SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D. C. 20549

                                    FORM 10-K

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

For the fiscal year ended September 30, 1997

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

For the transition period from _________________ to ________________________

                        Commission file number 000-22017

                          NACT TELECOMMUNICATIONS, INC.
             (Exact name of registrant as specified in its charter)

            Delaware                                        87-0378662
(State or Other Jurisdiction of                 (I.R.S. Employer Identification
incorporation or organization)                  Number)

191 West 5200 North, Provo, Utah                               84604
(Address of Principal Executive Offices)                    (Zip Code)

       Registrant's telephone number, including area code: (801) 802-3000

       Securities registered pursuant to Section 12(b) of the Act: None


                                               Name of each exchange
      Title of each class                       on which registered
      -------------------                       -------------------

        Securities registered pursuant to Section 12(g) of the Act:

                          Common Stock, $0.01 par value

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  the  Registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. /X/

The  aggregate  market  value at December  23, 1997 of the  Registrant's  Common
Stock, $0.01 par value (based upon the closing price of $15.00 per share of such
Shares on the Nasdaq Stock Market),  held by  non-affiliates  of the Company was
approximately  $45,226,275.00.  Solely  for the  purposes  of this  calculation,
shares held by directors and officers of the Registrant have been excluded. Such
exclusion should not be deemed a determination or an admission by the registrant
that such individuals are, in fact, affiliates of the Registrant.

At  December  23,  1997,  there  were   outstanding   8,128,797  shares  of  the
registrant's Common Stock, $0.01 par value.


<PAGE>

                       DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the registrant's  definitive proxy statement to be filed not
later than  January 28, 1998  pursuant to  Regulation  14A are  incorporated  by
reference in Items 10 through 13 of Part III of this Annual Report on Form 10-K.


<PAGE>
                                TABLE OF CONTENTS

                                                                        PAGE NO.
                                                                        --------

PART I

Item 1        Business                                                       3
Item 2        Properties                                                    15
Item 3        Legal Proceedings                                             15
Item 4        Submission of Matters to a vote of Security Holders           16

PART II

Item 5        Market for  Registrant's  Common  Equity and
              Related  Stockholder Matters                                  16
Item 6        Selected Financial Data                                       17
Item 7        Management's  Discussion  and Analysis of
              Financial  Condition and Results of Operations                19
Item 7A       Quantitative and Qualitative Disclosures about Market Risk    23
Item 8        Financial  Statements and Supplementary Data                  23
Item 9        Changes in and  Disagreements  with  Accountants on
              Accounting and Financial Disclosures                          46

PART III

Item 10       Directors and Executive Officers of the Registrant            46
Item 11       Executive Compensation                                        46
Item 12       Security Ownership of Certain Beneficial Owners
              and Management                                                46
Item 13       Certain Relationships and Related Transactions                46

PART IV

Item 14       Exhibits, Financial Statement Schedules, and Reports
              on Form 8-K                                                   46


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FORWARD-LOOKING STATEMENTS
This Form 10K contains certain forward-looking  statements within the meaning of
Section 27A of the  Securities  Act of 1993, as amended,  and Section 21E of the
Securities Exchange Act of 1934, as amended, which are intended to be covered by
the safe  harbors  created  thereby.  Although  the  Company  believes  that the
assumptions  underlying  the  forward-looking  statements  contained  herein are
reasonable, any of the assumptions could be inaccurate, and therefore, there can
be no assurance that the  forward-looking  statements included in this Form 10-K
will prove to be accurate.  Factors  that could cause  actual  results to differ
from the results discussed in the forward-looking  statements  include,  but are
not limited to, the  Company's  dependence on recently  introduced  products and
products under development,  competition and the impact of technological  change
on the Company's products. In light of the significant uncertainties inherent in
the  forward  -looking   statements  included  herein,  the  inclusion  of  such
information  should not be  regarded as a  representation  by the Company or any
other person that the objectives and plans of the Company will be achieved.


                                     PART I

ITEM 1 - BUSINESS

General

NACT  Telecommunications,  Inc. (the "Company") was incorporated in the State of
Utah in January 1982. The Company  reincorporated  in Delaware in February 1997.
The  Company's  address  is 191 West  5200  North,  Provo,  Utah  84604  and its
telephone number is (801) 802-3000.

The  Company  provides  advanced  telecommunication   switching  platforms  with
integrated  applications software and network telemanagement  capabilities.  The
Company designs,  develops and  manufactures all hardware and software  elements
necessary for a complete fully integrated,  turnkey telecommunications switching
solution.  Its  customers do not require the multiple  suppliers of hardware and
value added resellers of software that would otherwise be necessary to provide a
wide  range of  services  and  applications.  The  Company's  customers  include
national  and  international  long  distance  carriers,  prepaid  debit card and
prepaid  cellular  network  operators,   international  call  back/reorigination
providers and other specialty telecommunications service providers.

The  Company's  products  and  services  include the STX  application  switching
platform,  the NTS  telemanagement  and billing  system (the "NTS"),  facilities
management  services,  and selling and servicing LCXs. The STX (the "STX") is an
integrated  digital tandem switching system that currently  supports up to 1,344
ports per switch and can be combined with two additional STXs to provide a total
capacity  of 4,032  ports  per  system.  The STX  includes  proprietary  systems
software that enables  standard  applications  such as 1+ and optional  advanced
applications such as international call  back/reorigination,  prepaid debit card
and prepaid  cellular.  The  Company has  targeted  the STX,  with its  enhanced
features and scaleable  capacity,  to an expanded group of customers,  including
independent  telephone companies,  CAPs/CLECs,  shared tenant service providers,
Fortune 1000  corporations and local telephone  companies within and outside the
United  States.  The NTS performs call rating,  accounting,  switch  management,
invoicing and traffic  engineering for multiple switches that may either be NACT
switches or a number of other industry switches. In conjunction with the sale of
a system, the Company offers a facilities management service whereby the Company
will  operate and  maintain a  customer's  switch for a fee. In  providing  this
service,  the Company  enables its  customers to direct their  attention  toward
marketing their products rather than initially focusing on the technical aspects
of operating a switch.

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CURRENT YEAR'S DEVELOPMENTS

The Company  completed an initial public offering ("IPO") of its common stock in
March 1997.  A total of 3,000,000  shares of Common  Stock were sold;  2,000,000
shares by the Company  and  1,000,000  shares by GST USA,  Inc.,  the  Company's
parent  ("Selling  Shareholder"  or "GST USA").  The selling price per share was
$10.00.  The Company  and the Selling  Shareholder  received  gross  proceeds of
$20,000,000 and $10,000,000,  respectively. The net proceeds to the Company from
the sale,  after deducting  underwriting  discounts and offering  expenses,  was
approximately  $18,067,000.  The Company did not receive any  proceeds  from the
sale of Common Stock by the Selling shareholder.

On  July 1,  1997  the  Company  completed  the  planned  move of its  corporate
headquarters and  manufacturing  facilities from Orem, Utah to Provo,  Utah. The
new  building  was paid for from the  proceeds of the IPO.  The new facility has
increased the Company's  manufacturing  capabilities by approximately  300%. The
Company's former corporate  headquarters  and  manufacturing  facility was being
leased on a month to month basis.

In Fiscal 1997,  the Company opened new sales and technical  support  offices in
Florida, New York, New Jersey and in the United Kingdom.  Also, the Company made
its first  international  sales of its STX and NTS products in the fiscal fourth
quarter of 1997.

INDUSTRY BACKGROUND

Deregulation  of long distance  phone service in 1984 opened  competition in the
telecommunications market to companies such as MCI Communications, Inc. ("MCI"),
Sprint  Corporation  ("Sprint"),  WorldCom Inc.  ("WorldCom"),  and many smaller
specialty services providers.  Today, there are over 450 long distance companies
in the United  States  according to the FCC. In addition to basic long  distance
calling (1+), many of these companies are providing high value added,  specialty
long distance products such as international  call  back/reorigination,  prepaid
debit card and prepaid cellular to differentiate  their services from each other
and to generate  higher margin  revenue than basic long distance  phone services
can provide.

International call  back/reorigination,  International  call  back/reorigination
companies  provide  least cost long distance  calling  services from one foreign
country to another through the use of a switch located in the United States that
takes  advantage  of the  lower  rate per call  charged  in the  United  States.
According to M.J. Scheele and Associates  ("M.J,  Scheele"),  the  international
call back/  reorigination  market  increased  from $300  million in 1994 to $485
million in 1995,  with  estimated  growth in 1996 to over $750  million and over
$1.1 billion by 1997.  M.J.  Scheele also estimates that growth in the number of
call back  reorigination  providers will continue as well from 103 by the end of
1995 to 144 by the end of 1996 and 188 by the end of 1997. The Company  believes
that as  deregulation  takes place in  specific  countries,  international  call
back/reorigination  providers will be positioned for additional opportunities to
provide  direct  dial  international  calling  by  virtue  of their  established
customer base.

Prepaid debit  cards/Prepaid  cellular.  Prepaid debit cards allow users to make
long distance calls from any touch tone phone based on a given number of minutes
that have been  credited to the card.  Prepaid debit card  applications  include
promotional  campaigns,  fund raising for charitable  organizations and budgeted
out-of-town calling for travelling employees.  In addition,  prepaid debit cards
allow long distance  companies to generate revenues from a base of customers who
would  otherwise  not have the  opportunity  to take  advantage of long distance
services due to credit and other considerations. The United States prepaid debit
card market is expected to grow from $12.0 million in 1992 to approximately $1.1
billion in 1996 to over $2.0 billion in 2000, according to MultiMedia Publishing
Company ("MultiMedia"). An emerging application in the prepaid market is prepaid
cellular,  a service whereby cellular phone users can limit their monthly dollar
usage automatically in the same manner that a prepaid debit card limits the time
a user can call. The Company believes that the potential prepaid cellular market
is not currently being effectively addressed in the United States. The potential
market,  which,  according to MultiMedia,  is approximately  $1.5 billion and is
expected to exceed $3.0 billion by 2000, consists of a large number of potential
users who either are denied  traditional  cellular service due to lack of credit
or need to limit the usage of cellular service. Prepaid cellular offers a way to
capture revenue from these potential subscribers.

1+. One plus is a dialing method that enables equal access to telephone networks
by all service providers  offering direct dial long distance,  whether inside or
outside of a caller's own area code. This protocol also enables the introduction
of telephone  exchanges with the same three digits as area codes.  The 1+ market
is comprised of both large global  companies  including  MCI,  Sprint,  AT&T and
WorldCom and smaller,  entrepreneurial  long distance  providers that are either
facilities based or switchless.  Historically,  these smaller specialty services
providers  have  competed  exclusively  based on  price.  However,  the  Company
believes that these companies are competing  increasingly based on their ability
to provide enhanced services as well as on price. According to Frost & Sullivan,

                                       4
<PAGE>
revenues in the United States 1+ market are predicted to exceed $70.0 billion by
1998.  The  share of total  long  distance  revenues  related  to  international
services  rose from 16.0% in 1994 to 17.0% in 1995 and is likely to exceed 20.0%
by 1999. Additionally,  Frost & Sullivan estimates that the international market
is growing over two times as fast as the domestic market.

As long distance service providers have  increasingly  offered enhanced services
to their  customers,  demand for these  services has also increased in the local
exchange  market.  Competitors  such as Competitive  Access  Provider  ("CAPS"),
Competitive   Local   Exchange   Carrier   ("CLECs"),   cellular   and  Personal
Communications  Services Providers  ("PCS"),  specialized mobile radio companies
and, more recently,  cable  television  providers  have begun rapidly  deploying
enhanced  services and  providing  cost  effective  interfaces  to long distance
carriers.  In  addition,  the  Telecommunications  Act of 1996  allows  CLECs to
compete with the  incumbent  Local  Exchange  Carrier  ("LEC")  (generally,  the
Regional  Bell  Operating  Company or GTE) for basic  local  telephone  service.
NationsBanc  Capital  Markets,  Inc., in 1996,  estimated  that the business and
institutional market for telecommunications  services totals approximately $72.0
billion, all of which is addressable by CLECs. Additionally, demand for enhanced
services is expected to increase  internationally  as new service  opportunities
result from the  combination  of  privatization  of previously  government-owned
telecommunications  systems,  competition created in these international markets
and the  creation  of  services  in  developing  countries  with  typically  low
densities of telephones.

The Company  believes that companies  competing in this new environment  require
switching platform systems that are flexible to meet the diverse requirements of
an expanding  array of  applications.  These systems must be compatible with the
variety of transmission technologies utilized by telephone companies and must be
capable of processing multiple concurrent services. In order to provide enhanced
services to end users,  a provider  must  purchase (i) one or more  applications
switch  platforms,  (ii) software  applications  to run the switches and provide
system functionality and (iii) a billing system.  Historically,  an entrepreneur
interested in entering the international call back/ reorigination, prepaid debit
card and prepaid  cellular markets had to purchase each of these components from
a separate  vendor.  Customers who purchase  components  from different  sources
must, either on their own or through the services of a consultant, configure the
disparate  components  and provide for the system's  maintenance  and upgrading.
This   requires  a   significant   expenditure   of  time  and   money,   limits
interoperability and technology  upgrading,  and diverts company resources.  The
Company  believes  that in today's  market  environment  its  customers  require
solutions that allow quick,  easy entry into the market,  flexibility to add new
services and additional capacity, high reliability and low cost.

THE NACT SOLUTION

The  Company  provides  its  customers  with  a  complete,   integrated  package
consisting  of  both  the  application  platform  hardware  and  the  operations
application  software  necessary to provide a full array of intelligent  network
services.  The Company offers a switching solution that includes essentially all
of the key elements  necessary to enable a customer to offer  enhanced  services
such as; the  installation  of the switch,  the training of the customer for the
use  of  the  switch,  available  applications,  a  billing  system,  consulting
services, and ongoing customer support. The Company believes that it is the only
provider  of  a  system  that  integrates  all  of  these  components  into  one
comprehensive  package that includes a broad range of applications,  competitive
pricing,  interoperability  and scaleable port  capacity.  The Company sells its
products  to  long  distance  carriers,  international  call  back/reorigination
providers,  prepaid debit card and prepaid cellular network  operators and other
specialty telecommunications service providers.

The Company offers a turnkey system,  integrated with customer  support that can
be quickly  implemented and upgraded to meet evolving market  requirements.  The
Company  makes  available  to  its  customers  a full  array  of  technical  and
commercial support on a 24-hour-a-day,  seven-day-a-week basis. The Company also
offers to manage and  operate a  customer's  application  platform  and  provide
competitively priced network services. Further, the Company continually develops
enhancements  to its software  applications in an effort to enable its customers
to utilize the latest  technologies and most efficient  systems  available.  The
Company strives to address its customers'  specific needs and regularly enhances
its products to meet such needs.  The Company  believes its products  enable its
customers to enter the  marketplace  and expand their  businesses with increased
switching capacity and software applications as the need arises.

THE NACT STRATEGY

The Company's objective is to be a leading  manufacturer and supplier of turnkey
solutions to providers  of enhanced  telecommunications  services on a worldwide
basis. Key elements of the Company's strategy are to:

o        Provide a Complete  Integrated  Switch Solution.  The Company's product
         strategy  is to  offer a  switching  platform  consisting  of both  the
         hardware  and  software  necessary  to  provide   intelligent   network
         services, thus offering a single source solution to its customers.  The

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         Company provides its customers with a switching  solution that includes
         essentially  all of the key elements a customer needs to offer enhanced
         telephone  services.  The Company's package also includes  installation
         and   training   with  respect  to  the  use  of  the  switch  and  the
         applications.  The Company  offers  facilities  management  services to
         operate and maintain a  customer's  switch.  In  addition,  the Company
         offers long  distance  carrier  services to its  facilities  management
         services  customers.  Currently,  this long distance carrier service is
         provided to customers with  operations  primarily in Brazil and Eastern
         Europe.

o        Focus on  Growth-Oriented  Telecommunications  Providers.  The  Company
         focuses on emerging  providers  of  enhanced  long  distance  and local
         telecommunications  services that are entering existing service markets
         recently  opened to  competition.  The Company expects to capitalize on
         the opportunities created by the deregulation of the telecommunications
         industry  worldwide  and the resulting  increased  demand for advanced,
         integrated  telecommunications switching equipment by offering enhanced
         services  and  network  management  and  billing  systems.  The Company
         believes that as the  telecommunications  industry continues to evolve,
         individual providers will offer more diverse services and, as a result,
         will  require  intelligent   switches  with  application  software  and
         flexible billing systems.

o        Build Direct Sales  Organization.  The Company  believes  that a direct
         sales organization that understands and can solve complex switching and
         network  management  and billing  system  requirements  will enable the
         Company  to  increase  product  sales to  specialty  telecommunications
         network  service  providers.  The  Company  has  an  established  sales
         presence  in Utah,  New York and  Florida.  The  Company  is  currently
         establishing  a sales  presence  in the United  Kingdom  and intends to
         further   expand  its  sales   organization   both   domestically   and
         internationally.

o        Target Customers with Large Capacity  Requirements.  Historically,  the
         Company  has  focused  its  sales  and  marketing   efforts  on  small,
         entrepreneurial telecommunications service providers for which 480 port
         integrated  switching  systems  were  adequate to serve their  customer
         base. With the introduction of the STX and its enhanced,  interoperable
         feature set and capacity to provide 4,032 ports, the Company is capable
         of addressing the port requirements of larger customers.  This customer
         base  consists of larger  IXCs and LECs,  rural  independent  telephone
         companies,    CLECs,    organizations    with    large    volumes    of
         telecommunications traffic (especially multinational  corporations) and
         manufacturers  of  large  port  capacity  switches  that  do  not  have
         integrated capabilities to provide enhanced telephony services.

o        Expand  into  International  Markets.  The  Company  believes  that the
         international  markets for  competitive  services  present  significant
         opportunities for its products. To facilitate the implementation of its
         international  strategy,  the Company is  developing  and  adapting its
         existing products to meet international standards such as international
         dialing plans, E-1 and R-2 signaling.  The Company intends to build its
         international  presence  by forming  relationships  with  distributors,
         service providers and large telecommunications  equipment manufacturers
         and by creating an international sales force.

o        Maintain a High Level of Customer Satisfaction. The Company's customers
         operate in an  environment in which  reliability  and  availability  of
         technical  support are  increasingly  critical  factors.  The Company's
         manufacturing and technical support  operations are intended to achieve
         high reliability of its products and services.  The Company's technical
         support staff provides business  consulting as well as trouble-shooting
         services to its customers.  The Company  believes that its research and
         development   efforts   contribute   materially  to  ongoing   customer
         satisfaction by providing product features requested by customers.  The
         Company makes a significant number of sales as a result of repeat sales
         and referrals  from its existing  customers.  The Company also believes
         that  significant  investments  in  research  and  development  will be
         important in  maintaining  and building its customer  base.  During the
         year, the Company opened new technical support offices in Florida,  New
         Jersey and the United Kingdom.

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PRODUCTS

The Company's product line consists of the STX Switching System, the NTS billing
system and the LCX switching platforms.

THE STX SWITCHING SYSTEM
The  Company's  STX  Switching  System  consists  of an  integrated  application
switching  platform and a suite of applications  software.  The Company sells an
optional companion Master Control Unit ("MCU") to integrate and service multiple
STXs and to add  redundancy to the network.  The Company has targeted the STX to
an  expanded  group  of  customers,  including  larger  enhanced  long  distance
providers,  independent telephone companies,  CAPs/CLECs,  shared tenant service
providers,  Fortune 1000  corporations  and local  telephone  companies in other
countries. The Company believes that its STX switching platform meets or exceeds
the scaleability,  performance,  interoperability  and reliability  standards of
this  expanded  customer  base.  The Company  believes that the STX offers value
added features and capacity at price points typically below those offered by its
competitors.

The STX application  switching  platform was designed as a hardware platform for
the enhanced  service  features that are delivered by the Company's own suite of
applications software. The STX platform consists of a digital tandem switch that
currently  supports up to 1,344 ports per switch.  It is a single chassis design
with dual disk drives or RAID mass storage,  digital  audiotape (DAT) or digital
linear tape (DLT) back-up, console and dual modems. The simplicity of its design
makes it a  reliable  hardware  platform  to which  enhanced  telecommunications
service features can easily be added by software. The STX platform has also been
designed so that users can easily replace boards by hotswapping  them, a process
that does not require the user to shut down or temporarily disable the switching
system.

The  STX   applications   switching   platform  has  a   cost-effective   design
incorporating only three types of boards, CPU, T-1 and DSP, and a chassis with a
backplane that supports 2,048 time slots.  The current CPU board is powered by a
33 MHz  Motorola  68040  processor  and  contains 64 or 128  megabytes of RAM, a
SCSI-2 peripheral interface,  two ARCnet LAN controllers (backplane and external
for  communication  with the MCU and other STX  switches),  eight RS-232  serial
ports and alarm LEDs and external relays. The T-1 board is powered by a Motorola
processor and has two megabytes of RAM, an ARCnet LAN controller,  and eight T-1
interface  controllers  that  handle  192  ports.  The DSP board uses a Motorola
processor  with  eight  megabytes  of  RAM,  an  ARCnet  controller,  three  DSP
processors  (96 or 120 channels of tone  decoding or encoding)  and a 64-channel
audio  device for the playback of  integrated  audio  messages or the  temporary
recording  of  audio.  Each  DSP  board  may  cache  up to  seven  megabytes  of
frequently-used  audio  phrases,  regardless  of language.  All boards have been
designed with low-cost components.

The STX hardware platform can operate on a standalone basis with a port capacity
of 1,344.  The  Company's  optional MCU can link up to three STXs , which can be
served by a common database for a total system capacity of 4,032 ports.  The STX
is also designed to work  seamlessly  with the Company's NTS 1000 and future NTS
2000 billing systems.

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APPLICATIONS SOFTWARE
The Company's suite of STX  applications  software  consists of over one million
lines of code. This software supports major application  features that are fully
integrated and  interoperable.  The major applications  features include:  equal
access calling (1+),  automated  operator (0+), live operator  service  provider
support (0-), real-time  validation of credit card and billing numbers,  prepaid
debit cards, prepaid cellular, international call back, phone centers, real-time
rating,   fraud   minimization,   external  computer   application   programming
interfaces, call re-origination, and integrated audio with twenty two languages.
Interoperability enables several applications packages to be used in conjunction
with each other.  For example,  a prepaid,  international  call back call can be
assisted  by  a  live  operator  and  rated  as  a  prepaid,  operator-assisted,
international  call back call.  Almost all features are implemented in software,
allowing unlimited capability for enhancement and customization.

MASTER CONTROL UNIT

The Master  Control  Unit allows  interconnectivity  between  multiple  NACT STX
platforms and permits database  information to become  centralized by connecting
co-located  NACT  systems.   Interconnectivity  permits  expanded  carrier  call
routing.  With more ports  available due to the MCU, the  likelihood of a caller
receiving a "system busy" signal is essentially eliminated. Downtime of a single
switch has minimal caller impact when proper carrier management is used.

THE COMPANY'S STX SWITCHING APPLICATIONS PLATFORM

Scaleability.  The STX architecture allows configurations from 24 to 1,344 ports
in a single  chassis.  The MCU allows up to three STX platforms to use a single,
common  database  and to appear as a single  applications  system of up to 4,032
ports with common control of required features such as concurrency  checking and
fraud  minimization.  This  performance is achieved  using the current  Motorola
68040  CPU  board.  With a new  CPU  board  under  development  by the  Company,
incorporating  a Motorola  68060  microprocessor,  the STX and MCU systems  will
achieve  the full  capacity  of their  architectures  of 2,048 and 8,192  ports,
respectively.

Performance. The STX applications platform with the Motorola 68040 CPU board can
process seven to eight million call minutes per month in a 1,024 port nonblocked
configuration. The Motorola 68060 processor will increase capacity to 15 million
call minutes in a 2,048 port nonblocked configuration. By linking four STXs with
the MCU,  capacity  will be increased to up to 60 million call minutes per month
using the Motorola 68060 CPU board.

Interoperability.  The STX  applications  platform  has been  developed to allow
multiple  application  packages to run simultaneously and in a seamless fashion.
An   example   would   be  a   client   wishing   to  use   international   call
back/reorigination,  with the  assistance of an operator to place the call,  and
the cost of the call being debited from the client's  prepaid  calling  account.
Virtually  all  features are  implemented  in the  software  allowing  unlimited
capability for enhancement and customization.

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<PAGE>
Reliability.  The STX applications platform is designed using digital components
and is capable of running on single or redundant power  supplies.  When multiple
STX  platforms  are placed  under the control of an MCU, the failure of a single
STX platform is handled  through carrier routing of calls into the remaining STX
systems.  With the  introduction of the redundant MCU feature,  the failure of a
single STX will not compromise the routing of calls through the system.

NTS BILLING SYSTEM

The NTS 1000 is a call rating,  accounting,  switch  management,  invoicing  and
traffic  engineering  system designed to process the day-to-day  operations of a
small-to-medium sized long distance company. The NTS 1000 can collect calls from
most major switching platforms  including the STX and LCX application  platforms
and can rate all types of call traffic and, using a sophisticated rating engine,
provides  the owner with a highly  flexible  and  completely  customized  rating
capability.  The accounting  system handles all of the required  information for
managing a long distance customer base including  configuration of authorization
codes, ANIs, accounts receivable, and management of delinquent accounts. A major
feature of the NTS 1000 is its switch management  capability.  When coupled with
the STX and LCX application  platforms,  information  that has been entered into
the NTS 1000 can be  electronically  transferred  into  these  systems,  thereby
minimizing data entry needs. This integrated  communication between the NTS 1000
and the LCX and STX also allows for automatic  disabling of authorization  codes
or ANIs  when  credit  limits  are  exceeded.  The NTS 1000  also  has  complete
international call back/reorigination and prepaid debit card management support,
as well as a complete  invoicing  package that supports  multiple invoice styles
and options for summary  reports.  It has a  sophisticated  traffic  engineering
reporting package that provides the ability to generate over 20 types of reports
with a user specified beginning and ending time range.

The NTS 1000 system  uses high  performance  Pentium,  Pentium Pro or Pentium II
servers  using RAID and error  correcting  code (ECC)  memory with the option of
adding  additional  processors.  It uses SCO's latest Unix offering,  5.0, which
supports  multiple  processors  and has  full  LAN  support  and  enhanced  Unix
graphical user interface (GUI) system  administration  tools.  The NTS 1000 uses
Unify's relational database management system (RDBMS) for storage of information
and for  screen  entry  and  reports.  Access to the  application  can be either
through a LAN  using a  terminal  emulation  package  on PCs or using  terminals
connected directly through RS-232 ports.

The NTS 2000 is the Company's next generation  billing system.  This system is a
state-of-the-art   product   incorporating  leading  edge  technology  and  data
processing  techniques.  This new product  integrates  the popular  features and
functionality  of our existing NTS 1000 billing system with the following  major
enhancements:  real time data  processing  including  call  collection  and call
rating,  user friendly graphical user interface (GUI), open system  connectivity
which allows integration with other information  systems,  enhanced security and
audit trails of user  activity.  This new system  utilizes  Informix's  industry
standard  On-Line  Dynamic Server RDBMS,  which provides for expanded growth and
also takes  advantage  of  multiprocessor  configurations.  The new GUI  screens
provide  an  advanced  user  interface,   which   dramatically   increases  user
productivity by consolidating operational, and management needs and providing an
environment  that is user friendly and  intuitive.  The NTS 2000 has  additional
functionality  including:  support  of 250  digit  authorization  code  numbers,
complete support of  international  rating,  real time credit limit checks,  and
real-time customer support management.

The NTS 2000 was released to a customer on an alpha test basis during the fiscal
fourth  quarter of 1997 and is  projected to be released for general sale during
the second quarter of fiscal 1998.

                                       9
<PAGE>
LCX Switching  System.  Prior to  introducing  the STX, the Company's  principal
product was the LCX applications  platform,  which has a maximum capacity of 480
ports in a single  cabinet  configuration.  While the Company  continues to sell
refurbished  LCXs  and  support  users  of LCXs,  the  Company  does not plan to
manufacture  additional  LCXs or develop ongoing  enhancements  for the LCX. The
versatility  of  the  LCX,  which  was  designed  to  operate  in an  unattended
environment,  enables it to provide,  in an  integrated  fashion,  the following
applications:  long distance,  pay phone or courtesy  phone network  management,
international  call  back/reorigination  and  prepaid  debit  card.  During  the
introduction  of the STX, the Company  offered an option to customers of the LCX
to return  their LCX system in exchange  for a discount on their  purchase of an
STX system. The Company refurbishes and resells the returned LCX systems,  which
are attractive to customers with lower  capacity and feature  requirements.  The
reliability  of the LCX enables the system to be easily  refurbished  by general
cleaning and functional testing  procedures.  The system is then upgraded to the
latest LCX configuration,  including both hardware and software,  and made ready
for shipment to customers.  Refurbished  LCXs are currently  being sold with any
two applications and five languages and is targeted to smaller customers who are
considering  buying a PC-based  switch without an integrated  billing system for
essentially the same price.

Services. The Company offers facilities management services to its customers who
do not  have or plan  to hire  technical  operators.  This  service  allows  the
customer to concentrate on marketing its products while the Company operates and
maintains  its  switch  for a fee.  The  Company  offers  facilities  management
services  to  facilitate  sales  of its  switches.  The  Company  also  provides
competitively  priced  domestic  and  international   network  services  to  its
customers,  thereby  facilitating  their  smooth  entry into the  communications
business.   Through  the  aggregation  of  customer  traffic,  the  Company  has
negotiated  favorable  carrier  rates  from the  major  interexchange  carriers.
Currently,  the switch room that houses a customer's equipment is located at the
Company's headquarters in Provo, Utah.

Customers.  The Company's  applications  platforms and billing systems have been
accepted in a variety of segments of the telecommunications industry and serve a
broad array of domestic and  international  applications.  To date,  the Company
estimates  that it has  installed  over 500  application  switching  and billing
systems.  See note 11 of Notes to Financial  Statements,  included in Part II of
this Form 10K filing, for listing of significant customers.

The Company's  customers are diverse and represent many different aspects of the
telecommunications  industry. These customers have implemented a wide variety of
features on the STX switching platform and NTS billing system including: prepaid
debit card,  international call back, operator services,  prepaid cellular,  and
other applications for specialty markets.

                                       10
<PAGE>
SALES AND MARKETING

The Company primarily sells its products through a direct sales force located at
the Company's  headquarters  in Provo,  Utah and through remote sales offices in
New York and Florida.  The  Company's  marketing  strategy is to generate  leads
through  attendance  at trade shows,  advertising  in industry  periodicals  and
referrals from existing  customers.  The Company  convenes  annual two-day round
table discussions for its customers. The Company invites its customers and their
competitors  to meet in an  environment  of  cooperation  and  collaboration  to
discuss their  experiences with the Company's  products,  providing  significant
consideration for future NACT product development and enhancement.

The Company has  established a sales presence in the United Kingdom and plans to
establish  sales  presence in other  countries  it believes to be  strategically
advantageous.  The Company believes that a sales  organization  that understands
and can solve  complex  switching  and network  management  and billing  systems
requirements  is necessary to sell its products to specialty  telecommunications
network service providers and corporate end users. The Company intends to invest
significantly to enlarge its sales  organization in order to expand its customer
base and to be more geographically proactive.

The  Company  expects  that its  technical  support  organization  and  customer
referrals  will continue to be an important  factor in the Company's  sales.  In
attempting  to broaden its customer  base,  the Company  will be  marketing  its
products and services to larger telephony providers whose procurement  processes
are generally more protracted and may be expected to require  additional  effort
on the Company's part.

To date,  the  Company  has  made  approximately  $750,000  of  direct  sales to
international  customers. The Company believes that the international market for
its products  represents  growth  potential in the future,  particularly  in the
developing countries and in countries in which the  telecommunications  industry
is being  deregulated.  The Company  intends to address these  opportunities  by
creating an  international  sales force and by marketing  its  products  through
international partners directly involved in telecommunications equipment sales.

TECHNICAL SUPPORT

The Company's  technical support staff provides  business  consulting as well as
trouble-shooting  services to its customers.  The Company's customers operate in
an environment in which  reliability and  availability of technical  support are
increasingly  critical  factors.  Such  value-added  services have resulted in a
recurring stream of revenues for the Company.

                                       11
<PAGE>
The Company's technical support department installs and supports systems sold by
the Company and  provides  ongoing  services  that  include  training,  business
consultations,  trouble-shooting and upgrades.  Since the Company sells a single
switching solution that includes  essentially all of the key elements a customer
needs to offer enhanced  services,  a customer need not look beyond the Company,
its "single source," for its technical switching solutions.

The technical  support  department is involved with a customer as soon as a sale
has been finalized. A detailed pre-installation  checklist is completed with the
customer  prior to  installation.  A technical  support  engineer  installs  the
equipment  at the  customer's  location,  configures  software  for the specific
applications to be utilized and brings up the telephone circuits.  Typically,  a
system is operational shortly after it is delivered.

After the equipment is installed,  the Company's  technical  support  department
works with the customer to keep the equipment functioning reliably. Modem access
to all customer  equipment enables the Company's  technical support personnel to
perform  diagnostics,   trouble-shoot  equipment,   perform  software  upgrades,
transmit  programs and configure  hardware from a remote location.  In addition,
technical support provides  consulting services on network issues and additional
applications.

To quickly and  efficiently  resolve  customer  issues,  the  technical  support
department  uses  an  automated  tracking  system  that  contains  the  complete
installed  customer  database,   software  and  hardware   configuration,   site
addresses,  contacts  and modem  phone  numbers.  An incoming  customer  call is
monitored  on this  system,  and the status of the  resolution  of the  customer
problem and the  mean-time to repair are updated and  maintained  for  reporting
back to the customer. An incident escalation procedure ensures that all customer
problems receive appropriate  visibility until a solution has been achieved. The
technical support department maintains 24 hour,  7-day-a-week  emergency service
coverage.  The Company's  equipment is warrantied for one year,  after which the
customer pays an annual fee for factory  support.  Factory support includes toll
free telephone  support,  as well as all operating system software  upgrades and
free  board  repair.  These  upgrades  allow  the  Company's  customers  to take
advantage of software enhancements offered by the Company.

The Company's  main  technical  support  operations are located at the Company's
headquarters  in Utah.  The  Company  has  also  established  technical  support
satellite  offices in New Jersey,  Florida and the United  Kingdom.  The Company
plans to expand the department  into several key locations in  conjunction  with
the opening of additional sales offices.

RESEARCH AND DEVELOPMENT
The Company's research and development efforts are focused on the development of
new products and the addition of new features and  capabilities  to its existing
products.  The research and development  department continually works to improve
the quality of the  Company's  products  and to ensure that such  products  meet
industry  standards  and  government  regulations.  In addition,  the Company is
working toward the successful development of new products that will enable it to
offer additional  intelligence to a customer's existing network. During the past
16 years, the Company's engineers have introduced seven hardware  platforms,  10
software applications,  20 international language software packages and numerous
enhancements to such products.

The Company is working to increase  the port  capacity of the STX and to improve
and  supplement  its enhanced  services  and its billing  system  platform.  The
Company is  incorporating  the Motorola 68060 CPU board into the STX application
platform to enable the STX to support 2,048 ports per chassis or 8,192 ports per
integrated MCU system. With the Motorola 68060 processor, the STX is expected to
process  up to 15 million  call  minutes  per month in a 2,048  port  nonblocked
configuration  or can be combined with three additional STXs to provide up to 60
million call minutes per month.

                                       12
<PAGE>
The Company is currently  developing an improved  billing system,  the NTS 2000,
which is being  designed  for real time  transaction  processing  and will use a
graphic  user  interface  and  improved  call reports and will allow for greater
customization of invoices,  bills and reports.  The Company expects that the NTS
2000 will be available for use with its  applications  platform  switches in the
second  quarter  of  fiscal  1998 and will be  available  for use with  non-NACT
switches in the future.  The "server"  side of the NTS 2000 will use one or more
Pentium Pro PC-server systems with the SCO UNIX operating system and an Informix
database  management  system.  The "client" side will use a PC computer with the
Windows  95  operating  system.  All  processing  will be based  upon  real time
transaction processing. The NTS 2000 will allow for the customization of reports
and customer invoices on "client" PC computers while providing standard features
on the "server" computers.

The  telecommunications  equipment  market is  characterized by rapidly changing
technologies and frequent new product  introductions.  The rapid  development of
new  technologies  increases  the risk that  current  or new  competitors  could
develop  products  that  would  reduce  the  competitiveness  of  the  Company's
products.  The Company's  success will depend to a  substantial  degree upon its
ability to respond to changes in technology and customer requirements. This will
require the timely  selection,  development  and  marketing  of new products and
enhancements on a cost-effective basis. The development of new,  technologically
advanced products is a complex and uncertain  process,  requiring high levels of
innovation.  Further,  the  telecommunications  industry is characterized by the
need to design products that meet industry  standards for safety,  emissions and
network interconnection.  With new and emerging technologies, such standards are
often  changing or  unavailable.  As a result,  there is a potential for product
development delay due to the need for compliance with new or modified standards.
The  introduction  of new and enhanced  products  also requires that the Company
manage  transitions  from older  products  in order to minimize  disruptions  in
customer orders, avoid excess inventory of old products and ensure that adequate
supplies of new products can be delivered to meet customer orders.

As of September 30, 1997,  approximately 23 full-time  employees were engaged in
research and development. The Company spent approximately $1,183,000, $1,352,000
and  $2,385,000,  on  research  and  development  during the fiscal  years ended
September 30, 1995,  1996 and 1997,  respectively.  The Company  expects that it
will  continue  to  expend  significant   resources  for  product  research  and
development.

MANUFACTURING AND QUALITY ASSURANCE
The   Company's   manufacturing   operations   consist   primarily  of  material
requirements planning, material procurement and final assembly, test and quality
control of  subassemblies  and completed  systems.  The Company  outsources  its
printed  circuit board  assembly.  The Company  believes that by outsourcing its
printed   circuit  board  assembly,   the  Company  gains   flexibility  in  the
manufacturing  process and achieves lower direct labor and overhead  costs.  The
Company currently conducts its manufacturing operations in its new manufacturing
facility in Provo, Utah in a space of approximately 10,000 square feet.

                                       13
<PAGE>

The Company utilizes an annual planning forecast,  which is modified monthly, to
determine  its  material  and  outsourcing  requirements.   The  Company  orders
materials with differing  lead times,  generally 30 to 180 days in advance.  The
Company uses "just-in-time"  ordering of materials that are readily available to
minimize  inventory  carrying costs. The Company's systems are manufactured to a
standard configuration that allows for better production planning,  lower direct
labor and overhead costs and shorter order-to-shipment times.

The  Company  tests its  systems in  accordance  with  Company-designed  quality
control specifications that are consistent with ISO 9000 requirements.  ISO 9000
is an international  quality  certification  process,  developed in the European
Common Market and adopted in the United States as the method by which  companies
can demonstrate the functionality of their quality control system.

ISO 9000  certification  is a three step process:  writing a "quality manual" in
accordance  with  the ISO  9000  requirements;  documenting  the  processes  and
procedures used to design,  build, sell and finance products;  and being audited
by an offcial  ISO 9000  registrar.  The  Company  has  completed  the  "quality
manual," is currently  documenting the processes and procedures and has selected
an ISO 9000 registrar to conduct the  certification  audit. In conjunction  with
ISO 9000 certification, the Company presently has an in-house quality inspection
program  where it tests all  products  prior to  shipment  to ensure the highest
standard of quality.

The Company  primarily  uses  standard  parts and  components  for its products,
procured from multiple vendors.  Certain integrated circuits,  card cage chassis
and billing system database software are presently available only from a limited
source of supply. To date, the Company has been able to obtain adequate supplies
of these components in a timely manner.

COMPETITION
The market for switching equipment and network management and billing systems is
highly  competitive,  and the  Company  expects  competition  to increase in the
future.  The  market  is  subject  to  rapid  technological  change,  regulatory
developments in the telecommunications industry and emerging industry standards.
The  Company  believes  that the primary  competitive  factors in the market for
switching  equipment  and network  telemanagement  and  billing  systems are the
development and rapid  introduction of new product features,  price/performance,
reliability and quality of customer support.

THE COMPANY BELIEVES THAT IT COMPETES ACROSS THREE CATEGORIES:
PC Based Switch  Platforms.  A PC-based switch platform is a personal  computer,
usually  with  high  capacity,   that  contains  generic  telephony  boards  for
interfacing  with the  public  network.  A typical  platform  provides  a single
application such as debit card or international call  back/reorigination,  which
are  software  applications  that can be  brought  to  market  rapidly.  Leading
providers of these types of switches are CPDI,  ITP, and PCS Telecom.  The users
of this equipment  generally tend to be start-up  operations  that are concerned
about  initial  equipment  costs and that are generally  able to bring  software
solutions  to the  market  rapidly.  While  these  users may feel that  PC-based
solutions are relatively low cost, as their business grows, it becomes  apparent
that these  systems  are costly to expand on a cost per port basis and offer few
features that are standard with switch-based platforms.  Additionally,  PC-based
systems are not  regarded  as a viable  solution  for larger  users due to their
reliability concerns.

Open Architecture  (Programmable)  Hardware Platforms.  A programmable  hardware
platform generally  consists of proprietary  switch hardware,  together with the
necessary  software to provide a programming  application  interface  (API) that
allows other computers executing third-party application software to control the
calls within the switch hardware.  Leading  providers of these types of switches
are Summa Four,  Excel and Redcom and the value added  software  providers  that
support this type of  hardware,  such as Magellan,  Boston  Technology  and Open
Development.  The users of this type of equipment tend to be companies that have
the ability and desire to write  their own  applications  code or are willing to
purchase their applications code from a specialized third party developer.

                                       14

<PAGE>
Application Switch Platforms. An application switching platform is an integrated
hardware/software  switching  system that contains  software  applications  that
perform  basic 1+ and operator  assisted  services over the public  network.  To
provide  intelligent  functionality,  an adjunct switch must be connected to the
application  switch platform.  Leading providers of application switch platforms
are Harris and Siemens Stromberg Carlson. The major users are companies that are
established  in their  telephony  business such as 1+ providers that now need to
expand  their  offerings  to  their  customers  to  remain  competitive  in  the
marketplace.  Enhanced  services are particularly  attractive to these customers
and play a large part in their decision making process.

As the  Company's  business  develops  and it seeks to market its  switches to a
broader  customer base, the Company's  competitors may include larger switch and
telecommunications  equipment  manufacturers  such as Lucent  Technologies Inc.,
Harris,   Siemens  AG,  Alcatel  Alsthom  Compagnie,   Generale   D'Electricite,
Telefonaktiebolaget,  L.M.  Ericcson  and  Northern  Telecom  Ltd.  Many  of the
Company's  current  and  potential   competitors  have   substantially   greater
technical, financial, manufacturing and marketing resources than the Company.

INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The  Company's  success is dependent in part on  intellectual  property  rights,
including information  technology,  some of which is proprietary to the Company.
The Company  relies on a combination of copyright,  trade secret,  and trademark
law, confidentiality  procedures and other contractual restrictions to establish
and protect  proprietary  rights in its  products and  technologies.  As part of
these   confidentiality   procedures,   the   Company   generally   enters  into
confidentiality  and  non-disclosure  agreements  with its  employees and limits
access to and  distribution  of its  proprietary  information.  The  Company has
received  federal  trademark  applications for the marks STX and NTS 2000 and is
currently conducting a review of its products to determine for which products it
will seek patent,  trademark or copyright registration  protection.  The Company
currently  licenses certain  technology from third parties and plans to do so in
the future.

EMPLOYEES
At September 30, 1997, the Company had 93 full-time  employees,  of whom 23 were
engaged in research and development, 17 in manufacturing and quality control, 12
in sales and marketing,  21 in technical support, 6 in operations and management
information systems, and 14 in administration and finance. None of the Company's
employees  is  represented  by a  collective  bargaining  agreement  nor has the
Company experienced any work stoppage.  The Company considers its relations with
its employees to be good.

ITEM 2 - PROPERTIES

The Company's headquarters and manufacturing facility is located in Provo, Utah.
The Utah facility is a newly constructed building that the Company moved into on
July 1, 1997. The Utah facility was constructed for a cost of about $4.1 million
and was paid for from the proceeds of the Company's IPO.

The Company also has sales and technical  support  offices  located in New York,
New Jersey, Florida and London, England. These offices are leased by the Company
under leases that expire at various dates through 1998. Annual lease payments of
these offices aggregate approximately $30,000.

With the  exception  of the office  furnishings  held under an  operating  lease
(approximately  $900,000 net book value at September 30, 1997), the Company owns
the equipment and furnishings located in all of its facilities.

The Company  considers all of its  properties,  both owned and leased,  together
with  the  related  equipment  and  furnishings  contained  therein,  to be well
maintained,  in good  operating  condition,  and  suitable  for its  present and
forseeable future needs.

ITEM 3 - LEGAL PROCEEDINGS
On August 24,  1995,  Aerotel,  Ltd.  And Aerotel  U.S.A.,  Inc.  (collectively,
"Aerotel") commenced an action against the Company and a customer of the Company
in the United States District  Court,  Southern  District of New York,  alleging
that  telephone  systems  manufactured  and  sold by the  Company  incorporating
prepaid debit card features  infringe upon Aerotel's  patent which was issued in
November 1987 (the "Aerotel  Patent").  The initial  complaint  further  alleged
defamation and unfair  competition as a result of a Special Report  disseminated
by the Company to its  customers  and  tortious  interference  with  prospective
business  relations,  alleging that the Company induced third parties to abandon
licensing  negotiations with Aerotel.  Aerotel sought injunctive relief, damages
in an  unspecified  amount,  damages of up to three times the damages  found for
willful infringement of the Aerotel Patent and an order requiring the Company to
publish  a  written  apology  to  Aerotel.  The  Company  filed  an  answer  and
Counterclaim  in which it denied  infringement  of the Aerotel Patent and sought
judgment that the Aerotel patent is invalid and  unenforceable  and that Aerotel
has misused its patent in violation of  antitrust  laws.  The Company has denied
that it has committed  defamation,  unfair competition

                                       15
<PAGE>
and tortious  interference with prospective business relations.  On May 3, 1996,
the Company served its motion for summary  judgment.  The Court has indicated it
will deny such motion,  although the actual ruling has not yet been received. In
August  1997,  Aerotel  amended  its  complaint  to  include as  defendants  GST
Telecommunications,  Inc., the parent of GST USA ("GST"), and GST USA as well as
Kyle Love,  the former  President  of the Company and Dr.  Thomas E.  Sawyer,  a
director  of GST and the  Company and the former  Chairman  and Chief  Executive
Officer of the Company. The amended pleadings seek in excess of $18.7 million in
damages and allege that GST and GST USA have infringed the Aerotel patent, aided
and abetted infringment by others,  including the Company,  and participated in,
and aided and abetted alleged tortious conduct by the Company. GST, GST USA, Dr.
Sawyer and Mr. Love have served  answers  denying all material  allegations  and
intend to defend  vigorously.  Pretrail discovery has commenced and is scheduled
to be completed in 1998. The case is not expected to be tried until late 1998 at
the earliest.  The Company's  patent counsel believes that the Company has valid
defenses to the Aerotel  claims.  If upheld,  these defenses would also be valid
for all defendants. An unfavorable decision in this action could have a material
adverse effect on the Company.

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

None

                                     Part II

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

The  Company's  common  stock is traded over the counter on the NASDAQ  National
Market System under the symbol NACT. The following  table presents the quarterly
high and low bid quotations in the over the counter market, as quoted by NASDAQ.
These  quotations  reflect the  inter-dealer  prices,  without  retail  mark-up,
mark-down or commission and may not necessarily  represent actual  transactions.
Prior to the second fiscal quarter of 1997,  the Company's  common stock was not
publicly traded.

      1997 (Fiscal)                  High                    Low
      -------------                  ----                    ---

      Second Quarter                  9 - 1/2                5 - 7/8
      Third Quarter                  10 - 3/8                4 - 3/4
      Fourth Quarter                 17 - 5/8                8 - 3/8

The Company believes that there are in excess of 1,000 beneficial  owners of the
Company's common stock at November 30, 1997.

The Company has never  declared or paid cash  dividends on its shares of capital
stock  and does not  intend to pay cash  dividends  in the  foreseeable  future.
Moreover,  the indentures governing certain outstanding  indebtedness of GST and
GST USA restrict the Company's  ability to declare or pay cash  dividends,  and,
for the foreseeable future,  effectively prohibit such payments or declarations.
See "Management's  Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."

        Use of Proceeds of Initial Public Offering
        (1)     Effective date:  February 25, 1997.
        (2)     Offering date:   February 26, 1997.
        (3)     Not applicable.
        (4)     (i)     The offering terminated on March 3, 1997.
                (ii)    Managing Underwriter:  Hambrecht & Quist and
                                               Montgomery Securities.
                (iii)   Title of Securities Registered:  Common Stock, 
                        $.01 par value
                        per share.
                (iv)    Amount Registered:  2,000,000 shares.
                        Aggregate Offering Price:  $20,000,000.
                        Amount Sold:  2,000,000 shares.
                        Aggregate Offering Price of Amount Sold to Date:
                        $20,000,000.
                (v)     A reasonable  estimate of the expenses  incurred  during
                        the period from the effective date of the Securities Act
                        registration statement (February 25, 1997) and ending on
                        the ending date of the reporting  period  (September 30,
                        1997) is $1.9 million.
                (vi)    The net  proceeds to the  Company  after  deducting  the
                        total expenses described in (v) above is $18.1 million.
                (vii)   Approximately $4.1 million of net offering proceeds were
                        used for the  purchase  of land and a  building  for the
                        Company's   headquarters   from  GST  Realco,   Inc.,  a
                        subsidiary of GST Telecommunications,  Inc., a holder of
                        more than 10% of the  Company's  common  stock,  and for
                        construction costs to complete the building.
                (viii)  Not applicable.

                                       16
<PAGE>
ITEM 6 - SELECTED FINANCIAL DATA

The following  selected financial data of the Company are qualified by reference
to and should be read in conjunction with the financial statements and the notes
thereto and  "Management's  Discussion  and Analysis of Financial  Condition and
Results of  Operations"  included  elsewhere  in this filing.  The  statement of
operations data for the fiscal years ended September 30, 1995, 1996 and 1997 and
the balance sheet data as of September  30, 1996 and 1997 are derived from,  and
are  qualified by reference to, the Company's  financial  statements  audited by
KPMG  Peat  Marwick  LLP,  independent  certified  public  accountants  included
elsewhere in this filing.  The Statement of Operations data for the fiscal years
ended  December  31, 1992,  September  30, 1993 and  September  30, 1994 and the
balance sheet data as of December 31, 1992,  September  30, 1993,  1994 and 1995
are derived from the  Company's  financial  statements  audited by Squire & Co.,
independent certified public accountants, not included herein.

                                       17
<PAGE>
<TABLE>
<CAPTION>
                                          Fiscal year      Nine months
                                               ended           ended
                                          December 31,   September 30,          Fiscal year ended September 30,
                                          ------------   -------------   ------ -------------------------------------------
                                               1992        1993(1)       1994       1995            1996               1997
                                               ----        -------       ----       ----            ----               ----
                                                                      (in thousands, except per share data)
                                                                      -------------------------------------
 Statement of Operations Data:
<S>                                        <C>            <C>         <C>           <C>             <C>             <C>    
 Revenues:
     Product sales                         $1,860         $,2422      $5,479        $7,604          $9,930          $21,982
     Network carrier sales                      -              -           -         2,782           3,783            5,716
     Wins sales                                 -              -           -         1,098           2,572                -
                                           ------      ---------     -------       -------     -----------     ------------
          Total revenues                    1,860          2,422       5,479        11,484          16,285           27,698
 Cost of goods sold:
     Product                                  813            788       1,845         2,645           3,942            7,141
     Network carrier usage                      -              -           -         2,731           3,382            5,486
     Wins                                       -              -           -           787           2,572                -
     Amortization of
       Acquired intangibles                     -             15         185           443             362              362
                                           ------      ---------     -------       ----------  --------------  ------------
          Total cost of goods sold            813            803       2,030         6,606          10,258           12,989
                                           ------      ---------     -------       ----------  --------------  ------------
     Gross profit                           1,047          1,619       3,449         4,878           6,027           14,709
 Operating expenses:
     Research and development                 374            275         677         1,183           1,352            2,385
     Selling and marketing                    124            178         457           925             954            2,504
     General and administrative               624            561       1,353         2,153           3,024            3,472
     Amortization of
       Acquired intangibles                     -             20         257           520             573              573
                                           ------      ---------     -------       ----------  --------------  ------------
          Total operating expenses          1,122          1,034       2,744         4,781           5,903            8,934
                                           ------      ---------     -------       ----------  --------------  ------------
 Income (loss) from operations               (75)            585         705            97             124            5,775
 Other income net                              87             31          81           189             148              517
                                           ------      ---------     -------       ----------  --------------  ------------
 Income before income taxes                    12            616                       286             272            6,292
                                                                         786
 Income taxes (benefit)                       (5)            157         293           206              78            2,476
 Cumulative effect of prior year
     Accounting change                        162              -           -             -               -                -

                                           ======      =========     =======       ==========  ==============  ============
 Net income                                  $179           $459        $493           $80            $194           $3,816
                                           ======      =========     =======       ==========  ==============  ============
 Net income per share - primary             $0.06          $0.12       $0.08         $0.01           $0.03            $0.52
                                           ======      =========     =======       ==========  ==============  ============
 Net income per share - fully diluted       $0.06          $0.12       $0.08         $0.01           $0.03            $0.50
                                           ======      =========     =======       ==========  ==============  ============
 Weighted average shares outstanding        2,870          3,847       5,998         6,114           6,114            7,351
                                           ======      =========     =======       ==========  ==============  ============
</TABLE>
<TABLE>
<CAPTION>

                                                                                        September 30,
                                          December 31,                                  ---------------
                                             1992          1993           1994               1995            1996        1997
                                          ------------   --------------------------------------------------------------------
                                                                  (in thousands, except per share data)
                                                                  -------------------------------------
<S>                                        <C>             <C>          <C>                  <C>               <C>     <C>   
 Balance Sheet Data:
 Cash and cash equivalents                 $208            $352         $1,186               $1,122            $694    $9,947
 Working capital                             35           3,131          3,280                4,145           4,245    21,189
 Total assets                               884           8,474          9,072               13,178          14,685    39,755
 Long-term debt, net of current portion     150             387              -                   85              58         -
 Total stockholders equity                  128           6,094          6,969                9,630          10,210    33,004
</TABLE>

   (1)   The Company changed its fiscal  year-end to September  30th,  effective
         with the fiscal year ended September 30, 1993. Accordingly,  the fiscal
         year ended September 30, 1993 was a nine-month period.

                                       18

<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS
         OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The  following  discussion  should  be read in  conjunction  with the  Company's
financial statements contained herein under Item 8 of this report.

Overview

The  Company  provides  advanced  telecommunications  switching  platforms  with
integrated applications software and network telemanagement capabilities. During
the period from 1987 through 1989,  the Company  developed and began selling its
LCX 120C switch  application  product and NTS 1000  billing  system.  During the
period from 1990 through 1995, the Company  developed  enhancements  to the LCX,
including  T-1  capability,  enhancement  of its  prepaid  debit card  services,
automated operator,  international call back and call reorigination.  During the
same period,  the Company also  developed the Master  Control Unit. In May 1996,
the Company  completed  development  of and began selling the STX, an integrated
digital tandem switching system that includes  proprietary systems software that
enables standard applications such as 1+ and optional advanced applications such
as  international  call  back/reorigination,  prepaid  debit  card  and  prepaid
cellular.

The   Company   sells  its   products   in  the   United   States  to   enhanced
telecommunications  network  service  providers  through a direct  sales  force.
During  the  fourth  quarter  of fiscal  1997,  the  Company  sold its first STX
switching and NTS billing systems outside the United States. The Company intends
to  continue to expand the  marketing  of its  products  both  domestically  and
internationally.  Currently,  the Company also provides  long  distance  network
carrier service to facilities  management customers with operations primarily in
Brazil and Eastern Europe.

In response to customer  demand,  in fiscal  1995,  the Company  began  offering
facilities  management  and  network  carrier  services.  Facilities  management
services  enable a customer to  concentrate  on marketing its products while the
Company maintains such customer's  switch(es) in the Company's  facilities for a
fee.  Such  services  can  include  network  carrier  usage in  addition  to the
management  of  a  switch.   The  Company  provides  network  carrier  usage  at
competitively priced domestic and international rates.  Revenues associated with
such  facilities  management  services,  including  network  carrier usage,  are
presented in the Company's  financial  statements as network carrier sales.  The
gross  profits  associated  with such sales are  substantially  lower than those
associated with product sales. In addition,  given the small number of customers
and the high volume of revenues  generated from an individual  customer  through
network  carrier sales,  the loss or gain of one or more customers could cause a
significant fluctuation in the Company's quarterly revenues.

In 1995,  the  Company  formed  Wins,  a  wholly-owned  subsidiary,  to  provide
specialized long distance services (e.g. prepaid debit card,  international call
back/reorigination)  to potential switching system customers who wanted to enter
the  specialized  long  distance  service  market  before making a major capital
investment in switching  equipment.  The Company's financial  statements for the
fiscal year ended  September  30, 1995  include the  accounts of the Company and
Wins. On September 30, 1995, the Company transferred  ownership and operation of
Wins to GST USA in the form of a dividend accounted for at historical cost. From
October 1, 1995  through  September  30,  1996,  the  Company  provided  carrier
services to GST USA for the Wins operation. The Company ceased providing carrier
services to Wins on September 30, 1996.  Therefore,  no revenue is recognized by
the Company from the Wins operation after September 30, 1996.

GST USA acquired a 100% interest in the Company's  Common Stock through a series
of purchases of newly issued shares and shares owned by former  stockholders  of
the Company from  September  1993 through  September 30, 1995. GST USA accounted
for the acquisition  using the purchase method of accounting.  The excess of the
purchase  price over the fair value of the assets  acquired was accounted for by
GST USA as product support contracts,  software development costs, and goodwill.
In accordance with the  requirements of the Securities and Exchange  Commission,
the  Company's  financial  statements  reflect  these  intangible  assets on its
balance  sheet,  with  related  amortization  recorded in cost of goods sold and
other operating expense in the respective  years.  Product support contracts and
software  development  costs are being amortized over a five-year  straight-line
period and goodwill is being amortized over a 20-year straight-line period.


                                       19
<PAGE>
In the second  quarter of fiscal 1997,  the Company  completed an initial public
offering  of its common  stock,  pursuant  to which the  Company  and its parent
company,  GST,  sold two million and one million  shares,  respectively,  of the
Company's  common  stock,  resulting  in net  proceeds to the Company and GST of
approximately $18.1 million and $10.0 million, respectively. As a result of this
initial  public  offering,  GST's  interest in the  Company has been  reduced to
approximately  63%. On September 30, 1997,  GST  announced  that it had retained
Hambrecht and Quist LLC to explore  alternatives for monetizing its 63% interest
in the Company, including a potential sale of some or all of GST's shares of the
Company's capital stock to one or more strategic investors.

The Company is subject to certain financial restrictions by reason of its status
as a "Restricted  Subsidiary"  of GST and GST USA under  indentures  relating to
certain  outstanding   indebtedness  of  GST  and  GST  USA.  Such  restrictions
significantly   limit  or  prohibit  the  ability  of  GST  and  its  Restricted
Subsidiaries  to  incur  additional  indebtedness  or to  create  liens of their
assets. Effectively, the ability of the Company to incur indebtedness is limited
by the  amount of  indebtedness  that GST and its  Restricted  Subsidiaries  are
permitted to incur pursuant to the terms of the indentures.

FISCAL 1997 COMPARED TO FISCAL 1996

Revenues. Revenues increased by 70.1% from $16.3 million in fiscal 1996 to $27.7
million in fiscal 1997.  Product sales  increased by 121.4% from $9.9 million in
fiscal 1996 to $22.0  million in fiscal 1997  primarily  due to sales of the STX
switching systems,  which the Company began selling in May 1996. Network carrier
sales  increased  by 51.1% from $3.8  million in fiscal 1996 to $5.7  million in
fiscal 1997 due to increased carrier usage volumes from existing network carrier
customers.  The Company generated $2.6 million in revenues from sales of network
carrier  usage to Wins in 1996.  On October 1, 1996,  the  Company  discontinued
providing network carrier usage to Wins.

GROSS PROFIT

Product Sales.  Gross profit on product sales increased 147.8% from $6.0 million
in fiscal 1996 to $14.8 million in fiscal 1997 due to increases in sales volumes
and gross profit per unit from the sale of larger port  capacity  STX  switching
systems.  Gross  profit  on  product  sales as a  percentage  of  product  sales
increased  from 60.3% in fiscal  1996 to 67.5% in fiscal 1997  primarily  due to
sales of larger port  capacity STX  switching  systems,  which have higher gross
profit margins, in fiscal 1997 and due to lower margins on STX switching systems
in fiscal  1996 as a result  of  special  pricing  on its  initial  sales of STX
switching systems and the discounting of LCX systems prior to the release of the
STX system in May 1996.

Network  Carrier Sales.  Gross profit on network  carrier sales  decreased 42.6%
from  $0.4  million  in fiscal  1996 to $0.2  million  in  fiscal  1997 due to a
decrease  in  the  prices  charged  for  international  carrier  traffic  to the
Company's  network carrier customers and due to the non recognition of profit on
network  carrier  sales  during the fourth  quarter of fiscal  1997 to  Overseas
Telecom (a network carrier customer).

Wins. In fiscal 1997, there were no sales to GST USA for the Wins operations. In
fiscal 1996, the Company  provided  network carrier  services at cost to GST USA
for the Wins operations.

Overall. Gross profit increased 144.0% from $6.0 million in fiscal 1996 to $14.7
million in fiscal 1997  primarily  due to increases  in sales  volumes and gross
profit per unit from the sale of larger port  capacity  STX  switching  systems.
Gross profit as a percentage of net revenues increased from 37.0% in fiscal 1996
to 53.1% in fiscal  1997  primarily  due to sales of larger  port  capacity  STX
switching  systems,  which have higher gross profit margins,  in fiscal 1997 and
due to lower  margins on STX  switching  systems  in fiscal  1996 as a result of
special  pricing  on  its  initial  sales  of  STX  switching  systems  and  the
discounting of LCX systems prior to the release of the STX system in May 1996.

Research and Development.  Research and development  expenses increased by 76.4%
from $1.4 million in fiscal 1996 to $2.4 million in fiscal 1997 primarily due to
the expansion of the Company's engineering staff and an increase in expenditures
for planning and  implementation  of several hardware and software  research and
development  projects  designed  to enhance  the STX  switching  and NTS billing
systems.  Capitalized  software  development  costs were $0.4  million  and $0.8
million in fiscal 1996 and 1997, respectively.

                                       20
<PAGE>
Selling and Marketing.  Selling and marketing  expenses increased by 162.7% from
$1.0  million in fiscal 1996 to $2.5 million in fiscal 1997 due to the hiring of
additional  senior sales  personnel,  the opening of new domestic sales offices,
increased  advertising and trade show  expenditures,  and increased  commissions
paid to sales  personnel  as a result of the increase in the  Company's  product
sales.

General and Administrative.  General and administrative expenses increased 14.8%
from $3.0 million in fiscal 1996 to $3.5 million in fiscal 1997 primarily due to
the  hiring of new  personnel  in the  Company's  technical  support,  training,
finance,  and  administrative  departments  to support the  Company's  increased
sales,  shipments,  and  installations of STX switching and NTS billing systems.
Also,  in fiscal 1997,  additional  expenses  were  incurred by the Company as a
result   of  the   construction   of   and   move   into   the   Company's   new
headquarters/manufacturing facility on July 1, 1997.

Amortization of Acquired  Intangibles.  The Company has included amortization of
acquired  intangibles  as a  component  of both  cost  of  sales  and  operating
expenses.  These intangibles arose as a result of the acquisition of the Company
by GST USA. GST USA accounted for the  acquisition  using the purchase method of
accounting.  The excess of the purchase  price over the fair value of the assets
acquired  was  assigned  by  GST  USA as  product  support  contracts,  software
development  costs and goodwill,  and, in accordance  with  requirements  of the
Commission,  has been included in the balance sheets of the Company with related
amortization  recorded  in cost of goods  sold  and  other  operating  expenses.
Product  support  contracts and software  development  costs are being amortized
over a five-year  straight-line  period and goodwill is being  amortized  over a
20-year straight-line period.

Other  Income and  Expense.  Other  income,  net of $0.1  million in fiscal 1996
increased to $0.5  million in fiscal 1997 due to an increase in interest  income
during fiscal 1997 resulting from investing the cash proceeds  received from the
IPO completed in March of 1997.

Income Taxes.  The Company  recorded  provisions for income taxes with effective
rates of 28.8% and  39.4% of  income  before  taxes  for  fiscal  1996 and 1997,
respectively.  The  increase in the  effective  tax rate in 1997 is  primarily a
result of increased profitability. Future effective tax rates are expected to be
in excess of  statutory  rates  during the  amortization  period of the acquired
goodwill from GST USA, as the goodwill is not deductible for tax purposes.

FISCAL 1996 COMPARED TO FISCAL 1995

Revenues. Revenues increased by 41.8% from $11.5 million in fiscal 1995 to $16.3
million in fiscal 1996.  Product  sales  increased by 30.6% from $7.6 million in
fiscal 1995 to $9.9 million in fiscal 1996 primarily due to the  introduction of
the  Company's  new STX  switching  system in May 1996.  Network  carrier  sales
increased  by 36.0% from $2.8  million in fiscal 1995 to $3.8  million in fiscal
1996 due to increased  carrier  usage  volumes  from  existing  network  carrier
customers.  Wins  generated  $1.1  million in revenues  in fiscal 1995  Revenues
generated from Wins network carrier sales in fiscal 1996 were $2.6 million.

GROSS PROFIT.

Product Sales.  Gross profit on product sales  increased 20.8% from $5.0 million
in fiscal  1995 to $6.0  million in fiscal  1996 due to an  increase  in product
sales resulting from the  introduction  of the STX in May 1996.  Gross profit on
product sales as a percentage of product  sales  decreased  from 65.2% in fiscal
1995 to 60.3% in fiscal 1996  primarily due to lower margins  resulting  from an
emphasis on  promoting  the STX.  Margins on initial STX sales were lower due to
special STX upgrade pricing provided to the Company's  current customers through
June 1, 1996.

Network Carrier Sales. Gross profit on network carrier sales increased from $0.1
million in fiscal 1995 to $0.4 million in fiscal 1996 due to  increased  network
carrier sales volume.  Gross profit on network  carrier sales as a percentage of
network carrier sales increased from 1.8% in fiscal 1995 to 10.6% in fiscal 1996
due to increased  volume  discounts  received from the underlying  carriers as a
result of increased network carrier usage. The Company began its network carrier
operations in fiscal 1995.

Wins.  Wins  generated  $0.3  million of gross profit in fiscal 1995 or 28.3% of
Wins sales. The Company transferred  ownership and operations of Wins to GST USA
on October 1, 1995 and provided carrier services at cost to GST USA for the Wins
operations in fiscal 1996.

Overall.  Gross profit  increased 23.6% from $4.9 million in fiscal 1995 to $6.0
million in fiscal 1996 due to an increase  in both  product and network  carrier
sales volume.  Gross profit as a percentage of net revenues decreased from 42.5%
in fiscal 1995 to 37.0% in fiscal 1996 primarily due to lower margins  resulting
from an emphasis on the STX switching  system and lower margins on initial sales
of the STX switching systems.

                                       21
<PAGE>
Research and Development.  Research and development  expenses increased by 14.3%
from $1.2 million in fiscal 1995 to $1.4 million in fiscal 1996 primarily due to
the move to more  rapidly  develop  the STX  switching  system  and to  maintain
ongoing research and development of the Company's existing hardware and software
product lines. The Company's  capitalized  software  development costs were $0.2
million and $0.4 million in fiscal 1995 and 1996, respectively.

Selling and Marketing.  Selling and marketing  expenses increased 3.1% from $0.9
million in fiscal 1995 to $1.0 million in fiscal 1996 primarily due to continued
expansion of the Company's  sales and marketing  staff.  Fiscal 1996 selling and
marketing  expenses  were offset by the  transfer  of certain  salary and fringe
benefit  expenses to general and  administrative  when the Director of Sales and
Marketing  was promoted to Executive  Vice  President  and then to President and
Chief Executive Officer.

General and  Administrative.  General and  administrative  expenses increased by
40.5% from $2.2 million in fiscal 1995 to $3.0 million in fiscal 1996  primarily
due to an increase in the  provision  for bad debt,  continued  expansion of the
manufacturing  and technical support  departments,  the expansion of the finance
department and implementation of a Company-wide  quality assurance program.  The
increase in the  provision  for bad debt was a result of increased  sales volume
and the addition of a $310,000 reserve for accounts receivable due from Overseas
Telecom  (a  network  carrier  customer),   which  was  transferred  to  a  note
receivable.

Income Taxes.  The Company  recorded  provisions for income taxes with effective
rates of 71.9% and  28.8% of  income  before  taxes  for  fiscal  1995 and 1996,
respectively.  The decrease in the  effective tax rate is a result of additional
amortization  of  goodwill,  which is not  deductible  for income tax  purposes.
Future  effective  tax rates are  expected  to be in excess of  statutory  rates
during the  amortization  period of the acquired  goodwill  from GST USA, as the
goodwill is not deductible for tax purposes.

Liquidity and Capital Resources. The primary source of financing for the Company
in  fiscal  1995 and  1996 was from  operations  and  proceeds  of $2.6  million
received from the sale of securities in fiscal 1993 and 1994. The primary source
of  financing  for the  Company in fiscal 1997 was from  operations  and the net
proceeds of  approximately  $18.1 million  received  from the Company's  Initial
Public  Offering in March 1997.  Net cash  provided by operating  activities  in
fiscal 1995 and 1997 was $0.4 million and $0.2 million,  respectively.  Net cash
used by operating activities in fiscal 1996 was $0.1 million.

The Company has made capital  expenditures  of $0.3 million,  $0.3 million,  and
$5.2  million  in  fiscal  1995,  1996,  and  1997,  respectively.  The  capital
expenditures  in  fiscal  1995 and  1996  were  primarily  for the  purchase  of
computers and testing  equipment.  The capital  expenditures in fiscal 1997 were
primarily  for  the  purchase  of  land,  the  costs  of  construction,  and the
furnishing of the Company's new corporate offices and manufacturing building and
for additional computers and research and development equipment. In fiscal 1997,
the Company  also paid $0.3  million for the purchase of the source code for the
development of SS7 capability in the STX. The Company had principal  commitments
as of September 30, 1997 for approximately $0.9 million for contract completion,
and  purchase of the first 100 boards,  of the new 68060 CPU  processor  for the
STX.

As of September 30, 1997, the Company had cash, cash  equivalents and marketable
securities  totaling  $13.2 million an increase of $12.2 million from  September
30, 1996. This increase is primarily due to the cash proceeds  received from the
sale of common stock from the Company's initial public offering in March 1997.

The Company maintains an unsecured bank line of credit expiring in February 1998
that  provides  borrowings  up to $.8 million at the bank's  prime rate plus one
point.  There was no outstanding  balance under this line of credit at September
30, 1997.

As of  September  30,  1997,  the Company was  contingently  liable  under lease
repurchase  agreements for a maximum of $3.5 million to Zions Credit Corporation
(Zions). Zions provides lease financing to the Company's customers on a recourse
basis.  The  Company  maintains  a $6.0  million  unrestricted  cash  balance in
accordance with conditions of the repurchase agreement.

The Company has sold carrier  services to Overseas  Telecom  ("Overseas")  since
1994.   Overseas  is  located  in  Brazil  and   provides   international   call
back/reorigination services to companies and individuals primarily in Brazil and
Eastern  Europe.  During the year ended  September  30,  1996,  Overseas  became
delinquent on certain of its payments.  In fiscal 1997, the Company entered into

                                       22
<PAGE>
a note  receivable  agreement  with Overseas which provided for the repayment of
the  non-current   outstanding  amount  (approximately  $0.93  million)  bearing
interest  at 12  percent.  The note  provided  for  payments  in the amount of 6
percent  of  Overseas'  monthly  gross  revenues.  Additionally,  25  percent of
Overseas net income,  with a minimum  payment in the amount of $2,500,  was also
allocated to the payment of the note. The note was secured by Overseas' accounts
receivable,  customer list and certain  assets.  In the fourth quarter of fiscal
1997,  the  Company  exercised  its  call  privileges  under  the  note and took
possession of the  underlying  collateral - the customer  lists.  There were two
separate  and  distinct  customer  lists,  one from Brazil and one from  Eastern
Europe.  The  customer  list  related to the  Brazilian  operations  was sold to
Intertoll  Communications  Network  Corp.  (ICN),  an  existing  customer of the
Company with  operations in Argentina and Brazil for  $1,000,000  payable in 100
monthly  payments of $10,000.  The related  payments have been  discounted at 20
percent with the related unpaid amount of approximately  $485,000  classified as
notes receivable in the accompanying balance sheet.

The customer list related to the Eastern European operations was recorded on the
Company's  books at the lower of fair value or cost. Fair value was estimated by
an  independent  third  party  appraiser  using  generally   accepted  valuation
standards.  Accordingly,  a customer  list of  approximately  $964,000  has been
recorded as an intangible asset and will be amortized over a three-year period.

The Company  currently  sells the NTS 1000  billing  system  which will  require
upgrading  by the year 2000 due to its  existing  limitation  of using  only two
digits to identify the year in the date field.  The Company is planning  release
of its new billing  system,  the NTS 2000 in the first calendar  quarter of 1998
which overcomes the two digit limitation currently  experienced on the NTS 1000.
The company  anticipates the majority of customers will upgrade to the NTS 2000.
No assurance can be made that any of the Company's customers will upgrade to the
NTS 2000. In the event that a significant  number of the Company's  customers do
not upgrade to the NTS 2000,  the Company may incur  expenses and potential loss
of ongoing service revenues.

The Company  believes that the cash proceeds from the Company's  initial  public
offering,  anticipated  cash flows from  operations  and its line of credit will
satisfy the Company's working capital and capital expenditures  requirements for
at least the next twelve  months.  However,  there can be no assurance  that the
Company  will not be  required  to seek  additional  capital  sooner  or,  if so
required,  that  adequate  capital will be available on terms  acceptable to the
Company, or at all.

Forward-looking  statements:  This report  contains  both  historical  facts and
forward-looking  statements.  Any  forward-looking  statements involve risks and
uncertainties,  including  but not  limited  to risk of product  demand,  market
acceptance, economic conditions,  competitive products and pricing, difficulties
in product  development,  commercialization,  and  technology,  and other  risks
detailed  in this  filing.  Although  the  Company  believes  it has the product
offerings and resources for continuing success, future revenue and margin trends
cannot be  reliably  predicted.  Factors  external  to the Company can result in
volatility  of the  Company's  common  stock  price.  Because  of the  foregoing
factors,  recent trends are not necessarily  reliable indicators of future stock
prices or financial performance.

ITEM 7A - QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following  constitutes a list of Financial Statements included in Part II of
this report:

     o    Independent Auditors' Report

     o    Balance Sheets - September 30, 1997 and 1996

     o    Statements of Income Years ended - September 30, 1997, 1996 and 1995

     o    Statements of  Stockholders'  Equity Years ended - September 30, 1997,
          1996 and 1995

     o    Statements  of Cash Flows Years ended - September  30, 1997,  1996 and
          1995

     o    Notes to Financial  Statements Years ended - September 30, 1997, 1996,
          and 1995

                                       23
<PAGE>
The following  constitutes a list of Financial  Statement  Schedules included in
Part IV of this report:

      o   Schedule II - Valuation and Qualifying Accounts

Schedules  other than those listed  above are omitted  because of the absence of
conditions under which they are required or because the required  information is
presented in the Financial statements or notes thereto.

<PAGE>
                          Independent Auditors' Report



The Board of Directors and Stockholders
NACT Telecommunications, Inc.:


We have audited the accompanying balance sheets of NACT Telecommunications, Inc.
as  listed in the  accompanying  index.  In  connection  with our  audits of the
financial  statements,  we also have audited the financial statement schedule as
listed in the  accompanying  index.  These  financial  statements  and financial
statement  schedule are the  responsibility  of the  Company's  management.  Our
responsibility  is to  express  an opinion  on these  financial  statements  and
financial statement schedule based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the financial position of NACT  Telecommunications,  Inc.
as of September  30, 1997 and 1996,  and the results of its  operations  and its
cash flows for each of the years in the  three-year  period ended  September 30,
1997, in conformity with generally accepted accounting  principles.  Also in our
opinion,  the related financial statement schedule,  when considered in relation
to the basic financial  statements  taken as a whole,  presents  fairly,  in all
material respects, the information set forth therein.


                                               /S/ KPMG Peat Marwick LLP
                                               -------------------------
                                               KPMG Peat Marwick LLP

Salt Lake City, Utah
December 4, 1997

                                       24

<PAGE>
                          NACT TELECOMMUNICATIONS, INC.
                    (A Majority Owned Subsidiary of GST USA)

                                 Balance Sheets

                           September 30, 1997 and 1996
<TABLE>
<CAPTION>

                                                         Assets                         1997               1996
                                                         ------
                                                                                   --------------     -------------
Current assets:
<S>                                                                               <C>                     <C>
     Cash and cash equivalents (notes 11 and 12)                                  $    9,946,621          694,359
     Marketable investment securities (note 3)                                         3,247,296          250,000
     Trade accounts receivable, less allowance for doubtful accounts of
        $380,819 in 1997 and $100,000 in 1996                                          6,840,958        3,171,180
     Notes receivable, less allowance for doubtful notes of $250,000
        in 1997 and $310,000 in 1996 (note 4)                                          3,252,170          561,396
     Inventories (note 2)                                                              2,780,467        2,406,399
     Prepaid expenses and other                                                          197,659           16,338
     Deferred tax assets (note 8)                                                        587,199          418,449
                                                                                   --------------     -----------
               Total current assets                                                   26,852,370        7,518,121
                                                                                   --------------     -----------
Property and equipment, net (note 5)                                                   5,783,157          717,804
Notes receivable, less current installments (note 4)                                     966,868        1,179,750
Inventories-long term (note 2)                                                           225,000                -
Intangibles, net (notes 4 and 6)                                                       5,775,673        5,075,366
Other assets                                                                             152,043          193,709
                                                                                   --------------     -----------
                                                                                  $   39,755,111       14,684,750
                                                                                   ==============     ===========
                      Liabilities and Stockholders' Equity

Current liabilities:
     Accounts payable                                                             $    1,432,922        2,251,800
     Accrued expenses                                                                    963,034          266,451
     Income taxes payable (note 8)                                                     1,353,371          199,557
     Deferred revenue                                                                    466,859          350,439
     Current installments of obligation under capital lease                                    -           21,848
     Payable to GST USA                                                                1,446,891          183,176
                                                                                   --------------     -----------

               Total current liabilities                                               5,663,077        3,273,271

Obligation under capital lease, less current installments                                      -           58,221
Deferred compensation (note 13)                                                          157,819          157,819
Deferred tax liabilities (note 8)                                                        929,984          985,508
                                                                                   --------------     -----------

               Total long-term liabilities                                             1,087,803        1,201,548
                                                                                   --------------     -----------

Commitments and contingencies (notes 9, 12 and 13)

Stockholders' equity:
     Preferred stock, $.01 par value.  Authorized 10,000,000 shares; none
        issued and outstanding in 1997 and 1996                                                -                -
     Common stock, $.01 par value in 1997 and no par value in 1996.
        Authorized 25,000,000 and 10,000,000 shares in
        1997 and 1996, respectively;  issued and outstanding
        8,113,712 shares in
        1997 and 6,113,712 shares 1996
                                                                                          81,137        9,244,847
     Additional paid-in-capital                                                       28,130,161                -
     Retained earnings                                                                 4,780,760          965,255
     Net unrealized gain (loss) on marketable investment
        securities (note 3)                                                               12,173             (171)
                                                                                   --------------     -----------

               Total stockholders' equity                                             33,004,231       10,209,931
                                                                                   --------------     -----------

                                                                                  $   39,755,111       14,684,750
                                                                                   ==============     ===========
</TABLE>
See accompanying notes to financial statements.

                                       25
<PAGE>
                          NACT TELECOMMUNICATIONS, INC.
                    (A Majority Owned Subsidiary of GST USA)

                              Statements of Income

                 Years ended September 30, 1997, 1996, and 1995
<TABLE>
<CAPTION>
                                                               1997               1996               1995
                                                            -------------      -------------      -------------

<S>                                                        <C>                    <C>                <C>      
Revenues:
     Product sales                                         $  21,981,854          9,929,702          7,604,071
     Network carrier sales                                     5,716,406          3,783,445          2,781,761
     Wins (note 1(b))                                                  -          2,571,731          1,097,950
                                                            -------------      -------------      -------------
                  Total revenues                              27,698,260         16,284,878         11,483,782
                                                            -------------      -------------      -------------
Cost of goods sold (note 6):
     Products                                                  7,140,914          3,941,529          2,645,646
     Network carrier usage (note 13)                           5,485,671          3,381,716          2,731,295
     Wins (note 1(b))                                                  -          2,571,731            786,699
     Amortization of acquired intangibles                        362,424            362,428            442,734
                                                            -------------      -------------      -------------
                  Total cost of goods sold                    12,989,009         10,257,404          6,606,374
                                                            -------------      -------------      -------------
                                                                               -------------      -------------
                  Gross profit                                14,709,251          6,027,474          4,877,408
Operating expenses (note 6):
     Research and development                                  2,385,243          1,352,138          1,183,422
     Selling and marketing                                     2,504,420            953,486            924,542
     General and administrative                                3,472,069          3,024,361          2,152,898
     Amortization of acquired intangibles                        573,060            573,058            519,780
                                                            -------------      -------------      -------------
                  Total operating expenses                     8,934,792          5,903,043          4,780,642
                                                            -------------      -------------      -------------

                  Income from operations                       5,774,459            124,431             96,766
                                                            -------------      -------------      -------------
Other income (expense):
     Interest income                                             543,410            127,043            155,949
     Interest expense                                            (30,456)           (14,202)            (1,514)
     Miscellaneous income                                          4,439             34,670             34,635
                                                            -------------      -------------      -------------
                  Total other income                             517,393            147,511            189,070
                                                            -------------      -------------      -------------
Income before income taxes                                     6,291,852            271,942            285,836
Income taxes (note 8)                                          2,476,347             78,184            205,517
                                                            -------------      -------------      -------------
Net income                                                 $   3,815,505            193,758             80,319
                                                            =============      =============      =============


Earnings per common and common equivalent share:
     Primary                                                      $0.52               $0.03              $0.01
     Fully diluted                                                $0.50               $0.03              $0.01
</TABLE>

See accompanying notes to financial statements.

                                       26
<PAGE>
                          NACT TELECOMMUNICATIONS, INC.
                    (A Majority Owned Subsidiary of GST USA)

                       Statements of Stockholders' Equity

                 Years ended September 30, 1997, 1996, and 1995
<TABLE>
<CAPTION>

                                                                                                               Net
                                                                                                            unrealized
                                                                                                          gain (loss) on
                                                      Common stock               Additional                  marketable
                                              --------------------------------    paid-in       Retained     investment
                                                Shares            Amount         capital        earnings     securities     Total
                                              -------------     --------------  -----------    ----------   ------------   ---------

<S>                                            <C>           <C>                <C>             <C>                       <C>      
Balances at September 30, 1994                 6,113,712     $   6,277,572               -      691,178           -       6,968,750

Capital contribution by parent company
 (note 1(l))
                                                       -           414,981               -            -           -         414,981

Addition to capital arising from
    push down accounting                               -         2,162,384               -            -           -       2,162,384

Net unrealized gain on marketable
   investment securities                               -                 -               -            -       3,605           3,605

Net income                                             -                 -               -       80,319           -          80,319
                                              -----------     --------------    ----------   ----------    --------    ------------

Balances at September 30, 1995                 6,113,712         8,854,937               -      771,497       3,605       9,630,039

Capital contribution by parent company
 (note 1(l))
                                                       -           389,910               -            -           -         389,910

Net unrealized loss on marketable
   investment securities                               -                 -               -            -      (3,776)         (3,776)

Net income                                             -                 -               -      193,758           -         193,758
                                              -----------     --------------    ----------   ----------    --------    ------------

Balances at September 30, 1996                 6,113,712         9,244,847               -      965,255        (171)     10,209,931

Capital contribution by parent company
 (note 1(l))
                                                       -                 -         899,799            -           -         899,799

Issuance of common stock for cash, net of
 expenses of $1,933,348                        2,000,000            20,000      18,046,652            -           -      18,066,652

Net unrealized gain on marketable
   investment securities                               -                 -               -            -      12,344          12,344

Reclass of common stock to additional paid-
   in capital resulting from establishing a
   par value on common stock                           -        (9,183,710)      9,183,710            -           -              -

Net income                                             -                 -               -    3,815,505           -       3,815,505
                                              ===========     ============      =========-   ==========    ========    =============

Balances at September 30, 1997                 8,113,712     $      81,137      28,130,161    4,780,760      12,173       33,004,231
                                              ===========     ==============    =========    ==========    ========    =============
</TABLE>


See accompanying notes to financial statements.

                                       27
<PAGE>
                          NACT TELECOMMUNICATIONS, INC.
                    (A Majority Owned Subsidiary of GST USA)

                            Statements of Cash Flows

                 Years ended September 30, 1997, 1996, and 1995

<TABLE>
<CAPTION>
                                                                                            1997           1996           1995
                                                                                       -------------    -----------   -------------
Cash flows from operating activities:
<S>                                                                                   <C>                  <C>             <C>   
     Net income                                                                       $   3,815,505        193,758         80,319
     Adjustments to reconcile net income to net cash provided by (used in)
       operating activities:
        Depreciation and amortization                                                     1,431,226      1,165,885      1,212,039
        Provision for loss on accounts, notes receivable, and recourse obligation         1,385,734        942,785        229,342
         Loss (gain) on sale of marketable investment securities and equipment               45,699         (4,399)       (34,635)
         Capital contribution by parent company                                             899,799        389,910        414,981
         Provision for loss on inventories                                                  111,000              -              -
         Deferred taxes                                                                    (224,274)      (374,127)      (271,762)
         Decrease (increase) in operating assets:
               Trade accounts and notes receivable                                       (8,374,533)    (1,980,342)    (2,266,741)
               Inventories                                                                 (920,068)    (2,019,310)        19,873
               Prepaid expenses                                                            (181,321)        89,441        (94,484)
               Other assets                                                                  41,666         58,360       (227,882)
         Increase (decrease) in operating liabilities:
               Accounts payable                                                            (818,878)       888,670      1,210,516
               Accrued expenses                                                             496,583         45,287        148,411
               Income taxes payable                                                       1,153,814         60,578       (208,468)
               Deferred revenue and deferred compensation                                   116,420        193,475        180,844
               Payable to GST USA                                                         1,263,715        243,176              -
                                                                                       -------------    -----------   -------------

                        Net cash provided by (used in)
                           operating activities                                             242,087       (106,853)       392,353
                                                                                       -------------    -----------   -------------
Cash flows from investing activities:
     Purchase of land, plant, and equipment                                              (5,169,888)      (304,614)      (326,796)
     Proceeds from sale of equipment                                                              -              -         34,635
     Proceeds from sale of available-for-sale securities                                    250,000        596,836              -
     Purchase of available-for-sale securities                                           (3,234,952)             -              -
     Capitalization of software development costs                                          (821,568)      (419,154)      (162,025)
     Cash included in transfer of Wins to parent (note 1)                                         -       (173,718)             -
                                                                                       -------------    -----------   -------------

                        Net cash used in investing activities                            (8,976,408)      (300,650)      (454,186)
                                                                                       -------------   -----------   -------------
Cash flows from financing activities:
     Proceeds from issuance of common stock                                              18,066,652              -              -
     Principal payments on capital lease obligations                                        (80,069)       (19,868)        (2,271)
                                                                                       -------------    -----------   -------------

                        Net cash provided by (used in)
                           financing activities                                          17,986,583        (19,868)        (2,271)
                                                                                       -------------    -----------   -------------
Net increase (decrease) in cash and cash equivalents                                      9,252,262       (427,371)       (64,104)
Cash and cash equivalents at beginning of year                                              694,359      1,121,730      1,185,834
                                                                                      -------------     -----------   -------------
Cash and cash equivalents at end of year                                              $   9,946,621        694,359      1,121,730
                                                                                       =============    ===========   =============
</TABLE>

                                       28
<PAGE>
                          NACT TELECOMMUNICATIONS, INC.
                    (A Majority Owned Subsidiary of GST USA)

                      Statements of Cash Flows (continued)

                 Years ended September 30, 1997, 1996, and 1995
<TABLE>
<CAPTION>

                                                                                  1997               1996               1995
                                                                             -------------      -------------      --------------
Supplemental Schedule of Noncash Investing and Financing Activities


<S>                                                                         <C>                       <C>                  <C>  
Reclass of common stock to additional paid-in capital resulting from
   establishing a    par value on common stock                              $    9,183,170                 -                   -
Disposition of fully depreciated asset                                                   -           132,270                   -
Repossession of equipment in settlement of accounts and notes
   receivable
                                                                                    76,922            45,000             128,936
Property purchased under capitalized leases                                              -                 -             102,208
Transfer of inventory to property, plant, and equipment                            210,000                 -                   -
Intangibles capitalized as a result of push down                                         -                 -           2,162,384
Disposition of equipment                                                                 -            47,366                   -
Sale of equipment to Wins on note receivable                                             -            60,000                   -
Transfer of notes receivable to other assets (note 4)                              964,207                 -                   -
Change in net unrealized gain (loss) on marketable
  investment securities
                                                                                    12,344              (171)                  -
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for interest                                      $       30,457            17,707               1,145
Cash paid during the year for income taxes                                         638,287                 -             263,735
Supplemental Disclosure of the Assets and Liabilities
Transferred to GST (note 1(b))

Cash                                                                        $            -          (173,718)                  -
Trade accounts receivable                                                                -           (68,705)                  -
Prepaid expenses                                                                         -              (751)                  -
Property and equipment, net                                                              -           (46,020)                  -
Other assets                                                                             -           (14,036)                  -
Accounts payable                                                                         -           150,898                   -
Accrued expenses                                                                         -           152,332                   -
</TABLE>

See accompanying notes to financial statements.

                                       29
<PAGE>
                          NACT TELECOMMUNICATIONS, INC.
                    (A Majority Owned Subsidiary of GST USA)

                          Notes to Financial Statements

                       September 30, 1997, 1996, and 1995



(1)      Summary of Significant Accounting Policies

         (a)      Organization and Description of Business

                  NACT   Telecommunications,   Inc.  (the  "Company")   designs,
                  develops   and   manufactures   advanced    telecommunications
                  switching platforms with integrated  applications software and
                  network telemanagement  capabilities.  The Company's customers
                  include long distance  carriers,  prepaid debit (calling) card
                  and prepaid cellular  network  operators,  international  call
                  back/reorigination     providers    and    other     specialty
                  telecommunications service providers.

                  From September 1993 through  September 30, 1995, GST USA, Inc.
                  ("GST USA") acquired all of the issued and outstanding  common
                  stock  of  the  Company.  This  acquisition  was  accomplished
                  through a series of purchases  of newly issued  shares and the
                  shares of principal  stockholders of the Company.  As a result
                  of these  transactions,  the  Company  became  a wholly  owned
                  subsidiary of GST USA. GST USA  accounted for the  acquisition
                  using the  purchase  method of  accounting.  The excess of the
                  purchase  price  over the fair  value of the  assets  acquired
                  totaled  $6,912,322  and was  assigned  by GST USA as  product
                  support contracts,  software  development costs, and goodwill.
                  These amounts are included in the  accompanying  balance sheet
                  as intangible assets.

                  In  February  1997,  the  Company  closed  an  initial  public
                  offering  (IPO) of  3,000,000  shares  of  common  stock  with
                  2,000,000  sold by the Company and 1,000,000  sold by GST USA.
                  Upon completion of the offering, GST USA ownership was reduced
                  to approximately 63 percent of the outstanding common stock of
                  the Company  and, as such,  GST USA  continues  to control the
                  Company. In connection with the IPO, the Company established a
                  par value of $.01 for common  stock,  increased  the number of
                  common  shares   authorized  to  25,000,000,   and  authorized
                  10,000,000, $.01 par value preferred shares.

                  On September 30, 1997,  GST USA announced that it had retained
                  Hambrecht and Quist LLC to explore alternatives for monetizing
                  its 63 percent interest in the Company,  including a potential
                  sale of some or all of the  Company's  capital stock to one or
                  more strategic investors.

         (b)      Wasatch International Network Services

                  The 1995  financial  statements  include  the  accounts of the
                  Company and its wholly-owned  subsidiary Wasatch International
                  Network Services, Inc. ("Wins"), which commenced operations in
                  fiscal 1995 and had total  assets,  revenues,  and net loss of
                  $316,455,  $1,097,950 and $2,361, respectively,  as of and for
                  the  year  ended   September   30,   1995.   All   significant
                  intercompany  transactions  and balances  were  eliminated  in
                  consolidation.  On October 1, 1995,  the  Company  transferred
                  ownership  and  operations of Wins to GST USA in the form of a
                  dividend at  historical  cost.  From  October 1, 1995  through
                  September 30, 1996, the Company  provided  carrier services to
                  GST  USA  for  the  Wins   operation  for  which  it  received
                  $2,571,731.  GST USA began providing its own carrier  services
                  for Wins on October 1, 1996.

                                       30
<PAGE>
                          NACT TELECOMMUNICATIONS, INC.
                    (A Majority Owned Subsidiary of GST USA)

                          Notes to Financial Statements

         (c)      Cash and Cash Equivalents

                  The Company considers all highly liquid financial  instruments
                  purchased  with an  original  maturity to the Company of three
                  months  or  less  to be  cash  equivalents.  Cash  equivalents
                  consist of money market  accounts of  $8,472,637  at September
                  30, 1997 and $125,785 at September 30, 1996.

         (d)      Inventories

                  Raw  materials  are  valued  at the  lower of cost  (first-in,
                  first-out) or market.  Work-in-process  and finished goods are
                  stated on the basis of accumulated  manufacturing  costs,  but
                  not in excess of market (net  realizable  value).  Refurbished
                  inventory  is  stated  at the  estimated  selling  price  less
                  refurbishing costs,  selling costs and a normal profit margin.
                  Management  periodically  reviews  the  selling  price  of the
                  refurbished  inventory and records adjustments to the carrying
                  value, if any, in the period in which they occur.

                  Long-term  inventory consists of component parts held in order
                  to provide support on existing  customer  equipment beyond one
                  year.

         (e)      Notes Receivable

                  Notes   receivable  are  recorded  at  the  principal   amount
                  outstanding,  net of an  allowance  for  doubtful  notes.  The
                  allowance  is an  amount  that  management  believes  will  be
                  adequate to absorb  possible  losses based on  evaluations  of
                  collectibility and prior loss experience. The evaluation takes
                  into  consideration  such factors specific problem loans, past
                  payment   history,   and  current  and  anticipated   economic
                  conditions that may affect the customers' ability to pay.

                  While  management  uses  available  information  to  recognize
                  losses on notes, changing economic conditions and the economic
                  prospects of the borrowers might necessitate  future additions
                  to the allowance.

         (f)      Impaired Notes

                  Management,  considers  a  note  to  be  impaired  when  it is
                  probable  that the  Company  will be  unable  to  collect  all
                  amounts due  according  to the  contractual  terms of the note
                  agreement.  When a note  is  considered  to be  impaired,  the
                  amount of the  impairment  is  measured  based on the  present
                  value of expected  future cash flows  discounted at the note's
                  effective interest rate. Impairment losses are included in the
                  allowance for doubtful  accounts  through a charge to bad debt
                  expense.  Cash  receipts  on  impaired  notes  receivable  are
                  applied to reduce the principal amount of such notes until the
                  principal has been  recovered  and are  recognized as interest
                  income thereafter.

                                       31
<PAGE>
                          NACT TELECOMMUNICATIONS, INC.
                    (A Majority Owned Subsidiary of GST USA)

                          Notes to Financial Statements

         (g)      Property and Equipment

                  Property and  equipment  are stated at cost.  Depreciation  is
                  computed   using  the   straight-line   method  for  financial
                  reporting  purposes.  Depreciation is based upon the estimated
                  useful lives of  individual  classes of assets.  The estimated
                  useful  lives  of the  individual  classes  of  assets  are as
                  follows:

                         Building                               35 years
                         Furniture and equipment              7-10 years
                         Computer equipment                    3-7 years
                         Switch and testing equipment          3-7 years

         (h)      Intangibles

                  Intangibles  include  goodwill,  software  development  costs,
                  customer lists,  and product  support  contracts and are being
                  amortized on a straight-line  basis over the estimated  useful
                  lives of the respective assets.

         (i)      Software Development Costs

                  Software   development   costs   are   capitalized   upon  the
                  establishment  of  technological  feasibility  of the product.
                  Capitalization  is discontinued  when the product is available
                  for general  release to  customers.  The  Company  capitalized
                  software development costs of $821,568, $419,154, and $162,025
                  in 1997, 1996, and 1995, respectively.

         (j)      Stock-Based Compensation

                  Effective  October 1, 1996,  the Company  adopted the footnote
                  disclosure  provisions  of Statement  of Financial  Accounting
                  Standards No. 123,  Accounting  for  Stock-Based  Compensation
                  (SFAS  123).  SFAS 123  encourages  entities to adopt the fair
                  value based method of accounting  for stock options or similar
                  equity  instruments.  However,  it also  allows  an  entity to
                  continue   measuring   compensation   cost   for   stock-based
                  compensation  using the  intrinsic-value  method of accounting
                  prescribed  by  Accounting  Principles  Board  Opinion No. 25,
                  Accounting for Stock Issued to Employees (APB 25). The Company
                  has elected to continue to apply the  provisions of APB 25 and
                  provide pro forma footnote disclosures required by SFAS 123.

         (k)      Revenue Recognition and Deferred Revenue

                  Revenue from product sales is  recognized  when the product is
                  shipped  and  the  Company  has  no  significant   performance
                  obligations.  Revenue from network carrier sales is recognized
                  as the related service is provided.  Deferred revenue consists
                  of  warranty  payments  billed  or  received  in  advance  and
                  deposits  related to future product sales.  Warranty  payments
                  are amortized over the period of the warranty  agreement which
                  is typically one year.

                                       32
<PAGE>
                          NACT TELECOMMUNICATIONS, INC.
                    (A Majority Owned Subsidiary of GST USA)

                          Notes to Financial Statements

         (l)      Income Taxes

                  Through  February  26,  1997,  the  Company  was a member of a
                  controlled group which elected for federal income tax purposes
                  to file a consolidated  tax return with GST USA. In accordance
                  with the tax  sharing  arrangement  with GST USA,  the Company
                  recorded  the  estimated  income tax expense as if the Company
                  filed a tax return on a separate company basis using the asset
                  and  liability  method.  GST  USA  agreed  to  make a  capital
                  contribution to the Company in an amount that approximates the
                  Company's  current federal income tax expense through February
                  26,  1997 in lieu of an  intercompany  payment for such taxes.
                  Pursuant  to the tax sharing  arrangement  between the Company
                  and  GST  USA,  the  adjustment   recorded  to  reconcile  the
                  intercompany  and equity  accounts with regard to  differences
                  between the estimated tax determined at year-end and the final
                  tax amount are  recognized in income tax expense in the period
                  determined.

                  The Company uses the asset and liability  method of accounting
                  for  income  taxes.  Under  the asset  and  liability  method,
                  deferred tax assets and deferred  liabilities  are  recognized
                  for the future tax  consequences  attributable  to differences
                  between the financial  statement  carrying amounts of existing
                  assets  and  liabilities  and their  respective  tax bases and
                  operating  loss and tax  credit  carryforwards.  Deferred  tax
                  assets and deferred liabilities are measured using enacted tax
                  rates  expected  to apply to  taxable  income  in the years in
                  which those temporary differences are expected to be recovered
                  or settled.

                  After the IPO on February 26, 1997,  GST USA's  ownership  was
                  reduced to 63  percent.  As a result,  the  entities no longer
                  meet the  affiliated  group test  defined in Internal  Revenue
                  Code  Section  1504(a) and the Company  will file  stand-alone
                  returns for periods subsequent to February 26, 1997.

         (m)      Marketable Investment Securities

                  The  Company  classifies  all  of  its  marketable  investment
                  securities  as  available-for-sale  which are recorded at fair
                  market value. Unrealized holding gains and losses are excluded
                  from  earnings  and are  reported,  net of tax,  as a separate
                  component of stockholders' equity until realized. A decline in
                  the market value of any available-for-sale security below cost
                  that is deemed  other than  temporary  is charged to  earnings
                  resulting  in the  establishment  of a new cost  basis for the
                  security.  Dividend income is recognized when earned. Realized
                  gains and losses are  included  in  earnings  and are  derived
                  using the specific-identification method for securities sold.

                                       33
<PAGE>
                          NACT TELECOMMUNICATIONS, INC.
                    (A Majority Owned Subsidiary of GST USA)

                          Notes to Financial Statements

         (n)      Earnings Per Common and Common Equivalent Share

                  Earnings per common and common  equivalent  share are computed
                  based on the  weighted-average  number of common shares and as
                  appropriate,  dilutive  common stock  equivalents  outstanding
                  during the period.  Stock options are  considered to be common
                  stock  equivalents.  The  number  of  shares  used to  compute
                  primary  earnings per common and common  equivalent share were
                  7,350,623, 6,113,712, and 6,113,712, shares in 1997, 1996, and
                  1995,  respectively.  The  number  of shares  used to  compute
                  fully-diluted  earnings per share reflect additional  dilution
                  related to stock  options and warrants  using the market price
                  at the end of the period when  higher  than the average  price
                  for  the  period.   The  number  of  shares  used  to  compute
                  fully-diluted  earnings per share were  7,602,156,  6,113,712,
                  and 6,113,712, shares in 1997, 1996, and 1995, respectively.

         (o)      Fair Value Disclosure

                  At  September  30,  1997  and  1996,  the  book  value  of the
                  Companyis financial instruments approximates fair value.

         (p)      Use of Estimates

                  Management  of the Company has made a number of estimates  and
                  assumptions   relating   to  the   reporting   of  assets  and
                  liabilities  and  the  disclosure  of  contingent  assets  and
                  liabilities  at the date of the financial  statements  and the
                  reported amounts of revenues and expenses during the reporting
                  period. Actual results could differ from these estimates.


(2)      Inventories

         Inventories consisted of the following:

                                                      1997               1996
                                                 --------------    -------------
         Raw materials                           $    1,065,113       377,734
         Work-in-process                                498,525       346,273
         Finished goods                                 302,829       317,392
         Refurbished inventory held for sale            914,000     1,365,000
                                                 --------------    -----------
                                                 $    2,780,467     2,406,399
                                                  ==============   ===========

         Inventory - long-term                   $      225,000              -
                                                  ==============   ===========

                                       34
<PAGE>
                          NACT TELECOMMUNICATIONS, INC.
                    (A Majority Owned Subsidiary of GST USA)

                          Notes to Financial Statements

(3)      Marketable Investment Securities

         The amortized cost,  gross unrealized  holding gains,  gross unrealized
         holding  losses,  and fair value for  available-for-sale  securities by
         major  security  type and class of security at  September  30, 1997 and
         1996, are as follows:
<TABLE>
<CAPTION>
                                                                            Gross              Gross
                                                                          unrealized         unrealized
                                                         Amortized cost     holding            holding                Fair
                                                           cost              gains             losses                value
                                                         --------------    ---------------    ---------------    -------------
<S>                                                     <C>                         <C>                <C>           <C>      
             At September 30, 1997:
                  U.S. government securities -
                      Maturing in one year or less      $      2,237,009            10,287                 -         2,247,296
                  Certificate of deposit -
                      Maturing in one year or less               998,114             1,886                 -         1,000,000
                                                                           ---------------    ---------------    -------------
                                                         ==============
                                                        $      3,235,123            12,173                 -         3,247,296
                                                         ==============    ===============    ===============    =============
             At September 30, 1996:
                  U.S. government securities -
                      Maturing in one year or less      $        250,171                 -               171           250,000
                                                         --------------    ---------------    ---------------    -------------
                                                        $        250,171                 -               171           250,000
                                                         ==============    ===============    ===============    =============
</TABLE>


(4)      Notes Receivable

         Notes  receivable  at September  30, 1997 and 1996 include  amounts due
         from  product  sales  of   approximately   $4,065,638  and  $1,047,500,
         respectively.  Interest  rates on the notes  range from 9 percent to 14
         percent with lives ranging from six months to five years.

         The  Company's  recorded  investment in notes  receivable  for which an
         impairment  has been  recognized  was  $137,032 and  $928,210,  and the
         related  allowance  for doubtful  accounts was $137,032 and $310,000 at
         September  30,  1997  and  1996,  respectively.  The  average  recorded
         investment  in impaired  notes  receivable  during  1997 and 1996,  was
         $532,261  and  $548,331,  respectively.  There was no  interest  income
         recognized on impaired notes receivable during 1997 and 1996.

                                       35
<PAGE>
                          NACT TELECOMMUNICATIONS, INC.
                    (A Majority Owned Subsidiary of GST USA)

                          Notes to Financial Statements

(4)      Notes Receivable (continued)

         The Company has sold carrier services to Overseas Telecom  (iOverseasi)
         since 1994.  Overseas is located in Brazil and  provides  international
         call back/reorigination services to companies and individuals primarily
         in Brazil and Eastern Europe. During the year ended September 30, 1996,
         Overseas became delinquent on certain of its payments.  In fiscal 1997,
         the Company  entered into a note  receivable  agreement  with  Overseas
         which provided for the repayment of the noncurrent  outstanding  amount
         (approximately  $0.93 million) bearing interest at 12 percent. The note
         was  secured  primarily  by  Overseasi  customer  lists.  In the fourth
         quarter of fiscal 1997, the Company exercised its call privileges under
         the  note  and  took  possession  of the  underlying  collateral  - the
         customer  lists.  There were two separate and distinct  customer lists,
         one from Brazil and one from Eastern Europe.  The customer list related
         to the  Brazilian  operations  was  sold  to  Intertoll  Communications
         Network  Corp.  (iICN"),  an  existing  customer  of the  Company  with
         operations  in  Argentina  and  Brazil  for  $1,000,000  payable in 100
         monthly payments of $10,000.  The related payments have been discounted
         at  20  percent  with  the  unpaid  amount  of  approximately  $485,000
         classified as notes receivable in the accompanying  balance sheet as of
         September 30, 1997.

         The  customer  list  related to the  Eastern  European  operations  was
         recorded  on the  Companyis  books at the lower of fair  value or cost.
         Fair value was estimated by an independent  third party appraiser using
         generally accepted valuation standards. Accordingly, a customer list of
         approximately  $964,000 has been  recorded as an  intangible  asset and
         will be amortized over a three-year period.


(5)      Property and Equipment

         Property and equipment are as follows:
<TABLE>
<CAPTION>
                                                                1997                1996
                                                           ---------------      --------------
<S>                                                        <C>                      <C>
         Land                                              $       563,309                  -
         Building                                                3,626,891                  -
         Furniture and equipment                                   279,908            212,525
         Computer equipment                                        784,521            440,827
         Switch and testing equipment                            1,082,217            492,052
                                                           ---------------      --------------
                                                                 6,336,846          1,145,404
         Less accumulated depreciation and amortization            553,689            427,600
                                                           ===============      ==============
                                                           $     5,783,157            717,804
                                                           ===============      ==============
</TABLE>

                                       36
<PAGE>
                          NACT TELECOMMUNICATIONS, INC.
                    (A Majority Owned Subsidiary of GST USA)

                          Notes to Financial Statements

(6)      Intangibles

         Intangible assets are summarized as follows:
<TABLE>
<CAPTION>
                                                                                                Amortization
                                                         1997                 1996                  period
                                                   ---------------      ----------------     ----------------

<S>                                               <C>                         <C>                  <C>     
                   Goodwill                       $      2,863,766            2,863,766            20 years
                   Software development costs            3,305,127            2,483,559            3-5 years
                   Product support contracts             2,146,176            2,146,176             5 years
                   Customer list                           964,207                    -             3 years
                                                   ---------------      ----------------
                                                         9,279,276            7,493,501

                   Less amortization                     3,503,603            2,418,135
                                                   ===============      ================

                                                  $      5,775,673            5,075,366
                                                   ===============      ================
</TABLE>

         On an ongoing basis,  management reviews the valuation and amortization
         of intangible assets to determine possible  impairment by comparing the
         carrying value of the asset to its  undiscounted  estimated future cash
         flows.

         Amortization expense relating to these assets was $1,085,468, $978,813,
         and $962,514 for 1997, 1996, and 1995, respectively.  Of these amounts,
         $512,409,   $405,755,   and  $442,734,   for  1997,   1996,  and  1995,
         respectively, was recorded as a component of cost of goods sold.

(7)      Stock Options

         In November 1996, the Company adopted the 1996 Stock Option Plan ("1996
         Plan") which was  approved by the board of  directors  and GST USA. The
         Company has reserved 1,250,000 shares for issuance under the 1996 Plan,
         of which  options  to  purchase  935,250  shares of common  stock at an
         exercise  price of $9.35 per share were  granted.  All options  granted
         during the year  expire on  November  25,  2001.  The Company may grant
         incentive  stock options and  nonqualified  stock options to employees,
         officers,  directors,  independent  contractors,  and consultants.  The
         exercise  price  of  options  must  be  greater  than or  equal  to the
         estimated  fair  market  value of the stock at the date of  grant.  The
         board of directors or the  compensation  committee  thereof  determines
         which eligible  individuals are granted options,  terms of the options,
         exercise  price,  number of shares  subject to the option,  vesting and
         exercisability. The 1996 Plan expires on November 25, 2006.

                                       37
<PAGE>
                          NACT TELECOMMUNICATIONS, INC.
                    (A Majority Owned Subsidiary of GST USA)

                          Notes to Financial Statements

(7)      Stock Options (continued)

         A summary of activity follows:
<TABLE>
<CAPTION>
                                                                                                Year ended
                                                                                            September 30, 1997
                                                                               -------------------------------------------
                                                                                                         Weighted-average
                                                                                                             exercise
                                                                                Number of shares              price
                                                                               ------------------      ------------------
<S>                                                                                       <C>       <C>           
                 Options outstanding at beginning of year                                       -
                 Plus options granted                                                     935,250   $         9.35
                 Less options exercised                                                         -
                                                                               ==================
                 Options outstanding at end of year                                       935,250   $         9.35
                                                                               ==================
                 Options exercisable at end of year                                       289,688   $         9.35

                 Weighted-average fair value of options granted
                    during the year                                                                 $         3.03
</TABLE>

         The following table  summarizes  information  about fixed stock options
         outstanding at September 30, 1997:
<TABLE>
<CAPTION>

                                          Options outstanding                                           Options exercisable
                     ----------------------------------------------------------------      ----------------------------------------
                                              Weighted-average
                          Number                 remaining          Weighted-average              Number           Weighted-average
 Range of exercise    outstanding at            contractual             exercise              exercisable at           exercise
       prices          September 30,                life                 price                 September 30,            price
                           1997                                                                    1997
 ------------------  ------------------      ----------------      ------------------      -------------------   ------------------
<S>                       <C>                        <C>                  <C>                     <C>                      <C> 
$        9.35             935,250                    4.15                 9.35                    289,688                  9.35
</TABLE>

         The  Company  accounts  for these  plans  under APB 25,  under which no
         compensation cost has been recognized.  Had compensation cost for these
         plans been  determined  consistent  with SFAS 123,  the  Company's  net
         earnings  and  earnings  per  share  would  have  been  changed  to the
         following pro forma amount:
                                                                    1997
                                                              ------------------
      Net income                         As reported          $   3,815,505
                                          Pro Forma               2,784,147
       Primary earnings per share:       As reported          $        0.52
                                          Pro Forma                    0.38
      Fully-diluted earnings per share   As reported          $        0.50
                                          Pro Forma                    0.37

         Pro forma net earnings  reflects  only options  granted in fiscal 1997.
         Therefore,   the  effect  that   calculating   compensation   cost  for
         stock-based  compensation  under  SFAS  123  has on the pro  forma  net
         earnings  as shown  above may not be  representative  of the effects on
         reported net earnings for future years.

                                       38
<PAGE>
                          NACT TELECOMMUNICATIONS, INC.
                    (A Majority Owned Subsidiary of GST USA)

                          Notes to Financial Statements

(7)      Stock Options (continued)

         The fair value of each  option  grant is  estimated  on the date of the
         grant using the  Black-Scholes  option pricing model with the following
         weighted-average  assumptions used for grants in fiscal 1997: risk-free
         interest  rate of 6.0 percent;  expected  dividend  yield of 0 percent;
         expected life of 3.4 years; and expected volatility of 82 percent.


(8)      Income Taxes

         Income tax expense consists of:
<TABLE>
<CAPTION>
                                                            Current            Deferred             Total
                                                        --------------     ---------------     ---------------
<S>                                                    <C>                      <C>                 <C>      
              Year ended September 30, 1997:
                   U.S. federal                        $     2,336,145          (194,210)           2,141,935
                   State                                       364,476           (30,064)             334,412
                                                        ==============     ===============     ===============
                                                       $     2,700,621          (224,274)           2,476,347
                                                        ==============     ===============     ===============
              Year ended September 30, 1996:
                   U.S. federal                        $       389,910          (322,207)              67,703
                   State                                        60,358           (49,877)              10,481
                                                        --------------     ---------------     ---------------
                                                       $       450,268          (372,084)              78,184
                                                        ==============     ===============     ===============
              Year ended September 30, 1995:
                   U.S. federal                        $       414,981          (237,014)             177,967
                   State                                        64,239           (36,689)              27,550
                                                        --------------     ---------------     ---------------
                                                                           ===============
                                                       $       479,220          (273,703)             205,517
                                                        ==============     ===============     ===============
</TABLE>

         Income tax expense  differs  from the amounts  computed by applying the
         U.S.  federal  income  tax rate of 34  percent  to pretax  income  from
         continuing operations as a result of the following:
<TABLE>
<CAPTION>

                                                                                1997                1996                1995
                                                                           --------------     ---------------     ---------------

<S>                                                                  <C>                        <C>                  <C>   
         Computed "expected" tax expense                             $     2,139,230            92,460               97,184
         Increase (reduction) in income taxes resulting from:
              Amortization of goodwill                                        48,899            48,899               48,899
              State and local income taxes, net of federal
               income tax benefit                                            222,862             2,297               18,183
              Meals and entertainment                                          5,796             3,631                4,060
              Adjustment of tax provision to actual (1)                            -           (70,040)              36,214
              Other, net                                                      59,560               937                  977
                                                                      ---------------    ---------------     ---------------
                                                                     $     2,476,347            78,184              205,517
                                                                      ==============     ===============     ===============
</TABLE>

(1)      Represents   management's   adjustment  to  the  Company's  income  tax
         liability based on a current assessment of its related obligations.

                                       39

<PAGE>
                          NACT TELECOMMUNICATIONS, INC.
                    (A Majority Owned Subsidiary of GST USA)

                          Notes to Financial Statements

(8)      Income Taxes (continued)

         The tax effects of temporary  differences that give rise to significant
         portions of the deferred tax assets and  deferred  tax  liabilities  at
         September 30, 1997 and 1996, are presented below:
<TABLE>
<CAPTION>

                                                                                                1997                  1996
                                                                                         ------------------      --------------
<S>                                                                                     <C>                            <C>    
         Net current deferred tax assets:
              Accounts and notes receivable principally due to allowance for doubtful
                 accounts                                                               $          309,895             152,930
              Unearned product warranty                                                            125,422              47,074
              Accrued vacation payable                                                              55,386              37,327
              Unearned sales deposits                                                                    -              83,640
              Inventory principally due to uniform capitalization and reserves
                                                                                                    96,496              97,478
                                                                                         ------------------      --------------
                        Total gross deferred tax assets                                            587,199             418,449
                                                                                         ------------------      --------------
         Net long-term deferred tax liabilities:
              Deferred compensation                                                                 58,866              58,866
              Plant and equipment, principally due to differences in depreciation and
                 capitalized interest
                                                                                                   (77,155)            (87,588)
              Capitalized software                                                                (450,716)           (200,619)
              Push down intangibles                                                               (460,979)           (756,269)
              Unrealized (gain) loss on investments                                                      -                 102
                                                                                         ------------------      --------------
                        Total gross deferred tax liabilities                                      (929,984)           (985,508)
                                                                                         ------------------      --------------
                        Net deferred tax liability                                      $         (342,785)           (567,059)
                                                                                         ==================      ==============
</TABLE>

         Management  believes that existing taxable  temporary  differences will
         more likely than not reverse within the applicable carryforward periods
         to allow future realization of existing deferred tax assets.


(9)      Leases

         The Company has operating leases for office furnishings, various office
         equipment and two sales  offices.  Future  minimum lease payments as of
         September 30, 1997 are as follows:

             Year ending September 30:
                  1998                                    $          194,378
                  1999                                               180,240
                  2000                                               180,240
                  2001                                               180,240
                  2002                                               160,454
                                                           =================

                      Total minimum lease payments        $          895,552
                                                           =================

                                       40

<PAGE>
                          NACT TELECOMMUNICATIONS, INC.
                    (A Majority Owned Subsidiary of GST USA)

                          Notes to Financial Statements

(9)      Leases (continued)

         These leases  generally  require the Company to pay all executory costs
         such as maintenance  and insurance.  Rental  expenses for all operating
         leases for 1997, 1996, and 1995, were $123,462, $100,299, and $116,944,
         respectively.


(10)     Profit Sharing Plans

         The Company  sponsors a defined  contribution  401(k) plan (the "Plan")
         for employees  who have  completed one year of service and attained the
         age  of  21.  Participants  may  defer  up to 15  percent  of  eligible
         compensation.  The Company, at its discretion,  may match 50 percent of
         participant   contributions   up  to   7.5   percent   of   participant
         compensation.  Employer  contributions  made to the Plan were  $88,361,
         $59,881, and $51,863, for the years ended September 30, 1997, 1996, and
         1995, respectively.

         Through  September 30, 1996,  the Company  established a  discretionary
         profit  sharing  program for full time  employees who had completed one
         full year of employment.  Under the plan, 10 percent of the increase in
         profits  based on the  Company's  previous  highest  retained  earnings
         balance  were  allocated  among  employees   determined  on  length  of
         employment  and  salary  level  at  the  discretion  of  the  board  of
         directors.  Contributions to the program were $132,450 and $171,483 for
         the years ended September 30, 1996 and 1995, respectively.  The program
         was terminated on September 30, 1996.


(11)     Major Customers, Concentration of Credit Risk and Network Carrier Sales

         Sales to individual customers exceeding 10 percent of total revenues or
         total trade accounts and notes receivable as of and for the years ended
         September 30, 1997, 1996, and 1995, were as follows:
<TABLE>
<CAPTION>

                                                                                Percentage of total revenues
                                                                    ----------------------------------------------------
                                         Customer                        1997               1996                1995
         --------------------------------------------------------   --------------     --------------      -------------
<S>                                                                          <C>             <C>                   <C>
         J.D. Services, Inc.                                                 8%               -                     -
         Caribbean Telephone and Telegraph, Inc.                             -                -                    16%
         Intertoll Communications Network Corp.                              9               12%                    8
         Overseas Telecom                                                    5               13                     7
</TABLE>
<TABLE>
<CAPTION>

                                                                      Percentage of total notes and accounts receivable
                                                                    ----------------------------------------------------
                                         Customer                        1997               1996                1995
         --------------------------------------------------------   --------------     --------------      -------------
<S>                                                                       <C>                <C>                    <C>
         J.D. Services, Inc.                                              15%                 -                     -
         Caribbean Telephone and Telegraph, Inc.                           -                  -                     7%
         Intertoll Communications Network Corp.                            4                  6%                    7
         Overseas Telecom                                                  3                 22                     7
</TABLE>

                                       41
<PAGE>
                          NACT TELECOMMUNICATIONS, INC.
                    (A Majority Owned Subsidiary of GST USA)

                          Notes to Financial Statements

(11)     Major Customers, Concentration of Credit Risk and Network Carrier Sales
         (continued)

         The Company's  customers  consist of business  entities  geographically
         dispersed primarily throughout the United States.  However, the Company
         also sells products and/or services to customers in the United Kingdom,
         Bosnia,  Serbia,  Bulgaria,  Saudi  Arabia,  and  Brazil.  The  Company
         maintains  a security  interest  in the  telecommunications  systems it
         sells until the related account balances are paid in full.

         The Company had deposits with financial  institutions  in excess of the
         federally  insured  amount of $100,000 in the amount of $9,691,380  and
         $467,737 for the years ended September 30, 1997 and 1996, respectively.

         Network  carrier sales  originating  from countries  outside the United
         States aggregated approximately $3,180,000 and $2,105,000 for the years
         ended  September  30,  1997 and  1996,  respectively.  These  sales are
         payable in U.S. dollars.


(12)     Commitments and Contingencies

         The Company acted as a guarantor for  financing  transactions  executed
         under repurchase agreements with a financial institution for $3,482,182
         and  $1,035,032  at  September  30, 1997 and 1996,  respectively.  This
         results from the financial institution providing lease financing to the
         Company's  customers  to  enable  them to  purchase  product  from  the
         Company.  At September 30, 1997, the Company had  established a reserve
         of $200,000 for its estimated  obligation under the recourse provisions
         and maintains a security  interest in the equipment  financed under the
         repurchase agreement.  No such reserve was recorded as of September 30,
         1996. In addition to other covenants, the repurchase agreement requires
         the Company to maintain an unrestricted cash account of $6,000,000. The
         Company has also  established a $750,000  revolving line of credit with
         this same financial  institution.  No balances were  outstanding  under
         this line of credit at September 30, 1997.

         On October 1, 1996, the Company entered into employment agreements with
         various employees which specify the individual's salary,  benefits, and
         restrictions. All agreements expire on September 30, 2001.

                                       42

<PAGE>
                          NACT TELECOMMUNICATIONS, INC.
                    (A Majority Owned Subsidiary of GST USA)

                          Notes to Financial Statements

(12)     Commitments and Contingencies (continued)

         On  August  24,  1995,   Aerotel,   Ltd.  and  Aerotel  U.S.A.,   Inc.,
         (collectively,  "Aerotel") filed a patent infringement suit against the
         Company  alleging that telephone  systems  manufactured and sold by the
         Company  incorporating  prepaid calling features infringe upon a patent
         which was issued to Aerotel in November  1987.  The  complaint  further
         alleges  defamation  and unfair  competition  by the  Company and seeks
         various  damages.  Aerotel seeks  injunctive  relief,  damages of $18.7
         million for willful  infringement  of its patent and an order requiring
         the Company to publish a written  apology to  Aerotel.  The Company has
         filed  an  Answer  and   Counterclaim   denying  patent   infringement,
         defamation or unfair  competition and seeking judgment that the Aerotel
         patent is invalid and that  Aerotel has misused its patent in violation
         of  antitrust  laws.  Based  on  information  currently  available,  an
         estimate of potential  loss cannot be made.  However,  management is of
         the  opinion  that there will be no  material  impact of the  Company's
         financial  position,  results of operations or liquidity as a result of
         this suit. Accordingly,  no provision for loss has been provided in the
         accompanying financial statements. An unfavorable decision could have a
         material  adverse  effect on the  business,  financial  condition,  and
         results of operations of the Company.

         In addition to the above,  the  Company  has various  legal  claims and
         other  contingent  matters,  incurred in the normal course of business.
         Although the final  outcome of such matters  cannot be  predicted,  the
         Company  believes the ultimate  disposition  of these  matters will not
         have a material  adverse effect on the Company's  financial  condition,
         liquidity, or results of operations.

         As of September 30, 1997, the Company had capital expenditure  purchase
         commitments outstanding of approximately $900,000.

(13)     Related Party Transactions

         In June 1997,  and under  contract with the Company,  GST Realco,  Inc.
         ("GST Realco"),  a subsidiary of GST USA,  completed  construction of a
         40,000  square  foot  office  building  in  Provo,  Utah.  The  Company
         purchased the land and a portion of the building  construction from GST
         Realco  for  $563,309  and  $1,293,072,   respectively,  and  currently
         occupies the property as its corporate and manufacturing facility.

         During the year ended  September  30, 1996,  GST USA borrowed  $250,000
         from the Company on short-term  notes  bearing  interest at 11 percent.
         The note was  repaid  by  September  30,  1996.  The  Company  recorded
         interest  income of $2,602  relating to this note during the year ended
         September 30, 1996. There were no borrowings during fiscal 1997.

         Also, during the years ended September 30, 1997 and 1996, respectively,
         the Company sold $32,788 and $356,000 of application platform switching
         products and $-0- and $2,571,731 of wholesale  carrier usage to GST USA
         or  subsidiaries  and  purchased  $4,466,907  and $361,000 of wholesale
         carrier usage from GST USA.

         From April 1996  through May 1997 a member of the  Company's  board was
         compensated  by GST  USA  for  services  rendered  to GST  USA  and its
         subsidiaries.

                                       43
<PAGE>
                          NACT TELECOMMUNICATIONS, INC.
                    (A Majority Owned Subsidiary of GST USA)

                          Notes to Financial Statements

(13)     Related Party Transactions (continued)

         The Company has entered into a Deferred  Compensation  Trust  Agreement
         (the Trust) with the chairman of the Company whereby the Company funded
         the trust in the amount of $144,000. The principal and related interest
         thereon  are  payable  to  the  chairman  based  on a  defined  payment
         schedule.  The Company,  at its sole  discretion,  may at any time make
         additional  contributions  to the Trust. The Trust is subject to claims
         of the Company's creditors in the event of the Company's insolvency.


(14)     Accounting Standards Issued Not Yet Adopted

         In February  1997,  the  Financial  Accounting  Standards  Board issued
         Statement of Financial Accounting Standards No. 128, Earnings per Share
         (SFAS  128).  SFAS 128  establishes  a  different  method of  computing
         earnings per share than is currently  required  under the provisions of
         Accounting Principles Board Opinion No. 15. Under SFAS 128, the Company
         will be required to present  both basic  earnings per share and diluted
         earnings per share.  Basic and diluted  earnings per share are expected
         to be comparable to the currently  presented  earnings per share.  SFAS
         128 is effective for the consolidated  financial statements for interim
         and annual  periods ending after  December 15, 1997.  Accordingly,  the
         Company plans to adopt SFAS 128 in the first quarter of its 1998 fiscal
         year and at that time all historical  earnings per share data presented
         will be restated to conform with the provisions of SFAS 128.

         In  1997,   the  FASB  also  issued   Statement   No.  130,   Reporting
         Comprehensive Income, and Statement No. 131, Disclosures About Segments
         of an Enterprise and Related  Information.  These  statements which are
         effective  for periods  beginning  after  December 15, 1997,  expand or
         modify  disclosures  and  accordingly,  will  have  no  impact  on  the
         Company's  reported financial  position,  results of operations or cash
         flows.

                                       44
<PAGE>
                                                                     Schedule II

                          NACT TELECOMMUNICATIONS, INC.
                    (A Majority Owned Subsidiary of GST USA)

                        Valuation and Qualifying Accounts

                 Years ended September 30, 1997, 1996, and 1995
<TABLE>
<CAPTION>


                                    Balance at beginning      Additions charged to        Write offs against           Balance at
Allowance for doubtful accounts            of year                 bad debts                 allowance                 end of year
                                    ----------------------  ------------------------   -------------------------    ----------------

<S>                                    <C>                   <C>                       <C>                         <C>           
Year ended September 30, 1997          $      100,000        $      872,427            $      591,608              $      380,819
                                        =============         =============             ==============              ==============

Year ended September 30, 1996          $      116,410        $      672,785            $      689,195              $      100,000
                                        =============         =============             ==============              ==============

Year ended September 30, 1995          $            -        $      189,342            $       72,932              $      116,410
                                        =============         =============             ==============              ==============

                                    Balance at beginning      Additions charged to        Write offs against
Allowance for doubtful notes               of year                 bad debts               allowance year         Balance at end of
                                    ----------------------  ------------------------   ---------------------    -------------------

Year ended September 30, 1997          $      310,000        $      313,307             $      373,307             $      250,000
                                        =============         ==============             =============              ==============

Year ended September 30, 1996          $       40,000        $      270,000             $            -             $      310,000
                                        =============         ==============             =============              ==============

Year ended September 30, 1995          $            -        $       40,000             $            -             $       40,000
                                        =============         ==============             =============              ==============

                                         Balance at                                        Charges 
Recourse Obligation Reserve             beginning of        Additions and                  against                Balance at end of
Recourse Obligation Reserve                year             adjustments                    allowance                     year
                                    -----------------------------------------------   -----------------------     -----------------

Year ended September 30, 1997          $            -        $      200,000             $            -             $      200,000
                                        =============         ==============             =============              ==============
</TABLE>

                                       45
<PAGE>
ITEM  9 -  CHANGES IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
                   FINANCIAL DISCLOSURE

None

                                    PART III

ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The  information  required by this item is  incorporated  by reference  from the
Company's definitive proxy statement to be filed not later than January 28, 1998
pursuant  to  Regulation  14A of the  General  Rules and  Regulations  under the
Securities Exchange Act of 1934 ("Regulation 14A").

ITEM 11 - EXECUTIVE COMPENSATION

The  information  required by this item is  incorporated  by reference  from the
Company's definitive proxy statement to be filed not later than January 28, 1998
pursuant to Regulation 14A.

ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The  information  required by this item is  incorporated  by reference  from the
Company's definitive proxy statement to be filed not later than January 28, 1998
pursuant to Regulation 14A.

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The  information  required by this item is  incorporated  by reference  from the
Company's definitive proxy statement to be filed not later than January 28, 1998
pursuant to Regulation 14A.


                                     PART IV

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

(a)  The following  documents  constitute a list of financial
     statements,  financial  statement schedules and exhibits
     required to be included in this report:

     1.  Financial Statements.  Included in Part II, Item 8 of this report:

          Independent Auditors' Report

          Balance Sheets - September 30, 1997 and 1996

          Statements of Income - Years ended September 30, 1997, 1996, and 1995

          Statement of  Stockholders'  Equity - Years ended  September 30, 1997,
          1996 and 1995

          Statements of Cash Flows - Years ended  September 30, 1997,  1996, and
          1995

          Notes to Financial  Statements - Years ended  September 30, 1997, 1996
          and 1995

                                       46
<PAGE>
2. Financial Statement Schedules. Included in Part II of this report.

                 Schedule II - Valuation and Qualifying Accounts

Schedules not listed above have been omitted  because they are not applicable or
are not required or the information required to be set forth therein is included
in the Financial Statements or notes thereto.

3. Exhibit
   Number
     3.1      Certificate  of  Incorporation  of the  Company,  incorporated  by
              reference to Exhibit 3.1 of the Company's  Registration  Statement
              on Form S-1 (Registration No. 333-17735) (the "Form S-1")

     3.2      By-laws of the Company,  incorporated  by reference to Exhibit 3.2
              of the Form S-1.

     4.1      Specimen  Certificate of the Company's Common Stock,  incorporated
              by reference to Exhibit 4.1 of the Form S-1.

     4.2      Amended and  Restated  1996 Stock  Option  Plan,  incorporated  by
              reference to Exhibit 4.2 of the Form S-1.

    10.1      Employment  Agreement  dated as of October 1, 1996 by and  between
              the Company and A. Lindsay  Wallace,  incorporated by reference to
              Exhibit 10.1 of the Form S-1.

    10.2      Employment  Agreement  dated as of October 1, 1996 by and  between
              the Company and Eric F. Gurr, incorporated by reference to Exhibit
              10.2 of the Form S-1.

    10.3      Employment  Agreement  dated as of October 1, 1996 by and  between
              the Company and Gary Brown,  incorporated  by reference to Exhibit
              10.3 of the Form S-1.

    10.4      Employment  Agreement  dated as of October 1, 1996 by and  between
              the Company and  Geoffrey  Shupe,  incorporated  by  reference  to
              Exhibit 10.4 of the Form S-1.

    10.5      Revolving  Line of Credit  Agreement dated February 6, 1996 by and
              between the Company and Zions Credit Corporation,  incorporated by
              reference to Exhibit 10.5 of the Form S-1.

    10.6      Form of  Recourse  Lease  Financing  Agreement  by and between the
              Company and Zions Credit Corporation, incorporated by reference to
              Exhibit 10.6 of the Form S-1.

    10.7      Lease Agreement dated October 20, 1994, by and between the Company
              and Busch-Provo, LTD, incorporated by reference to Exhibit 10.7 of
              the Form S-1.

    10.8      Lease  Extension  Agreement dated May 15, 1996, by and between the
              Company and Busch-Provo, LTD, incorporated by reference to Exhibit
              10.8 of the Form S-1.

                                       47
<PAGE>
   *23.1      Consent  to  the  incorporation  by  reference  in  the  Company's
              registration  Statement  on Form S-8 of the  report  of KPMG  Peat
              Marwick LLP included herein.

   *24.1      Power of Attorney  (included  on the  signature  page of this Form
              10K).

   *27.1      Financial Data Schedule

------------------
*     Filed herewith.

             (b)   Reports on Form 8-K.           None





                                       48

<PAGE>
                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be signed
on its behalf by the  undersigned,  thereunto  duly  authorized,  in the city of
Provo, State of Utah, on the 26th day of December, 1997.

                                             NACT Telecommunications, Inc.

                                             By:  /S/ A. Lindsay Wallace
                                                   ---------------------
                                                      A. Lindsay Wallace
                                                      Chief Executive Officer

                                POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS,  that each person whose signature  appears below
constitutes and appoints A. Lindsay Wallace and Eric F. Gurr his true and lawful
attorney-in-fact,  each  acting  alone,  with  full  power of  substitution  and
resubstitution  for  him  and in his  name,  place  and  stead,  in any  and all
capacities to sign any and all amendments to this report,  and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities  and Exchange  Commission,  hereby  ratifying and confirming all that
said attorneys-in-fact or their substitutes,  each acting alone, may lawfully do
or cause to be done by virtue thereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been duly signed by the following  persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>

     Signature              Title                                 Date
     ---------              -----                                 ----



<S>                         <C>                                   <C> 
/S/ A. Lindsay Wallace      Chief Executive Officer (Principal    December 26, 1997
------------------------    Executive Officer) and Director
(A. Lindsay Wallace)




/S/ Eric F. Gurr            Chief Financial Officer (Principal    December 26, 1997
-------------------------   Financial & Accounting Officer)
(Eric F. Gurr)




/S/ Thomas E. Sawyer        Director                              December 26, 1997
------------------------
(Thomas E. Sawyer)



/S/ Ronald Eliason          Director                              December 26, 1997
------------------------
(Ronald Eliason)
</TABLE>

                                       49

<PAGE>


            Signature               Title                   Date
            ---------               -----                   ----



/S/ W. Gordon Blankstein            Director                December 26, 1997
------------------------
(W. Gordon Blankstein)




/S/ Robert Olson                    Director                December 26, 1997
------------------------
(Robert Olson)




/S/ Clifford V. Sander              Director                December 26, 1997
------------------------
(Clifford V. Sander)




/S/ Stephen Irwin                   Director                December 26, 1997
------------------------
(Stephen Irwin)

                                       50