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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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FORM 10-K

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[X] Annual Report Pursuant to Section 13 or 15() of the Securities Exchange
Act of 1934

For the Fiscal Year Ended DECEMBER 31, 2001

[ ] Transition Report Pursuant to Section 13 or 15() of the Securities
Exchange Act of 1934

For the Transition Period From to

COMMISSION FILE NUMBER: 000-27029

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RSTAR CORPORATION

(Exact name of Registrant as specified in its charter)

DELAWARE 91-1836242
(State or other jurisdiction of (IRS Employer
of Incorporation or Organization) Identification No.)


3000 EXECUTIVE PARKWAY, SUITE 150
SAN RAMON, CALIFORNIA 94583
(925) 543-0300

(Address of principal executive office, including ZIP Code, and telephone
number)

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

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

COMMON STOCK, $.01 PAR VALUE
(Title of Class)

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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.

As of March 4, 2002, there were 63,802,563 shares of the Registrant's
common stock outstanding and the aggregate market value of such shares held by
non-affiliates of the Registrant, based upon the closing sale price of such
shares on the Nasdaq National Market on February 27, 2002, was approximately
$6,089,140. Shares of common stock held by each executive officer and director
and by each entity that owns 5% or more of the outstanding common stock have
been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.

DOCUMENTS INCORPORATED BY REFERENCE

None





TABLE OF CONTENTS




PART I 4
Item 1. Business 4
Item 2. Properties 15
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15

PART II 15
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters 15
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 7a. Quantitative and Qualitative Disclosures about
Market Risk 34
Item 8. Financial Statements and Supplementary Data 34
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 35

PART III 35
Item 10. Directors and Executive Officers of the Registrant 35
Item 11. Executive Compensation 37
Item 12. Security Ownership of Certain Beneficial Owners
and Management 43
Item 13. Certain Relationships and Related Transactions 44

PART IV 45
Item 14. Exhibits, Financial Statements, Schedules and
Reports on Form 8-K 45

INDEX TO EXHIBITS







PART I



ITEM 1. BUSINESS

Certain written and oral statements made or incorporated by reference
from time to time by the Company or its representatives in this document or
other documents filed with the SEC, press releases, conferences, or otherwise
that are not historical facts, or are preceded by, followed by or that include
words such as "anticipate," "believe," "plan," "estimate," "seek," and "intend,"
and words of similar import are intended to identify forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements include the following: (i) our expectation to
generate revenues by charging end users for Internet access and other services,
and by charging suppliers for the dedicated connection, e-commerce services and
advertising access to their customers; (ii) our expectation to generate revenue
from a number of sources - end users of our industry-specific networks and
vendors to those communities of users, as well as customers of the StarBand
Latin America business; (iii) our belief that end users will pay a fee for
broadband Internet access, industry-specific content and other bundled products
and services; (iv) our belief that vendors will pay for the right to occupy a
priority position on our networks; (v) our expectation to provide much of our
earth segment to customers by purchasing or renting satellite dishes, hubs and
send/receive cards for our network servers and our expectation to purchase the
space segment from Spacenet; (vi) our belief that our available cash resources
and amounts available under financing facilities will be sufficient to meet our
expected working capital and capital requirements (including the exchange offer)
for the next 12 months based on our current business plan; (vii) our
expectations with respect to the StarBand Latin American business; (viii) our
belief that failure to complete the StarBand Latin America transaction could



4

negatively affect our operating results; and (ix) our belief that continued
investment in research and development will contribute to attaining our
strategic objectives, including the development of new business markets. These
statements are not guarantees of future performance and are subject to business
and economic risks and uncertainties, which are difficult to predict. Therefore,
the Company's actual results of operation may differ materially from those
expressed or forecasted in the forward-looking statements as a result of a
number of factors, including, but not limited to, those set forth in this
discussion under "Factors Affecting Our Business, Operating Results and
Financial Condition" and other risks detailed from time to time in reports filed
with the SEC.

All forward-looking statements of the Company are qualified by and
should be read in conjunction with such risk disclosure. The Company undertakes
no obligation to publicly update or revise any forward-looking statements
whether as a result of new information, future events or otherwise.

GENERAL

We develop, implement and manage industry-specific private networks for
businesses to communicate with their vendors and customers via bi-directional
satellite-delivered Internet connections. Our core services and products include
remote high-speed Internet access, delivery of data and high-quality video, and
networking services which can allow businesses to provide e-business services,
such as in-store audio and video, employee benefits administration, employee
training, and related services to their vendors and customers. Our solution
utilizes "always on" satellite technology, which delivers technology tools and
applications to small and medium-sized business entities. We customize our
managed browser technology for a network to allow Internet access, in an
industry-specific managed desktop environment, for conducting business
transactions, viewing web-based content and training, and providing e-business
services. We expect to generate revenues by charging end users for Internet
access, our software and other services, and by charging suppliers for the
dedicated connection, e-commerce services and advertising access to their
customers.

On October 3, 2000, Gilat Satellite Networks Ltd. ("Gilat") and the
Company announced an agreement under which Gilat would make a tender offer to
acquire for cash 51% of our outstanding common stock at $2.32 per share.
Effective January 11, 2001 Gilat acquired control pursuant to that tender
offer.

On April 23, 2001, the Company, Gilat and Spacenet, Inc. ("Spacenet"),
a wholly-owned subsidiary of Gilat, entered into an agreement pursuant to which
the Company would issue approximately 19.3 million shares of its common stock to
Spacenet (or its affiliate-designee) is full satisfaction of the Company
outstanding obligations to Spacenet. On May 21, 2001, that transaction was
completed.

On April 23, 2001, the Company, Gilat To Home Latin America (Holland)
N.V. and Gilat entered into a series of transactions that would result in the
acquisition by the Company of Gilat's StarBand Latin America business (the
"StarBand acquisition"), an entity focused on providing satellite-based
telephone and high speed internet services to small businesses and home-office
customers in Latin America. In consideration for such acquisition, the Company
agreed to issue to Gilat approximately 43.1 million shares of the Company's
common stock. Additionally, conditioned upon the closing of the acquisition
agreement, the Company announced it would make a tender offer to acquire, in
exchange for up to $4 million in cash and up to 312,500 ordinary shares of
Gilat, up to 20% of the Company's common stock held by each stockholder of the
Company other than Gilat and its affiliates. On September 7, 2001 the parties
entered into an amended agreement and, on December 31, 2001, the parties entered
into a second amended agreement. The revisions to the April 23, 2001 agreement:
a) increased the number of shares of rStar common stock that the Company may
acquire in the exchange offer to approximately 6,315,789 shares of rStar common
stock, b) adjusted the cash portion of the consideration for those shares from a
fixed $0.95/share to an amount that will vary between $0.32 and $1.58 per share,
depending on the then market value of Gilat ordinary shares, c) established
certain earnings targets for the StarBand Latin America business for the one
year periods ended June 30, 2003 and 2004 that, if not achieved, will entitle
non-Gilat stockholders to special cash distributions totaling up to $10 million
or, if exceeded, will entitle Gilat to additional rStar shares totaling 10% of
amount outstanding immediately following the StarBand acquisition, d) provided
an exception to the obligation to make the above-described special cash
distribution if the Company obtained substantial new equity financing, e)
clarified that rStar's rights to provide services in Mexico rStar are
non-exclusive and f) extended to May 31, 2002 the termination date of the
acquisition agreement. Stockholders representing approximately 81.6% of our
common stock have entered into a voting agreement to vote all of their shares
"FOR" the proposal to approve and adopt the second amended acquisition
agreement. We, therefore, expect our stockholders to approve the second amended
acquisition agreement, and the transactions it contemplates, when they are asked
to vote on the matter. Upon completion of the StarBand acquisition, StarBand
Latin America is expected to become a subsidiary of rStar.

We expect to commence the exchange offer as soon as the necessary
disclosure documents and financial statements have been prepared, and the
Securities and Exchange Commission has completed its review of the filed
materials. While there can be no assurance, we believe that we will be in a
position to commence the exchange offer and mail the proxy statement to our
stockholders within the next several weeks. Gilat, and its affiliates, currently
beneficially own approximately 65.5% of our common stock.

We were founded in June 1997 and until March 19, 2001, operated under
the name ZapMe! Corporation. On March 19, 2001 we changed our name to rStar
Corporation ("rStar"). We are a Delaware corporation. Our principal offices are
located at 3000 Executive Parkway, Suite 150, San Ramon, California 94583, and
our telephone number is (925) 543-0300. Our Web site address is: www.rstar.com.


OUR DISCONTINUED EDUCATION BUSINESS

In October 2000, we announced that we were shifting all of our business
focus and resources to pursue our current business, which business we initiated
in July 2000. Prior to that announcement, from September 1997 through October
2000, our principal focus was building an advertiser-supported network serving
the education market. We began


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offering sponsorships through our proprietary network in December 1998, and we
subsequently built one of the largest broadband networks dedicated to education
in the United States.

Our network was primarily designed to provide students aged 13 to 19
with computer experience that was free to schools and easy to use. Our principal
products and services for the discontinued education business consisted of
web-based education resources, learning tools and services. We provided each
participating school with from 5 to 15 high-end, multimedia PCs with 17-inch
monitors, a satellite-ready computer server, a laser printer, and
satellite-based broadband access to the Internet. In addition, we offered a
proprietary, easy-to-use browser interface that provided access to the Internet,
over 13,000 pre-selected and indexed third-party educational web sites, special
search tools, and other aggregated content and services. Our funding for the
development, installation and maintenance of the educational network was
provided primarily by corporate sponsorships and proceeds from our initial
public offering.

Since commencement of operations, our advertising-based revenue model
was targeted by federal and state legislative initiatives supported by persons
seeking to minimize advertising in schools. In October 2000, as a result of
these initiatives, we decided that we would no longer deliver paid commercial
messages directed at students, would end the advertising-supported business
model and would discontinue the installation of free computer labs in schools.
The subscription contracts with school districts under which our network
products were provided granted us the right, without penalty and upon notice to
the participating school districts, to cease providing services and to recover
our computer hardware.

Our education network business, including our former indirect
wholly-owned subsidiary, eFundraising.com Corporation, are reflected in the
accompanying financial statements as discontinued.

We recorded no revenue from our discontinued education business during
the 12 months ended December 31, 2001. During the 12 months ended December 31,
2000, we recorded $14,316,000 in revenue from our discontinued education
business. Four sponsors of our discontinued education business - Inacom,
Toshiba, Gilat and Sylvan - accounted for approximately 68% of our revenue, with
Inacom, Toshiba and Gilat each accounting for more than 10% of our revenue
during that period.

Unless otherwise noted, the discussion below relates to our current and
proposed business operations after the StarBand acquisition, and not the
discontinued education business.


MARKET OPPORTUNITY

SATELLITE MULTICASTING OF BROADBAND CONTENT.

We recognize a growing benefit to organizations in publishing and
delivering information - including data, audio, video, and other rich-media
content to communities of users in geographically dispersed locations at high
speeds and relatively low cost. Businesses can use bi-directional
satellite-based networks to multicast to network locations, including areas not
currently served by Internet service providers offering broadband connectivity,
so that all target users can access the most recently updated information at any
time. With this technology, network participants can, from a central location,
deliver remote training, education, and rich-media advertising materials,
display targeted video and graphics material, deliver live video links to remote
sites, and high-speed, high-bandwidth access to the Internet. Companies can
utilize multicasting to lower their communication costs, while improving their
productivity and operational efficiencies.

INCREASING VALUE OF DEFINED DEMOGRAPHIC AUDIENCE.

The Internet enables corporate sponsors to use demographics in
delivering their messages to specific groups, as well as to change their
messages frequently in response to market factors, current events and customer
feedback. Previous


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Internet sponsorship efforts were directed primarily at a broad audience by
placing corporate messages on the most frequently visited web sites. As the
Internet has matured, businesses have sought to improve the effectiveness of
their corporate sponsorship by directing their messages toward the Internet
users they most want to reach. By focusing corporate sponsorship efforts on the
most relevant users, Internet-based corporate sponsors seek to improve their
brand awareness and response rates and reduce costs by eliminating spending that
is not directed at their intended audience.

ANTICIPATED OPPORTUNITY IN LATIN AMERICA.

The market for communications network services in Latin America has
experienced growth in recent years. We believe that this market will continue to
grow in the future. Some of the key factors responsible for this growth include:

- Deregulation and privatization of government-owned
telecommunications monopolies throughout Latin America, which
allow for greater access to communications alternatives;

- Growing demand for communications capacity driven by the
increase in bandwidth-intensive applications, including the
Internet; and

- Continuous technological advances which are broadening
applications for and decreasing the cost of both satellite and
ground-based networks.


THE rSTAR SOLUTION

In addition to providing high-speed Internet access, our network design
allows us to remotely download and store full-motion video, other rich-media
files, system upgrades and other data directly, quickly and efficiently onto
local user servers, where they can be accessed immediately and without the
delays typically associated with downloading large media and application files.
The multicasting capabilities of satellite technology enable us to
simultaneously deliver these types of files to numerous locations. As a result,
our cost of delivery is relatively low even though the speed at which these
files can be transmitted is very high. Because these files are accessed locally,
and not over the Internet, we can also avoid delays associated with delivering
media files using streaming network architectures.

Our network management services for bi-directional satellite-based
communication and our proprietary managed browser technology allow us to deliver
custom-designed Internet media networking solutions for conducting business
transactions or viewing web-based content and training. We believe our services
and products will have great appeal to potential subscribers and sponsors.

WHAT WE OFFER TO BUSINESS USERS.

We intend to offer a turnkey technology solution for business
enterprises and community user groups by providing cost-effective solutions to
communications challenges. Specifically, we intend to offer:

- broadband Internet access;

- training on demand;

- up-to-the-minute product releases and information;

- authorization for credit card transactions;

- ability to order merchandise online;

- TV and music entertainment;

- point of sale polling and reporting;



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- management of communication between multiple offices and
locations; and

- remotely-managed software application upgrades.

WHAT WE OFFER TO SPONSORS.

We believe our private network offers an appealing opportunity for sponsors
because we can provide the following:

- Access to specific business industry groups. Many customers,
vendors and suppliers of industries have found it difficult to
build a 100% broadband network since all participants may not
have broadband access to the Internet. Our broadband
bi-directional multicasting capability provides a means for
manufacturers, suppliers, and other sponsors to reach network
locations nearly anywhere in North America.

- Dynamic billboard. Our dynamic billboard is a fixed space on
the PC screen that displays sponsorship messages and is larger
than typical banner advertisements. The dynamic billboard
displays new sponsorship messages periodically, for example,
every 15 seconds. Our billboard is designed to allow users to
click on the dynamic billboard and view the sponsor's message
on a full-screen, rich-media interactive display, with full
motion video and high quality audio.

WHAT WE EXPECT TO OFFER IN LATIN AMERICA.

After the StarBand acquisition, we expect to provide satellite-based telephone
and high-speed Internet access to consumer small business and home-office
customers in Latin America to meet the demands of rural, suburban and other
under served markets where broadband alternatives are limited. We believe our
products will offer:

- reliable high-speed, always-on access;

- a superior subscriber experience unavailable elsewhere; and

- a flexible infrastructure.


OUR STRATEGY

Our goal is to become a leading provider of industry-specific networks
for businesses to communicate with their vendors and customers via
bi-directional satellite-delivered Internet connections. We intend to aggregate
business applications, such as merchant payment services, in-store audio and
video, and customized applications by vendors to the industry and bundle these
services with dedicated connections, using a satellite-based network, to
subscribers, vendors and other application service providers. We plan to build
and operate networks for small and medium-sized business enterprises, across a
diverse range of industries. Key elements of our strategy are as follows:

ACTIVELY DEPLOY OUR NETWORKS AND GROW OUR INSTALLED BASE OF SITES.

We intend to capitalize on our early market entrance to deploy our
networks and grow our installed base of sites for each industry-specific
network.

PROMOTE REPEAT USAGE AND LOYALTY OF USERS.

We believe that broadband-delivered rich-media networks have an
inherent potential for creating loyal revenue-generating subscribers,
particularly when combined with relevant business applications critical to the
success of day-to-day business operations. As users invest time and energy in
rStar-powered services, they may become less inclined to switch to alternative
services. We intend to promote repeat usage and user loyalty by maintaining and
improving our range of services, expanding the breadth and depth of our product
offerings and remaining responsive to user trends and suggestions.



8



INCREASE FUNDING FROM SPONSORS.

We believe that our private networks will provide sponsors with an
attractive means of offering their products and services to well-targeted
businesses. We intend to develop innovative sponsorship relationships with
leading brand marketers that support broad marketing objectives, including brand
promotion, awareness, product introductions and ASP-delivered software. We
expect many of these sponsorship arrangements will involve longer-term contracts
and higher dollar values than traditional banner advertising deals. We also
intend to offer traditional banner advertising options for sponsors.

PURSUE STRATEGIC ALLIANCES.

We plan to increase usage of the networks and grow our revenues through
strategic alliances that offer opportunities to improve our technology, gain
access to compelling content, add new features and functionality or generate
sponsorship or e-commerce revenues. We also intend to form alliances with other
companies to leverage their brands, while incorporating content that is
consistent with our mission. We may also expand our revenue opportunities
through alliances with technology providers, online service and content
providers, commerce providers and advertisers.

In addition, as part of our planned expansion into Latin America
through the StarBand acquisition, we intend to:

PROVIDE BUNDLED INTERNET TELEPHONY SERVICES.

We expect to provide bundled telephony and Internet services in Latin
America. We anticipate using Gilat's technology to provide four telephony lines
with toll-quality and an Internet connection with broadband quality, all over a
single satellite antenna in a single unit.

ENHANCE OUR SUBSCRIBER'S EXPERIENCE.

We will continue to invest in our underlying technology and capitalize
on our relationship with Gilat to provide state-of-the-art technologies to our
subscribers.

MAINTAIN A LOW-COST AND CAPITAL-EFFICIENT BUSINESS MODEL.

We intend to design and operate our network around a low-cost and
capital- efficient business model. For example, we expect to lease satellite
capacity on existing communication satellites for our network rather than
investing the significant time and capital necessary to design, launch and
operate a proprietary fleet of satellites. As we grow our subscriber base, we
anticipate lowering our costs further by working with Gilat and other partners
to develop next-generation equipment and satellite capacity.


PRODUCTS AND SERVICES

We are dedicated to providing a complete satellite-based solution for
our customers. Installation, software customization, content uploading and
downloading, and service support are all included in our solution as is, at the
customer's election, computer hardware. These components of our solution are
designed specifically for customers who have a critical need to deliver
identical "rich" content to a large number of geographically separate locations
at a cost-effective rate. Key elements of our approach are:

INTERNET SERVICES.



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Our Internet services are immediately deployable and scalable. We will
be able to provide instant wireless, high-speed access to the Internet,
including on-demand delivery of multimedia audio, video and data using our
proprietary technology. We are developing private networks that include
essential features such as e-mail, message boards, personal planners, calendars
and client-targeted databases. Our networks will be centrally managed, with
real-time, in-depth monitoring, security and filtering capabilities.

MULTICAST SERVICES.

We employ satellite multicasting software to multicast content. As a
result, our network of users will receive interactive, high-bandwidth,
rich-media transmissions, ranging from full-motion, television-quality video to
complex imaging.

OPERATIONS SERVICES.

Our operations team provides support for out network clients, from the
point of contract signing through procurement, installation, customer support
and technical support. Our operations team manages all stages of the
installation process, including new installations, upgrades, site relocations,
changes, removals and redeployment of systems.

NETWORK SERVICES.

Our networks are centrally managed and web-based, and will come
complete with real-time, in-depth monitoring, security and filtering
capabilities.

HARDWARE.

We can provide a customized hardware package designed to meet a
customer's networking needs. From a single client station to a 30-client
computer network, we can provide the high performance tools and hardware
necessary to connect the client to a network.

MANAGED DESKTOP INTERFACE (RVISTA).

Our proprietary browser technology - rVista - is fully customizable,
which allows a business to operate its own branded network, multicasting to
thousands of locations. The rVista platform allows our customers to conduct
profile-driven demographic targeting, as well as offer complete e-procurement,
e-commerce and advertising capabilities. Our proprietary browser also assists
business users when they navigate through their extranet, launch web pages or
search the Internet. The managed desktop allows a customer to improve
productivity and save time by accessing all applications and tools from a
convenient, stationary location rather than having to minimize windows, search
directories, or fumble through lists of programs.

SUPPORT.

We intend to offer an end-to-end solution committed to complete
customer satisfaction.


In addition, as part of our planned expansion into Latin America
through the StarBand acquisition, we intend to:

- implement, operate and market our broadband Internet access
services and voice services to consumers and small office/home
office subscribers;


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- provide a bundled product with direct-to-home television
service using our single satellite dish technology; and

- provide such other technologies and products that our partners
may develop.


SALES AND MARKETING

As of February 27, 2002, we had a direct sales organization consisting
of 3 sales professionals with an average of 19 years of experience per person.
We intend to hire additional qualified sales professionals as needed to meet the
demands of the marketplace.

We intend to employ a variety of methods to promote our brands and to
increase network usage by users, including technology incentive and product
information training programs co-branded with partners. In addition, we intend
to engage in an ongoing public relations campaign.

As part of our planned expansion into Latin America through the
StarBand acquisition, we intend to rely primarily on wholesale distribution
channels to market our products and services.

PRINCIPAL MARKETS AND CUSTOMERS

Our current focus is on developing a private network for the automotive
collision repair industry, which performs more than $27 billion in repair work
annually in the United States and includes approximately 60,000 shops in the
United States and Canada. Our planned network is designed to streamline workflow
between collision shops, distributors, suppliers, manufacturers and insurers by
delivering industry information, computer-based training, application data and
software to these participants directly on their desktop PC. We expect that the
intended result will be reduced cycle time, improved communication, increased
productivity, revenue gains and higher customer satisfaction.

We launched a pilot network in four regions of the U.S. and Canada in
the third quarter of 2001, and are commencing deployment of this network for
subscribing participants.

Our operations in 2001 were limited to building a pilot network.
Accordingly, we did not generate any revenue.


INFRASTRUCTURE AND TECHNOLOGY

Our satellite delivery system permits us to simultaneously multicast
data, including full-motion video files, from our network operations center to
each site in a given network. We believe that this is an efficient way of
distributing files over a remote network in a business environment.

Our infrastructure is scalable, allowing management to quickly adjust
to the marketplace and customers' needs. We license commercially available
technology whenever possible in lieu of dedicating our financial and human
resources to developing technology solutions. We license the operating system
for our proprietary web browser, from Microsoft under an agreement with no
expiration date.

Gilat, a leading provider of telecommunications solutions based on very
small aperture terminal ("VSAT") satellite technology, supplies our satellite
uplink equipment and satellite modem for customer installation. Gilat's wholly
owned subsidiary, Spacenet Inc. ("Spacenet") provides us with our satellite
space segment services.

COMPETITION



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The market for our products and services is new and rapidly evolving,
and we expect competition in and around our market to intensify in the future.
Except for Gilat, we are not aware of any competitor that currently offers or is
planning to offer industry-specific private networks for different businesses in
an industry via bi-directional satellite-delivered Internet connections.
However, we face competition from a number of companies that provide products
and services similar to portions of our products and services to a similar base
of users, or both. For example, Hughes Electronics currently offers two-way
satellite-based broadband Internet access to businesses, and it has alliances
with America Online and Earthlink to promote their broadband services and
content. Additionally, the Connexstar subsidiary of Gilat offers
satellite-delivered internet connectivity with a limited selection of managed
services. Although none are focusing on vertical markets at this time, companies
such as AT&T, Worldcom, Sprint and other telecommunications companies have the
customer base and resources to deliver such services via established terrestrial
connections such as cable and DSL.

We believe that our greatest potential competitive threat is posed not
by a single company, but a combination of one or more companies which each
addresses different parts of our current business model. Many of our competitors
have significantly greater financial, technical, marketing and distribution
resources than currently possessed by us. Our competitors may engage in more
extensive research and development, adopt more aggressive pricing policies and
make more attractive offers to our potential subscribers, partners, sponsors and
e-commerce merchants. Our competitors may develop services that are equal or
superior to those currently offered by us or which achieve greater market
acceptance. In addition, current and potential competitors have established or
may establish cooperative relationships among themselves or with third parties
to better address the needs of industries for which we intend to develop private
satellite-based networks. As a result, it is possible that new competitors may
emerge and rapidly acquire significant market share, reduce our potential
revenues, and otherwise harm our business. We believe that our success in
competing with other potential competitors or imitators will depend on various
factors, many of which are outside our control.

With respect to our planned expansion into Latin America through the
StarBand acquisition, our potential competitors will include other satellite
service providers, local wire line and wireless telecommunications providers and
cable modem service providers.

GOVERNMENT REGULATION

The Internet is the subject of an increasing number of laws and
regulations. These laws and regulations may relate to liability for information
retrieved from or transmitted over the Internet, online content regulation, user
privacy, taxation and the quality of products and services. In particular,
Congress has passed:

- Child Online Protection Act of 1998. The Act makes it unlawful
for anyone to knowingly distribute material for commercial
purposes over the Internet to minors that is harmful to
minors. It imposes additional restrictions and obligations and
establishes the Commission on Online Protection to study and
report to Congress on methods to help reduce access to harmful
information by minors.

- Children's Online Privacy Protection Act of 1998. The Act
makes it unlawful for an operator of a web site or online
service directed to children under 13 to collect, use or
distribute personal information from a child under 13 in a
manner which violates regulations to be proscribed by the
Federal Trade Commission (the "FTC"). The FTC is in the
process of issuing final regulations, which concern, among
other things, the scope of the Act's parental consent
requirements.

- Protection of Children from Sexual Predators Act of 1998. This
Act mandates that electronic communication service providers
report facts or circumstances from which a violation of child
pornography laws is apparent.

- Digital Millennium Copyright Act of 1998. This Act establishes
limited liability for online copyright infringement by online
service providers for listing or linking to third-party web
sites that include copyright-infringing materials.

The courts are in the process of interpreting these and other such laws
and their applicability and reach, therefore, are not well defined. These, and
other, laws may impose significant additional costs on our business, require us
to change



12


our operating methods, or subject us to additional liabilities. Moreover, the
applicability to the Internet of existing laws governing issues such as
intellectual property ownership, copyright, defamation, obscenity and personal
privacy is uncertain and developing. We may be subject to claims that our
services violate such laws. Any new legislation or regulation in the United
States or Latin America or the application of existing laws and regulations to
the Internet could impose significant restrictions, requirements or additional
costs on our business, require us to change our operating methods, business
strategy, or subject us to additional liabilities and cause the price of our
common stock to decline.

The satellite industry is a highly regulated industry. In the United
States, operation and use of satellites requires licenses from the FCC. As a
lessee of satellite space, we could in the future be indirectly subject to new
laws, policies or regulations or changes in the interpretation or application of
existing laws, policies or regulations, any of which may modify the present
regulatory environment in the United States. While we believe that our satellite
access providers will be able to obtain all U.S. licenses and authorizations
necessary to operate effectively, they may not continue to be successful in
doing so. Our failure to indirectly obtain some or all necessary licenses or
approvals could seriously harm our business.

In addition, as part of our planned expansion into Latin America
through the StarBand acquisition, our international operations in Latin America
will increase our exposure to international laws and regulations. Many of these
laws are often complex and subject to variation and unexpected changes. For
example, the governments of foreign countries might attempt to regulate our
products and services or levy sales or other taxes relating to our operations.
Additionally, foreign countries may confiscate our products and assets, or
impose tariffs, duties, price controls or other restrictions on foreign
currencies or trade barriers. Our expected expansion into Latin America is also
subject to factors beyond our control, such as political and economic
instability, including the current political instability in Argentina.

INTELLECTUAL PROPERTY

We seek to protect our intellectual property under relevant U.S. and
international law regarding copyright, patents, trademarks and trade secrets as
well as through confidentiality agreements with employees, consultants,
contractors and business partners. We currently have eighteen patent
applications on file with the United States Patent and Trademark Office. The
proprietary technologies for which we are pursuing patents include those
allowing us to:

- establish a multiple browser client architecture that allows a
user to keep track of and move between opened windows more
effectively by providing a window management system designed
specifically for Internet use;

- customize the browser based on the industry or community user
group licensing the browser technology;

- transmit sponsor messages, advertising and other content via
satellite to local enterprises or community user groups for
distribution to other users of the network;

- gather geographical data on network users for automatic
tailoring of content and advertising;

- simultaneously monitor system usage across multiple computers
for diagnostic purposes;

- manage e-mail and other communications remotely;

- multicast and locally cache relevant information requested by
a group of users of our satellite network;

- correlate user's preferences and access privileges with a user
name so that the user's experience is consistent regardless of
what computer her or she users;

- identify web sites viewed by user groups on a given computer
network; and

- award and dynamically adjust incentive points based on time
users spend viewing content.



13


In addition, we have applied to register "rStar," the rStar Networks
logo, and other trademarks in the United States. We have given copyright and
trademark notices on our web sites and private networks, and many other
copyrightable or trademarked materials by affixing a standard copyright and/or
trademark notice in the appropriate places. We have taken further steps to
protect our trademarks by developing trademark brand guidelines which are
included in certain agreements with business partners who are licensed to
display the "rStar Networks" brands. We control access to our trade secrets and
proprietary information by entering into confidentiality agreements with our
employees, consultants, contractors and actual and potential business partners.
We currently own several Internet domain names based upon our "rStar Networks"
brands and services, including "rstar.com," from which we conduct our corporate
web site.


EMPLOYEES

As of February 27, 2002, rStar had 21 full time employees. Our
employees are not represented by a labor union or subject to a collective
bargaining agreement. We have never experienced a work stoppage and we believe
that our employee relations are good.

EXECUTIVE OFFICERS

rStar's executive officers, who are appointed by and serve at the
discretion of the Board of Directors, and their ages as of February 27, 2002,
are as follows:



NAME AGE POSITION

Lance Mortensen 49 Chairman of the Board, Chief Executive Officer and President
Robert Edwards 50 Senior Vice President, Administration and Chief Financial Officer
Jay Scott 53 Chief Operating Officer
David Wallace 38 General Counsel, Vice President and Secretary


Mr. Mortensen is a founder of rStar Corporation and was Chairman of the
Board from our inception until October 2000. Mr. Mortensen was renamed Chairman
in January 2001. Mr. Mortensen began the planning and preliminary organization
of rStar in 1996, and incorporated us in June 1997. Prior to founding rStar, Mr.
Mortensen was Chief Executive Officer of Monterey Pasta Company, a food service
company, from January 1993 to October 1995. From 1981 to 1992 he was President
of Morweg Construction Company, a California residential construction company.
Mr. Mortensen also serves on the Board of Advisors of the San Francisco State
University College of Business.

Mr. Edwards joined rStar in March 2000 as Vice President and Chief
Financial Officer. Mr. Edwards previously served as Chairman and Chief Executive
Officer of A Sport, Inc., a diversified sporting goods manufacturer, where he
was Chairman and Chief Executive Officer from 1994 to 1999. Prior to A Sport,
Inc., Mr. Edwards served as Senior Vice President, Corporate Development and
Planning at K2 Inc., a leading branded consumer products manufacturer, from 1986
to 1994. He also served as Vice President, Finance & Administration for Thorn
EMI Screen Entertainment from 1985 to 1986. Mr. Edwards received an MBA in
finance from The Anderson School of Management at UCLA and his undergraduate
degrees from Tufts University.

Mr. Scott joined rStar in March 2000 as Executive Vice President,
applying his 15-plus years of leadership experience to the daily managerial
responsibilities at our wholly-owned subsidiary, rStar Broadband Networks, Inc.
He became COO of rStar in January 2001. From 1989 to 2000, Mr. Scott lead an
800-person sales support center while serving as Vice President of various
departments at CompuCom Systems, Inc. Mr. Scott attended the University of
Maryland with a Business Administration focus.

Mr. Wallace joined rStar in November 1999. As General Counsel, Mr.
Wallace is responsible for directing our in-house legal activities and for
managing our outside counsel. Prior to joining us, Mr. Wallace was a partner at
Shapiro Buchman Provine & Patton LLP, a law firm in Walnut Creek, California
where, from 1992 to 1999, Mr. Wallace


14

represented technology and real property entrepreneurs. Mr. Wallace was admitted
to the California State Bar in December 1988. He received his law degree from
Hastings College of the Law and his undergraduate degree from the University of
San Francisco.



ITEM 2. PROPERTIES

We lease our principal offices in San Ramon, California, which as of
February 19, 2002 consisted of approximately 16,100 square feet of office space.
The San Ramon lease expires in August 2002. An additional approximately 5,400
square feet of office space is leased in San Jose, California, which lease will
expire in September 2002. We have subleased the office space in San Jose at a
monthly rate that approximately equals our monthly rental expense. Following the
StarBand acquisition, we expect to relocate a majority of our operations to the
StarBand offices in Florida.


ITEM 3. LEGAL PROCEEDINGS

On or about October 22, 2001, STM Wireless, Inc. ("STM") filed an
action entitled STM Wireless, Inc. v. Gilat Satellite Networks Ltd. et al.,
Orange County Superior Court Case No. 01 CC13531, by which action STM alleges
that the named defendants, including the Company, improperly interfered with
STM's bid to provide telecommunication services to rural areas of Peru. STM's
complaint seeks unspecified damages.

We are not a party to any legal proceedings that we believe could have
a material adverse effect on our operating results and financial position.
However, we may from time to time become a party to various legal proceedings
arising in the ordinary course of business.


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

No matters were submitted to a vote of security holders during the
fourth quarter of fiscal year 2001.

PART II

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

PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY

Our common stock is traded publicly on the Nasdaq National Market under
the symbol "RSTR". Our common stock has been publicly traded since October 20,
1999, and prior to March 21, 2001 traded under our original symbol - "IZAP". Our
initial public offering price was $11.00 per share. Prior to our initial public
offering, there was no established public trading market for the common stock.

The following table shows the high and low common stock prices by
quarter from the Nasdaq National Market of the common stock for the periods
indicated. Such quotations represent inter-dealer prices without retail markup,
markdown or commission and may not necessarily represent actual transactions.



2001 2000 1999
---- ---- ----

HIGH LOW HIGH LOW HIGH LOW
---- --- ---- --- ---- ---

First Quarter $1.6094 $0.5000 $11.625 $5.8750 $ N/A $ N/A
Second Quarter 1.1500 0.5500 8.0000 1.8125 N/A N/A
Third Quarter 0.8300 0.3500 4.1875 1.5625 N/A N/A
Fourth Quarter 0.5900 0.2400 2.5000 0.4688 13.75 5.31


As of February 27, 2002, there were 63,802,563 shares issued and
outstanding held by approximately 138 stockholders of record and approximately
3,600 beneficial owners of shares held by brokers and fiduciaries.


15

We have never paid cash dividends on our common stock. Other than the
special cash distribution described in the Business Section of Item 1 we expect
to retain our future earnings, if any, for use in the operation and expansion of
our business and do not anticipate paying any cash dividends in the foreseeable
future. Under the second amended acquisition agreement dated December 31, 2001,
subject to limited exceptions, Gilat has agreed not to permit rStar to pay or
declare any dividends or other distributions for the longer of (x) one year
following the closing of the StarBand acquisition or (y) the date on which
rStar's obligation to make the special cash distribution (as defined in the
second amended acquisition agreement) has been satisfied in full or otherwise
terminated in accordance with the terms of the second acquisition agreement. The
second amended acquisition agreement also contains other restrictions on rStar's
ability to declare or pay any dividends or other distributions on its capital
stock.


ITEM 6. SELECTED FINANCIAL DATA

The selected consolidated financial data presented below is derived
from our consolidated financial statements, which statements are included
elsewhere in this document. The selected consolidated financial data set forth
below is qualified in its entirety by, and should be read in conjunction with,
Management's Discussion and Analysis of Financial Condition and Results Of
Operations and the Consolidated Financial Statements and the related notes
thereto included elsewhere in this document.



PERIOD FROM
JUNE 25, 1997
(INCEPTION)
YEAR ENDED DECEMBER 31, THROUGH
(In thousands except per share data) DECEMBER 31,
2001 2000 1999 1998 1997
---- ---- ---- ---- ----


STATEMENT OF OPERATIONS:
Net revenues from continuing operations $ - $ - $ - $ - $ -
Net revenues from discontinued operations $ - $ 14,316 $ 2,542 $ - -
Income (Loss) from continuing operations (15,111) (6,858) 182 (122) (54)
Loss from discontinued operations (12,260) (104,097) (27,309) (4,909) (527)
Total net loss (27,371) (110,955) (27,127) (5,031) (581)
Preferred dividends actual, accreted, and deemed - (213) (17,965) (606) -
Net loss applicable to common stockholders $(27,371) $(111,168) $(45,092) $(5,637) $ (581)
Net income (loss) per share, basic and diluted continuing
operations $ (0.27) $ (0.16) $ (0.91) $ (0.06) $(0.05)
Net income (loss) per share, basic and diluted discontinued
operations $ (0.22) $ (2.40) $ (1.39) $ (0.42) -
Shares used in calculation of net loss per share, basic and
diluted 56,068 43,348 19,607 11,685 11,620



16


DECEMBER 31,
2001 2000 1999 1998 1997
---- ---- ---- ---- ----

BALANCE SHEET:
Cash and equivalents $31,034 $48,406 $112,714 $ 815 $ 275
Restricted Cash 683 577 565 - -
Total Current Assets 32,055 48,981 113,141 820 288
Total Current Liabilities 6,052 41,108 23,587 118 399
Total Liabilities 6,052 61,653 36,879 5,726 861
Total Stockholders' equity (deficit) 29,984 11,575 114,313 (2,123) (512)
Current Ratio 5.30 1.19 4.80 6.95 .72



17







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

We are building and managing industry-specific private networks for
businesses to communicate with their vendors and customers via bi-directional,
satellite-delivered Internet connections. Our core services and products include
remote high-speed Internet access, data delivery, high-quality video, and
networking services which can allow businesses to provide e-business services,
such as merchant payment, in-store audio and video, employee benefits
administration, employee training, and related services to their vendors and
customers. We are initially focusing our efforts on building an
industry-specific network for the collision industry. Once fully developed we
intend to contribute the assets necessary to conduct the business to a currently
inactive, 85% owned subsidiary. We began developing a new managed browser
technology as an important component of our advertising-supported network
serving the education market ("School Business") during 1999. Although the new
browser was intended to replace the browser then installed in the schools in
connection with our School Business, it was never deployed in that environment.

Due to changes in our School Business, which led to its
discontinuation, we decided to focus our efforts toward becoming a provider of
satellite-based services to vertical markets. Accordingly, we are seeking to
utilize the managed browser technology that was in development for the now
discontinued School Business in our commercial business, including the StarBand
Latin America business described below. Our solution utilizes "always on"
satellite technology, which delivers technology tools and applications to small
and medium-sized business entities. We customize our managed browser technology,
or ("rVista(TM)") for each network to allow Internet access, in an
industry-specific managed desktop environment, for conducting business
transactions or viewing web-based content and training, and providing e-business
services. We expect to generate revenues by charging end users for Internet
access and other services, and by charging suppliers for the dedicated
connection, e-commerce services and advertising access to their customers.

In October 2000, we announced that we were shifting our business focus
and resources to pursue our current business, which we initiated in July 2000.
Prior to that announcement, our principal focus was on building the School
Business.

Operations of the School Business commenced in September 1997 and we
began offering sponsorships through our proprietary network in December 1998.
Over the next two years, we built one of the largest broadband networks
dedicated to education in the United States. This network was designed primarily
for students aged 13-19 to provide a rich-media computer experience that was
free to schools and easy to use. We provided each school participating in the
network from 5 to 15 multimedia personal computers with monitors, a
satellite-ready server, a laser printer and satellite-based broadband access to
the Internet. In addition, we offered a proprietary, easy-to-use browser
interface providing access to the Internet, over 13,000 pre-selected and indexed
third-party educational web sites, educational tools, and other aggregated
content and services.

Since commencement of operations of the School Business, our
advertising-based revenue model for the educational market was targeted by
federal and state legislative initiatives supported by persons seeking to
minimize advertising in schools. In October 2000, as a result of these
initiatives, the negative publicity generated by persons opposed to advertising
and the gathering of demographic information in schools, increasing expenses
associated with the maintenance and servicing of our school network, and our
uncertainty regarding future sponsorship revenues, we decided that we would no
longer deliver paid commercial messages directed at students, would end the
advertised-supported business model and would discontinue the installation of
free computer labs in schools. The School Business operations, including the
operations of our eFundraising subsidiary, which comprised all of our revenues
and a significant portion of our assets and expenses, are reflected in the
accompanying financial statements as discontinued. We have disposed of most of
our education network through a sale of the assets and operations. Unless
otherwise noted, all references to customers and clients relate to our current
business operations and not the discontinued School Business.

In connection with our change in business focus, we have undergone
significant reductions-in-force during 2001. These actions, combined with
attrition, have reduced our headcount approximately 77% from 120 employees at
December 31, 2000 to 28 employees as of December 31, 2001. Total severance costs
associated with these actions equaled approximately $735,000 for the twelve
months of 2001.

On April 23, 2001, we entered into an agreement with Gilat To Home
Latin America (Holland) N.V. and Gilat concerning our acquisition of Gilat's
StarBand Latin America business. See Item 1 for further details.

18

Gilat established StarBand Latin America as an entity focused on
providing satellite-based telephone and high-speed Internet access to small
business and home-office customers in Latin America. We also expect to offer to
exchange up to 6,315,789 shares of our common stock for a combination of cash
and Gilat ordinary shares. The StarBand acquisition, and the other transactions
contemplated by the second amended acquisition agreement, are subject to the
approval by our stockholders. The Company expects to hold a stockholder's
meeting to vote on these matters some time in the first or second quarter of
2002.

On April 23, 2001, the Company, Gilat, and the Spacenet subsidiary of
Gilat entered into an agreement pursuant to which the Company would issue
approximately 19.3 million shares of its common stock to Spacenet (or its
affiliate-designee) in full satisfaction of the Company's outstanding
obligations to Spacenet. On May 21, 2001, that transaction was completed.

CRITICAL ACCOUNTING POLICIES

The Company's critical accounting policies, including the assumptions
and judgments underlying them, are disclosed in the Notes to the Consolidated
Financial Statements. These policies have been consistently applied in all
material respects and address the estimated loss on disposal of discontinued
operations and asset impairment recognition. While the estimates and judgements
associated with the application of these policies may be affected by different
assumptions and conditions, the Company believes the estimates and judgments
associated with the reported amounts are appropriate under the circumstances.


RESULTS OF OPERATIONS

We believe that, due to the majority of our operations being deemed
discontinued, period-to-period comparisons of our operating results are not
meaningful and should not be relied upon as predictive of future performance.
Our prospects must be considered in light of the risk, expenses and difficulties
frequently encountered by companies in the early stage of development,
particularly companies in new and rapidly evolving markets. We may not be
successful in addressing such risks and difficulties.

REVENUES

We expect to generate revenue from a number of sources - end users of
our industry-specific networks and vendors to those community of users, as well
as end users of the StarBand Latin America business. We believe that end users
will pay a fee for broadband Internet access, industry-specific content and
other bundled products and services. Additionally, we believe vendors will pay
for the right to occupy a priority position on our networks in order to gain
special access to those customers, particularly considering that the network
will provide, we believe, an efficient means to distribute training, new product
and other vendor services and products. Revenues from these sources will be
recognized as the services are rendered.

To date, we have generated no revenue from our continuing operations.
Revenue from our School Business, which comprised 100% of our revenue, is not
classified as such because that business has been classified as discontinued.
Rather, it has been applied as a reduction in the loss from discontinued
operations.

COST OF REVENUES

We anticipate that upon maturation of our continuing operations, cost
of revenue will consist primarily of depreciation on network equipment,
including computers placed at user sites, and to a lesser degree, the cost of
administering our satellite communications network. The costs associated with
this form of telecommunication include (1) the cost of land-based equipment, or
"earth segment," such as the satellite dishes, hubs, send/receive cards located
inside the network servers and land-based phone service and (2) the cost of the
link to and from the satellite, or "space segment." We expect to provide much of
our earth segment to customers by purchasing or renting satellite dishes, hubs
and send/receive cards for our network servers. We expect to purchase the space
segment from Spacenet, a wholly-owned subsidiary of Gilat. Our cost of revenue
will vary based on the number of locations we serve within our networks.

In the twelve months ended December 31, 2001 and in all prior periods,
there were no costs of revenues from continuing operations. All such costs were
attributable to our discontinued School Business operations.


19

SALES AND MARKETING

Sales and marketing expenses for continuing operations for the years
ended December 31, 2001 and 2000 were $2,988,000 and $399,000 representing costs
of personnel and overhead associated with initiating our new industry-specific
private network business. In 2000, we were just starting to develop our new
industry-specific private network business. In 1999 there were no sales and
marketing expenses associated with continuing operations.

GENERAL AND ADMINISTRATIVE

General and administrative expenses for the year ended December 31,
2001 were $7,789,000 representing costs of personnel and overhead associated
with initiating our new industry-specific private network business. Included in
these general and administrative costs were legal costs, and consulting costs,
relating to the acquisition agreement entered into on April 23, 2001 by the
Company, Gilat to Home Latin America (Holland) N. V., and Gilat, the Company's
major shareholder, amounting to approximately $1,320,000 for the twelve months
ended December 31, 2001. The pending acquisition of StarBand Latin America by
rStar is a combination of two entities under common control. As such, all
transaction costs have been expensed as incurred. General and administrative
expenses for the year ended December 31, 2000 amounted to $5,614,000. In 1999
general and administrative expenses for continuing operations totaled $673,000
and was comprised largely of depreciation on corporate equipment not directly
related to the School Business.

RESEARCH AND DEVELOPMENT

Research and development expenses for our continuing operations for the
year ended December 31, 2001 were $2,619,000 representing costs of personnel and
overhead associated with the development of our new industry-specific private
network business, the majority of which related to furthering the development of
our managed browser for use in that business. In 2000, research and development
expenses were $817,000 as we were starting to develop our new industry-specific
private network business. We are seeking to utilize the managed browser
technology initially developed for our School Business to further develop
industry-specific private networks in a commercial environment under the
rVista(TM) brand name. In 1999 there were no research and development expenses
associated with continuing operations.

To date, we have not capitalized any software development costs under
Statement of Financial Accounting Standards ("SFAS") No. 86 under which certain
software development costs incurred subsequent to the establishment of
technological feasibility are capitalized and amortized over the estimated lives
of the related products. Technological feasibility is established upon
completion of a working model. To date, costs incurred subsequent to the
establishment of technological feasibility have not been significant, and all
such software development costs have been charged to research and development
expense as incurred.

AMORTIZATION OF DEFERRED STOCK COMPENSATION

Amortization of deferred compensation for the years ended December 31,
2001, and 2000 was $490,000 and $180,000, respectively, relating to personnel
associated with initiating our new industry-specific private network business.
These amounts have been included in Sales and Marketing expenses, as $28,000 and
$11,000, General and Administrative expenses, as $458,000 and $166,000, and
Research and Development expenses as $4,000 and $3,000, for the years ended
December 31, 2001 and 2000 respectively. In 1999 all amortization of deferred
compensation, amounting to $6,056,000 was attributable to personnel who were
dedicated to operating the discontinued education business.


Amortization of deferred compensation relating to personnel operating
the discontinued education business in 2000 amounted to $4,977,000 and such
expense was included in the loss from discontinued operations figures in that
year. The decline in overall expense in 2001 was largely due to the expiration
of the amortization periods of earlier grants and the departure of several
executives who were beneficiaries. No grants that would generate deferred
compensation were made during the year ended December 31, 2001.


20

Deferred stock compensation is amortized over the vesting period of the
options, generally 3 to 4 years from the date of grant, or the performance
period for various warrants we granted using a graded vesting method. All the
remaining deferred compensation as of December 31, 2001 in the amount of
$140,000 will be amortized over the next 12 months.

INTEREST INCOME AND EXPENSE

Interest income totaled $1,616,000, $5,259,000 and $1,812,000 for the
years ended December 31, 2001, 2000 and 1999, respectively. The increase in
income from 1999 to 2000 was due to the investment of the proceeds of our public
offering late in 1999 in interest-bearing securities and the decrease in income
from 2000 to 2001 was due to diminishing cash balances available for investment,
as significant proceeds from our initial public offering were used late in 2000
and throughout 2001 in support of School Business operations. Although that
business was discontinued late in 2000 lease obligations related to computer
equipment purchased in support of the business continued to consume cash in
2001.

Interest expense totaled $2,253,000,$5,447,000 and $1,183,000 for the
years ended December 31, 2001, 2000 and 1999, respectively. The increase in
expense from 1999 to 2000 was associated with the substantial capital lease
obligations incurred to finance computer equipment purchases in support of the
School Business. The decrease in expense from 2000 to 2001 was associated with
the settlement of the Spacenet lease obligations in April 2001 which was our
largest lessor. Interest expense of $904,000,$3,809,000 and $867,000 for the
years ended December 31, 2001, 2000 and 1999, respectively was with Spacenet, a
related party.

INCOME TAXES.

There has been no provision for federal or state income taxes for any
period since inception due to our net operating losses. At December 31, 2001, we
had net operating loss carryforwards for federal income tax purposes of
approximately $130.1 million, which will expire beginning in fiscal year 2013 if
not utilized. Utilization of our net operating loss carryforwards may be subject
to a substantial annual limitation due to the ownership change limitations
provided by the Internal Revenue Code and similar state tax code provisions.
Such an annual limitation could result in the expiration of the net operating
loss carryforwards before utilization. Management has established a valuation
allowance and, accordingly, no benefit has been recognized for our net operating
losses and other deferred tax assets. The net valuation allowance increased by
approximately $4.5 million during the year ended December 31, 2001. We believe
that, based on a number of factors, the available objective evidence creates
sufficient uncertainty regarding the realizability of the deferred tax assets
such that a full valuation allowance has been recorded. These factors include
our history of net losses since inception and expected near-term future losses.
We will continue to assess the realizability of the deferred tax assets based on
actual and forecasted operating results.

LOSS FROM DISCONTINUED OPERATIONS

For the year ended December 31, 2001, we reported a loss from
discontinued operations of $12,260,000 which was a result of a $5,850,000 charge
recorded to cover principally the cost of excess space segment bandwidth
consumed by the School Business that resolved a discrepancy between Spacenet and
the Company and $9,045,000 impairment charges to reflect a revised estimate of
the net proceeds to be obtained from the sale of School Business assets.
Partially offsetting these charges were actual expenses that were lower than the
original estimates for which a reserve was established in December 2000. At
December 31, 2001 all remaining school business assets have been sold.

For the year ended December 31, 2000 we reported a loss from
discontinued operations of $104,097,000. Of this loss, $61.1 million reflects
the cost, net of $14.3 million of revenue, of deploying and operating the
advertiser-supported school network. The other $42.9 million is the estimated
loss on disposal of that network. This is comprised of asset impairment charges,
totaling $34.2 million and estimated future net operating losses from January 1,
2001 to the June, 2001 expected disposal date. Severance and other estimated
expenses comprise the $1.4 million remainder.

For the year ended December 31, 1999 we reported a loss from
discontinued operations of $27,309,000. This reflects the cost, net of $2.5
million of revenue, of developing, deploying and operating the
advertiser-supported school network.

LIQUIDITY AND CAPITAL RESOURCES


21

On April 23, 2001, the Company entered into an agreement to issue
19,396,552 shares of its common stock to Gilat Satellite Networks (Holland) B.V.
(Spacenet's affiliate-assignee) in full satisfaction of the Company's
outstanding obligations to Spacenet of approximately $45,000,000. These shares
were issued on May 21, 2001.

On September 7, 2001, Gilat and the Company announced revisions to a
series of related transactions that will result in the acquisition by the
Company of Gilat's StarBand Latin America business. In consideration for such
acquisition, the Company will issue to Gilat, or its designee, approximately
43.1 million shares of the Company's common stock. Additionally, the Company
announced a tender offer to acquire, in exchange for up to $10 million in cash
and up to 466,150 ordinary shares of Gilat, up to 6,315,789 shares or
approximately 29 percent of the Company's common stock not held by Gilat and its
corporate affiliates. The tender offer is conditioned upon the purchase by the
Company of Gilat's StarBand Latin America business.

We have contractual obligations totaling approximately $6.2 million.
The majority of these relate to capital and operating leases. The capital leases
are principally for computer equipment deployed in the now-discontinued School
Business while the operating leases are primarily related to office space.
Additionally, we have an employment agreement with our chief executive officer
and severance agreements with a number of other senior executives that provide
for substantial payments if their employment is terminated, as is expected upon
the acquisition of StarBand Latin America.




Payments due by period (000s)
----------------------------------------------------------
Less than More than
Contractual Obligations Total 1 year 1 year
- ----------------------- ------ ---------- ----------

Capital Lease Obligations............... $3,306 3,306
Operating Leases........................ 493 489 4
Employment and
severance agreements.................... 2,392 2,357 35
------ ------ ---
Total Contractual Cash
Obligations............................. $6,191 $6,152 $39


We believe that our available cash resources will be sufficient to meet
our expected working capital and capital expenditure requirements, including the
cash that we expect to pay to our stockholders in the exchange offer, for the
next 12 months based on our current business plan and that of StarBand Latin
America. However, if by acquisition or other means, opportunities are presented
to deploy our products and services more rapidly than currently planned, we may
seek to raise additional funds. Additionally, we may require additional capital
to develop new satellite-based private networks, respond to competitive
pressures, acquire complementary technologies, or respond to unanticipated
developments.

We may seek to raise additional funds through private or public sales
of securities, strategic financial and business relationships, bank debt, lease
financing, or otherwise. If additional funds are raised through the issuance of
equity securities, the percentage of the Company owned by existing stockholders
will be reduced, stockholders may experience additional dilution, and these
equity securities may have rights, preferences, or privileges senior to those of
the holders of our common stock. Additional financing may not be available on
acceptable terms, if at all. If adequate funds are not available or are not
available on acceptable terms, we may be unable to deploy or enhance our
networks, take advantage of future opportunities, or respond to competitive
pressures or unanticipated developments, which could severely harm our business.


RISK FACTORS

Investors should carefully consider the risks described below. We
operate in a rapidly changing environment that involves a number of risks, some
of which are beyond our control. The risks described below are not the only ones
we face. Additional risks we are not presently aware of or that we currently
believe are immaterial may also impair our business operations. Our business
could be harmed by any of these risks. The trading price of our common stock
could decline due to any of these risks, and investors may lose all or part of
their investment. In assessing these risks, investors should also refer to the
other information contained in our filings with the Securities and Exchange
Commission, including our consolidated financial statements and other notes.

WE HAVE AN UNPROVEN BUSINESS MODEL AND A LIMITED OPERATING HISTORY.

Because we discontinued our principal business - building an advertiser
supported network serving the education market - and we have not completed the
development of our industry-specific private network business, we have no
operating history on which investors can base an evaluation of our business and
prospects. Our revenue and income potential are unproven and our business model
is unique and evolving. We have limited insight into trends that may emerge and
affect our business.

An investor in our common stock must carefully consider the risks and
difficulties frequently encountered by companies in an early stage of
development, as well as the risks we face due to our participation in a new and
rapidly evolving market. Our business strategy may not be successful and it may
not successfully overcome these risks.

OUR BUSINESS MODEL IS CHANGING AND FUTURE REVENUE GROWTH WILL SUFFER IF WE FAIL
TO ATTRACT AND GROW OUR SPONSORSHIP AND USER BASE.


22

The success of our business will depend on our ability to generate
revenue by attracting sponsors and subscribers for the industry-specific private
networks we seek to develop and deploy. If we are unable to rapidly deploy our
networks to a large number of fee-based business customers, our ability to
generate revenue and implement our strategy will be severely limited.

Users may find that our networks' features and content are not
sufficiently compelling to continue regular use, or may turn to other Internet
providers for such services such as broadband Internet connectivity, software
applications, industry-specific content, and e-commerce business solutions. If
we are not able to demonstrate to sponsors that our networks have an active and
growing user base, sponsors may choose not to enter into sponsorship agreements
with us and our revenues generated from sponsorships would suffer.

WE HAVE INCURRED SUBSTANTIAL LOSSES AND ANTICIPATE CONTINUED LOSSES.

We incurred net losses of approximately $189.8 million for the period
of inception through December 31, 2001, which losses resulted primarily from
costs related to developing our discontinued education network business,
deploying the network to schools and developing content and features for the
network. We have not achieved profitability. We expect to have continued net
losses and negative cash flows. The size of these net losses will depend, in
part, on revenues from our sponsors and subscribers of the industry-specific
private networks we intend to provide, and on the level of our expenses.

We will need to generate significant additional revenues to achieve
profitability. It is possible that we will never achieve profitability, and even
if we do achieve profitability, we may not sustain or increase profitability on
a quarterly or annual basis in the future. If we do not achieve or sustain
profitability in the future, then we may be unable to continue our operations.

WE EXPECT OUR QUARTERLY FINANCIAL RESULTS TO FLUCTUATE AND OUR RECENT SHIFT TO
OUR CURRENT BUSINESS LIMITS MANAGEMENT'S ABILITY TO PREDICT REVENUES AND
EXPENSES PRECISELY.

Our quarterly and annual operating results have varied in the past and
are likely to fluctuate significantly in the future due to a variety of factors,
many of which are outside of our control. Factors that might cause quarterly
fluctuations in our operating results include the factors described in the
accompanying subheadings. To respond to these and other factors, we may need to
make business decisions that could impact our quarterly operating results. Most
of our expenses are relatively fixed in the short term. Moreover, our expense
levels are based, in part, on our expectations regarding future revenue levels
in connection with our current business. As a result, if total revenues for a
particular quarter are below our expectations we may not be able to
proportionately reduce our operating expenses for that quarter. This revenue
shortfall might then have a disproportionate effect on our expected operating
results for that quarter. Consequently, management believes that
period-to-period comparisons of our operating results are not necessarily
meaningful, and should not be viewed as indicators of our future performance in
connection with our current business. In addition, during future periods our
quarterly or annual operating results may fail to meet the expectations of
securities analysts or investors. In this case the trading price of our common
stock would likely decrease.



23


FOLLOWING THE STARBAND ACQUISITION AND THE EXCHANGE OFFER, GILAT WILL BE ABLE TO
EXERCISE TOTAL INFLUENCE OVER rSTAR.

Currently, Gilat beneficially owns approximately 65.5% of our common stock.
Upon completion of the StarBand acquisition and the exchange offer, Gilat's
beneficial ownership of our common stock will increase to approximately 86%,
assuming that Gilat is issued the maximum number of shares upon rStar's exercise
of the option for Gilat ordinary shares and under the provisions regarding the
additional shares that may be issued to Gilat. Pursuant to the second amended
acquisition agreement, Lance Mortensen, Charles Appleby and Michael Arnouse will
tender their resignations from our Board of Directors at the closing of the
StarBand acquisition. We expect Gilat to nominate five nominees, including two
current Gilat nominees, at our stockholder's meeting. Gilat will, therefore, be
able to exercise total control over all such matters as the election of our
directors and other fundamental corporate transactions such as mergers, asset
sales and the sale of rStar. Additionally, pursuant to the acquisition
agreement, the Board of Directors is proposing certain changes to our Third
Amended and Restated Certificate of Incorporation that, as permitted by the
Delaware General Corporation Law, will allow Gilat to undertake certain actions
without calling and holding a special meeting of stockholders. In addition, the
Board of Directors intends to propose another amendment to our Third Amended and
Restated Certificate of Incorporation that will permit Gilat, as our majority
stockholder, to call a special meeting of rStar stockholders at any time.
Accordingly, the influence of our other stockholders will be limited and may
depress our stock price. Also, we cannot assure you that the interests of Gilat
will not, from time to time, conflict with your interests as a stockholder.

WE MAY NOT REALIZE ANY BENEFITS FROM THE TRANSACTIONS CONTEMPLATED BY THE
ACQUISITION AGREEMENT.

Achieving the benefits of the transactions as reflected in the
acquisition agreement will depend, in part, on the integration of StarBand Latin
America's business, technology, operations and personnel into our operations.
The integration of StarBand Latin America into rStar will be a complex, time
consuming and expensive process and may disrupt our business if not completed in
a timely and efficient manner. Among the challenges involved in this integration
are (i) demonstrating to our customers, suppliers, and strategic partners that
the acquisition will not result in adverse changes in client service standards
or business focus, (ii) persuading personnel that rStar's and StarBand Latin
America's business cultures are compatible, (iii) retaining key personnel and
addressing any adverse changes in business focus. We do not have experience in
integrating operations on the scale represented by the acquisition, and it is
not certain that we will be able to successfully integrate StarBand Latin
America into our operations in a timely manner or at all, or that any of the
anticipated benefits of the acquisition will be realized. Failure to do so could
seriously harm our business, financial condition and operating results.

WE HAVE NO PREVIOUS EXPERIENCE IN THE LATIN AMERICAN MARKET AND OUR ABILITY TO
BE SUCCESSFUL IN THAT MARKET IS UNCERTAIN.

Through the Acquisition, we will be expanding our business operations
into the delivery of satellite-based telephony and Internet access services in
Latin America. We have no previous experience in the Latin American market, and
we have limited meaningful historical financial and operational data upon which
we can base projected revenues and planned operating expenses and upon which you
may evaluate our prospects in Latin America. The Latin America satellite-based
telephony and Internet access market is an untested market for us and the
results of these operations are uncertain and unpredictable. As a company
attempting to expand its business in the satellite-based telephony and Internet
access market in Latin America, we face risks relating to our ability to
implement our business plan, including our ability to continue to develop and
upgrade our technology, our ability to maintain and develop customer and
supplier relationships, obtain key technology and the necessary governmental and
regulatory approvals, consents and licenses. We may not adequately address these
risks, and if we do not, we may not be able to implement our business plan as we
intend. Our business model contemplates that we will generate revenues, through
wholesale sales to Latin American Internet Service Providers, DTH TV companies
and other service providers. The revenues may not materialize if we fail to
implement our strategy for attracting wholesale customers. You should consider
our business and prospects in light of the heightened risks and unexpected
expenses and problems we may face in an emerging market place. An investor in
our common stock must carefully consider the risks and difficulties frequently
encountered by companies that are still developing their business plan, as well
as the risks we face due to our participation in a new and rapidly evolving
market in Latin America. Our business strategy may not be successful and it may
not successfully overcome these risks.

IF THE CONDITIONS IN THE ACQUISITION AGREEMENT ARE NOT MET, THE TRANSACTIONS MAY
NOT OCCUR.

In addition to rStar stockholder approval of the Acquisition Agreement
and the transactions contemplated thereby, several other conditions must be
satisfied or waived to complete the transactions. We cannot assure you that each
of the conditions will be satisfied. If the conditions are not satisfied or
waived, the transactions will not occur or will be delayed,

24

and we may lose some or all of the intended benefits of the acquisition. For
example, if either party's representations and warranties are not materially
true and correct at the closing or either party suffers a material adverse
change in its financial condition prior to closing the acquisition, the other
party is not required to close the transactions.

FAILURE TO COMPLETE THE TRANSACTIONS COULD NEGATIVELY AFFECT OUR OPERATING
RESULTS.

If the Transactions are not completed for any reason, we may experience
a number of adverse consequences, including the following:

- the market price of our common stock may decline;

- an adverse reaction by our investors and potential investors
could adversely affect future financing opportunities;

- we may be required under certain circumstances to pay Gilat a
termination fee and reimburse Gilat and GTH Latin America for
any of their out of pocket expenses incurred in connection
with the Acquisition Agreement and the Transactions; and

- our common stock may be delisted from the Nasdaq National
Market.


THE MARKET PRICE OF OUR COMMON STOCK MAY DECLINE AS A RESULT OF THE STARBAND
LATIN AMERICA ACQUISITION.

In connection with the StarBand Latin America acquisition, we will
issue new shares of rStar common stock to Gilat and certain of its subsidiaries
that will dilute our results of operations on a per-share basis. This dilution
could reduce the market price of our common stock unless and until we achieve
revenue growth or cost savings and other business economies sufficient to offset
the effect of the issuance of additional shares. Additionally, the market price
of our common stock may decline as a result of the transactions if:

- the integration of rStar and StarBand Latin America is
unsuccessful;

- we do not achieve the perceived benefits of the StarBand Latin
America acquisition as rapidly or to the extent anticipated by
financial or industry analysts or investors; or

- the effect of the StarBand Latin America acquisition on our
financial results is not consistent with the expectations of
financial or industry analysts or investors.

IF WE TERMINATE THE ACQUISITION AGREEMENT, WE MAY BE UNABLE TO FIND OR EFFECT
ANY BUSINESS COMBINATION WITH ANOTHER SUITABLE PARTNER.

If the Acquisition Agreement is terminated and our Board of Directors
determines to seek another acquisition or business combination, there can be no
assurance that we will be able to find a partner willing to enter into an
equivalent or more favorable arrangement, and, as a result, our operations may
be adversely affected. These factors could adversely affect our stock price as
they may restrict our ability to pursue alternative business combinations.

BECAUSE WE DO NOT INTEND TO PAY DIVIDENDS, YOU MAY LOSE THE ENTIRE AMOUNT OF
YOUR INVESTMENT.

We have never declared or paid any cash dividends on our common stock.
Subject to certain limited exceptions, we expect to retain our future earnings,
if any, for use in the operation and expansion of our business and do not
anticipate paying any cash dividends in the foreseeable future. Therefore, you
will not receive any funds without selling your shares. Under the acquisition
agreement, Gilat has agreed not to permit rStar to pay or declare any dividends
or other distributions, other than the special cash distributions, for the
longer of (x) one year following the closing of the StarBand acquisition or (y)
the date on which rStar's obligation to make the special cash distributions has
been satisfied in full or otherwise terminated in accordance with the terms of
the acquisition agreement. Further, pursuant to the acquisition agreement, we
expect to amend our Certificate of Incorporation to provide that, until such
time as rStar has satisfied its obligation to make the special cash
distributions, it shall not be permitted to declare or pay any dividend or other
distributions on any of its capital stock other than rStar common stock and
dividends payable in the form of additional shares of rStar capital stock. We
cannot assure you that you will receive a return on your investment when you
sell your shares of rStar common stock or that you will not lose the entire
amount of your investment.

NASDAQ HAS SENT US NOTICES REGARDING THE POSSIBILITY OF DELISTING OUR COMMON
STOCK.

On February 14, 2002 we received a notice from the Nasdaq Stock Market
that pursuant to Market place Rule 4450 (a)(5) our stock could be delisted from
the Nasdaq National Market because the stock failed to close above a minimum
bid price of $1.00 during the preceding 30 consecutive trading days. Pursuant
to Market place Rule 4450 (e)(2), we have until May 15, 2002 to regain
compliance with the minimum bid price requirements. A common course of action
for companies attempting to maintain their listing by ensuring a bid


25

price in excess of $1.00 is the institution of a reverse stock split. At
present, we have made no decision with respect to this course of action but will
continue to evaluate this alternative in light of all other options, including
accepting a delisting determination. A reverse stock split could negatively
impact the value of our stock by allowing additional downward pressure on the
stock price as our relative value becomes greater following the reverse split.
That is to say, the stock, at our new, higher price per share has farther to
fall and therefore more room for investors to short or otherwise trade the value
of the stock downward.

On February 14, 2002, we also received a notice from the Nasdaq National Market
which stated that pursuant to Market place Rules 4350(e) and 4350(g), unless we
hold our stockholders meeting by March 29, 2002, our common stock would be
delisted.

NASDAQ HAS SENT US A NOTICE OF ITS INTENTION TO REVIEW THE DECISION OF A NASDAQ
LISTING QUALIFICATIONS PANEL THAT DETERMINED THAT OUR STOCK WOULD NOT BE
DELISTED FROM THE NASDAQ NATIONAL MARKET

On January 23, 2001 we received a notice from the Nasdaq Stock Market
informing us that the Nasdaq Listing and Hearing Review Council ("Review
Council") called for a review of the December 10, 2001 decision of the Nasdaq
Listing Qualifications Panel ("Listing Panel") to permit our continued inclusion
on the Nasdaq National Market, notwithstanding the view of the Listing Panel
that, under Nasdaq Rules 4350(i)(c)(1) and 4350(i)(1)(c)(ii), a vote of our
stockholders was necessary in connection with our debt for equity swap with
Spacenet Inc. At the time of the consummation of that transaction with Spacenet
Inc., stockholders owning a majority of our common stock advised us that they
were in favor of the transaction, and we believed that no formal stockholder
approval was required in connection with the debt for equity transaction. The
Listing Panel's decision, which we received on December 10, 2001, followed a
hearing conducted on August 9, 2001 concerning our compliance with Nasdaq's
rules, including the minimum bid price rule.

The Nasdaq Listing and Hearing Review Council advised us that it will
likely issue its decision following its meeting in March 2002.

OUR SHARES OF COMMON STOCK MAY BE DELISTED FROM THE NASDAQ NATIONAL MARKET,
WHICH WOULD IMPAIR THEIR LIQUIDITY.

If the shares of our common stock are delisted from the Nasdaq National
Market, their liquidity will be impaired. Though we may decide, among other
alternatives, to seek trading of our common stock on the Over-the-Counter
Bulletin Board, or OTC market, if our common stock is delisted, the OTC market
provides substantially less liquidity than the Nasdaq National Market, and
stocks traded on the OTC market generally trade with larger spreads between the
bid and the ask price, which may cause the trading price of our common stock to
decline.

Also, if we decide to seek trading of our common stock on the OTC
market, our common stock would be subject to rules under the Securities Exchange
Act of 1934, which impose additional requirements on broker-dealers who sell
such securities to persons other than established customers and to persons other
than "accredited investors." In this context the term "accredited investors"
includes individuals with a net worth in excess of $1,000,000 or an annual
income exceeding $200,000, or $300,000 together with their spouses. For
transactions covered by such rules, a broker-dealer must make a special
suitability determination regarding the purchaser and must have received the
purchaser's written consent prior to the sale. This could negatively affect the
ability of broker-dealers to sell shares of our common stock and further impair
the liquidity of our common stock.

IF DELISTED, OUR SHARES OF COMMON STOCK MAY BE CHARACTERIZED AS PENNY STOCKS,
WHICH MAY SEVERELY HARM THEIR LIQUIDITY.

The SEC has adopted regulations which define a "penny stock" to be any
equity security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, these rules require
delivery, prior to any transaction in a penny stock, of a disclosure schedule
relating to the penny stock market. Disclosure is also required to be made about
current quotations for the securities and about commissions payable to both the
broker-dealer and the registered representative. Finally, broker-dealers must
send monthly statements to purchasers of penny stocks disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. Although we are not currently considered a penny
stock, the foregoing penny stock restrictions will not apply to our shares of
common stock if: (1) they continue to be listed on the Nasdaq National Market;
(2) certain price and volume information is publicly available about our shares
on a current and continuing basis; and (3) we meet certain minimum net tangible
assets or average revenue criteria. Our common stock may not qualify for an
exemption from the penny stock restrictions. If our shares of common stock were
subject to the rules on penny stocks, the liquidity of our common stock would be
severely harmed.


26

OUR STOCK PRICE HAS BEEN HIGHLY VOLATILE AND HAS EXPERIENCED A SIGNIFICANT
DECLINE, PARTICULARLY BECAUSE OUR BUSINESS DEPENDS ON THE INTERNET, AND MAY
CONTINUE TO BE VOLATILE AND DECLINE.

The trading price of our common stock has fluctuated widely in the past
and is expected to continue to do so in the future, as a result of a number of
factors, many of which are outside our control. In addition, the stock market
has experienced extreme price and volume fluctuations that have affected the
market prices of many technology companies, particularly telecommunication and
Internet-related companies, and that have often been unrelated or
disproportionate to the operating performance of these companies. These broad
market fluctuations could adversely affect the market price of our common stock.
In the past, following periods of volatility in the market price of a particular
company's securities, securities class action litigation has often been brought
against that company. Securities class action litigation could result in
substantial costs and a diversion of our management's attention and resources.

OUR METHODS OF GENERATING REVENUES ARE NEW AND LARGELY UNTESTED.

The success of our business will depend on our ability to generate
revenue. Prior to discontinuing our School Business, we generated 100% of our
revenues from that business. We have not yet begun to generate any revenue from
our new business, and because our methods of generating revenue are new and
largely untested we may generate lower revenues than we expect. Further, if we
are unable to generate multiple new sources of revenue, our future revenue
growth will suffer. Currently, we expect to receive the majority of our revenue
from: (1) suppliers to participants in industries for which we plan to provide
private networks, who will be charged for dedicated connections, and for
e-commerce and advertising access to their customers; (2) network services,
including marketing and profit sharing fees; and (3) fees paid by network end
users.

The success of our initiatives to become a leading provider of
satellite-based network services to specific industries depends in part on our
ability to adapt our experience in building a satellite-based network for our
discontinued school business to other markets and those markets' acceptance of
our products and services, and more generally upon the adoption of the Internet
as a medium for commerce by a broad base of customers and our users. If these
markets fail to develop or develop more slowly than expected, or if our products
and services do not achieve market acceptance, our revenue generated from our
new network business will be lower than expected.

WE RELY HEAVILY ON OUR KEY PARTNERS, WHO ARE RELATED PARTIES, AND IF THEY
TERMINATE THEIR STRATEGIC ALLIANCES WITH US OR IF THE ARRANGEMENTS FAIL TO MEET
OUR OBJECTIVES, WE MAY EXPERIENCE DIFFICULTY OR DELAYS IN INSTALLING AND
MAINTAINING OUR PLANNED NETWORKS AND OUR REVENUE GROWTH MAY SUFFER.

We rely heavily on our strategic alliance relationships with Gilat and
its wholly owned subsidiary, Spacenet. Our agreements with Gilat and Spacenet
involve many aspects of our business, including deployment and operation of our
planned industry-specific networks. Our arrangements with Gilat and Spacenet are
complex and as a result, there are many risks related to these arrangements,
including some that we may not have foreseen. It is difficult to assess the
likelihood of occurrence of these risks, including the lack of success of the
overall arrangements to meet the parties' objectives. If we fail to maintain
these relationships, as anticipated, or if our partners do not perform to our
expectations, the performance of our networks, and our ability to generate
revenues, may be harmed.

WE ARE DEPENDENT ON RELATED PARTIES TO DEPLOY OUR PLANNED NETWORKS TO BUSINESS
ENTERPRISES AND SUPPORT IT ONCE INSTALLED.

We have used, and plan to continue to use, related parties such as
Gilat and Spacenet to install and support our planned networks in business
entities. In the past we have experienced difficulties resulting from the
failure of third parties to manage successfully the wide-scale deployment of our
discontinued education network in a school environment. Such failures, if
duplicated in our new network business, would result in delays in the scheduled
deployment of our networks and could limit or eliminate revenue generated from
sponsorships, e-commerce and network services.

We also rely on related parties to provide the majority of support
necessary to maintain our networks once installed. Any inability to maintain or
delays to the maintenance of this equipment would lead to lower revenue
generated from sponsorships, e-commerce and network services.


27

OUR VARIED SALES CYCLES COULD HARM OUR RESULTS OF OPERATIONS IF FORECASTED SALES
ARE DELAYED OR DO NOT OCCUR.

The length of time between the date of initial contact with a potential
customer or sponsor and the execution of a contract with the potential customer
or sponsor may vary significantly and may depend on the nature of the
arrangement. Furthermore, contracting with potential sponsors is subject to
delays over which we have little or no control, including: (1) potential
sponsors' adoption of our industry-specific networks, which are a relatively new
advertising medium, as an acceptable use of those sponsors' budgets; (2)
potential sponsors' or customers' budgetary constraints; (3) potential sponsors'
internal acceptance reviews; and (4) the possibility of cancellation or delay of
projects by sponsors.

During any given sales cycle, we may expend substantial funds and
management resources and yet not obtain sponsorship or subscriber revenue. Our
results of operations for a particular period may suffer if sales to sponsors
and subscribers forecasted in a particular period are delayed or do not
otherwise occur.

GOVERNMENT REGULATION AFFECTING OUR BUSINESS STRATEGY COULD HARM OUR BUSINESS.

Laws and regulations directly applicable to communications or commerce
over the Internet are becoming more prevalent. These laws or regulations may
relate to liability for information retrieved from or transmitted over the
Internet, online content regulation, user privacy, taxation and the quality of
products and services. In addition, the courts have not yet significantly
interpreted these new laws, and consequently their applicability and reach are
not defined. Moreover, the applicability to the Internet of existing laws
governing issues such as intellectual property ownership, copyright, defamation,
obscenity and personal privacy is uncertain and developing. We may be subject to
claims that our services violate such laws.

Governmental regulations may prevent us from choosing our business
partners or restrict our activities following the StarBand acquisition. For
example, a particular Latin American country may decide that high-speed data
networks used to provide access to the Internet should be made available
generally to Internet service providers and may require us to provide our
wholesale service to any Internet service providers that request it, including
entities that compete with us. Additionally, relevant zoning ordinances may
restrict the installation of satellite antennas, which might also reduce market
demand for our service. Governmental authorities may also increase regulation
regarding the potential radiation hazard posed by transmitting earth station
satellite antennas' emissions of radio frequency energy, which may negatively
impact our business plan and revenues.

Any new legislation or regulation, particularly in the United States of
America or in Latin America or the application of existing laws and regulations,
related to the Internet could impose significant restrictions, requirements or
additional costs on our business, require us to change our operating methods,
business strategy, or subject us to additional liabilities and cause the price
of our common stock to decline.

WE MAY SUFFER FOREIGN EXCHANGE RATE LOSSES.

Following the StarBand acquisition, our international revenues and
expenses will be denominated in local currency. Therefore, a weakening of other
currencies compared to the U.S. dollar could make our products less competitive
in foreign markets and could negatively affect our operating results and cash
flows. We do not currently engage in currency hedging activities, although in
some instances we will reserve the right to engage in such activities. We have
not yet, but may in the future, experience significant foreign currency
transaction losses, especially to the extent that we do not engage in currency
hedging.

THE SUCCESS OF OUR INTERNATIONAL OPERATIONS FOLLOWING THE STARBAND ACQUISITION
IS DEPENDENT ON MANY FACTORS BEYOND OUR CONTROL WHICH COULD ADVERSELY AFFECT OUR
ABILITY TO OFFER OUR PRODUCTS AND SERVICES IN LATIN AMERICA AND OUR
PROFITABILITY.

Following the StarBand acquisition, our international operations in
Latin America will increase our exposure to international laws and regulations.
If we cannot comply with foreign laws and regulations, which are often complex
and subject to variation and unexpected changes, we could incur unexpected
costs, delays and potential litigation. For example, the governments of foreign
countries might attempt to regulate our products and services or levy sales or
other taxes relating to our activities. In addition, foreign countries may
confiscate our products or impose tariffs, duties, price controls or other
restrictions on foreign currencies or trade barriers, any of which could make it
more difficult for us to conduct our business. In addition, our international
operations in Latin America are also subject other factors beyond our control,
such as political and economic instability, including the current political
instability in Argentina.

Our expansion in foreign markets will require us to respond to rapid
changes in market conditions in these countries. Our overall success as an
international business will depend, in part, upon our ability to succeed in
differing economic, social and political conditions. We may not continue to
succeed in developing and implementing policies and strategies that are
effective in each location where we expect to do business following the
completion of the StarBand acquisition.

BECAUSE WE WILL OPERATE IN FOREIGN COUNTRIES, WE MAY FACE LIABILITY UNDER THE
U.S. FOREIGN CORRUPT PRACTICES ACT AND OTHER REGULATIONS.

Following the StarBand acquisition, we will be subject to additional
provisions the U.S. Foreign Corrupt Practices Act, which generally prohibits
U.S. companies and their intermediaries from bribing foreign officials for the
purpose of obtaining or maintaining business. As a result, we may be exposed to
liability under this Act as a result of past or future actions taken with or
without our knowledge by our agents, strategic partners or other intermediaries.
For many of our activities, we are also subject to the U.S. foreign export
control laws.

BARRIERS TO INTERNATIONAL EXPANSION COULD LIMIT OUR FUTURE GROWTH.

Expansion of our Latin American operations following the StarBand
acquisition will require significant management attention and financial
resources. Expenses incurred in expanding international operations might never
result in increased revenue. We face certain risks inherent in conducting
business internationally, such as:

- difficulties and costs of staffing and managing international operations;

- difficulties in recruiting and training an international staff;

- difficulties in entering into strategic relationships with companies in
international markets;

- language and cultural differences;

- difficulties in collecting accounts receivable and longer collection
periods; and

- seasonal business activity in certain parts of the world.

Any of these factors could seriously harm our international operations and,
consequently, our business.



WE ARE DEPENDENT ON OUR NETWORK INFRASTRUCTURE, AND IN PARTICULAR ON SATELLITES
AND SATELLITE TRANSMISSION TECHNOLOGY, AND ANY FAILURE OF OUR NETWORKS WOULD
HARM OUR OPERATIONS.

We decided to withdraw from the education market and, instead,
emphasize our goal of becoming a leading provider of satellite-based private
networks for specific industries. Our network infrastructure may not be able to
support the demands this growth may place on it and our performance and
reliability may decline. We experienced interruptions in service as a result of
outages and other delays occurring throughout our network infrastructure in our
former School Business, and we may in the future experience such interruptions
in service and other delays. If these outages or delays occur frequently in the
future, use of our planned networks and their growth could be impaired.

Our network operations center and our communications and other computer
hardware, are also subject to disruptions which are beyond our control and for
which we may not have adequate insurance. Fire, floods, earthquakes,
telecommunications failures, break-ins and similar events could damage our
communications hardware and other network operations.

Each user of our planned networks will be connected to our networks
through a satellite link. The complete or partial loss of a satellite used to
transmit data to network subscribers could affect the performance of our
networks.


28

Orbiting satellites are subject to the risk of failing prematurely due
to mechanical failure, collision with objects in space or an inability to
maintain proper orbit. Any such loss of the use of a satellite could prevent us
from delivering our services. This interruption in services would continue until
either a substitute satellite is placed into orbit, or until our services are
moved to a different satellite. Moving to an alternate satellite would require
us to redirect all of the satellite dishes in our networks-a very time-consuming
and expensive process. The loss of a satellite could also result in increased
costs of using satellites.


29



We are dependent on transmissions from the satellite to our customer
sites, and these transmissions may be interrupted or experience other
difficulty, which could result in service interruptions and delays in our
networks. In addition, the use of the satellite to provide transmissions to our
customers requires a direct line of sight between the satellite and the receiver
at the business site and is subject to distance and rain attenuation. In markets
that experience heavy rainfall we may need to use greater power to maintain
transmission quality. Such changes may require Federal Communications
Commission, or FCC, approval, which may not be granted.

WE MAY BE SUBJECT TO THIRD PARTY ABUSES OF OUR NETWORKS, SUCH AS COMPUTER
VIRUSES, "SPAM" OR "HACKING," WHICH COULD LEAD TO INTERRUPTIONS IN OUR SERVICES
AND OTHER ADVERSE CONSEQUENCES WHICH COULD BE EXPENSIVE TO FIX, SUBJECT US TO
LIABILITY OR RESULT IN LOWER USE OF OUR NETWORKS THAN EXPECTED.

The future success of our business depends on the security of our
planned networks. Computer viruses or problems caused by our users or other
third parties, such as the sending of excessive volumes of unsolicited bulk
e-mail or "spam," could lead to interruptions, delays, or cessation in service
to our users. In addition, the sending of "spam" through our networks could
result in third parties asserting claims against us. We may not prevail in such
claims and our failure to do so could result in large judgments that would harm
our business. Users or other third parties could also potentially jeopardize the
security of confidential information stored in our computer systems by their
inappropriate use of the Internet, including "hacking," which could cause losses
to us, or our users or deter persons from using our services. Users or third
parties may also potentially expose us to liability by "identity theft," or
posing as another network user. Unauthorized access by current and former
employees or others could also potentially jeopardize the security of
confidential information stored in our computer systems and that of our users.

We expect that our users will increasingly use the Internet for
commercial transactions in the future. Any network malfunction or security
breach could cause these transactions to be delayed, not completed at all, or
completed with compromised security. Users or others may assert claims of
liability against us as a result of any failure by us to prevent these network
malfunctions and security breaches, and may deter others from using our
services, which could cause our business prospects to suffer. Although we intend
to continue using industry-standard security measures, such measures have been
circumvented in the past, and we cannot assure you that these measures will not
be circumvented in the future. In addition, to alleviate problems caused by
computer viruses or other inappropriate uses or security breaches, we may have
to interrupt, delay, or cease service to our users, which could severely harm
our business.

WE ARE DEPENDENT ON LEASED SATELLITE BANDWIDTH, AND IF SUCH A LEASE IS
UNAVAILABLE TO US, WE COULD BE SUBJECTED TO SIGNIFICANT RESTRICTIONS ON OUR
BUSINESS.

We leased satellite bandwidth from Spacenet for our discontinued School
Business. We have agreed to lease all of our satellite transponder capacity from
Spacenet and other third parties. If we achieve the substantial subscriber
growth that we anticipate, we will need additional satellite capacity. If we are
unable to procure this capacity, we may be unable to provide service to our
subscribers or the quality of service we provide may not meet their
expectations. There is no assurance that these third parties will continue to
provide the capacity and positioning we need on reasonable terms, or at all. If
we were forced to change our satellite capacity providers, we would be forced to
spend significant time and resources finding alternative providers and
re-pointing antennas. If, for any reason, we are not able to obtain the benefits
of the lease with Spacenet or another satellite provider on favorable terms, our
business could be significantly jeopardized, as it is bi-directional
satellite-based.

The satellite industry is a highly regulated industry. In the United
States, operation and use of satellites requires licenses from the FCC. As a
lessee of satellite space, we could in the future be indirectly subject to new
laws, policies or regulations or changes in the interpretation or application of
existing laws, policies or regulations, any of which may modify the present
regulatory environment in the United States of America. While we believe that
Spacenet will be able to obtain all U.S. licenses and authorizations necessary
to operate effectively, it may not continue to be successful in doing so. Our
failure to indirectly obtain some or all necessary licenses or approvals could
impose significant additional costs and restrictions on our business, require us
to change our operating methods, or result in us no longer being able to provide
our service to affected users.

IF WE ARE UNABLE TO COMPETE EFFECTIVELY AGAINST OUR CURRENT AND POTENTIAL
COMPETITORS, THEN WE MAY LOSE USERS TO OTHER SERVICES, WHICH COULD RESULT IN
LOWER USAGE OF OUR PLANNED NETWORKS AS WELL AS LOWER THAN EXPECTED REVENUES.


30

The market for our industry-specific private network products and services is
new and rapidly evolving, and we expect competition in and around this market to
intensify in the future. While we do not believe any of our competitors
currently offer the bundle of products and services we will offer, we face
competition from a number of companies who (i) provide services and
functionality similar to some of our services and functionality, (ii) who market
products and services to a similar base of users, or both, and (iii) could in
the future seek to compete more directly with us. For example, Hughes
Electronics currently offers one-way satellite based broadband Internet access
to businesses, and it has an alliance with America Online to promote America
Online's broadband services and content. We therefore believe that our greatest
potential competitive threat is posed not by a single company, but a combination
of one or more companies that each addresses different parts of our new business
model.

Many of our existing competitors for some of our products and services,
as well as potential new competitors, have longer operating histories, greater
name recognition, larger customer bases and significantly greater financial,
technical and marketing resources than we do. This may allow such competitors to
devote greater resources than we can to the development and promotion of their
products and services and to adopt more aggressive pricing policies and make
more attractive offers to our potential subscribers, partners, sponsors and
e-commerce merchants. Many of these competitors may offer a wider range of
products and services than we do, may attract sponsors and subscribers to our
competitors' products and services and, consequently, result in lower acceptance
and usage of our private network products and services.

BUSINESS ENTERPRISES MAY USE ALTERNATIVE MEANS TO ACQUIRE COMPUTERS, SERVICES,
INDUSTRY-SPECIFIC CONTENT, AND INTERNET ACCESS, WHICH COULD REDUCE OUR POTENTIAL
USER BASE AND MAY LEAD TO LOWER THAN EXPECTED REVENUES.

We believe an attraction of our business is the complete bundle of
computer hardware, software, industry-specific content and broadband Internet
connectivity we intend to offer. However, for a variety of reasons, business
enterprises may decide to use other methods to acquire computers, Internet
access and other services to meet their needs. If business enterprises decide to
use means other than deployment of our products and services, it will limit our
user and sponsor base, and consequently we will have lower than expected
revenues.

WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL CAPITAL TO FUND OUR OPERATIONS WHEN
NEEDED.

We expect to use our existing cash for general corporate purposes,
developing StarBand Latin America business, expanding our sales and marketing
activities if the prospects for our vertical market business remain encouraging,
continuing investments in technology and product development and other capital
expenditures, as well as working capital and other corporate expenses, including
the funding of net losses from operations. We believe that our existing capital
resources will be sufficient to meet our cash requirements for at least the next
12 months. However, our cash requirements are large, and depend on several
factors, including cash outflows due to lease obligations, the rate of expansion
of our planned industry-specific private networks, our success in generating
revenues, the growth of sales and marketing efforts, and other factors. If
capital requirements vary materially from those currently planned, we may
require additional financing sooner than anticipated. If additional funds are
raised through the issuance of equity securities, the percentage ownership of
our stockholders will be reduced, stockholders may experience additional
dilution, or these equity securities may have rights, preferences or privileges
senior to those of the holders of our common stock. If additional funds were
raised through the issuance of debt securities, such securities would have
rights, preferences and privileges senior to holders of common stock and the
terms of such debt could impose restrictions on our operations. Additional
financing may not be available when needed on terms favorable to us or at all.
If adequate funds are not available or are not available on acceptable terms, we
may be unable to deploy our planned networks, develop or enhance our services,
take advantage of future opportunities or respond to competitive pressures.
Given Gilat's majority ownership and future control of the Board of Directors,
all future financing decisions will be made by Gilat.

WE ARE DEPENDENT ON GROWTH IN USE AND POPULARITY OF OUR NETWORKS AND THE
INTERNET BY OUR USERS AND OUR ABILITY TO SUCCESSFULLY ANTICIPATE THE FREQUENTLY
CHANGING TASTES OF OUR USERS.

Our business is unlikely to be successful if the popularity of the
Internet as a viable business tool does not continue to increase. Even if the
popularity of the Internet and related media does increase, the success of our
planned industry-specific private network in particular depends on our ability
to anticipate and keep current with the frequently changing tastes of our users,
primarily small and medium-sized business enterprises in the industries we seek
to serve. Any


31


failure on our part to successfully anticipate, identify or react to changes in
styles, trends or preferences of our users would lead to reduced interest in and
use of our networks and therefore limit opportunities for sponsorship sales,
subscriber fees and e-commerce revenues. Moreover, the "rStar Networks" brand
could be eroded by misjudgments in service offerings or a failure to keep our
offerings, services and content current with the evolving preferences of the
marketplace.

UNAUTHORIZED ACCESS COULD HARM OUR BUSINESS AND CAUSE US TO LOSE EXISTING
CUSTOMERS, DETER POTENTIAL CUSTOMERS AND HARM OUR REPUTATION.

Unauthorized access could potentially jeopardize the security of
confidential information stored in the computer systems of our customers, which
might cause our subscribers to bring liability claims against us and also might
deter potential customers from using our services. Since our services allow end
users to be connected to the Internet at all times, unauthorized users may have
a greater ability to access information stored in end users' computer systems.
Always-on Internet services may give unauthorized users, or hackers, more and
longer opportunities to break into end users' computer or access,
misappropriate, destroy or otherwise alter data accessed through the Internet.

WE MAY BE SUBJECT TO LIABILITY FOR SERVICES SOLD THROUGH OUR NETWORK.

To date, we have had very limited experience in enabling consumers to
directly purchase products and services online or in the development of
relationships with manufacturers or suppliers of such products and services.
However, we plan to develop a range of e-commerce opportunities in connection
with our industry- specific private networks. Network users may sue us if the
products or services sold online are defective, fail to perform properly or
injure the user. Liability claims resulting from our sale of products could
require us to spend significant time and money in litigation or to pay
significant damages.

WE MAY BE SUBJECT TO LIABILITY FOR INFORMATION RETRIEVED AND REPLICATED BY MEANS
OF OUR SERVICES.

Because our customers' end users will download and redistribute
material and we may replicate material or store it on our own network devices in
connection with our services, claims may be made against us for defamation, or
other theories based on the nature and content of such materials. These types of
claims have been brought, and sometimes successfully litigated, against online
service providers in the past. Although we carry general liability insurance,
our insurance may not cover potential claims of these types, or may not be
adequate to indemnify us for all liability that may be imposed. Any imposition
of liability that is not covered by insurance or is in excess of insurance
coverage could result in a substantial reduction in our revenue and losses over
a significant period of time.

WE ARE HEAVILY DEPENDENT ON OUR RELATIONSHIP WITH GILAT FOR KEY NETWORK
TECHNOLOGY, HARDWARE AND SOFTWARE, AND WE MAY BE SIGNIFICANTLY HARMED IF GILAT
IS UNABLE OR FAILS TO CONTINUE TO DEVELOP AND SELL US THIS TECHNOLOGY AND
RELATED EQUIPMENT.

We will depend on Gilat and its subsidiaries and suppliers for the
satellite technology used to deliver our products and services. We have an
agreement with Gilat pursuant to which, if certain conditions are met, Gilat
will serve as our exclusive provider of the equipment, technology and services
that we will use in our Latin American operations. If we are not able to perform
our obligations under our agreements with Gilat, or if Gilat is unable or fails
to continue to sell us this equipment and technology under the current terms of
our agreement, our ability to operate our Latin American operations would be
severely harmed.

Gilat's principal offices, development facilities and manufacturing and
research are located in the State of Israel. Gilat is directly affected by the
political, economic and military conditions in Israel. Gilat's production is
dependent upon components imported from outside of Israel and any major
hostilities involving Israel or the interruption or curtailment of trade between
Israel and its present trading partners could significantly harm Gilat's ability
to meet its supply obligations to us. If Gilat does not meet our demand and
quality standards for its products, for any reason, or if the terms of our
agreements with Gilat change and we decide to pursue other strategic partners,
it is unlikely that we would be able to find a replacement supplier without
significant harm to our business operations or relationship with Gilat.


32

Our future growth depends on a number of technological advances Gilat
expects to attain over its existing satellite technology and which Gilat has
agreed to license to us, such as the development of software that we expect will
enable us to optimize the allocation of end users across our leased satellite
capacity and reduce our satellite capacity costs per end user. Furthermore,
Gilat has substantial business operations and opportunities apart from our
business, and Gilat may develop different business objectives than ours. As a
result, situations may arise in which Gilat's interests diverge from rStar or
our other stockholders. For example, we expect to be one of Gilat's largest
customers for their technology, equipment and software. We will seek to purchase
from Gilat technology, products, software and equipment necessary to the
operations of StarBand Latin America at prices favorable to us, but Gilat will
seek to sell those items to us at prices favorable to them. If Gilat does not
meet our expectations regarding these technological advances, our ability to
successfully operate our business, and our financial condition and
profitability, would be harmed.

OUR SUCCESS DEPENDS UPON THE SUCCESSFUL DEVELOPMENT OF NEW SERVICES AND FEATURES
IN THE FACE OF RAPIDLY EVOLVING TECHNOLOGY.

The market for our current products and services is characterized by
rapidly changing technologies, frequent new service introductions and evolving
industry standards. The recent growth of the Internet and intense competition in
our industry exacerbate these market characteristics. Our future success will
depend on our ability to adapt to rapidly changing technologies by continually
improving the performance, features and reliability of our networks. We may
experience difficulties that could delay or prevent the successful development,
introduction or marketing of new features, content or network services. In
addition, our new enhancements must meet the requirements of our current and
prospective sponsors and subscribers and must achieve significant market
acceptance. We could also incur substantial costs if we needed to modify our
service or infrastructures to adapt to these changes.

FAILURE TO MANAGE THE GROWTH OF OUR OPERATIONS COULD HARM OUR BUSINESS AND
STRAIN OUR MANAGERIAL, OPERATIONAL AND FINANCIAL RESOURCES.

We have recently and significantly changed our business model and
strategy. We anticipate that future expansion will be required to build a
sponsor and subscriber base if we are to be successful in implementing our
business strategy. We may not be able to implement management information and
control systems in an efficient and timely manner, and our current or planned
personnel, systems, procedures and controls may not be adequate to support our
future operations. If we were unable to manage growth effectively, our business
would suffer. To manage the expected growth of our operations and personnel, we
will be required to: (1) improve existing and implement new operational,
financial and management controls, reporting systems and procedures; (2) install
new management information systems; and (3) train, motivate and manage our sales
and marketing, engineering, technical and customer support employees.

We do not have any experience in doing business in Latin America. Our
employees, outsourcing arrangements, systems, procedures and controls may be
inadequate to support our future operations. In particular, once the acquisition
of StarBand Latin America is completed, we expect that demands on the network
infrastructure and our technical support resources will increase rapidly as our
customer base grows. We may therefore experience difficulties meeting a high
demand for services in the future or encounter problems in dealing with the
customs of various countries in Latin America. In order to meet this demand, we
will need to hire, train and retain the appropriate personnel, as well as the
third-party service providers we depend on for customer service, to manage our
operations. We will also need to adapt our financial and management controls,
billing and information systems, reporting systems and operating systems. Our
failure to manage growth and expansion effectively, or the failure by one of our
service providers to adequately perform ts services, could harm our ability to
retain or grow our customer base which in turn would harm our business,
financial condition and results of operations.

THE LOSS OF KEY PERSONNEL MAY HURT OUR ABILITY TO OPERATE OUR BUSINESS
EFFECTIVELY.

Our success depends, in part, upon the continued
contributions of the principal members of our sales, engineering and management
departments, many of whom perform important management functions and would be
difficult to replace. The loss of the services of any key personnel could
seriously harm our business.

IF WE ARE UNABLE TO RETAIN AND HIRE ADDITIONAL QUALIFIED PERSONNEL AS NECESSARY,
WE MAY NOT BE ABLE TO SUCCESSFULLY ACHIEVE OUR OBJECTIVES.

We have hired engineering, sales, marketing, customer support
accounting and other personnel. We may not be able to attract and retain the
necessary personnel to accomplish our business objectives, and we may experience
constraints that will adversely affect our ability to deploy our networks in a
timely fashion or to support our users and operations. We have at times
experienced, and continue to experience, difficulty in recruiting qualified
personnel. Recruiting qualified personnel is an intensely competitive and
time-consuming process.

WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT DILUTE OUR STOCKHOLDERS AND RESULT IN
INCREASED DEBT AND ASSUMPTION OF CONTINGENT LIABILITIES.

As part of our business strategy, we may consider acquisition prospects
that would complement our current product offerings, augment our market
coverage, enhance our technical capabilities, or otherwise offer growth
opportunities. In the

33


event of such future acquisitions, we could: (1) issue equity securities, which
would dilute current stockholders' percentage ownership; (2) incur substantial
debt; or (3) assume contingent liabilities.

Such actions by us could have a detrimental effect on our results of
operations and/or the price of our common stock. Acquisitions also entail
numerous risks, including: (1) difficulties in assimilating acquired operations,
technologies, products or personnel; (2) unanticipated costs associated with the
acquisition that could materially adversely affect our results of operations;
(3) negative effects on our reported results of operations from acquisition
related charges and of amortization of acquired technology and other
intangibles; (4) diversion of management's attention from other business
concerns; (5) adverse effects on existing business relationships with suppliers
and customers; (6) risks of entering markets in which we have no or limited
prior experience; and (7) potential loss of key employees of acquired
organizations.

OUR DEPENDENCE ON THIRD PARTIES FOR OUR INTELLECTUAL PROPERTY PUTS US AT RISK
IF THIS INTELLECTUAL PROPERTY IS NOT PROPERLY PROTECTED OR INFRINGES UPON THE
RIGHTS OF OTHERS.

We rely exclusively on third parties like Gilat and Spacenet for most
of the intellectual property used in our business. If Gilat or any of our other
suppliers fails to adequately protect their intellectual property or is found to
be infringing on the intellectual property rights of other parties, our ability
to operate our business as expected may, in turn, be harmed.

Infringement claims could materially harm our business and financial
condition. From time to time, we may receive notice of claims of infringement of
third parties' proprietary rights. The fields of telecommunications and Internet
communications are filled with domestic and international patents, both pending
and issued. We may unknowingly infringe such a patent. We may be exposed to
future litigation based on claims that our products infringe the intellectual
property rights of others, especially patent rights. Someone, including a
competitor, might file a suit with little merit, in order to harm us
commercially, to force us to re-allocate resources to defending such a claim, or
extract a large settlement. In addition, our employees might utilize proprietary
and trade secret information from their former employers without our knowledge,
even though we prohibit these practices. Any litigation, with or without merit,
could be time consuming to defend, result in high litigation costs, divert our
management's attention and resources or cause us to delay deployment of related
technology. A jury or judge may decide against us even if we had not in fact
infringed. If we lose or are forced to settle, we could be required to remove or
replace allegedly infringing technology, to develop non-infringing technology or
to enter into royalty or licensing arrangements. These royalty or licensing
arrangements, if required, may not be available on terms acceptable to us, or at
all.

POSSIBLE INFRINGEMENT OF INTELLECTUAL PROPERTY RIGHTS COULD HARM OUR BUSINESS.

We seek to protect our intellectual property and to respect the
intellectual property rights of others. To protect our own intellectual
property, we rely on U.S. and international law regarding copyright, patents,
trademarks and trade secrets as well as confidentiality agreements with
employees, consultants, contractors and business partners. We cannot guarantee
that we will succeed in obtaining, registering, policing or defeating challenges
to our intellectual property rights, or that we will avoid claims that we are
infringing the rights of others.

Despite our efforts to protect our intellectual property, we may be
unsuccessful in doing so. We may be unable to obtain patents or register
trademarks for a variety of reasons, including a mistaken belief that these
items are eligible for intellectual property protection or that we are the
entity entitled to this protection, if any. Our copyrights and trade secrets may
similarly turn out to be ineligible for legal protection. In addition, parties
may attempt to disclose, obtain or use our proprietary information despite, or
in the absence of, a confidentiality agreement. Some foreign countries do not
protect intellectual property rights to the same extent as the United States of
America, and intellectual property law in the United States of America is still
uncertain and evolving as applied to Internet- related industries. The status of
domain names and the regulatory bodies in charge of them is also unsettled. Any
inability to register or otherwise protect our intellectual property rights
could seriously harm our business since it could enable competitors to copy
important features on our network.

Furthermore, third parties may assert intellectual property
infringement claims against us. These claims, possibly including those from
companies from which we license key technology for our operations, could result
in significant liability, the inability to use key rights and technologies, and
the invalidation of our own proprietary rights. In addition, regardless of the
outcome, any litigation could be time-consuming, expensive, and distracting of
management's time and attention.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk for changes in interest rates relates
primarily to the increase or decrease in the amount of interest income we can
earn on our investment portfolio and on the increase or decrease in the amount
of interest expense we must pay with respect to our various outstanding debt
instruments. The risk associated with fluctuating interest expense is limited,
however, to the expense related to those debt instruments and credit facilities
that are tied to market rates. We do not use derivative financial instruments in
our investment portfolio. We ensure the safety and preservation of our invested
principal funds by limiting default risks, market risk and reinvestment risk. We
mitigate default risk by investing in investment grade and high-credit quality
securities. A hypothetical increase or decrease in market interest rates by 10%
from the market interest rates at December 31, 2001 would not cause the fair
value of our cash and cash equivalents or the interest expense paid with respect
to our outstanding debt instruments to change by a material amount. Declines in
interest rates over time will, however, reduce our interest income while
increases in interest rates over time will increase our interest expense. As of
December 31, 2001, we had not engaged in any significant foreign currency
activity.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this item is in Item 14 of Part IV of this
Report and is incorporated into this item by reference.


34


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

We changed accountants in June 2000 as previously reported in our Form
8-K filed with the SEC on June 6, 2000.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Set forth below is certain information as of February 27, 2002
regarding our current directors and nominees for Directors of the Board. There
is no family relationship among any of the Directors or executive officers of
rStar.



NAME AGE PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE

Lance Mortensen 49 See Part I, "Executive Officers".

Charles Appleby 53 Mr. Appleby has been a member of our Board of Directors since January 2001. Mr. Appleby is president
and an equity holder of CAVCO, Inc., a private investment company, positions he has held for the past
5 years. Prior to that, from 1984 to 1996, Mr. Appleby was a founding partner in the accounting firm
of Grenadier, Appleby, Collins & Company, specializing in taxation matters including income, estate
and gift for individuals, corporations, estates and trusts for residents and non-residents. Mr.
Appleby holds an MBA from Stetson University and is a retired colonel in the Florida Army National
Guard. He is Chair of the Audit Committee and a member of the Compensation Committee. (See also Item
13. Other Transactions.)

Michael Arnouse 45 Mr. Arnouse has been a member of our Board of Directors since October 1998. Mr. Arnouse has spent the
past 10 years as a business consultant and financier for private and publicly traded companies. During
that period, he had financed more than 50 transactions totaling in excess of five hundred million
dollars. Mr. Arnouse co-founded Sky Trek International Airlines and served as Chairman of the Board of
Directors from January 1996 until June 1998 and continues to serve on its board. Mr. Arnouse is
currently employed as Chairman and President of Wharton Capital Partners Ltd., a New York based
investment banking and financial consulting firm. Mr. Arnouse also serves as president of State
Capital Market Group Ltd., a privately owned investment and business consulting company. He is Chair
of the Compensation Committee and a member of the Audit Committee.

Amiel Samuels 42 Mr. Samuels has been a director of rStar since May 2001 and a member of rStar's audit committee since
June 2001. He also currently serves as the Vice President, Broadband Networks of Gilat, a position he
has held since 1998. At Gilat, Mr. Samuels is responsible for a number of corporate transactions,
including merger and acquisition transactions, several corporate finance, and certain strategic
partnerships. Prior to joining Gilat, Mr. Samuels was an investment banker for Lehman Brothers from
1989 to 1998 and worked in both their New York and Tel Aviv offices, focusing on investment banking
transactions for high technology companies. Mr. Samuels is a citizen of both the United States and
Israel.



35





Sasson Darwish 36 Mr. Darwish has been a director of rStar since May 2001. Mr. Darwish also currently serves as
President of Emblaze Systems, Inc., a subsidiary of Emblaze Systems Ltd., a publicly held Israeli
company whose shares are quoted on the London Stock Exchange. Emblaze provides streaming multimedia
solutions over wireless networks. As President of Emblaze, Mr. Darwish is responsible for all U.S.
operations, including sales, business development, marketing and personnel. Prior to joining Emblaze,
Mr. Darwish worked as an investment banker for Lehman Brothers from 1996 until 2000, focusing on
software and Internet infrastructure investment banking for leading companies in the
telecommunications, Internet and software industries. Mr. Darwish is an Israeli citizen.



COMPENSATION OF DIRECTORS

In fiscal year 2001, each Director who was not an employee of rStar or
any of its subsidiaries ("non-employee director") received fees for his service
as a Director. Each non-employee director received an annual retainer of
$10,000, plus $1,000 for each Board meeting they attend. Directors who serve as
a chair for the Compensation or Audit Committees each receive an additional fee
of $750 for each committee meeting they chair. All other non-employee directors
receive a fee of $500 for each committee meeting they attend. Directors are also
reimbursed for out of pocket expenses in attending Board meetings.

Our 1998 Stock Plan, as amended in July 2000, provides that options
will be granted to non-employee directors pursuant to an automatic
non-discretionary grant formula. Each non-employee director will be granted an
option to purchase 20,000 shares of Common Stock on the date of each Annual
Meeting of the Stockholders of rStar. Each option will be granted at the fair
market value of the Common Stock on the date of grant. Options granted to
non-employee directors under the 1998 Stock Plan will be fully vested and
exercisable on the date of grant. The options to be granted under the 1998 Stock
Plan will be nonqualified stock options. Nonqualified stock options are stock
options which do not constitute "incentive stock options" within the meaning of
Section 422 of the Internal Revenue Code. Currently, all Directors other than
Mr. Mortensen are eligible to participate in the 1998 Stock Plan as non-employee
directors.


BOARD MEETINGS AND COMMITTEES

The Board of Directors held a total of 10 meetings (including regularly
scheduled and special meetings) during fiscal 2001. During the last fiscal year,
no incumbent director while a member of the Board of Directors attended fewer
than 75% of the aggregate of (1) the total number of meetings of the Board of
Directors and (2) the total number of meetings held by all committees on which
such director served.

Our Board of Directors has 2 standing committees: an Audit Committee
and a Compensation Committee. The Audit Committee, which currently consists of
Messrs. Appleby, Arnouse, and Samuels is responsible for, among other things,
(1) recommending engagement of our independent auditors, (2) approving the
services performed by such auditors, (3) consulting with such auditors and
reviewing with them the results of their examination, (4) reviewing and
approving any material accounting policy changes affecting our operating
results, (5) reviewing our control procedures and personnel, and (6) reviewing
and evaluating our accounting principles and our system of internal accounting
controls. The Audit Committee held 7 meetings during fiscal year 2001.

The Compensation Committee, which currently consists of Messrs. Arnouse
and Appleby, is responsible for (1) reviewing and approving the compensation and
benefits for our officers and other employees, (2) administering our stock
purchase and stock option plans, and (3) making recommendations to the Board of
Directors regarding such matters. The Compensation Committee did not conduct any
formal meetings during fiscal year 2001. Neither Mr. Arnouse nor Mr. Appleby is
an officer or employee of rStar or its subsidiaries.

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT


36


Section 16(a) of the Exchange Act ("Section 16(a)") requires our
executive officers and our directors, and persons who own more than 10% of a
registered class of our equity securities, to file reports of ownership on Form
3 and changes in ownership on Form 4 or Form 5 with the Securities and Exchange
Commission (the "SEC") and the National Association of Securities Dealers, Inc.
Such executive officers, directors and 10% stockholders are also required by SEC
rules to furnish the Company with copies of all such forms that they file.

Based solely on its review of the copies of such forms received by us,
or written representations from certain reporting persons that no Form 5 was
required for such persons, we believe that during fiscal 2001 all Section 16(a)
filing requirements applicable to its executive officers, directors and 10%
stockholders were complied with.


ITEM 11. EXECUTIVE COMPENSATION


Summary Compensation Table

The following table sets forth certain information concerning total
compensation received by the Chief Executive Officer and each of the 4 most
highly compensated executive officers other than the Chief Executive Officer
during the last fiscal year (the "Named Officers") for services rendered to us
in all capacities during the last 3 fiscal years.



SECURITIES
FISCAL SALARY BONUS UNDERLYING
NAME AND PRINCIPAL POSITION YEAR ($) ($) OPTIONS (#)
- --------------------------- ---- --- --- -----------
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION AWARDS
------------ ------

Lance Mortensen(1) 2001 275,000 103,125 0
Chairman, CEO and President 2000 261,692 0 0
1999 248,400 0 0
Robert Edwards(2) 2001 210,101 57,050 50,000
SVP, Administration and CFO 2000 154,000 0 250,000
1999 0 0 0
Christophe Morin(3) 2001 184,583 49,979 125,000
VP, Marketing 2000 109,000 0 125,000
1999 0 0 0
Jay Scott(4) 2001 208,541 89,250 400,000
Chief Operating Officer 2000 131,000 0 0
1999 0 0 0
David Wallace(5) 2001 183,542 44,425 211,900
VP, General Counsel and Secretary 2000 147,625 0 30,000
1999 6,379 0 8,100



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

(1) Mr. Mortensen served as our Chief Executive Officer from June of 1997
to September of 1999. He was renamed Chief Executive Officer in October
2000.

(2) Mr. Robert Edwards joined us in March 2000 in his current position.

(3) Mr. Morin joined us in May 2000 and served in his current position
since April 2001 through February 5, 2002.

(4) Mr. Scott joined us in March 2000 and has served in his current
position since January 2001.


37


(5) Mr. Wallace joined us in November 1999 and has served in his current
position since January 2001.


OPTION GRANTS IN LAST FISCAL YEAR

The following table sets forth, as to the Named Officers, information
concerning stock options granted during the fiscal year ended December 31, 2001.









PERCENT OF
TOTAL OPTIONS 5% 10%
GRANTED TO -- ---
NUMBER OF EMPLOYEES POTENTIAL REALIZABLE
SECURITIES IN FISCAL VALUE AT ASSUMED
UNDERLYING YEAR (2) ANNUAL RATES OF STOCK
OPTIONS -------- EXERCISE EXPIRATION PRICE APPRECIATION
NAME GRANTED (1) INDIVIDUAL GRANTS PRICE DATE FOR OPTION TERM (4)
- ---- ----------- ----------------- ----- ---- -------------------


Lance Mortensen 0 0 N/A N/A 0 0
Robert Edwards 50,000 3.0% $0.7188 1/3/11 $ 9,500 $ 36,500
Christophe Morin 125,000 7.5% $0.7188 1/3/11 $23,750 $ 91,250
Jay Scott 400,000 24.0% $0.7188 1/3/11 $76,000 $292,000
David Wallace 211,900 12.7% $0.7188 1/3/11 $40,250 $154,700


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

(1) All options in this table were granted under the 1998 Stock Plan and
have exercise prices not less than the fair market value on the date of
grant. All such options have 10-year terms. Options vest over a 4-year
period at the rate of one-fourth on the first anniversary of the
vesting commencement date and monthly thereafter.

(2) We granted options to purchase 1,665,913 shares of Common Stock to
employees and consultants in fiscal 2001.

(3) Options may terminate before their expiration upon the termination of
the optionee's status as an employee or consultant, the optionee's
death or an acquisition of us.

(4) Potential realizable value assumes that the stock price increases from
the exercise price from the date of grant until the end of the option
term (10 years) at the annual rate specified (5% and 10%). Annual
compounding results in total appreciation of approximately 63% (at 5%
per year) and 159% (at 10% per year). If the price of our Common Stock
were to increase at such rates from the price at 2000 fiscal year end
($0.56 per share) over the next 10 years, the resulting stock price at
5% and 10% appreciation would be $0.91 and $1.45, respectively. The
assumed annual rates of appreciation are specified in SEC rules and do
not represent our estimate or projection of future stock price growth.
We do not necessarily agree that this method can properly determine the
value of an option.


38



OPTION EXERCISES AND HOLDINGS


The following table sets forth, as to the Named Officers, certain
information concerning stock options exercised during fiscal 2001 and the number
of shares subject to both exercisable and unexercisable stock options as of
December 31, 2001. Also reported are values for "in-the-money" options that
represent the positive spread between the respective exercise prices of
outstanding stock options and the fair market value of our Common Stock as of
December 31, 2001.






EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
SHARES ----------- ------------- ----------- -------------
ACQUIRED ON VALUE NUMBER OF SECURITIES VALUE OF UNEXERCISED
EXERCISE REALIZED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
NAME (#) ($) OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END ($)(1)(2)
- ---- --- --- -------------------------- ----------------------------

Lance Mortensen 0 0 300,000 0 0 0
Robert Edwards 0 0 106,249 193,751 0 0
Christophe Morin 0 0 49,479 200,521 0 0
Jay Scott 0 0 76,562 323,438 0 0
David Wallace 0 0 18,593 231,407 0 0



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

(1) Market value of underlying securities based on the closing price of
Company's Common Stock on December 31, 2001 (the last trading day of
fiscal year 2001) on the Nasdaq National Market of $0.3900 minus the
exercise price.

(2) The exercise price of options granted exceeds the fair market value of
$0.3900 of our Common Stock on December 31, 2001.

COMPENSATION COMMITTEE REPORT



REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS

This report dated as of March 2, 2002, is provided by the Compensation
Committee (the "Committee") of the Board of Directors to assist stockholders in
understanding the Committee's objectives and procedures in establishing the
compensation of our Chief Executive Officer and our other senior officers.

The Committee is comprised of 2 non-employee directors. The Committee's
responsibility is to review and to recommend to the Board of Directors the
compensation levels of the Chief Executive Officer and our other senior
officers, to evaluate the performance of management and to consider management
succession and related matters. The Committee also establishes the policies and
programs that determine the compensation of our officers and other employees.
The Committee sets base cash compensation and bonus compensation on an annual
basis for the Chief Executive Officer and our other executive officers and
employees. In addition, the Committee administers our stock incentive plan. The
Committee considers both internal data, including corporate goals and individual
performance, as well as external data from outside compensation consultants and
independent executive compensation data from comparable high technology
companies, in determining officers' compensation.

The Committee's 2001 compensation actions and policies were based on
recommendations on our executive compensation practices from Watson Wyatt, an
outside consulting firm that specializes in executive compensation, internally
generated information, comparative pay practice data, and its own review of the
status of the executive compensation program that was adopted by the Committee
in 1999. As a result of its comprehensive review, the


39



Committee implemented changes to increase the percentage of pay that can be
earned under the annual and long-term incentive compensation programs. To seek
to better align the executive officers' interests with those of our
stockholders, the Committee also increased the number of shares subject to stock
option grants.

COMPENSATION PHILOSOPHY

When creating policies and making decisions concerning executive
compensation, the Committee:

- Ensures that the executive team has clear goals and
accountability with respect to corporate performance;

- Establishes pay opportunities that are competitive based on
prevailing practices for the industry, the stage of our
growth, and the labor markets in which we operate;

- Independently assesses operating results on a regular basis in
light of our expected performance; and

- Aligns pay incentives with the long-term interests of our
stockholders.

COMPENSATION PROGRAM

Our executive compensation program has 3 major components, all of which
are intended to attract, retain and motivate highly effective executives:

1. Base salary for executive officers is set annually by
reviewing the competitive pay practices of comparable high
technology companies. Local (San Francisco Bay Area) and
national data are examined and taken into account, along with
the skills and performance of the individual and our needs.

2. Cash incentive compensation is designed to motivate executives
to attain short-term and longer-term corporate, business unit
and individual management goals and is earned upon attainment
of these specified business goals.

3. Equity-based incentive compensation has been provided to
employees and executive officers through our stock incentive
plans. Under these plans, our officers, employees and certain
consultants are eligible to be granted stock options based on
competitive market data, as well as their responsibilities.
These options allow participants to purchase shares of our
Common Stock at the market price on the date of the grant,
subject to vesting during the participant's employment with
us. Employees are also permitted to purchase shares of our
Common Stock, subject to certain limitations, at eighty-five
percent (85%) of fair market value under the Employee Stock
Purchase Plan. The purpose of these stock plans is to instill
the economic incentives of ownership and to create management
incentives to improve stockholder value. Our stock option
plans utilize vesting periods to encourage employees and
executives to remain with us and to focus on longer-term
results.

CHIEF EXECUTIVE OFFICER COMPENSATION

Mr. Mortensen resumed service as our Chief Executive Officer in October
2000. In determining the compensation of our Chief Executive Officer for the
fiscal year ended December 31, 2001, we used an industry survey of compensation
paid to chief executive officers of comparable companies, with a focus on those
companies located in the San Francisco Bay Area, as well as our corporate
individual objectives for the fiscal year. Mr. Mortensen's annual base
compensation for fiscal year 2001 was $275,000. Mr. Mortensen received $103,125
as an employee bonus for the fiscal year ended December 31, 2001.

Mr. Mortensen did not receive a stock option grant or stock award for
fiscal year 2001.

OTHER EXECUTIVE COMPENSATION


40

We provide certain compensation programs to executives that are also available
to our other employees, including pre-tax savings plans and
medical/dental/vision benefits. There are no pension programs. We do not provide
executive perquisites such as club memberships.

DEDUCTIBILITY OF EXECUTIVE COMPENSATION

The Internal Revenue Code of 1986, as amended (the "Code") limits the
federal income tax deductibility of compensation paid to our chief executive and
to each of the other four most highly compensated executive officers. For this
purpose, compensation can include, in addition to cash compensation, the
difference between the exercise price of stock options and the value of the
underlying stock on the date of exercise. We may deduct compensation with
respect to any of these individuals only to the extent that during any fiscal
year such compensation does not exceed $1 million or meets certain other
conditions (such as stockholder approval). Considering our current compensation
plans and policy, rStar and the Committee believe that, for the near future,
there is little risk that we will lose any significant tax deduction relating to
executive compensation. If the deductibility of executive compensation becomes a
significant issue, our compensation plans and policy will be modified to
maximize deductibility if rStar and the Committee determine that such action is
in our best interest.

COMPENSATION COMMITTEE OF THE
BOARD OF DIRECTORS

Michael Arnouse
Charles Appleby


41

STOCK PRICE PERFORMANCE GRAPH

The following graph compares the cumulative total return to
stockholders on our Common Stock with the cumulative return of the Nasdaq
Composite Stock Market Index (the "Nasdaq Composite Index") and the Chase H&Q
Internet 100 Index (the "H&Q 100 Index"). The graph assumes that $100 was
invested on October 20, 1999 in our Common Stock, the Nasdaq Composite Index and
the Chase H&Q Internet 100 Index, including reinvestment of dividends. No
dividends have been declared or paid on our Common Stock. Historic price
performance is not indicative of future stock price performance.



[PERFORMANCE LINE GRAPH]


RSTAR CORP



Cumulative Total Return
-----------------------------------------------------
10/20/99 12/99 12/00 12/01

RSTAR CORP. 100.00 78.41 5.12 3.55
NASDAQ STOCK MARKET (U.S.) 100.00 145.70 87.63 69.54
JP MORGAN H & Q INTERNET 100 100.00 190.23 73.19 47.10




Begin: 10/20/99
Period End: 12/31/01
RSTAR CORP End: 12/31/01



Beginning
Transaction Closing No. Of Dividend Dividend Shares Ending Cum. Tot.
Date* Type Price** Shares*** per Share Paid Reinvested Shares Return
----- ---- ------- --------- --------- ---- ---------- ------ ------

20-Oct-99 Begin 11.000 9.09 9.091 100.00

31-Dec-99 Year End 8.625 9.09 9.091 78.41

31-Dec-00 Year End 0.563 9.09 9.091 5.12

31-Dec-01 End 0.390 9.09 9.091 3.55



* Specified ending dates or ex-dividends dates.

** All Closing Prices and Dividends are adjusted for stock splits and
stock dividends.

***' Begin Shares' based on $100 investment.


Begin: 10/20/99
Period End: 12/31/01
NASDAQ End: 12/31/01



Beginning
Transaction Closing No. Of Dividend Dividend Shares Ending Cum. Tot.
Date* Type Price** Shares*** per Share Paid Reinvested Shares Return
----- ---- ------- --------- --------- ---- ---------- ------ ------

20-Oct-99 Begin 936.990 0.11 0.107 100.00

31-Dec-99 Year End 1365.176 0.11 0.107 145.70
31-Dec-00 Year End 821.131 0.11 0.107 87.63
31-Dec-01 End 651.557 0.11 0.107 69.54


* Specified ending dates or ex-dividends dates.

** All Closing Prices and Dividends are adjusted for stock splits and
stock dividends.

*** 'Begin Shares' based on $100 investment.



Begin: 10/20/99
Period End: 12/31/01
JP MORGAN H & Q INTERNET End: 12/31/01



Beginning
Transaction Closing No. Of Dividend Dividend Shares Ending Cum. Tot.
Date* Type Price** Shares*** per Share Paid Reinvested Shares Return
----- ---- ------- --------- --------- ---- ---------- ------ ------

20-Oct-99 Begin 479.830 0.21 0.208 100.00

31-Dec-99 Year End 912.760 0.21 0.208 190.23
31-Dec-00 Year End 351.200 0.21 0.208 73.19
31-Dec-01 End 225.980 0.21 0.208 47.10



* Specified ending dates or ex-dividends dates.

** All Closing Prices and Dividends are adjusted for stock splits and
stock dividends.

*** 'Begin Shares' based on $100 investment.


42

COMPARISON OF 14 MONTH CUMULATIVE TOTAL RETURN* AMONG rSTAR CORPORATION, THE
NASDAQ STOCK MARKET (U.S.) INDEX AND THE JP MORGAN H&Q INTERNET INDEX



* $100 invested on 10/29/99 in stock or index-including reinvestment of
dividends. Fiscal year ending December 31.

COMPENSATION COMMITTEE
INTERLOCKS AND
INSIDER PARTICIPATION

The Compensation Committee is comprised solely of outside Directors.
The Compensation Committee of the Board of Directors consists of Mr. Arnouse, as
Chairman, and Mr. Appleby. None of our executive officers served on the
compensation committee of another entity or on any other committee of the board
of directors of another entity performing similar functions during the last
fiscal year.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT



PRINCIPAL STOCKHOLDERS

The following table sets forth as of March 3, 2002 certain information
relating to the ownership of our Common Stock by: (i) each person known by us to
be the beneficial owner of more than five percent (5%) of the outstanding shares
of rStar Common Stock; (ii) each of our directors; (iii) each of the officers
named in the Executive Compensation Table on page 35, hereof; and (iv) all of
our directors and executive officers as a group.



SHARES PERCENTAGE
BENEFICIALLY BENEFICIALLY
5% STOCKHOLDERS, DIRECTORS AND OFFICERS OWNED (1) OWNED
- --------------------------------------- --------- -----

5% STOCKHOLDERS (2):
Gilat Satellite Networks, Ltd. (3) 41,814,643 65.5%
Lance Mortensen , also a director (4) 6,430,875 10.1%
Michael Arnouse , also a director (5) 3,617,554 5.7%

DIRECTORS:
Charles Appleby (6) 813,335 1.3%
Amiel Samuels (7) 58,646 *
Sasson Darwish (8) - -




EXECUTIVE OFFICERS:
Robert Edwards (9) 143,234 *
Christophe Morin (10) 85,937 *
Jay Scott (11) 163,457 *
David Wallace (12) 88,436 *
All directors and executive officers as a group (9 persons) 11,398,828 17.9%



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

* Less than 1%

(1) The number of shares owned is determined in accordance with Rule 13d-3
of the Exchange Act, and the information is not necessarily indicative
of beneficial ownership for any other purpose. Under such rule,
beneficial ownership includes any shares as to which the individual or
entity has voting power or investment power and also any shares which
the individual or entity has the right to acquire within 60 days of
March 3, 2002 through the exercise of any stock option or other
right. Unless otherwise indicated in the footnotes, each person has
sole voting and investment power (or shares such powers with his or her
spouse) with respect to the shares shown as beneficially owned.

(2) Unless otherwise indicated, the address of each of the individuals or
entities named above is: c/o rStar Corporation, 3000 Executive Parkway,
Suite 150, San Ramon, CA 94583.

(3) Based on Schedule 13D/A filed with the SEC on May 21, 2001, Gilat held
shared voting as to 41,814,643 of such shares. Gilat indicates that it
had no sole voting, sole dispositive, or shared dispositive power over
such shares. Gilat's address is 1651 Old Meadow Road, McLean Virginia
22102.

(4) Includes options to purchase 300,000 shares of our common stock
exercisable within 60 days of March 3, 2002. Mr. Mortensen is
Chairman of the Board, Chief Executive Officer and President of the
Company.

(5) Includes options to purchase 40,000 shares of our common stock
exercisable within 60 days of March 3, 2002. Mr. Arnouse is a
director of rStar. Mr. Arnouse's address is 545 Madison Avenue, New
York, NY 10022.

(6) Includes options to purchase 6,667 shares of our common stock
exercisable within 60 days of March 3, 2002. Mr. Appleby is a
director of rStar. Mr. Appleby's address is 9250 Baymeadows Road, Suite
220, Jacksonville, FL 32256.

(7) Includes shares of rStar common stock that are controlled by Mr.
Samuels' spouse. Mr. Samuels disclaims beneficial ownership of these
shares. Mr. Samuels's address is c/o Gilat Satellite Networks Ltd., 21
Gilat Yegia Kapayim Street, Kiryat Arye, Petah Tikva 49130, Israel.

(8) Mr. Darwish's address is c/o Emblaze Systems, Inc., 424 Madison Avenue,
16th Floor, New York, New York.

(9) Includes options to purchase 12,502 shares of our common stock
exercisable within 60 days of March 3, 2002. Mr. Edwards is Senior
Vice President, Administration and Chief Financial Officer of rStar.

(10) Mr. Morin served as Vice President, Marketing of rStar through and
including March 3, 2002.

(11) Includes options to purchase 16,666 shares of our common stock
exercisable within 60 days of March 3, 2002. Mr. Scott is Chief
Operating Officer of rStar.

(12) Includes options to purchase 10,416 shares of our common stock
exercisable within 60 days of March 3, 2002. Mr. Wallace is Vice
President, General Counsel and Secretary of rStar.



43

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

STOCK TRANSACTIONS

Since January 2001, as part of our normal review and determination of
compensation, we have granted the following options to our executive officers:

- In January 2001, Robert Edwards, Senior Vice President,
Administration and Chief Financial Officer, was granted
options to purchase 50,000 shares, respectively, of our Common
Stock at an exercise price of $0.7188. These options vest over
4 years at a rate of one-fourth on the anniversary of the
vesting commencement date and monthly thereafter;

- In January 2001, Christophe Morin, Vice President of
Marketing, was granted options to purchase 125,000 shares of
our Common Stock at an exercise price of $0.7188 per share.
These options vest over 4 years at a rate of one-fourth on the
anniversary of the vesting commencement date and monthly
thereafter;

- In January 2001, Jay Scott, Chief Operating Officer, was
granted options to purchase 400,000 shares of our Common Stock
at an exercise price of $0.7188 per share. A portion of these
options , 225,000 shares, vest over 4 years at a rate of
one-fourth on the anniversary of the vesting commencement date
and monthly thereafter. The balance of the options, 175,000
shares, vest over four years with a vesting commencement date
of March 2000.

- In January 2001, David Wallace, Vice President, General
Counsel and Secretary, was granted options to purchase 211,900
shares of our Common Stock at an exercise price of $0.7188 per
share. These options vest over 4 years at a rate of one-fourth
on the anniversary of the vesting commencement date and
monthly thereafter;

OTHER TRANSACTIONS

We paid Mr. Charles Appleby, a director, $220,000 during the year ended
December 31, 2001 for consulting services in connection with the StarBand Latin
America acquisition agreements. The consulting services began on February 1,
2001, for an initial term of six months at $20,000 per month, and has continued
on a month to month basis at $20,000 per month thereafter. It is anticipated
that these consulting services will continue until the StarBand acquisition is
closed.

We paid Aquatic Innovations, Inc., a company owned by Mr. Lance
Mortensen, approximately $43,000 and $94,000 for office equipment rental and
other expenses incurred on our behalf in 2001 and 2000 respectively. This
financing arrangement, which was approved by the Board in 1999, concluded in
December 2001.

In January 2002, we entered into a Settlement Agreement and Mutual
Release with Rick Inatome, our former Chief Executive Officer. The agreement
provides that Mr. Inatome will receive $175,000 immediately; $275,000 for
consulting fees to be paid in twice-monthly installments commencing January 16,
2002 through and including January 31, 2003; the principal sum of $7,388
immediately; and $6,000 monthly for a full-time secretary and directly lease
office space commencing March 1, 2002 through and including February 28, 2003.
At December 31, 2001 we accrued for this amount in full, which amounts to
approximately $530,000.

During the year, we made additional investments of $509,000 consisting
of cash advances of $320,000, accrued interest of $15,000, and extended lines of
credit of $174,000 to ASK DR. TECH, a company in which our Company, and our
directors Lance Mortensen, and Michael Arnouse, are preferred shareholders. Due
to operational and financial difficulties of ASK DR. TECH, the Company had to
write off this $509,000 in addition to the initial investment of $770,000 made
in March, 2000. The total write-off booked in December, 2001 was $1,279,000 of
which $1,105,000 was recognized in the Statement of Operations and $174,000
was previously reserved.

On April 23, 2001, the Company entered into a debt for equity swap
agreement to issue 19,396,552 shares of its common stock to Gilat Satellite
Networks (Holland) B.V. (Spacenet's affiliate-assignee) in full satisfaction of
the Company's


44

outstanding obligations to Spacenet of approximately $45,000,000.

On December 31, 2001, the Company, Gilat To Home Latin America
(Holland) N.V. and Gilat, the Company's majority shareholder, entered into the
second amended and restated acquisition agreement that will result in the
acquisition of StarBand Latin America by rStar.

In connection with the acquisition agreement, the Company expensed
$1,320,000 of legal and consulting costs during 2001. The pending acquisition
of StarBand Latin America by rStar is a combination of two entities under
common control. As such, all transaction costs have been expensed as incurred.

We agreed to grant to an employee of Gilat a 5% equity interest in
AutoNetworks, Inc., our subsidiary, in exchange for his contributions to
developing our vertical networks business. AutoNetworks, Inc. is currently an
inactive corporation but will be the entity through which we expect to conduct
our vertical network business serving the automotive industry.


PART IV


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


(a) The following documents are filed as part of this Report on Form 10-K:

1. Financial Statements. The following consolidated financial
statements, and related notes thereto, and the Reports of
Independent Auditors are included in Part IV of this Report on
the pages indicated by the Index to Financial Statements as
presented on page F-1 of this Report.

Report of Grant Thornton LLP, Independent Auditors

Report of Ernst & Young LLP, Independent Auditors

Consolidated Balance Sheets-December 31, 2001 and 2000

Consolidated Statements of Operations-Fiscal Years Ended
December 31, 2001, 2000, and 1999

Consolidated Statement of Redeemable Convertible Preferred
Stock and Stockholders' Equity (Deficit)-Fiscal Years Ended
December 31, 2001, 2000, and 1999

Consolidated Statements of Cash Flows-Fiscal Years Ended
December 31, 2001, 2000, and 1999

Notes to Consolidated Financial Statements

2. Financial Statement Schedules.

Schedules have been omitted since they are either not
required, not applicable or the information is otherwise
included in the Consolidated Financial Statements or notes
thereto.

3. Exhibits: See Item 14(c) below.

(b) Reports on Form 8-K.
Form 8-K filed on September 14, 2001 and Form 8-K filed on
December 17, 2001.

(c) Exhibits. The exhibits listed on the accompanying index to
exhibits immediately following the financial statement
schedules are filed as part of, or incorporated by reference
into, this Form 10-K.





45

rSTAR CORPORATION

Index to Financial Statements



Report of Grant Thornton LLP, Independent Auditors F-2
Report of Ernst & Young LLP, Independent Auditors F-3
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-5
Consolidated Statement of Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit) F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8



46

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



The Board of Directors and Stockholders
rStar Corporation

We have audited the accompanying consolidated balance sheets of rStar
Corporation as of December 31, 2001 and 2000, and the related consolidated
statements of operations, redeemable convertible preferred stock and
stockholders' equity and cash flows for each of the two years in the period
ended December 31, 2001. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
rStar Corporation at December 31, 2001 and 2000, and the results of its
consolidated operations and its consolidated cash flows for each of the two
years in the period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America.

/s/ Grant Thornton LLP

San Francisco, California

January 31, 2002


F-2

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
rStar Corporation

We have audited the accompanying consolidated statements of operations,
redeemable convertible preferred stock and stockholders' equity (deficit), and
cash flows of rStar Corporation (formerly known as ZapMe! Corporation) for the
year ended December 31, 1999. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of rStar Corporation for the year ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States.

/s/ ERNST & YOUNG LLP

Walnut Creek, California
January 28, 2000,
except for Note 3,
as to which the date is
March 27, 2001.


F-3

rSTAR CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
(In thousands, except share and per share amounts)



2001 2000
---- ----

ASSETS
Current assets:
Cash and cash equivalents $ 31,034 $ 48,406
Receivables 277 123
Prepaid expenses and other current assets 744 452
--------- ---------
Total current assets 32,055 48,981
Equipment, net 1,895 4,507
Restricted cash 683 577
Other assets 1,081 2,288
Net assets of discontinued operations 322 17,470
--------- ---------
Total assets $ 36,036 $ 73,823
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,177 $ 1,790
Accrued and other liabilities 1,491 13,575
Accrued compensation and related expenses 285 2,056
Current portion of capital lease obligations 3,099 4,853
Current portion of capital lease obligations-related party -- 18,834

---------- ---------
Total current liabilities 6,052 41,108
Capital lease obligations, less current portion -- 3,358
Capital lease obligations-related party, less current portion -- 17,187

---------- ---------
Total liabilities 6,052 61,653
Minority interest in subsidiary -- 595
Stockholders' equity :
Convertible preferred stock, $0.01 par value
Authorized shares-5,000,000, none issued and outstanding at
December 31, 2001 and 2000 -- --
Common stock, $0.01 par value
Authorized shares-200,000,000,
Issued and outstanding shares 63,802,563 and 43,957,709 at
December 31, 2001 and 2000, respectively 638 440
Additional Paid-in-Capital 225,835 180,778
Deferred stock compensation (140) (665)
Notes receivable from stockholders (6,500) (6,500)
Accumulated deficit (189,849) (162,478)
--------- ---------
Total stockholders' equity 29,984 11,575
--------- ---------
Total liabilities and stockholders' equity $ 36,036 $ 73,823
========= =========




See accompanying Notes to Consolidated Financial Statements


F-4

rSTAR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
(In thousands, except per share amounts)



2001 2000 1999
---- ---- ----

Costs and expenses:
Sales and marketing $ 2,988 $ 399 $ --
General and administrative 7,789 5,614 673
Research and development 2,619 817 --
-------- --------- --------
Total costs and expenses 13,396 6,830 673
-------- --------- --------

Loss from operations (13,396) (6,830) (673)
Other income, net 27 160 347
Impairment losses on investment in affiliates (1,105) -- --
Interest income 1,616 5,259 1,812
Interest expense (2,253) (5,447) (1,183)
-------- --------- --------
(Loss) income from continuing operations before income taxes (15,111) (6,858) 303
Provision for income taxes -- -- (121)
-------- --------- --------
(Loss) Income from continuing operations (15,111) (6,858) 182
Loss from discontinued operations (12,260) (104,097) (27,309)
-------- --------- --------
Net loss (27,371) (110,955) (27,127)
Deemed dividend on preferred stock -- -- (7,815)
Beneficial conversion of Series E preferred stock -- -- (10,150)
Dividend on Series A preferred stock -- (213) --
-------- --------- --------
Net loss applicable to common stockholders $(27,371) $(111,168) $(45,092)
======== ========= ========

Basic and diluted loss per common share:
Loss from continuing operations $ (0.27) $ (0.16) $ (0.91)
Loss from discontinued operations (0.22) (2.40) (1.39)
-------- --------- --------
Net loss per share $ (0.49) $ (2.56) $ (2.30)
======== ========= ========

Shares used in calculation of net loss per common share:
Basic and diluted 56,068 43,348 19,607

































See accompanying Notes to Consolidated Financial Statements

F-5

rSTAR CORPORATION
CONSOLIDATED STATEMENT OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
THREE YEARS ENDED DECEMBER 31, 2001
STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands, except share amounts)


REDEEMABLE
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
--------------- --------------- ------------ ADDITIONAL
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT PAID-IN-CAPITAL
------ ------ ------ ------ ------ ------ ---------------

Balances at January 1, 1999 600,000 $3,352 9,557,671 $2,783 14,208,730 $143 $ 6,069
Issuance of common stock upon
exercise of stock options -- -- -- -- 222,558 2 73

Issuance of Series D preferred
stock net of issuance costs of
$1,834 -- -- 5,554,110 25,937 -- -- --

Issuance of Series D preferred
stock for conversion of note payable -- -- 40,000 200 -- -- --

Issuance of Series E preferred
stock, net of issuance of $26 -- -- 2,030,000 10,124 -- -- --

Issuance of common stock options to
non-employees in consideration for
services rendered -- -- -- -- -- -- 388

Warrants issued in connection with
lease financing & services
agreements -- -- -- -- -- -- 2,701

Deferred stock compensation -- -- -- -- -- -- 12,016

Amortization of deferred stock
compensation -- -- -- -- -- -- --

Accretion of redeemable convertible
preferred stock -- 1,276 -- -- -- -- --

Accretion of guaranteed return -- 1,792 -- -- -- -- --

Accrued Series C dividends -- 258 -- -- -- -- --

Accrued dividends on Series D and E -- -- -- 4,489 -- -- --

Deemed dividend on preferred stock -- -- -- 10,150 -- -- --

Issuance of common stock upon
initial public offering -- -- -- -- 9,488,753 95 95,417

Issuance of shares to stockholders
for note receivable -- -- -- -- 1,300,000 13 6,487

Conversion of preferred stock to
common stock upon initial public
offering (600,000) (6,678) (17,181,781) (53,683) 18,583,740 185 60,176

Net loss -- -- -- -- -- -- --
------- ------ --------- ------ ---------- ---- ---------

Balances at December 31, 1999 -- -- -- -- 43,803,781 438 183,327

Issuance of common stock upon
exercise of common stock options -- -- -- -- 425,541 4 412

Issuance of common stock in
connection with LearningGate.com
acquisition -- -- -- -- 999,958 10 2,740

Repurchase of common stock -- -- -- -- (1,350,000) (13) (148)

Amortization of deferred stock
compensation for stock options and
warrants -- -- -- -- -- -- --

Cancellation of stock options -- -- -- -- -- -- (5,738)

Issuance of common stock in
connection with Employee Stock

Purchase Plan -- -- -- -- 78,429 1 185

Net loss -- -- -- -- -- -- --

Dividends on Series A preferred
shares of a subsidiary -- -- -- -- -- -- --
------- ------ --------- ------ ---------- ---- ---------
Balances at December 31, 2000 -- -- -- -- 43,957,709 440 180,778

Issuance of common stock upon
exercise of common stock options -- -- -- -- 54,823 -- 11

Issuance of common stock in
connection with Employee Stock
Purchase Plan -- -- -- -- 32,165 -- 22

Amortization of Deferred Stock
Compensation for stock options and
warrant -- -- -- -- -- -- --

Cancellation of stock options -- -- -- -- -- -- (35)

Issuance of common stock in
connection with settlement of
TARSAP agreements -- -- -- -- 361,314 4 253

Issuance of common stock in
connection with settlement of
liabilities with Spacenet, Inc. -- -- -- -- 19,396,552 194 44,806

Net loss -- -- -- -- -- -- --
------- ------ --------- ------ ---------- ---- ---------
Balances at December 31, 2001 -- $ -- -- $ -- 63,802,563 $638 $ 225,835
======= ====== ========= ====== ========== ==== =========


F-6



NOTES TOTAL
DEFERRED RECEIVABLE STOCKHOLDERS'
STOCK FROM ACCUMULATED EQUITY
COMPENSATION STOCKHOLDERS DEFICIT (DEFICIT)
------------ ------------ ------- ---------

Balances at January 1, 1999 $(4,900) $ -- $(6,218) $(2,123)
Issuance of common stock upon
exercise of stock options -- -- -- 75

Issuance of Series D preferred
stock net of issuance costs of
$1,834 -- -- -- 25,937

Issuance of Series D preferred
stock for conversion of note payable -- -- -- 200

Issuance of Series E preferred
stock, net of issuance of $26 -- -- -- 10,124

Issuance of common stock options to
non-employees in consideration for
services rendered -- -- -- 388

Warrants issued in connection with
lease financing & services
agreements (782) -- -- 1,919

Deferred stock compensation (12,016) -- -- --

Amortization of deferred stock
compensation 6,056 -- -- 6,056

Accretion of redeemable convertible
preferred stock -- -- (1,276) (1,276)

Accretion of guaranteed return -- -- (1,792) (1,792)

Accrued Series C dividends -- -- (258) (258)

Accrued dividends on Series D and E -- -- (4,489) --

Deemed dividend on preferred stock -- -- (10,150) --

Issuance of common stock upon
initial public offering -- -- -- 95,512

Issuance of shares to stockholders
for note receivable -- (6,500) -- --

Conversion of preferred stock to
common stock upon initial public
offering -- -- -- 6,678

Net loss -- -- (27,127) (27,127)
------- ------- --------- ---------
Balances at December 31, 1999 (11,642) (6,500) (51,310) 114,313

Issuance of common stock upon
exercise of common stock options -- -- -- 416

Issuance of common stock in
connection with LearningGate.com
acquisition -- -- -- 2,750

Repurchase of common stock -- -- -- (161)

Amortization of deferred stock
compensation for stock options and
warrants 5,239 -- -- 5,239

Cancellation of stock options 5,738 -- -- --

Issuance of common stock in
connection with Employee Stock
Purchase Plan -- -- -- 186

Net loss -- -- (110,955) (110,955)

Dividends on Series A preferred
shares of a subsidiary -- -- (213) (213)
------- ------- --------- ---------

Balances at December 31, 2000 (665) (6,500) (162,478) 11,575

Issuance of common stock upon
exercise of common stock options -- -- -- 11

Issuance of common stock in
connection with Employee Stock
Purchase Plan -- -- -- 22

Amortization of deferred stock
compensation for stock options and
warrant 490 -- -- 490

Cancellation of stock options 35 -- -- --

Issuance of common stock in
connection with settlement of
TARSAP agreements -- -- -- 257

Issuance of common stock in
connection with settlement of
liabilities with Spacenet, Inc. -- -- -- 45,000

Net loss -- -- (27,371) (27,371)
------- ------- --------- ---------
Balances at December 31, 2001 $ (140) $(6,500) $(189,849) $ 29,984
======= ======= ========= =========




See accompanying Notes to Consolidated Financial Statements.


F-7


rSTAR CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEAR ENDED DECEMBER 31,

(DOLLARS ARE IN THOUSANDS, EXCEPT PER SHARE FIGURES)



2001 2000 1999
---- ---- ----

CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income from continuing operations $ (15,111) $ (6,858) $ 182
Adjustments to reconcile net (loss) income from continuing operations to net
cash (used in) provided by operating activities:
Amortization of deferred stock compensation 490 180 --
Depreciation 2,133 1,617 673
Warrants issued for services -- -- 388
Common stock issued for services -- -- 122
Impairment loss on Investments in Affiliates 1,105 -- --
Changes in operating assets and liabilities:
Receivables (154) (73) --
Prepaid expenses and other current assets (292) (25) (422)
Other assets 102 (987) (489)
Accounts payable (613) (517) 952
Accrued expenses and other liabilities (3,105) 5,097 8,301
Accrued compensation and related expenses (1,772) 333 1,277
--------- --------- ---------

Net cash provided by (used in) operating activities from
continuing operations (17,217) (1,233) 10,984
Net cash used in operating activities from discontinued operations (915) (35,561) (22,988)
--------- --------- ---------

NET CASH FLOWS USED IN OPERATING ACTIVITIES (18,132) (36,794) (12,004)


CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (151) (3,085) (1,076)
Disposal of equipment 194 -- --
Restricted cash (106) (12) (565)
Purchase business combinations -- (3,037) --
--------- --------- ---------

Net cash used in investing activities from continued operations (63) (6,134) (1,641)
Net cash provided by (used in) investing activities
from discontinued operations 5,928 (1,081) (3,896)
--------- --------- ---------

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 5,865 (7,215) (5,537)



F-8



2001 2000 1999
---- ---- ----

CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on lease obligations (5,112) (15,027) (2,533)
Payment to settle minority interest (25) -- --
Proceeds from issuance of preferred stock, net -- -- 36,261
Proceeds from the issuance of common stock, net 32 602 95,512
Proceeds from borrowings on notes payable -- -- 700
Payments on notes payable -- -- (500)
Redemption of preferred stock in subsidiary -- (5,500) --
Payments of dividends -- (213) --
Repurchase of common stock -- (161) --

Net cash (used in ) provided by financing activities (5,105) (20,299) 129,440


(Decrease) increase in cash and cash equivalents (17,372) (64,308) 111,899
Cash and cash equivalents at beginning of year 48,406 112,714 815


Cash and cash equivalents at end of year $ 31,034 $ 48,406 $ 112,714



SUPPLEMENTAL DISCLOSURES:
Non cash investing and financing activities:
Issuance of common stock in settlement of liabilities with Spacenet, Inc. $ 45,000 $ - $ -
Conversion of notes payable to stockholders to preferred stock $ - $ - $ 200
Issuance of common stock for notes receivable $ - $ - $ 6,500
Conversion of preferred stock to common stock, net of issuance costs $ - $ - $ 60,361
Accretion and dividends on convertible preferred stock $ - $ - $ 7,815
Deemed dividend on preferred stock $ - $ - $ 10,150
Equipment purchased through capital lease agreements $ - $ 27,644 $ 26,508
Warrants issued in connection with lease financing and service agreements $ - $ - $ 2,701
Stock options issued in connection with consulting agreement $ - $ - $ 388
Cash paid for interest $ 851 $ 4,577 $ 975
Preferred stock in subsidiary issued in purchase of eFundraising.com $ - $ 6,095 $ -
Common stock issued in purchase of LearningGate.com $ - $ 2,750 $ -



See accompanying Notes to Consolidated Financial Statements


F-9

RSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


DESCRIPTION OF THE COMPANY

rStar Corporation, previously known as ZapMe! Corporation, was founded
in June 1997 for the principal purpose of building an advertiser-supported
network serving the education market. Over time we built a broadband Internet
media network specializing in education and acquired two businesses that served
the education market (together, the "School business"). The advertiser-supported
network serving the education market generated revenue via commercial
advertising on Company installed, networked computer labs in schools. In
connection with this business, we provided free Internet media network service
and computer equipment to schools. In July, 2000, we began the development of a
service to build and manage industry-specific, satellite-based networks for
commercial entities using customized managed browser technology to communicate
with their vendors and customers via Internet access, in a managed environment.
The services we expect to provide include remote high-speed Internet access,
data delivery, high-quality video and other network services bundled and
delivered through dedicated Internet media networks. ("Commercial business"). In
October 2000, we decided we would no longer accept or present paid commercial
advertising directed at students and announced our plan to end the School
business. These operations, which comprised a significant portion of our assets,
and a vast majority of our revenues and expenses, are reflected in the
accompanying financial statements as discontinued operations. See Note 2.

We have focused our full efforts toward the continued development of
our Commercial business and now operate in one segment. We have experienced
operating losses since our inception as a result of our efforts to build our
network infrastructure and internal staffing, develop our systems and expand our
markets. We earned all of our revenue from our discontinued School business and,
with the discontinuance of this segment, we have eliminated our ability to earn
revenue in that segment. We plan to continue to focus on expanding our
Commercial business, which will cause our loss from continuing operations to
increase. There can be no assurance that the Commercial business will develop to
the extent that sufficient revenue will be produced.

On October 3, 2000 Gilat Satellite Networks Ltd. ("Gilat") and the
Company announced an agreement under which Gilat would make a tender offer to
acquire for cash 51% of our outstanding voting common shares at $2.32 per share.
Effective January 11, 2001, Gilat acquired control pursuant to that tender
offer.

On April 23, 2001, Gilat and the Company announced a series of
transactions that would result in the acquisition by the Company of Gilat's
StarBand Latin America business. In consideration for such acquisition, the
Company agreed to issue to Gilat approximately 43.1 million shares of the
Company's common stock. Additionally, conditioned upon the acquisition of
Starband, the Company announced it would make a tender offer to acquire, in
exchange for up to $4 million in cash and up to 312,500 ordinary shares of
Gilat, up to 20% of the Company's common stock held by each stockholder of the
Company other than Gilat and its affiliates. On September 7, 2001 the parties
entered into an amended agreement and, on December 31, 2001, the Company, Gilat
and Gilat To Home Latin America (Holland) N.V. entered into a second amended and
restated agreement. The revisions to the April 23, 2001 agreement a) increased
the number of shares of rStar common stock that the Company will acquire in the
tender offer to approximately 29% of the outstanding shares of rStar common
stock not held by Gilat and its corporate affiliates, b) adjusted the cash
portion of the consideration for those shares from a fixed $0.95/share to an
amount that will vary between $0.32 and $1.58 per share, depending on the then
market value of Gilat shares, c) established certain earnings targets for the
StarBand Latin America business for the one year periods ended June 30, 2003 and
2004 that, if not achieved, will entitle non-Gilat shareholders to special cash
distributions totaling up to $10 million or, if exceeded, will entitle Gilat to
additional rStar shares totaling 10% of amount outstanding immediately following
the acquisition, d) provided an exception to the obligation to make the
above-described special cash distribution if the Company obtained substantial
new equity financing, e) clarified that rStar's rights to provide services in
Mexico rStar are non-exclusive and f) extended to May 31, 2002 the termination
date of the agreement.

The Company also agreed to issue approximately 19.3 million shares of
its common stock to Spacenet Inc., ("Spacenet"), a wholly-owned subsidiary of
Gilat (or its affiliate-designee) in full satisfaction of the Company's
outstanding obligations to Spacenet of $45,000,000. On May 21, 2001 that
transaction was completed.

We purchase satellite and other services and formerly leased a majority
of the computer equipment deployed in schools from Spacenet.

Gilat, as of December 31, 2001, owns 65% of the Company's common stock.
The substance of the transaction is that Gilat will effectively own up to 85% of
the Company after the consummation of the transactions contemplated by the
acquisition agreement. At consummation, Gilat intends to use the Company's
assets, to further finance its operations in Latin America. However, Gilat's
business plan in Latin America is unproven.


Management's current business plan is to continue its development of
its Commercial business, as well as to consummate the StarBand Latin America
transaction, thereby entering into the Latin America market. The Company's
current business plan and projections have considered the need to reduce or
delay expenditures. Management believes that the Company's available cash
resources will be sufficient to meet their expected working capital and capital
expenditure requirements, including the cash the Company expects to pay its
stockholders in the exchange offer, for the next year and are sufficient to
provide the Company with the ability to continue in existence. However, the
Company's operations and ultimate realization of the assets is dependent on the
operating decisions of Gilat.

BASIS OF PRESENTATION

The consolidated financial statements are prepared on the basis of our
School business being presented as a discontinued operation and include our
accounts and those of our wholly and majority-owned subsidiaries. All
subsidiaries are wholly owned with the exception of AutoNetworks, Inc. which has
a 10% minority shareholder. That subsidiary currently has no assets, liabilities
or employees as all operations in the automotive area are being conducted
directly by rStar. All significant inter-company accounts and transactions have
been eliminated in consolidation. As stated in Note 3, in February 2001, our
board of directors approved a formal plan to sell our School business. For
comparative purposes, the consolidated statements of operations and related loss
per share information, for all periods presented, have been restated to reflect
the results of operations for the discontinued business in "Loss from
discontinued operations". The consolidated balance sheets at December 31, 2001
and 2000 reflect assets and liabilities related to the School business as "Net
assets of discontinued operations". The Consolidated Statements of Cash Flows
for the three years in the period ended December 31, 2001 reflects separately
cash flows from discontinued operations.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts of assets
and liabilities, the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and expenses
during the period. Actual results could differ from those estimates.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of demand deposits and money market
accounts held with a financial institution and highly rated commercial paper
with original maturities of three months or less from the date of purchase.


F-10

RSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999


Restricted cash consists of security deposits made against letters of
credit issued in connection with lease agreements.

CONCENTRATIONS OF CREDIT RISK

Financial instruments that potentially subject us to concentrations of
credit risk consist primarily of cash and cash equivalents. We maintain our cash
balances primarily in one financial institution in California, which at times
exceeds federally insured limits. We have not experienced any losses in such
accounts. We believe we are not exposed to any significant credit risk on our
cash and cash equivalents. We perform ongoing credit evaluations of our
customers and generally do not require collateral.

EQUIPMENT

Equipment is stated at cost and is depreciated using the straight-line
method over estimated useful lives of three to seven years. Depreciation of
capital leases is expensed using the straight-line method over the life of the
lease or of the asset, whichever is shorter.

LONG-LIVED ASSETS

We review long-lived assets for impairment whenever events or
circumstances indicate the carrying value of asset may not be recoverable. An
impairment loss is recognized when estimated future cash flows expected to
result from the use of the asset and its eventual disposition are less than its
carrying amount.

RESEARCH AND DEVELOPMENT

We account for software development costs in accordance with SFAS No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed" under which software development costs incurred subsequent
to the establishment of technological feasibility are capitalized and amortized
over the estimated lives of the related products. Technological feasibility is
established upon completion of a working model. To date, costs incurred
subsequent to the establishment of technological feasibility have not been
significant, and all software development costs related to the School business
have been charged to research and development expense and classified in loss
from discontinued operations. To date, we have not achieved technological
feasibility for development costs incurred related to continuing operations.
Accordingly, such development costs have been charged to research and
development expense in the accompanying statement of operations.

We charge all costs related to the development of internal use of
software to operations as incurred, other than those incurred during the
application development stage. Costs incurred during the application development
stage were insignificant for all periods presented.

REVENUE RECOGNITION

Our continuing operations did not generate revenue in the periods
presented. Revenue from discontinued operations reported in Note 2 is comprised
of multiple sources. Sponsorship or advertising revenue was recognized ratably
over the period the advertising was delivered unless the advertising or
sponsorship is based on a minimum number of impressions, in which case revenue
was recognized on the basis of impressions delivered. Network services and other
revenue consisted of revenue from the distribution of content and products
delivered through our network and from educational programs delivered in Company
labs such as teacher training, tutoring and other educational programs offered
through strategic alliances. Network services and other revenue was recognized
in the time period in which the underlying service was delivered. Revenue from
school fundraising services and supplies was recognized upon shipment or
delivery of services and consisted of proceeds derived from the sales of
fundraising kits and supplies to schools and school organizations.

STOCK-BASED COMPENSATION


F-11

RSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999


We account for compensation expense for employees and non-employee
directors compensation plans using the intrinsic value method and provide pro
forma disclosures of net loss and net loss per share as if the fair value method
has been applied in measuring compensation expense.

The value of warrants, options or stock exchanges for services are
expensed over the period benefited. Warrants and options for services received
from non-employees are valued at fair value based on the Black-Scholes option
pricing model.

INCOME TAXES

We account for income taxes using the asset and liability method in
accounting for income taxes. Under this method, deferred tax assets and
liabilities are measured based on the difference between the financial statement
and income tax bases of assets and liabilities using enacted tax rates and laws
that will be in effect when the differences are expected to reverse.

RECLASSIFICATIONS

Certain reclassifications have been made to conform to the 2001
presentation.

NET LOSS PER SHARE

Basic and diluted loss per share has been computed using net loss, less
accretion and dividends on preferred stock, divided by the weighted-average
number of common shares outstanding during the period, less shares subject to
repurchase, and excludes stock options, warrants, and convertible securities.

The calculation of basic and diluted net loss per share is as follows
(in thousands, except for per share amounts):



YEAR ENDED DECEMBER 31,
-----------------------
2001 2000 1999
---- ---- ----

Net (loss) income from continuing operations $ (15,111) $ (6,858) $ 182
Accretion and dividends on convertible preferred stock -- -- (7,815)
Beneficial conversion of Series E preferred Stock -- -- (10,150)
Dividend on Series A preferred stock of a subsidiary -- (213) --
--------- --------- ---------
Loss applicable to common stockholders-continuing
operations $ (15,111) $ (7,071) $ (17,783)
Loss from discontinued operations (12,260) (104,097) (27,309)
--------- --------- ---------
Loss applicable to common stockholders $ (27,371) $(111,168) $ (45,092)
========= ========= =========



Weighted-average shares of common stock outstanding 56,168 44,475 20,354
Less: weighted-average shares subject to repurchase 100 1,127 747
--------- --------- ---------
Weighted-average shares of common stock outstanding
used in computing basic and diluted net loss per
common share 56,068 43,348 19,607
========= ========= =========



F-12

RSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999




YEAR ENDED DECEMBER 31,
-----------------------
2001 2000 1999
---- ---- ----

Basic and diluted net loss per common share from
continuing operations $ (0.27) $ (0.16) $ (0.91)
Basic and diluted net loss per common share from
discontinued operations (0.22) (2.40) (1.39)
--------- --------- ---------

Basic and diluted net loss per common share $ (0.49) $ (2.56) $ (2.30)
========= ========= =========



We have excluded all convertible preferred stock, warrants to purchase
common stock, outstanding stock options and stock subject to repurchase from
the calculation of diluted net loss per common share because all such
securities are antidilutive for all periods presented.

The securities excluded from the calculations of diluted net loss per
common share are as follows:



YEAR ENDED DECEMBER 31,
-----------------------
2001 2000 1999
---- ---- ----

Convertible preferred stock of a subsidiary -- 169,920 --
Stock options 1,967,529 3,540,209 3,344,040
Warrants to purchase stock 800,000 800,000 685,625
--------- --------- ---------

Total 2,767,529 4,510,129 4,029,665
========= ========= =========



FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used in estimating the fair
value of financial instruments:

Cash and Cash Equivalents: The carrying amount recorded in the balance
sheets for cash and cash equivalents approximates fair value due to the
short-term nature of such instruments.

Notes Receivable from Stockholders: The fair value of the notes
receivable from stockholders is not determinable due to the related party nature
of the instrument.

EFFECT OF NEW ACCOUNTING STANDARDS


F-13

RSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999


EFFECT OF NEW ACCOUNTING STANDARDS

During 2001, the Financial Accounting Standards Board (FASB) approved
for issuance Statement of Financial Accounting Standards (SFAS) 141, Business
Combinations, and SFAS 142, Goodwill and Other Intangible Assets. SFAS 141
provisions relating to the initial measurement and recording of goodwill and
intangible assets, as well as financial statement disclosures, are effective for
purchase business combinations completed after June 30, 2001. SFAS 142 is
effective for fiscal years beginning after December 15, 2001; however, certain
provisions of this Statement apply to goodwill and other intangible assets
acquired between July 1, 2001 and the effective date of SFAS 142. Major
provisions of these Statements and their effective dates for the Company are as
follows:

o All business combinations initiated after June 30, 2001 must use the
purchase method of accounting. The poolings of interest method of
accounting is prohibited except for transactions initiated before
July 1, 2001.

o Intangible assets acquired in a business combination must be
recorded separately from goodwill if they arise from contractual or
other legal rights or are separable from the acquired entity and can
be sold, transferred, licensed, rented or exchanged, either
individually or as part of a related contract, asset or liability.

o Goodwill, as well as intangible assets with indefinite lives,
acquired after June 30, 2001, will not be amortized. Effective
January 1, 2001, all previously recognized goodwill and intangible
assets with indefinite lives will no longer be subject to
amortization.

o Effective January 1, 2002, goodwill and intangible assets with
indefinite lives will be tested for impairment annually and whenever
there is an impairment indicator.

o All acquired goodwill must be assigned to reporting units for
purposes of impairment testing and segment reporting.

The Financial Accounting Standards Board also issued SFAS 143,
Accounting for Asset Retirement Obligations. SFAS 143 applies to all entities
that have legal obligations associated with the retirement of a tangible
long-lived asset that result from acquisition, construction, or development and
(or) normal operations of the long-lived asset. SFAS 143 requires that a
liability for an asset retirement obligation be recognized if the obligation
meets the definition of a liability in FASB, Concepts Statement 6, Elements of
Financial Statements, and if the amount of the liability can be reasonably
estimated, SFAS 143 is effective for financial statements issued for fiscal
years beginning after June 15, 2002.

In addition, the Financial Accounting Standards Board also issued SFAS
144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS 144
supercedes SFAS 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, as well as the provisions of Opinion 30,
Reporting the Results of Operations -- Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, that address the disposal of a business. SFAS 144 also
amended APR 51, Consolidated Financial Statements, to eliminate the exception to
consolidate a subsidiary for which control is likely to be temporary. SFAS 144
carries over the recognition and measurement provisions of SFAS 121, but differs
from SFAS 121 in that it provides guidance in estimating future cash flows to
test recoverability. SFAS 144 also includes criteria that have to be met for an
entity to classify a long-lived asset or asset group as held for sale, and
extends the presentation of discontinued operations permitted by Opinion 30 to
include disposals of a component of an entity. SFAS 144 is effective for
financial statements issued for fiscal years beginning after December 15, 2001,
except for the disposal provisions which are immediately effective.

The effects of the adoption of SFAS 141 did not have a material effect
on the Company's financial statements. We do not expect that the adoption of the
other accounting standards will have a material effect on the Company's
financial statements.



2. DISCONTINUED OPERATION

In February 2001, our board of directors approved a formal plan to
discontinue and dispose of the School business. These operations, which
comprised a significant portion of our assets and a majority of our revenues and
expenses, are reflected in the accompanying financial statements as
discontinued.

We have directed our full efforts toward furthering the development of
our Commercial business of building and managing large scale, satellite-based
networks for commercial customers and communities of interest.

The loss from discontinued operations consists of the following (in thousands):



YEAR ENDED DECEMBER 31,
-----------------------
2001 2000 1999
---- ---- ----

Revenue $ -- $ 3,128 $ 1,179
Revenue from affiliates -- 11,188 1,363
--------- --------- ---------

Total Revenue -- 14,316 2,542
Costs and expenses:
Costs of revenues 5,850 29,750 7,653
Sales and marketing -- 10,552 7,401
General and administrative -- 21,489 6,158
Research and development -- 6,318 2,583
Amortization of goodwill -- 2,387 --
Amortization of deferred stock compensation -- 4,977 6,056
--------- --------- ---------

Total costs and expenses 5,850 75,473 29,851
--------- --------- ---------

Loss from discontinued operations (5,850) (61,157) (27,309)

Estimated loss on disposal (6,410) (42,940) --
--------- --------- ---------

Loss from discontinued operations $ (12,260) $(104,097) $ (27,309)
========= ========= =========



F-14

RSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999


In 2001, we reported a loss from discontinued operations of $12,260,000
which was a result of a $5,850,000 charge recorded to cover principally the cost
of excess space segment bandwidth consumed by the School Business that resolved
a discrepancy between Spacenet, a related party, and the Company and $9,045,000
impairment charges to reflect a revised estimate of the net proceeds to be
obtained from the sale of computer equipment deployed in the School Business.
Initially, these assets were to be disposed of by bulk sale, and the value was
written down to such. However, these assets were disposed of on a piecemeal
basis which realized a much lower sale price, resulting in these impairment
charges. Partially offsetting these charges were actual expenses that were
$2,635,000 lower than the original estimates for which a reserve was established
in December 2000. Actual expenses were lower than original estimates due to a)
our original estimated date of disposal of our eFundraising subsidiary was the
end of June 2001, but we sold it in the beginning of June 2001, and b)
overestimates of estimated connectivity costs and personnel costs for the
discontinued school business to the actual date of disposal at June 30, 2001.

In 2000, we reported a loss from discontinued operations of
$104,097,000. Of this loss, $61.1 million reflects the cost, net of $14.3
million of revenue, of deploying and operating the advertiser-supported school
network. The other $42.9 million is the estimated loss on disposal of those
discontinued operations. This is comprised of asset impairment charges totaling
$34.2 million and estimated future net operating losses from January 1, 2001 to
the June, 2001 expected disposal date of $7.3 million. Severance and other
estimated expenses comprise the $1.4 million remainder.

In 2001, there was no stock-based compensation included in the loss
from discontinued operations. In 2000, stock-based compensation of $4,977,000
comprises $278,000 relating to sales and marketing, $4,380,000 relating to
general and administrative, and $319,000 relating to research and development.
In 1999, stock-based compensation of $6,056,000 comprises $1,187,000 relating to
sales and marketing, $4,370,000 relating to general and administrative, and
$499,000 relating to research and development.


Net assets of discontinued operations as of December 31, consists of
the following (in thousands):



2001 2000
---- ----

CURRENT ASSETS
Cash and cash equivalents $ -- $ 97
Accounts receivable 41 556
Other receivables -- 311
Prepaid expenses and other current assets 281 444
-------- --------
Total current assets 322 1408
Equipment, net -- 15,485
Goodwill -- 1,200
-------- --------

Total assets 322 18,093
Total current liabilities -- (623)
-------- --------

Net assets of discontinued operations $ 322 $ 17,470
======== ========








F-15

RSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999



3. EQUIPMENT

Equipment attributable to our continuing operations consists of the
following (in thousands):



DECEMBER 31,
------------
2001 2000
---- ----

Computer and office equipment $ 5,116 $ 5,294
Furniture and fixtures 1,199 1,599
------- -------
6,315 6,893
Less accumulated depreciation and amortization (4,420) (2,386)
------- -------
$ 1,895 $ 4,507
======= =======



Equipment includes $1,940,000 of computer and office equipment recorded
under capital lease obligations at December 31, 2001 and 2000. Accumulated
depreciation for such equipment as of December 31, 2001 and 2000 was $1,537,000
and $813,000, respectively.

4. STOCKHOLDERS' EQUITY





F-16




RSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999


In October 1999, we completed our Initial Public Offering and all
shares of preferred stock were converted into common stock. Subsequent to the
Initial Public Offering, we authorized 5 million shares of an additional series
of preferred stock. As of December 31, 2001 and 2000, no shares were issued and
outstanding. The holders of Series C preferred stock were accreted dividends in
1999. Additionally, redemption value privileges were accreted and charged to
accumulated deficit in 1999. Holders of the series C, D, and E preferred stock
received liquidation preferences in the form of common stock in connection with
the Initial Public Offering, in the amount of 309,299, 456,902, and 35,758
shares respectively, in the aggregate amount of $8,421,000.

Because of the proximity of the issues of the Series E preferred stock
to the commencement of our Initial Public offering, we concluded that a
beneficial conversion feature was present in the preferred stock on the date of
issuance. For purposes of evaluating this beneficial conversion feature, we
considered that the public offering price ($11.00) represented the fair value of
the common stock on the date the Series E was issued. As a result, we recorded a
deemed dividend charge of $10,150,000 with a corresponding increase to
Convertible Preferred Stock.

BRIDGE FINANCINGS

In February 1999, we issued a $200,000 note payable with an interest
rate of 10% per annum. The principal amount was converted into 40,000 shares of
Series D preferred stock in March 1999.


STOCK PLANS

We have a 1998 Stock Plan ("Stock Plan") which provides for the
granting of stock options or shares of common stock to employees, directors and
consultants. Stock options are exercisable immediately upon issuance (subject to
vesting agreements) and generally have a term of 10 years. Unvested options are
canceled upon termination of employment. The vesting schedule and other option
terms, subject to certain Stock Plan provisions, are determined by the
Compensation Committee of the Board of Directors at the time of issuance. Stock
options generally vest over a period of between three and four years. As of
December 31, 2001, we reserved 10,900,000 shares of our common stock for
issuance under the Stock Plan. The Stock Plan provides for an annual increase in
the number of shares available for issuance on the first day of our fiscal year
beginning in fiscal year 2000 equal to the lesser of (i) 2,000,000 shares, (ii)
5% of the outstanding shares of our common stock on such date, or (iii) such
other amount as determined by the Board of Directors. As of December 31, 2001,
there were 6,863,245 shares available for grant under the Stock Plan.

In connection with a reduction in force the stock option vesting period
for several terminated executives was extended, resulting in additional
compensation expense in 2000 of $589,000. In 2001, no stock option vesting
period was extended for terminated employees.


F-17

RSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999


A summary of activity under our stock option plan is as follows:



WEIGHTED-
AVERAGE
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
------ ---------
OPTIONS OUTSTANDING
-------------------

Outstanding at January 1, 1999 1,749,230 $0.80
Options granted 3,042,566 6.51
Options exercised (222,558) 0.34
Options canceled (406,104) 1.07
----------

Outstanding at December 31, 1999 4,163,134 $5.39
Options granted 2,389,316 3.09
Options exercised (425,541) 4.76
Options canceled (3,626,700) 5.76
----------

Outstanding at December 31, 2000 2,500,209 $7.79
Options granted 1,665,913 0.72
Options exercised (416,137) 0.64
Options canceled (1,812,456) 4.86
----------
Outstanding at December 31, 2001 1,937,529 $1.59
==========




The following table summarizes information concerning outstanding and
exercisable options at December 31, 2001:



OPTIONS OUTSTANDING OPTIONS VESTED AND EXERCISABLE
------------------- ------------------------------
WEIGHTED-
WEIGHTED- AVERAGE WEIGHTED-
AVERAGE REMAINING AVERAGE
NUMBER OF EXERCISE PRICE CONTRACTUAL NUMBER OF EXERCISE PRICE
EXERCISE PRICES SHARES PER SHARE LIFE (YEARS) SHARES PER SHARE
- --------------- ------ --------- ------------ ------ ---------

$ 0.02 - $ 0.25 150,169 $0.21 6.31 150,169 $0.21
$ 0.26 - $ 0.99 933,440 0.72 9.02 135,811 0.71
$ 1.00 - $ 1.99 309,000 1.10 6.74 308,000 1.10
$ 2.00 - $ 4.00 321,044 2.75 8.01 178,686 2.84
$ 4.01 - $ 20.00 223,876 5.14 7.95 102,540 5.30
--------- -------
1,937,529 $1.59 8.05 875,206 $1.73
========= =======



F-18

RSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999



PRO FORMA DISCLOSURES OF THE EFFECT OF STOCK-BASED COMPENSATION

Pro forma information regarding results of operations and net loss per
share is required by SFAS No. 123, which also requires that the information be
determined as if we had accounted for our employee stock options under the fair
value method of SFAS No. 123. The fair value for these options was estimated at
the date of grant using the Black Scholes method with the following weighted
average assumptions:



2001 2000 1999
---- ---- ----

Risk free rate 5.25% 6.0% 5.5%
Dividend yield 0% 0% 0%
Volatility 42% 97% 70%
Expected option life 2.0 years 3.5 years 3.5 years



The option valuation models were developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected life of the option. Because our
employee stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
our employee stock options.

Had compensation cost for our stock-based compensation plans been
determined using the fair value of each award at the grant dates, our net loss
(in thousands, except per share data) and pro forma basic and diluted net loss
per share would have been increased to the pro forma amounts indicated below:



YEAR ENDED DECEMBER 31
----------------------
2001 2000 1999
---- ---- ----

Continuing operations applicable to common stockholders
Net loss-as reported ($15,111) ($7,071) ($17,783)
Net loss-pro forma (15,158) (7,071) (17,783)
Net loss per share-as reported (0.27) (0.16) (0.91)
Net loss per share-pro forma (0.27) (0.16) (0.91)
Discontinued operations applicable to common stockholders
Net loss-as reported ($12,260) ($104,097) ($27,309)
Net loss-pro forma (13,337) (106,200) (27,920)
Net loss per share-as reported (0.22) (2.40) (1.39)
Net loss per share-pro forma (0.24) (2.45) (1.42)



F-19




RSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999

The weighted-average fair value of options granted for the three years
ended December 31, 2001, 2000, and 1999 was $0.47, $2.98, and $2.47,
respectively.

The pro forma net loss is not necessarily indicative of the effect on
pro forma net loss in future years, as future years will include the effects of
additional years of stock option grants.

1999 EMPLOYEE STOCK PURCHASE PLAN

Our 1999 Employee Stock Purchase Plan ("ESPP") was adopted by the board
of directors in August 1999 and approved by the stockholders in October 1999. As
of December 31, 2001, there were approximately 765,000 shares available for
grant under the ESPP. Eligible employees may purchase common stock at 85% of the
lower of the fair market value of our common stock on the first day or the last
day of the applicable six-month offering period at the date of purchase. In
addition, the ESPP provides for automatic annual increases in the number of
shares available for issuance on the first day of each fiscal year equal to the
lowest of 1,000,000 shares of common stock, 2% of the outstanding shares of our
common stock on the first day of the fiscal year, or such other amount as
determined by the Board of Directors.

DEFERRED COMPENSATION

During the year ended December 31, 1998, we granted an officer the
right to purchase 1,350,000 shares of common stock at a purchase price of
approximately $0.125 per share which was below the deemed fair market value at
the date of grant of $2.75 per share. As a result, we recorded deferred
compensation of $3,375,000 during the year ended December 31, 1998 representing
the difference between the price paid per share and the deemed fair value of our
common stock. These amounts were being amortized by charges to discontinued
operations over the vesting period of the stock of approximately four years
resulting in amortization of approximately $1,422,000 and $730,000 for the years
ended December 31, 1999 and 1998. In September 1999, the officer's employment
was terminated and subsequently, he brought an employment action against the
Company related to the aforementioned stock grant.

In October 2000, an arbitrator named us the prevailing party and
awarded a settlement in which: (i) we were given the right to repurchase 625,000
shares at $0.12 per share and the former officer was entitled to retain 250,000
shares of the 875,000 shares received under the related Restricted Stock
Purchase Agreement and (ii) we were given the right to repurchase 450,000 shares
at $0.12 per share and the former officer was entitled to retain 25,000 shares
of the 475,000 shares received under the Employee Bonus Stock Agreement for
1998. Pursuant to the settlement, we were obligated, to repurchase retained
shares awarded to the former officer at a fixed price of $3.81 per share. In
December 2000, we repurchased all the retained shares awarded to the former
officer for an amount of approximately $1,048,000. We also repurchased the
remaining 1,075,00 shares not awarded to the former officer, at a price of
$0.12 per share, amounting to $129,000.

We recorded deferred stock compensation during the two years ended
December 31, 1999, representing the excess of the deemed fair value of our
common stock over the exercise price on the grant date for certain of our stock
options granted to other employees. In the absence of a public market for our
common stock, the deemed fair value was based on the price per share of the
preferred stock financings, less a discount to give effect to the superior
rights of the preferred stock. These amounts are being amortized over the
vesting periods of the individual stock options using a graded vesting method.
Such amortization, including an additional charge related to modifications of
stock options, amounted to approximately $490,000, $5,239,000, and $6,056,000,
for the years ended December 31, 2001, 2000, and 1999, respectively. In
addition, during the years ended December 31, 2001 and 2000, the Company
reversed $ 35,000 and $5,738,000 respectively, of deferred compensation due to
cancellation of stock options.

Assuming no terminations of option holders, amortization of the
remaining balance in deferred stock compensation of $140,000 will be in fiscal
year 2002.

WARRANTS

We had the following warrants outstanding at December 31, 2001 to
purchase shares of stock:



NUMBER OF SHARES STOCK TYPES EXERCISE PRICE PER SHARE EXPIRATION OF WARRANTS
- ---------------- ----------- ------------------------ ----------------------

250,000 Common $3.00 May 2003
250,000 Common 3.50 May 2003
100,000 Common 5.00 June 2004
150,000 Common 5.00 December 2003
50,000 Common 5.00 September 2004

800,000


SHARES RESERVED FOR FUTURE ISSUANCE

At December 31, 2001, we had reserved shares of capital stock for
future issuance as follows:

F-20

RSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999




COMMON
STOCK
-----

Warrants to purchase stock 800,000
Stock options outstanding 1,937,529
Stock options and shares available for grant 6,863,245
Employee stock purchase plan 765,000



5. INCOME TAXES

There has been no provision for U.S. Federal, U.S. State, or foreign
income taxes for any period as we have incurred net operating losses in all
periods in all jurisdictions.

A reconciliation of income taxes at the statutory federal income tax
rate to net (loss) income taxes from continuing operations included in the
accompanying statements of operations is as follows:



YEAR ENDED DECEMBER 31
----------------------
2001 2000 1999
---- ---- ----

U.S federal taxes/(benefit)
At statutory rate (34.0%) (34.0%) 34.0%
State, net of federal benefit (7.6) (7.6) 6.2
Valuation allowance 41.6 41.6 --
Other -- -- (0.2)
----- ----- -----

Total 0.0% 0.0% 40.0%






Significant components of our net deferred tax asset are as follows (in
thousands):



DECEMBER 31,
------------
2001 2000
---- ----

Net operating loss carry forwards $ 51,182 $ 30,292
Accrued compensation 56 101
Other -- 136
Excess depreciation 434 2,068
Discontinued operations -- 3,752
Impairment 728 11,096
Bad debt allowance 107 561


Total net deferred tax asset 52,507 48,006
Valuation allowance (52,507) (48,006)


Net deferred tax asset $ - $ -



F-21

RSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999


Realization of deferred tax assets is dependent upon future earnings,
if any, the timing and amount of which are uncertain. Accordingly, the net
deferred tax assets have been fully offset by a valuation allowance. The
valuation allowance increased by approximately $4,501,000 and $38,030,000
during 2001 and 2000, respectively.

At December 31, 2001, we had net operating loss carryforwards for
federal income tax purposes of approximately $130,861,000, which expire in the
years 2013 through 2021. We also had net operating loss carryforwards for state
income tax purposes of approximately $75,671,000 expiring in the year 2006.
Utilization of our net operating loss may be subject to substantial annual
limitation due to the ownership change limitations provided by the Internal
Revenue Code and similar state provisions. Such an annual limitation could
result in the expiration of the net operating loss before utilization.

6. COMMITMENTS

We lease our office facility and certain office equipment under
non-cancelable lease agreements, which require us to pay a portion of operating
costs, including property taxes, insurance and normal maintenance. Rent expense
amounted to approximately $ 974,000, $1,174,000, and $244,000 for the years
ended December 31, 2001, 2000, and 1999, respectively.

Capital lease obligations represent the present value of future rental
payments under capital lease agreements for equipment in the school business.
Future minimum payments under capital and operating leases are as follows (in
thousands):



CAPITAL LEASES OPERATING LEASES
-------------- ----------------

Year ending December 31:
2002 $3,306 $489
2003 -- 4
------ ----
Total minimum lease payments $3,306 $493
====

Less amount representing interest (207)
------
Present value of minimum lease payments $3,099
======



In 1999, we entered into credit lines with a number of lease finance
companies for the purpose of acquiring computer and network equipment in
schools. These lease arrangements bear interest from 10.5% to 18% and have terms
ranging from 24 to 36 months. As of December 31, 2001, we had capital leases
with eight lessors, representing a total present value obligation of
approximately $3,099,000. No excess lease capacity exists on these leases.

In connection with the sale of our School business assets we have sold
most of the equipment collateralizing these lease agreements, and as a result,
we are in default of several covenants in these lease agreements. As such all of
the lease obligations have been classified in the accompanying balance sheets as
a current liability. As a remedy of default, the lessors may call the remaining
portions of these lease obligations as of December 31, 2001 as immediately due
and payable. No request for accelerated payout has been made by any lessor.

In addition, we issued letters of credit to two companies as security
against the leases, the collateral for which appears as restricted cash on our
balance sheet. The leases are also collateralized by the underlying computer
equipment. We have sold all the equipment that are securing these leases. Terms
of the letter of credit entitle the beneficiary to payment if we fail to make
all contractual payments.


F-22

RSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999


As of December 31, 2001 and 2000, the total present value of capital
lease obligations of $0 and $36,021,000 were attributable to Spacenet, Inc., a
related party.

Interest expense on capital leases was $1,803,000, $4,921,000, and
$960,000 for years ending December 31, 2001, 2000, and 1999, respectively. Of
those amounts, $904,000, $3,809,000, and $867,000 was attributable to our leases
with Spacenet, Inc., a related party. (See Note 1).

The Company is currently building an automotive collision network
designed to streamline workflow between collision shops, distributors,
suppliers, manufacturers, and insurers. Although all operations are now
directly conducted by the Company, we have agreed with the minority stockholder
of Auto Networks, Inc, to transfer to AutoNetworks, Inc., an 85% - owned
Subsidiary of the Company, the assets, liabilities and employees necessary to
conduct the business on terms yet to be agreed upon. We do not expect the
contribution of these net assets to have a material impact on the Company's
financial position. However, this action will diminish to 85% the Company's
share of those net assets and of future profits. The minority stockholders in
this subsidiary are responsible for developing this business.


7. RELATED PARTY TRANSACTIONS


NOTES RECEIVABLE FROM STOCKHOLDERS

In August 1999 a majority of our board of directors approved the
issuance of an immediately exercisable option to purchase 300,000 shares of our
common stock to one of our directors at an exercise price of $5.00 per share.
The shares were and are subject to a right of repurchase in favor of us, which
will expire at a rate of one third each anniversary date of the date of grant.
In September 1999, the officer exercised the right to purchase the shares. We
recorded deferred stock compensation of approximately $1.8 million, which is
being amortized by a charge to operations over the vesting period of the stock
using a graded vesting method. We have also loaned the amount necessary to pay
for the aggregate purchase price of the option, which has been secured by a full
recourse promissory note. The note has a term of four years and bears an
interest rate of 5.98%. The promissory note is due in September 2003. This
promissory note was amended in April 2001 to provide for the shares to serve as
the sole collateral for the loan. No charge to earnings was recorded upon the
change in collateral underlying the loan.

In September 1999, we hired a new chief executive officer. As part of
the officer's employment agreement, we granted a right to purchase 1,000,000
shares of our common stock at an exercise price of $5.00 per share. The shares
are subject to a right of repurchase in favor of us, which will expire at a rate
of twenty-five percent on the first anniversary of the grant date and one
forty-eighth of the shares at the end of each month thereafter. In September
1999, the officer exercised his purchase right and we recorded deferred stock
compensation of approximately $5.0 million, which is being amortized by a charge
to operations over the vesting period of the stock using a graded vesting
method. We loaned the amount necessary to pay for the aggregate purchase price
of the restricted stock, secured by a full recourse promissory note. The
promissory note, was amended in September 2000 to provide for the shares to
serve as the sole collateral for the loan, has a payment term of four years and
an interest rate of 5.98%. The promissory note is due in September 2003. No
charge to earnings was recorded upon the change in collateral underlying the
loan. In October 2000, we terminated our relationship with our chief executive
officer and entered into a consulting agreement with the officer that provided
for a two year consulting agreement at his then annual base compensation and
agreed to provide an office and secretarial expenses. Additionally, we
surrendered our right to repurchase his restricted shares and canceled his
options to purchase our common stock.

In connection with a dispute that arose subsequent to termination, in
January 2002, we entered into a Settlement Agreement and Mutual Release with,
our former Chief Executive Officer. The agreement provides the receipt of
$175,000 immediately; $275,000 for consulting fees to be paid in twice-monthly
installments commencing January 16, 2002 through and including January 31, 2003,
the principal sum of $7,388 payable immediately, and $6,000 monthly for a full
time secretary and office space commencing March 1, 2002 through and including
February 28, 2003. At December 31, 2001, we accrued for this amount in full,
which amounts to approximately $530,000.


F-23

RSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999


We recorded revenues totaling $0, $11,188,000, and $1,363,000 for
sponsorship and advertising for the three years ended December 31, 2001,
respectively, from affiliates with which we have strategic business alliances.
For revenue recognition purposes a party is deemed an affiliate if it shares
common board members, owns more than 5% of our stock or is a significant vendor
to us. All such revenue from affiliates was attributable to discontinued
operations.

We paid Aquatic Innovations, Inc., a company owned by the Company's
Chief Executive Officer, approximately $43,000 and $94,000 for office equipment
rental and other expenses incurred on our behalf in 2001 and 2000 respectively.
This financing arrangement, which was approved by the Board in 1999, concluded
in December 2001.

During the year 2001, we made additional investments of $509,000
consisting of cash advances of $320,000, accrued interest of $15,000, and
extended lines of credit of $174,000 to Ask Dr Tech, Inc., a company in which
our Company, and two of our directors, are preferred shareholders. Due to
operational and financial difficulties of Ask Dr Tech, Inc., the Company had to
write off the 2001 additional investments of $509,000, in addition to the
initial investment of $770,000 made in March, 2000. The total write-off booked
in December, 2001 was $1,279,000, of which $1,105,000 was recognized in to the
income statement, and $174,000 was previouly reserved.

We paid a director of the Company's Board $220,000 during the year
ended December 31, 2001 for consulting services in connection with the StarBand
Acquisition Agreement. The consulting services began on February 1, 2001, for an
initial term of six months at $20,000 per month, and has continued on a month to
month basis at $20,000 per month thereafter. These consulting services will
continue until the Acquisition Agreement is consummated.

8. BUSINESS COMBINATIONS

We completed two acquisitions during the year ended December 31, 2000;
eFundraising.com Corporation Inc. ("eFundraising.com") and LearningGate.com,
Inc. ("LearningGate.com"). Each acquisition was recorded using the purchase
method of accounting under Accounting Principles Boards Opinion No. 16 ("APB
No. 16.") The aggregate purchase price of the acquired companies, excluding
future contingent consideration, was $11,553,000, and was comprised of common
stock, preferred stock in a subsidiary, Time Accelerated Restricted Stock Award
Plan stock options ("TARSAPS") and cash. Results of operations for each
acquired company have been included in our financial results from the closing
date of each transaction.

In accordance with APB No. 16, all identifiable assets were assigned a
portion of the cost (purchase price) of the acquired companies on the basis of
their respective fair values. The entire purchase consideration in both
acquisitions was allocated primarily to goodwill on the accompanying
consolidated balance sheets and is being amortized over their estimated useful
lives, which is three years.

On May 10, 2000, we completed our acquisition of efundraising.com, a
company that offers fundraising endnote and services to schools and other
organizations. In connection with the acquisition, we issued a combination of
cash and securities totaling approximately $7,945,000 to acquire all of the
outstanding shares of eFundraising.com. The eFundraising.com purchase price
consideration recorded at closing was $7,945,000 consisting of $1,850,000 cash,
$5,500,000 Class A preferred shares (500,000 shares at $11.00 per share),
$198,240 Class C preferred shares consisting of 56,640 shares at $3.50 per
share, $198,240 Class D preferred shares consisting of 56,640 shares at $3.50
per share and $198,240 Class E preferred shares consisting of 56,640 shares at
$3.50 per share. All of the preferred shares issued pursuant to this
acquisition were issued by a subsidiary of the Company. The $11.00 value per
Class A preferred share was determined from the redemption price. The holders
of the Class A preferred shares had the right to convert such shares into rStar
common stock on a one-for-one basis. During the fourth quarter of 2000, Gilat
tendered for a majority of our outstanding shares. This event triggered a
"change in control" provision in the Class A preferred shares that allowed the
holders of the security to demand a redemption of face value of their shares.
In December of 2000, we repurchased for $5,500,000 all Class A preferred
shares.

The $3.50 value per share for the Class C, Class D, and Class E was
based on the closing market price of rStar common stock on May 10, 2000. The
169,920 preferred shares consisting of 56,640 shares of Class C, 56,640 shares
of Class D, and 56,640 of Class E, are convertible into rStar common shares.
These shares are not redeemable.

The LearningGate.com purchase price consideration on June 23, 2000 was
approximately $3,608,000 consisting of $858,000 cash, and $2,750,000 rStar's
common shares consisting of 999,958 shares at $2.75 per share. The $2.75 value
per share was the closing market price on June 23, 2000. Additional cash
consideration amounting to $329,000 represented loans for pre-closing direct
operating expenses of $267,000 and legal expenses of $62,000. Total cash
consideration, therefore, amounted to $1,187,000.

The acquired businesses were both components of our School business
and, as such, are part of discontinued operations. In connection with our exit
from the School business, we recorded an asset impairment charge of $8,000,000
to reduce the carrying value of goodwill to the estimated net realizable value
upon sale. Of that amount,$5,000,000 was attributable to eFundraising.com and
the balance to LearningGate.com. Goodwill in connection with LearningGate.com
was considered by management to be unrecoverable, as our principal products were
software tools to be used in the School business, which we are exiting. The
impairment to goodwill associated with eFundraising.com was based on
management's estimate of the proceeds to be received upon an expected sale of
the business.

The proforma results of operations for the years ended December 31,
2000 and 1999 would not be materially different from the amounts reported in the
consolidated statements of operations.

In April 2001 we issued 361,314 shares of common stock to the two
founders of eFundraising.com in exchange for the cancellation of all of the Time
Accelerated Restricted Stock Award Plan issued in connection with our
acquisition of the company. In June of 2001 we sold eFundraising.com in exchange
for approximately $1,727,000 the then-carrying value of its net assets.

9. UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL DATA:

Summarized quarterly supplemental consolidated financial information
for 2001 and 2000 is as follows:


F-24

RSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(In thousands, except for per share data)



QUARTER ENDED
-------------
TOTAL FOR THE
YEAR ENDED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 DECEMBER 31
-------- ------- ------------ ----------- -----------

2001
Revenue from continuing operations $ -- $ -- $ -- $ -- $ --
Revenue from discontinued operations -- -- -- -- --
--------- --------- --------- --------- ---------
Total revenue $ -- $ -- $ -- $ -- $ --
========= ========= ========= ========= =========
Costs and expenses continuing operations $ 2,728 $ 4,850 $ 3,681 $ 3,852 $ 15,111
Costs and expenses discontinued operations $ 12,350 ($789) $ 428 $ 271 $ 12,260
--------- --------- --------- --------- ---------
Total costs and expenses $ 15,078 $ 4,061 $ 4,109 $ 4,123 $ 27,371
========= ========= ========= ========= =========
Income (loss) from continuing operations $ (2,728) $ (4,850) $ (3,681) $ (3,852) $ (15,111)
Income (loss) from discontinued operations $ (12,350) $ 789 $ (428) $ (271) $ (12,260)
--------- --------- --------- --------- ---------
Total income (loss) $ (15,078) $ (4,061) ($ 4,109) $ (4,123) $ (27,371)
========= ========= ========= ========= =========
Net loss per share, basic and diluted
continuing operations $ (0.06) $ (0.09) $ (0.06) $ (0.06) $ (0.27)
Net loss per share, basic and diluted,
discontinued operations $ (0.28) $ 0.01 $ (0.00) $ (0.00) $ (0.22)
--------- --------- --------- --------- ---------
Net loss per share, basic and diluted $ (0.34) $ (0.08) $ (0.06) $ (0.06) $ (0.49)
========= ========= ========= ========= =========
Number of shares used in calculation 43,764 52,617 63,590 63,699 56,068

2000
Revenue from continuing operations $ -- $ -- $ -- $ -- $ --
Revenue from discontinued operations 5,410 7,256 767 883 14,316
--------- --------- --------- --------- ---------
Total revenue $ 5,410 $ 7,256 $ 767 $ 883 $ 14,316
========= ========= ========= ========= =========
Costs and expenses continuing operations $ 331 $ 398 $ 1,262 $ 4,839 $ 6,830
Costs and expenses discontinued operations 16,204 21,317 19,927 18,025 75,473
--------- --------- --------- --------- ---------
Total costs and expenses $ 16,535 $ 21,715 $ 21,189 $ 22,823 $ 82,303
========= ========= ========= ========= =========
Income (loss) from continuing operations $ 92 $ (305) $ (1,422) $ (5,223) $ (6,858)
Income (loss) from discontinued operations (10,794) (14,061) (19,160) (60,082) (104,097)
--------- --------- --------- --------- ---------
Total income (loss) $ (10,702) $ (14,366) $ (20,582) $ (65,305) $(110,955)
========= ========= ========= ========= =========



Net loss per share, basic and diluted
continuing operations $ (0.00) $ (0.01) $ (0.03) $ (0.12) $ (0.16)
Net loss per share, basic and diluted,
discontinued operations $ (0.25) $ (0.33) $ (0.44) $ (1.35) $ (2.40)
--------- --------- --------- --------- ---------
Net loss per share, basic and diluted $ (0.25) $ (0.34) $ (0.47) $ (1.47) $ (2.56)
========= ========= ========= ========= =========
Number of shares used in calculation 42,236 42,464 43,765 44,315 43,348



F-25



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Form 10-K to be signed
on our behalf by the undersigned, thereunto duly authorized on this 7th day of
March 2002.



rSTAR CORPORATION


/s/ Lance Mortensen
By: President and Chief Executive Officer


POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoint Robert Edwards and David S. Wallace, as
such person's attorney-in-fact, with the power of substitution, for him or her
in any and all capacities, to sign any amendments to this Annual Report on Form
10-K and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorney-in-fact, or his or her
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934,
this Form 10-K has been signed below by the following persons on March 1, 2002
on behalf of the Registrant and in the capacities indicated:



SIGNATURES TITLE DATE
---------- ----- ----


/s/ Lance Mortensen President, Chief Executive Officer (principal executive March 7, 2002
officer) and Chairman of the Board of Directors

/s/ Robert Edwards Chief Financial Officer (principal financial and accounting March 7, 2002
officer)

/s/ Charles C. Appleby Director March 7, 2002


/s/ Michael Arnouse Director March 7, 2002


/s/ Sasson Darwish Director March 7, 2002


/s/ Amiel Samuels Director March 7, 2002


INDEX TO EXHIBITS

EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------ -------------------

2.1 Acquisition Agreement dated as of April 23, 2001 by and among
Gilat to Home Latin America (Holland) N.V., rStar Corporation,
and Gilat Satellite Networks Ltd. relating to the acquisition
of StarBand Latin America (Holland) B.V. (schedules and exhibits
omitted). (1)

2.2 Agreement dated as of April 23, 2001 by and between rStar
Corporation (formerly known as ZapMe! Corporation), a Delaware
corporation, and Spacenet Inc., a Delaware corporation. (2)

2.3 Amended and Restated Acquisition Agreement dated as of September
7, 2001 by and among Gilat to Home Latin America (Holland) N.V.,
rStar Corporation, and Gilat Satellite Networks Ltd. relating to
the acquisition of StarBand Latin America (Holland) B.V.
(schedules and exhibits omitted). (3)

2.4 Second Amended and Restated Acquisition Agreement dated as of
December 31, 2001 by and among Gilat to Home Latin America
(Holland) N.V., rStar Corporation, and Gilat Satellite Networks
Ltd. relating to the acquisition of StarBand Latin America
(Holland) B.V. (schedules and exhibits omitted). (4)

3.1 Third Amended and Restated Certificate of Incorporation (effective
March 19, 2001). (5)

3.2 Bylaws (Amended and Restated as of January 4, 2001). (5)

4.1 Specimen Stock Certificate of Registrant. (5)

10.1 Employment Agreement by and between David Wallace and rStar
Corporation dated April 2, 2001. (6)

10.2 Employment Agreement by and between Robert Edwards and rStar
Corporation dated April 2, 2001. (6)

10.3 Employment Agreement by and between Christophe Morin and rStar
Corporation dated April 2, 2001. (6)

10.4 Employment Agreement by and between Jay Scott and rStar
Corporation dated April 2, 2001. (6)

21.1 Subsidiaries of the Registrant.

23.1 Consent of Grant Thornton LLP, Independent Certified Public
Accountants.

23.2 Consent of Ernst & Young LLP, Independent Auditors.

24.1 Power of Attorney (which is included as part of the signature
page of this 10-K).


(1) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed on April 23, 2001.

(2) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed on May 23, 2001.

(3) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed on September 14, 2001.

(4) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed on January 17, 2002.

(5) Incorporated by reference to the Registrant's Annual Report on Form 10-K
filed on April 17, 2001.

(6) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
filed on August 21, 2000.

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