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 333-33601-02

                                  GST USA, INC.
--------------------------------------------------------------------------------
             (Exact Name of Registrant as Specified in its Charter)


                 Delaware                                    83-0310464
 ---------------------------------------         -------------------------------
      (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 10 shares of the Registrant's  common stock, no par value
per share.


<PAGE>
ITEM 1.   BUSINESS.

OVERVIEW

         GST  USA,  Inc.  ("GST  USA")  is  a  wholly-owned  subsidiary  of  GST
Telecommunications,  Inc. ("GST").  GST USA was formed to hold the capital stock
of the  consolidated  operating  subsidiaries  of GST. In December 1995, GST USA
issued its 137/8% Senior Discount Notes due 2005 (the "Senior Notes"), which are
unconditionally  guaranteed by GST and GST issued its 137/8%  Convertible Senior
Subordinated  Notes due 2005 (the  "Convertible  Notes"  and  together  with the
Senior Notes, the "1995 Notes") which are unconditionally  guaranteed by GST USA
in a private  placement  (the  "1995  Notes  Offering").  In May  1996,  GST USA
consummated an exchange offer for the Senior Notes. The net proceeds of the 1995
Notes Offering were used to fund capital expenditures and for working capital.

         GST USA also purchases equipment from its wholly-owned subsidiary,  GST
Equipment  Funding,  Inc.  ("GST  Funding")  and leases  such  equipment  to the
operating subsidiaries of GST and GST USA. GST USA is obligated to assume the 13
1/4% Senior Secured Notes due 2007 of GST Funding (the "Secured  Notes") as soon
as GST USA is permitted to do so pursuant to the terms of the indenture relating
to the Senior  Notes.  At such time GST is obligated  to  guarantee  the Secured
Notes.  GST Funding issued the Secured Notes in a private  placement in May 1997
(the "Secured Notes  Offering").  Of the $255.8 million of net proceeds from the
Secured Notes Offering,  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 USA neither owns nor leases material physical properties.

ITEM 3.  LEGAL PROCEEDINGS.

         On  August  24,  1995,   Aerotel,   Ltd.  and  Aerotel   U.S.A.,   Inc.
(collectively,  "Aerotel") commenced an action against NACT  Telecommunications,
Inc. ("NACT"), then a wholly-owned subsidiary of GST USA, and a customer of NACT
in the United States District  Court,  Southern  District of New York,  alleging
that

                                       -1-

<PAGE>
telephone systems manufactured and sold by NACT 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  NACT  to its
customers  and  tortious   interference  with  prospective  business  relations,
alleging that NACT 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  NACT to  publish a written  apology to
Aerotel.  NACT 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. NACT also denied that it had committed  defamation,  unfair competition or
tortious interference with prospective business relations.  On May 3, 1996, NACT
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 and GST USA as
well as Kyle Love,  the former  President of NACT and Dr.  Thomas E.  Sawyer,  a
director of GST and NACT and the former Chairman and Chief Executive  Officer of
NACT.  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
infringement  by others,  including  NACT,  and  participated  in, and aided and
abetted, alleged tortious conduct by NACT. GST, GST USA, Dr. Sawyer and Mr. Love
have  served  answers  denying  all  material  allegations  and intend to defend
vigorously.

         In February 1998, GST USA sold to World Access,  Inc.  ("World Access")
its then remaining  interest in NACT.  Concurrently  with such sale, GST USA and
World Access  entered into an agreement  whereby GST USA generally will bear 50%
of any damages in the  action,  including  reasonable  attorneys  fees,  losses,
liabilities,  claims and  assessments,  royalties  and license  fees.  Under the
agreement,  subsequent to a  determination,  if any, by a court that the Aerotel
Patent is valid and that it has been infringed,  GST USA's liability  associated
with  royalties,  license  fees,  refunds  and cost of  product  replacement  or
modification is limited to $2.0 million.

         Pretrial  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.
NACT's  patent  counsel  believes  that NACT 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 GST
USA and GST.

         On or about  February  25, 1997,  U S WEST  Communications,  Inc. ("U S
WEST")  filed a  declaratory  judgment  action  against  members of the  Arizona
Corporation  Commission (the "ACC"), the ACC, ACSI, Brooks Fiber Properties Inc.
and GST in the United  States  District  Court in Arizona.  The  District  Court
consolidated a number of similar lawsuits filed by U S WEST against other CLECs,
including  MFS  Communications   Company,   Inc.  ("MFS"),   Sprint  Corporation
("Sprint"),  MCI Communications  Corporation ("MCI") and AT&T Corp ("AT&T"). U S
WEST  alleges  that  the ACC has  entered  into an  interconnection  order  that
unlawfully  requires U S WEST to resell  services  below  cost,  imposes  resale
restrictions and denies U S WEST recovery for  construction  and  implementation
costs, unlawfully treats the cost recovery of access revenues for interim number
portability,  requires  U S WEST to  obtain  additional  rights  of way or build
additional  facilities  solely to provide access to GST, and amounts to a taking
of U S WEST's property without just  compensation.  U S WEST seeks a declaratory
judgment stating that the ACC has violated the  Telecommunications  Act and that
the ACC has taken U S WEST's property without providing just  compensation.  U S
WEST also seeks an injunction  prohibiting all  defendants,  including GST, from
taking any action to enforce any of the order's allegedly  unlawful  provisions.
GST's  time  to  answer  or  move  against  the   complaint  has  been  extended
indefinitely  by U S WEST,  pending a decision  with respect to motions filed by
all other  defendants to dismiss the  complaint.  Should U S WEST prevail in its
suit, it could have an adverse impact on GST's operations in Arizona.


                                       -2-

<PAGE>
         On or about  April 8,  1997,  U S WEST filed a state  court  proceeding
against the ACC, individual members of the ACC, and GST Net (AZ), Inc. ("GST Net
(AZ)") which holds a Certificate of Convenience and Necessity ("CCN") to provide
local exchange service in Arizona. In its complaint appealing the ACC's February
6, 1997 decision and order  granting GST Net (AZ) its CCN, U S WEST alleges that
the ACC's  action  violates  certain  requirements  of the Arizona  Constitution
relating to rate of return regulation,  carrier of last resort obligations,  and
equal  protection.  The  appeal  seeks to  subject  GST Net (AZ) and U S WEST to
identical  forms of  regulation,  treating both  carriers as either  traditional
monopoly  carriers  or  as  co-equal  competitive  companies.  The  state  court
consolidated  the case with a number of  substantially  similar  lawsuits  filed
against other CLECs,  including MFS, Sprint, MCI and AT&T. GST Net (AZ) answered
U S WEST's complaint on August 6, 1997,  alleging,  among other things, that U S
WEST's  complaint is preempted  by the  Telecommunications  Act. On February 27,
1998, GST Net(AZ) joined in the other CLECs' motions to dismiss. Should U S WEST
prevail in its appeal,  it could have an adverse  impact on GST's  operations in
Arizona; however, the magnitude thereof is uncertain at this time.

         GST USA is not a party to any other material legal proceedings, nor, to
the knowledge of GST USA, are any material legal proceedings  threatened against
GST USA. GST USA's  subsidiaries are a party to various  proceedings  before the
public  utilities  commissions of the states in which they provide or propose to
provide  telecommunications  services.  These  proceedings  typically  relate to
licensure of such  subsidiaries or others and to the regulation of the provision
of telecommunications service.

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 USA's  common
equity. All of the issued and outstanding shares of such common equity are owned
by GST.


ITEM 6.  SELECTED FINANCIAL DATA.
         Not required.

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

         The  following  management's   discussion  and  analysis  of  financial
condition and results of operations  contains  forward  looking  statements that
involve  risks  and  uncertainties.   GST  USA's  actual  results  could  differ
materially  from those  anticipated  in these  forward  looking  statements as a
result of certain factors discussed herein.

OVERVIEW

         GST provides a broad range of  integrated  telecommunications  products
and services, primarily to business customers located in the western continental
United States and Hawaii.  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.  GST's  full line of
products, which offer a "one-stop" solution

                                       -3-

<PAGE>
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 has  invested  significant  capital  and effort in  developing  its
telecommunications  business.  This capital has been invested in the development
of GST's  networks  and  longhaul  fiber  optic  facilities,  for the hiring and
development of an experienced  management team, the development and installation
of operating systems, the introduction of services,  marketing and sales efforts
and for  acquisitions.  GST expects to make increasing  capital  expenditures to
expand its networks and longhaul fiber optic  facilities and broaden its service
offerings and may consummate additional acquisitions. Proper management of GST's
growth will  require GST to maintain  quality  control  over its services and to
expand GST's internal management, technical and accounting systems, all of which
will require substantial investment.

         GST, GST USA and their subsidiaries  changed their fiscal year end from
September  30 to  December  31st in  order  to align  financial  reporting  with
regulatory  reporting and to the reporting of others in GST's  industry  sector.
GST,  GST  USA  and  GST  Funding  are  providing  investors  audited  financial
information  for the three month  transition  period ended December 31, 1997 and
will provide audited financial  information for the subsequent  12-month periods
ending  December  31st.  As a result of the  limited  revenues  and  significant
expenses  associated  with the  expansion  and  development  of its networks and
services,  GST's  operating  results  could vary  significantly  from  period to
period.

         LOCAL SERVICES. To facilitate its entry into local services, GST has in
service eight high capacity  digital switches and has installed and is currently
testing six  additional  high  capacity  digital  switches  that are expected to
become  operational by the end of the first quarter of 1998. As demand warrants,
GST  plans  to  continue  to  install  switching  equipment  in its  operational
networks,  in markets  where it is  constructing  networks and in certain  other
cities where GST will rely on the  incumbent  local  exchange  carrier  ("ILEC")
facilities for  transmission.  Once a switch is  operational,  where  regulatory
conditions permit, GST intends to offer local dial tone, in addition to enhanced
services such as ISDN, Centrex, voice mail and other custom calling features.

         GST expects negative EBITDA from its switched services during the 24 to
36  month  period  after  a  switch  is  deployed.  For  switches  operating  in
conjunction with GST's networks, GST expects operating margins to improve as the
network is expanded and larger  volumes of traffic are carried on GST's network.
For  switches  operating in cities  where GST will rely on ILEC  facilities  for
transmission,  GST will  experience  lower or negative  operating  margins under
current ILEC pricing  tariffs.  Although under the  Telecommunications  Act, the
ILECs will be required to unbundle  local  tariffs,  permitting  GST to purchase
only the  origination  and  termination  services it needs,  thereby  decreasing
operating  expenses,  there can be no  assurance  that such  unbundling  will be
effected in a timely manner and result in prices favorable to GST.

         LONG  DISTANCE  SERVICES.  GST offers basic and enhanced  long distance
services,   such  as  toll  free,   calling  card,   prepaid  calling  card  and
international  call  back  services,   targeting  primarily  business  customers
purchasing  between  $200 and $15,000 of services per month as well as resellers
and other  carriers.  As part of its  strategy,  GST has acquired  long distance
carriers  and  intends  to  continue  to pursue  acquisitions  of long  distance
carriers in the future.  GST purchases long distance  capacity under  agreements
with certain  major long  distance  carriers  that provide GST capacity at rates
that vary with the monthly traffic generated by GST. GST is obligated to satisfy
certain minimum  monthly usage  requirements of an aggregate of $2.3 million per
month as of January 1, 1998,  increasing  to a maximum of $6.1 million per month
over the next three years. If such  requirements  are not satisfied,  GST may be
required to pay an underutilization fee in addition to its monthly bill.

         INTERNET SERVICES.  GST presently offers  Internet-related  services in
most of its markets,  such as dedicated Internet services,  Web site development
and hosting, provides access and upstream transport

                                       -4-

<PAGE>
for local ISPs,  EDI and electronic  commerce  services and is in the process of
developing  various  Internet  software  applications.  GST also offers  dial-up
Internet services to customers in Portland (Oregon), Vancouver (Washington), the
State of Hawaii and select  markets in California  and intends to begin offering
such services in the Los Angeles,  San Francisco and Houston  metropolitan areas
in 1998.  Management  believes  that these  services  will  become an  important
component of GST's overall  product  offerings and intends to continue to expand
its Internet access and service business to other markets.

         DATA  SERVICES.  GST offers  national  and  international  frame  relay
services on its own frame relay network and through  interconnection  agreements
with other data service  providers.  Under these  agreements,  GST and such data
service  providers  have agreed to link their data  networks and  terminate  one
another's traffic. GST has deployed Cascade  Communications frame relay switches
in 21 markets in the western United States. Such switches can provide both frame
relay and Internet services.

         GST is leveraging its  infrastructure  and network  experience to offer
data networking services such as asynchronous  transfer mode ("ATM"), high speed
LAN connectivity,  video conferencing,  multimedia  networking,  frame relay and
high  capacity  access  to the  Internet.  GST has one ATM  switch  commercially
operational in each of Los Angeles and Ontario, California.

         NETWORK  OPERATIONS.  The  development,  construction  and expansion of
GST's  networks  requires  significant  capital,  a large  portion  of  which is
invested before any revenue is generated.  GST has  experienced,  and expects to
continue to experience,  increasing  negative EBITDA and losses while it expands
its network  operations  and builds its customer  base.  None of GST's  existing
networks is generating  EBITDA.  Based on its experience to date and that of its
competitors,  GST estimates that a new network will generate EBITDA within 30 to
36 months after commencement of commercial operations.  Construction periods and
operating  results will vary from network to network.  There can be no assurance
that GST will be able to establish a sufficient revenue-generating customer base
or achieve EBITDA in any particular market or on a consolidated basis.

         Management  estimates that the total costs associated with the purchase
and  installation  of fiber optic cable and high-speed  electronic  transmission
equipment,  including  capitalized  engineering  costs,  will  range  from $10.0
million to $25.0  million  per  network,  depending  upon the size of the market
served  and the scope  and  complexity  of the  network.  Actual  costs may vary
significantly  from this range. The amounts and timing of these expenditures are
subject to a variety of factors that may vary  significantly  by the  geographic
and  demographic   characteristics  of  each  market.  In  addition  to  capital
expenditure  requirements,  upon  commencement  of the  construction  phase of a
network,  GST begins to incur direct  operating costs for such items as salaries
and rent. As network construction progresses, GST incurs rights-of-way costs and
increased sales and marketing  expenses.  Certain direct  preoperating costs for
new networks  are  capitalized  until the network  becomes  operational  and are
thereafter expensed as incurred.

         The  initial  development  of a network may take as long as six months,
depending  upon the size and complexity of the network and a variety of factors,
including  the time  required  to obtain  rights-of-way  and other  governmental
approvals, such as franchise agreements.  Once actual construction commences, it
may take from two to six months to complete  the initial  backbone  segment of a
network.  The time  required  during  the  construction  phase is  significantly
influenced  by the  number of route  miles  involved,  the mix of aerial  versus
underground  fiber  deployment,  possible delays in receiving fiber optic cable,
electronic equipment and required permits and other factors.

         MANUFACTURING.  In a series of transactions  between 1993 and 1995, GST
acquired 100% of the outstanding  capital stock of NACT, which produces advanced
telecommunications switching platforms with integrated applications software and
network telemanagement capabilities.  The aggregate consideration paid for GST's
100% interest in NACT was $8.9  million,  consisting of $4.1 million in cash and
notes payable and 956,283 common  shares,  without par value of GST (the "Common
Shares") valued at $4.8

                                       -5-

<PAGE>
million.  In February  1997,  GST USA sold one million  shares of NACT's  common
stock for net  proceeds  of $9.0  million.  In February  1998,  GST USA sold its
remaining interest in NACT for net proceeds of $86.5 million.

         GST USA.  The majority of GST's  business is performed  through GST USA
and its  subsidiaries.  However,  a portion of the long distance business of GST
was performed through direct wholly owned subsidiaries of GST during the periods
presented below.

RESULTS OF OPERATIONS

THREE MONTHS  ENDED  DECEMBER 31, 1997  COMPARED TO THE  UNAUDITED  THREE MONTHS
ENDED DECEMBER 31, 1996

         REVENUES.  Total  revenue for the three months ended  December 31, 1997
increased  $8.1 million,  or 53.9%,  to $23.3 million from $15.2 million for the
three months ended December 31, 1996.  Telecommunications  services  revenue for
the three months ended December 31, 1997 increased  $5.6 million,  or 54.4%,  to
$16.0 million from $10.4  million for the three months ended  December 31, 1996.
The increase in  telecommunications  services  revenue  resulted  primarily from
increased  local  and long  distance  service  revenue  generated  by GST  USA's
networks.  Additionally,  during the three months ended  December 31, 1997,  the
Company completed a $1.5 million longhaul conduit sale. To a lesser extent,  the
increase in revenue  resulted  from the  acquisition  of the Guam  operations of
Sprint in October 1997.  Product revenue for the three months ended December 31,
1997 increased $2.5 million, or 52.7%, to $7.3 million from $4.8 million for the
three months ended December 31, 1996. The increase in product  revenue  resulted
primarily from increased unit sales of NACT's STX switch.

         OPERATING EXPENSES. Total operating expenses for the three months ended
December 31, 1997 increased $11.7 million, or 37.7%, to $42.8 million from $31.1
million for the three months ended December 31, 1996.  Network  expenses,  which
include direct local and long distance circuit costs, increased $2.2 million, or
22.2%, to $12.2 million, or 76.3% of telecommunications services revenue for the
three months  ended  December 31, 1997  compared to $10.0  million,  or 96.4% of
telecommunications  services  revenue for the three  months  ended  December 31,
1996.  The primary  reason for the decrease in network  expenses as a percent of
revenue is the increase in on-net  revenues  generated at GST USA's network as a
percent of total revenues.  Facilities  administration and maintenance  expenses
(consisting  primarily  of costs  related to  personnel  providing  maintenance,
monitoring and technical assistance for GST USA's networks) for the three months
ended  December 31, 1997  decreased $.2 million,  or 7.4%,  to $2.9 million,  or
17.8% of telecommunications services revenue, compared to $3.1 million, or 29.7%
of telecommunications  services revenue, for the three months ended December 31,
1996.

         Cost of product  revenue,  which  represents the costs  associated with
product  revenue of NACT,  increased $.5 million,  or 27.8%, to $2.3 million for
the three months ended  December 31, 1997 from $1.8 million for the three months
ended December 31, 1996.  Cost of product  revenue was 31.9% of product  revenue
for the three  months ended  December  31, 1997  compared to 38.1% for the three
months ended  December 31,  1996.  The decrease in cost of product  revenue as a
percentage of product revenue resulted primarily from economies of scale related
to increased unit sales of NACT's STX switch. Research and development costs for
the three months ended December 31, 1997 increased $.3 million, or 82.0%, to $.7
million  from $.4 million for the three months  ended  December  31,  1996.  The
increase  was due to the  addition of  personnel  to enhance the current  switch
product line and to facilitate  the  development  of new switching  products and
applications.

         Selling, general and administrative expenses for the three months ended
December 31, 1997 increased $4.9 million,  or 38.6%, to $17.6 million from $12.7
million for the three months ended December 31, 1996. The increase is due to the
expansion of GST USA's CLEC and enhanced services operations

                                       -6-

<PAGE>
and the hiring of a significant number of marketing,  management information and
sales personnel to implement GST USA's integrated  services  strategy.  Selling,
general and  administrative  expenses  were 75.3% of total revenue for the three
months ended  December 31, 1997 compared to 83.7% of total revenue for the three
months ended December 31, 1996.

         Depreciation  and  amortization for the three months ended December 31,
1997  increased $4.0 million,  or 129.2%,  to $7.1 million from $3.1 million for
the three months  ended  December 31,  1996.  The increase was  attributable  to
newly-constructed   networks   becoming   operational.   GST  USA  expects  that
depreciation  will  continue to increase as it expands its networks and longhaul
fiber optic  facilities  and  installs  additional  switches.  Depreciation  and
amortization  was 30.3% of total revenue for the three months ended December 31,
1997 compared to 20.4% for the three months ended December 31, 1996.

         OTHER  EXPENSES/INCOME.  For the three months ended  December 31, 1997,
net other expenses increased $9.5 million, or 245.4%, to $13.3 million, or 56.8%
of total revenue,  from $3.8 million,  or 25.3% of total revenue,  for the three
months  ended  December 31,  1996.  The primary  reason for the increase was the
inclusion of interest expense associated with the Secured Notes. The increase in
interest  expense  was  partially  offset  by  interest  income  earned  on  the
investment of a portion of the proceeds of the sale of the Secured  Notes.  To a
lesser extent,  net other expenses increased due to NACT's income tax expense as
well as minority interest in the income of NACT.

FISCAL 1997 COMPARED TO FISCAL 1996

         REVENUES.  Total  revenue for the fiscal year ended  September 30, 1997
("Fiscal 1997")  increased $28.8 million,  or 76.4%, to $66.5 million from $37.7
million  for  the  fiscal  year  ended  September  30,  1996  ("Fiscal   1996").
Telecommunications  services revenue for Fiscal 1997 increased $16.4 million, or
58.3%,  to $44.6  million from $28.2  million for Fiscal  1996.  The increase in
telecommunications  services  revenue  primarily  from  increased  CLEC  service
revenue  generated by GST USA's  networks.  To a lesser extent,  the increase in
telecommunications  services  revenue resulted from increased  Internet,  shared
tenant and data  services.  Product  revenue  for Fiscal  1997  increased  $12.4
million,  or 129.6%,  to $22.0  million from $9.6  million for Fiscal 1996.  The
increase in product  revenue  resulted  from the  introduction  in April 1996 of
NACT's STX switch and subsequent increased unit sales.

         OPERATING EXPENSES.  Total operating expenses for Fiscal 1997 increased
$60.5 million,  or 78.0%,  to $138.1 million from $77.6 million for Fiscal 1996.
Network  expenses,  which include direct local and long distance  circuit costs,
increased $18.8 million,  or 75.3%, to $43.7 million for Fiscal 1997 compared to
$25.0  million  for  Fiscal  1996.  Facilities  administration  and  maintenance
expenses   (consisting   primarily  of  costs  related  to  personnel  providing
maintenance,  monitoring and technical  assistance  for GST USA's  networks) for
Fiscal 1997 increased  $1.2 million,  or 11.4%,  to $11.5  million,  or 25.8% of
telecommunications  services  revenue,  compared to $10.3  million,  or 36.7% of
telecommunications  services revenue,  for Fiscal 1996. These expenses increased
primarily  as a result of the  continuing  rollout  of the local  service at GST
USA's network locations.

         Cost of  product  revenue,  which are  costs  associated  with  product
revenue of NACT,  increased $3.1 million,  or 79.7%,  to $7.1 million for Fiscal
1997 from $4.0  million for Fiscal  1996.  Cost of product  revenue was 32.5% of
product  revenue for Fiscal 1997 compared to 41.5% for Fiscal 1996. The decrease
in cost of product  revenue as a percentage  of product  revenue  resulted  from
economies  of scale  related  to  increased  unit  sales of NACT's  STX  switch.
Research and development costs for Fiscal 1997 increased $1.0 million, or 69.3%,
to $2.3 million  from $1.3 million for Fiscal 1996.  The increase was due to the
addition of NACT  personnel  to enhance the current  switch  product line and to
facilitate the development of new switching products and applications.


                                       -7-

<PAGE>
         Selling,  general and administrative expenses for Fiscal 1997 increased
$26.5  million,  or 90.6%,  to $55.8 million from $29.3 million for Fiscal 1996.
The increase is due to the  expansion  of GST USA's CLEC and  enhanced  services
operations  and the  hiring of a  significant  number of  marketing,  management
information  and sales  personnel to  implement  GST USA's  integrated  services
strategy.  Selling,  general  and  administrative  expenses  were 83.8% of total
revenue for Fiscal 1997 compared to 77.6% of total revenue for Fiscal 1996.

         Depreciation  and  amortization for Fiscal 1997 increased $9.9 million,
or 128.1%,  to $17.6 million from $7.7 million for Fiscal 1996. The increase was
attributable to newly-constructed  networks becoming  operational.  Depreciation
and  amortization  was 26.5% of total  revenue for Fiscal 1997 compared to 20.5%
for Fiscal 1996.

         OTHER  EXPENSES/INCOME.  For Fiscal 1997, net other expenses  increased
$6.3 million, or 41.5%, to $21.6 million, or 32.5% of total revenue,  from $15.3
million,  or 40.5% of total  revenue,  for Fiscal  1996.  Fiscal  1997 net other
expenses  included a $7.4 million gain  recognized on the sale of one million of
GST USA's shares of NACT in February 1997. If the gain had been excluded,  other
expenses for Fiscal 1997 would have  increased  $13.8  million over Fiscal 1996.
Such increase  primarily  resulted from  increased  interest  expense due to the
issuance  of the 1995 Notes in  December  1995 and the  issuance  of the Secured
Notes in May 1997. To a lesser extent,  other  expenses  increased due to income
tax  expense  attributable  to income of NACT,  which as of March 1, 1997 was no
longer consolidated for tax purposes.

FISCAL 1996 COMPARED TO FISCAL 1995

         REVENUES.  Total revenues for Fiscal 1996 increased  $19.0 million,  or
101.9%,  to $37.7 million from $18.7 million for the fiscal year ended September
30, 1995 ("Fiscal 1995").  Telecommunications  services revenues for Fiscal 1996
increased  $17.0  million,  or 153.2%,  to $28.1  million from $11.1 million for
Fiscal 1995. The increase in telecommunications  services revenues resulted from
the  continuing  growth of long distance  (including  revenues  associated  with
Fiscal  1995  and  1996  acquisitions),   local,  Internet  and  data  services.
Acquisitions  (primarily the acquisition of International  Telemanagement Group,
Inc. but also the acquisitions of businesses of Reservations, Inc. d/b/a/ Hawaii
On Line ("Hawaii On Line") and  Texas-Ohio  Communications,  Inc. and affiliated
companies  (collectively,  "Texas-Ohio"))  accounted  for $11.5  million  of the
increase in such revenues.  Telecommunications products revenues for Fiscal 1996
increased   $2.0  million,   or  26.6%,   over  Fiscal  1995.  The  increase  in
telecommunications  products  revenues resulted from the introduction by NACT of
the STX product line in the third quarter of Fiscal 1996.

         OPERATING EXPENSES.  Total operating expenses for Fiscal 1996 increased
$48.6 million,  or 168.1%,  to $77.6 million from $28.9 million for Fiscal 1995.
Network  expenses,  which include direct local and long distance  circuit costs,
increased $14.9 million to $25.0 million from $10.1 million for Fiscal 1995, due
to  an  expanded   customer  base  and  increased  usage.  As  a  percentage  of
telecommunications  services revenues, network expenses decreased from 90.9% for
Fiscal 1995 to 88.7% for Fiscal 1996. Facilities  administration and maintenance
expenses  for Fiscal 1996  increased  $8.2  million to $10.3  million  from $2.1
million  for  Fiscal  1995.  As  a  percentage  of  telecommunications  services
revenues,  facilities  administration  and maintenance  expenses  increased from
18.9%  for  Fiscal  1995 to 36.7% for  Fiscal  1996.  The  increase  related  to
additional   personnel  and  facility  costs  required  by  continuing   network
expansion, a substantial portion of which are incurred before the realization of
revenues.

         Cost of product  revenues at NACT for Fiscal 1996 increased $.9 million
to  $4.0  million  from  $3.1  million  for  Fiscal  1995.  As a  percentage  of
telecommunications  products  revenues for Fiscal 1996, cost of product revenues
increased  nominally  as compared to Fiscal  1995 due to initial  lower  margins
resulting  from the  discontinuance  of NACT's former switch  product line as it
began to offer the new STX to existing customers. Research and development costs
increased nominally for Fiscal 1996 relative to Fiscal 1995

                                       -8-

<PAGE>
as GST USA moved to more rapidly develop an improved  billing system product and
to maintain ongoing research and development of GST USA's existing  hardware and
software product lines.

         Selling,  general and administrative  expenses increased $19.3 million,
or 192.4%, to $29.3 million from $10.0 million for Fiscal 1995. The increase was
due to the expansion of GST USA's CLEC and enhanced services operations,  and to
a lesser extent,  the  acquisitions  during Fiscal 1996 of Tri-Star  Residential
Communications  Corp. and the businesses of Hawaii On Line and  Texas-Ohio.  The
implementation  of GST  USA's  integrated  services  strategy  has  resulted  in
additional marketing, management information and sales staff.

         Depreciation and amortization for Fiscal 1996 increased $5.4 million to
$7.7 million  from $2.4  million for Fiscal 1995 due to  increased  depreciation
resulting from newly  constructed  networks  becoming  operational.  To a lesser
extent,  the increase in depreciation and amortization was also due to increased
amortization of intangible assets resulting from acquisitions.

         OTHER  EXPENSES/INCOME.  Net other  expenses  (income)  for Fiscal 1996
increased $16.1 million to $15.3 million from $(.8) million for Fiscal 1995. The
increase was principally the result of additional  interest  expense  associated
with the 1995 Notes,  offset by interest income resulting from the investment of
the proceeds of the sale of the 1995 Notes.

LIQUIDITY AND CAPITAL RESOURCES

         GST USA has incurred  significant  operating and net losses as a result
of the  development  and  operation of its  networks.  GST USA expects that such
losses  will  continue  to  increase  as GST  USA  emphasizes  the  development,
construction  and expansion of its networks and builds its customer  base.  Cash
provided by  operations  will not be  sufficient  to fund the  expansion  of its
networks, longhaul fiber optic facilities and services.

         GST USA's net cash used in operating and investing activities was $83.5
million,  $309.6 million, and $137.4 million for the three months ended December
31,  1997,  Fiscal  1997 and Fiscal  1996,  respectively.  Net cash  provided by
financing  activities from borrowings and contributions from GST to fund capital
expenditures,  acquisitions  and  operating  losses was $226.2  million,  $322.8
million and $174.9 million for the three months ended December 31, 1997,  Fiscal
1997 and Fiscal 1996, respectively.

         Capital  expenditures  for the three  months  ended  December 31, 1997,
Fiscal  1997 and  Fiscal  1996 were  $46.7  million,  $224.1  million  and $96.8
million,   respectively.   GST  USA  estimates  1998  capital   expenditures  of
approximately  $245.0 million. The majority of these expenditures is expected to
be made for the  construction of network and longhaul fiber optic facilities and
the purchase of switches and related equipment to facilitate the offering of GST
USA's services.  Continued  significant capital  expenditures are expected to be
made  thereafter.  In addition,  GST USA expects to continue to incur  operating
losses  while it expands  its  business  and builds its  customer  base.  Actual
capital  expenditures  and  operating  losses will  depend on numerous  factors,
including the extent of future  expansion,  acquisition  opportunities and other
factors beyond GST USA's control,  including economic  conditions,  competition,
regulatory developments and the availability of capital.

         In addition to GST USA's capital  expenditures  in Fiscal 1996, GST USA
acquired the business of Texas-Ohio  for a purchase price of $.6 million and the
assumption of certain liabilities. All other acquisitions consummated by GST USA
in Fiscal 1996 (Hawaii On Line and  Tri-Star)  were in  consideration  of Common
Shares.  In the first quarter of Fiscal 1997, GST USA acquired the remaining 50%
interest in Phoenix Fiber Access,  Inc.  ("Phoenix  Fiber") owned by ICG Telecom
Group,  Inc.  ("ICG") in consideration of (i) the repayment to ICG at closing of
approximately $2.1 million of intercompany indebtedness and the

                                       -9-

<PAGE>
repayment,  under certain circumstances,  of up to an additional $2.0 million of
such intercompany indebtedness and (ii) the indemnification of ICG in respect of
all  indebtedness  of  Phoenix  Fiber to GST USA and third  parties,  other than
certain  liabilities  of Phoenix  Fiber that were  assumed by ICG.  Prior to the
acquisition of the remaining 50% interest,  GST USA had contributed an aggregate
of $5.0 million to Phoenix  Fiber.  In October 1997, GST USA acquired the assets
of Sprint's operations in Guam for consideration of $2.0 million in cash and $.5
million in liabilities for services to be provided to Sprint.

         In September 1996, GST Switchco,  Inc. ("GST  Switchco") a wholly owned
subsidiary of GST USA entered into a Loan and Security  Agreement  (the "Siemens
Loan Agreement") with Siemens Telecom Networks  ("Siemens"),  which provides for
loans by Siemens of up to an aggregate of $226.0 million to finance the purchase
of Siemens equipment and certain equipment from other suppliers. At December 31,
1997,  $116.0  million of such  facility was available to GST Switchco (of which
$7.9 million had been provided). GST Switchco may seek to increase the amount of
such  facility  up to $226.0  million  on an as  needed  basis,  subject  to the
negotiation and execution of mutually  satisfactory  documentation.  In December
1996,  GST Equipco,  Inc., a wholly owned  subsidiary of GST USA entered into an
equipment loan and security  agreement  with NTFC Capital Corp.,  which provides
for $50.0  million of  equipment  financing to finance the purchase of equipment
and products from  Northern  Telecom Inc. (all of which had been provided to the
Company at December 31, 1997).

         In March 1997,  NACT completed an initial public offering of its common
stock  pursuant  to which  GST USA and NACT  sold one  million  and two  million
shares,  respectively,  of NACT's common stock, resulting in net proceeds to GST
USA and NACT of approximately $9.0 million and $18.1 million,  respectively.  In
February 1998, GST USA completed the sale of its remaining  interest in NACT for
net proceeds of $86.5 million.

         In May 1997, GST Funding completed the Secured Notes Offering of $265.0
million principal amount of 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,  including  approximately $41.5
million  that had been used to  refinance  indebtedness  of GST USA  incurred to
purchase  equipment.  The indentures  relating to the 1995 Notes and the Secured
Notes include restrictive  covenants which, among other items, limit or restrict
additional  indebtedness  incurred  by GST USA and GST,  investment  in  certain
subsidiaries, the sale of assets and the payment of dividends.

         In November  1997,  GST  completed a stock and debt offering (the "1997
Offering") which yielded net proceeds of approximately  $211.2 million.  The net
proceeds of the 1997  Offering  will be used by GST to fund the expansion of its
infrastructure,  the  expansion of its products  and service  offerings  and for
working capital and general corporate purposes.

         As of December 31, 1997,  GST USA had  approximately  $613.7 million of
indebtedness  outstanding.  In addition,  as of December  31, 1997,  GST USA had
$25.0 million of availability  under a a credit facility (the "Tomen  Facility")
with Tomen America,  Inc. and its affiliates and $108.1 million of  availability
under the Siemens Loan Agreement. Although GST USA's liquidity was substantially
improved as a result of the  proceeds  received  from the sale of the 1995 Notes
and the Secured Notes and from the 1997 Offering,  GST USA will have significant
debt  service  obligations.  GST USA  will be  required  to make  principal  and
interest payments of approximately $56.8 million (of which $35.1 million will be
made from funds  securing  the  Secured  Notes),  $61.3  million (of which $35.1
million will be made from funds securing the Secured  Notes),  $65.7 million (of
which $17.6 million will be made from funds securing the Secured Notes),  $110.2
million and $108.8 million in 1998,  1999,  2000,  2001 and 2002,  respectively.
However,   GST  USA  will  need  to  refinance  a  substantial  amount  of  such
indebtedness. In addition, GST USA anticipates

                                      -10-

<PAGE>
that cash flow from  operations will be insufficient to repay the 1995 Notes and
the Secured  Notes in full and that such notes will need to be  refinanced.  The
ability of GST USA to effect such refinancings will be dependent upon the future
performance of GST USA, which will be subject to prevailing  economic conditions
and to  financial,  business and other  factors,  including  factors  beyond the
control  of GST  USA.  There  can be no  assurance  that GST USA will be able to
improve its earnings  before fixed  charges or that GST USA will be able to meet
its debt service obligations.

         At  December  31,  1997,  GST  USA  had  cash,  cash  equivalents,  and
investments,  including restricted cash and investments, of approximately $349.4
million,  compared to $229.7  million at  September  30,  1997.  GST and GST USA
believe  that  the net  proceeds  from  the  sale of NACT  and the  cash on hand
(including the remaining  proceeds from the Secured Notes Offering  available to
purchase  equipment),  and borrowings  expected to be available  under the Tomen
Facility and the Siemens Loan  Agreement will provide  sufficient  funds for GST
and  GST USA to  expand  its  business  as  presently  planned  and to fund  its
operating  expenses  through March 2000.  Thereafter,  GST and GST USA expect to
require  additional  financing.  In the event  that GST and GST  USA's  plans or
assumptions  change or prove to be inaccurate,  or its cash resources,  together
with  borrowings  under  the  current   financing   arrangements   prove  to  be
insufficient to fund GST and GST USA's growth and  operations,  or if GST or GST
USA consummates additional acquisitions, they may be required to seek additional
sources  of  capital  (or  seek   additional   capital   sooner  than  currently
anticipated).  GST and GST USA may also seek to raise additional capital to take
advantage  of  favorable  conditions  in the  capital  markets.  There can be no
assurance that additional  financing will be available to GST and GST USA or, if
available,  that it can be concluded on terms  acceptable  to GST and GST USA or
within  the   limitations   contained   within  GST  and  GST  USA's   financing
arrangements.  Failure to obtain  such  financing  could  result in the delay or
abandonment of some or all of GST and GST USA's  development or expansion  plans
and could  have  material  adverse  effect on GST and GST USA's  business.  Such
failure  could also limit the ability of GST and GST USA to make  principal  and
interest  payments  on its  outstanding  indebtedness.  GST and GST USA  have no
material  working  capital or other credit  facility under which they may borrow
for  working  capital  and other  general  corporate  purposes.  There can be no
assurance that such a facility will be available to such companies in the future
or that if such a facility were  available,  that it would be available on terms
and conditions acceptable to GST and/or GST USA.

INCOME TAXES AND ADOPTION OF NEW ACCOUNTING STANDARDS

         At  December  31,  1997,   GST  USA  had  a  U.S.  net  operating  loss
carryforward of approximately $129.6 million.  While such loss carryforwards are
available to offset future taxable income of GST USA, GST USA does not expect to
generate sufficient taxable income so as to utilize all or a substantial portion
of such loss carryforwards prior to their expiration.  Further,  the utilization
of net operating loss carryforwards  against future taxable income is subject to
limitation if GST USA  experiences  an "ownership  change" as defined in Section
382 of the Internal Revenue Code of 1986, as amended.

         In June 1997, the Financial  Accounting Standards Board ("FASB") issued
Statement  of  Financial   Accounting  Standard  ("SFAS")  No.  130,  "Reporting
Comprehensive  Income." SFAS No. 130 established standards for the reporting and
display of comprehensive income and its components in the financial  statements.
GST USA is required to adopt the  provisions  of SFAS No. 130 in 1998,  however,
GST USA believes that adopting this new accounting  standard will not materially
impact the manner of presentation  of its financial  statements as currently and
previously reported.

         In June 1997, the FASB issued SFAS No. 131,  "Disclosure about Segments
of an Enterprise and Related  Information"  ("SFAS No. 131"),  which changes the
way public companies report information about operating segments.  SFAS No. 131,
which is based on the  management  approach  to segment  reporting,  establishes
requirements  to report  selected  segment  information  quarterly and to report
entity-wide  disclosures about products and services,  major customers,  and the
material countries in which the entity

                                      -11-

<PAGE>
holds assets and reports  revenue.  Management has not yet evaluated the effects
of this change on its reporting of segment information.  GST USA will adopt SFAS
No. 131 in the fiscal year ending December 31, 1998.

YEAR 2000 PROGRAM

         Many computer systems experience difficulty processing dates beyond the
year 1999 and, as such,  some  computer  hardware and  software  will need to be
modified  prior to the year 2000 to remain  functional.  GST USA's core internal
systems  that have  been  recently  implemented  are year  2000  compliant.  The
remaining  core  internal  systems  are  scheduled  to be replaced by the second
quarter of 1999 and will be year 2000 compliant when installed.  GST USA is also
completing a preliminary  assessment of year 2000 issues not related to its core
systems, including issues surrounding systems that interface with external third
parties. Based on its initial evaluation, GST USA does not believe that the cost
of remedial  actions will have a material adverse effect on GST USA's results of
operations and financial  condition.  There can be no assurance,  however,  that
there  will  not  be a  delay  in,  or  increased  costs  associated  with,  the
implementation  of changes as the program  progresses,  and failure to implement
such changes could have an adverse effect on future results of operations.

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.
         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:  see page S-1.
   (3)    Exhibits:
   *3(a)  Certificate of Incorporation of GST USA, as amended.
   *3(b)  By-Laws of GST USA.
 **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.

                                      -12-

<PAGE>

***4(b)  Senior Notes Indenture dated as of December 19, 1995, by and among GST,
         GST USA and United States Trust Company of New York.
***4(c)  Convertible Notes Indenture dated as of December 19, 1995, by and among
         GST, GST USA and United States Trust Company of New York.
 #10(a)  Stock  Purchase  Agreement  dated  December  31,  1997 by and among GST
         Telecommunications,  Inc.,  GST  USA,  Inc.  and  World  Access,  Inc.,
         incorporated  by reference to Exhibit  99.2 to the  Company's  Form 8-K
         dated January 6, 1997.
##27     Financial Data Schedule.

-------------------
*        Incorporated by reference to GST USA's  Registration  Statement on Form
         S-4 (No. 333-33601-02).
**       Incorporated  by reference to GST's  Quarterly  Report on Form 10-Q for
         the period ended June 30, 1997.
***      Incorporated  by reference to GST's Annual  Report on Form 20-F for the
         fiscal year ended September 30, 1995.
#        Incorporated  by  reference  to  Exhibit  99.2 to GST's  Form 8-K dated
         January 6, 1998.
##       Filed herewith.
(b)      Reports on Form 8-K:  None.

                                      -13-

<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 USA, 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
---------------------------    Senior Vice President and Chief Financial Officer
(Daniel L. Trampush)           (Principal Financial Officer)


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


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




<PAGE>
                          INDEX TO FINANCIAL STATEMENTS

                                                                         Page(s)

GST USA, INC.

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

Consolidated Balance Sheets at December 31, 1997, and
  September 30, 1997 and 1996................................................F-3

Consolidated Statements of Operations for the
  three-month period ended December 31, 1997
  and the years ended September 30, 1997, 1996 and
  and 1995...................................................................F-4

Consolidated Statements of
  Shareholders' (Deficit) Equity at December 31, 1997
  September 30, 1997, 1996 and 1995..........................................F-5

Consolidated Statements of Cash Flows for the
  three-month period ended December 31, 1997
  and the years ended September 30, 1997, 1996
  and 1995...................................................................F-6

Notes to Consolidated Financial Statements...................................F-7


                                       F-1


<PAGE>



                          Independent Auditors' Report
                          ----------------------------



The Board of Directors and Shareholder
GST USA, Inc.:


We have audited the  accompanying  consolidated  balance sheets of GST USA, Inc.
and  subsidiaries  as of December 31, 1997 and September 30, 1997 and 1996,  and
the related  consolidated  statements  of  operations,  shareholder's  (deficit)
equity,  and cash flows for the  three-month  period ended December 31, 1997 and
for each of the years in the three-year  period ended September 30, 1997.  These
consolidated  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility is to express an opinion on these  consolidated
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  consolidated  financial  statements are
free of material  misstatement.  An audit includes  examining,  on a test basis,
evidence  supporting the amounts and disclosures in the  consolidated  financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial  position of GST USA, Inc. and
subsidiaries  as of December 31, 1997 and September  30, 1997 and 1996,  and the
results  of its  operations  and cash  flows for the  three-month  period  ended
December  31,  1997 and for each of the  years in the  three-year  period  ended
September 30, 1997, in conformity with generally accepted accounting principles.





/s/ KPMG PEAT MARWICK LLP

Portland, Oregon
February 25, 1998


                                      F - 2


<PAGE>
                                  GST USA, INC.
                                AND SUBSIDIARIES

                           Consolidated Balance Sheets

                      (In thousands, except share amounts)

<TABLE>
<CAPTION>
                                                                                                   September 30,
                                                                              December 31,      -------------------
                              Assets                                             1997           1997          1996
                              ------                                             ----           ----          ----

<S>                                                                             <C>          <C>          <C>
Current assets:
      Cash and cash equivalents                                                 $ 197,373    $  54,657    $  41,420
      Restricted cash and investments                                              31,731       50,039       16,000
      Accounts receivable, net                                                     21,254       16,232        7,186
      Receivable from parent                                                          964          964          988
      Investments                                                                   7,554        3,247        5,177
      Inventory                                                                     2,823        2,790        2,406
      Other current assets                                                         12,736       10,100        4,329
                                                                                ---------    ---------    ---------

                                                                                  274,435      138,029       77,506

Restricted investments                                                            112,719      121,711         --
Property and equipment, net                                                       402,767      359,976      124,545
Goodwill, net                                                                      17,005       19,846       21,394
Other assets, net                                                                  44,278       42,098       22,943
                                                                                ---------    ---------    ---------

                        Total assets                                            $ 851,204    $ 681,660    $ 246,388
                                                                                =========    =========    =========

        Liabilities And Shareholder's (Deficit) Equity
        ----------------------------------------------

Current liabilities:
      Accounts payable                                                          $  10,795    $  16,369    $   8,635
      Accrued expenses                                                             28,381       40,528       21,588
      Payable to parent                                                           298,889       85,775         --
      Current portion of capital lease obligations                                  5,755        5,892          286
      Current portion of long-term debt                                             3,097        2,521        3,091
      Other current liabilities                                                       994          607          686
                                                                                ---------    ---------    ---------

                                                                                  347,911      151,692       34,286
                                                                                ---------    ---------    ---------

Other liabilities                                                                   1,409        1,088          158
Capital lease obligations, less current portion                                    13,140       14,343          541
Long-term debt, less current portion                                              591,728      585,405      209,544
Minority interest                                                                  12,732       12,208          182

Commitments and contingencies

Shareholder's (deficit) equity:
      Common stock:  200 shares authorized, 10 shares
           issued and outstanding, no par value                                    78,462       78,373       69,957
      Accumulated deficit                                                        (194,178)    (161,449)     (68,280)
                                                                                ---------    ---------    ---------

                                                                                 (115,716)     (83,076)       1,677
                                                                                ---------    ---------    ---------

                        Total liabilities and shareholder's (deficit) equity    $ 851,204    $ 681,660    $ 246,388
                                                                                =========    =========    =========
</TABLE>


See accompanying notes to consolidated financial statements.



                                      F - 3


<PAGE>
                                  GST USA, INC.
                                AND SUBSIDIARIES

                      Consolidated Statements of Operations

                                 (In thousands)


<TABLE>
<CAPTION>
                                                          Three-month
                                                         period ended       Years ended September 30,
                                                         December 31,    -------------------------------
                                                             1997         1997         1996         1995
                                                             ----         ----         ----         ----

<S>                                                               <C>          <C>          <C>          <C>
Revenue:
      Telecommunications and other services              $  16,028    $  44,566    $  28,148    $  11,118
      Product                                                7,300       21,982        9,573        7,563
                                                           -------      -------      -------      -------

                    Total revenue                           23,328       66,548       37,721       18,681
                                                           -------      -------      -------      -------

Operating costs and expenses:
      Network expenses                                      12,226       43,746       24,955       10,103
      Facilities administration and maintenance              2,852       11,495       10,317        2,096
      Cost of product revenues                               2,328        7,141        3,974        3,096
      Selling, general and administrative                   17,577       55,773       29,259       10,008
      Research and development                                 746        2,289        1,352        1,270
      Depreciation and amortization                          7,073       17,639        7,733        2,369
                                                           -------      -------      -------      -------

                    Total operating costs and expenses      42,802      138,083       77,590       28,942
                                                           -------      -------      -------      -------

                    Loss from operations                   (19,474)     (71,535)     (39,869)     (10,261)
                                                           -------      -------      -------      -------

Other expenses (income):
      Interest income                                       (4,077)      (6,315)      (4,927)        (241)
      Interest expense, net of amounts capitalized          15,793       33,849       18,263          805
      Loss from joint venture                                 --           --          1,495          661
      Other, net                                               217       (7,415)         794          159
                                                           -------      -------      -------      -------

                                                            11,933       20,119       15,625        1,384
                                                           -------      -------      -------      -------

                    Loss before minority interest in
                        (income) loss of subsidiary
                        and income tax expense             (31,407)     (91,654)     (55,494)     (11,645)
                                                           -------      -------      -------      -------

Income tax expense:
      Current                                                  758        1,802           72           70
      Deferred                                                  92         (899)        --             96
                                                           -------      -------      -------      -------

                                                               850          903           72          166
                                                           -------      -------      -------      -------

                    Loss before minority interest in
                        (income) loss of subsidiary        (32,257)     (92,557)     (55,566)     (11,811)

Minority interest in (income) loss of subsidiary              (472)        (612)         411        2,364
                                                           -------      -------      -------      -------

                    Net loss                             $ (32,729)   $ (93,169)   $ (55,155)   $  (9,447)
                                                         =========    =========    =========    =========
</TABLE>

See accompanying notes to consolidated financial statements.


                                      F - 4


<PAGE>


                                  GST USA, INC.
                                AND SUBSIDIARIES

            Consolidated Statements of Shareholder's (Deficit) Equity

                      (In thousands, except share amounts)




<TABLE>
<CAPTION>
                                                                                 Total
                                               Common Shares                  shareholder's
                                          ----------------------  Accumulated   (deficit)
                                          Shares          Amount    Deficit      Equity
                                          ------          ------    -------      ------

<S>                                        <C>        <C>         <C>          <C>
Balance, September 30, 1994                      10   $  16,340   $  (3,678)   $  12,662

Cash contributions from parent                 --        24,675        --         24,675
Non-cash contributions from parent             --         6,894        --          6,894
Net loss                                       --          --        (9,447)      (9,447)
                                          ---------   ---------   ---------    ---------

Balance, September 30, 1995                      10      47,909     (13,125)      34,784

Cash contributions from parent                 --         9,009        --          9,009
Non-cash contributions from parent             --        13,039        --         13,039
Net loss                                       --          --       (55,155)     (55,155)
                                          ---------   ---------   ---------    ---------

Balance, September 30, 1996                      10      69,957     (68,280)       1,677

Capital transaction, sale of subsidiary
      shares                                   --         8,416        --          8,416
Net loss                                       --          --       (93,169)     (93,169)
                                          ---------   ---------   ---------    ---------

Balance, September 30, 1997                      10      78,373    (161,449)     (83,076)

Exercise of subsidiary stock options           --            89        --             89
Net loss                                       --          --       (32,729)     (32,729)
                                          ---------   ---------   ---------    ---------

Balance, December 31, 1997                       10   $  78,462   $(194,178)   $(115,716)
                                          =========   =========   =========    =========
</TABLE>


See accompanying notes to consolidated financial statements.

                                      F - 5

<PAGE>
                                  GST USA, INC.
                                AND SUBSIDIARIES

                      Consolidated Statements of Cash Flows
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                       Three-month
                                                                      period ended         YEARS ENDED SEPTEMBER 30,
                                                                       December 31,     -------------------------------
                                                                          1997          1997         1996         1995
                                                                          ----          ----         ----         ----
Operations:
<S>                                                                     <C>          <C>          <C>          <C>
      Net loss                                                          $ (32,729)   $ (93,169)   $ (55,155)   $  (9,447)

      Items not involving cash:
           Minority interest in income (loss) of subsidiary                   472          612         (411)      (2,364)
           Depreciation and amortization                                    7,823       19,469        8,821        2,819
           Deferred income taxes                                               92         (899)        --             96
           Accretion of interest                                            5,767       17,099       17,758         --
           Non-cash stock compensation and other expense                      374        2,521          574         --
           Loss on disposal of assets                                        --            679        1,012          122
           Loss on joint venture                                             --           --          1,495          766
           Gain on sale of subsidiary shares                                 --         (7,376)        --           --
      Changes in non-cash operating working capital:
           Accounts receivable, net                                        (4,173)      (9,696)      (2,274)      (1,522)
           Inventory                                                          (35)        (382)      (2,019)         (13)
           Other current and other assets, net                             (2,726)      (5,718)      (4,162)      (1,848)
           Accounts payable and accrued liabilities                       (17,531)      24,667        1,909         (298)
           Other liabilities                                                  708          130          153          413
                                                                          -------      -------      -------      -------

                    Cash used in operations                               (41,958)     (52,063)     (32,299)     (11,276)
                                                                          -------      -------      -------      -------

Investing:
      Acquisition of subsidiaries, net of cash acquired                    (2,105)        (673)      (1,466)         207
      Purchase of investments                                              (4,307)      (3,247)      (9,799)         (28)
      Proceeds from sales of investments                                     --          5,177        5,493         --
      Purchase of fixed assets                                            (46,475)    (221,540)     (75,698)     (27,713)
      Proceeds from sale of fixed assets                                     --          5,774            8         --
      Purchase of other assets                                               (992)     (10,359)      (7,628)      (2,150)
      Change in cash and investments restricted for the purchase
           of property and equipment                                       12,217      (59,776)     (16,000)        --
      Proceeds from sale of subsidiary shares, net                            141       27,105         --            615
                                                                          -------      -------      -------      -------

                    Cash used in investing activities                     (41,521)    (257,539)    (105,090)     (29,069)
                                                                          -------      -------      -------      -------

Financing:
      Proceeds from long-term debt                                          7,729      352,850      175,897       19,923
      Proceeds of debt payable to parent                                  212,740       82,879         --           --
      Principal payments on long-term debt and capital leases              (9,270)      (4,912)      (1,511)        (816)
      Contributions from parent                                              --           --          9,009       24,675
      Deferred debt financing costs                                           (87)     (12,004)      (8,480)        (853)
      Change in investments restricted to finance interest payments        15,083      (95,974)        --           --
                                                                          -------      -------      -------      -------

                    Cash provided by financing activities                 226,195      323,839      174,915       42,929
                                                                          -------      -------      -------      -------

                    Increase in cash and cash equivalents                 142,716       13,237       37,526        2,584

Cash and cash equivalents, beginning of year                               54,657       41,420        3,894        1,310
                                                                          -------      -------      -------      -------

Cash and cash equivalents, end of year                                  $ 197,373    $  54,657    $  41,420    $   3,894
                                                                        =========    =========    =========    =========

Supplemental disclosure of cash flow information:
      Cash paid for interest                                            $  21,631    $   4,564    $   1,813    $     364
      Cash paid for income taxes                                            1,038          638         --            264

Supplemental schedule of non-cash investing and financing activities:
      Recorded in business combinations:
           Assets acquired                                              $   2,605    $   1,052    $  12,817    $  17,081
           Liabilities assumed                                                500          379        3,037        7,706
           Minority interest                                                 --           --         (2,686)       1,797
           Common shares of parent                                           --           --         12,465        7,241
      Amounts in accounts payable and accrued liabilities for the
           purchase of fixed assets at year-end                            19,029       19,718       18,291        4,363
      Assets acquired through capital leases                                  480       21,241         --            128

</TABLE>

See accompanying notes to consolidated financial statements.

                                      F - 6
<PAGE>
                                  GST USA, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                      (In thousands, except share amounts)

                December 31, 1997 and September 30, 1997 and 1996

(1) Summary of Significant Accounting Policies

   (a) Description of the Company

       GST  USA,  Inc.  (the  Company)  is  a  wholly-owned  subsidiary  of  GST
       Telecommunications, Inc. (GST), a Canadian company, and is engaged in the
       business of providing  competitive local exchange  services  primarily in
       the western United States.  In addition,  the Company provides a range of
       telecommunications  services which include long distance, Internet access
       and data  services.  Upon formation of the Company in August of 1994, GST
       transferred all of its operating  subsidiaries and equity  investments to
       the Company.

   (b) CHANGE IN FISCAL YEAR-END

       In 1997,  the Company  changed its fiscal  year-end from  September 30 to
       December 31. Included in the accompanying  audited  financial  statements
       are the results of operations for the  three-month  period ended December
       31, 1997. Unaudited results of operations for the comparable  three-month
       period ended December 31, 1996 are summarized below:

               Revenues                         $ 15,161
               Loss from operations              (15,927)
               Other expenses, net                (3,838)
               Income tax expense                    -
               Net loss                          (19,765)

   (c) BASIS OF CONSOLIDATION

       The accompanying  consolidated  financial statements include the accounts
       of the Company and its greater than 50% owned subsidiaries. The Company's
       investments in  unconsolidated  companies owned 20% or more are accounted
       for using the equity method. All significant  intercompany  accounts have
       been eliminated.

   (d) CASH AND CASH EQUIVALENTS

       Cash equivalents  consist of short-term,  highly liquid  investments with
       original maturities of ninety days or less.


                                                                     (Continued)


                                      F - 7
<PAGE>
                                  GST USA, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                      (In thousands, except share amounts)

(e)    ACCOUNTS AND NOTES RECEIVABLE

       The  Company  maintains  a security  interest  in the  telecommunications
       systems it sells until the Company is paid in full. Notes receivable from
       customers, included in accounts receivable, total $4,055, $3,334 and $623
       at December  31,  1997 and  September  30,  1997 and 1996,  respectively.
       Management provides an allowance for doubtful accounts and notes based on
       current customer information and historical statistics. The allowance for
       doubtful accounts was $3,830,  $3,451 and $1,183 at December 31, 1997 and
       September 30, 1997 and 1996, respectively.

(f)    CASH AND 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  and  $1,075  in
       certificates  of deposit,  as  available-for-sale  and  held-to-maturity.
       Held-to-maturity  investments,   recorded  at  amortized  cost,  totaling
       $81,966  and  $97,049  at  December  31,  1997 and  September  30,  1997,
       respectively,  and maturing  between  three  months and three years,  are
       restricted   primarily   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.

       The Company's unrestricted investments totaling $7,554, $3,247 and $5,177
       at December  31,  1997 and  September  30,  1997 and 1996,  respectively,
       consist of U.S.  government  securities and certificates of deposit,  all
       maturing within one year, and are classified as available-for-sale  which
       approximates market value.

                                                                     (Continued)

                                      F - 8
<PAGE>
                                  GST USA, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                      (In thousands, except share amounts)


(g)    INVENTORY

       Inventory is stated at the lower of cost (first-in,  first-out) or market
       (net realizable value) and consists of the following:

<TABLE>
<CAPTION>

                                                   December 31,  September 30,   September 30,
                                                       1997         1997             1996
                                                       ----         ----             ----

<S>                                                  <C>          <C>             <C>
               Raw materials                         $1,577       $1,065          $  378
               Work in process                          587          499             346
               Finished and refurbished goods           659        1,226           1,682
                                                     ------       ------          ------
                              Inventory              $2,823       $2,790          $2,406
                                                     ======       ======          ======
</TABLE>

(h)    PROPERTY AND EQUIPMENT

       Property  and  equipment  is recorded at cost and is  depreciated  on the
       straight-line  basis  over their  estimated  useful  lives,  which are as
       follows:

               Telecommunications networks                     20 years
               Electronic and related equipment                10 years
               Leasehold improvements                          10 years
               Furniture, office equipment and other        3 - 7 years
               Building                                        40 years

       Construction,  engineering  and overhead  costs  directly  related to the
       development of the Company's networks are capitalized. The Company begins
       depreciating   these  costs  when  the   networks   become   commercially
       operational.  Depreciation  expense totaled $5,857,  $13,756,  $5,496 and
       $1,193 for the  three-month  period  ended  December 31, 1997 and for the
       years ended September 30, 1997, 1996 and 1995, respectively.

(i)    GOODWILL

       Goodwill is  amortized,  using the  straight-line  method,  over  periods
       ranging  from five to twenty  years.  The Company  assesses  the carrying
       amount  of  goodwill  for  impairment   whenever  events  or  changes  in
       circumstances  indicate that the carrying  amount may not be recoverable.
       Measurement of any impairment  includes a comparison of estimated  future
       operating  cash flows  anticipated  to be generated  during the remaining
       life of the goodwill to the net carrying value.  Amortization  charged to
       operations was $602,  $2,385,  $1,528 and $389 for the three-month period
       ended December 31, 1997 and for the years ended  September 30, 1997, 1996
       and 1995, respectively.


                                                                     (Continued)

                                      F - 9
<PAGE>
                                  GST USA, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                      (In thousands, except share amounts)

(j)    REVENUE RECOGNITION

       Telecommunication  services  revenue is recorded upon placing of calls or
       rendering of other  related  services.  Product  revenue is recorded upon
       shipment of product and is  presented  in the  accompanying  consolidated
       statements of operations net of product returns.

       Deferred revenue consists of monthly service contract  payments  received
       in  advance,  warranty  payments  received in advance  and  research  and
       development advances, and is included in other current liabilities in the
       accompanying  consolidated balance sheets.  Advance warranty payments are
       amortized  over the  length of  warranty  on the  system  sold,  which is
       typically one year.

(k)    LOSS PER SHARE

       The Company  does not have any equity  instruments  which are  considered
       common stock  equivalents,  and, as weighted  average common shares total
       only ten for all periods,  loss per share  information  is not meaningful
       and  is  not  presented  in  the  accompanying   consolidated   financial
       statements.

(l)    ISSUANCE OF SUBSIDIARY STOCK

       Issuances of subsidiary  stock are accounted for as capital  transactions
       in the accompanying consolidated financial statements.

(m)    MINORITY INTEREST

       In  March  1997,  the  Company's  then  wholly-owned   subsidiary,   NACT
       Telecommunications,  Inc. (NACT), completed an initial public offering of
       its common stock, pursuant to which the Company and NACT sold one and two
       million shares,  respectively,  of NACT's common stock,  resulting in net
       proceeds of approximately $9,000 and $18,100,  respectively.  As a result
       of the  offering,  the Company's  ownership was reduced to 63%.  Minority
       interest represents the non-Company owned shareholder  interest in NACT's
       equity resulting from the 1997 offering.

       As discussed in note 11, the Company sold its remaining  interest in NACT
       in February 1998.

                                                                     (Continued)


                                     F - 10
<PAGE>
                                  GST USA, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                      (In thousands, except share amounts)


(n)    CONCENTRATION OF CREDIT RISK

       For purposes of segment  reporting,  the Company is  presently  operating
       100% in the telecommunications  industry in the United States and results
       of operations are derived from United States operations and substantially
       all  assets  reside in the  United  States.  The  Company  is  exposed to
       concentration of credit risk principally  from accounts  receivable.  The
       Company's five largest  telecommunications  services customers  accounted
       for  approximately  28.8%,  38.5%,  52.9%  and  26.8%  of  the  Company's
       consolidated  telecommunications  services  revenue  for the  three-month
       period  ended  December  31, 1997 and for the years ended  September  30,
       1997, 1996 and 1995, respectively.

(o)    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.

(p)    FINANCIAL INSTRUMENTS

       The  carrying  amounts  reported in the  balance  sheet for cash and cash
       equivalents,  receivables, short-term borrowings and 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.


                                                                     (Continued)

                                     F - 11
<PAGE>
                                  GST USA, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                      (In thousands, except share amounts)


(q)    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.

(r)    ADVERTISING COSTS

       The Company expenses advertising costs as incurred.

(s)    RECLASSIFICATIONS

       Certain reclassifications have been made in the accompanying consolidated
       financial  statements  for September  30, 1997,  1996 and 1995 to conform
       with the December 31, 1997 presentation.

(2)    ACQUISITIONS

       The Company has made the acquisitions set forth below,  each of which was
       accounted  for  as a  purchase.  The  consolidated  financial  statements
       include the operating results from the effective date of acquisition.

   (a) PHOENIX FIBER ACCESS, INC. (PHOENIX FIBER)

       In the first quarter of 1997,  the Company paid $2,000 in cash to acquire
       the remaining 50% of Phoenix  Fiber,  previously 50% owned by the Company
       through a joint venture with ICG Telecom Group,  Inc. (ICG). In addition,
       the  Company  assumed  the  repayment  of up to  $2,000  of  intercompany
       indebtedness, under certain circumstances, and indemnified ICG in respect
       of all  indebtedness  of Phoenix Fiber to the Company and third  parties,
       other than certain liabilities of Phoenix Fiber that were assumed by ICG.
       Phoenix  Fiber is an Arizona  company  engaged in  providing  competitive
       local exchange services in the Phoenix metropolitan area.

                                                                     (Continued)

                                     F - 12

<PAGE>
                                  GST USA, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                      (In thousands, except share amounts)


  (b) GST TELECOM, INC. (GST TELECOM)

       In a series of transactions  between 1994 and 1996, the Company purchased
       100% of the outstanding shares of GST Telecom, which develops, constructs
       and operates competitive local exchange networks and other communications
       systems. Consideration paid for GST Telecom consisted of 2,100,000 common
       shares of GST valued at $15,447,  which shares were paid to Pacwest,  LLC
       (Pacwest),  an entity  controlled by the Chief  Executive  Officer of the
       Company.   Goodwill  of  $15,330  was   recorded  as  a  result  of  this
       acquisition.

   (c) OTHERS

       In October 1997, the Company  purchased the assets of the Guam operations
       of  Sprint  Communications  Company  L.P.  (Sprint)  which  provide  long
       distance  and  ancillary  services in Guam.  Consideration  paid for this
       acquisition  consisted  of  $2,000  in cash and $500 in  liabilities  for
       services to be provided to Sprint.

       In May 1996, the Company  purchased from Tomen America,  Inc. (Tomen) the
       remaining 10% interest in the GST Pacific Lightwave,  Inc., a GST Telecom
       subsidiary  which  operates  a fiber  optic  competitive  local  exchange
       network  in  southern   California.   The  consideration  paid  for  this
       acquisition consisted of $1,250 in cash, which was recorded as goodwill.

       During 1996, the Company  acquired the assets of  Reservations,  Inc. dba
       Hawaii Online (Hawaii Online),  the assets of Texas-Ohio  Communications,
       Inc. (Texas-Ohio),  and 100% of the outstanding capital stock of Tri-Star
       Residential Communications, Inc. (Tri-Star). Hawaii Online is an Internet
       service  provider;  Texas-Ohio is a long distance service  provider;  and
       Tri-Star  provides  shared tenant  services  consisting of long distance,
       cable  television  and  security  service to  tenants  of  multi-dwelling
       apartment units.  Consideration paid for these acquisitions  consisted of
       199,887  common  shares of GST valued at $1,862,  a  commitment  to issue
       approximately  50,887  common  shares of GST valued at $604 over the next
       year and $719 of cash.  Goodwill  of $1,044 was  recorded  as a result of
       these acquisitions.

       The consolidated  results of operations for the three-month  period ended
       December 31, 1997 reflect each of the  acquisitions  discussed  above for
       the full  period.  Pro forma  results for the years ended  September  30,
       1997, 1996 and 1995 are not material to the financial  statements and, as
       such, have not been presented.


                                                                     (Continued)

                                     F - 13
<PAGE>
                                  GST USA, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                      (In thousands, except share amounts)


(3) PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>

                                                        December 31,       September 30,     September 30,
                                                            1997               1997              1996
                                                            ----               ----              ----

<S>                                                   <C>                   <C>              <C>
            Telecommunications networks               $   132,028           $ 95,447         $  25,551
            Electronic and related equipment               66,627             57,925            29,951
            Leasehold improvements                         20,858              8,439             3,495
            Furniture, office equipment
                   and other                               12,282             11,780             7,465
            Building                                        3,366              3,366             2,134
            Construction in progress                      192,888            202,545            62,658
                                                      -----------           --------         ---------

                                                          428,049            379,502           131,254

            Less accumulated depreciation                 (25,282)           (19,526)           (6,709)
                                                      -----------           --------         ---------

                                                      $   402,767           $359,976         $ 124,545
                                                      ===========           ========         =========
</TABLE>

       Property  and  equipment  includes  $192,888,  $202,545  and  $62,658  of
       equipment  which had not been  placed in service at  December  31,  1997,
       September 30, 1997 and 1996,  respectively,  and accordingly is not being
       depreciated.  During the  three-month  period ended December 31, 1997 and
       the three years ended September 30, 1997, 1996 and 1995, $3,726, $15,170,
       $2,316 and $291 of interest,  respectively,  was  capitalized  as part of
       telecommunications networks and networks in progress.

(4)    ACCRUED EXPENSES
<TABLE>
<CAPTION>

                                                        December 31,    September 30,   September 30,
                                                           1997            1997            1996
                                                           ----            ----            ----

<S>                                                   <C>                 <C>             <C>
            Fixed asset purchases                     $   12,157          $11,531         $14,153
            Carrier costs                                     23            2,113           2,659
            Accrued interest                               7,966           17,998             413
            Payroll and related liabilities                2,345            2,752           1,468
            Other                                          5,890            6,134           2,895
                                                      ----------          -------         -------

                              Total                   $   28,381          $40,528         $21,588
                                                      ==========          =======         =======
</TABLE>


                                                                     (Continued)

                                     F - 14
<PAGE>
                                  GST USA, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                      (In thousands, except share amounts)


(5) LONG-TERM DEBT
<TABLE>
<CAPTION>

                                                                  December 31,               September 30,       September 30,
                                                                      1997                       1997               1996
                                                                      ----                       ----               ----

<S>                                                              <C>                        <C>                 <C>
            Senior secured notes, 13.25%,
                  due May 1, 2007                                $265,000                   $265,000            $     -
            Note payable to Tomen,
                  LIBOR plus 3% (9.0% at
                  December 31, 1997)                               61,793                     69,137               31,771
            Note payable to NTFC, LIBOR
                  plus 3.5% (9.5% at
                  December 31, 1997)                               50,000                     44,634                  -
            Note payable to Siemens,
                  LIBOR plus 3.5% (9.5%
                  at December 31, 1997)                             7,889                       5,846                 -
            Senior discount notes, 13.875%,
                  due December 15, 2005                           210,136                     203,280             177,760
            Other                                                       7                          29               3,104
                                                                 --------                     -------             -------

                                                                  594,825                     587,926             212,635

            Less current portion of
                  long-term debt                                    3,097                        2,521              3,091
                                                                 --------                     --------           --------

                                                                 $591,728                     $585,405           $209,544
                                                                 ========                     ========           ========
</TABLE>

      The schedule of future principal payments on long-term debt is as follows:

            Year ending December 31:
                  1998                            $   3,097
                  1999                               13,196
                  2000                               19,115
                  2001                               22,242
                  2002                               22,945
                  Thereafter                        514,230
                                                  ---------

                                                  $ 594,825
                                                  =========


                                                                     (Continued)

                                     F - 15

<PAGE>
                                  GST USA, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                      (In thousands, except share amounts)

   (a) SENIOR SECURED NOTES

       In May of 1997, GST Equipment Funding,  a wholly-owned  subsidiary of the
       Company,  issued $265,000 in Senior Secured Notes (the Secured Notes) due
       May 1, 2007.  The  Secured  Notes bear  interest at a rate of 13.25% with
       semiannual   interest   payments   due   beginning   November   1,  1997.
       Approximately  $93,790 of the  proceeds  were set aside to fund the first
       six scheduled  interest  payments.  The remainder of the net proceeds are
       restricted  to  the  purchase  and  installation  of   telecommunications
       equipment.  The Secured Notes are secured by the equipment purchased with
       the proceeds and are subject to certain debt covenants.

       The  Indenture  provides that the Company 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 the Company. The note guarantee will be senior unsecured  indebtedness
       of GST.

       The Secured Notes are  redeemable at the option of the Company,  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,  the Company
       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.

   (b) TOMEN FACILITY

       In the first quarter of 1995, the Company entered into a master financing
       agreement with Tomen. Under the agreement, Tomen will loan up to $100,000
       to  subsidiaries  of the  Company for  development  and  construction  of
       network projects.  As of December 31, 1997, Tomen had provided a total of
       $69,468 in debt financing to the Company's  subsidiaries for construction
       and  operation of its fiber optic  networks in southern  California,  New
       Mexico,  Arizona  and  Hawaii.  The Tomen  financing  is  secured  by the
       equipment  purchased  with the  proceeds  and  subject  to  certain  debt
       covenants.

   (c) NTFC CAPITAL CORPORATION (NTFC) AGREEMENT

       In the first quarter of 1997, the Company entered into a $50,000 loan and
       security agreement with NTFC to finance the purchase of certain equipment
       from Northern  Telecom,  Inc.  Amounts  borrowed under the agreement bear
       interest  at LIBOR  plus  3.5% and will be  repaid  in  twenty  quarterly
       installments  beginning  in  January  1999.  The loan is  secured  by the
       equipment  purchased  with the  proceeds  and  subject  to  certain  debt
       covenants.


                                                                     (Continued)

                                     F - 16
<PAGE>
                                  GST USA, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                      (In thousands, except share amounts)


   (d) SIEMENS TELECOM NETWORKS (SIEMENS) AGREEMENT

       In the  fourth  quarter  of 1996,  the  Company  entered  into a loan and
       security  agreement  with  Siemens.  Under  the  terms of the  agreement,
       Siemens  will loan up to $226,000 to the  Company  for the  purchase  and
       installation of  telecommunications  switching and related equipment.  At
       December  31,  1997,  $116,000  was  available  to the  Company.  Amounts
       borrowed  under the agreement  initially bear interest at LIBOR plus 4.5%
       and are secured by the equipment.  Such interest  decreases to LIBOR plus
       3.5% at the time each initial  loan is  converted  to a term loan,  which
       conversion  occurs at the first  calendar  quarter  following the initial
       loan.  The  Company  is  committed  to  purchase  a minimum of $16,500 in
       equipment over three years.  Amounts borrowed under the agreement will be
       repaid in  twenty-four  quarterly  installments  beginning  five quarters
       after the initial loan is  converted to a term loan.  The loan is subject
       to certain debt covenants.

   (e) SENIOR DISCOUNT NOTES

       In the first quarter of 1996, the Company issued  approximately  $160,000
       in 13.875% Senior  Discount Notes (the Senior Notes) maturing on December
       15, 2005. The Senior Notes were sold at a substantial  discount and there
       will be no accrual of cash interest prior to December 15, 2000 or payment
       of interest  until June 15,  2001.  The Senior  Notes  accrete to a total
       principal  amount,  due December 15, 2005, of  approximately  $312,400 by
       December  15,  2000.  The Senior  Notes rank in right of payment with all
       unsubordinated  indebtedness  of the  Company.  On or after  December 15,
       2000,  the Senior Notes will be  redeemable at the option of the Company.
       The Senior Notes are subject to certain debt covenants and are guaranteed
       by GST.

   (f) GUARANTEE OF PARENT'S DEBT

       The Company has guaranteed GST's Convertible Senior Subordinated Discount
       Notes (the Convertible Notes) totaling  approximately $26,133 at December
       31, 1997. The Convertible Notes accrete to a total principal amount,  due
       December 15, 2005, of  approximately  $39,100 by December 15, 2000. On or
       after December 15, 2000, the Convertible  Notes will be redeemable at the
       option of the  Company  and GST.  The  Convertible  Notes are  subject to
       certain debt covenants.


                                                                     (Continued)

                                     F - 17
<PAGE>
                                  GST USA, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                      (In thousands, except share amounts)


(6) SHAREHOLDER'S (DEFICIT) EQUITY

   (a) COMMON STOCK

       Since  inception,  GST has  owned  all of the  outstanding  shares of the
       Company.

   (b) NON-CASH CONTRIBUTIONS FROM PARENT

       Non-cash  contributions from parent consist primarily of GST stock issued
       in connection with the Company's acquisition of certain subsidiaries.

   (c) STOCK-BASED COMPENSATION

       Certain  employees of the Company are eligible for stock option and stock
       bonus awards of GST's common stock. Pursuant to performance-based awards,
       compensation  expense of $374, $2,521,  $574 and $-0- for the three-month
       period  ended  December  31, 1997 and for the years ended  September  30,
       1997,  1996 and 1995,  respectively,  has been  recorded in the Company's
       financial statements.


                                                                     (Continued)

                                     F - 18
<PAGE>
                                  GST USA, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                      (In thousands, except share amounts)


(7)    INCOME TAXES

       The  provision  for income  taxes  differs  from the amount  computed  by
       applying the statutory income tax rate to net income before taxes for the
       three-month  period ended December 31, 1997 and the years ended September
       30, 1997, 1996 and 1995 as follows:
<TABLE>
<CAPTION>

                                                  December 31,       September 30,            September 30,       September 30,
                                                      1997               1997                     1996                1995
                                                      ----               ----                     ----                ----

<S>                                                     <C>              <C>                       <C>               <C>
            Computed expected income
                  tax expense (benefit)
                  at statutory rate                     (34)%            (34)%                     (34)%             (34)%
            Expected state income tax
                  expense (benefit)                      (4)              (4)                       (4)               (5)
            Increase in valuation
                  allowance                              38               36                        25                 37
            Amortization of goodwill                      1                1                         1                  7
            Minority interest                             -                -                         -                 (9)
            Effect of inability to offset
                  losses of subsidiaries                  -                -                         -                  2
            Equity method accounting
                  for joint venture                       -                -                         1                  2
            Effect of acquisition of new
                  subsidiaries                            -                -                         5                  1
            Non-deductible interest                       2                2                         2                  -
            Other                                         -                -                         4                  1
                                                        ----             ----                      ----                ---

                        Income tax expense                3 %              1 %                       - %                2 %
                                                        ====             ====                      ===                 ====
</TABLE>

                                                                     (Continued)


                                     F - 19
<PAGE>
                                  GST USA, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                      (In thousands, except share amounts)

       Deferred   income  taxes   reflect  the  net  tax  effects  of  temporary
       differences  between the carrying  amounts of assets and  liabilities for
       financial  reporting  purposes  and  the  amounts  used  for  income  tax
       purposes.  The tax effects of significant  items comprising the Company's
       deferred tax asset and liability are as follows:
<TABLE>
<CAPTION>

                                                               December 31,               September 30,              September 30,
                                                                   1997                       1997                       1996
                                                                   ----                       ----                       ----

<S>                                                            <C>                        <C>                        <C>
            Deferred tax assets:
                 Federal and state net operating
                     loss carryforwards                        $     47,246               $     40,106               $     16,378
                 Non-deductible interest                             18,365                     13,757                      4,608
                 Other                                                4,425                      3,692                      2,063
                                                               ------------               ------------               ------------

                           Total gross deferred
                                 tax assets                          70,036                     57,555                     23,049

                 Less valuation allowance                           (63,659)                   (51,501)                   (18,438)
                                                               ------------               ------------               ------------

            Deferred tax liabilities:
                 Furniture, fixtures and
                     equipment, due to
                     differences in depreciation                      5,376                      4,918                      2,110
                 Capitalized software/intangibles                     1,436                      1,479                      2,501
                                                               ------------               ------------               ------------

                           Total gross deferred
                                 tax liabilities                      6,812                      6,397                      4,611
                                                               ------------               ------------               ------------

                           Net deferred tax liabilities        $       (435)              $       (343)              $         -
                                                               ============               ============               ===========
</TABLE>

       The valuation allowance for deferred tax assets as of October 1, 1994 was
       $713.  The net change in total  valuation  allowance for the  three-month
       period  ended  December  31, 1997 and for the years ended  September  30,
       1997,  1996 and 1995 was an  increase of  $12,158,  $33,063,  $14,237 and
       $3,488, respectively.


                                                                     (Continued)


                                     F - 20
<PAGE>
                                  GST USA, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                      (In thousands, except share amounts)


       The  Company  has  net  operating  losses  for  income  tax  purposes  of
       approximately  $129,633  available to reduce United States taxable income
       of future years, expiring as follows:

            2006                $     405
            2007                      537
            2008                    2,800
            2009                    5,020
            2010                   36,922
            2011                   64,379
            2012                   19,570
                                 --------
                                 $129,633
                                 ========

       Utilization  of net operating  losses may be subject to limitation in the
       event of certain  substantial  stock  ownership  changes having  occurred
       pursuant to IRC Section 382 and referred to  hereinafter  as an ownership
       change.  The Company  may have  incurred an  ownership  change  under IRS
       Section 382. This potential  ownership change would limit the utilization
       of any net  operating  losses  incurred  prior to the change in ownership
       date.  The Company  intends to complete an analysis under IRC Section 382
       to determine if an ownership change has occurred.

(8)    LEASES

       The Company is obligated  under capital leases for equipment which expire
       at  various  dates  during  the  next  twenty  years.  Certain  of  these
       agreements contain clauses which allow the lessor to cancel the agreement
       upon twelve-month written notice.  However, the Company believes that the
       likelihood  of such clauses being  exercised is remote.  Gross amounts of
       equipment and related  accumulated  amortization  recorded  under capital
       leases were as follows:
<TABLE>
<CAPTION>

                                               December 31,  September 30,  September 30,
                                                  1997          1997          1996
                                                  ----          ----          ----

<S>                                             <C>           <C>            <C>
            Equipment                           $24,265       $24,030        $ 924
            Less accumulated amortization        (4,985)       (3,541)        (249)
                                                -------       -------        -----
                                                $19,280       $20,489        $ 675
                                                =======       =======        =====
</TABLE>

       Amortization  of  assets  held  under  capital  leases is  included  with
       depreciation expense.


                                                                     (Continued)

                                     F - 21
<PAGE>
                                  GST USA, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                      (In thousands, except share amounts)


       The  Company  also has  noncancelable  operating  leases,  primarily  for
       facilities, which expire over the next thirty years. Rental expense under
       operating leases was $934, $2,822, $1,443 and $800 for three-month period
       ended December 31, 1997 and for the years ended  September 30, 1997, 1996
       and 1995, respectively.

       Future minimum lease payments under noncancelable leases (with initial or
       remaining  lease terms in excess of one year) and future minimum  capital
       lease payments as of December 31, 1997 are:

                                                Capital              Operating
                                                Leases                Leases
                                                ------                ------
            Year ending December 31:
               1998                             $ 7,717              $  4,253
               1999                               2,849                 3,768
               2000                               2,780                 3,036
               2001                               2,780                 2,461
               2002                               2,780                 2,317
               Thereafter                        12,930                 9,012
                                                --------              -------

                 Total minimum lease payments    31,836               $24,847
                                                =======               =======

            Less amount representing interest
                  (at rates ranging from
                   10% to 17%)                   12,941
                                                -------

                  Net minimum lease payments     18,895

            Less current installments of
                  obligations under
                  capital leases                  5,755
                                                -------

                Obligations under capital
                  leases, excluding
                  current installments          $13,140
                                                =======

(9) COMMITMENTS AND CONTINGENCIES

   (a) PENSION AND PROFIT SHARING PLANS

       In 1995,  the  Company  adopted a defined  contribution  401(k) plan (the
       Plan).   Employees  are  eligible  to   participate   in  the  Plan  upon
       commencement  of  service.  Participants  may defer up to 15% of eligible
       compensation.   Currently,   the  Company   does  not  provide   matching
       contributions for the Plan.


                                                                     (Continued)


                                     F - 22
<PAGE>
                                  GST USA, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                      (In thousands, except share amounts)


   (b) LONG DISTANCE CARRIERS

       The Company is party to various  contracts  with long  distance  carriers
       pursuant to which the Company is committed to minimum  service fees.  The
       average monthly minimum commitments range from $2,300 to $6,100 per month
       over the  next  three  years.  The  Company  may be  required  to pay the
       carriers for  differences  between the commitment  amounts and the actual
       amounts billed.

   (c) LEGAL PROCEEDINGS

       On August 24, 1995, Aerotel, Ltd. and Aerotel U.S.A., Inc. (collectively,
       "Aerotel")  filed a patent  infringement  suit against NACT alleging that
       telephone  systems  manufactured  and  sold by NACT  incorporate  prepaid
       calling  features  which  infringe  upon a patent  issued to  Aerotel  in
       November  1987.  The  complaint  further  alleges  defamation  and unfair
       competition by NACT and seeks various  damages.  NACT has filed an Answer
       and Counterclaim  denying patent infringement,  committing  defamation or
       unfair  competition and seeks judgment that the Aerotel patent is invalid
       and that Aerotel has misused its patent in  violation of antitrust  laws.
       On May 3, 1996,  NACT served its motion for summary  judgment,  which the
       Court has indicated it will deny such motion,  although the Court has not
       yet  issued its  ruling.  Aerotel  amended  its  complaint  to include as
       defendants  the Company and GST.  The amended  pleadings  allege that the
       Company  and GST have  infringed  the Aerotel  patent,  aided and abetted
       infringement by others,  including NACT, and  participated  in, and aided
       and abetted  alleged  tortious  conduct by NACT. The Company and GST have
       served  answers  denying all  material  allegations  and intend to defend
       vigorously.  Pretrial  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.  NACT's  patent  counsel  believes  that NACT 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.  Based on  information
       currently  available,  the  Company's  management  is of the opinion that
       there will be no material  impact of the  Company's  financial  position,
       results  of  operations,  or  cash  flows  as  a  result  of  this  suit.
       Accordingly,  no provision for loss has been provided in the accompanying
       consolidated financial statements.

       Concurrent  with the sale of NACT (see note 11),  the  Company  and World
       Access, Inc. entered into an agreement whereby the Company generally will
       bear 50% of any damages,  including  reasonable  attorney  fees,  losses,
       liabilities,  claims and  assessments,  royalties and license fees. Under
       the agreement, subsequent to a determination, if any, by a Court that the
       Aerotel  patent  is  valid  and  it has  been  infringed,  the  Company's
       liability associated with royalties and license fees, refunds and cost of
       product replacement or modification is limited to $2,000.


                                                                     (Continued)


                                     F - 23
<PAGE>
                                  GST USA, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                      (In thousands, except share amounts)


       The Company is involved in various other claims and legal actions arising
       in the ordinary  course of business.  In the opinion of  management,  the
       ultimate  disposition of these matters will not have a material effect on
       the Company's financial position, results of operations or cash flows.

   (d) REPURCHASE AGREEMENT

       NACT is guarantor for financing  transactions executed under a repurchase
       agreement with Zions Credit  Corporation  (Zions) for a maximum of $4,169
       at December 31, 1997. Zions provides lease financing to NACT customers on
       a recourse basis.

   (e) EMPLOYMENT AGREEMENTS

       The Company has entered into  employment  agreements  with key members of
       management.  These  agreements  provide  for  payments  based upon death,
       disability and change of control.  The agreements also contain  covenants
       not to compete.

(10) RELATED PARTY TRANSACTIONS

   (a) MAGNACOM WIRELESS, LLC (MAGNACOM)

       Magnacom, a company 99% owned by Pacwest Network, Inc. (PNI), which is in
       turn  controlled by the Chief Executive  Officer of the Company,  and the
       Company have entered into a twelve-year  reseller agreement (the Magnacom
       Reseller Agreement) pursuant to which (i) the Company has been designated
       a  non-exclusive  reseller  of PCS  telephone  services in the markets in
       which Magnacom has obtained licenses, and (ii) Magnacom has agreed to use
       the  Company on an  exclusive  basis to provide  switched  local and long
       distance services, and other enhanced telecommunications services, to all
       of  Magnacom's  resellers  in markets  where the Company has  operational
       networks.  Magnacom  agreed to sell PCS  minutes  to the  Company at five
       cents  per  minute,  subject  to  downward  adjustment  to equal the most
       favorable  rates offered to Magnacom's  other  resellers (but in no event
       less than  Magnacom's  cost).  In connection  with the Magnacom  Reseller
       Agreement,  the  Company  has paid a total of  approximately  $14,000  as
       pre-payments for future PCS services.


       (Continued)

                                     F - 24
<PAGE>
                                  GST USA, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                      (In thousands, except share amounts)


       In addition, the Company has been granted a conditional option to acquire
       up to PNI's entire interest in Magnacom (currently 99%), conditioned upon
       Magnacom and the Company  entering into an agreement for the construction
       and/or  operation of Magnacom's  facilities.  The condition  precedent to
       such option has not yet been met. Such option,  if and when the condition
       precedent is met, shall be subject to compliance  with all applicable FCC
       regulations  relating to prior approval of any transfer of control of PCS
       licenses,  including  those relating to foreign  ownership or control and
       requirements   regarding  the  ownership  of  C  and  F  block  licenses.
       Accordingly,  until such time as FCC regulations or administrative action
       permit the Company to own in excess of 25% of Magnacom, the option by its
       terms is limited to a 24% interest in Magnacom. The Company, Magnacom and
       PNI are in negotiations  with respect to modifying the option in order to
       provide,  among  other  things,  that the  Company own no more than a 25%
       interest in Magnacom upon exercise of such option.

   (b) PACWEST NETWORK, INC. (PNI)

       The operations of the Company's  Hawaiian  microwave  network require the
       use of radio  licenses  from the FCC.  Such  licenses are owned by PNI, a
       company  controlled  by the  Company's  Chief  Executive  Officer.  Under
       agreements  between the Company and PNI,  (1) the Company  pays a monthly
       fee to PNI to utilize PNI's licenses for its  communications  traffic and
       (2) PNI pays an equal monthly fee to the Company for the right to utilize
       the Company's facilities for other communications traffic using up to 10%
       of PNI's license capacity.

   (c) TOMEN

       Under the Tomen facility, Tomen has the right to act as procurement agent
       for each network project it finances. The Company has purchased equipment
       through  Tomen at  competitive  prices.  Additionally,  an upfront fee of
       1.50% of the aggregate principal amount of each project loan advanced and
       a commitment  fee of .50% per annum on the unused portion of each project
       loan is payable to Tomen.

       Pursuant to the Tomen agreements, Tomen has purchased 1,579,902 shares of
       GST  common  stock for total  cash  consideration  of  $10,400  and holds
       warrants to purchase an additional  246,155 shares of GST common stock at
       prices ranging from $12.61 to $12.96 per share.  Such warrants  expire at
       various times between May 1998 and September 1999.


                                                                     (Continued)


                                     F - 25
<PAGE>
                                  GST USA, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                      (In thousands, except share amounts)


   (d) OTHER

       The Company and GST paid approximately  $104, $2,066,  $2,264 and $770 in
       legal fees during the three-month  period ended December 31, 1997 and the
       years ended  September 30, 1997, 1996 and 1995,  respectively,  to a firm
       having a member who is also a director of the Company and of GST.

       Prior to June 1997,  the Company's  Chief  Executive  Officer served as a
       paid consultant to Tomen.  Additionally,  Pacwest received a fee equal to
       1% of the aggregate  debt and equity  financing  provided by Tomen to the
       Company and GST through  October 1997.  Such fees incurred by the Company
       and GST totaled $437,  $195 and $221 during the years ended September 30,
       1997, 1996 and 1995, respectively.

       Receivables  from parent are primarily  comprised of expenses paid by the
       Company of behalf of GST.

       Payables to parent represent advances from GST to be used in constructing
       and operating the Company's telecommunications networks.

(11) SUBSEQUENT EVENT

       In  February  1998,  the  Company  completed  the  sale of its  remaining
       interest in NACT for net proceeds of $86,545.



                                     F - 26
<PAGE>
                          INDEPENDENT AUDITORS' REPORT

The Board of Directors
GST USA, Inc.:

Under date of February 25, 1998, we reported on the consolidated  balance sheets
of GST USA, Inc. and subsidiaries as of December 31, 1997 and September 30, 1997
and 1996, and the related consolidated  statements of operations,  shareholder's
(deficit)  equity and cash flows for the  three-month  period ended December 31,
1997 and for each of the years in the  three-year  period  ended  September  30,
1997,  which  are  included  in the  transition  report  on  Form  10-K  for the
three-month period ended December 31, 1997. In connection with our audits of the
aforementioned  consolidated  financial  statements,  we also have  audited  the
related  consolidated  financial  statement  schedule listed in the accompanying
index. This financial  statement schedule is the responsibility of the Company's
management.  Our  responsibility  is to express  an  opinion  on this  financial
statement schedule based on our audits.

In our opinion,  such financial statement schedule,  when considered in relation
to the  basic  consolidated  financial  statements  taken as a  whole,  presents
fairly, in all material respects, the information set forth therein.


/s/ KPMG PEAT MARWICK LLP


Portland, Oregon
February 25, 1998


                                      S-1


<PAGE>

                                 GST USA, INC.

                       Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
                                           Balance at    Charged     Written off   Balance at
                                           beginning   to bad debt     against      end of
Allowance for doubtful accounts            of period     expense      allowance     period
-------------------------------            ---------     -------      ---------     ------

<S>                                         <C>          <C>            <C>        <C>
Three months ended December 31, 1997        3,451        1,121          742        3,830

Year ended September 30, 1997               1,183        4,765        2,497        3,451

Year ended September 30, 1996               1,402        1,703        1,922        1,183

Year ended September 30, 1995                  60        1,354           12        1,402

</TABLE>


                                      S-2
<PAGE>
                                  EXHIBIT INDEX

EXHIBIT

   *3(a)  Certificate of Incorporation of GST USA, as amended.
   *3(b)  By-Laws of GST USA.
  **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.
 ***4(b)  Senior Notes  Indenture  dated as of December  19, 1995,  by and among
          GST, GST USA and United States Trust Company of New York.
 ***4(c)  Convertible  Notes  Indenture  dated as of December 19,  1995,  by and
          among GST, GST USA and United States Trust Company of New York.
  #10(a)  Stock Purchase Agreement dated December 31, 1997 by and among GST, GST
          USA and World Access, Inc.
 ##27     Financial Data Schedule.

---------------------
*         Incorporated by reference to GST USA's Registration  Statement on Form
          S-4 (No. 333-33601-02).
**        Incorporated by reference to GST's  Quarterly  Report on Form 10-Q for
          the period ended June 30, 1997.
***       Incorporated  by reference to GST's Annual Report on Form 20-F for the
          fiscal year ended September 30, 1995.
#         Incorporated  by  reference  to  Exhibit  99.2 to GST's Form 8-K dated
          January 6, 1998.
##        Filed herewith.