SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-K

(Mark One)

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

For the fiscal year ended SEPTEMBER 30, 1997

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

For the transition period from _________to______________

                       Commission file number 333-33601-02

                                  GST USA, INC.
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             (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
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             (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
January 7, 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 (the  "Guarantee")  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 (the "Convertible Notes Guarantee") 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 September 30, 1997 approximately $93.8 million was
used to purchase  securities  pledged to fund the first six interest payments on
the  Secured  Notes  and  approximately  $91.3  million  was  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  39  markets  in  Arizona,
California,  Hawaii, Idaho, New Mexico, Texas and Washington.  In addition,  GST
has  networks  under  construction  which,  when  completed,  will  serve  three
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  600 route miles and an  additional  1,100 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")  and a customer  of NACT in the  United  States  District  Court,
Southern District of New York, alleging that telephone systems  manufactured and
sold by

                                       -1-


<PAGE>

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.  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 July 5, 1994,  the Tucson City Council (the  "Council")  awarded GST
Tucson Lightwave,  Inc. ("GST Tucson") a non-exclusive fiber optic communication
license that permits GST Tucson, for a period of 25 years, to conduct,  maintain
and operate in and across designated  portions of city-owned  rights-of-way.  On
June  12,  1995,   the  Council   approved   the  City  of  Tucson   Competitive
Telecommunications  Code (the "Tucson Code"),  which was subsequently amended on
July 10, 1995.  The Tucson Code now provides,  among other things,  (i) that the
City of Tucson  grant  licenses  for a period of 15 years,  (ii) for an increase
from 2% to 5 1/2% of  gross  revenues  to be paid by  licensees  and  (iii)  for
cancellation of a license in certain events. The Council subsequently refused to
permit GST  Tucson to modify the route  plans  previously  approved  in order to
construct connections between its customers and the network,  asserting that GST
Tucson's  existing  license does not permit such action and requiring GST Tucson
to receive an amended  license  under the Tucson Code to modify its route plans.
After trying to  negotiate a settlement  with the City of Tucson with respect to
its license,  GST Tucson  commenced an action in the Superior  Court of Arizona,
County of Pima, against the City of Tucson. The Court ruled in favor of the City
that the City Engineer does not have the authority to grant  modifications  from
the route map, that such route modifications must be approved by the Council and
that the City could  condition  GST  Tucson's  application  for a franchise  for
intrastate  service on a relinquishment of GST Tucson's  existing  license.  GST
Tucson appealed the Superior Court's rulings and  subsequently  filed a petition
for review in the Arizona Supreme Court. On May 13, 1996, GST Tucson  instituted
an action in the  United  States  District  Court for the  District  of  Arizona
against the City of Tucson seeking a declaratory  judgment and injunctive relief
arising out of the City of Tucson's  failure to manage its public  rights-of-way
in a  competitively  neutral and  nondiscriminatory  manner in  violation of the
Telecommunications  Act  of  1996  (the  "Telecommunications  Act").  The  Court
dismissed GST Tucson's action. GST Tucson filed a Notice of Appeal to the United
States Court of Appeals for the Ninth  Circuit on January 16, 1997. On August 5,
1997, the Tucson City Council approved a settlement  agreement that resolves the
Superior Court action. Under the terms of the settlement  agreement,  GST Tucson
has agreed to pay the City the annual  license fee called for by the Tucson Code
that amounts to 5 1/2% of gross revenues,  and the City has permitted GST Tucson
to modify  its  current  route map and to serve  customers  throughout  the City
limits.  While dismissing the pending state court appeal,  the parties agreed to
allow the United  States  Court of Appeals  for the Ninth  Circuit to decide the
pending legal issue relating to whether companies like GST Tucson


                                       -2-
<PAGE>

enjoy a private  right of action to assert  right-of-way  claims  under  Section
253(c) of the Telecommunications Act in the United States District Courts.

         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.
("Brooks")  and  GST in  the  United  States  District  Court  in  Arizona.  GST
understands  that one or more  substantially  similar  lawsuits  have been filed
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 a motion
filed by MFS to dismiss the  complaint.  Should U S WEST prevail in its suit, it
could have an adverse impact on GST's operations in Arizona.

         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.  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.  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.


                                       -3-
<PAGE>
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 39 markets in
Arizona,  California,  Hawaii,  Idaho,  New  Mexico,  Texas and  Washington.  In
addition, GST has networks under construction which, when completed,  will serve
three 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  600 route miles and an  additional  1,100 route miles are
expected  to become  operational  over the next 12  months.  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 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 and GST USA are  changing  their  fiscal year to  December  31st in
order  to  align  financial  reporting  with  regulatory  reporting  and  to the
reporting  of others in GST's  industry  sector.  GST will  provide to investors
audited  financial  information  for the three month  transition  period  ending
December 31, 1997 and 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 five high  capacity  digital  switches,  has  installed and is currently
testing  seven  additional  high  capacity  digital  switches and is planning to
deploy an additional two such switches  through early 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

                                       -4-

<PAGE>
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 $1.6 million per
month as of October 1, 1997,  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  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

                                       -5-
<PAGE>
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 September 1993, GST purchased a 52% interest in NACT,
which produces advanced  telecommunications  switching platforms with integrated
applications  software  and  network  telemanagement  capabilities.  During  the
thirteen  moths ended  September  30, 1994  ("Fiscal  1994"),  GST acquired in a
series of  transactions  an  additional  28%  interest  in NACT.  The  aggregate
consideration  paid for GST's 80% interest in NACT was $5.8 million,  consisting
of $3.2  million in cash and  451,536  Common  Shares of GST,  without par value
("Common Shares").  On January 5, 1995, GST purchased the remaining 20% interest
in NACT for  consideration  consisting  of $.9 million in cash and notes payable
and 504,747 Common Shares (valued at $2.2 million).  In the third quarter of the
fiscal year ended September 30, 1996 ("Fiscal  1996"),  NACT introduced the STX,
the first of a new  generation  of  switches.  In a public  offering  (the "NACT
Offering"),  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 $9.0 million and $18.1  million,  respectively.  As a result of the NACT
Offering,  GST USA's interest in NACT has been reduced to approximately  63%. On
December 31, 1997, GST and GST USA executed an agreement with World Access, Inc.
("World Access") to sell its remaining interest in NACT for approximately  $89.4
million, consisting of cash and common stock of World Access.

         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 is
performed  through direct wholly owned  subsidiaries of GST that were not wholly
owned by GST USA as of the periods presented below.

RESULTS OF OPERATIONS

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 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

                                       -6-

<PAGE>
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.

         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. GST USA expects
that  depreciation will continue to increase as it expands its networks and long
haul fiber optic facilities and installs additional  switches.  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.  GST USA expects that  interest  expense will increase due to
the issuance and sale of the Secured Notes.  To a lesser extent,  other expenses
increased due to income tax expense  attributable to income of NACT, which as of
March 1, 1997 is 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.  ("ITG") 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.

                                       -7-

<PAGE>
         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 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.  ("Tri-Star")  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.

         At  September  30,  1997,  GST  USA had  cash,  cash  equivalents,  and
investments,  including restricted cash and investments, of approximately $229.7
million,  compared to $62.6  million at September  30, 1996.  GST USA's net cash
used in operating and investing  activities was $311.8  million,  $137.4 million
and $40.3  million for Fiscal 1997,  Fiscal 1996 and Fiscal 1995,  respectively.
Net cash provided by financing activities from borrowings and contributions from
GST to fund capital  expenditures,  acquisitions and operating losses was $325.0
million,  $174.9  million  and $42.9  million for Fiscal  1997,  Fiscal 1996 and
Fiscal 1995, respectively.

                                       -8-

<PAGE>

         Capital  expenditures for Fiscal 1997, Fiscal 1996 and Fiscal 1995 were
$224.1 million, $96.8 million and $33.9 million, respectively. GST USA estimates
capital  expenditures  of  approximately  $286  million  from October 1, 1997 to
December 31, 1998. 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 Acess,  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 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 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 Stromberg-Carlson  ("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 September
30, 1997,  $116.0  million of such  facility  was  available to GST Switchco (of
which $5.8  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. ("GST  Equipco") a wholly owned  subsidiary of
GST USA entered into an equipment  loan and security  agreement  (the "NTFC Loan
Agreement")  with NTFC Capital  Corporation  ("NTFC"),  which provides for $50.0
million of equipment financing to finance the purchase of equipment and products
from Northern Telecom Inc.  ("Nortel") (of which $44.6 million had been provided
as of September 30, 1997).

         In March 1997,  NACT  completed  the NACT  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 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 September 30, 1997  approximately
$93.8 million had been used to purchase securities pledged to fund the first six
interest payments on the Secured Notes and approximately  $91.3 million had been
used to purchase 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

                                       -9-

<PAGE>

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 September 30, 1997, GST USA had  approximately  $608.2 million of
indebtedness  outstanding.  In addition,  as of September 30, 1997,  GST USA had
$25.0  million  of  availability  under the Tomen  Facility,  $110.2  million of
availability  under the Siemens Loan Agreement and $5.4 million of  availability
under the NTFC 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 $56.6 million (of which $35.1 million will be
made from funds  securing  the  Secured  Notes),  $63.7  million (of which $35.1
million will be made from funds securing the Secured  Notes),  $66.4 million (of
which $17.6 million will be made from funds securing the Secured Notes),  $109.2
million and $107.1 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  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  September  30,  1997,  GST  USA had  cash,  cash  equivalents,  and
investments,  including restricted cash and investments, of approximately $229.7
million.  GST and GST USA believe  that the net  proceeds of the 1997  Offering,
together with 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 equipment  financing  agreements with
Siemens and NTFC 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  September  30,  1997,  GST  USA  had  a  U.S.  net  operating  loss
carryforward  of  approximately   $110.1.  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 (the "Code").

                                      -10-

<PAGE>
         In June 1997, the Financial  Accounting Standards Board ("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  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.

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 the Index to Financial Statements.

   (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.

***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.

****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.

                                      -11-

<PAGE>

***      Incorporated by reference to GST's Annual Report on Form 20-F for the
         fiscal year ended September 30, 1995.
****     Filed herewith.
(b)      Reports on Form 8-K:  None.


                                      -12-


<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 7th day of January, 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 January 7, 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 (Principal Financial Officer)
     (Daniel L. Trampush)

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


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


<PAGE>
                         INDEX TO FINANCIAL STATEMENTS

GST USA, Inc.
  Independent Auditors' Report of KPMG Peat Marwick LLP.....................F-2
  Consolidated Balance Sheets at September 30, 1996 and 1997................F-3
  Consolidated Statements of Operations for the years
   ended September 30, 1995, 1996 and 1997..................................F-4
  Consolidated Statements of Shareholders' Equity for
   the years ended September 30, 1995, 1996 and 1997........................F-5
  Consolidated Statements of Cash Flows for the years
   ended September 30, 1995, 1996 and 1997..................................F-6
  Notes to Consolidated Financial Statements................................F-7





                                     F - 1

<PAGE>

                                  GST USA, INC.
                                AND SUBSIDIARIES

                        Consolidated Financial Statements

                           September 30, 1997 and 1996

                   (With Independent Auditors' Report Thereon)


<PAGE>

                          INDEPENDENT AUDITORS' REPORT

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

We have audited the  accompanying  consolidated  balance sheets of GST USA, Inc.
and subsidiaries as of September 30, 1997 and 1996, and the related consolidated
statements of operations,  shareholder=s  (deficit)  equity,  and cash flows 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  September  30,  1997  and  1996,  and  the  results  of its
operations and cash flows 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
                                             -------------------------
                                                 KPMG Peat Marwick LLP


Portland, Oregon
November 26, 1997

                                      F - 2


<PAGE>
                                  GST USA, INC.
                                AND SUBSIDIARIES

                           Consolidated Balance Sheets

                      (In thousands, except share amounts)
<TABLE>
<CAPTION>

                                                                                                 SEPTEMBER 30,
                                                                                             -----------------------
                                                ASSETS                                        1997              1996
                                                ------                                        ----              ----

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

                                                                                            138,029           77,506

Restricted investments                                                                      121,711               -
Property and equipment, net                                                                 359,976          124,545
Goodwill, net                                                                                19,846           21,394
Other assets, net                                                                            42,098           22,943
                                                                                         ----------       ----------

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

                 LIABILITIES AND SHAREHOLDER'S (DEFICIT) EQUITY
                 ----------------------------------------------

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

                                                                                            151,692           34,286
                                                                                         ----------       ----------

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

Commitments and contingencies

Shareholder=s (deficit) equity:

     Common stock:  200 shares authorized, 10 shares
        issued and outstanding, no par value                                                 78,373           69,957
     Accumulated deficit                                                                   (161,449)         (68,280)
                                                                                            -------       ----------

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

                  Total liabilities and shareholder's (deficit) equity                   $  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>


                                                                                        YEARS ENDED SEPTEMBER 30,
                                                                               --------------------------------------
                                                                               1997             1996             1995

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

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

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

               Total operating costs and expenses                              138,083           77,590          28,942
                                                                            ----------        ---------       ---------
               Loss from operations                                            (71,535)         (39,869)        (10,261)
                                                                            ----------        ---------       ---------

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

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

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

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

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

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

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

               Net loss                                                     $  (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>             <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)
                                             ===          =========        =========          =========
</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>
                                                                                        Years Ended September 30,
                                                                                 -----------------------------------------
                                                                                 1997              1996               1995
                                                                                 ----              ----               ----

Operations:
<S>                                                                           <C>                <C>               <C>       
     Net loss                                                                 $  (93,169)        $  (55,155)       $  (9,447)

     Items not involving cash:
        Minority interest in income (loss) of subsidiary                             612               (411)          (2,364)
        Depreciation and amortization                                             19,469              8,821            2,819
        Deferred income taxes                                                       (899)                -                96
        Deferred compensation                                                         -                   7              151
        Accretion of interest                                                     17,099             17,758               -
        Stock compensation and other expense                                       2,521                574               -
        Loss on disposal of assets                                                   679              1,012              122
        Loss on investments and joint venture                                         -               1,495              766
        Gain on sale of subsidiary shares                                         (7,376)                -                -
     Changes in non-cash operating working capital:
        Accounts receivable, net                                                  (9,696)            (2,274)          (1,522)
        Inventory                                                                   (382)            (2,019)             (13)
        Other current and other assets, net                                       (5,718)            (4,162)          (1,848)
        Accounts payable and accrued liabilities                                  24,667              1,909             (298)
        Other current liabilities                                                    130                146              262
                                                                              ----------         ----------         --------

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

Investing:
     Acquisition of subsidiaries, net of cash acquired                              (673)            (1,466)             207
     Purchase of investments                                                      (3,247)            (9,799)             (28)
     Proceeds from sales of investments                                            5,177              5,493               -
     Purchase of fixed assets                                                   (221,540)           (75,698)         (27,713)
     Proceeds from sale of fixed assets                                            5,774                  8               -
     Purchase of other assets                                                    (10,359)            (7,628)          (2,150)
     Change in cash and investments restricted for the purchase

        of property and equipment                                                (61,960)           (16,000)              -
     Proceeds from sale of subsidiary shares, net                                 27,105                 -               615
                                                                              ----------         ----------         --------

               Cash used in investing activities                                (259,723)          (105,090)         (29,069)
                                                                                 -------            -------           ------

Financing:
     Proceeds from long-term debt                                                352,850            175,897           19,923
     Proceeds of debt payable to parent                                           82,879                 -                -
     Principal payments on long-term debt and capital leases                      (4,912)            (1,511)            (816)
     Contributions from parent                                                        -               9,009           24,675
     Deferred debt financing costs                                               (12,004)            (8,480)            (853)
     Purchase of restricted securities to finance interest payments              (93,790)                -                -
                                                                              ----------         ----------         -------

               Cash provided by financing activities                             325,023            174,915           42,929
                                                                              ----------         ----------         --------

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

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

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

Supplemental disclosure of cash flow information:

     Cash paid for interest                                                   $    4,564         $    1,813        $     364
     Cash paid for income taxes                                                      638                 -               264

Supplemental schedule of non-cash investing and financing activities:
     Recorded in business combinations:

        Assets acquired                                                       $    1,052         $   12,817        $  17,081
        Liabilities assumed                                                          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                                      19,718             18,291            4,363
     Assets acquired through capital leases                                       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)

                           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.  The  Company  also  manufactures  telecommunications
       switching  equipment.  The Company was formed in August of 1994,  and GST
       transferred all of its operating  subsidiaries and equity  investments to
       the Company.

   (b) 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.

   (c) CASH AND CASH EQUIVALENTS

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

   (d) ACCOUNTS AND NOTES RECEIVABLE

       The  Company  maintains  a security  interest  in the  telecommunications
       systems it sells until the Company is paid in full.  Management  provides
       an allowance  for doubtful  accounts and notes based on current  customer
       information  and  historical  statistics.   The  allowance  for  doubtful
       accounts  was  $3,451  and  $1,183  at  September   30,  1997  and  1996,
       respectively.


                                                                     (Continued)

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

                   Notes to Consolidated Financial Statements

                      (In thousands, except share amounts)

   (e) RESTRICTED CASH AND INVESTMENTS

       The Company  adopted the provisions of Statement of Financial  Accounting
       Standards (SFAS) No. 115,  ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND
       EQUITY SECURITIES.  Accordingly,  the Company classifies its investments,
       consisting  of  $170,675  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
       $97,049 and maturing  between one and three  years,  are  restricted  for
       interest payments.  Available-for-sale investments,  totaling $74,701 and
       maturing  between one month and two years,  are  restricted for equipment
       purchases.  Available-for-sale  securities are recorded at amortized cost
       which  approximates  the market value of such securities at September 30,
       1997.

   (f)  INVENTORY, NET

       Inventory is stated at the lower of cost (first-in,  first-out) or market
       (net realizable value) and consists of the following at September 30:

                                                          1997          1996
                                                          ----          ----

           Raw materials                            $     1,065    $       378
           Work in process                                  499            346
           Finished and refurbished goods                 1,226          1,682
                                                       --------        -------

                      Inventory, net                $     2,790    $     2,406
                                                       ========        =======

   (g) 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.

                                                                     (Continued)

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

                   Notes to Consolidated Financial Statements

                      (In thousands, except share amounts)

   (h) 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 $2,385,  $1,528 and $389 for the years ended September 30,
       1997, 1996 and 1995, respectively.

   (i)  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.

   (j)  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 10 for all periods, loss per share information is not meaningful and
       is not presented in the accompanying consolidated financial statements.

   (k) ISSUANCE OF SUBSIDIARY STOCK

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

                                                                     (Continued)

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

                   Notes to Consolidated Financial Statements

                      (In thousands, except share amounts)

   (l)  MINORITY INTEREST

        In  the  second  quarter  of  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.

  (m) 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  38.5%,  52.9% and 26.8% of the
        Company=s consolidated telecommunications services revenue for the years
        ended September 30, 1997, 1996 and 1995, respectively.

   (n) 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.


                                                                     (Continued)

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

                   Notes to Consolidated Financial Statements

                      (In thousands, except share amounts)

   (o) FINANCIAL INSTRUMENTS

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

   (p) 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.

   (q)  ADVERTISING COSTS

       The Company expenses advertising costs as incurred.

   (r) RECLASSIFICATIONS

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

                                                                     (Continued)

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

                   Notes to Consolidated Financial Statements

                      (In thousands, except share amounts)

(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.

   (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 May 1996, the Company purchased from Tomen America, Inc. 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 (HOL), the assets of Texas-Ohio Communications, Inc. (TOC),
       and  100%  of the  outstanding  capital  stock  of  Tri-Star  Residential
       Communications, Inc. (Tri-Star). HOL is an Internet service provider; TOC
       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 175,333 common shares of GST valued
       at $1,559,  a commitment to issue  approximately  66,223 common shares of
       GST  valued  at $907  over the next  year and $719 of cash.  Goodwill  of
       $1,103 was recorded as a result of these acquisitions.


                                                                     (Continued)

                                     F - 12


<PAGE>
                                  GST USA, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                      (In thousands, except share amounts)

       The  consolidated  results  of  operations  for  the  fiscal  year  ended
       September 30, 1997 reflect each of the acquisitions discussed above for a
       full year. As a result, pro forma information is not presented.

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

                                                      September 30,        September 30,
                                                          1997                 1996
                                                          ----                 ----

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

                                                          379,502              131,254

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

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

     Property and equipment includes $202,545 and $62,658 of equipment which had
     not been placed in service at  September  30, 1997 and 1996,  respectively,
     and accordingly is not being depreciated.  During the years ended September
     30,  1997 and 1996,  $15,170  and  $2,316 of  interest,  respectively,  was
     capitalized  as  part  of  telecommunications   networks  and  networks  in
     progress.

(4) ACCRUED EXPENSES
<TABLE>
<CAPTION>
                                                     September 30,        September 30,
                                                         1997                 1996
                                                         ----                 ----

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

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

                                                                     (Continued)

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

                   Notes to Consolidated Financial Statements

                      (In thousands, except share amounts)

(5) LONG-TERM DEBT
<TABLE>
<CAPTION>
                                                               September 30,        September 30,
                                                                   1997                 1996
                                                                   ----                 ----

         <S>                                                 <C>                  <C>         
         Senior secured notes, 13.25%, due May 1,
              2007                                           $     265,000        $          -
         Note payable to Tomen, LIBOR plus 3%
              (8.8% at September 30, 1997)                          69,137               31,771
         Note payable to NTFC, LIBOR plus 3.5%
              (9.3% at September 30, 1997)                          44,634                   -
         Note payable to Siemens, LIBOR plus 4.5%
              (10.3% at September 30, 1997)                          5,846                   -
         Senior discount notes, 13.875%, due
              December 15, 2005                                    203,280              177,760
         Other                                                          29                3,104
                                                                ----------           ----------
                                                                   587,926              212,635

         Less current portion of long-term debt                      2,521                3,091
                                                                ----------           ----------
                                                             $     585,405        $     209,544
                                                                ==========           ==========
</TABLE>

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

         Year ending September 30:

              1998                                                 $       2,521
              1999                                                        12,897
              2000                                                        18,506
              2001                                                        21,943
              2002                                                        22,001
              Thereafter                                                 510,058
                                                                      ----------

                                                                   $     587,926
                                                                      ==========

                                                                     (Continued)

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

                   Notes to Consolidated Financial Statements

                      (In thousands, except share amounts)

 (a) SENIOR SECURED NOTES

     In the third quarter of 1997, GST Equipment Funding,  Inc., a subsidiary of
     the  Company,  completed  a  private  placement  under  an  indenture  (the
     Indenture) of $265,000 of senior secured notes (the notes).  The notes bear
     interest  at a  rate  of  13.25%  with  semiannual  interest  payments  due
     beginning  November  1, 1997.  Approximately  $93,790 of the  proceeds  are
     restricted to fund the first six schedules interest payments. The remainder
     of the net proceeds are  restricted  to the  purchase and  installation  of
     telecommunications  equipment.  Pursuant to the  Indenture,  all  purchased
     equipment  will be sold to the  Company  for use in its  telecommunications
     operations.  The notes are secured by a first priority security interest in
     the equipment and the restricted investment securities held for the payment
     of interest. The notes are subject to certain debt covenants.

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

     The 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 notes,  the Company will redeem the portion of the
     notes that cannot be assumed at 101% of their principal amount plus accrued
     interest at the date of redemption.

 (b) TOMEN AMERICA, INC. FACILITY

     In the first quarter of 1995, the Company  entered into a master  financing
     agreement with Tomen America, Inc. (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 September  30,  1997,  Tomen has
     agreed to  provide a total of $74,950 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.


                                                                     (Continued)

                                     F - 15
<PAGE>
                                  GST USA, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                      (In thousands, except share amounts)

 (c) NTFC CAPITAL CORPORATION AGREEMENT

     In the first quarter of 1997,  the Company  entered into a $50,000 loan and
     security  agreement  with NTFC  Capital  Corporation  (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.

 (d) SIEMENS STROMBERG-CARLSON AGREEMENT

     In the fourth quarter of 1996, the Company entered into a loan and security
     agreement with Siemens Stromberg-Carlson  (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
     September 30, 1997, $116,000 was available to the Company. Amounts borrowed
     under the agreement  initially bear interest at LIBOR plus 4.5% and will be
     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 $16,600 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 of  approximately  $312,400 by December 15,  2000.  The senior notes
     will rank in right of payment with all  unsubordinated  indebtedness of the
     Company and are subject to certain  debt  covenants.  The senior  notes are
     guaranteed by GST.

(f)  GUARANTEE OF PARENT'S DEBT

     The Company has guaranteed GST's convertible senior  subordinated  discount
     notes  totaling  approximately  $25,410 at September  30,  1997.  Such debt
     matures on December  15, 2005 at a  fully-accreted  value of  approximately
     $39,100.  On or after December 15, 2000, the senior and  convertible  notes
     will be redeemable at the option of the Company and GST.

                                                                     (Continued)

                                     F - 16
<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 OPTION PLANS AND STOCK BONUS AGREEMENT

      Certain  employees of the Company are eligible for stock option  awards of
      GST common stock under various stock option  plans.  In addition,  certain
      members of  management  are eligible to receive stock awards of GST common
      stock upon achievement of certain milestones.  Given that senior operating
      and  executive  management  are  employees  of the  Company,  compensation
      expense is recognized in the  financial  statements of the Company.  Stock
      compensation  totaled $2,521,  $574 and $-0- for the years ended September
      30, 1997, 1996 and 1995, respectively.

(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 as
      follows:
<TABLE>
<CAPTION>

                                                                           Years Ended September 30,
                                                                 ------------------------------------------
                                                                 1997               1996               1995
                                                                 ----               ----               ----
<S>                                                                <C>               <C>             <C>  
         Computed expected income tax expense
              (benefit) at statutory rate                          (34)%             (34)%           (34)%
         Expected state income tax expense (benefit)                (4)               (4)             (5)
         Increase in valuation allowance                            36                25                37
         Amortization of goodwill                                    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                 -
         Other                                                       -                 4                 1
                                                                  ----               ---               ---
                      Income tax expense                           1 %                 - %             2 %
                                                                  ==                 ===               =
</TABLE>


                                                                     (Continued)

                                     F - 17
<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>

                                                                           September 30,       September 30,
                                                                               1997                1996
                                                                               ----                ----
<S>                                                                      <C>                  <C>
     Deferred tax assets:
         Federal and state net operating
            loss carryforwards                                           $     40,106         $     16,378
         Non-deductible interest                                               13,757                4,608
         Other                                                                  3,692                2,063
                                                                            ---------            ---------

                Total gross deferred tax assets                                57,555               23,049

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

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

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

                Net deferred tax liabilities                             $       (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 years  ended
      September 30, 1997, 1996 and 1995 was an increase of $33,063,  $14,237 and
      $3,488, respectively.


                                                                     (Continued)

                                     F - 18
<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 $110,063 available to reduce United States taxable income of
      future years, expiring as follows:

         2007                                                    $     405
         2008                                                          537
         2009                                                        2,800
         2010                                                        5,020
         2011                                                       36,922
         2012                                                       64,379
                                                                 ---------
                                                                 $ 110,063
                                                                 =========

      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 five years.  At  September  30, 1997 and
      1996, the gross amounts of equipment and related accumulated  amortization
      recorded under capital leases were as follows:

                                                           1997           1996
                                                           ----           ----

         Equipment                                   $     24,030      $   924
         Less accumulated amortization                      3,541          249
                                                        ---------         ----

                                                     $     20,489      $   675
                                                        =========         ====

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


                                                                     (Continued)

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

                   Notes to Consolidated Financial Statements

                      (In thousands, except share amounts)

     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 September 30, 1997 are:

                                                       Capital         Operating
                                                       Leases           Leases
                                                       ------           ------

         Year ending September 30:

              1998                                      $ 8,173           4,132
              1999                                        3,965           3,679
              2000                                        2,772           3,103
              2001                                        2,772           2,337
              2002                                        2,772           2,211
              Thereafter                                 13,149           7,045
                                                        -------         -------

                   Total minimum lease payments          33,603         $22,507
                                                                        =======

         Less amount representing interest (at rates
              ranging from 10% to 17%)                   13,368
                                                        -------

                      Net minimum lease payments         20,235

         Less current installments of obligations under
              capital leases                              5,892

           Obligations under capital leases, excluding
                           current installments         $14,343
                                                        =======

(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 - 20
<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 $1,600 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 not yet ruled  upon.
     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.

     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.


                                                                     (Continued)

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

                   Notes to Consolidated Financial Statements

                      (In thousands, except share amounts)

 (d) REPURCHASE AGREEMENT

     NACT is guarantor for financing  transactions  executed  under a repurchase
     agreement with Zions Credit Corporation  (Zions) for a maximum of $3,482 at
     September 30, 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.

     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.

                                                                     (Continued)

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

                   Notes to Consolidated Financial Statements

                      (In thousands, except share amounts)

 (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  advance  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.

 (d) OTHER

     The Company's Chief  Executive  Officer serves as a consultant to Tomen for
     which he is paid a fee. Additionally, Pacwest receives a fee equal to 1% of
     the aggregate debt and equity  financing  provided by Tomen to the Company.
     Such fees incurred by the Company totaled $437, $195 and $221 in 1997, 1996
     and 1995, respectively.

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

     The payable to parent,  totaling  $85,775 at September 30, 1997  represents
     advances  from GST to be used in  constructing  and operating the Company=s
     telecommunications networks.


                                                                     (Continued)

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

                   Notes to Consolidated Financial Statements

                      (In thousands, except share amounts)

(11) SUBSEQUENT EVENTS (UNAUDITED)

     On December 31, 1997,  the Company and GST executed an agreement with World
     Access,  Inc. (World Access) to sell its interest in NACT for approximately
     $89,400 consisting of cash and common stock of World Access.

                                     F - 24
<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.

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