SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-K

(Mark One)

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

For the fiscal year ended__________________

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

For the transition period from OCTOBER 1, 1997 to DECEMBER 31, 1997

                          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) 906-7100

          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 / /



<PAGE>
                  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/

                  Indicate  the  number  of  shares  outstanding  of each of the
Registrant's  classes of common  stock,  as of the latest  practicable  date: At
March 26, 1998,  there were  outstanding 100 shares of the  Registrant's  common
stock, $.01 par value per share.



<PAGE>
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, 1997  approximately  $93.8
million  had been  used to  purchase  securities  pledged  to fund the first six
interest  payments on the Secured Notes (the first such payment of $16.4 million
having been made in November  1997) and  approximately  $104.4  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
United  States and Hawaii.  As a  facilities-based  competitive  local  exchange
carrier, 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" solution to customers'  telecommunications
services requirements,  include long distance,  Internet,  data transmission and
private  line  services,  and local  dial tone  services,  which  were  recently
introduced.

         GST's  digital   networks   currently  serve  40  markets  in  Arizona,
California,  Hawaii, Idaho, New Mexico, Texas, Washington and Guam. In addition,
GST has  networks  under  construction  which,  when  completed,  will serve two
additional  markets  and  expand its  regional  footprint  to  Oregon.  GST also
constructs, markets and manages longhaul fiber optic facilities,  principally in
Arizona,  California and Hawaii. GST's longhaul fiber optic facilities currently
extend  approximately  700 route miles and an  additional  1,600 route miles are
expected to become operational over the next 12 months.

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.


                                       -1-


<PAGE>
         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.

         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.

         As of December 31, 1997, GST Funding has purchased approximately $104.4
million of equipment and holds restricted  investments of  approximately  $143.4
million restricted for the acquisition of equipment and 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.

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

         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, 1997
approximately $93.8 million had been used to purchase securities pledged to fund
the first six interest  payments on the Secured Notes (the first such payment of
$16.4  million  having  been made in  November  1997) and  approximately  $104.4
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.

ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
         Not applicable.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
         See page F-1.

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


                                       -2-


<PAGE>
         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).
**       Filed herewith.
(b)      Reports on Form 8-K:  None.


                                       -3-

<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 Vancouver, State of Washington, on the 26th day of March, 1998.

                                                  GST EQUIPMENT FUNDING, INC.

                                                  By: /S/ JOHN WARTA
                                                      -----------------------
                                                          John Warta,
                                                          Chairman of the Board

                                POWER OF ATTORNEY

         KNOW  ALL MEN BY THESE  PRESENTS,  that  each  person  whose  signature
appears  below  constitutes  and  appoints  John Warta,  Stephen  Irwin,  Daniel
Trampush  and  Clifford  V.  Sander 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 26, 1998.

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


/S/ JOHN WARTA
----------------------     Chairman of the Board, Chief Executive Officer
 (John Warta)              (Principal Executive Officer) and Director


/S/ DANIEL L. TRAMPUSH
-----------------------    Vice President and Chief Financial Officer (Principal
 (Daniel L. Trampush)      Financial Officer)


/S/ CLIFFORD V. SANDER
-----------------------    Vice President, Treasurer and Assistant Secretary
 (Clifford V. Sander)      (Principal Accounting Officer) and Director


/S/ STEPHEN IRWIN
-----------------------    Senior Vice President, Secretary and Director
 (Stephen Irwin)



<PAGE>

                          INDEX TO FINANCIAL STATEMENTS

                                                                         Page(s)

GST EQUIPMENT FUNDING, INC.

Independent Auditors' Report.................................................F-2

Balance Sheets at December 31, 1997, and
  September 30, 1997.........................................................F-3

Statements of Operations for 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 Shareholders' (Deficit) Equity
  at 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
  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


                                       F-1

<PAGE>
                          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, 1997 and  September 30, 1997,  and the related  statements of
operations,  shareholder's  deficit,  and cash flows for 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, 1997 and September 30, 1997,  and the results of its  operations
and cash flows for the three-month period ended December 31, 1997 and the period
from March 5, 1997 (date of inception) to September 30, 1997, in conformity with
generally accepted accounting principles.


/s/ KPMG PEAT MARWICK LLP

Portland, Oregon
February 25, 1998

                                      F - 2

<PAGE>
                           GST EQUIPMENT FUNDING, INC.

                                 BALANCE SHEETS

                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>

                                                                                 DECEMBER 31,                     SEPTEMBER 30,
                                                   ASSETS                            1997                             1997
                                                   ------                            ----                             ----

Current assets:
<S>                                                                        <C>                              <C>               
      Cash .............................................................   $              373               $            1,003
      Restricted investments............................................               30,656                           48,964
                                                                                -------------                    -------------

                                                                                       31,029                           49,967
                                                                                -------------                    -------------

Restricted investments..................................................              112,719                          121,711
Notes receivable from parent............................................              109,164                           91,274
Interest receivable from parent.........................................                2,670                            3,655
Deferred financing costs, net...........................................                8,994                            9,182
                                                                                -------------                    -------------

                                                                                      233,547                          225,822
                                                                                -------------                    -------------

                                                                           $          264,576               $          275,789
                                                                                =============                    =============

                      LIABILITIES AND SHAREHOLDER'S DEFICIT

Current liabilities:
      Accrued interest payable..........................................                5,852                           13,460
      Accrued income taxes payable to parent............................                   -                             2,680
      Other payable to parent...........................................                1,260                            1,905
                                                                                -------------                    -------------

                                                                                        7,112                           18,045
                                                                                -------------                    -------------

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...............................................               (8,536)                          (8,256)
                                                                                -------------                    -------------

                                                                                       (7,536)                          (7,256)
                                                                                -------------                    -------------

                                                                           $          264,576               $          275,789
                                                                                =============                    =============
</TABLE>


See accompanying notes to financial statements.

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

                            STATEMENTS OF OPERATIONS

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>

                                                                                        PERIOD FROM
                                                                  THREE-MONTH           MARCH 5, 1997
                                                                    PERIOD                (DATE OF
                                                                     ENDED              INCEPTION) TO
                                                                 DECEMBER 31,           SEPTEMBER 30,
                                                                     1997                   1997
                                                                     ----                   ----

Revenues:
<S>                                                               <C>                      <C>    
  Interest income.............................................    $  6,059                 $ 8,248
                                                                  ----------               -------

              Total revenues..................................       6,059                   8,248
                                                                  ----------               -------

Operating costs and expenses:
  Interest expense............................................       9,019                  13,824
                                                                  ----------               -------

              Loss before income taxes........................      (2,960)                 (5,576)
                                                                  ----------               -------

Income tax expense (benefit):
  Current  ...................................................      (2,680)                  2,680
  Deferred ...................................................         -                       -
                                                                  --------                 --------

                                                                    (2,680)                  2,680
                                                                  --------                 --------

              Net loss........................................    $   (280)                $(8,256)
                                                                  ========      =          ========
</TABLE>


See accompanying notes to financial statements.

                                      F - 4

<PAGE>

                           GST EQUIPMENT FUNDING, INC.

                       STATEMENTS OF SHAREHOLDER'S DEFICIT

                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

               FOR THE THREE-MONTH PERIOD ENDED DECEMBER 31, 1997
                   AND THE PERIOD FROM MARCH 5, 1997 (DATE OF
                        INCEPTION) TO SEPTEMBER 30, 1997

<TABLE>
<CAPTION>

                                                 COMMON STOCK             ADDITIONAL                              TOTAL
                                          ------------------------          PAID-IN        ACCUMULATED        SHAREHOLDER'S
                                           SHARES           AMOUNT          CAPITAL          DEFICIT             DEFICIT
                                           ------           ------          -------          -------             -------

<S>                                           <C>           <C>            <C>              <C>                   <C>    
Balance, at date of inception............     100           $   -          $    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)
                                           ======           ======         ======           ========              =========
</TABLE>


See accompanying notes to financial statements.


                                      F - 5

<PAGE>
                           GST EQUIPMENT FUNDING, INC.

                            STATEMENTS OF CASH FLOWS

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>

                                                                                                          PERIOD FROM
                                                                                 THREE-MONTH             MARCH 5, 1997
                                                                                   PERIOD                  (DATE OF
                                                                                    ENDED                INCEPTION) TO
                                                                                DECEMBER 31,             SEPTEMBER 30,
                                                                                    1997                     1997
                                                                                    ----                     ----

Operations:
<S>                                                                             <C>                     <C>
      Net loss ......................................................           $       (280)           $      (8,256)
      Items not involving cash:
           Amortization of deferred financing costs..................                    241                      364

Changes in non-cash operating working capital:
      Interest receivable from parent................................                    985                   (3,655)
      Accrued interest payable.......................................                 (7,608)                  13,460
      Accrued income taxes payable to parent.........................                 (2,680)                   2,680
      Other payable to parent........................................                   (645)                   1,905
                                                                                ------------            -------------

                     Cash (used in) provided by operations...........                 (9,987)                   6,498
                                                                                ------------            -------------

Investing:
      Change in investments restricted for
           fixed asset purchases.....................................                 12,217                  (74,701)
      Notes receivable from parent...................................                (17,890)                 (91,274)
                                                                                ------------            -------------

                     Cash used in investing activities...............                 (5,673)                (165,975)
                                                                                ------------            -------------

Financing:
      Proceeds from issuance of long-term debt.......................                     -                   265,000
      Change in investments restricted for interest
           payments  ................................................                 15,083                  (95,974)
      Deferred debt financing costs..................................                    (53)                  (9,546)
      Proceeds from investment by parent.............................                     -                     1,000
                                                                                ------------            -------------

                     Cash provided by financing activities...........                 15,030                  160,480
                                                                                ------------            -------------

                     (Decrease) increase in cash and cash
                           equivalents...............................                   (630)                   1,003

Cash and cash equivalents, beginning of period.......................                  1,003                       -
                                                                                ------------            ------------

Cash and cash equivalents, end of period.............................           $        373            $       1,003
                                                                                ============            =============

Supplemental disclosure of cash flow information:
      Cash paid for interest.........................................           $     16,386            $          -
</TABLE>


See accompanying notes to financial statements.

                                      F - 6


<PAGE>
                           GST EQUIPMENT FUNDING, INC.

                          NOTES TO FINANCIAL STATEMENTS

                                 (IN THOUSANDS)

                    DECEMBER 31, 1997 AND SEPTEMBER 30, 1997

(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,  1997  of  $143,375  in  U.S.   Treasury   securities  as
         available-for-sale and held-to-maturity.  Held-to-maturity investments,
         recorded at amortized  cost,  totaling  $80,891 and $95,974 at December
         31, 1997 and September  30, 1997,  respectively,  and maturing  between
         three months and three years,  are  restricted  for interest  payments.
         Available-for-sale   investments,   totaling  $62,484  and  $74,701  at
         December 31, 1997 and September 30,, 1997,  respectively,  and maturing
         between  two  months  and  one  year,   are  restricted  for  equipment
         purchases. Available-for-sale securities are recorded at amortized cost
         which  approximates the market value of such securities at December 31,
         1997 and September 30, 1997.

         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  $241 and $364 for the  three-month  period
         ended  December 31, 1997 and for the period from March 5, 1997 (date of
         inception) to September 30, 1997, respectively.

                                                                     (Continued)

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

                          NOTES TO FINANCIAL STATEMENTS

                                 (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 amount of the Company's  long-term debt  approximates  its
         fair  value.  The  fair  value  of the  Company's  long-term  debt  was
         determined  based on quoted  market  prices  for  similar  issues or on
         current rates  available to the Company for debt of the same  remaining
         maturities and similar terms.

         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 September 30, 1997 to conform with the December 31, 1997
         presentation.

                                                                     (Continued)

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

                          NOTES TO FINANCIAL STATEMENTS

                                 (IN THOUSANDS)

(2) FINANCING ARRANGEMENTS

         LONG-TERM DEBT

         The Company's  long-term debt consists of the following at December 31,
         1997 and September 30, 1997:

               Senior secured notes, interest at 13.25%,
                    due May 1, 2007.........................$ 265,000
                                                            =========

         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.

                                                                     (Continued)

                                      F - 9


<PAGE>
                           GST EQUIPMENT FUNDING, INC.

                          NOTES TO FINANCIAL STATEMENTS

                                 (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 $109,164  and  $91,274 at December  31, 1997 and
    September 30, 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  totalled  $3,838 and $3,543 for the  periods  ended
    December 31, 1997 and September 30, 1997, respectively.

    The  payable  to parent of  $1,260  and  $1,905  at  December  31,  1997 and
    September 30, 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:

                                                       FOR THE PERIOD ENDED
                                                  ------------------------------
                                                  DECEMBER 31,     SEPTEMBER 30,
                                                     1997              1997
                                                     ----              ----

      Computed "expected" income tax
           benefit................................$(1,007)           $(1,896)
      Effect of change in valuation allowance..... (1,673)             4,576
                                                  -------            -------

      Actual tax expense (benefit)................$(2,680)           $ 2,680
                                                  =======            =======

      The tax effects of  temporary  differences  that give rise to deferred tax
      assets and deferred tax liabilities at 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
      $2,903 and $-0- at December 31, 1997,  respectively,  and $4,576 and $-0-,
      respectively, at September 30, 1997.

                                                                     (Continued)

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

                          NOTES TO FINANCIAL STATEMENTS

                                 (IN THOUSANDS)

      The  valuation  allowance  for deferred tax assets as of December 31, 1997
      and September 30, 1997 was $2,903 and $4,576, respectively. The net change
      in the total  valuation  allowance for the periods ended December 31, 1997
      and  September  30,  1997,  was 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, 1997 and September 30, 1997 was $-0-
      and $2,680, respectively.

                                     F - 11
<PAGE>
                                  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.