
Compensation expense relating to stock options..........         --          --          --          --      168,000     (118,000)
Issuance of common stock................................         --          --   3,924,512       4,000    5,564,000           --
Issuance of preferred stock.............................  2,802,446       3,000          --          --    7,497,000           --
Net loss................................................         --          --          --          --           --           --
Cash distributions to stockholders......................         --          --          --          --   (4,034,000)          --
                                                          ---------  -----------  ---------  -----------  ----------  -------------
Balance, December 31, 1996..............................  2,802,446       3,000   23,223,810     23,000    9,937,000     (118,000)
 
Effect of L.D. Services terminating the S-corporation
  election..............................................         --          --          --          --      (61,000)          --
Conversion of redeemable preferred stock to common
  stock.................................................  (2,802,446)     (3,000) 1,868,284       3,000           --           --
Initial public offering of common stock.................         --          --   8,097,500       8,000   30,936,000           --
Exercise of stock options...............................         --          --     488,925          --      447,000           --
Compensation expense relating to stock options..........         --          --          --          --           --       88,000
Tax benefit from non-qualified stock options............         --          --          --          --      114,000           --
Cash distributions to stockholders......................         --          --          --          --           --           --
Net income..............................................         --          --          --          --           --           --
                                                          ---------  -----------  ---------  -----------  ----------  -------------
Balance, December 31, 1997..............................         --   $      --   33,678,519  $  34,000   $41,373,000   $ (30,000)
                                                          ---------  -----------  ---------  -----------  ----------  -------------
                                                          ---------  -----------  ---------  -----------  ----------  -------------
 
<CAPTION>
                                                           RETAINED
                                                           EARNINGS
                                                          (DEFICIT)     TOTAL
                                                          ----------  ----------
<S>                                                       <C>         <C>
Balance, December 31, 1994..............................  $1,839,000  $2,197,000
Issuance of common stock................................          --     103,000
Conversion of debt to equity............................          --     990,000
Net income..............................................   3,973,000   3,973,000
Cash distributions to stockholders......................  (4,216,000) (4,216,000)
                                                          ----------  ----------
Balance, December 31, 1995..............................   1,596,000   3,047,000
Effect of terminating the S-corporation election........     690,000          --
Compensation expense relating to stock options..........          --      50,000
Issuance of common stock................................          --   5,568,000
Issuance of preferred stock.............................          --   7,500,000
Net loss................................................  (4,220,000) (4,220,000)
Cash distributions to stockholders......................          --  (4,034,000)
                                                          ----------  ----------
Balance, December 31, 1996..............................  (1,934,000)  7,911,000
Effect of L.D. Services terminating the S-corporation
  election..............................................      61,000          --
Conversion of redeemable preferred stock to common
  stock.................................................          --          --
Initial public offering of common stock.................          --  30,944,000
Exercise of stock options...............................          --     447,000
Compensation expense relating to stock options..........          --      88,000
Tax benefit from non-qualified stock options............          --     114,000
Cash distributions to stockholders......................  (1,058,000) (1,058,000)
Net income..............................................   5,568,000   5,568,000
                                                          ----------  ----------
Balance, December 31, 1997..............................  $2,637,000  $44,014,000
                                                          ----------  ----------
                                                          ----------  ----------
</TABLE>
 
 The accompanying notes are an integral part of these consolidated statements.
 
                                      F-5
<PAGE>
                 STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                                               YEARS ENDED DECEMBER 31,
                                                                     --------------------------------------------
                                                                          1995           1996           1997
                                                                     --------------  -------------  -------------
<S>                                                                  <C>             <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)................................................  $    3,973,000  $  (4,220,000) $   5,568,000
  Adjustments to reconcile net income (loss) to net cash provided
    by (used in) operating activities:
    Depreciation and amortization..................................         186,000      1,151,000      4,245,000
    Loss on investment.............................................          80,000             --             --
    Loss on disposal of equipment..................................              --             --         42,000
    Compensation expense relating to stock options.................              --         50,000         88,000
    Provision for doubtful accounts................................         217,000     15,753,000      7,695,000
    Deferred income taxes..........................................              --             --     (3,699,000)
    Deferred compensation..........................................              --        116,000        (59,000)
Decrease (increase) in assets:
  Accounts receivable..............................................     (10,522,000)   (28,476,000)   (22,442,000)
  Receivable from related parties..................................         129,000        (65,000)       115,000
  Other receivables................................................        (268,000)            --     (1,914,000)
  Prepaid expenses.................................................        (114,000)      (830,000)    (3,752,000)
  Deposits.........................................................        (630,000)    (4,948,000)      (425,000)
  Prepaid taxes....................................................              --       (677,000)       677,000
  Other current assets.............................................              --       (825,000)       764,000
Increase (decrease) in liabilities:
  Accounts payable.................................................       8,035,000     (1,269,000)    (1,404,000)
  Taxes payable....................................................              --             --      2,270,000
  Related party payables...........................................         320,000        (51,000)      (269,000)
  Accrued line costs...............................................         476,000     19,018,000     18,909,000
  Accrued expenses.................................................         194,000      1,865,000      3,523,000
  Deposits.........................................................              --             --        164,000
                                                                     --------------  -------------  -------------
        Net cash provided by (used in) operating activities........       2,076,000     (3,408,000)    10,096,000
                                                                     --------------  -------------  -------------
 
CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures.............................................      (1,123,000)    (7,852,000)   (13,436,000)
  Investments......................................................              --       (153,000)       126,000
  Short-term investments...........................................              --     (1,630,000)   (16,949,000)
  Other............................................................              --       (139,000)       639,000
                                                                     --------------  -------------  -------------
        Net cash used in investing activities......................      (1,123,000)    (9,774,000)   (29,620,000)
                                                                     --------------  -------------  -------------
</TABLE>
 
                                      F-6
<PAGE>
                 STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
 
               CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                               YEARS ENDED DECEMBER 31,
                                                                     --------------------------------------------
                                                                         1995           1996            1997
                                                                     -------------  -------------  --------------
<S>                                                                  <C>            <C>            <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
  Stockholders' distributions......................................  $  (4,216,000) $  (4,034,000) $   (1,058,000)
  Borrowings under lines of credit.................................      1,460,000     14,746,000      34,211,000
  Repayments under lines of credit.................................       (130,000)    (8,262,000)    (42,025,000)
  Borrowings under lines of credit with stockholder................      3,418,000        701,000         583,000
  Repayments under lines of credit with stockholder................     (1,319,000)    (1,873,000)       (471,000)
  Borrowings under long-term debt..................................             --        800,000         193,000
  Payments under long-term debt....................................             --        (67,000)     (1,622,000)
  Payments under capital lease obligations.........................        (52,000)      (358,000)     (1,946,000)
  Issuance of common stock.........................................             --      5,568,000      30,944,000
  Stock options exercised..........................................             --             --         447,000
  Issuance of preferred stock......................................             --      7,500,000              --
                                                                     -------------  -------------  --------------
      Net cash (used in) provided by financing activities..........       (839,000)    14,721,000      19,256,000
                                                                     -------------  -------------  --------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...................        114,000      1,539,000        (268,000)
CASH AND CASH EQUIVALENTS, beginning of year.......................         73,000        187,000       1,726,000
                                                                     -------------  -------------  --------------
CASH AND CASH EQUIVALENTS, end of year.............................  $     187,000  $   1,726,000  $    1,458,000
                                                                     -------------  -------------  --------------
                                                                     -------------  -------------  --------------
</TABLE>
 
  The accompanying notes are an integral part of these consolidated statements
 
                                      F-7
<PAGE>
                 STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
                               DECEMBER 31, 1997
 
1. NATURE OF BUSINESS
 
    STAR Telecommunications, Inc., a Delaware corporation, and Subsidiaries (the
"Company" or "STAR"), is an emerging multinational carrier focused primarily on
the international long distance market. The Company offers highly reliable,
low-cost switched voice services on a wholesale basis primarily to U.S.-based
long distance carriers. STAR provides international long distance service
through a flexible network comprised of foreign termination relationships,
international gateway switches, leased and owned transmission facilities and
resale arrangements with other long distance providers. While the Company was
incorporated in 1993, it did not commence its current business as a provider of
long distance services until the second half of 1995. During the six months
ended June 1995, the Company primarily acted as an agent for, and provided
various consulting services to, companies in the telecommunications industry.
 
    During 1996 and 1997, the Company established several wholly-owned foreign
subsidiaries to further expand its international network. The Company made
substantial investments to install switch facilities in two of these
subsidiaries, Star Europe Limited (SEL) which is located in London, England, and
Star Telecommunications Deutschland (GmbH) which is located in Frankfurt,
Germany. The Company plans to use these switch facilities to decrease
international traffic termination costs and to initiate outbound calls from
these local markets.
 
    In December 1997, the Company entered into the domestic commercial
long-distance market through the acquisition of L.D. Services, Inc., also known
as LCCR Inc. ("LDS"). LDS is a retail long-distance service provider throughout
the United States. The merger constituted a tax-free reorganization and has been
accounted for as a pooling of interests under Accounting Principles Board
Opinion No. 16. Accordingly, all prior period consolidated financial statements
presented have been restated to include the results of operations, financial
position and cash flows of LDS as though it had always been a part of STAR (see
Note 8). The pro forma results of operations and pro forma income or loss per
common share for 1995, 1996 and 1997 assumes that both STAR and LDS had been
C-Corporations for all periods presented.
 
    The Company is subject to various risks in connection with the operation of
its business. These risks include, but are not limited to, regulations (both
domestic and foreign), dependence on transmission facilities-based carriers and
suppliers, price competition and competition from larger industry participants.
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
    PRINCIPLES OF CONSOLIDATION
 
    The accompanying consolidated financial statements include the accounts of
STAR Telecommunications, Inc. and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated.
 
    REVENUE RECOGNITION
 
    The Company records revenues for telecommunications sales at the time of
customer usage. Finance charges for customer late payments are included in
revenues and amount to $32,000, $1,467,000 and $2,747,000 for the years ended
December 31, 1995, 1996 and 1997, respectively.
 
                                      F-8
<PAGE>
                 STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 31, 1997
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    COST OF SERVICES
 
    Cost of services for wholesale long distance services represents direct
charges from vendors that the Company incurs to deliver service to its
customers. These include leasing costs for the dedicated phone lines, which form
the Company's network, and rate-per-minute charges from other carriers that
terminate traffic on behalf of the Company. In addition, retail long distance
service cost includes billing and collection service fees from local exchange
carriers and call rating services.
 
    ACCOUNTING FOR INTERNATIONAL LONG DISTANCE TRAFFIC
 
    The Company has carrier service agreements with telecommunication carriers
in foreign countries under which international long distance traffic is both
originated and terminated on the Company's network. The Company records revenues
and related costs as the traffic is recorded in the switch. Revenue from foreign
customers equaled $178,000 and $6,577,000 for the years ended December 31, 1996
and 1997, respectively. The Company recognized settlement costs relating to
foreign carrier agreements of $152,000 in 1996 and $12,314,000 in 1997, which
are included in cost of services in the consolidated statements of operations.
The Company had no revenues or costs relating to foreign customers during 1995.
 
    CASH AND CASH EQUIVALENTS
 
    Cash and cash equivalents consist of demand deposits and money market funds,
which are highly liquid short-term instruments with original maturities of three
months or less from the date of purchase. Cash and cash equivalents are stated
at cost, which approximates market.
 
    FINANCIAL INSTRUMENTS
 
    The carrying amounts of notes payable and capital lease obligations
approximate their fair value because interest rates approximate market rates for
similar instruments.
 
    Off balance sheet derivative financial instruments at December 31, 1997
consist of foreign currency exchange agreements.
 
    The Company enters into foreign currency exchange contracts to manage
foreign currency exposures. The principle objective of such contracts is to
minimize the risks and/or costs associated with financial and global operating
activities. The Company does not utilize financial instruments for trading or
other speculative purposes. The counterparty to these contractual arrangements
is a multi-national financial institution with which the Company also has other
financial relationships.
 
    The Company enters into forward currency exchange contracts in the normal
course of business to manage its exposure against foreign currency fluctuations
on payable positions resulting from fixed asset purchases and other contractual
expenditures denominated in foreign currencies. At December 31, 1997, gains and
losses on foreign exchange contracts are not material to the consolidated
financial statements.
 
    The fair values of foreign currency contracts are estimated by obtaining
quotes from brokers. At December 31, 1997, the Company has foreign currency
contracts outstanding with the notional value of $6,305,000 which had an
estimated fair value to receive $6,218,000 worth of German marks and British
pounds, the difference of which has been recognized in operations.
 
                                      F-9
<PAGE>
                 STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 31, 1997
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    The following table summarizes outstanding commitments to purchase foreign
currency at December 31, 1997:
 
<TABLE>
<CAPTION>
                                              MATURITY             NOTIONAL
                                                DATE                AMOUNT      FAIR VALUE   DIFFERENCE
                                     --------------------------  ------------  ------------  ----------
<S>                                  <C>                         <C>           <C>           <C>
British Pounds.....................   1/29/98 through 3/27/98    $    364,000  $    373,000  $    9,000
Deutsche Mark......................   1/05/98 through 1/26/98       5,941,000     5,845,000     (96,000)
                                                                 ------------  ------------  ----------
                                                                 $  6,305,000  $  6,218,000  $  (87,000)
                                                                 ------------  ------------  ----------
                                                                 ------------  ------------  ----------
</TABLE>
 
    MARKETABLE SECURITIES
 
    Marketable securities consists of interest bearing securities with original
maturities in excess of three months. At December 31, 1997, the fair market
value of temporary investments, classified as "available for sale securities",
approximated cost, thus no unrealized holding gains or losses were reported in
the accompanying balance sheets. During fiscal year 1997, the Company realized
gains from the sale of securities of approximately $48,000.
 
    PROPERTY AND EQUIPMENT
 
    Property and equipment are carried at cost. Depreciation and amortization of
property and equipment are computed using the straight-line method over the
following estimated useful lives:
 
<TABLE>
<S>                                                         <C>
Operating equipment.......................................      5-25 years
Leasehold improvements....................................   Life of lease
Computer equipment........................................       3-7 years
Furniture and fixtures....................................       5-7 years
</TABLE>
 
    Operating equipment includes assets financed under capital lease obligations
of $6,218,000 and $15,921,000 at December 31, 1996 and 1997, respectively.
Accumulated amortization related to assets financed under capital leases was
$391,000 and $2,123,000 at December 31, 1996 and 1997, respectively.
 
    In addition, operating equipment includes seven Indefeasible Rights of Use
(IRU) in cable systems amounting to $110,000 and $2,303,000 and four ownership
interests in an international cable amounting to $148,000 and $1,534,000 at
December 31, 1996 and 1997, respectively. These assets are amortized over the
life of the agreements of 14 to 25 years (see Note 5).
 
    Replacements and betterments, renewals and extraordinary repairs that extend
the life of the asset are capitalized; other repairs and maintenance are
expensed. The cost and accumulated depreciation applicable to assets sold or
retired are removed from the accounts and the gain or loss on disposition is
recognized in other income or expense.
 
    DEPOSITS AND OTHER ASSETS
 
    Deposits represent payments made to long distance providers to secure lower
rates. These deposits are refunded or applied against future services. Other
assets at December 31, 1996 represent initial public offering expenses, which
were subsequently charged to additional paid in capital during 1997 at the time
of the initial public offering.
 
                                      F-10
<PAGE>
                 STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 31, 1997
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    ACCRUED LINE COSTS
 
    Accrued line costs represent accruals for services to transmit and terminate
long distance telephone traffic, which has been provided to the Company but not
yet billed. It also includes differences between billings received by the
Company and the liability computed by the Company's own systems which are being
resolved by the Company and its vendors. Such disputed amounts have not been
material to the results of operations for each statement of operations period
presented.
 
    CONSOLIDATED STATEMENTS OF CASH FLOWS
 
    During the years ended December 31, 1995, 1996 and 1997 cash paid for
interest was $45,000, $534,000 and $1,359,000, respectively. For the same
periods, cash paid for income taxes amounted to $51,000, $1,262,000 and
$3,761,000, respectively.
 
    Non-cash investing and financing activities are as follows:
 
<TABLE>
<CAPTION>
                                                                               YEARS ENDED DECEMBER 31,
                                                                      -------------------------------------------
                                                                          1995           1996           1997
                                                                      -------------  -------------  -------------
<S>                                                                   <C>            <C>            <C>
Equipment purchased through capital leases..........................  $   1,052,000  $   5,166,000  $   9,772,000
Notes issued for asset purchases....................................             --             --      1,524,000
Debt converted to equity............................................      1,093,000             --             --
Tax benefits related to stock options...............................             --             --        114,000
</TABLE>
 
    These non-cash transactions are excluded from the consolidated statements of
cash flows.
 
    NET INCOME (LOSS) PER COMMON SHARE
 
    The following schedule summarizes the information used to compute pro forma
net income or loss per common share for the years ended December 31, 1995, 1996
and 1997:
 
<TABLE>
<CAPTION>
                                                                          1995           1996           1997
                                                                      -------------  -------------  -------------
<S>                                                                   <C>            <C>            <C>
Pro forma net income (loss).........................................  $   2,407,000  $  (5,163,000) $   5,373,000
                                                                      -------------  -------------  -------------
                                                                      -------------  -------------  -------------
Weighted average number of common shares used to compute basic
 earnings (loss) per share..........................................     18,020,000     21,939,000     28,868,000
Weighted average common share equivalents...........................             --             --      2,757,000
                                                                      -------------  -------------  -------------
Weighted average number of common shares and common share
 equivalents used to compute diluted net income (loss) per common
 share..............................................................     18,020,000     21,939,000     31,625,000
                                                                      -------------  -------------  -------------
                                                                      -------------  -------------  -------------
Basic pro forma net income (loss) per common share (unaudited)......  $        0.13  $       (0.24) $        0.19
Diluted pro forma net income (loss) per common share (unaudited)....  $        0.13  $       (0.24) $        0.17
</TABLE>
 
                                      F-11
<PAGE>
                 STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 31, 1997
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    CONCENTRATIONS OF RISK
 
    The Company's two largest customers account for approximately 25 percent and
7 percent of gross accounts receivable at December 31, 1996 and 1997,
respectively. The Company's largest customer and second largest customer in 1997
represent 3 percent and 4 percent of accounts receivable as of December 31,
1997, respectively. The Company's largest customer in 1996 was Cherry
Communications, Inc. The second largest customer in 1996 was Hi-Rim
Communications, Inc. Only one customer, Cherry Communications had a receivable
balance exceeding 10 percent of gross accounts receivable at December 31, 1996
and no individual customer has an account receivable balance greater than 10
percent of gross accounts receivable at December 31, 1997.
 
    The two largest customers represent approximately 16 percent, 26 percent and
17 percent of revenues during the years ended December 31, 1995, 1996 and 1997,
respectively. During 1995 and 1996, only sales to Cherry Communications exceeded
10 percent of total sales. For the year ended December 31, 1997, only one
customer exceeded 10 percent of revenues.
 
    The Company performs ongoing credit evaluations of its customers. The
Company analyzes daily traffic patterns and concludes whether or not the
customer's credit status justifies the traffic volume. If the customer is deemed
to carry too large a volume in relation to its credit history, the traffic
received by the Company's switch is reduced to prevent further build up of the
receivable from this customer. The Company's allowance for doubtful accounts is
based on current market conditions.
 
    Purchases from the four largest vendors for the years ended December 31,
1995 and 1996 amounted to 57 percent and 45 percent of total purchases,
respectively. Purchases from the four largest vendors for the year ended
December 31, 1997 amounted to 36 percent of total purchases.
 
    Included in the Company's balance sheets at December 31, 1996 and 1997 are
approximately $179,000 and $6,367,000 of equipment which is located in foreign
countries.
 
    USE OF ESTIMATES
 
    The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
 
    RECENTLY ISSUED ACCOUNTING STANDARDS
 
    In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share". The statement replaces primary EPS with basic EPS, which is computed by
dividing reported earnings available to common stockholders by weighted average
shares outstanding. The provision requires the calculation of diluted EPS. The
Company adopted this statement in 1997 and all prior year earnings per share
amounts have been recalculated based on the provisions of SFAS No. 128.
 
                                      F-12
<PAGE>
                 STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 31, 1997
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
    TRANSLATION OF FOREIGN CURRENCY
 
    Management determined that the functional currency of its foreign
subsidiaries is still the U.S. dollar. Thus all foreign translation gains or
losses are reflected in the results of operations in other income (expense).
 
    The foreign subsidiary balance sheets are translated into U.S. dollars using
the year-end exchange rates except for prepayments, property, other long-term
assets, and stockholders' equity accounts, which are translated at rates in
effect when these balances were originally recorded. Revenues and expenses are
translated at average rates during the year except for depreciation and
amortization, which are translated at historical rates.
 
3. ACCRUED EXPENSES
 
    Accrued expenses at December 31, 1996 and 1997 consist of the following:
 
<TABLE>
<CAPTION>
                                                                                  1996          1997
                                                                              ------------  ------------
<S>                                                                           <C>           <C>
Payroll and related.........................................................  $    783,000  $    943,000
Management bonuses..........................................................        25,000       152,000
Professional services.......................................................       640,000       384,000
Sales and other taxes.......................................................        10,000       295,000
Line and billing cost.......................................................       324,000     2,592,000
Other.......................................................................       304,000     1,243,000
                                                                              ------------  ------------
                                                                              $  2,086,000  $  5,609,000
                                                                              ------------  ------------
                                                                              ------------  ------------
</TABLE>
 
4. LINES OF CREDIT
 
    BANK LINE OF CREDIT
 
    Effective as of September 30, 1997, the Company executed an agreement with
Sanwa Bank, California for a $25 million line of credit, which expires on July
1, 1999. The facility has certain financial and non-financial covenants that
include, among other restrictions, the maintenance of minimum levels of tangible
net worth. Borrowings on the facility are limited to 75 percent of eligible
accounts receivable and are secured by substantially all of the assets of the
Company. The credit facility provides for borrowings at an interest rate based
upon the bank's cost of funds plus 1.75 percent (7.47 percent at December 31,
1997). The Company plans to use the credit facility to support letters of credit
and for working capital or other general corporate purposes. At December 31,
1997, no amounts were outstanding, however the Company's availability under this
credit facility was reduced to $20.1 million due to $4.9 million in letters of
credit which were outstanding at December 31, 1997.
 
    The weighted average interest rate on short term debt during the years ended
December 31, 1995, 1996 and 1997 was 10.21 percent, 9.68 percent and 9.12
percent, respectively.
 
                                      F-13
<PAGE>
                 STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 31, 1997
 
4. LINES OF CREDIT (CONTINUED)
    LINES OF CREDIT WITH STOCKHOLDER
 
    At December 31, 1996 and 1997, the Company's revolving lines of credit with
the founder and chief executive officer of the Company totaled $1,448,000. The
debt matures on March 30, 1998 with interest payable at maturity at a rate of 9
percent. There was $1,422,000 and $1,310,000 available to be borrowed against
these lines of credit at December 31, 1996 and 1997, respectively. The Company
recognized interest expense related to this debt of $11,000, $34,000 and $9,000
for the years ended December 31, 1995, 1996 and 1997, respectively.
 
5. LONG-TERM DEBT
 
    The Company finances some of its telecommunication equipment under capital
lease arrangements or through notes payable as follows:
 
<TABLE>
<CAPTION>
                                                                                    DECEMBER 31,
                                                                             ---------------------------
                                                                                 1996          1997
                                                                             ------------  -------------
<S>                                                                          <C>           <C>
Bank debt at prime plus 1.5 percent........................................  $    733,000  $          --
 
Notes payable for Indefeasible Rights of Use on submarine cable, payable in
 quarterly installments of principal plus interest at LIBOR plus 6 percent
 (11.72 percent at December 31, 1997) through September 1999...............            --        762,000
 
Note payable for Indefeasible Right of Use, payable in quarterly
 installments of $9,000 plus interest at LIBOR plus 6 percent through
 September 1999............................................................            --         66,000
 
Obligations under capital leases...........................................     5,808,000     13,634,000
                                                                             ------------  -------------
 
                                                                             $  6,541,000  $  14,462,000
                                                                             ------------  -------------
                                                                             ------------  -------------
</TABLE>
 
    Minimum future lease payments under capital leases at December 31, 1997 are
as follows:
 
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
-----------------------------------------------------------------------------------------
<S>                                                                                        <C>
    1998.................................................................................  $   3,944,000
    1999.................................................................................      3,943,000
    2000.................................................................................      3,614,000
    2001.................................................................................      2,927,000
    2002.................................................................................      2,505,000
    Thereafter...........................................................................        814,000
                                                                                           -------------
                                                                                              17,747,000
Less: Amount representing interest.......................................................     (4,113,000)
                                                                                           -------------
                                                                                              13,634,000
Less: Current portion....................................................................     (2,495,000)
                                                                                           -------------
                                                                                           $  11,139,000
                                                                                           -------------
                                                                                           -------------
</TABLE>
 
                                      F-14
<PAGE>
                 STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 31, 1997
 
6. COMMITMENTS AND CONTINGENCIES
 
    OPERATING LEASES
 
    The Company leases office space, dedicated private telephone lines,
equipment and other items under various agreements expiring through 2006. At
December 31, 1997, the minimum aggregate payments under non-cancelable operating
leases are summarized as follows:
 
<TABLE>
<CAPTION>
                                                           FACILITIES AND    DEDICATED
YEAR ENDING DECEMBER 31,                                     EQUIPMENT     PRIVATE LINES      TOTAL
---------------------------------------------------------  --------------  -------------  -------------
<S>                                                        <C>             <C>            <C>
    1998.................................................   $  3,375,000   $   4,969,000  $   8,344,000
    1999.................................................      3,318,000       1,906,000      5,224,000
    2000.................................................      3,283,000         372,000      3,655,000
    2001.................................................      2,946,000              --      2,946,000
    2002.................................................      2,739,000              --      2,739,000
    Thereafter...........................................      8,423,000              --      8,423,000
                                                           --------------  -------------  -------------
                                                            $ 24,084,000   $   7,247,000  $  31,331,000
                                                           --------------  -------------  -------------
                                                           --------------  -------------  -------------
</TABLE>
 
    Facility and equipment rent expense for the years ended December 31, 1995,
1996 and 1997 was approximately $195,000, $1,076,000 and $3,199,000,
respectively. Dedicated private line expense was approximately $604,000,
$7,045,000 and $9,414,000, for those same periods and is included in cost of
services in the accompanying consolidated statements of operations.
 
    EMPLOYMENT AGREEMENTS
 
    The Company has employment agreements through December 31, 2000 with several
employees and executives. Some of these agreements provide for a continuation of
salaries in the event of a termination, with or without cause, following a
change in control of the Company. One agreement provides for a payment of at
least $1,500,000 in the event of a change in control of the Company.
 
    The Company expensed $116,000 and $64,000 of deferred compensation relating
to these agreements for the years ended December 31, 1996 and 1997,
respectively.
 
    PURCHASE COMMITMENTS
 
    The Company is obligated under various service agreements with long distance
carriers to pay minimum usage charges. The Company anticipates exceeding the
minimum usage volume with these vendors. Minimum future usage charges at
December 31, 1997 are as follows:
 
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
-----------------------------------------------------------------------------------------
<S>                                                                                        <C>
1998.....................................................................................  $  44,053,000
1999.....................................................................................      8,356,000
2000.....................................................................................      2,949,000
2001.....................................................................................         65,000
2002.....................................................................................         65,000
Thereafter...............................................................................        774,000
                                                                                           -------------
                                                                                           $  56,262,000
                                                                                           -------------
                                                                                           -------------
</TABLE>
 
                                      F-15
<PAGE>
                 STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 31, 1997
 
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
    The Company has entered into six fixed asset purchase agreements. These
commitments are to purchase IRU's, switches, and leasehold improvements for
switch sites. The total commitment approximates $63 million. The Company plans
to finance the majority of these costs through capital lease arrangements.
 
    LEGAL MATTERS
 
    The Company is subject to litigation from time to time in the normal course
of business. Although it is not possible to predict the outcome of such
litigation, based on the facts known to the Company and after consultation with
counsel, management believes that such litigation will not have a material
adverse effect on its financial position or results of operations.
 
    On September 4, 1997, prior to the merger between LDS and the Company, LDS
entered into a settlement agreement with the Consumer Services Division of the
California Public Utilities Commission (PUC). The agreement settles the alleged
unauthorized switching of long-distance customers to LDS between the years 1995
and 1996. It includes a payment of $760,000 to the PUC for restitution to
affected customers as defined in the agreement. Additionally, LDS agreed to a
voluntary revocation of its operating authority in the State of California.
Under the agreement, service to all California customers has to be terminated
within 120 days after approval of the agreement by the PUC. On November 19,
1997, the PUC approved the agreement along with a transfer of control to STAR.
 
    On November 15, 1997, LDS settled a civil suit with the District Attorney of
Monterey, California for a monetary payment of $700,000 and various non-monetary
concessions as defined in the agreement. This suit was of the same nature as the
above action of the PUC and covers complaints from the years 1994 through 1997.
 
    LETTERS OF CREDIT
 
    At December 31, 1997, the Company has nine standby letters of credit
outstanding, which expire between January 20, 1998 and December 19, 1998. These
letters of credit, all of which are secured by the bank line of credit, total
$4,900,000.
 
7. RELATED PARTY TRANSACTIONS
 
    The founder and chief executive officer of the Company owns Star Aero
Services, Inc. (Star Aero). Star Aero's principal assets represent airplanes
which it provides to the Company for business travel on an as needed basis. In
return, the Company pays for costs related to the airplanes. Star Aero
reimburses the Company for certain costs relating to the maintenance of the
planes. For the years ended December 31, 1995, 1996 and 1997, the Company paid
$144,000, $68,000 and $171,000, respectively, in costs related to the use of
Star Aero services. As of December 31, 1995 and 1996, the Company had
receivables from Star Aero of $50,000 and $115,000, respectively. The Company
had no receivables from Star Aero at December 31, 1997.
 
    During 1997, the Company provided a short-term loan to the chief executive
officer for $8,000,000. The loan carried interest of 7 percent per annum, was
secured by $30,000,000 of the stockholder's stock in the Company, and was repaid
in seven days.
 
                                      F-16
<PAGE>
                 STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 31, 1997
 
7. RELATED PARTY TRANSACTIONS (CONTINUED)
    During 1995, the Company invested $128,000 in a company related to an
employee of STAR. During 1996 and 1997, the Company provided services to this
company in the amounts of $167,000 and $926,000. As of December 31, 1996 and
1997, accounts receivable from this related party amounted to $57,000 and
$41,000, respectively.
 
    During 1995, 1996 and 1997, the Company purchased consulting services from a
company owned by a board member in the amount of $60,000, $154,000 and $72,000,
respectively.
 
    During 1996 and 1997, the Company purchased consulting services from a
company owned in part by an employee and a significant stockholder for $37,000
and $256,000, respectively. In addition, the Company purchased equipment and
services from this company in the amount of $1,114,000 in 1997. This significant
stockholder is also a 30 percent investor in a company, whose subsidiary
provided consulting services to the Company in the amount of $12,000 in 1996 and
$213,000 in 1997. In addition, the Company purchased telecommunication services
from three related companies for $240,000 during 1996 and paid legal fees on
behalf of these companies in the amount of $131,000.
 
    During the years ended December 31, 1995, 1996 and 1997, the Company also
provided long distance telephone service to a company controlled by another
board member in the amount of $43,000, $250,000 and $1,141,000, respectively.
Accounts receivable for these services total $721,000 as of December 31, 1997.
In addition, the Company loaned $2,500,000 to this related party. The Company
has announced its intention to merge the two companies (see Note 14).
 
8. BUSINESS COMBINATIONS
 
    In November 1997, the Company acquired LDS, a domestic commercial long
distance telecommunications provider, in a transaction that was accounted for as
a pooling of interests. The Company issued 849,298 shares of its common stock to
LDS' shareholders in exchange for all outstanding LDS shares plus shares of
certain non-operating entities owned by LDS' shareholders and majority ownership
in an affiliated telephone retailer controlled by LDS. The accompanying
consolidated financial statements have been restated to include the financial
position and results of operations of LDS for all periods presented.
 
    Net sales and historical net income (loss) of the combining companies for
the last three years are as follows:
 
<TABLE>
<CAPTION>
                                                             1995            1996            1997
                                                         -------------  --------------  --------------
<S>                                                      <C>            <C>             <C>
Net Sales:
  STAR.................................................  $  16,125,000  $  208,086,000  $  348,738,000
  LDS..................................................     30,158,000      29,905,000      27,460,000
                                                         -------------  --------------  --------------
  Total................................................  $  46,283,000  $  237,991,000  $  376,198,000
                                                         -------------  --------------  --------------
                                                         -------------  --------------  --------------
Net Income (Loss):
  STAR.................................................  $    (568,000) $   (6,644,000) $    5,605,000
  LDS..................................................      4,541,000       2,424,000         (37,000)
                                                         -------------  --------------  --------------
  Total................................................  $   3,973,000  $   (4,220,000) $    5,568,000
                                                         -------------  --------------  --------------
                                                         -------------  --------------  --------------
</TABLE>
 
                                      F-17
<PAGE>
                 STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 31, 1997
 
9. INCOME TAXES
 
    Through December 31, 1995, the Company had elected to be taxed as an
S-Corporation for both federal and state income tax purposes. While the election
was in effect, all taxable income, deductions, losses and credits of the Company
were included in the tax returns of the shareholders. Accordingly, for federal
income tax purposes, no tax benefit, liability or provision has been reflected
in the accompanying historical consolidated financial statements for the year
ended December 31, 1995. For state tax purposes, an S-Corporation is subject to
a 1.5 percent tax on taxable income, with a minimum tax of approximately $1,000
annually. Effective January 1, 1996, the Company terminated its S-Corporation
election and is now taxable as a C-Corporation.
 
    In addition, the results of operations and provision for income taxes for
LDS through November 30, 1997 reflects LDS' status as an S-Corporation. The
unaudited pro-forma income taxes, pro-forma net income (loss), and pro-forma
earnings per share information reflected in the consolidated statements of
operations assumes that both STAR and LDS were taxed as C-Corporations for all
periods presented.
 
    The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," under which deferred assets and liabilities are
provided on differences between financial reporting and taxable income using
enacted tax rates. Deferred income tax expenses or credits are based on the
changes in deferred income tax assets or liabilities from period to period.
Under SFAS No. 109, deferred tax assets may be recognized for temporary
differences that will result in deductible amounts in future periods. A
valuation allowance is recognized if, on the weight of available evidence, it is
more likely than not that some portion or all of the deferred tax asset will not
be realized.
 
    The Company has recorded a net deferred tax asset of $3,699,000 at December
31, 1997. Realization is dependent on generating sufficient taxable income in
the future. Although realization is not assured, management believes it is more
likely than not that the net deferred tax asset recorded will be realized.
 
    The components of the net deferred tax assets at December 31, 1996 and 1997
are as follows:
 
<TABLE>
<CAPTION>
                                                                                1996           1997
                                                                            -------------  -------------
<S>                                                                         <C>            <C>
Deferred tax asset:
  Reserve for accounts and note receivable................................  $   3,104,000  $   4,169,000
  Accrued line cost.......................................................        201,000        798,000
  Vacation accrual........................................................         24,000        138,000
  Deferred compensation...................................................         47,000         38,000
  Accrued bonuses.........................................................         25,000             --
  Accrued services........................................................             --        183,000
  Foreign net operating losses............................................             --        468,000
  State income taxes......................................................         48,000        392,000
                                                                            -------------  -------------
                                                                                3,449,000      6,186,000
Deferred tax liability:
  Depreciation............................................................       (565,000)      (804,000)
                                                                            -------------  -------------
Subtotal..................................................................      2,884,000      5,382,000
Valuation reserve.........................................................     (2,884,000)    (1,683,000)
                                                                            -------------  -------------
Net deferred tax asset....................................................  $          --  $   3,699,000
                                                                            -------------  -------------
                                                                            -------------  -------------
</TABLE>
 
                                      F-18
<PAGE>
                 STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 31, 1997
 
9. INCOME TAXES (CONTINUED)
    The provision for income taxes for the years ended December 31, 1995, 1996
and 1997 are as follows:
 
<TABLE>
<CAPTION>
                                                                                            PRO FORMA
                                                         HISTORICAL                        (UNAUDITED)
                                              --------------------------------  ----------------------------------
                                                1995       1996        1997       1995        1996         1997
                                              ---------  ---------  ----------  ---------  -----------  ----------
<S>                                           <C>        <C>        <C>         <C>        <C>          <C>
Current
  Federal taxes.............................  $      --  $ 393,000  $4,899,000  $1,365,000  $1,231,000  $5,281,000
  State taxes...............................     66,000    199,000   1,138,000    416,000     394,000    1,261,000
                                              ---------  ---------  ----------  ---------  -----------  ----------
                                                 66,000    592,000   6,037,000  1,781,000   1,625,000    6,542,000
                                              ---------  ---------  ----------  ---------  -----------  ----------
Deferred
  Federal taxes.............................         --         --  (2,273,000)  (121,000)    (70,000)  (2,512,000)
  State taxes...............................         --         --    (869,000)   (28,000)    (20,000)    (940,000)
                                              ---------  ---------  ----------  ---------  -----------  ----------
                                                     --         --  (3,142,000)  (149,000)    (90,000)  (3,452,000)
                                              ---------  ---------  ----------  ---------  -----------  ----------
Provision for income taxes..................  $  66,000  $ 592,000  $2,895,000  $1,632,000  $1,535,000  $3,090,000
                                              ---------  ---------  ----------  ---------  -----------  ----------
                                              ---------  ---------  ----------  ---------  -----------  ----------
</TABLE>
 
    Differences between the provision for income taxes and income taxes at the
statutory federal income tax rate for the years ended December 31, 1995, 1996
and 1997 are as follows:
 
<TABLE>
<CAPTION>
                                                                                        PRO FORMA
                                                    HISTORICAL                         (UNAUDITED)
                                        ----------------------------------  ----------------------------------
                                           1995        1996        1997       1995        1996         1997
                                        ----------  ----------  ----------  ---------  -----------  ----------
<S>                                     <C>         <C>         <C>         <C>        <C>          <C>
Income taxes at the statutory federal
  rate................................  $1,373,000  $(1,234,000) $2,962,000 $1,373,000 ($1,234,000) $2,962,000
State income taxes, net of federal
  income tax effect...................     246,000    (221,000)    486,000    246,000    (221,000)     486,000
Foreign taxes at rates different than
  U.S. taxes..........................          --          --     187,000         --          --      187,000
Change in valuation reserve...........          --   2,884,000  (1,201,000)        --   2,884,000   (1,201,000)
Permanent differences.................          --     104,000      33,000     13,000     108,000      307,000
Effect of STAR S-Corp status until
  December 31, 1995...................     223,000          --          --         --          --           --
Effects of LDS S-Corp status until
  November 30, 1997...................  (1,808,000)   (958,000)    152,000         --          --           --
Other.................................      32,000      17,000     276,000         --      (2,000)     349,000
                                        ----------  ----------  ----------  ---------  -----------  ----------
                                        $   66,000  $  592,000  $2,895,000  $1,632,000  $1,535,000  $3,090,000
                                        ----------  ----------  ----------  ---------  -----------  ----------
                                        ----------  ----------  ----------  ---------  -----------  ----------
</TABLE>
 
10. STOCK OPTIONS
 
    On January 22, 1996, the Company adopted the 1996 Stock Incentive Plan (the
"Plan"). The Plan, which was amended on March 31, 1996, provides for the
granting of stock options to purchase up to 1,476,000 shares of common stock and
terminates January 22, 2006. Options granted become exercisable at a rate of not
less than 20 percent per year for five years.
 
    During 1996, the Company entered into three separate stock option agreements
outside the Plan. The first agreement, dated March 1, 1996, provided for 410,000
non-incentive stock options exercisable immediately. The options were
exercisable at fair market value at the date of issuance, which was $0.98 per
share, to expire in 10 years. The second stock option agreement was entered into
on May 1, 1996 for an additional 410,000 shares to also be issued at $0.98 per
share. Of these options half vested on March 1,
 
                                      F-19
<PAGE>
                 STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 31, 1997
 
10. STOCK OPTIONS (CONTINUED)
1997 and half expired. On May 15, 1996, the Company granted 205,000 options,
valued at $1.46 per share at the date of issuance to a director. Of these
options 34 percent were exercisable immediately. The remaining options are
exercisable equally on May 15, 1997 and 1998.
 
    At December 31, 1996 and 1997, 1,025,000 and 820,000 options, respectively,
issued outside a plan were outstanding.
 
    On September 23, 1996, the Company adopted the 1996 Supplemental Stock
Option Plan. This plan which expires on August 31, 2006, replaces the Plan and
has essentially the same features. The Company can issue options or other rights
to purchase up to 2,050,000 shares of stock which expire up to 10 years after
the date of grant, except for incentive options issued to a holder of more than
10 percent of the common stock outstanding, which expire five years after the
date of grant.
 
    In December 1996, the Company issued 174,000 options at $4.00 per share. The
Board of Directors determined the market value of the December options to be
$4.68 per share. The Company is recognizing the difference between the market
value at the date of grant and the exercise price as compensation expense over
the vesting period.
 
    At December 31, 1996 and 1997, 2,358,000 and 1,873,000 options,
respectively, were outstanding under the aggregate of the 1996 Stock Incentive
Plan and the Supplemental Stock Option Plan.
 
    On May 14, 1996, the Company adopted the 1996 Outside Director Nonstatutory
Stock Option Plan (the "Director Plan"). The number of shares which may be
issued under this plan upon exercise of options may not exceed 410,000 shares.
The exercise price of an option is determined by the Board of Directors and may
not be less than 85 percent of the fair market value of the common stock at the
time of grant and has to be 110 percent of the fair market value of the common
stock at the time of grant if the option is granted to a holder of more than 10
percent of the common stock outstanding. At the discretion of the administrator,
the options vest at a rate of not less than 20 percent per year, which may
accelerate upon a change in control, as defined. The plan expires on May 14,
2006. At December 31, 1996 and 1997, 82,000 and 41,000 options, respectively,
were outstanding under the Director Plan.
 
    On January 30, 1997, the Board of Directors approved the 1997 Omnibus Stock
Incentive Plan (the "Omnibus Plan") to replace the existing 1996 supplemental
plan upon the effective date of the initial public offering. The plan provides
for awards to employees, outside directors and consultants in the form of
restricted shares, stock units, stock options and stock appreciation rights and
terminates on January 22, 2007. The maximum number of shares available for
issuance under this plan may not exceed 1,025,000 shares plus the number of
shares still unissued under the supplemental option plan. Options granted to any
one optionee may not exceed more than 1,025,000 common shares per year subject
to certain adjustments. Incentive stock options may not have a term of more than
10 years from the date of grant. At December 31, 1997, 763,000 options, were
outstanding under the Omnibus Plan.
 
                                      F-20
<PAGE>
                 STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 31, 1997
 
10. STOCK OPTIONS (CONTINUED)
    Information regarding the Company's stock option plans and nonqualified
stock options as of December 31, 1995, 1996 and 1997, and changes during the
years ended on those dates is summarized as follows:
 
<TABLE>
<CAPTION>
                                                                              WEIGHTED-AVERAGE
                                                                 SHARES        EXERCISE PRICE
                                                             ---------------  -----------------
<S>                                                          <C>              <C>
December 31, 1995..........................................               --      $      --
Granted....................................................        3,491,355           1.89
Exercised..................................................               --             --
Forfeited..................................................          (26,855)          1.95
                                                             ---------------         ------
December 31, 1996..........................................        3,464,500           1.89
                                                             ---------------         ------
Granted....................................................          914,296           7.91
Exercised..................................................         (488,925)          0.89
Forfeited..................................................         (392,774)          2.40
                                                             ---------------         ------
December 31, 1997..........................................        3,497,097      $    3.54
                                                             ---------------         ------
                                                             ---------------         ------
</TABLE>
 
    At December 31, 1996, 912,425 options were exercisable at a weighted average
exercise price of $1.10 per share. At December 31, 1997, 1,275,645 options were
exercisable at a weighted average exercise price of $1.51 per share. The options
outstanding at December 31, 1997 expire in various years through 2007.
 
    Information about stock options outstanding at December 31, 1997 is
summarized as follows:
 
<TABLE>
<CAPTION>
                                                                              OPTIONS OUTSTANDING
                                                      -------------------------------------------------------------------
                                                                     WEIGHTED-
                                                                      AVERAGE      WEIGHTED-                  WEIGHTED-
                                                        NUMBER       REMAINING      AVERAGE      NUMBER        AVERAGE
                                                      OUTSTANDING   CONTRACTED     EXERCISE    EXERCISABLE    EXERCISE
RANGE OF EXERCISE PRICES                              AT 12/31/97      LIFE          PRICE     AT 12/31/97      PRICE
----------------------------------------------------  -----------  -------------  -----------  -----------  -------------
<S>                                                   <C>          <C>            <C>          <C>          <C>
$0.73 to $1.46......................................   1,807,126          8.28     $    1.17    1,113,695     $    1.14
$4.00 to $6.83......................................   1,146,721          8.96     $    4.68      161,950     $    4.07
$8.11 to $11.10.....................................     543,250          9.66     $    9.06           --     $      --
                                                      -----------        -----    -----------  -----------        -----
                                                       3,497,097          8.72     $    3.54    1,275,645     $    1.51
                                                      -----------        -----    -----------  -----------        -----
                                                      -----------        -----    -----------  -----------        -----
</TABLE>
 
    The Company has elected to adopt FASB No. 123 for disclosure purposes only
and applies Accounting Principle Board (APB) Opinion No. 25 and related
interpretations in accounting for its employee stock options. Approximately
$50,000 and $88,000 in compensation cost was recognized relating to consultant
options for the years ended December 31, 1996 and 1997, respectively. Had
compensation cost for stock options awarded under these plans been determined
based on the fair value at the dates of grant consistent with the methodology of
FASB No. 123, the Company's net income or loss and basic and diluted income or
loss per share for the years ended December 31, 1996 and 1997 would have
reflected the following pro-forma amounts:
 
                                      F-21
<PAGE>
                 STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 31, 1997
 
10. STOCK OPTIONS (CONTINUED)
        Pro-forma Net Income (Loss) Per Share
 
<TABLE>
<CAPTION>
                                                                       1996           1997
                                                                   -------------  ------------
<S>                                                                <C>            <C>
Pro-Forma Net Income (Loss)......................................  $  (5,536,000) $  4,756,000
Pro-Forma Basic Net Income (Loss) per share......................  $       (0.25) $       0.16
Pro Forma Diluted Net Income (Loss) per share....................  $       (0.25) $       0.15
</TABLE>
 
    The fair value of each option grant is estimated on the date of grant using
the minimum value method of option pricing with the following assumptions used
for the grants; weighted average risk-free interest rate of 6.4 and 6.2 percent
and an expected life of ten years and six years for the years ended December 31,
1996 and 1997, respectively. Expected volatility for 1997 was 31.05 percent and
it is assumed that no dividends would be issued during the option term. Because
the Company did not have a stock option program prior to 1996, the resulting
pro-forma compensation cost may not be representative of that to be expected in
future years.
 
11. CAPITAL STOCK
 
    During 1994, the Company issued 16,606,661 shares of stock to the Company's
founder for $10,000. During 1995, this stockholder converted $990,000 of debt
into capital for no additional shares. During 1995, the Company also issued
1,843,339 shares to another executive of the Company on conversion of a loan.
 
    On February 23, 1996, the Company sold 2,049,980 shares of common stock to
various investors for $1,500,000. On July 12, 1996, the Company sold 1,874,532
shares of common stock to an investor for $4,068,000.
 
    On July 25, 1996, the Company sold 2,802,446 shares of Series A preferred
stock to a group of investors for $7,500,000. In connection with this
transaction, the Company and buyers of the preferred shares entered into an
investor's rights agreement which obligated the Company to file up to two
registration statements to register such shares. These preferred shares
converted to common stock at a ratio of 3-for-2 as a result of the public
offering in accordance with the investors rights agreement.
 
    In June 1997, the Company completed its Initial Public Offering ("IPO") of
9,430,000 shares of common stock of which 8,097,500 shares were sold by the
Company and 1,332,500 shares were sold by certain selling shareholders. The net
proceeds to the Company (after deducting underwriting discounts and offering
expenses of approximately $4.6 million) from the sale of shares was
approximately $30.9 million.
 
    On November 30, 1997, the Company completed the acquisition of LDS pursuant
to the terms of the agreement and 849,298 shares were issued for all of the
outstanding shares to LDS.
 
12. BUSINESS SEGMENTS
 
    At December 31, 1997, Star has two business segments, wholesale long
distance and commercial long distance telecommunications. The wholesale segment
provides long distance services to U.S. and foreign based telecommunications
companies and the commercial segment, obtained by acquisition of LDS, provides
commercial long distance services to small retailers throughout the United
States.
 
                                      F-22
<PAGE>
                 STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 31, 1997
 
12. BUSINESS SEGMENTS (CONTINUED)
    The accounting policies of the segments are the same as those described in
the significant accounting policies, however, the Company evaluates performance
based on profit or loss from operations before income taxes and non-recurring
gains or losses. There are no intercompany sales among the wholesale and
commercial segments and both segments are managed separately.
 
    Reportable segment information for the years ended December 31, 1995, 1996
and 1997 are as follows:
 
<TABLE>
<CAPTION>
                                                         WHOLESALE      COMMERCIAL    ALL OTHER       TOTAL
                                                       --------------  -------------  ----------  --------------
<S>                                                    <C>             <C>            <C>         <C>
                        1995
Revenues from external customers.....................  $   16,125,000  $  30,158,000  $       --  $   46,283,000
Interest income......................................              --         22,000          --          22,000
Interest expense.....................................         (64,000)            --          --         (64,000)
Depreciation and amortization........................        (128,000)       (58,000)         --        (186,000)
Segment profit (loss)................................        (568,000)     4,541,000          --       3,973,000
Other significant non-cash items:
  Capital lease additions............................         888,000        164,000          --       1,052,000
  Property additions financed by notes payable.......              --             --          --              --
  Debt converted to equity...........................       1,093,000             --          --       1,093,000
Segment assets.......................................      12,869,000      5,447,000          --      18,316,000
Expenditures for segment assets......................       1,062,000         61,000          --       1,123,000
 
                        1996
Revenues from external customers.....................  $  208,086,000  $  29,905,000  $       --  $  237,991,000
Interest income......................................          83,000         27,000          --         110,000
Interest expense.....................................        (589,000)       (12,000)         --        (601,000)
Depreciation and amortization........................      (1,073,000)       (78,000)         --      (1,151,000)
Segment profit (loss)................................      (6,644,000)     2,424,000          --      (4,220,000)
Other significant non-cash items:
  Capital lease additions............................       5,097,000         69,000          --       5,166,000
  Property additions financed by notes payable.......              --             --          --              --
Segment assets.......................................      48,674,000      5,326,000          --      54,000,000
Expenditures for segment assets......................       7,838,000         14,000          --       7,852,000
 
                        1997
Revenues from external customers.....................  $  348,738,000  $  27,460,000  $       --  $  376,198,000
Interest income......................................         519,000             --     (27,000)        492,000
Interest expense.....................................      (1,633,000)       (27,000)     27,000      (1,633,000)
Depreciation and amortization........................      (4,189,000)       (56,000)         --      (4,245,000)
Segment profit (loss)................................       5,605,000        (37,000)         --       5,568,000
Other significant non-cash items:
  Capital lease additions............................       9,772,000             --          --       9,772,000
  Property additions financed by notes payable.......       1,524,000             --          --       1,524,000
Segment assets.......................................     106,709,000      6,844,000          --     113,553,000
Expenditures for segment assets......................      13,419,000         17,000          --      13,436,000
</TABLE>
 
                                      F-23
<PAGE>
                 STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 31, 1997
 
12. BUSINESS SEGMENTS (CONTINUED)
    The Company had no customers, collectively, representing more than 10
percent of consolidated revenue in any foreign country.
 
13. QUARTERLY CONSOLIDATED INFORMATION (UNAUDITED)
 
    The following table presents unaudited quarterly operating results,
including the results of LDS, for each of the Company's eight quarters in the
two-year period ended December 31, 1997 (amounts in thousands):
 
<TABLE>
<CAPTION>
                                                                            QUARTER ENDED
                                                            ---------------------------------------------
                                                             MARCH 31,   JUNE 30,   SEPT. 30,   DEC. 31,
                                                            -----------  ---------  ---------  ----------
<S>                                                         <C>          <C>        <C>        <C>
1996
  Net sales...............................................   $  42,926   $  50,064  $  68,433  $   76,568
  Operating income (loss).................................       2,100       1,961      1,219      (8,356)
  Pro forma net income (loss).............................       1,477       1,294        870      (7,861)
 
1997
  Net sales...............................................   $  79,382   $  89,167  $  94,867  $  112,782
  Operating income........................................       2,495       2,633      3,100       2,821
  Pro forma net income....................................       1,907         656      1,014       1,991
</TABLE>
 
14. SUBSEQUENT EVENTS
 
    ACQUISITIONS
 
    In November 1997, the Company signed a merger agreement with United Digital
Network, Inc. ("UDN"). The Company intends to account for the transaction as a
pooling of interests. At December 31, 1997, the Company has accounts receivable
from UDN in the amount of $721,000 and a note receivable of $2.5 million plus
accrued interest of $28,000. Both the accounts receivable and the note have been
fully reserved at December 31, 1997. Subsequent to year end, the Company loaned
an additional $2 million to UDN which has also been fully reserved since the
time of issuance.
 
                                      F-24
<PAGE>
                 STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 31, 1997
 
14. SUBSEQUENT EVENTS (CONTINUED)
    On March 10, 1998, the Company consummated a merger with T-One Corp.
("T-One") to be accounted for as a pooling of interests. In connection with this
merger, the Company issued 1,353,000 shares of its common stock for all
outstanding shares of T-One. The following unaudited pro forma data summarizes
the combined operating results of the Company and T-One as if the merger had
occurred at the beginning of the periods presented.
 
<TABLE>
<CAPTION>
                                                                       1995            1996            1997
                                                                   -------------  --------------  --------------
<S>                                                                <C>            <C>             <C>
Revenue..........................................................  $  58,937,000  $  259,697,000  $  404,605,000
Income (loss) from operations....................................      3,847,000      (3,658,000)     11,365,000
Net income (loss) (1)............................................      2,140,000      (5,738,000)      5,574,000
Diluted income (loss) per common share (2).......................  $        0.11  $        (0.25) $         0.17
</TABLE>
 
------------------------
 
(1) Includes pro forma income (loss) of STAR plus net income (loss) of T-One
    assuming STAR and LDS C-Corporation status.
 
(2) The diluted pro forma income (loss) per common share is based on the sum of
    the historical average common shares outstanding, as reported by STAR, and
    the historical average common shares outstanding for T-One (adjusted to
    reflect non-dilutive common stock equivalents) converted to STAR shares at
    the exchange ratio of 13,530 STAR shares per T-One share.
 
    EQUITY TRANSACTIONS
 
    On February 3, 1998 the Company announced a 2.05 for 1 stock split in the
nature of a stock dividend. The stock split is effective March 31, 1998 and has
been retroactively reflected in the accompanying consolidated financial
statements for all periods presented.
 
    Subsequent to year end, the Company granted 219,350 additional stock options
to employees and directors.
 
    LINE OF CREDIT
 
    On March 18, 1998, the Company amended the line of credit agreement with
Sanwa Bank by adjusting the borrowing base to 55% of aggregate eligible accounts
receivable, revising certain covenants and releasing all pledged collateral.
 
                                      F-25
<PAGE>
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To STAR Telecommunications, Inc. and Subsidiaries:
 
    We have audited in accordance with generally accepted auditing standards the
consolidated financial statements of STAR Telecommunications, Inc. and
subsidiaries, included in this Form 10-K and have issued our report thereon
dated February 12, 1998. Our audits were made for the purpose of forming an
opinion on the basic consolidated financial statements taken as a whole. The
schedule of valuation and qualifying accounts is the responsibility of the
Company's management and is presented for the purpose of complying with the
Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic consolidated financial
statements and, in our opinion, fairly states, in all material respects, the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
 
                                          ARTHUR ANDERSEN LLP
 
Los Angeles, California
February 12, 1998
 
                                      S-1
<PAGE>
                                                                     SCHEDULE II
 
                         STAR TELECOMMUNICATIONS, INC.
                 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
 
<TABLE>
<CAPTION>
                                                                   BALANCE AT                            BALANCE AT
                                                                    BEGINNING                              END OF
                                                                    OF PERIOD    PROVISION   WRITE-OFF     PERIOD
                                                                   -----------  -----------  ----------  -----------
                                                                                    (IN THOUSANDS)
<S>                                                                <C>          <C>          <C>         <C>
Allowance for doubtful accounts
  1995...........................................................   $      81    $     217   $   --       $     298
  1996...........................................................   $     298    $  15,753   $   (9,849)  $   6,202
  1997...........................................................   $   6,202    $   7,695   $   (6,152)  $   7,745
Deferred tax asset valuation allowance
  1995...........................................................   $  --        $      30   $   --       $      30
  1996...........................................................   $      30    $   2,854   $   --       $   2,884
  1997...........................................................   $   2,884    $  (1,201)  $   --       $   1,683
Note Receivable
  1997...........................................................   $  --        $   2,500   $   --       $   2,500
</TABLE>
 
                                      S-2
<PAGE>
    Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K/A
to be signed on its behalf by the undersigned, thereunto duly authorized in the
City of Santa Barbara, State of California, on the 15th day of January, 1999.
 
<TABLE>
<S>                             <C>  <C>
                                STAR TELECOMMUNICATIONS, INC.
 
                                By:              /s/ KELLY D. ENOS
                                     -----------------------------------------
                                                   Kelly D. Enos
                                              Chief Financial Officer
</TABLE>
 
                                      II-1