<PAGE>   1
                       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 December 31, 1998.

         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 0-9728

                           GST EQUIPMENT FUNDING, INC.
             (Exact Name of Registrant as Specified in its Charter)

           Delaware                                          91-1785734
(State or other jurisdiction of                     (IRS Employer Identification
 incorporation or organization                                 Number)


                  4001 Main Street, Vancouver, Washington 98663

               (Address of Principal Executive Offices) (Zip Code)

       Registrant's telephone number, including area code: (360) 356-7100

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

                                      None

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

                                      None

  THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I(1)(a)
      AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM 10-K WITH THE
                 REDUCED DISCLOSURE FORMAT CONTEMPLATED THEREBY.

         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
<PAGE>   2
         Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date: At March 29, 1999,
there were outstanding 100 shares of the Registrant's common stock, $.01 par
value per share.
<PAGE>   3
ITEM 1.  BUSINESS.

OVERVIEW

         GST Equipment Funding, Inc. ("GST Funding") is a special purpose
finance subsidiary of GST Telecommunications, Inc. ("GST"). GST Funding was
formed to issue its 13 1/4% Senior Secured Notes due 2007 (the "Secured Notes")
that were sold in a private placement in May 1997 (the "Secured Notes Offering")
and to purchase equipment with the proceeds of the Secured Notes Offering. GST
Funding acts as a purchasing agent for GST USA, Inc., a wholly owned subsidiary
of GST and the parent of GST Funding ("GST USA") and sells to GST USA the
equipment it purchases. Ultimately, such equipment is leased to the operating
subsidiaries of GST by GST USA. Of the $255.8 million of net proceeds from the
issuance of the Secured Notes, as of December 31, 1998 approximately $93.8
million had been used to purchase securities pledged to fund the first six
interest payments on the Secured Notes ($43.8 million of which was used to make
the first three interest payments in November 1997, May 1998 and November 1998)
and approximately $194.2 million had been used to purchase telecommunications
equipment ($41.5 million of which was used to refinance intercompany
indebtedness).

         GST provides a broad range of integrated telecommunications products
and services, primarily to business customers located in the western continental
states. As a facilities-based integrated communications provider ("ICP"), GST
operates state-of-the-art, digital telecommunications networks that represent an
alternative to incumbent local exchange carriers. GST's full line of products,
which offer a "one-stop" customer-focused solution to the telecommunications
services requirements of its customers, include local dial tone, long distance,
Internet, data transmission and private line services. With the turn-up of its
Virtual Integrated Transport and Access ("VITA") network in the fiscal year
ended December 31, 1998, GST became one of the first ICPs to develop and deploy
a converged network.

ITEM 2.  PROPERTIES.

         GST Funding neither owns nor leases material properties.

ITEM 3.  LEGAL PROCEEDINGS.

         There are no material legal proceedings to which GST Funding is a
party. GST Funding knows of no threatened or pending material legal action
against it.

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

         Not required.

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

         There is no established public trading market for GST Funding's common
equity. All of the issued and outstanding shares of such common equity are owned
by GST USA.

ITEM 6.  SELECTED FINANCIAL DATA.

         Not required.

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS (REDUCED DISCLOSURE NARRATIVE).

OVERVIEW

         GST Funding was formed on March 5, 1997 for the purpose of issuing the
Secured Notes and financing the purchase of telecommunications equipment. GST
Funding acts as purchasing agent for GST USA and sells to GST USA the equipment
it purchases with the proceeds from the Secured Notes Offering. GST Funding has
only a limited operating history.


                                      -1-
<PAGE>   4
         As of December 31, 1998, GST Funding had purchased approximately $194.2
million of equipment and held restricted investments of approximately $50.0
million restricted for the payment of interest. All of such equipment has been
sold to GST USA in exchange for intercompany notes. Ultimately, such equipment
is leased by GST USA to the various operating subsidiaries of GST.

RECENT DEVELOPMENTS

         GST, GST USA, GST Funding and GST Network Funding, Inc. (the "GST
Companies") are parties to certain indentures and have issued or guaranteed
notes governed by those indentures. In November 1998, the GST Companies notified
United States Trust Company of New York, as trustee under the indentures, that
certain actions by GST and its subsidiaries may not have been in compliance with
the technical requirements of the restrictive covenants contained in the
indentures. In particular, the GST Companies disclosed that a series of
transactions involving Global Light Telecommunications, Inc. ("Global") may have
resulted in technical non-compliance with the indentures. The GST Companies are
currently conducting a review of the relevant transactions and intend to
vigorously pursue any necessary action to cure the potential non-compliances.
GST has initiated litigation against Global and others in an effort to cure any
technical covenant violations that may have resulted from the transactions
involving Global.

         In February 1999, the trustee informed the note holders of the
potential violations. Pursuant to the definitions contained within the
indentures of each of the notes described above, no default has been declared
and no event of default has occurred. GST Funding has not classified the related
debt obligations as current in its consolidated financial statements because
management believes it is probable that, in the event that the holders declared
a default, the GST companies would be able to take corrective actions to cure
any objectively determinable violations within the prescribed grace period.

         While GST Funding believes that any non-compliances can be cured, GST
Funding cannot offer any assurance that the litigation will be successful or
that any other potential cures will be effected in a timely manner or be
sufficient. In the event that the GST Companies have violated their indentures
and do not cure the violations, the holders of the notes issued under the
indentures could demand repayment of the notes, discontinue disbursements of
cash proceeds of the most recent notes and assert other remedies against the GST
Companies. If any of these events occurred, the GST Companies would not have
sufficient liquid assets to repay the notes.

OPERATIONS

         The operations of GST Funding are limited to (i) purchasing equipment,
(ii) selling equipment, (iii) receiving payments under intercompany notes, (iv)
making payments of interest and principal on the Secured Notes, and (v)
fulfilling its obligations under the indenture relating to the Secured Notes,
the pledge agreement relating to the security interest in the Secured Notes and
the registration rights agreement relating to the Secured Notes. GST Funding
satisfied its obligations under such registration rights agreement in November
1997, upon the consummation of an exchange offer for the Secured Notes.

LIQUIDITY AND CAPITAL RESOURCES

         At December 31, 1998, GST Funding had restricted investments of
approximately $50.0 million. On May 13, 1997, GST Funding completed the Secured
Notes Offering, consisting of $265.0 million in Secured Notes. Of the $255.8
million of net proceeds from the issuance of the Secured Notes, as of December
31, 1998 approximately $93.8 million had been used to purchase securities
pledged to fund the first six interest payments on the Secured Notes ($43.8
million of which was used to make the first three interest payments in November
1997, May 1998 and November 1998) and approximately $194.2 million had been used
to purchase telecommunications equipment ($41.5 million of which was used to
refinance intercompany indebtedness). The indenture governing the Secured Notes
includes restrictive covenants which, among other items, limit or restrict
additional indebtedness incurred by GST Funding and GST, investment in certain
subsidiaries and the payment of dividends.

         GST Funding may have committed certain technical indenture covenant
violations, and GST Funding has notified the indenture trustee in this regard.
See "Recent Developments."


                                      -2-
<PAGE>   5
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.

INTEREST RATE MARKET RISK

         GST Funding has fixed income investments consisting of cash equivalents
and short-term investments in U.S. government debt instruments. See note 1 to
the Financial Statements for information about investments in U.S. government
debt instruments.

         Interest income earned on GST Funding's investment portfolio is
affected by changes in the general level of U.S. interest rates. GST Funding
believes that it is not exposed to significant changes in fair value because
such investments are composed of Government debt instruments and the maturities
are predominantly short term. The fair value of each investment approximates
amortized cost, and long term securities have maturities of eighteen months or
less.

         GST Funding does not use derivative financial instruments to manage its
interest rates. GST Funding's investments had a book value of $265,000 and a
market value of $273,933 at December 31, 1998.

MARKET PRICE RISK

         GST Funding has risk exposure associated with the market price on its
publicly traded long-term debt. These bonds are recorded at book value, which
could vary from current market prices.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         See page F-1.

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

         Not applicable.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         Not required.

ITEM 11. EXECUTIVE COMPENSATION.

         Not required.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         Not required.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         Not required.

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

(a)(1)   Financial Statements:  see the Index to Financial Statements.

   (2)   Financial Statement Schedules:  Not applicable.

   (3)   Exhibits:

   *3(a) Certificate of Incorporation of GST Funding.

   *3(b) By-Laws of GST Funding.

   *4(a) Indenture dated as of May 13, 1997, by and among GST Funding, GST, GST
         USA and United States Trust Company of New York.

  *10(a) Collateral Pledge and Security Agreement dated as of May 13, 1997, by
         and among GST Funding, United States Trust Company of New York and the
         holders of the Notes as defined therein.

  **27   Financial Data Schedule.

----------

*        Incorporated by reference to GST Funding's Registration Statement on
         Form S-4 (No. 333-33601).


                                      -3-
<PAGE>   6
**       Filed herewith.

(b)      Reports on Form 8-K:  None.


                                      -4-
<PAGE>   7
                          INDEX TO FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
GST Equipment Funding, Inc.
                                                                          PAGE
<S>                                                                        <C>
Independent Auditors' Report .........................................     F-2

Balance Sheets at December 31, 1998 and 1997 .........................     F-3

Statements of Operations for the year ended December 31,
   1998, the three-month period ended December 31, 1997 and the period
   from March 5, 1997 (date of inception) to September 30, 1997 .......    F-4

Statements of Shareholder's (Deficit) Equity for the year
   ended December 31, 1998, the three-month period ended December 31,
   1997 and the period from March 5, 1997 (date of inception) to 
   September 30, 1997 .................................................    F-5

Statements of Cash Flows for the year ended December 31,
   1998, the three-month period ended December 31, 1997 and the period 
   from March 5, 1997 (date of inception) to September 30, 1997 .......    F-6

Notes to Financial Statements .........................................    F-7
</TABLE>

                                      F-1
<PAGE>   8
                          INDEPENDENT AUDITORS' REPORT


The Board of Directors and Shareholder
GST Equipment Funding, Inc.:

We have audited the accompanying balance sheets of GST Equipment Funding, Inc.
as of December 31, 1998 and 1997, and the related statements of operations,
shareholder's deficit, and cash flows for the year ended December 31, 1998, the
three-month period ended December 31, 1997 and for the period from March 5, 1997
(date of inception) to September 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of GST Equipment Funding, Inc. as
of December 31, 1998 and 1997, and the results of its operations and cash flows
for the year ended December 31, 1998, the three-month period ended December 31,
1997 and for the period from March 5, 1997 (date of inception) to September 30,
1997, in conformity with generally accepted accounting principles.


                                              KPMG Peat Marwick LLP




Portland, Oregon
March 1, 1999

                                      F-2

<PAGE>   9
                           GST EQUIPMENT FUNDING, INC.

                                 Balance Sheets

                      (In thousands, except share amounts)



<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                                                        -----------------------
                         ASSETS                           1998          1997
                                                        ---------     ---------
<S>                                                     <C>           <C>
Current assets:
    Cash ...........................................    $      --     $     373
    Restricted investments .........................       32,759        30,656
                                                        ---------     ---------
                                                           32,759        31,029
                                                        ---------     ---------

Restricted investments .............................       17,244       112,719
Notes receivable from parent .......................      194,228       109,164
Interest receivable from parent ....................        4,812         2,670
Deferred financing costs, net ......................        8,187         8,994
                                                        ---------     ---------
                                                          224,471       233,547
                                                        ---------     ---------
                                                        $ 257,230     $ 264,576
                                                        =========     =========

          LIABILITIES AND SHAREHOLDER'S DEFICIT

Current liabilities:
    Accrued interest payable .......................        5,852         5,852
    Accrued income taxes payable to parent .........           --            --
    Other payable to parent ........................        1,037         1,260
                                                        ---------     ---------
                                                            6,889         7,112
                                                        ---------     ---------

Long-term debt .....................................      265,000       265,000

Shareholder's deficit:
    Common stock:
      Authorized - 1,000 of $.01 par
        common shares; issued and
        outstanding - 100 shares ...................           --            --
    Additional paid-in capital .....................        1,000         1,000
    Accumulated deficit ............................      (15,659)       (8,536)
                                                        ---------     ---------
                                                          (14,659)       (7,536)
                                                        ---------     ---------
                                                        $ 257,230     $ 264,576
                                                        =========     =========
</TABLE>

See accompanying notes to financial statements.


                                      F-3
<PAGE>   10
                           GST EQUIPMENT FUNDING, INC.

                            Statements of Operations

                                 (In thousands)


<TABLE>
<CAPTION>
                                                                              PERIOD FROM
                                                                             MARCH 5, 1997
                                                              THREE-MONTH      (DATE OF
                                               YEAR ENDED     PERIOD ENDED   INCEPTION) TO
                                               DECEMBER 31,   DECEMBER 31,    SEPTEMBER 30,
                                                  1998            1997           1997
                                                --------        --------        --------
<S>                                            <C>            <C>            <C>
Revenues:
    Interest income .....................       $ 28,979        $  6,059        $  8,248
                                                --------        --------        --------
              Total revenues ............         28,979           6,059           8,248

Operating costs and expenses:
    Interest expense ....................         36,102           9,019          13,824
                                                --------        --------        --------
              Loss before income taxes ..         (7,123)         (2,960)         (5,576)
                                                --------        --------        --------
Income tax expense (benefit):
    Current .............................             --          (2,680)          2,680
    Deferred ............................             --              --              --
                                                --------        --------        --------
                                                      --          (2,680)          2,680
                                                --------        --------        --------
              Net loss ..................       $ (7,123)       $   (280)       $ (8,256)
                                                ========        ========        ========
</TABLE>

See accompanying notes to financial statements.


                                       F-4
<PAGE>   11
                           GST EQUIPMENT FUNDING, INC.

                            Statements of Shareholder's Deficit     

                                 (In thousands)



<TABLE>
<CAPTION>
                                                                  ADDITIONAL                      TOTAL
                                         COMMON STOCK              PAID-IN      ACCUMULATED    SHAREHOLDER'S
                                     SHARES         AMOUNT         CAPITAL        DEFICIT         DEFICIT
                                    --------       ---------       --------       --------        --------
<S>                                 <C>            <C>            <C>           <C>            <C>     
Balance, at date of inception            100       $      --       $      1       $      1        $      1

Capital investment by parent              --              --            999             --             999
Net loss ....................             --              --             --         (8,256)         (8,256)
                                    --------       ---------       --------       --------        --------
Balance, September 30, 1997 .            100              --          1,000         (8,256)         (7,256)

Net loss ....................             --              --             --           (280)           (280)
                                    --------       ---------       --------       --------        --------
Balance, December 31, 1997 ..            100              --          1,000         (8,536)         (7,536)

Net loss ....................             --              --             --         (7,123)         (7,123)
                                    --------       ---------       --------       --------        --------
Balance, December 31, 1998 ..            100       $      --       $  1,000       $(15,659)       $(14,659)
                                    ========       =========       ========       ========        ========
</TABLE>

See accompanying notes to financial statements.


                                      F-5
<PAGE>   12
                           GST EQUIPMENT FUNDING, INC.

                            Statements of Cash Flows

                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                           PERIOD FROM
                                                                                          MARCH 5, 1997
                                                                          THREE-MONTH       (DATE OF
                                                          YEAR ENDED      PERIOD ENDED    INCEPTION) TO
                                                         DECEMBER 31,     DECEMBER 31,    SEPTEMBER 30,
                                                            1998             1997             1997
                                                          ---------        ---------        ---------
<S>                                                      <C>              <C>             <C>
Operations:
    Net loss ......................................       $  (7,123)       $    (280)       $  (8,256)
    Items not involving cash:
      Amortization of deferred financing costs ....             989              241              364
    Changes in non-cash operating working capital:
      Interest receivable from parent .............          (2,142)             985           (3,655)
      Accrued interest payable ....................              --           (7,608)          13,460
      Accrued income taxes payable to parent ......              --           (2,680)           2,680
      Other payable to parent .....................            (223)            (645)           1,905
                                                          ---------        ---------        ---------
              Cash (used in) provided by operations          (8,499)          (9,987)           6,498
                                                          ---------        ---------        ---------
Investing:
    Change in investments restricted for
      fixed asset purchases .......................          62,484           12,217          (74,701)
    Notes receivable from parent ..................         (85,064)         (17,890)         (91,274)
                                                          ---------        ---------        ---------
              Cash used in investing activities ...         (22,580)          (5,673)        (165,975)
                                                          ---------        ---------        ---------
Financing:
    Proceeds from issuance of long-term debt ......              --               --          265,000
    Change in investments restricted for interest
      payments ....................................          30,888           15,083          (95,974)
    Deferred debt financing costs .................            (182)             (53)          (9,546)
    Proceeds from investment by parent ............              --               --            1,000
                                                          ---------        ---------        ---------
              Cash provided by financing activities          30,706           15,030          160,480
                                                          ---------        ---------        ---------
              (Decrease) increase in cash and
                cash equivalents ..................            (373)            (630)           1,003

Cash and cash equivalents, beginning of period ....             373            1,003               --
                                                          ---------        ---------        ---------
Cash and cash equivalents, end of period ..........       $      --        $     373        $   1,003
                                                          =========        =========        =========
Supplemental disclosure of cash flow information:
    Cash paid for interest ........................       $  35,113        $  16,386        $      --
</TABLE>

See accompanying notes to financial statements.


                                      F-6
<PAGE>   13
                           GST EQUIPMENT FUNDING, INC.

                          Notes to Financial Statements

                December 31, 1998 and 1997 and September 30, 1997

                                 (In thousands)


(1)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         DESCRIPTION OF THE COMPANY

         GST Equipment Funding, Inc. (the Company) was formed on March 5, 1997.
         The Company is a wholly-owned subsidiary of GST USA, Inc. (GST USA),
         which is a wholly-owned subsidiary of GST Telecommunications, Inc.
         (GST).

         The Company's operations are limited to (i) purchasing equipment, (ii)
         selling equipment to GST USA, (iii) receiving payments under
         intercompany notes, and (iv) making payments of interest and principal
         on senior secured notes.

         RESTRICTED INVESTMENTS

         The Company follows the provisions of Statement of Financial Accounting
         Standards (SFAS) No. 115, Accounting for Certain Investments in Debt
         and Equity Securities.

         The Company classifies its restricted investments, consisting at
         December 31, 1998 of $50,003 in U.S. Treasury securities as
         available-for-sale and held-to-maturity. Held-to-maturity investments,
         recorded at amortized cost, totaling $50,003 and $80,891 at December
         31, 1998 and 1997, respectively, and maturing between four months and
         eighteen months, are restricted for interest payments.
         Available-for-sale investments, totaled $0 and $62,484 at December 31,
         1998 and 1997, respectively, are restricted for equipment purchases.
         Restricted investments are recorded at amortized cost which
         approximates the fair value for all periods presented.

         DEFERRED FINANCING COSTS

         Deferred financing costs, consisting of legal, accounting and
         underwriting fees related to the May 13, 1997 debt offering, and are
         being amortized to interest expense over the life of the related notes.
         Amounts amortized totaled $989, $241 and $364 for the year ended
         December 31, 1998, the three-month period ended December 31, 1997 and
         for the period from March 5, 1997 (date of inception) to September 30,
         1997, respectively.


                                       F-7
<PAGE>   14
                           GST EQUIPMENT FUNDING, INC.

                    Notes to Financial Statements, Continued

                                 (In thousands)


         INCOME TAXES

         The Company accounts for income taxes under the asset and liability
         method. Under the asset and liability method, deferred income taxes
         reflect the future tax consequences of differences between the tax
         bases of assets and liabilities and their financial reporting amounts
         at each year-end. Deferred tax assets and 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. The effect on deferred tax assets and liabilities of a
         change in the tax rates is recognized in income in the period that
         includes the enactment date. Valuation allowances are established when
         necessary to reduce deferred tax assets to the amounts expected to be
         realized.

         FINANCIAL INSTRUMENTS

         The carrying amounts reported in the balance sheet for cash, short-term
         borrowings, accounts payable and accrued liabilities approximate fair
         values due to the short maturity of those instruments. The carrying
         amounts for current and non-current restricted investments approximate
         fair value due to the composition of such investments and related
         maturities.

         The carrying value and estimated fair value of the Company's long-term
         debt were $265,000 and $273,933, respectively, at December 31, 1998.
         The fair value of the Company's long-term debt was estimated based on
         quoted market prices.

         Fair value estimates are made at a specific point in time, based on
         relevant market information about the financial instrument. These
         estimates are subjective in nature and involve uncertainties and
         matters of significant judgment and therefore cannot be determined with
         precision. Changes in assumptions could significantly affect the
         estimates.

         USE OF ESTIMATES

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

         RECLASSIFICATIONS

         Certain reclassifications have been made in the accompanying financial
         statements for December 31, 1997 and September 30, 1997 to conform with
         the December 31, 1998 presentation.


                                      F-8
<PAGE>   15
                           GST EQUIPMENT FUNDING, INC.

                    Notes to Financial Statements, Continued

                                 (In thousands)


(2)      FINANCING ARRANGEMENTS

         LONG-TERM DEBT

         The Company's long-term debt consists of the following at December 31,
         1998 and 1997:

<TABLE>
<S>                                                                   <C>        
         Senior secured notes, interest at 13.25%, due
           May 1, 2007.............................................   $  265,000
                                                                      ==========
</TABLE>

         ISSUANCE OF SENIOR SECURED NOTES

         The Company completed a private placement (the 1997 Offering) under an
         indenture (the Indenture) dated May 13, 1997, of $265,000 of Senior
         Secured Notes (the Secured Notes). The Secured Notes bear interest at
         13.25% payable in semi-annual installments commencing November 1, 1997.
         Net proceeds from the 1997 Offering totaled approximately $255,800,
         $93,790 of which were set aside to fund the first six scheduled
         interest payments. The remainder of the net proceeds is restricted to
         the purchase and installation of telecommunications equipment. Pursuant
         to the Indenture, all purchased equipment will be sold to GST USA for
         use in its telecommunications operations (see note 3). The Secured
         Notes are secured by a first priority security interest in the
         equipment and the restricted investment securities held for the payment
         of interest. The Secured Notes are subject to certain debt covenants.

         The Indenture provides that GST USA will assume and become a direct
         obligor on the Secured Notes and GST will guarantee the Secured Notes
         on May 13, 2000, or earlier if permitted by the terms of their existing
         debt. Once assumed the Secured Notes will be secured senior
         indebtedness of GST USA. The note guarantee will be senior unsecured
         indebtedness of GST.

         The Secured Notes are redeemable at the option of GST USA, in whole or
         in part, at any time, on or after May 1, 2002, initially at 106.625% of
         their principal amount, plus accrued and unpaid interest, declining
         ratably to 100% on or after May 1, 2004. If on May 13, 2000, GST USA is
         prohibited from assuming all of the Secured Notes, the Company will
         redeem the portion of the Secured Notes that cannot be assumed at 101%
         of their principal amount plus accrued interest at the date of
         redemption.

         DEBT COVENANTS AND CLASSIFICATION OF LONG TERM DEBT

         In November 1998, the Company informed the Trustee who represents the
         holders of the Senior Secured Notes that it may have violated certain
         technical covenants contained in the indenture related to such notes.
         In February 1999, the Trustee informed the note holders of the
         potential violations. The note holders have not declared a default, as
         defined within the indentures of the Senior Secured Notes. The Company
         has classified the related debt obligations as non-current in the
         accompanying balance sheets as management believes it is
         probable that, in the event the note holders declare a default, the
         Company would be able to take corrective actions to cure, within the
         prescribed grace period, those technical violations deemed
         objectively-determinable.


                                      F-9
<PAGE>   16
                           GST EQUIPMENT FUNDING, INC.

                    Notes to Financial Statements, Continued

                                 (In thousands)


(3)      RELATED PARTY TRANSACTIONS

         The Company acts as a purchasing agent for GST USA and sells to GST USA
         the equipment it purchases with the proceeds from the 1997 Offering.
         The note receivable from parent of $194,228 and $109,164 at December
         31, 1998 and 1997, respectively, represents equipment purchases for GST
         USA and compounded interest. The note receivable is guaranteed by GST
         and bears interest at 15.25%, compounded semiannually on May and
         November 1, and is payable in full on May 13, 2000. Interest income
         earned on the note receivable from parent totaled $23,271, $3,838 and
         $3,543 for the periods ended December 31, 1998, December 31, 1997 and
         September 30, 1997, respectively.

         The payable to parent of $1,037 and $1,260 at December 31, 1998 and
         1997, respectively, consists of cash advances from GST USA for the
         purchase of equipment and the payment of expenses related to the May
         Offering.


(4)      INCOME TAXES

         The provision for income taxes differs from the "expected" amount
         computed by applying the U.S. federal corporate rate as follows:

<TABLE>
<CAPTION>
                                                                              PERIOD FROM
                                                                             MARCH 5, 1997
                                                              THREE-MONTH      (DATE OF
                                               YEAR ENDED     PERIOD ENDED   INCEPTION) TO
                                               DECEMBER 31,   DECEMBER 31,    SEPTEMBER 30,
                                                  1998           1997            1997
                                                 -------        -------         -------
<S>                                            <C>            <C>            <C>
       Computed "expected" income                                           
           tax benefit ...................       $(2,421)       $(1,007)        $(1,896)
       Effect of change in valuation                                        
           allowance .....................         2,421         (1,673)          4,576
                                                 -------        -------         -------
       Actual tax expense (benefit) ......       $    --        $(2,680)        $ 2,680
                                                 =======        =======         =======
</TABLE>
                                                                           
         The tax effects of temporary differences that give rise to deferred tax
         assets and deferred tax liabilities at December 31, 1998, December 31,
         1997 and September 30, 1997, are derived primarily from interest
         expense not currently deductible for tax purposes. Gross deferred tax
         assets and liabilities amount to $5,324 and $0, respectively, at
         December 31, 1998 and $2,903 and $0, respectively, at December 31,
         1997.


                                      F-10
<PAGE>   17
                           GST EQUIPMENT FUNDING, INC.

                    Notes to Financial Statements, Continued

                                 (In thousands)


         The valuation allowance for deferred tax assets as of December 31,
         1998, December 31, 1997 and September 30, 1997 was $5,324, $2,903 and
         $4,576, respectively. The net change in the total valuation allowance
         for the periods ended December 31, 1998, December 31, 1997 and
         September 30, 1997 was an increase of $2,421, a decrease of $1,673 and
         an increase of $4,576, respectively.

         The Company files consolidated income tax returns with its parent
         corporation. However, income tax expense (benefit) is computed as if
         the Company filed on a single entity basis. The tax related balance due
         to the parent corporation as of December 31, 1998, December 31, 1997
         and September 30, 1997 was $-0-, $-0- and $2,680, respectively.


                                      F-11
<PAGE>   18
                                   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 Vancouver, State of Washington, on the 30TH day of March, 1999.

                                    GST EQUIPMENT FUNDING, INC.


                                    By: /s/ Robert A. Ferchat

                                        Robert A. Ferchat,
                                        Chairman of the Board


                                POWER OF ATTORNEY

         KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Robert A. Ferchat, Joseph A. Basile, Jr.,
Jack G. Armstrong and Daniel L. Trampush 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 on MARCH 30, 1999.

         SIGNATURE                                   TITLE
         ---------                                   -----

/s/ Robert A. Ferchat            Chairman of the Board and Director
    (Robert A. Ferchat)

/s/ Joseph A. Basile, Jr.        President, Chief Executive Officer (Principal 
    (Joseph A. Basile, Jr.)      Executive Officer) and Director

/s/ Jack G. Armstrong            Director
    (Jack G. Armstrong)

/s/ Daniel L. Trampush           Vice President and Chief Financial Officer 
    (Daniel L. Trampush)         (Principal Financial Officer)
                                  
<PAGE>   19
                                  EXHIBIT INDEX


Exhibit

   *3(a) Certificate of Incorporation of GST Funding.

   *3(b) By-Laws of GST Funding.

   *4(a) Indenture dated as of May 13, 1997, by and among GST Funding, GST, GST
         USA and United States Trust Company of New York.

  *10(a) Collateral Pledge and Security Agreement dated as of May 13, 1997, by
         and among GST Funding, United States Trust Company of New York and the
         holders of the Notes as defined therein.

  **27   Financial Data Schedule.


----------
*        Incorporated by reference to GST Funding's Registration Statement on
         Form S-4 (No. 333-33601).

**       Filed herewith.